From Edward Lambert, responding to Romer’s recent talk:

“I would love to support continued aggressive policy to bring the economy back to full employment, but the social cost of inequality is sickening. And if stopping this disease means putting the economy back into a recession, then so be it.”

My good friend Becky Hargrove comments:

Looks like Piketty is giving some folks new confidence!

Edward Lambert goes on:

It is like re-breaking a bone to set it straight. If the re-breaking of a bone is not done, the bone won’t work correctly in the future. It is proper medicine. You will be better off going through the moment of extra pain. My prescription is to re-break the economic bone which has not set correctly, and this time let’s be aggressive in setting straight better wages and labor share from the start. The idea of re-breaking the economy may sound crazy to you, but the methods of medicine have a greater wisdom than what I see currently among economists. The Volcker recession was good medicine. It had a wisdom to re-break the economy to correct inflation. Current day economists seem squeamish about an economic correction, even if it was to correct mistakes.

Let me zoom in on his Volcker wisdom.

As recounted by William Barnett in his book “Getting it wrong:How faulty monetary statistics undermine the Fed, the financial system, and the economy” (pages 102-104):

Following the inflationary 1970s, Paul Volcker, as chairman of the Federal Reserve Board, decided to bring inflation under control by decreasing the rate of growth of the money supply…The policy succeeded in ending the escalating inflation of the 1970s. but was followed by a recession. That recession, widely viewed as having been particularly deep, was not intended. The existence of widespread three-year negotiated wage contracts was viewed as precluding a sudden decrease in the money growth rate…As a result the Fed´s decision was to decrease from the high double-digit growth rates…and then gradually decrease toward the intended long-run growth rates of about 4 or 5 percent growth rate.

And Barnett explains (my adaptation):

The chart reveals the cause of the unintended recession. The rates of growth of the Divisia monetary aggregate was much lower than the rate of growth of the official simple-sum aggregate which was the official target of policy. With the Divisia growth so much lower the result was an unintended negative shock of substantially greater magnitude than intended. A deep recession resulted.

In other words, if you are set in “breaking bones”, make sure you´ll break the right ones and, please, use the right instruments!

HT Becky Hargrove