The Case for 4% Inflation

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Yves here. Some readers are likely to recoil at the idea that more inflation might be a good thing. But the flip side is that economists are still fighting the war of the 1970s. The 1970s stagflation was the result of a specific set of conditions that look very remote now: a recent past of budget deficits when the economy was already strong leading to currency depreciation (Nixon going off the gold standard) which also hurt the Saudis (who lost out because oil was denominated in dollars), leading them to retaliate with oil price increases. And because labor had bargaining power, unlike now, the combination of too much unintended stimulus (the deficits were the result of an unwillingness to raises taxes, since they’d perceived to be the result of needing to fund the unpopular Vietnam War) plus a commodities shock led not just to inflation, but an increasing rate of inflation.

What makes inflation hated now is that workers have no leverage, so stagnant wages plus inflation means a declining standard of living. Similarly, an increase in the level of inflation hurts investors. But if an inflation rate is not terribly high and doesn’t rise, bond yields and securities prices will adjust to reflect that level of inflation. In other words, what hurts workers is when pay increases lag inflation in a meaningful way, and when investment returns don’t include an adequate inflation premium.

By Laurence Ball, Professor, Johns Hopkins University; Research Associate, NBER; and Visiting Scholar, IMF. Cross posted from VoxEU

Since the double-digit inflation of the 1970s, central banks have sought to reduce inflation and keep it low. This column argues that recent history teaches us that inflation has fallen too low. Raising inflation targets to 4% would have little cost, and it would make it easier for central banks to end future recessions.

Many central banks have adopted a common policy – an inflation target near 2%. These central banks include the Fed (which calls it a ‘long run goal’), the ECB (which targets inflation ‘below, but close to 2%’) and the central banks of most other advanced economies.

A number of economists, such as Blanchard et al. (2010), have suggested a higher inflation target – typically 4%. Yet this idea is anathema to central bankers. According to Ben Bernanke (2010a), the Federal Open Market Committee unanimously opposes an increase in its inflation goal, which ‘would likely entail much greater costs than benefits’.

I examine the case for a 4% inflation target in a recent essay (Ball 2013) and reach the opposite conclusions to those of Chairman Bernanke:

• A 4% target would ease the constraints on monetary policy arising from the zero bound on interest rates, with the result that economic downturns would be less severe.
• This important benefit would come at minimal cost, because 4% inflation does not harm an economy significantly.

A Lesson from the Great Recession

Recent history has demonstrated the problem of the zero bound. In response to the US financial crisis and recession, the Fed reduced its target for the federal funds rate from 5.25% in August 2007 to a range of 0 to 0.25% in December 2008. The target remains in that range today. Yet this sharp monetary easing has not restored full employment. The unemployment rate peaked at 10% in 2009 and then stayed high; in April 2013, it was 7.6%. Unemployment of 5% – widely considered the natural rate just a few years ago – is nowhere in sight.

During past recessions, the Fed has reduced interest rates and kept reducing them until unemployment fell to an acceptable level. But cutting interest rates has not been feasible since 2008. With nominal rates already near zero, they cannot fall farther. Nobody would lend at a negative interest rate because one can do better by holding cash.

As the US recession spread around the world, many other central banks reduced interest rates to 1% or less. Like the US, their economies are stuck in the ‘liquidity trap’ described by Keynes (1936). Unemployment is high and policymakers cannot reduce it with interest-rate cuts.

In general, a higher inflation target reduces the zero-bound problem. In long run equilibrium, a higher inflation rate implies that nominal-interest rates are also higher – the Fisher effect. When a recession occurs, rates can fall by more before hitting zero, making it more likely that policymakers can restore full employment.

Suppose that central banks had been targeting 4% inflation in the early 2000s rather than 2%. Nominal-interest rates would have been two percentage points higher, allowing rates to fall by an extra two points before hitting zero. I estimate that this extra stimulus would have reduced average unemployment over 2010-2013 by two percentage points (Ball 2013).

Future Risks from the Zero Bound

Looking forward, the case for a higher inflation target depends on the risk that interest rates will hit zero in future recessions. Some economists believe that this risk is low. Mishkin (2011), for example, argues:

Although [the zero bound] has surely been a major problem in this recent episode, it must be remembered that episodes like this do not come very often. Indeed, we have not experienced a negative shock to the economy of this magnitude for over seventy years. If shocks of this magnitude are rare, then the benefits to a higher inflation target will not be very large because the benefits will only be available infrequently.

In my view, Mishkin understates the risk of the zero bound. If we look beyond the US, the crisis of 2007-2009 is not unique in recent history. A completely separate financial crisis pushed Japanese interest rates to zero in 1997. It was only around 1990 that central banks began to target inflation rates of 2% or less. The two largest economies that adopted this policy both hit the zero bound within 20 years.

More generally, history suggests that the zero bound is dangerous if central banks target 2% inflation. In my paper, I make this point by examining the eight US recessions since 1960.

We can divide these recessions into two groups:

• First, recessions with low initial inflation

Three of the eight recessions began with inflation rates between two and three percent. These episodes provide the most direct evidence on the zero-bound problem at low inflation rates. One of the three is the Great Recession of 2008-09, when the zero bound constrained monetary policy severely. Based on the Taylor rule that fits policy before 2008, Rudebusch (2009) finds that the optimal federal funds rate, ignoring the zero bound, fell to -5% in 2009.

The other two recessions that began with 2-3% inflation are the first one in the sample, which occurred in 1960-61, and the last one before the Great Recession, in 2001. These two recessions were milder than most: their peak levels of unemployment were only 7.1% and 6.3%. In both cases, the federal funds rate did not hit zero, but it came close. The funds rate fell to 1.2% following the 1960-61 recession and 1.0% following the 2001 recession.

We have seen that, with low inflation, a severe recession reduces the optimal federal funds rate to -5% and mild recessions reduce it to about +1%. Comparing these cases, it seems likely that a recession of average severity would push the optimal rate below zero.

• Second, recessions with high initial inflation

In five of the eight recessions since 1960, inflation began above 4%. With high inflation, nominal-interest rates were also high, so the Fed could cut them sharply without approaching zero. But what would have happened if inflation had started at 2%?

We can get an idea by examining real interest rates. If the nominal-interest rate, i, cannot fall below zero, then the real rate, r=i-π , cannot fall below -π . One way to interpret the danger of low inflation is that it raises the lower bound on the real interest rate.

