Inflationistas Are Guilty of Derp
In many ways, 2011 was the year the 1970s finally ended. It was when solar power first started to show that it could be more economically viable than in the Jimmy Carter years. It also was the year that the conservative populism that started taking over the nation in the '70s reached a sort of reductio ad absurdum with the Tea Party and the debt-ceiling threat. And it was the year when most of America finally realized that inflation wasn't coming back.
That kind of realization isn't easy. In an influential paper in 2013, behavioral economists Ulrike Malmendier and Stefan Nagel showed evidence that people's lifetime experiences strongly predict their inflation expectations. In other words, people who lived through the 1970s will always expect higher inflation than people who didn't. This is a possible source of what economists call "expectation anchoring."
But expectation anchoring and the searing experience of the '70s can't entirely explain the dogmatic fervor with which a certain group of economists continues to warn about inflation. In 2010, a bunch of economists -- including some who are highly respected in the profession -- offered up the last gasp of '70s thinking, when they wrote a letter to then-Federal Reserve Chairman Ben Bernanke, warning of the impending inflation that would result from quantitative easing. Of course, no inflation resulted. But amazingly, jaw-droppingly, none of the letter's signatories have publicly changed their minds!
For those brave few, the 1970s didn't die in 2011. For those brave few, the 1970s will never, ever die.
There's a word for this: "derp." In 2013, I wrote that the Internet slang word "derp" -- which sounds like the monotonous, insensate beeping of a robot out of an old sci-fi movie -- should be used to describe "the constant, repetitive reiteration of strong priors." In other words, when your mind is made up and will never change, and you feel the need to keep broadcasting that fact over and over, you are guilty of "derp."
Because, let's be clear -- even in 2010, there was clear evidence that inflation wasn't about to slip its bonds and run loose upon the world. Market inflation expectations, as measured by Treasury inflation protected securities, were never high -- in other words, people were never paying much money to hedge against the risk of inflation. If the financial market represents the wisdom of crowds, the inflationistas must have believed they knew something most of the world didn't. Also, there was the historic experience of deflation in Japan, not to mention the Great Depression. Nothing about our situation in 2010 remotely resembled the 1970s.
But if inflation panic was dubious back then, it's nothing short of monomaniacal now. We have three rounds of QE under our belt, and no inflation in sight. And as Cardiff Garcia of the Financial Times reports, the world is still facing deflationary pressures from several directions, including aging populations, slower Chinese growth and the shale and fracking boom.
One would think that any rational, intelligent person would revise their predictions of inflation. But the 2010 signatories -- at least, the ones who commented publicly -- have universally refused to do so. Some have turned to the bogus website shadowstats.com, which offers fake inflation numbers. Others have retreated to the claim that asset prices, not consumer prices, show "inflation" -- as if rising stock portfolios were something to worry about. And still others simply repeat that their warning was correct and remains correct.
Part of this may simply be intellectuals defending their reputations against public humiliation. But much of it simply seems like derp -- beliefs so strong held that nothing will ever sway them. But whatever the reason, our response is clear. We must place very little weight on the policy views of these people in the future. Their dire warnings of inflation can be replicated by a simple robot that repeats the same line again and again. When these people predict inflation, it is no more a signal of impending inflation than the sun rising in the east or Rob Ford admitting to using cocaine. The alarm contains no information. A flat wave has no signal.
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Noah Smith at firstname.lastname@example.org