The Paul Krugman thread

[alybaba]

Says the Reagan worshipper

 

[Julius Skrrvin]

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[Dusty Bake Activate]

I had read that earlier about expected rate of increase in Medicare costs being revised down...interesting.

Last month the Congressional Budget Office released its much-anticipated projections for debt and deficits, and there were cries of lamentation from the deficit scolds who have had so much influence on our policy discourse. The problem, you see, was that the budget office numbers looked, well, O.K.: deficits are falling fast, and the ratio of debt to gross domestic product is projected to remain roughly stable over the next decade. Obviously it would be nice, eventually, to actually reduce debt. But if you’ve built your career around proclamations of imminent fiscal doom, this definitely wasn’t the report you wanted to see.

Still, we can always count on the baby boomers to deliver disaster, can’t we? Doesn’t the rising tide of retirees mean that Social Security and Medicare are doomed unless we radically change those programs now now now?

Maybe not.

To be fair, the reports of the Social Security and Medicare trustees released Friday do suggest that America’s retirement system needs some significant work. The ratio of Americans over 65 to those of working age will rise inexorably over the decades ahead, and this will translate into rising spending on Social Security and Medicare as a share of national income.

But the numbers aren’t nearly as overwhelming as you might have imagined, given the usual rhetoric. And if you look under the hood, the data suggest that we can, if we choose, maintain social insurance as we know it with only modest adjustments.

Start with Social Security. The retirement program’s trustees do foresee rising spending as the population ages, with total payments rising from 5.1 percent of G.D.P. now to 6.2 percent in 2035, at which point they stabilize. This means, by the way, that all the talk of Social Security going “bankrupt” is nonsense; even if nothing at all is done, the system will be able to pay most of its scheduled benefits as far as the eye can see.

Still, it does look as if there will eventually be a shortfall, and the usual suspects insist that we must move right now to reduce scheduled benefits. But I’ve never understood the logic of this demand. The risk is that we might, at some point in the future, have to cut benefits; to avoid this risk of future benefit cuts, we are supposed to act pre-emptively by...cutting future benefits. What problem, exactly, are we solving here?

What about Medicare? For years, many people — myself included — have warned that Medicare is a much bigger problem than Social Security, and the latest report from the program’s trustees still shows spending rising from 3.6 percent of G.D.P. now to 5.6 percent in 2035. But that’s a smaller rise than in previous projections. Why?

The answer is that the long-term upward trend in health care costs — a trend that has affected private insurance as well as Medicare — seems to have flattened out significantly over the past few years. Nobody is quite sure why, but there are indications that some of the cost-reducing measures contained in the Affordable Care Act, a k a Obamacare, are actually starting to “bend the curve,” just as they were supposed to. And because there are a number of cost-reducing measures in the law that have not yet kicked in, there’s every reason to believe that this favorable trend will continue.

Furthermore, there’s plenty of room for more savings, if only because recent research confirms that Americans pay far more for health procedures than citizens of other advanced countries pay; that the price premium can and should be brought down, and when it is, Medicare’s financial outlook will improve further.

So what are we looking at here? The latest projections show the combined cost of Social Security and Medicare rising by a bit more than 3 percent of G.D.P. between now and 2035, and that number could easily come down with more effort on the health care front. Now, 3 percent of G.D.P. is a big number, but it’s not an economy-crushing number. The United States could, for example, close that gap entirely through tax increases, with no reduction in benefits at all, and still have one of the lowest overall tax rates in the advanced world.

But haven’t all the great and the good been telling us that Social Security and Medicare as we know them are unsustainable, that they must be totally revamped — and made much less generous? Why yes, they have; they’ve also been telling us that we must slash spending right away or we’ll face a Greek-style fiscal crisis. They were wrong about that, and they’re wrong about the longer run, too.

The truth is that the long-term outlook for Social Security and Medicare, while not great, actually isn’t all that bad. It’s time to stop obsessing about how we’ll pay benefits to retirees in 2035 and focus instead on how we’re going to provide jobs to unemployed Americans in the here and now.