If inflation is 2% when a recession begins, the bound on the real rate is -2% at that point. However, the recession is likely to push inflation down somewhat. In the three recessions that actually started with 2-3% inflation, the inflation rate fell to about 1% before the economy recovered. History suggests, therefore, that initial inflation of 2% will produce a bound of -1% on the real interest rate.

For the recessions that started with inflation above 4%, we can gauge the relevance of a real-interest-rate bound by examining the lowest value reached by the real rate during the recession and subsequent recovery. In two of the five cases – the recessions of 1973-75 and 1980 – the real rate fell below -4%. In these episodes, a lower bound of -1% would have severely distorted monetary policy. For the recession of 1969-70, the real rate fell to a minimum of -2.3%. For the recession of 1990-91, the minimum was -0.6%; this episode would have been a near-miss with a lower bound of -1%. Only in one case, the recession of 1981-82, was the minimum real rate above zero.

To summarise, history suggests that, with a 2% inflation target, the lower bound on interest rates is likely to bind in a large fraction of recessions.

Opposition to Higher Inflation

Would 4% inflation hurt the economy? Economists have suggested various costs of inflation, such as variability in relative prices and distortions of the tax system. But research has not shown that these effects are quantitatively important for moderate inflation. As Krugman (1997) puts it: “one of the dirty little secrets of economic analysis is that even though inflation is universally regarded as a terrible scourge, efforts to measure its costs come up with embarrassingly small numbers”.

Some central bankers acknowledge that 4% inflation does not greatly harm the economy. Nonetheless, they oppose adoption of a 4% target because they think this action may actually cause inflation to rise above 4%, or at least create expectations of that outcome.

Bernanke (2010a), for example, asserts that “inflation would be higher and probably more volatile” with a 4% target and “inflation expectations would also likely become significantly less stable”. According to Bernanke (2010b):

The Fed, over a long period of time, has established a great deal of credibility in terms of keeping inflation low, around 2%… If we were to go to 4% and say we’re going to 4%, we would risk a lot of that hard-won credibility, because folks would say, well, if we go to 4%, why not go to 6%? It’d be very difficult to tie down expectations at 4%.

Mishkin (2011) makes a similar argument, asserting that “when inflation rises above the 3% level, it tends to keep on rising”.

The Addictive Theory of Inflation

We might call this view ‘the addictive theory of inflation’. Like an alcoholic’s first drink, 4% inflation may not do great harm by itself, but it is the first step in a dangerous process.

The rationale for this view is not clear. In other contexts, Bernanke and Mishkin argue that a central bank should determine its optimal policy, explain this policy to the public, and carry it out. Why can’t policymakers explain that the zero-bound problem makes 4% inflation desirable, raise inflation to 4%, and keep it there? Mishkin points to the 1960s, when inflation rose to 4% and the Fed let it keep rising, but why must policymakers repeat that mistake?

History does not suggest that it would be “difficult to tie down expectations” if inflation rises modestly. Inflation expectations, as measured by surveys, have generally followed actual inflation with a lag. They followed inflation up during the 1960s and 70s, and after that they followed inflation down. If inflation rises to 4%, it seems unlikely that expectations will overshoot this level.


Since the double-digit inflation of the 1970s, central banks have sought to reduce inflation and keep it low. Recent history teaches us that inflation has fallen too low. Raising inflation targets to 4% would have little cost, and it would make it easier for central banks to end future recessions.

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  1. LXDR1F7

    A higher nominal inflation target of 4% will result in higher nominal growth but real or inflation adjusted growth would be the same right?

    1. R Foreman

      ..and what happens when every firm writes off their non-performing loans, and the Fed sells all their debt securities reducing their balance sheet back to $800Billion, all derivative transactions are force-marked to market daily, and financial fraud is actually prosecuted/regulated?

      That’s the mean reversion I’m looking for, and I won’t produce anything of economic value until we get to that point.

      4% grow our way out of this and reward all the criminal activity.. are you fucking insane?

    2. Nathanael

      The higher inflation will get students out from under student loan debt, will get homeowners out from under the mortgage debt, etc. etc. etc. etc.

      The key thing is that this MUST be WAGE INFLATION. 4% inflation, yes — but only if that is 4% inflation in WAGES. If wages don’t go up, this is a failure.

  2. Andrew Watts

    I do not understand the premise of this post. The Federal Reserve is not even able to hit it’s inflation target of 2%. Which is a good indication that we’re in for another round of deflation. So why should it be aiming for an even higher target it won’t be able to hit?

    Nor am I convinced that inflation is the solution to our problem. Workers were able to keep pace with inflation throughout the 1970s era. Through increased wages and property values. In the present an increase in inflation will lower the living standards of the working class. The class that suffered the most from inflation was the financial parasites. Do we honestly expect the Fed to actively harm it’s constituency?

    1. Andrew Watts

      My favorite part of the article though was when the author referenced Keynes and his theory of the liquidity trap while totally ignoring the context in which his observations took place.

      During the Great Depression the Fed tried to expand the monetary base to absolutely no effect on the economy. This was a similar course the Fed under Bernanke’s leadership took from 2008 onward. When you constantly do the same thing and expect different results you are……?

      1. LXDR1F7

        I think this article focuses on what should be preemptively done in order to avoid the zero bound once you hit a recesion. We are already pretty much at the zero bound so too late maybe.

    2. Yves Smith Post author

      1. The post is arguing for what the author would be good policy, not what anyone thinks will happen. We argue al the time for prosecuting bankers and more fiscal stimulus even though those will never happen either.

      2. The reason for the low inflation is and isn’t due to the Fed. It IS due to the Fed in that since the 1970s (starting with Volcker) it favored policies that weakened labor (un, underemployment, and hostility to unions) as a way to contain inflation (the Fed funds about 1/4 of graduate level research in economics in the US, so it wields a very heavy hand in promoting and enforcing neoliberal views). It is also due to the Fed to the extent that the Fed designed and implemented tons of bailouts and demanded squat of the banks. It doesn’t even talk badly about them in public (by contrast, the Bank of England regularly hectors them and fought for a Glass-Steagall type split but Treasury fought them and as a result only a firewall was implemented).

      It isn’t the Fed’s fault to the extent that monetary policy is a poor substitute for fiscal policy.

      1. Jose

        “…the Fed funds about 1/4 of graduate level research in economics in the US”.

        Very interesting and relevant information.

        Can we have the source for that?

        It would also be nice to know who funds the remaining 75%, especially in what concerns the share of the commercial banks.

        As the French are fond of saying: “cherchez à qui le crime profite”.

