First some background from the WSJ.
IMF chief economist Olivier Blanchard, in a recent paper, said maybe the U.S. central bank’s future inflation goal should be 4% instead. John Williams, head of the San Francisco Fed’s research department, argued last year that higher targets might be needed to provide a cushion for future crises.
The proposals underscore a broader rethink that is rumbling through the economics profession in the wake of the financial crisis. Many of the things economists thought they knew turned out to be wrong.
Ludwig von Mises addresses these points in his Economic Freedom and Intervention. Mises on what economists know (pg. 127)
The fanatical supporters of inflationism, unbalanced budgets, and reckless government spending have, it is true, succeeded in banning sound theory from universities and textbooks. And they have founded special research institutions whose main purpose it is to put the monetary theory into oblivion. But their triumph is always shortlived.
Then Mises on inflation as a solution to economic problems (pg. 274).
The interventionists, however, ascribe to the government the power to prevent or, at least, to mitigate considerably the harshness and duration of the slump by measures which they call “anti-cyclical.” Under this high-sounding name they recommend, for the emergency in which government revenue is shrinking on account of the depression, tax abatement, on the one hand, and, on the other hand, a huge increase in government spending through gigantic public works and an increase in unemployment compensation. Though the crisis is the inevitable outcome of the creation of additional quantities of money and money substitutes, the interventionists want to cure it by still further inflation. They blithely neglect to take cognizance of the teachings of both theory and history concerning the final outcome of a protracted inflationary policy.
Speaking of what economists know and Mises my RMIT colleague and Catallaxy blogger (soon to return now that he’s back from his summer travels) Steve Kates will be seminaring this Friday on the topic ‘Why Your Grandfather’s Economics was Better than Yours’. This is a dummy run for when he presents the Ludwig von Mises Lecture at the Austrian Scholar’s Conference to be held at the Mises Institute in Auburn Alabama March 11-13, 2010.