 

[Dusty Bake Activate]

http://www.nytimes.com/2013/07/12/opinion/krugman-delusions-of-populism.html?_r=0

Have you heard about “libertarian populism” yet? If not, you will. It will surely be touted all over the airwaves and the opinion pages by the same kind of people who assured you, a few years ago, that Representative Paul Ryan was the very model of a Serious, Honest Conservative. So let me make a helpful public service announcement: It’s bunk.

Some background: These are tough times for members of the conservative intelligentsia — those denizens of think tanks and opinion pages who dream of Republicans once again becoming “the party of ideas.” (Whether they ever were that party is another question.)

For a while, they thought they had found their wonk hero in the person of Mr. Ryan. But the famous Ryan plan turned out to be crude smoke and mirrors, and I suspect that even conservatives privately realize that its author is more huckster than visionary. So what’s the next big idea?

Enter libertarian populism. The idea here is that there exists a pool of disaffected working-class white voters who failed to turn out last year but can be mobilized again with the right kind of conservative economic program — and that this remobilization can restore the Republican Party’s electoral fortunes.

You can see why many on the right find this idea appealing. It suggests that Republicans can regain their former glory without changing much of anything — no need to reach out to nonwhite voters, no need to reconsider their economic ideology. You might also think that this sounds too good to be true — and you’d be right. The notion of libertarian populism is delusional on at least two levels.

First, the notion that white mobilization is all it takes rests heavily on claims by the political analyst Sean Trende that Mitt Romney fell short last year largely because of “missing white voters” — millions of “downscale, rural, Northern whites” who failed to show up at the polls. Conservatives opposed to any major shifts in the G.O.P. position — and, in particular, opponents of immigration reform — quickly seized on Mr. Trende’s analysis as proof that no fundamental change is needed, just better messaging.

But serious political scientists like Alan Abramowitz and Ruy Teixeira have now weighed in and concluded that the missing-white-voter story is a myth. Yes, turnout among white voters was lower in 2012 than in 2008; so was turnout among nonwhite voters. Mr. Trende’s analysis basically imagines a world in which white turnout rebounds to 2008 levels but nonwhite turnout doesn’t, and it’s hard to see why that makes sense.

Suppose, however, that we put this debunking on one side and grant that Republicans could do better if they could inspire more enthusiasm among “downscale” whites. What can the party offer that might inspire such enthusiasm?

Well, as far as anyone can tell, at this point libertarian populism — as illustrated, for example, by the policy pronouncements of Senator Rand Paul — consists of advocating the same old policies, while insisting that they’re really good for the working class. Actually, they aren’t. But, in any case, it’s hard to imagine that proclaiming, yet again, the virtues of sound money and low marginal tax rates will change anyone’s mind.

Moreover, if you look at what the modern Republican Party actually stands for in practice, it’s clearly inimical to the interests of those downscale whites the party can supposedly win back. Neither a flat tax nor a return to the gold standard are actually on the table; but cuts in unemployment benefits, food stamps and Medicaid are. (To the extent that there was any substance to the Ryan plan, it mainly involved savage cuts in aid to the poor.) And while many nonwhite Americans depend on these safety-net programs, so do many less-well-off whites — the very voters libertarian populism is supposed to reach.

Specifically, more than 60 percent of those benefiting from unemployment insurance are white. Slightly less than half of food stamp beneficiaries are white, but in swing states the proportion is much higher. For example, in Ohio, 65 percent of households receiving food stamps are white. Nationally, 42 percent of Medicaid recipients are non-Hispanic whites, but, in Ohio, the number is 61 percent.

So when Republicans engineer sharp cuts in unemployment benefits, block the expansion of Medicaid and seek deep cuts in food stamp funding — all of which they have, in fact, done — they may be disproportionately hurting Those People; but they are also inflicting a lot of harm on the struggling Northern white families they are supposedly going to mobilize.

Which brings us back to why libertarian populism is, as I said, bunk. You could, I suppose, argue that destroying the safety net is a libertarian act — maybe freedom’s just another word for nothing left to lose. But populist it isn’t.

