Adding Some Inflation

http://www.nytimes.com/2009/08/02/business/economy/02view.html?_r=1&emc=eta1

Professor Joseph Stiglitz, of Columbia University, was chairman of President Clinton's Council of Economic Advisors and won the Nobel Prize in Economics in 2001 for his work on the economics of information. He appeared on CNN yesterday and, among other observations, took the position that the U.S. economy needs more stimulus. He now joins Paul Krugman (a fellow "Nobel" in Economics), Warren Buffet, and Mort Zuckerman all of whom share that same position.

Stiglitz sees the weak recovery that is coming thru the perspective of unemployment which he, and other noted economists, estimates at 11% (or more) for 2009. His position is that any reasonable added stimulus combats the very unemployment numbers that will be a drag on economic recovery. This, of course, engenders questions about the inevitable deficit spending which would be required for more "stimulus". His response to that is that "deficits" are not automatically "bad". If deficit spending creates "assets" (like the right infrastructure spending on bridges, roads, schools, teachers, etc.), then the spending was worth it.

For my generation, the words "deficit" and "inflation" are bad words. My own experience with "Wage and Price Controls" in the early 70s was enough to swear anyone off any potential inflation-inducing policies. I administered the wage side of those controls at a large company (Citibank) and was in the unenviable position of telling SVPs and EVPs (let alone, the CEO) that they could not process "merit" increases for their best people ("promotions" were OK - if they were "bona fide").

Tyler Cowen's article in the Sunday NY Times (attached) refers to potential new monetary remedies for the economy since fiscal stimulus has not been a "striking success." I think most people would think that the Fed is out of bullets because Fed interest rates are an effective "zero." But, Cowen points out that Professor Scott Sumner (of Bentley College) has an idea that is "doable": the Fed makes a firm commitment to raising expectations of price inflation to 2 to 3% annually. While his views are controversial, they are based on some assumptions that are not. It is commonly agreed among economists that deflation brings layoffs and sluggish investment. Yet, energy prices aside, we have been seeing downward pressure on prices. The Fed can print money and commit to spending it on various financial assets if necessary but, Sumner believes, that may not be necessary, since the very announcement itself would be inflationary. Further, a Fed stance in favor of mild price inflation need not require higher taxes or larger budget deficits.

While these arguments have not won over the economics profession, neither have they been refuted. Paul Krugman has suggested that a Fed policy favoring 2 or 3% price inflation isn't politically realistic in today's environment. That doesn't mean it won't work.