Shadow Stats and Tom Coburn's Inflation Fantasies

Yesterday, Ron Paul briefly inhabited the body of Oklahoma Senator Tom Coburn during a hearing involving the Federal Reserve Chairman Ben Bernanke. When a Ron-Paul-animated being has the ability to question Bernanke, the being usually asks whether gold is money, and then Bernanke replies simply "no." But on an off night, such a being will talk about how inflation is out of control and way above the official estimates. Tom Coburn sadly fell into that trap on Thursday, insisting in front of Bernanke that our actual inflation rate is 8%, more than quadruple the official estimate.

Needless to say, Coburn's view on inflation is misinformed, if not totally fevered. Matt O'Brien at the Atlantic repeats an old Paul Krugman point that independent inflation metrics like MIT's Billion Prices Project closely mirror the official inflation measurement. Matt Yglesias at Slate amusingly notes that Coburn's 8 percent figure entails that we have been in a basically permanent recession and real GDP decline for decades, which is obviously not the case.

One point missed in the debunkings so far is that the source Tom Coburn is almost certainly using,, is total nonsense. The basic thrust of Coburn's and Ron Paul's inflation conspiracy theory is that the government has changed the way it measures inflation over time to intentionally generate a deceptively low inflation figure. By using older inflation-measuring methods (e.g. the method used in 1980 for some reason), we can cancel out all that deception and get the true inflation. But, as John Aziz pointed out recently, this Shadow Stats site people like Coburn rely upon for this "real" inflation figure is clearly not measuring anything. Instead, Shadow Stats just takes the official government inflation figure and adds on some fixed constant to arrive at its own figure. That's it.

Coburn's wacky views about inflation are fun to lampoon, but inflation policy is a serious matter. For those who haven't moved along yet from our still-existing jobs crisis, ginning up more inflation should be a top policy priority. Conspiracy theories claiming inflation is too high when in fact it is not high enough are dangerous.

Beyond the instant crisis, there is a more general debate to be had about what amount of inflation we should be targeting. In recent times, the Fed has targeted 2 percent inflation, but a few months ago Laurence Ball made a very persuasive case for upping that target to 4 percent. The basic problem with a 2 percent inflation rate is that even when the Fed cuts interest rates as low as it can, real interest rates will never fall below -2 percent. Sometimes, -2 percent interest rates wont be enough to restore full employment, and we will wind up in a protracted recession like the one we are still digging out of from four years ago. But with a 4 percent inflation target, real interest rates will be able to go as low as -4 percent, which should give the Fed enough room to bring the economy back to capacity more quickly after a downturn.

For the most part, these monetary policy decisions are almost entirely removed from politics. You never see any political candidates, except oddities like Ron Paul, make monetary policy a campaign issue. But our choice of monetary policy regimes has massive economic impacts that affect everyone, poor and working people especially. So while Coburn's inflation conspiracy theory is a bit strange, at least he is engaging in a monetary policy debate, something basically no other politicians ever do.