US economy

The Secret Triumph of Economic Policy


The clear answer is that restoring full employment was more important than avoiding inflation if — a big if — inflation eventually subsides.

Here’s why: Although it’s true that inflation erodes real incomes, there’s overwhelming evidence that maintaining full employment is extremely important for reasons that go beyond money. Jobs bring in income; but they also, for many workers, bring dignity, so that being unemployed damages happiness far more than you can explain simply by the lost dollars.

And full employment is especially crucial for the young: Graduating into a bad labor market can cast a shadow over your career for many years, possibly your whole life.

So getting America back to full employment as quickly as possible was urgent, and well worth it even if the price was putting us through, say, two years of elevated inflation.

The counterargument is the fear that inflation will be hard to get rid of, that it will become entrenched in economywide expectations and that getting it back down will require another nasty recession down the line. And I can’t offer a 100 percent guarantee that this won’t happen.

At this point, however, there is little evidence that inflation is getting entrenched. The bond market is implicitly forecasting high inflation this year but not beyond; the point isn’t that the market is necessarily right, but rather that one important measure of inflation expectations shows no sign that people are betting on a return to the 1970s. Consumer surveys tell a similar story: High expected inflation over the next year, but much less over the next five years, which is implicitly a forecast of returning normalcy.

So far, then, we seem to be looking at an extraordinarily quick economic recovery from a devastating economic shock, coming at the cost of an unpleasant but probably temporary surge in inflation. And given what could have happened, that amounts to a policy triumph.

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