  3. Chris Engel

    The only people I can imagine who would not like 4% inflation are goldbugs and austerians.

    Krugman has given his seal of approval for a 4% level (even adopting an activist-style rallying call). I think 4-5% is a comfortable range for inflation — whether it’s achieved through a higher target or NGDP level targeting doesn’t matter, but it’s badly needed. There was never any intellectual basis for the 2% inflation being “optimal”, it’s a sham from the Breton Woods era.

    Ignore the Wall Street types who claim that inflation only benefits the rich, they’re the same ones who want to cut SS and have clear ulterior motives for their proposed public policy positions.

    The one thing I don’t like is inflation indexing because of how it could spark a wage-price spiral in case of resource supply shock or if the 4% target gets the economy a little too heated too fast.

    Point is, inflation will help lighten the burden of debt that is still crippling a lot of household balance sheets and help boost velocity and economic activity, tightening some of that slack.

    Unless we all want to end up like Japan, radical solutions will be necessary to avoid their deflationary fate. Absent a major shock, the teahadist House will not increase spending on any proper stimulus (although around election time it may be possible to get some kind of modest infrastructure investment package…). The only tool left is the central bank, and there ARE ideas out there that are not being utilized which need to be considered more seriously in the monetary policy arena.

    1. redleg

      Really? At 4% the nominal price for stuff would double every 18 years. This would be smoke and mirrors, nominal growth substituting for real growth.
      Further, by what measure is it 4%? The way inflation is currently measured 4% would be more like 14% or more.

      1. Nathanael


        The nominal price for stuff would double — which means *the hoarded assets of the superrich would be worth half as much*.

        Meanwhile, *your nominal wages would double*.

        So your *debts* would become much easier to pay off, because they would take half as many hours of work.

        Inflation is a wealth transfer from creditors to debtors.

        We NEED a wealth transfer from creditors to debtors right now. There are other ways to do the transfer: we could tax the rich, we could cancel & forgive student loans, etc. But inflation is ONE way to do the transfer.

        It is *critically important* that any inflation include *WAGE* inflation, of course.

  4. Jardinero1

    This essay begs the question that a central bank can set an inflation rate in the overall economy. No central bank in history has ever done that. Until that’s possible, the whole question is moot.

    1. Yves Smith Post author

      Volcker most assuredly broke the late 1970s inflation. Central banks can influence inflation via influencing lending rates when lending is the main source of credit. It’s harder now that so much lending is securitized and banks don’t want to lend because the big ones dominate banking and they can’t be bothered to make loans to small businesses, who are the folks who might go out and hire (admittedly small businesses as a whole aren’t to keen to borrow now, but the ones that do are finding it hard to get credit).

      1. Jardinero1

        Setting an inflation rate is not the same as breaking inflation.

        I am not so sure Volcker broke inflation as much as tanking oil prices, broken labor unions and the severe recession at the beginning of Reagan’s first term did.

      2. They didn't leave me a choice

        I can’t help but think, do we want more lending? Isn’t there any other way of more safely causing inflation?

        1. Nathanael

          Yes. We could more safely generate inflation by printing money and mailing it to people. A flat amount, the same amount to every man, woman, and child in the United States, issued every year in order to keep inflation up, would do a very effective policy.

      3. jonboinAR

        @Jardinero1: But wasn’t Volker credited/blamed for, by jacking up interest rates, bringing on the bad recession which then was credited for breaking inflation? So indirectly, then, he may be said to have broken the inflation spiral.

      4. Nathanael

        The Fed can usually raise interest rates and restrict the money supply. (Not always, mind you.) That’s what Vollker did. That will generally cause a recession.

        The Fed can usually lower interest rates (the limit is zero), but the Fed can ALWAYS increase the money supply, just by printing “Federal Reserve Notes” and throwing them out the window.

        However, the Fed has been unwilling to give the newly-printed Federal Reserve Notes to anyone except big banks. This is the problem right now.

  5. wunsacon

    Fed policy seems designed to help capital and hurt labor.

    When labor has enough leverage to increase their share of the pie, that’s good for laborers and bad for capital. What does the Fed do in that situation? It pays *higher interest rates* on Treasuries, which motivates capitalists to park their money and not risk it investing in a business and which causes a recession that weakens labor’s leverage. Double whammy there.

    When labor has insufficient leverage, the Fed “sees no inflation” and keeps shoveling money out the door to capitalists who bid up asset and commodity prices and thereby make labor pay more for food, shelter, and transportation.

    1. Birch

      Henry George makes a good case for Labour and Capital being on the same side, with Rentiers on the other side, constantly pitting Labour and Capital against each other whilst constantly winning incremental gains for themselves. [Progress and Poverty]

      This makes even modern day sense, if you consider so many labourers are passive capitalists with their pensions and all. Rentiers are different from capitalists, though they wouldn’t want us to recognize that.

      1. Andrew Watts

        What that viewpoint ignores is the fact the top 10% has monopolized all the economic gains made so far. Which makes social tension inevitable. Even in the case where the financial parasites are liquidated. The enemy of your enemy is still probably your enemy.

        It must be nice to believe that social/class conflict is wholly unnecessary. If only the economy would cooperate and grow sufficiently so we wouldn’t have to deal with these matters!

      2. LifelongLib

        I haven’t read Henry George, but it seems to me the real split is between people who make money by doing (workers broadly defined) and people who make money by having (which includes having money as well as owning things like land, houses, etc.). I’m not clear on how charging rent for money (i.e. return on investment) is any different from charging rent on land, “intellectual property”, or anything else that workers need to do work.

        1. Nathanael

          That’s a good analysis.

          Personally, I’m enough of a socialist that I don’t believe we should valorize “work” too much.

          Work is what we want to avoid, right, so that we can play and create art and research science and do what we love?

          I think it’s OK for people to get money by speculation and gambling. And I think everyone, inlcuding lazy people, should be guaranteed a minimum income.

          But there should be limits on it. People shouldn’t be racking up several million dollars a year in unearned income. At that point, it’s obscene.

      3. Rutger

        Matt Bruenig had a quite decent post on how the rentier/production distinction isn’t all that clear:

        “My own view aligns with the understanding that the passive incomes of both capitalists and landlords are basically the same. I do not find anything especially endearing about surplus that is captured by owners of firms over the surplus captured by owners of land and buildings. How you go about getting that surplus back is a huge task especially given that investment and ownership are largely private.”


