So, not on the bike yet; and I’ve had a chance to read the new OECD Economic Outlook. It’s a terrifying document.
Why? Not because it offers a grim prospect, although it does — although the OECD has marked up its growth projections, it’s still forecasting extremely high unemployment for years to come.
No, what’s scary is the utter folly that now passes for respectable opinion.
In the United States, where some long-term measures of inflation expectations have increased and the labour market has stabilised earlier than expected, the start of normalisation [by which they mean raising interest rates] should not be delayed beyond the last quarter of 2010. Policy interest rates should be well above half-way to neutral by end-2011, but the path of convergence to full normalisation would have to accelerate if long-term inflation expectations were to drift up further.
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.