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William White: wrong about the future of central banking

“We too must bring into our science a strict order and discipline, which we are still far from having…by a disorderly and ambiguous terminology we are led into the most palpable mistakes and misunderstandings – all these failings are of so frequent occurrence in our science that they almost seem to be characteristic of its style.”

– Eugen von Böhm-Bawerk (1891: 382-83)

What William White writes about inflation is wrong, sloppy and seems a conscious effort to derail the discussion. Today again a bit about central banking but this time more critical. On the prestigious Project Syndicate site, William White (former deputy governor of the Bank of Canada, and a former head of the Monetary and Economic Department of the Bank for International Settlements, Chairman of the Economic and Development Review Committee at the OECD) published a blogpost, ”The Dangerous Delusion of Price Stability”, about the limits of ‘pure’ inflation targeting. It is a sign of the times in the sense that it heralds the end of this kind of cb policies. But it’s not a very good post. Actually, it’s a bad post.

He messes up the definitions of scientific economics to be able to frame the discussion. The very first sentence of his piece starts with a scientific lie: ‘Since the hyperinflation of the 1970s’. But there was no hyperinflation in the 1970s. According to the recommended article ‘World hyperinflations’ (available on the site of the CATO institute) by Steve Hanke and Nicholas Krus, which starts with the Böhm-Bawerk quote above, hyperinflations are, following the definition by Cagan: “a price-level increase of at least 50% per month.” Per month! In the 1970s (looking at western countries only) the UK had the highest consumer price inflation. It peaked at 26,9% per year in august 1975 (source). Hanke and Krus also embed hyperinflation in a social situation: “Hyperinflation is an economic malady that arises under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy – to name a few.” Venezuela comes to mind. But, dear mister White, the UK in 1975 was no Venezuela. Not by a long shot. It is frightening (and a bad example for students of economics) that somebody with the résumé of White does not use scientific rigor and precision in his blogs. Neither the data nor the situation matches with the framing of White – not for the UK, let alone for Germany, France or the USA.  

The rest of the piece is sloppy, too. It has a bullying tone. It does not really address the problems of the present. It argues that expecting results from macro-prudential policies is wishful thinking but advises that “policymakers should (belatedly) start asking themselves what practical measures they can take to prevent another crisis from erupting” and should i.e. impose macro prudential policies. And while the article sets out to argue that we should not obsess about inflation it obsesses about inflation and argues that we should be so afraid for inflation that we have to learn to accept mild deflation. Yes, that will lead to higher ‘real’ debt service costs, unfortunately, but as we were the ones who were borrowing and lending we have to accept that. While, in another paragraph, it argues that debt service costs are restraining aggregate demand and therewith a main cause for the present stagnation. What an incoherent mess.

Let me be clear: abandoning ‘pure’ inflation targeting means that occasionally mild deflations will have to be accepted. But the same holds for, say, 4% inflation. White repeatedly mentions the costs of inflation. If we’ve learned anything after 2008 it’s that the costs of financial crises are a magnitude larger than even the costs of UK inflation in the seventies. At this moment, such an inflation rate would do a lot to solve the problem of overleveraged economies!

  1. December 18, 2017 at 6:26 pm

    Inflation is a redistributive tax. It has certain characteristics of who it burdens and who it benefits, so we can argue whether inflation makes for good or bad tax design. But it can be pretty well approximated as a tax. Places like Greece relied on inflation as a tax for decades and then when it was taken away failed to transition to other types. Even hyper-inflations are similar to over-taxing an economy way past its supply capacity to drive a war or other resource drain.

    I wonder if the global anti-inflation camp that’s currently in ascendance is really just an anti-tax camp (anti-tax on us) rather than anything with more merit.

    • December 18, 2017 at 11:29 pm

      Inflation is a redistributive tax.

      Well, it is certainly true that the elitist policy makers representing The One Percent perceive inflation to be just as onerous a threat to rich people as steeply progressive tax rates on their incomes would seem to be.

      Of course, here in America, Republican Party politicians have succeeded in popularizing a perception that taxes are nothing more than a costly and fruitless imposition of pain on the citizenry that serves no meaningful purpose. From this POV, inflation is depicted as a very bad thing that needs to be avoided if at all possible.

      My analysis assails both of these ignorance-based myths as equally invalid—both the idea that progressive income taxation imposes any kind of material hardship on rich people and also the idea that price inflation imposes any kind of material hardship on anyone who experiences it.

