Duncan Black: Geniuses, They Are: Noted
Duncan Black: Eschaton: Geniuses, They Are:
5 years later and our famed macroeconomists have begun to remember a bit of macroeconomics.
WASHINGTON — Inflation is widely reviled as a kind of tax on modern life, but as Federal Reserve policy makers prepare to meet this week, there is growing concern inside and outside the Fed that inflation is not rising fast enough.
Binyamin Applebaum: In Fed and Out, Many Now Think Inflation Helps:
The Fed has worked for decades to suppress inflation, but economists, including Janet Yellen, President Obama’s nominee to lead the Fed starting next year, have long argued that a little inflation is particularly valuable when the economy is weak. Rising prices help companies increase profits; rising wages help borrowers repay debts. Inflation also encourages people and businesses to borrow money and spend it more quickly....
“Weighed against the political, social and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about,” Kenneth S. Rogoff, a Harvard economist, wrote recently. “It should be embraced.”
The Fed, in a break from its historic focus on suppressing inflation, has tried since the financial crisis to keep prices rising about 2 percent a year.... Critics, including Professor Rogoff, say the Fed is being much too meek. He says that inflation should be pushed as high as 6 percent a year for a few years, a rate not seen since the early 1980s. And he compared the Fed’s caution to not swinging hard enough at a golf ball in a sand trap. “You need to hit it more firmly to get it up onto the grass,” he said. “As long as you’re in the sand trap, tapping it around is not enough.”...
The current generation of policy makers came of age in the 1970s, when a higher tolerance for inflation did not deliver the promised benefits. Instead, Western economies fell into “stagflation”--rising prices, little growth. Lately, however, the 1970s have seemed a less relevant cautionary tale than the fate of Japan, where prices have been in general decline since the late 1990s. Kariya, a popular instant dinner of curry in a pouch that cost 120 yen in 2000, can now be found for 68 yen, according to the blog Yen for Living....
“Let me just remind everyone that inflation falling below our target of 2 percent is costly,” Charles L. Evans, the president of the Federal Reserve Bank of Chicago, said in a speech in Madison, Wis., this month. “If inflation is lower than expected, then debt financing is more burdensome than borrowers expected. Problems of debt overhang become that much worse for the economy.”
Inflation also helps workers find jobs, according to an influential 1996 paper by the economist George Akerlof and two co-authors [George Perry and Bill Dickens]. Rising prices allows companies to increase profit margins quietly, by not raising wages, which in turn makes it profitable for companies to hire additional workers. Lower rates of inflation have the opposite effect, making it harder to find work...