        “Ultimately, an Anti-Rentier program that does not also attempt to socialize financial wealth is simultaneously too ambitious and not ambitious enough. It undertakes the ambitious project of trying to capture the unearned incomes of the super-rich while still leaving in their hands the power to frustrate that project’s realization.”

        1. Nathanael

          Well, your *classic* “capitalist” will invest a huge amount of labor and expertise — with no salary and no wages — into setting up a company which produces something useful. He will also dump all his accumulated wages into it.

          He does this in hopes of “winning the gamble”, building a successful company, and collecting the profits later.

          This is quite different from a rentier.

          Now, there aren’t that many of these:
          – the “passive investors” in stocks are mostly rentiers and gamblers, not capitalists. You might be able to argue about IPO investors.

          – CEOs who take salaries are not merely rentiers, but actually thieves; they have promised the profit from the company to other people (the stockholders) and then have chosen to steal it for themselves, because they know that the stockholders have no power.

          But Elon Musk types qualify as actual capitalists. They are different from rentiers.

    2. financial matters

      I think the Fed is definitely bidding up asset prices. Commodity prices seem more difficult to figure out and seem to be related to unregulated financial speculation.

      The most direct asset prices that I see are the cost of a house and an education. Both are backed by bad loans which the Fed is backing. The increasing financial inequality is getting to the point where this debt can’t be serviced. The bailouts are partly due to keeping the system from crashing but I can’t see the Fed continuing to bail out these loans that got hugely out of control so we should see some deleveraging here and a drop in these asset prices.

      Equities and money market funds are more difficult to figure out. US Treasuries are increasing their role as collateral but ultimately this needs to be backed by real substance. This will take the US backing off from its FIRE sector (already baked in the cake) and re-establishing its domestic base which requires anti-austerity measures.

      Getting rid of gaming systems like HFT would help restore confidence in the stock market but a truly world class market should also have much better corporate compliance regulations and enforcement.

      This added QE liquidity should also be used to help unwind derivative positions rather than create new ones.

      1. Nathanael

        HFT makes it impossible to figure out what the “real” prices of anything on the HFT-infested markets are. The majority of the trading is from these computer manipulation speculators.

        There’s so little in the way of real trades that it’s very hard to tell where the real money actually is. Completely opaque market.

  6. Birch

    “The only people I can imagine who would not like 4% inflation are goldbugs and austerians.”

    …and anybody interested in stable currency.

    1. AbyNormal

      “…anybody interested in stable currency” fairytale.

      Disorder is inherent in stability. Civilized man doesn’t understand stability. He’s confused it with rigidity. Our political and economic and social leaders drool about stability constantly. It’s their favorite word, next to ‘power.’

      ‘Gotta stabilize the political situation in Southeast Asia, gotta stabilize oil production and consumption, gotta stabilize student opposition to the government’ and so forth.

      Stabilization to them means order, uniformity, control. And that’s a half-witted and potentially genocidal misconception. No matter how thoroughly they control a system, disorder invariably leaks into it. Then the managers panic, rush to plug the leak and endeavor to tighten the controls. Therefore, totalitarianism grows in viciousness and scope. And the blind pity is, rigidity isn’t the same as stability at all.

      True stability results when presumed order and presumed disorder are balanced. A truly stable system expects the unexpected, is prepared to be disrupted, waits to be transformed. tom robbins

        1. AbyNormal

          i had only one word in the entire reply…fairytale.

          but you can bet this ‘astute’ quote will find a few more uses…don’t you think?

      1. Nathanael

        Thank you, Aby.

        “Sound money” is an illusion. Money is a social agreement, and its value *will* change as the social situation changes. It is a tool and it should be used appropriately.

  7. masaccio

    Ball, Krugman and others write this inflation stuff based solely on the effect on the “economy”. They do not identify the people who will be hurt by the policy and those who will be helped. The comments here do both: inflation helps debtors, and hurts labor and retirees and small savers, and it probably hurts big-time investors.

    Why should I support a policy that hurts me? Especially when there are other policies, like fiscal policy, that help the economy and don’t hurt me?

    1. Jim Haygood

      ‘In other words, what hurts workers is when pay increases lag inflation in a meaningful way, and when investment returns don’t include an adequate inflation premium.’

      Pay increases nearly always lag inflation, absent a tight labor market (remember those?). For people on fixed incomes, it’s a certainty.

      Advocacy of inflation (institutionalized theft) is the sine qua non of ‘let them cake’ elitism. The well-heeled have capital assets to hedge inflation.

      Those without significant capital assets systematically get their pockets picked by their well-educated, deeply-networked, money-manipulating overlords.

      Neoprogressivism, comrades. It’s the enlightened version of neoliberalism!

      1. washunate

        “Those without significant capital assets systematically get their pockets picked by their well-educated, deeply-networked, money-manipulating overlords.”


        This point seems so theoretically and empirically obvious that it is amazing it even has to be discussed.

      2. Chris Engel

        The reason for higher inflation is that it will benefit workers, not hurt them.

        SS is indexed to inflation, so there’s no reason for retirees or disabled to be upset.

        And ordinary workers will finally start seeing some raises and new jobs opening up and investment capital being unleashed.

        Literally the only losers here are people who want deflation and prioritize preservation of purchasing power over proper public policy aimed at minimizing unemployment and inequality and generating solid real gdp growth.

        There are still numerous underwater mortgages out there. Tons of little people, middle classers who are drowning in debt and doing what they can to pay it off. Inflating away that debt and shaking up the labor market is precisely what we need.

        You write:

        “Those without significant capital assets systematically get their pockets picked by their well-educated, deeply-networked, money-manipulating overlords.”

        How so? Those without significant capital assets are living of cash flows, cash flows that will reduce in their purchasing power in the short-run but will catch up with raises and more jobs in the medium-term. It’s those who have tons of money lent out who are scared that inflation will eat away their bond holdings…not the workers without capital!

        1. washunate

          “cash flows that will reduce in their purchasing power in the short-run but will catch up with raises and more jobs in the medium-term”

          Trickle down to the rescue!

          1. jrs

            Believing that wage increases will follow inflation seems the ultimate in delusional thinking. So a tighter job market could lead to wage increases, ok that’s alright in theory (ceteris paribus and all), you think this will actually come to happen with: outsourcing, H1Bs, low wage immigration, automation, etc., etc, etc.? No way. Maybe if we had a labor movement …

          2. Chris Engel

            It’s not trickle down. I’m not suggesting smashing regulation and taxes to hope that rich people will hire people. I’m talking strictly about demand.

