There was a spurt of articles this weekend calling for increased inflation as a way to help jump-start the economy. (Here’s Tyler Cowen; here’s James Surowiecki; here’s Neil Irwin.) As a (self-inducted) member of the 4 percent club myself, I think it’s welcome news that more attention is being paid to finding a new way out of the awful economic state we’re currently in. But I want to highlight some of the objections to a higher inflation target that these three describe.
First, Cowen says that the politics are unfavorable:
Imagine the day after the announcement of a plan for 3 percent inflation. Older people, creditors and workers on fixed incomes — all connected to powerful lobbies — would start to complain. Republicans would wonder whether they had found a new issue on which to campaign, namely, opposition to inflation. And Democrats would worry about what position to take. Presidents of some regional Fed banks would probably oppose the policy publicly.
Although the unemployed might prefer such a policy, they are not well-mobilized politically. And President Obama is himself politically weak at the moment, so he cannot offer the Fed much cover.
Second, Irwin says that, without the threat of outright deflation, the Federal Reserve won’t be motivated to take the steps necessary to pull the inflation rate back up to trend:
Even if the United States can avoid the kind of deflation that crippled the Japanese economy in the 1990s, the current economic recovery could suffer if extremely low levels of inflation become the norm. The current rate of inflation may be just high enough to keep Fed policy makers from taking bold action to try to invigorate the recovery, but just low enough to represent a continued drain on economic activity.
“If that kind of equilibrium forms, you can get stuck in a really suboptimal situation,” said Tim Duy, a University of Oregon economist.
Last, and perhaps most ominously, Surowiecki says that ordinary people hate inflation, even when it would benefit them:
In polls, voters regularly cite high prices as one of their biggest concerns, even when inflation is low. A 2001 study that looked at the “macroeconomics of happiness” found that higher inflation put a severe dent in how happy people reported themselves to be. The distaste for inflation is such that a 1996 study (titled, aptly, “Why Do People Dislike Inflation?”), by the Yale economist Robert Shiller, found that, in countries around the world, sizable majorities said that they would prefer low inflation and high unemployment to high inflation and low unemployment, even if that meant that millions of extra people would go without work.
Suffice to say, the political road to a 4 percent or a 3 percent inflation target is harder than it seems. Paul Krugman once noted that in depression economics — a world we’re currently inhabiting, even if the economy is technically growing — what is ordinarily thought of as virtue becomes vice, and vice becomes virtue. Savings are good, for example, but when demand is down and resources are idled, more savings amount to more misery for everyone. Of course, as Krugman has also said, thinking about the macroeconomy in moralistic terms is a serious error, but I think I’ll save my thoughts on that for another time.
