In this post, Mark Thoma casually points us to the recent Phillips Curve as it has recently revealed itself to us.
I may be going out on a limb here, but I think he is subtly suggesting we exploit that relationship to do some social good.
Certainly I would go out on that limb myself.
The standard answer is the expectation augmentation answer.
And that's fine, as far as it goes. But then that's an empirical question. How well anchored are inflation expectations now? Are they well anchored or poorly anchored? I would argue that they are fairly well anchored.
In my mind, the chance that I am wrong about that seems a lot lower than the chance that I am right. And if I am wrong I think we know what to do about high inflation. And also if I am wrong we should get a sense of it before its too late because we should be able to see whether inflation is accelerating or not. If there is really a terrifying new NAIRU it's going to show itself.
When I think about the competing risks here, I feel more and more like an old Keynesian on the Phillips Curve. Hell, it took those scoundrels almost two decades to cause any problems back in the third quarter of the twentieth century, and even then it was really exogenous oil shocks that did the heavy lifting, not the old Keynesians themselves.
But this strikes people as imprudent, and I don't understand why.
Did expectations augmentation become a greater risk after we understood it than it was before we understood it? That doesn't seem to make sense. The fact that old Keynesians who did not think in terms of expectations augmentation and managed a strong economy for two decades before any trouble happened suggests to me that we modern Keynesians, who do think in terms of expectation augmentation (and therefore know the warning signs) don't pose all that much of a stagflationary risk in the current depressionary environment.
The assessment of these risks seems so clear to me that it almost sounds silly to title this post "comepting risks".