            And I’m also talking strictly about monetary policy solutions in a time period where fiscal solutions are simply not feasible.

            So you have to think of the bigger picture and the limitations of what monetary policy alone can achieve (especially in the current situation). Either we can keep doing QE-infinity and barely keeping M2 on a stable path, or we can take radical measures that threaten the purchasing power and safe-asset stability of the wealthy that would force them to divert it into productive assets (read: unemployed people, unused factories) and there will come a sort of positive spiral between demand and avoiding inflation.

            You can keep dreaming about a competent congress that will institute regulations and policy that will lead to a resurgence in the power of the working class…but some of us are trying to figure out what angles we can get ACTUAL results with given the shortfalls of the system.

        2. Bill Smith

          SS is poorly indexed to the inflation seniors actually get hit with. Not too many of them eat their iPads or use them for medical care.

          What has inflation been over the last 10 years as measured by the CPI? 26%? Whose wages have gone up by that amount?

          1. jrs

            You don’t see in a tight job market unicorns would frolic in the fields …

            Ahem, until you realize a lousy economy is far from the only reason we don’t and may never have a tight job market.

          2. Chris Engel

            Well there are hidden benefits to a higher inflation rate that is not just a 1-2% tip-toe.

            The dollar will become more competitive from a policy like this, giving a much needed export boost.

            Capitalists will scramble to put their cash to work to avoid opportunity costs.

            I understand your concerns about wages getting further screwed on a real basis — but I think given the positives and the likelihood of success it should actually be beneficial net-net.

      3. Larry Barber

        I’m afraid I must dispute the “well-educated” part of your description. A good education includes knowledge and practice of ethics, which appears to be sorely lacking in Wall Street. Merely getting a degree from an Ivy doesn’t make you well-educated. It merely means you, or your parents, were able to afford the ruinous tuition for four years.

    2. Nathanael

      “The comments here do both: inflation helps debtors,”

      The majority of the entire US population — the 99%, if you will — are debtors in very large amounts of debt.

      Why should you support this policy? Just think about it!

  8. skippy

    Inflation – Deflation these days only corresponds to paper assets.

    skippy… disconnect between real and financial economy much?

  9. petridish

    To the extent that this post is about using a target inflation rate to end recessions by reducing unemployment (that IS what he’s talking about, right?) I would say that unemployment HAS been reduced, just not in the US. Millions of Asian “jobs” have been financed by American inflation (however that term is defined.)

    Any genuine effort to end a US recession will need to focus specifically and exclusively on protecting and empowering the US population, with ALL that such a “narrow” focus implies.

    Changing the value of one variable in an equation may produce a different result, but it’s a pointless exercise if the equation does not accurately reflect existing real-world conditions.

  10. Ep3

    Yves, I read the first two paragraphs and have to disagree. The inflation they were fighting in the 1970s was wage inflation. Workers gains were going gangbusters by that time. Ppl were able to “disrespect” their employers. Workers didn’t have to suck up to the boss. This upset business owners, who for centuries believe they are gods that somehow have a talent above and beyond the power of Jesus to rise from the dead. If a worker was unhappy with a job, he/she were free (how about that freedom?) to go elsewhere with some sort of assurance that the wage would be enough to live on.

    1. Jefemt

      As long as we are eating scarce, marginal non-renewable oil, we do and will have very real inflation. The government conveniently excludes, ‘volatile food and energy prices’. The modern agricultural methods that the first world employs join food and oil-based energy at the hip– part and parcel. Food and energy have not been volatile for the last three years. They may have been volatile prior to that time, but we have entered a purgatory netherworld of doldrum and malaise, with $88 dollar /bbl (and up) oil price. First, economically, and as consequence socially, politically. These guys who say we have no inflation need to try a lower-paying job, living further from work, and buying groceries and paying utility bills for a few months. In terms of a credibility gap, the Governmint had a press release (I heard it on NPR– but that’s a different problem…) that Food and Energy were LOWER. Lower than what? Relative to the real wage stagnation deflation over the last decade? The geometric increase in housing cots, due to the bubble we all blew, such that, despite record low rates, the working man, after housing, fuel and utilities, and food, has NO money to save? An economist, a chemist, and a physicist all wash up on a desert isle. A can of food washes ashore. Chemist: we simply put salt water on the lid, electrolytic process will rust it off in no time, and we can eat. Physicist: I suggest a fire, thermodynamics step in, the lid will pop… Economist: you guys sure complicate things, we simply need to imagine we have a can-opener!

    2. Yves Smith Post author

      The trigger for the inflation was most assuredly the late 1960s deficits plus the “Nixon shock”. The former was what led unemployment to be so low that workers had bargaining power. And the long-established practice of wage rises that corresponded to inflation was long-established workplace practice (in union contracts but replicated broadly). That was hardly an issue in a low inflation economy but became an issue as inflation rose.

      Arthur Burns (Fed chairman) wasn’t interested in taming wages to kill inflation. Volcker was. He carried an index card of weekly construction worker wages and used that to keep track of whether he was succeeding in getting wages down.

      1. Nathanael

        I don’t agree entirely with that analysis, because I read some very long and detailed coverage of specific events during that period.

        Crucially, there was a major drought and grain harvest failure just before the first inflation started kicking in. Since the entire economy is dependent on grain, there was no way of avoiding a general increase in the price level.

        The indexed wages did cause this to pass through into wages; otherwise it would have caused wage values to drop in real terms. Which would have been worse.

        Shortly after that came the first oil shock. Since the entire economy is dependent on oil, there was no way of avoiding a general increase in the price level.

        After that, Nixon imposed wage and price controls. This created a MESS, and there’s no other way for me to describe it. Poorly thought-out price controls caused diversion of oil from some uses to other uses, causing even MORE price inflation.

        Right around the time the wage and price controls were finally removed, we got the SECOND oil shock. Again, since the entire economy is dependent on oil, there was no way of avoiding a general increase in the price level.

        Again, the indexed wages did cause this to pass through into wages; but without this, the situation would have been much worse.

        Then Vollcker decided to raise interest rates to crush inflation. This caused even higher unemployment. It’s actually impossible to tell whether it worked to reduce inflation. Why? Because THE OIL SPIGOT OPENED, which removed the primary cause of inflation. The grain crops were also succeeding again.

        Now, where are we today? If we could get wage inflation, it might help. But can we get general inflation… or will it be sucked up by the ever-increasing price of oil?

        We know the high price of oil in 2008 was one of the proximate triggers for the economic crash. Now, one of the things which Krugman finds “mysterious” is that we still have 2% inflation, rather than actual deflation.