 

[Domingo Halliburton]

http://www.nytimes.com/2013/07/12/opinion/krugman-delusions-of-populism.html?_r=0

see my problem is he just criticizes and never offers a solution. should we do the opposite of what he opposes? I'm glad he brings some basic economics to the masses but he offers no solution.

 

[Dusty Bake Activate]

see my problem is he just criticizes and never offers a solution. should we do the opposite of what he opposes? I'm glad he brings some basic economics to the masses but he offers no solution.

How you figure? He always talks solutions...Keynesian saltwater economics...using government spending to stimulate demand until it reaches or nears productive capacity.

 

[Domingo Halliburton]

How you figure? He always talks solutions...Keynesian saltwater economics...using government spending to stimulate demand until it reaches or nears productive capacity.

Yeah I get that. I was more referring to the article I quoted. Since congress can't do anything, we have QE infinity going on how much more stimulus can we have?

 

[Dusty Bake Activate]

http://www.nytimes.com/2013/08/23/opinion/krugman-this-age-of-bubbles.html?ref=paulkrugman&_r=0

So, another BRIC hits the wall. Actually, I’ve never much liked the whole “BRIC” — Brazil, Russia, India, and China — concept: Russia, which is basically a petro-economy, doesn’t belong there at all, and there are large differences among the other three. Still, it’s hard to deny that India, Brazil, and a number of other countries are now experiencing similar problems. And those shared problems define the economic crisis du jour.

What’s going on? It’s a variant on the same old story: investors loved these economies not wisely but too well, and have now turned on the objects of their former affection. A couple years back, Western investors — discouraged by low returns both in the United States and in the noncrisis nations of Europe — began pouring large sums into emerging markets. Now they’ve reversed course. As a result, India’s rupee and Brazil’s real are plunging, along with Indonesia’s rupiah, the South African rand, the Turkish lira, and more.

Does this reversal of fortune pose a major threat to the world economy? I don’t think so (he said with his fingers crossed behind his back). It’s true that investor loss of confidence and the resulting currency plunges caused severe economic crises in much of Asia back in 1997-98. But the crucial point back then was that, in the crisis countries, many businesses had large debts in dollars, so that falling currencies effectively caused their debts to soar, creating widespread financial distress. That problem isn’t completely absent this time around, but it looks much less serious.

In fact, count me among those who believe that the biggest threat right now is that policy in emerging markets will overreact — that their central banks will raise interest rates sharply in an attempt to prop up their currencies, which isn’t what they or the rest of the world need right now.

Still, even if the news from India and elsewhere isn’t apocalyptic, it’s not the kind of thing you want to hear when the world’s wealthier economies, while doing a bit better than they were a few months ago, are still deeply depressed and struggling to recover. And this latest financial turmoil raises a broader question: Why have we been having so many bubbles?

For it’s now clear that the flood of money into emerging markets — which briefly drove Brazil’s currency up by almost 40 percent, a rise that has now been completely reversed — was yet another in the long list of financial bubbles over the past generation. There was the housing bubble, of course. But before that there was the dot-com bubble; before that the Asian bubble of the mid-1990s; before that the commercial real estate bubble of the 1980s. That last bubble, by the way, imposed a huge cost on taxpayers, who had to bail out failed savings-and-loan institutions.

The thing is, it wasn’t always thus. The ’50s, the ’60s, even the troubled ’70s, weren’t nearly as bubble-prone. So what changed?

One popular answer involves blaming the Federal Reserve — the loose-money policies of Ben Bernanke and, before him, Alan Greenspan. And it’s certainly true that for the past few years the Fed has tried hard to push down interest rates, both through conventional policies and through unconventional measures like buying long-term bonds. The resulting low rates certainly helped send investors looking for other places to put their money, including emerging markets.

But the Fed was only doing its job. It’s supposed to push interest rates down when the economy is depressed and inflation is low. And what about the series of earlier bubbles, which, at this point, reach back a generation?

