Krugman: The Inflation Cure

[Kurt_and_Hunter]

September 2, 2010, 9:23 am
The Inflation Cure
Paul Krugman

Ken Rogoff is proposing — not for the first time — that the United States use a burst of inflation to get out of its slump. My reaction is a mix of agreement and exasperation. I agree that higher inflation would help; my exasperation comes from Rogoff’s offhandedness about the whole thing. How, exactly, are we supposed to get this burst of inflation?

Just saying “monetary policy” doesn’t cut it. Yes, the Fed has tools available even though short-term rates are up against the zero lower bound, and it should be using them to the max. But their effect is highly uncertain; I don’t think anyone can count on the Fed to deliver, on cue, Rogoff’s “two or three years of slightly elevated inflation”. In fact, the whole logic of the liquidity trap suggests that if central banks can gain any leverage at all, it’s only by credibly committing to inflation over a fairly sustained period.

So how might inflation be achieved? Actually, we have a good example: the end of the Great Depression. The immediate cause of the depression’s end was, of course, a very large fiscal stimulus, also known as World War II. But why didn’t the US slide back into depression when the war was over? Many people thought it would; the decline of Montgomery Ward had a lot to do with Sewell Avery’s policy of refusing to expand and hoarding cash in preparation for the return of depression. Why, then, didn’t depression return? The best answer I’ve come up with is that the depression was, at least in part, a Koo-type balance sheet slump — and the private sector emerged from World War II with much-improved balance sheets.

And inflation was an important part of that improvement. Here’s the GDP deflator (a measure of the overall price of things America produces) from 1929 to 1948:



Much More of this Krugman entry at Link...
http://krugman.blogs.nytimes.com/2010/09/02/the-inflation-cure/

Rogoff Article:
http://www.project-syndicate.org/commentary/rogoff72/English

[Winterblues]

1. I am not an economist by any means but raising the price of goods does not seem wise to me.

I would much rather see taxes raise than food prices...Inflation is not desirable IMO unless it is wages..

[ThomWV]

4. Inflation doesn't of necessity mean rising price of goods, it means more money supply.

[Winterblues]

5. I think more money supply creates inflation but does not define it

My understanding is limited though.

[WI_DEM]

2. Krugman--The DU God.

[Uncle Joe]

3. I believe relative competition comes in to play as well

the rest of the industrial world was devastated for years, if not a decade or two after World War II.

The U.S. was king of the hill, but for too long we've let our world leading, fundamental domestic infrastructure erode as increasing percentages of our national GDP has gone to maintaining the military industrial complex to service or protect our global empire.

Thanks for the thread, Kurt_and_Hunter.

[Xolodno]

6. Well...I'm an Economist....

....and this flies contrary to every instinct on economic stability. Inflation has always been the giant beast that once you let it out, its very difficult to cage up again. But you know what, it may just work this time....

Profitable companies are sitting on piles of cash and not really hiring or producing. Banks are not lending and are just hording every nickle. Introduce inflation and then there is a very real threat that the money they are sitting on will NOT be able to buy the same out of goods and services if they used their cash later instead of sooner. So...they start purchasing durable goods, hiring, etc.

[Kurt_and_Hunter]

8. Yes, but deflation is more damaging and incurable

And we are not talking about scary INFLATION, of course, we are only talking about trying to restore normal garden variety 3-4%/year.

[Xolodno]

9. If only inflation was that easy to tame...

...could shoot for that target, but, what happens if it spooks everyone to start spending and inflation is double or triple than what was intended? Try bottling up that genie. Economics would be an exact science....IF people behave rationally. But there is plenty of evidence everywhere to the contrary.

Deflation is more damaging...incurable? Not in the long run...but of course, in the long run we are all dead. And I would say we are flirting very dangerously close with deflation. We have seen some areas where wages are cut, prices dropping, but its not an epidemic....yet.

And here's another problem, what if business and the banks put their funds in precious metals instead? That won't do much good. Thus you would have to either cease all sales of those commodities or slap a significant tax on "holding" on such commodities in excess of a certain limit...and try getting that past a filibuster when you got "useful idiots" glued to the false gospel of Beck.

[tnlurker]

7. As long as the inflation they are talking about is wage inflation

Then I am for it.

We have had 30 years of price inflation where the wage inflation was flat or insignificant. That is why our buying power is so low.

[Kurt_and_Hunter]

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[Kurt_and_Hunter]

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