Paul Krugman sees "serious people" of the economic world in the grip of an austerity fever - an irrational fear of a coming inflation that the markets show no sign of believing in. Krugman the Keynesian sees this as a recipe for a new great depression.
So the OECD wants the Fed to start raising interest rates soon — in the next six months or less — because … well, we can look at the OECD’s own forecast. According to this forecast, in the fourth quarter of 2011 — a year and a half from now — the unemployment rate will still be 8.4 percent. Meanwhile, inflation will be 1 percent — well below the Fed’s implicit target of 2 percent. My view is that inflation will be lower than that — core inflation is already below 1 percent. But even given the OECD’s forecast, what possible reason would there be to tighten monetary policy now, when the economy will still have vast excess capacity and inflation that’s too low at the end of next year?
The only explanation seems to be at the beginning of that passage: some people, the report claims, are starting to think there might be inflation, so even though they’re wrong according to our forecasts, see, we need to head off this phantom threat and slow the economy’s recovery … what?
What’s so scary about this is that the OECD virtually defines conventional wisdom; it’s a numbered-paragraph sort of place, where a committee has to sign off on everything, policing the nuances as they say. So what we get from this is that among sensible people the idea that you should undermine recovery to appease those who think there might be inflation even though actually there isn’t has become conventional wisdom — so conventional that it’s treated as self-evident.
This is really, really bad.
Unfortunately, we live in a world rebelling against science, and the scientific pretensions of economics are none too solid anyway.