        I have a hypothesis: I believe that this 2% is actually oil-driven stagflation.

        We need the government to print money and spend it on “de-oiling” our economy.

  11. washunate

    “In other words, what hurts workers is when pay increases lag inflation in a meaningful way, and when investment returns don’t include an adequate inflation premium.”

    Wow, I couldn’t have asked for a better summary. Thanks! That shows that wages aren’t driving inflation – something else is.

    As to the essay itself, I’m genuinely confused why anyone thinks, either theoretically or empirically, that inflation caused by money printing is definitionally a good thing. Isn’t the whole point that monetary policy is irrelevant? That a monetarily sovereign nation can spend whatever it wants?

    What matters is how the money is spent, whether we build prisons or wind farms, invade Iraq or rebuild our passenger rail system, bailout criminal banks or provide universal unemployment insurance, protect monopolies in the healthcare system or provide universal health insurance.

  12. tyler healey

    I haven’t seen any evidence that the Fed can cause inflation to rise. Broad prosperity causes inflation to rise, not the other way around.

    1. Yves Smith Post author

      The Fed can cause inflation to fall, however, by raising rates and generating a recession or slowdown. By doing that often, it can keep inflation low.

    2. Nathanael

      Under some circumstances, the Fed can cause inflation to rise. The federal government (Bureau of Engraving and Printing) can ALWAYS cause inflation to rise, by printing money and giving it to people.

  13. nothing but the truth

    the problems that are plaguing us are not due to excessively low inflation as put out by propagandist-economists but the relentless pursuit of asset inflation and the inevitable exhaustion of that strategy.

    propagandist-economists see the problem as the one they find the easiest to solve and more probably give the cake to asset owners again, from whom some consulting dollars can be wrung out.

    let me put it clearly:

    the asset price to labor price ratio is a problem in the real economy. it is not a “nominal” problem that a “monetary phenomenon” will solve. It will make it worse.

  14. F. Beard

    Inflation is but a crude way to get money into the pockets of people and does it not depend on the negotiating power of labor? Which is near nil? So what? Raises the expenses of labor but not their wages? And that’s supposed to help them pay down their debt?

    If the population needs money, then distribute it to them equally! And combine that distribution with leverage restrictions on the banks to prevent price inflation.

    1. paul boisvert

      Yes, if the population needs money, distribute it to them equally! Fiscal policy is best, and if the economy is below capacity, increasing demand from fiat money distribution to all (except above an “affluent” cutoff) will not increase inflation much–instead, unused capacity and resources will be employed, leading to improved standards of living for previously unemployed workers, while tigher labor markets will enable previously employed workers to keep their wages rising along with inflation. MMT’s prescriptions are wisest…

      The whole “target inflation” discussion is confused. First we need a definition: inflation is a general rising of prices, crucially INCLUDING the price of labor. Of course, some prices will rise more than others, but if labor’s price is not rising as fast as average inflation, or as we (the laborers) like, we need to (politically) give labor more bargaining power. This is easy to do conceptually, just pass card-check union legitimation laws. And allow the effects of increased demand from generous fiscal policy to work naturally, tightening labor markets.

      Modest, tolerable inflation in general is a wash, and thus not harmful, once the distribution of price increases (mainly that of labor) is addressed politically. Prices rise, but everybody (modulo distribution effects, but that’s a separate, political issue) has more money with which to pay the higher prices. Index social security and minimum wage, and note that bond yields rise with inflation, and we’re good for low/fixed income people too.

      It’s like declaring blue chips in poker to be worth a nickel instead of a dime–fine, since I will now get twice as many blue chips for my money input.

      Targeting inflation is like targeting “more smiles” among the population. Smiling is generally good…but it’s a dumb target: the question is why are they smiling? Inflation is overall a wash: hurts some, helps others…but that distribution of effects can be changed politically. So the question is not whether there is inflation, but whether idle resources are being fully used and the bottom 80% of the people are given full opportunities to lead good lives (note the top 20% are by definition given such opportunities). Generally, low demand leads to recessions and unemployment, bad for the bottom 80%, which cause low inflation (70’s stagflation being a special case, as Yves so aptly explains). So sufficiently high demand to generate full employment (best created by fiscal policy, I agree), regardless of whether it creates higher (tolerable, relatively unvolatile, bounded, 3 to 4 to 5 to 6 to 7%) inflation, is better because it…creates full employment! Q.E.D.

  15. Paul W

    How about the case for allowing the free market to determine the rate of inflation and all other economic issues? The idea of allowing people we don’t trust – bankers and politicians – to manipulate the market for the benefit of whomever they choose does not appear to be in our best interest. It’s down right dumb considering that these people have a track record of failure. We can’t depend on their motivation to be for our benefit, nor can we count on them succeeding. Perhaps the free market might be a better option?

    1. F. Beard

      A truly free market would have any number of private monies and thus any number of price inflation rates determined by the creators of that money.

      But only the government should create government money and thus only the government should have control of price inflation in its money.

    2. Carla

      @Paul W: I would argue that the bankers and politicians have been wildly successful in serving their own best interests. And the 99 percent have benignly enabled them to do so.

      The idea that this intolerable situation will be remedied without systemic change is, I fear, a fantasy.

      However, the “free market” is simply a religion. It has never existed and it never will.

  16. Yancey Ward

    You already have the inflation rate you ask for, and more- it is just that we don’t count inflation of assets, real and financial, as part of the inflation rate. Think of it all as being stored future demand. It is only a matter of time before that stored demand is turned into real demand- then you will see inflation of assets turned into inflation in consumer goods.

  17. Pelham

    What gets lost in the discussion of what inflation should be is the first principle that we should keep inflation down by keeping unemployment up. Maybe not as high as it is now, but high enough to induce fear in the working population and prevent any possibility of wage-push inflation (although there are other varieties).

    That’s troubling. Actually, it’s monstrous. The very idea that we have an institution in the Fed that, as part (and historically the main part) of its mission is to deliberately keep a few million Americans out of work — with all the horror that entails — so that many millions more working Americans live in a constant state of low-grade fear of job loss is repulsive.

    If this policy were directed against any kind of identifiable minority group in society, we would all be outraged. As it is, there is no such identifier; mainly, though, it affects those at the bottom of the scale, people whose existence we don’t want to acknowledge and don’t have to because their have no power or representation.