      Within the collection of specious rationalizations which drives both of these myths, there is a crucially important failure to notice that when everyone within an income bracket sees their disposable income reduced by the same percentage, then none of them will actually lose any of their purchasing power in the marketplace.

      This, because 1) markets auction off all that is brought to market to the highest bidders, 2) all those directly affected by either inflation or tax increases will experience no change in their rankings (within the hierarchy of all disposable incomes) as a consequence of the inflation/tax increase.

      This is a crucially important matter, since the ultimate reality we are dealing with in market economies is that our purchasing power within the marketplace is determined solely by our individual household rankings within the hierarchy of all households’ accumulations of disposable money wealth.

      The solution for Greece was always for the government to impose steeply progressive income tax rates on the incomes of the richest of Greece’s citizens and then spend that money on pure economic investments, like infrastructure.

      This would have immediately reduced unemployment at the same time that it was driving up Greece’s GDP, while also reducing the government’s spending on social services, without any additional borrowing, and all of that would have occurred without negatively affecting the material welfare of the rich citizens of Greece, who would have maintained their status at the top of Greece’s economic ladder.

      Ignorance within the leadership class can be a very sad thing for the millions who must suffer as a consequence of it…

      • Nell
        December 28, 2017 at 10:38 am

        Good points. I wonder whether the assumption that the comparisons of relative wealth/income only matter within a nation. I suspect that those at the top of the hierarchy compare their income/wealth to people at similar levels in other countries too. So those rich Greeks would gauge their income/wealth relative to rich Germans, or French etc.

      • February 10, 2018 at 4:47 pm

        Hi sorry I saw that late. Yes it is crucial to realise that markets are auctions, and money is a relative claim on the goods that are offered. A lot of misconceptions, not just about inflation but also about funding retirement, are cleared up when we realise that all that matters is absolute productivity and relative income rank.

  2. rjw
    December 18, 2017 at 6:43 pm

    I have read longer, more cleanly argued pieces by Bill White, but I nevertheless think you are being too harsh. It is a short opinion piece after all. He has written much and more articulated pieces on the same theme.

    I give you the point on hyperinflation, which is a strange choice of words, but that is fairly trivial. Where does he “obsess” over the costs of inflation? His central point is that the inflation rate is an unreliable guide to monetary conditions and so we should not obsess about it.

    Moreover, where he argues policy makers need to think about what they are up to, he does not propose, as you imply, the wider use of macro prudential measures. It would indeed be odd to do so, given he largely dismisses them earlier in the piece. To be fair, he makes no specific concrete proposal, but you do seem to be putting words into his mouth here.

    The basic message of the piece, as I see it, is that keeping rates too low for too long has risks, and that more weight needs to be put on fiscal policy. We expect to much of monetary policy. Moreover, we are where we are now partly because of past overemphasis on price developments, and inadequate emphasis on debt stocks, leverage, and financial stability.

    • merijntknibbe
      December 18, 2017 at 8:12 pm

      I’ll be happy to read one of these pieces and te reconsider some of my views. However – the 1970s did not witness hyperinflation and it is wrong to state they did. Mind: he started his article with this phrase!

      • December 19, 2017 at 12:27 am

        …the 1970s did not witness hyperinflation and it is wrong to state they did.

        I must say that I share your umbrage at White’s use of the word, hyperinflation.

        But in my mind, it was the second phrase he used immediately afterward that really underscored the gravity of his mischaracterization of the historical facts: “…which central banks were right to combat by whatever means necessary…

        The “whatever means necessary” he was talking about with respect to the Fed was Volcker’s hiking of the reserve ratio + a big tightening of credit controls. Together they succeeded in shutting down the borrowing of speculators that was driving the the “accelerated” pace of inflation at that time.

        The actual truth is that—properly conceived and applied—credit controls alone would have reduced the “inflationary pressures” sufficiently without resorting to the reserve ratio “nuclear option.”

        It’s amusing, and more than a little bit annoying, that the Fed’s use of credit controls has been criticized in the literature since as a failed tool of monetary policy, but the criticism is misplaced.

        The criticism of credit controls we read about today is not that they were not effective, but that they were too effective, in that they were blamed for causing the economy to contract much more severely than was desirable.

        While it is possible that they did contribute to the severity of the collapse, I believe the hike in the RR deserves most of the blame; that, and the determination of the central bankers to quash their favorite bogeyman of all: inflationary expectations

      • rjw
        December 19, 2017 at 2:11 am

        One of White’s longer pieces is the lecture he gave on receiving the NABE prize (link below). He has interesting views for someone who has spent a lifetime in government institutions. Not at all a “mainstream” economist.


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