I’ve been highly skeptical of Christina Romer’s thinking since she came out with that egregiously poorly-reasoned paper (PDF) that got so much play a couple of years ago. But her NYT “Economic View” piece today seems cogent, lucid, and well-supported to me.
Basically: the emperors of theory-driven, sky-is-falling inflation hysteria are not wearing any clothing.
Although the Survey of Professional Forecasters, conducted by the Federal Reserve Bank of Philadelphia, shows virtually no change in long-run inflation expectations since the start of the program, the theorists hold fast to their concerns.
And she doesn’t even pull out the big guns to prove her point – the TIPS spread, which should be telling us the market’s best guess for inflation ten years out. (Click to build your own graph.)
Terrifying, huh? And who knows better than the market?
I do have one small problem with the piece, though it’s somewhat peripheral to the main thrust.
Reductions in American interest rates make domestic assets less attractive, reducing the demand for dollars and lowering the currency’s value in foreign exchange markets. This tends to decrease our imports and increase our exports, raising domestic production and employment.
This cuts straight to the core of my current hobby horse: she’s saying that lower interest rates make American financial assets less attractive. But by lowering the dollar’s value, they make real assets — like American factories and businesses — more attractive. It drives me crazy that even top economists use the term “assets” so sloppily.