    A minimally decent policy should be one of full employment at living wages ($22 an hour or better). Full stop. If the private sector can’t or won’t provide it, the public sector must. Then let inflation be what it needs to be or let our genius elites figure out another brilliant way to tackle it.

    1. Carla

      Thank you, Pelham, for this comment!

      I agree with almost every word, and would amend only this statement:”it affects those at the bottom of the scale, people whose existence we don’t want to acknowledge and don’t have to because they have no power or representation” to reflect that fact that only the 1 percent have any power or representation.

      Actually, it may be that it is just too damned uncomfortable for those who are at the top 20-30 percent of the economic ladder to admit that we are just as powerless as those “at the bottom of the scale.” We are, for the time being, more comfortable, to be sure. But we sure as hell are not being represented by our elected officials or anybody else. And neither are the interests of our country.

      Again, thank you. I don’t mean to quibble.

      1. Pelham

        Thank you. And you’re right about virtually everyone but the 1% having any representation.

    2. flashy

      Wishfull dreaming…

      You think $22 of today will be the same as if a minimum wages of $22 an hour is put in place. This is all a mirage Pelham, your proposal will leave the same people that are struggling today still struggling.

      For $22 you will be able to buy exactly what you buy today for $7.50. It wont do anything for you or anyone else. Sending people free checks, as some suggest, will also do the same, NOTHING. It’s not about the amount of money you earn, it’s about what you can purchase with the money. Purchasing power cannot increase if we continue to allow the issuance of un-backed currency. We need to work for the currency, while at the same time the currency is debased and our purchasing power diluted.

      What’s needed is to stop the counterfeiting by a government who engages in counterfeiting by using the Federal Reserve and the Banking cartel. This will not fit the bill for many who think the government is some sort of god like figure who can create purchasing power out of nothing. For those, i suggest they are either in it while the getting is good or liars. I suggest purchasing power has been extorted out of laborers to a point where there is not much left. I also suggest people tend to lose it when they lose it all. We are near that point.

      1. Pelham

        I picked $22 an hour because, a few decades ago, that is what the minimum wage was in inflation-adjusted terms. So we know empirically that this level of pay at the bottom is possible without distorting the economy.

        Ideally, I would go back to a tax system such as we had in the 1950s that, in effect, allowed that no one could have total compensation above about $200,000 a year. Rationally speaking, no one — no matter what they do — is worth more than that. This could have the effect of redistributing income where it belongs in the first place, with working people who produce it rather than the people at the top who manipulate things. But it still leave plenty of room for economic incentive.

        1. psychohistorian

          The people at the top who manipulate things do not make a salary that is visible. They hire the now highly paid psychopaths who implement their antisocial policies.

        2. Nathanael

          “Ideally, I would go back to a tax system such as we had in the 1950s that, in effect, allowed that no one could have total compensation above about $200,000 a year. ”

          It’s worth noting that, inflation-adjusted, that’s somewhat more than $200,000/year today. It would be something like $2 million a year today. So it was actually EXTREMELY generous to the elite.

          Nowadays we have gazillionaires with incomes far larger than that. So your general point is something I agree strongly with — we need to cut off the top of the income distribution and stop people from getting dangerously rich. I call them “dangerously rich” because it is far too easy for these people to buy elections, buy Congressmen, buy private armies, etc.

    3. Nathanael

      “What gets lost in the discussion of what inflation should be is the first principle that we should keep inflation down by keeping unemployment up. Maybe not as high as it is now, but high enough to induce fear in the working population and prevent any possibility of wage-push inflation (although there are other varieties).

      That’s troubling. Actually, it’s monstrous.”

      Thank you. Here’s the thing: the exact sort of inflation we actually NEED right now is…. wage-push inflation.

  18. flashy

    Relating inflation to prices is like relating a hangover on a headache.

    So, before we suggest 4% inflation, it is important to understand what “inflation” means. Prices can increase or decrease TEMPORARILY depending on many variables. Further, prices tend to be deflationary by default as high profits increases competition, more supply drives down prices. Therefore, inflation can not simply be in increase in prices.

    So what is inflation? Inflation is simply a constant increase in the amount of money and credit. The SYMPTOM of this is that prices tend to ALWAYS increase. Since ever more credit is required to purchase the same goods and services, the purchasing power of those without access to credit (laborers) is destroyed. Plain and simple, it’s theft. The rule of 72 says prices will double in about 35 years at 2% and will double in about 18 years at 4%.

    With this context with regards to inflation, why would you want to increase the theft to the laborers when they are in dire need to increase their purchasing power?

    At this point we’ve done everything from lower rates, pushing liquidity, QE, etc, but let the markets work. Excuses to allow the government to extort more from the laborers is all I hear. This is sickening at this point.

    1. John

      Why stop at 4%? Let’s make it 10%. Heck, let’s make it 20%! We don’t need people who produce wealth, we need people speculating in stocks and real estate. We want reckless to be rewarded and prudent to be punished. It’s sickening to see academics discussing by how much savers should be robbed and by how much standard of living of vast majority of people should be decreased. Utterly disgusting!

    2. Nathanael

      Let me fix your GROSS misunderstanding.

      Inflation is simply a constant increase in the amount of money and credit. The SYMPTOM of this is that WAGES tend to ALWAYS increase.

      Think about it. What I always say is, if wages aren’t going up, it isn’t inflation, it’s just increased prices.

  19. Norman

    From a moderated point of view here, can anyone explain how an inflation rate of 4% can be achieved without degrading further weakening the buying power of the lower wage earners? Unles I’m wrong, the so called basket that is used for gauging inflation keeps getting smaller and smaller each year. Or do the people who defend that 4% rate increase, use another type of basket, as in two different seperate methods?

    1. washunate

      I notice no one who supports loose monetary policy took you up on your question.

    2. Nathanael

      The target is 4% WAGE inflation.

      If there isn’t wage inflation, it isn’t actually inflation, it’s just expensive products.

      So, as an advocate of “loose monetary policy”, I think I have answered you, quite comprehensively.

      Of course, I’m a somewhat heterodox advocate of “loose monetary policy”: I think the banking system is broken, and the only way to target higher inflation is to offer lower interest rates to REAL PEOPLE rather than to banks.

      Right now, the Fed lowers the borrowing rates for banks, and the banks just collect the spread, rather than lowering borrowing rates for actual people.

      1. washunate

        Um, wow.

        Ball doesn’t even mention the word wage, never mind call for 4% wage inflation. Clearly everyone is talking about inflation in the sense of price level inflation and monetary inflation.

