Imagine yourself as a Nobel Prize-winning economist working as a paid pundit on public affairs for the New York Times. You weigh in on major policy initiatives in the wake of the dot-com bubble, making strong predictions of disaster if the Federal Reserve doesn’t engage in monetary inflation. Fueling a boom in the housing sector with low interest rates, you declare, will save the economy from a painful recession; the Fed’s bond purchases will not cause high price inflation; those rats racing in their cages will keep the wheels of commerce turning.
And some of what you predicated actually comes to pass. The Fed does indeed inflate a housing bubble to replace the dot-com bubble. But that bubble, too, inevitably bursts, resulting in an even more severe recession and precipitating a global financial crisis. What do you do?
You might admit that you were wrong, and try to figure out why. But almost nobody does that; we live in an age of unacknowledged error.
Alternatively, you might insist that you were right and that those who opposed the Fed policy you advocated that caused the problem were always wrong and call them names like “inflation truthers”.
Finally, there’s a third option: You can pretend that you didn’t say that the Fed should create a housing bubble to replace the dot-com bubble, poo-poo the warnings about the consequences of monetary inflation and artificially low interest rates, and go on advocating even more of the same policy that caused the problem on an even greater scale.
This what policy failure looks like, and it should have had the advocates of monetary inflation engaged in soul-searching about why they got it so wrong. But no.
Instead, the line — exemplified by a recent op-ed article by Paul Krugman — is that since the CPI shows low price inflation, there is nothing to see here.