I know that there are some people who believe that the Fed has been keeping interest rates too low, and printing too much money, all along. But interest rates in the ’80s and ’90s were actually high by historical standards, and even during the housing bubble they were within historical norms. Besides, isn’t the sign of excessive money printing supposed to be rising inflation? We’ve had a whole generation of successive bubbles — and inflation is lower than it was at the beginning.

O.K., the other obvious culprit is financial deregulation — not just in the United States but around the world, and including the removal of most controls on the international movement of capital. Banks gone wild were at the heart of the commercial real estate bubble of the 1980s and the housing bubble that burst in 2007. Cross-border flows of hot money were at the heart of the Asian crisis of 1997-98 and the crisis now erupting in emerging markets — and were central to the ongoing crisis in Europe, too.

In short, the main lesson of this age of bubbles — a lesson that India, Brazil, and others are learning once again — is that when the financial industry is set loose to do its thing, it lurches from crisis to crisis.

 

[TLR Is Mental Poison]

I fell back on my Krugman hate but he still has way too much faith on govt spending reviving the economy

Our problems are structural and cant be fixed with sustained stimulus... thats the underlying theme he seems to love to hang his hat on that just doesnt pan out with me. Beyond that he makes a lot of sense.

 

[Spin]

The article he wrote on the libertarian populism was interesting. I agree that the republicans can't rely on a "re-energized" white base to win the presidential election. The tea party candidates can continue to win in deep red states, but it won't carry over into the national election. The establishment republicans already know this which is why they're pushing Christie to the moon.

As far as the economy goes, GDP grew 1.7% in the 2nd quarter (slow, but still positive). A large chunk of the money the Fed has pumped into the banks still hasn't been loaned out. The banks are just hoarding the cash. It's probably one of the reasons inflation hasn't risen as fast as many thought. However, rates have started to move higher. Wells Fargo just axed 2,000 employees as re-fi's has slowed with rising rates. Banks are sending out those 0% credit card offers like crazy again. I have also seen more ads for small business lending (though you have to be pretty well established to get the loan/line).

At the end of the day, a person can't wait for the government to GIVE you a job. If you don't learn a skill you will be stuck in a service job that basically turns you into a drone. The US has been on the service economy tip for a good while and it doesn't seem to be changing. Companies are getting more done with less and people are accepting lower pay.

As bad as they make it seem here, things are still moving better than almost anywhere else. They pumped up Brazil and India, now look at them.

Some might not like George Soros, but he makes an interesting point with his reflexivity theory. Economists want to point out that there is an equilibrium mechanism that prices gravitate to over time. While at times this may be true, ultimately prices are always moving all over the place. We have boom and bust cycles based on human emotions running prices up and down. While Soros believes capitalism is the lesser of the evils between socialism, communism, etc, he does mention there is a role for government. The extreme capitalistic model turns such programs as healthcare, education, and politics into business's that undermine the nation.

 

[Dusty Bake Activate]

http://krugman.blogs.nytimes.com/20...rence-loanable-funds-and-erskine-bowles/?_r=0

Here’s Erskine Bowles in March 2011:

[T]his is a problem we’re going to have to face up to. It may be two years, you know, maybe a little less, maybe a little more. But if our bankers over there in Asia begin to believe that we’re not going to be solid on our debt, that we’re not going to be able to meet our obligations, just stop and think for a minute what happens if they just stop buying our debt.

Strange to say, however, neither Bowles nor anyone else of similar views has, as far as I can tell, actually done what he urged: “stop and think for a minute what happens if they just stop buying our debt.” They just assume that it would be catastrophic, without laying out any kind of model of how that would work.

I, on the other hand, have worked out two models, one ad hoc and the other a more buttoned-down New Keynesian-type model — and they just don’t support Bowles’s worries.

Some commenters here have declared it obvious that a cutoff of Chinese funds would drive up interest rates, saying that it’s just supply and demand. That struck me, because it’s exactly what George Will said when I tried to argue, back in 2009, that budget deficits need not lead to high interest rates when the economy is depressed. And in fact the argument that foreigners will reduce their lending to us, sending rates higher, and shrinking the economy even though we have our own currency and monetary policy is, when you think about it, more or less isomorphic to the famously wrong argument that fiscal expansion is contractionary, because it will drive up interest rates.

