STAFF NEWS & ANALYSIS
Four New Schools of Economic Thought: None Question the Fed
By Daily Bell Staff - May 24, 2016

Four Ways to Think About the Economy … I see four different schools of thought about how the economies of the U.S. and much of the developed world should be managed. The challenge for the Federal Reserve and other central bankers is that it’s hard to know who’s right. –Bloomberg

The author of this article proposes a series of unique, economic “schools.”

The first, he says, are “neutralists.” This group of economists believe that so long as inflation is “low and stable,” central banks need not exercise their power.

They believe that government officials should spend more time concentrating on building better economies and less time worrying about monetary policy.

The second group, he calls, “inflationistas.” These economists worry a lot about price inflation and are constantly upset by lack of definitive Fed action to combat it.

Inflationistas see price inflation everywhere and want to use central banks to take constant action to make sure it doesn’t get worse.

The third group is the “bubblers.” He compares this group of economists to the “neutralists.” The neutralists don’t want much central bank activity. The bubblers are actually “skeptical about the efficacy of monetary policy.”

The bubblers don’t even see central banks at the heart of monetary phenomena. “Many would even say that inflation is being driven largely by technological and demographic forces outside central banks’ control.”

The fourth group is called “the gappers.” Gapper economists believe that economic activity is modest and will have to climb much higher to create price inflation.

Gappers want central bank activism via increased monetary production. They are in favor of continued low interest, additional quantitative easing and other creative kinds of stimulus to support and expand economic activity.

These Gappers are so convinced that more can and should be done that they argue that if central banks are reluctant to be proactive, fiscal and government authorities should take over and do the job themselves.

This argument is a somewhat incendiary one that “provokes the inflationistas and also many neutralists, who believe that government is already too big.”

Having summarized these four schools of thought, the article asks, “who’s right?”

Somewhat predictably, the author decides that all four points of view have at least some validity.

The neutralists are correct that we should consider ways to improve the economy’s longer-term growth potential …

The Fed shouldn’t address the inflationistas’ concerns by choking off growth now. Instead, the central bank should be clear about its willingness to raise rates sharply once “core” inflation … has risen in a sustainable way above the 2 percent target.

If the bubblers are right about artificially inflated asset prices, that doesn’t necessarily mean that an ensuing bust has to severely harm the economy.

Gappers are demonstrably right that inflation and expected inflation are too low in the developed world. On this front, there’s plenty that monetary and fiscal authorities can do.

The article concludes that further stimulus is necessary and that “policy makers” need to support what is thus far “a profoundly disappointing economic expansion.”

Where to start with this article?  We would argue that these so-called schools of thoughts are all merely reactions to central bank policy. In other words, they did not spring up independently.

The author makes it sound as if there were different academic persuasions busily building their own economic disciplines. But, fundamentally, there are no gappers or inflationistas, etc. There are only mainstream economists who have varying opinions on central bank monetary policy.

The article is so wrongheaded and clumsy that we decided a very young person must have written it. We looked up the author and his bio.

Here, from Wikipedia:

Narayana Rao Kocherlakota is an American economist and is the Lionel W. McKenzie Professor of Economics at the University of Rochester. Previously, he served as the 12th president of the Federal Reserve Bank of Minneapolis until December 31, 2015.

Conclusion: This editorial, among others, shows how far from truth-telling mainstream economics is. Only when people finally start exposing the fundamental, illogical and ruinous nature of monopoly central banking, will economics will begin to change. Nothing is going to happen until then. Bloomberg is only making matters worse.

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  • Bruce C.

    The referenced article suffers from the similar discussion about capitalism in America. The US has a “mixed” economy and therefore every circumstance and example to dissect it or explain it is diluted, if not polluted, by ever present government (and central banking) involvement.

    There is no theoretical reason for central banking (i.e., monopolistic control of the money supply and interest rates) in economics. Instead it is always assumed and/or imposed, and everything is explained in that context.

  • Pedestrian

    An excellent dissection of a pile of muddle-headed mumbo jumbo coming from a High Priest of the Central Banking Religion.

  • Jim Johnson

    How we do the Big Reset will probably be the biggest decision a President will sell us on. Do enough people know who Hayek is? Truthfully, i believe not. All my neighbor’s eyes glaze over when I touch the subject. They will go with whoever they ‘trust’ the most. Right now, I fear that will be whoever Faux News tells Oreilly to tell them. You have done yeoman’s work waking us up to Liberty, but if we get the Reset wrong, I fear it will all be for naught. People must gain a basic understanding of economics. I need to do a better job of making this apparent to them, and you are the folks with the expertise to give me the tools. Mike Maloney talks in simple enough terms, but such really needs to be made front and center.

  • tetrahemicon

    I looked at the Wikipedia article on Mr. Kocherlakota and learned he has done work in the fields of “optimal tax” and the Principle-Agent Problem.
    The first paragraph in the Wiki article on the Principle-Agent problem was a dead giveaway – “… This dilemma exists in circumstances where the agent is motivated to act
    in his own best interests, which are contrary to those of the
    principal, and is an example of moral hazard.
    Common examples of this relationship include corporate management
    (agent) and shareholders (principal), or politicians (agent) and voters
    (principal).”

    Obviously, those who work for the government & the Fed have it backwards.

  • Praetor

    So, wrongheaded, is right. Big and more are sometimes the problem. Smaller and less, on the other can be a good thing. The time big and more are a good thing, big savings account, and more going in all the time. Smaller and less are a good thing when small debt and less Fed liquidity flooding the world.

    The Keynesian collective school of thought is everywhere!!!

  • r2bzjudge

    For each action, there is an equal and opposite reaction, as nothing occurs in a vacuum. A manipulated market will manipulate back. 100% of booms end in a bust. 100% of bubbles burst and deflate. The math never changes.

    Managing the economy doesn’t really work. The economy is cyclical. Management simply causes distortions. The business cycle runs some 7 years or so. Martin Armstrong has a Pi cycle of 8.6 years. The economic managers huff and they puff, but every economic cycle comes full circle anyway. Economic managers insist on fighting the laws of economic nature. Nature always prevails.

    Two cycles ago we had subprime stocks. Then we had subprime housing, now we have subprime auto. It always ends the same way.

  • r2bzjudge

    ” Having summarized these four schools of thought, the article asks, “who’s right?” ”

    A stopped clock is right twice a day. The clock however, is still broken.

  • Samarami

    “Where to start with this article?…”

    I truly admire your tenacity, your temerity — your patience — in producing an exposé of this nature. Your “…exposing the fundamental, illogical and ruinous nature of monopoly central banking…” provides an exceedingly necessary service. It does need to be exposed. On that I will never disagree.

    Yet exposing “central banking” uncovers the mere tip of the iceberg. I divorced virtually all media, including television, nearly fifty years ago — long before my vocabulary owned the term “social engineering”. I was becoming anarchist before I could define anarchy. I was, little-by-little, coming to understand that all fiat — even presumably gold-backed fiat currency — was criminal by its very nature.

    I became impatient (insulted even by media advertising). Embedded into each and every sentence, paragraph, thought and expression — the incessant message: government is necessary, provides socially useful purpose, deserves (demands) everybody’s support. No questions allowed.

    Anarchy was beyond the pale.

    Once again I’ll recommend reviewing Dr Gary North’s article of some years back, since it fits so very compatibly with your treatment of this Bloomberg piece:

    https://www.lewrockwell.com/2011/03/gary-north/those-lying-textbooks/

    Sam

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