The Poverty of Folk Economics, and the Culpability of the Economist Class

by Will on November 8, 2010

I reveal the full extent of my geekiness when I casually mention Quantitive Easing II, the Federal Reserve’s recent effort to increase the money supply. I believe that this effort was worthwhile: it probably won’t do much of anything, but it just might help, and anything that might help us right now is worth trying. Most others who are aware of the Fed’s action view it with great horror as an act of utmost irresponsibility. They warn of catastrophic hyper-inflation, even though that was also their response to Quantitive Easing I two years ago, and price levels in the intervening time have been not rising but ever falling.

Today the Financial Times is speaking of a “backlash” against QEII. The Financial Times is a respected newspaper that concerns itself especially with economic issues. And yet somehow, it doesn’t get that the entire point of Quantitive Easing is to create expectations of higher future inflation. Successfully changing expectations does two important things. First, it makes investors think that hiding their money in safe bonds with a 3 percent return will be unprofitable, so that hopefully they will take their money out of the bond market and invest in something productive instead. Second, creating mere expectations of future inflation will make foreigners more squeamish about holding their wealth in dollars, so that some of them will instead hold it in Euros or Francs or Kroners, making the value of the dollar fall relative to those currencies. That sounds like a bad thing but it is not: a cheaper dollar, and a more expensive Euro and Franc and Kroner, mean that people here and abroad will buy more things produced in the United States, and fewer things from elsewhere. More production here is eminently desirable. And so the Financial Times, in speaking of a “backlash,” reveals that it does not understand any of this. A “backlash” is precisely what the policy was supposed to produce!

But you can’t blame the writers at the Financial Times. Economists do an awful job of making these matters accessible to the wider public. Indeed, the abstract and opaque term “Quantitive Easing” is typical of the jargon that economists use to talk to each other. The use of such jargon, and the inaccessibility of the material, safeguards the reputation and high standing of professors of economics and renders their expertise evidently necessary. But it ill serves the quality of public debate — even, apparently, at the elite level. These issues are not easy to understand, even for intelligent and curious persons. Using dense and impenetrable language to describe and teach them does little to aid the difficult task of comprehension.

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