The Guardian’s view on excessive unemployment: creating unnecessary suffering | Editorial
Jill-advised attempts by some central banks to reduce inflation by raising interest rates and generating unemployment appear to be a matter of credibility. Their reputation as anti-inflationary fighters must be preserved despite the high cost. Even when Nobel laureate and prominent monetarist Franco Modigliani renounced this theory in 2000, central banks continued to follow the creed he had abandoned. More pain is being inflicted on the public by rate hikes as evidence mounts that it is unnecessary suffering.
Last October, the Peterson Institute for International Economics published a paper looking at 11 advanced economies and said the “little-noticed dark side” of low inflation before the Covid pandemic was that “unemployment was almost continuously higher than necessary to keep inflation low. Unless central bankers change their economic models, the world risks falling back into chronically excessive unemployment in the years following the [current] inflation surge. The problem is that central bankers are seeing economies spinning faster than they actually are – and raising borrowing costs when there’s no reason to.
The institute says that even when booms have occurred – the biggest ones have been in Spain and Italy – “there has been no increase in … inflation”. He goes on to recommend that if inflation does not quickly return to its 2% target, “central banks should not… risk recessions to return to 2%”. Instead, say the authors, inflation targets should be relaxed. This heresy is very good advice. Unfortunately, many central bankers are too stuck in their destructive ways to accept this.
The Bank of England raised interest rates for the ninth consecutive time last month. Although inflation hurts the poorest the most, it is expected to be temporary. There is a risk of long-term damage to the economy from excessive tightening. Last September, the Office for National Statistics looked into the precise measurement of unemployment. When he looked at a more natural understanding of what it means to be unemployed, he calculated a UK unemployment rate of around 7%, almost double the official tally. High unemployment is such a waste of resources that no one who cares about efficiency can live with it. When he recanted, Modigliani admitted that “unemployment is due to the lack of aggregate demand. This is mainly the result of faulty macroeconomic policies. What are the good ones? Jens van ‘t Klooster of the University of Amsterdam thinks that high interest rates are meant to end the “failed experimentof quantitative easing rather than fighting inflation. But it feels like jumping from the frying pan into the fire.
Economist Bill Mitchell of Kyoto University suggests we should watch the Bank of Japan. In December, the Japanese central bank’s decision to let the yield on its 10-year government debt fluctuate half a percentage point above and below its target of 0% – twice as much as before – did predict “a period of tightening”. But as Professor Mitchell correctly observed, this was a move to restore the ability of Japanese companies to issue corporate bonds at reasonable rates. The Bank of Japan believes that the current inflationary spurt is transitory and does not want to risk undermining economic growth and record levels of prime-age employment by raising rates. Seeking the right exchange rate and the right level of nominal growth to avoid a slowdown, his policy is out of step for all the right reasons. This, as Professor Mitchell points out, makes it a very different country.