The right question, asked by the wrong tradition

National Review tells us that Kevin Warsh is talking about inflation the right way — specifically, that rising prices are not the inevitable by-product of a strong economy. Good. That is a proposition I would have been glad to defend in my own time, when the Treasury and the Bank of England were forever insisting that you could not have employment without igniting prices. The claim was wrong then; it appears to remain contested now.

The classical error — and it persists — is to treat inflation and growth as twin faces of the same coin, so that every percentage point of reduced unemployment must be purchased with a corresponding tax on the currency. The Phillips curve, in its crudest form, enshrined this as doctrine. But the evidence, as I understand it has mounted since my time, is considerably more ambiguous. Supply expands when demand is sustained. Investment responds to confidence. Productivity is not fixed by nature. A well-run economy at full employment need not be an inflationary one — and the refusal to pursue full employment on precautionary grounds is itself a choice with very large costs.

So Warsh is right to sever the link. The question is what he does with that severing. The inflation-hawk tradition, having conceded that growth need not cause inflation, sometimes concludes only that monetary policy should be tighter for longer — that the lesson is vigilance, not ambition. That is, I would suggest, drawing the wrong inference from a correct premise. If strong growth does not require inflation, then the case for tolerating a little slack in the labour market — keeping a reserve army of the unemployed as a permanent buffer — loses what little justification it ever possessed.

The deeper issue, which monetary policy alone cannot resolve, is the composition of demand. Central banks can set a price for money; they cannot direct investment toward the sectors where it is most needed, nor can they force private animal spirits to revive when the business community has decided that uncertainty is too great and the returns too uncertain. That is the perennial gap between what a central bank can do and what an economy in difficulty actually requires. I do not know the precise state of the Fed's balance sheet or the mechanics of the instruments available to it in 2026 — those are engineering questions that post-date my own experience — but the macroeconomic logic has not changed.

What I would urge any monetary official — and the legislators who confirm them — is this: price stability is a necessary condition for a well-functioning economy, not a sufficient one. An economy with low inflation and persistent unemployment is not a success; it is a failure wearing respectable clothes. The moral weight of full employment — the dignity, the purpose, the aggregate demand that only wages-in-pockets can sustain — must sit alongside the price index in any honest account of what a central bank is for. Warsh, on the evidence of this report, has asked the right question. The answer, fully pursued, leads somewhere more demanding than monetary discipline alone can take us.