        I do agree with you that things are expensive. That’s one of the primary problems of wasteful government spending – it makes things cost more than they otherwise would.

  20. The Dork of Cork.

    Is inflation possible in the US given its car dependent nature ?
    Portland – a model pubic transport city is suffering from deflation and indeed inflation would help this city but how many American cities have such a integrated public transport system ?

    Portland light rail is down -8.12 % in the 4th quarter at 115,500 passengers a day.
    Portland WES Diesel commuter is up 8.94 % but is only 1700 passengers a day.
    Portland bus service up 3.65 % in the 4th quarter with 195,500 passengers a day.

    A recently transit dependent girl experience (37.20)

    1. Nathanael

      The dependence on cars, and the dependence on oil, are serious problems.

      This is best understood by a microeconomic “cofactors of production” analysis.

      First imagine, in order to make a widge, you need one worker. Put more money in the hands of consumers, and they buy more widgets. So you hire more workers. All is good! A virtuous cycle! Those workers have more money, they buy more widgets, this continues until full employment. Then the workers start demanding higher wages, this leads into “wage-price spiral” inflation. Which is just fine! It’s good and healthy!

      But now, suppose, in order to make a widget, you need a barrel of oil and a worker working for a year. If the oil supply starts shrinking, you need to spend more and more money on oil, so your product price goes up… even though you’re not employing any more workers and you’re not paying them any more.

      Put more money in the hands of consumers… and will you employ more workers? Well, they’ll try to buy more widgets. So you’ll try to hire more workers… but you also have to buy more oil. And that means you’re competing with other companies for oil, and so the price of oil goes up. And so you have to raise the price of widgets. And then fewer people will buy the widgets. And you’ll end up not hiring any more workers.

      This makes something very clear. You have to FIRST change the production process so that it doesn’t require oil, and THEN you can have “loose monetary policy” and it will work.

  21. Steve

    I find it incredible that all comparisons to previous economic periods and inflation are all based on different calculations of inflation. Calculate inflation today based on the same definition of inflation 10, 20 or 30 years ago and we would be at 6%-10%. Good grief. How Ben Bernanke could tell Congress that he and Greenspan have been responsible for 2% inflation for decades is beyond a lie. Can you imagine what real GDP would be with an accurate inflation deflator!!!! Real inflation goes into GDP today and only gets reduced by a tiny inflation factor. GDP would not have been positive for years if adjusted correctly for real inflation. We already have 4% inflation today and then some.

    1. MaroonBulldog

      Yes, and if we calculated unemployment with reasonable honesty, the combined unemployment-inflation “misery” index would be even more than the 13-17% we would get by adding 7% to Steve’s inflation estimates.

      The inflation rate and the unemployment rate are both calculated by federal civil servants. They have learned by now that they can’t produce a report card that will give their elected boss a failing grade.

    2. washunate

      Wow, I’m surprised none of the inflation deniers disputed this point. The most obvious retort to the case for 4% inflation is that it’s already here!

  22. ChrisPacific

    A rise in inflation would have the benefit of providing a politically acceptable way of recognizing bad debts a little at a time. During the era of extend and pretend, this has some value, and is why the creditors who are the biggest influence on government and monetary policy resist it so strongly. It’s a workaround rather than a solution, but it might be better than nothing at all.

    Lack of bargaining power for labor is a separate issue, and is likely to be a problem even if inflation stays low. In a high unemployment economy, wage increases can lag inflation even when inflation is very low or zero.

  23. allcoppedout

    Inflation just isn’t the same for all people. Madness is involved in discussing it like this. Oxfam did a report this year - – suggesting the wealth of only 100 people would end the worst poverty 4 times over globally. If this is true one has to wonder whether any economics starts in a rational base.

  24. Francis

    Dear friends, the US is not in a closed system and cannot choose a higher inflation target without considering the effects on the other countries. It’s extremely sad to read all this nonsense. I suggest to learn a little more about the oil and energy market in general. The price of oil will grow more than 1% in case of a 1% increase in inflation, feedbacks are everywhere in a globalised economy which is starving essentially because cheap fossil energy is no more available. You can still buy a lot of fossil energy but only at higher and higher prices and there are a lot of other countries fighting for the same oil.

    1. Nathanael

      (A) increase inflation
      (B) shovel newly printed money, or money from taxing the rich, into renewable energy, to get off of oil

  25. Roland

    Yves: “What makes inflation hated now is that workers have no leverage.”

    Where in the article is the solution to that problem?

    Follow the chain of cause-and-effect, that took us from the 1970’s to the neoliberal era in which we workers now find ourselves trapped:

    The workers lost leverage because the unions got broken. Unions got broken because the public was okay with electing anti-union governments. People elected anti-union governments because many of them were getting fed up with constant labour unrest. There was constant labour unrest during the 1970’s because unionized workers were forced to keep going on strike for wage raises. Workers needed to keep obtaining wage raises because there was high inflation destroying the value of their earnings.

    Workers during the 1970’s managed to keep up with the inflation caused by reckless monetary expansion. But they did so at the cost of fatally weakening the political position of labour within Western societies.

    So please don’t talk about loose money until after we’ve fixed our distributional problems. We don’t face a technical monetary policy problem. Rather, we have a class struggle on our hands, and a few lousy technocrats wanking in a room will fix nothing.

    1. Nathanael

      The 1970s “inflation” was due entirely to restrictions of the oil supply (OPEC, etc.) and the food supply (drought).

      That is a very different situation from a normal “inflation” which is due to internal stuff, and is associated with full employment. Internal inflation is unproblematic, *as long as wage inflation is happening*.

      There is a very particular problem with inflation which is driven by restrictions on the oil supply or the food supply (or some other crucial resource — water, perhaps), which is that this type of inflation will coexist with high unemployment. *Only* if it is due to resource restriction, rather than full employment or simple price recalibration, will you have stagflation.

      Because of peak oil, this is a future risk and we really need to pour our energy into renewables now. This could be done by printing money and giving / lending it to renewable energy manufacturers and installers.

      The distributional problem is key, of course… but one of the keys is that *ordinary inflation* (as opposed to resource-restriction inflation) acts to help fix the distributional problem. It transfers wealth from lenders to borrowers.

      *Resource-restriction* inflation doesn’t do this. An oil shortage transfers wealth directly to the oil companies, not to borrowers. Resource-restriction inflation is extremely dangerous and government policy needs to be designed to prevent it. This means government needs to engage in specific industrial policy, policy to support industries which prevent resource restriction (such as renewable energy).

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