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Why We Need Inflation

This article is more than 7 years old.

An acquaintance lost her job as a nonprofit fundraiser more than a year ago. Today, despite lots of job-searching, she works a low-paying, part-time shift behind the jewelry counter at her local Macy’s. Her plight is hardly unique; she’s lucky compared to those who’ve been unemployed as long as she’s been underemployed.

America’s rate of long-term jobless — those who’ve been out of work six months or more — is the highest in years. Thirty-eight percent of all the unemployed fall into this category of the long-ago laid off.

Which leads to an obvious conclusion: What this country needs is higher prices.

Some economists believe some modest, sustained inflation is just the tonic for our global recessionary hangover.

That’s no typo. Some serious people believe a modest, sustained inflation is just the tonic for our global recessionary hangover, starting with Japan’s new prime minister. After winning last fall, Shinzo Abe has pursued a campaign promise to expand the money supply and trigger higher prices. The markets have applauded: the Nikkei stock index has been galloping, while lenders are rewarding Japan with low interest demands.

Unlike Abe, we don’t have to combat deflation, a cripplingly relentless plunge in prices. But we have another problem: government spending, one tried-and-true antidote to past recessions, appears to be off the table in deficit-fixated, sequester-saddled Washington.

Meanwhile, cheerleaders for unleashing modest inflation have run the gamut from liberal economist Paul Krugman to former George W. Bush adviser N. Gregory Mankiw, now at Harvard. Specifically, they’ve proposed that the Federal Reserve announce, loudly and clearly, that it will up its current inflation target of 2 percent to, say, 4 or 5 percent. Economics and history suggest it might work.

First, the economics: The advocates say that consumers’ reluctance to spend, which businesses have blamed for their sluggish hiring, could be overcome if shoppers expected higher prices. Some who could afford a little spending would be more likely to reach for their wallets if they knew that that laptop they’ve coveted will only be more expensive next year. Higher inflation would have another stimulative punch, as workers who receive automatic cost-of-living raises would see nominally larger paychecks, and some would feel richer and more spendthrift, even if they weren’t wealthier in real terms.

And what does history have to say? Inflation helped slay both the Great Depression (our worst ever) and the runner-up for worst economic calamity, the depression of the 1890s. Franklin Roosevelt called for higher prices to fight the deflation of the 1930s, and backed up his words by outlawing private ownership of gold, which relaxed our then official gold standard. (By tying the supply of money to the nation’s supply of gold, the standard was choking off needed growth in the monetary base.) The gold standard was even more revered orthodoxy during the 1890s depression. A series of gold strikes and improved refining late in the decade dumped shiploads of the precious stuff on the economy. The printing presses turned on, leading to more money, higher prices, and a return to prosperity.

Inflation helped slay both the Great Depression (our worst ever) and the runner-up for worst economic calamity, the depression of the 1890s.

Admittedly, this would not be a painless cure. While many people could manage an extra four or five cents on the dollar at the store, some lower-wage folks would struggle. Inflation also whacks the value of savings for those of us preparing for retirement or our kids’ education. But we’re already getting whacked: The Fed is keeping interest rates low, and has promised to do so for at least another two years, to avoid kicking the economy when it’s down. And if it’s low earners and savers we’re concerned about, how about those whose earnings and savings are at or near zero, either from unemployment or underemployment?

Fears of a return to the relentless price spikes of the Jimmy Carter years, says Krugman, overlook that a depressed economy like our current one can print money with more impunity. In fact, Paul Ryan, Mitt Romney’s ex-running mate, predicted that the Fed’s already lax monetary policy was flirting with runaway inflation. That was two years ago, and Ryan’s still waiting for his catastrophe.

There are actually just two impediments — one potential, one sadly real — to this strategy. The first, via Krugman, is that as responsible, buttoned-down bankers, the Fed lacks credibility to keep inflation going, and the public won’t go on that buying binge. (The Fed has been pursuing an easy money policy by other means; it helped stave off another Great Depression, but it has hardly turbo-charged the recovery.) The second reason is that if our politicians can’t even agree to spend us out of this mess, they’ve hardly got the spine for a little inflation.

Meanwhile, my acquaintance still works the jewelry counter, in what passes for a lucky break these days.


This program aired on March 6, 2013. The audio for this program is not available.

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