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Tuesday, August 20, 2013

Learn to Stop Worrying and Love (Moderate) Inflation

Noah Smith says moderate inflation would be a good thing (each point is explained in detail in his post):

Learn to stop worrying and love (moderate) inflation, by Noah Smith: The Federal Reserve's unprecedented programs of Quantitative Easing have not, as many predicted, resulted in substantially increased inflation. But I view this as a failure of the policy, not a success.
Inflation is grossly underappreciated. Economists consistently fail to educate the public about what they mean by the term "inflation". People think it just means "a rise in the price of something" (though that's not really what it means). And people don't like prices rising, because it seems like it should make stuff more expensive - and who wants that?
We're told that inflation is a necessary cost of improving the economy. And in fact, that's exactly what monetarist macroeconomists (think of Mike Woodford, Miles Kimball, etc.) tell us that it is. We must accept higher inflation, they tell us, in order to also get better GDP growth. But given our 'druthers, they tell us, we'd rather have very low inflation. No one wants to become like Zimbabwe, or the Weimar Republic, right??
I'm not so sure this is true, and I'll explain why later. But first, let me dispel a couple of popular myths about inflation.
Popular Inflation Myth 1: "Inflation means I can't buy as much stuff." ...
Popular Inflation Myth 2: "Inflation punishes savers." ...
Inflation Benefit 1: Your debt goes away. ...
Inflation Benefit 2: The federal government debt goes away. ...
Inflation Benefit 3 (?): "Balance sheet recession" might go away! ...
Now, I have to be fair, so I should mention that of course inflation has its costs as well. One of these is the pure nuisance cost - constantly changing prices is a nuisance, and that nuisance can become extremely economically damaging in a hyperinflation. Second, high inflation leads to variable inflation, increasing uncertainty and depressing investment. And finally there might even be government moral hazard; if the government decides it can simply inflate away its debt, it might engage in more irresponsible spending. These costs are all especially severe for higher levels of inflation.
But anyway I hope, after reading this, that you will be a little more wary of all those warnings about the evils of inflation. stop listening to poorly informed politicians, "Austrian" forum trolls, and your uncle who thinks he's still in the 70s. Inflation does not rob the poor man of his hard-earned wages; in fact, it is more likely to unburden the poor man from his crippling debt. And inflation helps get rid of all that debt, both public and private, that many people believe is clogging up our economic system. 
We don't want to let inflation get out of hand. But a higher Fed inflation target for the next decade - say, 4% or 5%, instead of our current 2% - would probably be a good thing for most Americans.

I'm not so sure about raising the target that high for an entire decade, but overshooting the 2% target (o raising the target) during the recovery could have helped to speed the return to normal.

    Posted by on Tuesday, August 20, 2013 at 12:33 PM in Economics, Inflation, Monetary Policy | Permalink  Comments (41)



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