I am, by the way, grateful to those commenters — thinking about the equivalence of the China-debt and deficit-interest fallacies nudged me into a better, simpler formulation of my NK model, which I’ll say more about in a few days. And my model-building has, in turn, given me a new way to talk about what’s going on.

So, here we go. Start from the observation that the balance of payments always balances:

Capital account + Current account = 0

where the capital account is our sales of assets to foreigners minus our purchases of assets from foreigners, and the current account is our sales of goods and services (including the services of factors of production) minus our purchases of goods and services. So in the hypothetical case in which foreigners lose confidence and stop buying our assets, they’re pushing our capital account down; as a matter of accounting, then, our current account balance must rise.

But what’s the mechanism? (Remember the fallacy of immaculate causation.) The answer is, it depends on the currency regime.

If you’re Greece, the way it works is indeed that interest rates soar, depressing demand and compressing imports until the current account has risen enough; unfortunately, demand for domestic goods falls too, so you have a nasty slump.

But if you’re America or Britain, the central bank sets interest rates, and under current conditions that means holding them at zero. So what happens instead is that your currency depreciates, making exporters and import-competing industries more competitive. The effect on the economy as a whole is therefore expansionary, not contractionary.

Things might be different if the private sector had large debts in foreign currency, as was true in Asia in the 90s. But it doesn’t.

So the conventional wisdom about how we have to fear a Chinese bond-buying strike just doesn’t make sense — and in fact it falls down in exactly the same way as fallacious arguments about the harm done by fiscal deficits in a depressed economy; basically, Erskine Bowles is making the same error as whatshisname.

You may find it hard to believe that so many important and influential people could be dead wrong about the basic economics of our situation. But as far as I can tell, this is simply something “everyone knows”, and none of them have ever thought it through.

 

[Dusty Bake Activate]

http://krugman.blogs.nytimes.com/2014/02/20/key-stimulus-graphs/

I thought it might be useful to put up a few graphs that are key to how I think about the sad tale of fiscal policy in the Great Recession and afterwards.

First, during the debate over stimulus there was one key issue: what would happen to interest rates. Opponents warned darkly of soaring rates and crowding out; proponents argued that this wouldn’t happen in a depressed economy. Results:

Second, while there have been a number of studies using various approaches to estimate the impact of fiscal policy in a depressed economy, I think the really decisive evidence comes from differential austerity in Europe. Here’s a crude picture, simply comparing the change in IMF estimates of the cyclically adjusted budget balance with growth from 2009 to 2013:

You can try to explain this correlation away — but it’s a steep climb. The prima facie evidence is that austerity is contractionary, with a multiplier more than 1.

So how did US political debate come to be shaped by the idea that the stimulus was a failure? Go back to the original Romer-Bernstein projection (pdf):

The striking thing here isn’t what they thought the Recovery Act would achieve, it’s how optimistic they were about how the economy would perform even without stimulus — that we would be back to 5 percent unemployment after 5 years, i.e., by now. The stimulus was simply supposed to shave off the top of what would in any case be a fairly brief bulge in unemployment.

I have never understood where that optimism came from, but in any case, what happened is that the actual protracted effects of the financial crisis and the debt overhang got interpreted as a failure of stimulus.

 

[Dusty Bake Activate]

The Inflation Obsession
MARCH 2, 2014

Recently the Federal Reserve released transcripts of its monetary policy meetings during the fateful year of 2008. And, boy, are they discouraging reading.

Partly that’s because Fed officials come across as essentially clueless about the gathering economic storm. But we knew that already. What’s really striking is the extent to which they were obsessed with the wrong thing. The economy was plunging, yet all many people at the Fed wanted to talk about was inflation.

Matthew O’Brien at The Atlantic has done the math. In August 2008 there were 322 mentions of inflation, versus only 28 of unemployment and 19 of systemic risks or crises. In the meeting on Sept. 16, 2008 — the day after Lehman fell! — there were 129 mentions of inflation versus 26 mentions of unemployment and only four of systemic risks or crises.

