Another Inflation Hawk Argues for a Higher Inflation Target

(An important point about an economic policy that's rarely questioned. - promoted by desmoinesdem)

Economist Kenneth Rogoff, no liberal, is arguing for a higher inflation target:


If the Federal Reserve raises its target inflation rate by several percentage points – up from around 2 percent, where it’s been for the past decade, to somewhere in the neighborhood of 4 to 6 percent – and injects new money into the economy until it gets there, then debtors will get some relief and the wheels of the economy will once again start to turn.

One of the biggest propaganda victories of the 20th century was convincing the middle class that inflation is the worst possible thing that can happen to them. High inflation sucks, to be sure, but people tend to forget that inflation also reduces the real value of one's debts.

We also hear a lot about the “elderly who live on a fixed income.” Except that most elderly people depend on Social Security for the bulk of their income, and SS is inflation-protected via COLAs.

However, there is one class of people for whom inflation is in every and all cases an unmitigated disaster: bondholders, a.k.a. the owning class. These are the folks who make money from money. As Rogoff, an inflation hawk, notes, tolerating higher inflation will result in a transfer of income from financiers to workers, (or as he puts it in less class-war terms: from creditors to debtors). That's exactly right. All economic policy is a question of the distribution of income.

Cross-posted at Cheeze Blog.

  • I agree with your general point

    but I have two questions: first, hasn’t Obama proposed to change the COLA formula for Social Security, meaning that seniors would see benefits erode over time?

    And second, wasn’t inflation more of a “debtor’s friend” before the U.S. experienced four decades of zero or negative real wage growth?

    • both good points

      Obama did propose using a different formula to calculate COLAs that would make the benefit hikes smaller each year. Seniors would see benefits erode over time, about 3% every 10 years I believe.

      It’s essentially a benefit cut under the guise of a “technical adjustment.” (Whether the new formula is truly more accurate is of course beside the point.)

      But any COLA is better than none. Bondholders, obviously, don’t have COLAs, so they fear-monger about inflation and invoke “elderly people on fixed incomes,” which is impossible if we assume that all elderly people get SS.

      On your second point, inflation has the same effect on the real value of one’s debts regardless of what’s happening to incomes. Inflation was more of a debtor’s friend in the 1960s and before because inflation was generally higher. It’s tough for inflation to take off when wages aren’t rising.

      • one more thing about inflation

        The problem right now is that corporations are hoarding cash. A higher inflation policy would make it more expensive to hoard cash, giving employers more incentive to invest that money, which creates jobs.

        The same is true of consumers, they are deleveraging, but I don’t think we actually want the savings rate to drop down to the 1-2% rate of the 1990s and 2000s. The post-war personal savings rate hovered around 8% until the late 1980s. That’s probably where it should be. So consumers probably can’t pull us out of the recession by themselves. That’s what makes it such a tough problem to solve.

  • another point worth mentioning

    Is that President Obama had the opportunity to choose different leadership for the Federal Reserve. In fact, you argued at the time that he should choose an “inflation dove.” But Obama reappointed “mild-mannered economic overlord” Ben Bernanke, with whom Wall Street was comfortable.  

    • "Employment Hawk!"

      Somebody suggested that for audiences for whom the image of a dove would be a turn-off because of its irenic, fluffy nature, that “Employment Hawk” would be a good substitute.

      That way, instead of the Inflation Hawk swooping down and snatching the Inflation Dove out mid-air all the time, I.H. has to fight it out with Employment Hawk.

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