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| Updates on the inflation debate |
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| Written by Giles Wilkes |
| Monday, 20 April 2009 11:15 |
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A debate is taking place about the risks of inflation. Martin Feldstein – once the chair of Reagan’s advisors – thinks they are large, because that will be the only way of paying for the massive fiscal deficits. (Mark Thoma explains the issue algebraically in the accompanying comment.) Unlike Feldstein, Harless would like inflation but thinks it won’t happen. Sellers have to be given a proper reason to raise prices. What I find powerful about his piece is that it draws attention to how historically unique the previous run-up in inflation (over 1968-1980) was: “that whole process took a long time. The inflation rate rose from 1% (in 1964) to 10% (in 1980), but it took 16 years to do so. And it took a series of policy errors, not just a one-time failure. William Martin’s Fed (along with the Johnson administration) made errors in the late 1960’s; Arthur Burns’ Fed (along with the Nixon administration) made errors in the early 1970’s; William Miller’s Fed (along with Carter administration) made errors in the late 1970’s; and OPEC took several unprecedented moves to restrict oil production over the course of the 1970’s. And the whole process began with a huge economic boom. The unemployment rate fell from 5.7% in 1963 to 3.5% in 1969.” So when Feldstein writes: “there is ample historic evidence of the link between fiscal profligacy and subsequent inflation” – how much US evidence is there, really? Arch-monetarist Scott Sumner is similarly dismissive of the risk of things getting out of hand. Krugman would also like inflation – but does not think there is the establishment backing for even something as mild as a 2 per cent inflation target (largely on the back of Volker’s reaction here). So would Greg Mankiw (once advisor to Dubya), amazingly, who examines negative interest rates but really argues for a high inflation target. Krugman and Mankiw agree on something? My internet connection must be broken. It is slightly dispiriting how weak the UK debate on inflation is in comparison. Chris Dillow exploded a poor piece of argument linking M4 growth to inflation a while ago. He will have to work full time to dispel Tory myths that are becoming mainstream amongst rightwing bloggers: that, in the words of one of the less economically-qualified of their number, “lurking behind the Budget are two nightmare scenarios: an IMF bailout and hyperinflation.” Meanwhile, Reform has put out a bunch of recommendations for cutting the size of the state, barely containing their glee at the way the wind is blowing on this issue. It is not obvious how seriously one is meant to take them – the mention of four-day weeks and a 10 per cent cut in doctors’ salaries leaves the question open. An interesting parlour game could be played along the theme of how many massive strikes could be provoked by the ideas contained therein; my market is somewhere between 8 and 11. Eddie George, legendary Bank of England governor, has died aged 70. Here is an insightful tribute from Willem Buiter, and here the obituary of the FT.
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| Last Updated ( Thursday, 21 May 2009 15:59 ) |
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