The clear answer is that restoring full employment was more important than avoiding inflation if – a big if – inflation eventually came down.
Here’s why: While it’s true that inflation erodes real incomes, there is overwhelming evidence that maintaining full employment is extremely important for reasons that go beyond money. Jobs generate income; but they are also, for many workers, bearers of dignity, so that being unemployed night of happiness much more than you can explain just by lost dollars.
And full employment is especially crucial for young people: graduating in a bad labor market can have an impact shadow on your career for many years, maybe your whole life.
It was therefore urgent to get America back to full employment as quickly as possible, and it was worth it even if the price took us through, say, two years of high inflation.
The counter-argument is the fear that inflation is difficult to get rid of, that it is rooted in the expectations of the whole economy and that getting it back down will require another bad recession all over the line. And I can’t 100% guarantee that it won’t happen.
At this point, however, there is little evidence that inflation is taking root. The bond market implicitly expects high inflation this year but not beyond; the fact is not that the market is necessarily right, but rather that a major 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 on the next five years, which is implicitly a return-to-normal forecast.
Thus far, we seem to be looking at an extraordinarily rapid economic recovery from a devastating economic shock, at the cost of an unpleasant but probably temporary surge in inflation. And considering what could have happened, that amounts to a political triumph.
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