Joblessness is such a waste of resources that no one interested in efficiency can be complacent about it
The misguided attempts by some central banks to reduce inflation by raising interest rates and generating unemployment seem to be about credibility. Their reputations as anti-inflation fighters must be preserved despite the heavy cost. Even when the Nobel laureate and prominent monetarist Franco Modigliani renounced this theory in 2000, central banks continued to follow the creed he abandoned. More pain is being inflicted on the public through rate rises while the evidence stacks up that this is unnecessary suffering.
Last October, the Peterson Institute for International Economics produced a paper looking at 11 advanced economies and said the “little noticed dark side” of low inflation before the Covid pandemic was that “unemployment was almost continuously higher than needed to keep inflation low. Unless central bankers change their economic models, the world is likely to return to chronically excessive unemployment in the years after the [current] inflation surge.” The problem is that central bankers see economies running hotter than they actually are – and hike borrowing costs when there is no reason to do so.
