William White: wrong about the future of central banking

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Merijn T. Knibbe
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“We too must bring into our science a strict order and discipline, which we are still far from having…by a disorderly and ambiguous terminology we are led into the most palpable mistakes and misunderstandings – all these failings are of so frequent occurrence in our science that they almost seem to be characteristic of its style.”

– Eugen von Böhm-Bawerk (1891: 382-83)

What William White writes about inflation is wrong, sloppy and seems a conscious effort to derail the discussion. Today again a bit about central banking but this time more critical. On the prestigious Project Syndicate site, William White (former deputy governor of the Bank of Canada, and a former head of the Monetary and Economic Department of the Bank for International Settlements, Chairman of the Economic and Development Review Committee at the OECD) published a blogpost, ”The Dangerous Delusion of Price Stability”, about the limits of ‘pure’ inflation targeting. It is a sign of the times in the sense that it heralds the end of this kind of cb policies. But it’s not a very good post. Actually, it’s a bad post.

He messes up the definitions of scientific economics to be able to frame the discussion. The very first sentence of his piece starts with a scientific lie: ‘Since the hyperinflation of the 1970s’. But there was no hyperinflation in the 1970s. According to the recommended article ‘World hyperinflations’ (available on the site of the CATO institute) by Steve Hanke and Nicholas Krus, which starts with the Böhm-Bawerk quote above, hyperinflations are, following the definition by Cagan: “a price-level increase of at least 50% per month.” Per month! In the 1970s (looking at western countries only) the UK had the highest consumer price inflation. It peaked at 26,9% per year in august 1975 (source). Hanke and Krus also embed hyperinflation in a social situation: “Hyperinflation is an economic malady that arises under extreme conditions: war, political mismanagement, and the transition from a command to market-based economy – to name a few.” Venezuela comes to mind. But, dear mister White, the UK in 1975 was no Venezuela. Not by a long shot. It is frightening (and a bad example for students of economics) that somebody with the résumé of White does not use scientific rigor and precision in his blogs. Neither the data nor the situation matches with the framing of White – not for the UK, let alone for Germany, France or the USA.  

The rest of the piece is sloppy, too. It has a bullying tone. It does not really address the problems of the present. It argues that expecting results from macro-prudential policies is wishful thinking but advises that “policymakers should (belatedly) start asking themselves what practical measures they can take to prevent another crisis from erupting” and should i.e. impose macro prudential policies. And while the article sets out to argue that we should not obsess about inflation it obsesses about inflation and argues that we should be so afraid for inflation that we have to learn to accept mild deflation. Yes, that will lead to higher ‘real’ debt service costs, unfortunately, but as we were the ones who were borrowing and lending we have to accept that. While, in another paragraph, it argues that debt service costs are restraining aggregate demand and therewith a main cause for the present stagnation. What an incoherent mess.

Let me be clear: abandoning ‘pure’ inflation targeting means that occasionally mild deflations will have to be accepted. But the same holds for, say, 4% inflation. White repeatedly mentions the costs of inflation. If we’ve learned anything after 2008 it’s that the costs of financial crises are a magnitude larger than even the costs of UK inflation in the seventies. At this moment, such an inflation rate would do a lot to solve the problem of overleveraged economies!