Some Economists See Inflation as Cure for Sluggish Economy

By:  Jack Kenny
11/04/2013
       
Some Economists See Inflation as Cure for Sluggish Economy

Janet Yellen, President Obama's choice to head the Federal Reserve next year, is among a number of influential economists who would welcome a higher rate of inflation to boost a stagnant economy and reduce unemployment.

President Obama's choice to succeed Federal Reserve Chairman Ben Bernanke next year, is among a number of influential economists who would welcome a higher rate of inflation to boost a stagnant economy and reduce unemployment, the New York Times reported, noting "a growing concern inside and outside the Fed that inflation is not rising fast enough."

Inflation in one recent month, August, was measured at an annual rate of 1.2 percent, nearly the lowest rate on record. "Weighed against the political, social and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about," Harvard economist Kenneth Rogoff has written. "It should be embraced." Rogoff believes the Fed should push for an annual rate of inflation of about 6 percent.

"Low inflation is not good for the economy because very low inflation increases the risks of deflation, which can cause an economy to stagnate," Fed Chairman Bernanke said in July. Fears of a possible deflation are based on the belief that in an era of falling prices, people postpone purchases, thus contributing to a downward spiral of the economy. "The evidence is that falling and low inflation can be very bad for an economy," said Bernanke, whose efforts at stimulating the sluggish recovery from the last recession has included purchases by the central bank of  $85 billion a month in mortgage and Treasury bonds. The Federal Reserve recently decided against a "tapering" or reduction of those purchases until "the outlook for the labor market has improved substantially in a context of price stability." Unemployment stood at 7.2 percent of the labor force for September, according to the Bureau of Labor Statistics, though the official number does not include those who have stopped looking for work and those with only part-time jobs.

The dangers inherent in the Fed's "quantitative easing" are clear from recent memory. The oversubscription of mortgaged-backed securities led to the bubble in the housing market that burst in 2007-2008, sending financial markets into a tailspin. And underwriting public debt through purchase of more Treasury notes encourages Congress and the president to continue outspending revenues, conferring benefits while deferring costs to some indefinite time in the (hoped for) distant future. (Even the "conservative" long-term spending proposal advanced last year by House Budget Committee Chairman Paul Ryan would not produce a balanced budget until some time around 2040.

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