Historians of the Great Depression have long marveled at the folly of policy discussion at the time. For example, the Bank of England, faced with a devastating deflationary spiral, kept obsessing over the imagined threat of inflation. As the economist Ralph Hawtrey famously observed, “That was to cry ‘Fire, fire!’ in Noah’s flood.” But it turns out that modern monetary officials facing financial crisis were just as obsessed with the wrong thing as their predecessors three generations before.

And it wasn’t just a bad call in 2008. Much supposedly informed opinion has remained fixated on the supposed threat of rising prices despite being wrong again and again. If you spent the last five years watching CNBC, or reading the Wall Street Journal opinion pages, or for that matter listening to prominent conservative economists, you lived in a constant state of alarm over runaway inflation, which was coming any day now. It never did.

What accounts for inflation obsession? One answer is that obsessives failed to distinguish between underlying inflation and short-term fluctuations in the headline number, which are mainly driven by volatile energy and food prices. Gasoline prices, in particular, strongly influence inflation in any given year, and dire warnings are heard whenever prices rise at the pump; yet such blips say nothing at all about future inflation.

They also failed to understand that printing money in a depressed economy isn’t inflationary. I could have told them that, and in fact I did. But maybe there was some excuse for not grasping this point in 2008 or early 2009.

The point, however, is that inflation obsession has persisted, year after year, even as events have refuted its supposed justifications. And this tells us that something more than bad analysis is at work. At a fundamental level, it’s political.

This is fairly obvious if you look at who the inflation obsessives are. While a few conservatives believe that the Fed should be doing more, not less, they have little if any real influence. The overall picture is that most conservatives are inflation obsessives, and nearly all inflation obsessives are conservative.

Why is this the case? In part it reflects the belief that the government should never seek to mitigate economic pain, because the private sector always knows best. Back in the 1930s, Austrian economists like Friedrich Hayek and Joseph Schumpeter inveighed against any effort to fight the depression with easy money; to do so, warned Schumpeter, would be to leave “the work of depressions undone.” Modern conservatives are generally less open about the harshness of their view, but it’s pretty much the same.

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Recent Comments
Jerry Parsons
3 days ago
This piece strikes me as underlying the old adage that hindsight is 20-20. For those of us that lived through the 1980's with its runaway...

Mark Thomason
3 days ago
Yes, politics is at the root of the problem, and it is the politics bought by money.However, this is done by way of a structural imbalance. ...

hero2victory
3 days ago
inflation is THEFT.Money is a measure of human labor. The money we earn represents our individual contribution to society and should be a...

• See All Comments

The flip side of this antigovernment attitude is the conviction that any attempt to boost the economy, whether fiscal or monetary, must produce disastrous results — Zimbabwe, here we come! And this conviction is so strong that it persists no matter how wrong it has been, year after year.

Finally, all this ties in with a predilection for acting tough and inflicting punishment whatever the economic conditions. The British journalist William Keegan once described this as “sado-monetarism,” and it’s very much alive today.

Does any of this matter? It’s true that the Fed hasn’t surrendered to the sado-monetarists. Notably, it didn’t panic in 2011, when another blip in gasoline prices briefly raised the headline rate of inflation, and Republicans began inveighing against the “debasement” of the dollar.

But I’d argue that the clamor from inflation obsessives has intimidated the Fed, which might otherwise have done more. And it has also been part of a general climate of opposition to anything that might address our continuing jobs crisis.

As I suggested, we used to marvel at the wrongheadedness of policy makers during the Great Depression. But when the Great Recession struck, and we were given a chance to do better, we ended up repeating all the same mistakes.

 

[Dusty Bake Activate]

http://www.nytimes.com/2014/04/07/opinion/krugman-oligarchs-and-money.html?hp&rref=opinion

Econonerds eagerly await each new edition of the International Monetary Fund’s World Economic Outlook. Never mind the forecasts, what we’re waiting for are the analytical chapters, which are always interesting and even provocative. This latest report is no exception. In particular, Chapter 3 — although billed as an analysis of trends in real (inflation-adjusted) interest rates — in effect makes a compelling case for raising inflation targets above 2 percent, the current norm in advanced countries.

