No, I’m not talking about Obamamania sweeping the White House. At least, not yet. Right now, I’m worried about what the fears of stagflation will do to our economy in the long run.
The WSJ has an article explaining the quandary the Fed is in over creeping inflation and unemployment. The paper is touting the old mantra of the Phillips Curve trade-off, without recognizing the lesson learned from Friedman and Phelps about what long-term ill effects tinkering with the economy can do.
Like so many bad policy decisions, we can blame politics if expansionary policy is used to temporarily increase employment. The pay off for government spending will be a noticeable drop in the unemployment rate. Short term, that is. But this effect, while very appealing to politicians because it looks like they “fixed” what last term’s politicians “botched”, will only increase the inflation rate in the long term and make the country’s financial markets even more unstable. Not only that, the apparent “drop” in unemployment will disappear, settling back to the natural rate of unemployment.
I’m just hoping that while the stage may be set for politics to trump good policy, the play never gets started.