This conclusion fits in with other I.M.F. research. Last month the fund’s blog — yes, it has one — discussed the problems created by “lowflation,” which is nearly as destructive as outright deflation. An earlier edition of the World Economic Outlook analyzed historical experience with high debt, and found that countries that were willing to let inflation erode their debt — including the United States — fared much better than those, like Britain after World War I, that clung to monetary and fiscal orthodoxy.

But the I.M.F. evidently doesn’t feel able to say outright what its analysis clearly implies. Instead, the report resorts to euphemisms that preserve deniability: the analysis “could have implications for the appropriate monetary policy framework.”

So what makes the obvious unsayable? In a direct sense, what we’re seeing is the power of conventional wisdom. But conventional wisdom doesn’t come from nowhere, and I’m increasingly convinced that our failure to deal with high unemployment has a lot to do with class interests.

First, let’s talk about the case for higher inflation.

Many people understand that a falling price level is a bad thing; nobody wants to turn into Japan, which has struggled with deflation since the 1990s. What’s less understood is that there isn’t a red line at zero: an economy with 0.5 percent inflation is going to have many of the same problems as an economy with 0.5 percent deflation. That’s why the I.M.F. warned that “lowflation” is putting Europe at risk of Japanese-style stagnation, even though literal deflation hasn’t happened (yet).

Moderate inflation turns out to serve several useful purposes. It’s good for debtors — and therefore good for the economy as a whole when an overhang of debt is holding back growth and job creation. It encourages people to spend rather than sit on cash — again, a good thing in a depressed economy. And it can serve as a kind of economic lubricant, making it easier to adjust wages and prices in the face of shifting demand.

But how much inflation is appropriate? European inflation is below 1 percent, which is clearly too low, and U.S. inflation isn’t that much higher. But would it be enough to get back to 2 percent, the official inflation target in both Europe and the United States? Almost certainly not.

You see, monetary experts have long known about the case for moderate inflation, but back in the 1990s, when the 2 percent target was hardening into policy orthodoxy, they thought that 2 percent was high enough to do the job. In particular, they thought it was enough to make liquidity traps — periods when even an interest rate of zero isn’t low enough to restore full employment — very rare. But America has now been in a liquidity trap for more than five years. Clearly, the experts were wrong.

Furthermore, as the latest I.M.F. report shows, there’s strong evidence that changes in the global economy are increasing the tendency of investors to hoard cash rather than put funds to work, thereby increasing the risk of liquidity traps unless the inflation target is raised. But the report never dares to say this outright.

So why is the obvious unsayable? One answer is that serious people like to prove their seriousness by calling for tough choices and sacrifice (by other people, of course). They hate being told about answers that don’t involve more suffering.

And behind this attitude, one suspects, lies class bias. Doing what America did after World War II — using low interest rates and inflation to erode the debt burden — is often referred to as “financial repression,” which sounds bad. But who wouldn’t prefer modest inflation and a bit of asset erosion to mass unemployment? Well, you know who: the 0.1 percent, who receive “only” 4 percent of wages but account for more than 20 percent of total wealth. Modestly higher inflation, say 4 percent, would be good for the vast majority of people, but it would be bad for the superelite. And guess who gets to define conventional wisdom.

Now, I don’t think that class interest is all-powerful. Good arguments and good policies sometimes prevail even if they hurt the 0.1 percent — otherwise we would never have gotten health reform. But we do need to make clear what’s going on, and realize that in monetary policy as in so much else, what’s good for oligarchs isn’t good for America.

@DEAD7

 

[TLR Is Mental Poison]

Free market Free market Free market Free market Free market Free market Free market Free market Free market Free market Free market Free market Free market Free market

Even the monetary supply should be Free market Free market Free market Free market Free market Free market Free market Free market Free market Free market Free market