The best argument for a more expansionary monetary policy?

It’s not very glorious or motivational, but here goes: the costs of inflation, within reasonable ranges, are not very high.

I am more agnostic about the gains from monetary expansion than are many of its advocates.  I think we do not know where the point of “potential output” lies, I think sticky nominal wages (especially for new labor market entrants and the unemployed) are overrated as a problem, I doubt the ability of the Fed to make credible commitments at this point, and often I view “hiring” as more of an multi-dimensional investment and longer-term commitment, which requires various variables to be set at the right places, not just the short-run real wage in spot markets.

A bit more personally or perhaps psychologically, the contrarian in me gets nervous when I read the ongoing ritual excoriation of Ben Bernanke in the blogosphere, every time the Fed decides to take no further major action.

Still, at the end of the day if we try further monetary expansion and it fails to stimulate employment, I don’t see a huge social cost to having a three or four percent rather than a two percent inflation rate.

Addendum: Arnold Kling offers related thoughts.  Ryan Avent also comments.  Scott Sumner replies.  Matt Yglesias comments.


Why not a targeted inflation aiming to alleviate some of the debt problems which are impeding recovery? i.e. Monetary/fiscal stimulus that seeks to alleviate the "average American."

INDEED!!! If you're going to have monetary expansion, you might as well give the worst-off people (Those of previously poor dove-tail coordination decisions) the advantage of higher incomes and lowers costs. If we ignore justice, and just want to alleviate the dragging sectors, then the stimulus should have cut a check/loan to mortgage holders and construction workers. Mises long advocated inflation as a process that spreads through the economy transaction by transaction of increased money supply. However, it may not be wise to give people who invested unwisely cash-balance advantages. It was a bad idea for the rich and I see little reason that the case is different for the less-rich.

Would your view changed if you lived on a fixed rate annuity?

You seem to agree with the idea that the problem is age warfare.

Naturally, I was thinking of young Trustafarians.

Tyler, the popularity of Scott Sumner's beliefs among Ryan Avent, Matty Yglesius, me, et al, are due to you. You!

At this point, because I'm tired of the argument, I'd be more than happy to see Sumner proved wrong. I'd love to see inflation take off at say 5% and unemployment not move a ding. Just because it would shut Sumner up.

Just because it would shut Sumner up.

Just because it would shut Sumner up.

I think that would be a worthwhile goal of the Fed at this point. To shut Sumner up.

If nothing else, it seems worth the experiment. If a little inflation doesn't help employment a little bit, we'll know that the dual mandate wasn't a balancing act to begin with, like we all thought it was. We'll know that Sumner was wrong.

Until then:




the Fed for not trying.

Please try.


Right. Because negative real interest and printing up trillions to mop up financially-impossible levels of derivatives and government debt are working so well.

You think you're wailing and gnashing your teeth now ....

"Obama Calls for Decisive Action to Stop Euro From Unraveling"

Some men just want to watch the world Bernanke.

US fiscal policy should not be based on the desire to "shut someone up."

Hell, Krugman has been consistently wrong for decades. Hasn't shut him up in the slightest.

Well, it's a good thing that US fiscal policy wouldn't be involved in shutting Sumner up, because this entire debate concerns monetary policy.

There is no separation between fiscal and monetary policy. Any separation is a lie that we economists tell ourselves. Fiscal policy drives monetary policy, and monetary policy allows fiscal policy.

Very good post.

According to me Ben Bernanke already has a secret model which tells him what is the natural rate of unemployment under the Obamian policy regime, current uncertainty and a minimum wage of $7.25. I bet is that this model says (Minimum Wage + 1)% is an unemployment level that monetary policy cannot change.

I agree that this is an excellent post by TC. It is refreshing to see a famous economist willing to say exactly what he thinks without pretending to know more about future effects than is really possible. This is the kind of thing that keeps me coming back to MR.

For the non-economist, is there a difference between "we need a little inflation to stimulate employment" and the layman's version "we need to reduce your wages by cutting the value of the money you are paid" ?

Am I missing something?

You're not. Another phrase that comes to mind is, "the rich are not to be allowed to become poor."

Under unexpected inflation: Wage rigidity implies lower real wages. Price rigidity implies higher real wages (and lower real capital rent). Both wage and price rigidity implies an ambiguous effect.

There is a difference. The second scenario spares the fixed income annuitant and others vulnerable to inflation.

Huge difference: increased (but reasonable) inflation makes household/corporate debt easier to manage, which obviously isn't true for decreased wages. Inflation also makes lenders and businesses more likely to invest, because holding on to your money becomes less appealing.

The goal is to reduce wages to increase income by increasing hours worked.

We know where potential output is. We also know that it doesn't meet consumer utility. Everything else is unknown.

And I think your tepid support for inflation IS THE support for inflation: figure out if bad monetary policy is the problem by trying some potentially bad monetary policy.

The self-assured "get tough" certainty language of Yglesias et. al. is maddening. It's a two-way street, but aren't we pretty sure that the financial collapse caused the tightness of money and not just that tight money caused the recession?

They make it sound like Bernanke has it out for the (non)working man. It's also possible that he simply "can't push on a string." It is one reason why that phrase exists. It's not because we all do a lot of work with string.

I've started playing a little game with myself- guess the economist based on the headline. Here's one I just got right.

"U.S. Is “Totally Broke”: Federal Govt.’s Fiscal Gap Is $222 Trillion: Economist"

Anyone want to play? No cheating.

Sounds like Peter Schiff (not an economist).

It's a non-linear system. We saw what happened in 2008 when deflation wins out; we saw a brief flash in 2011 over the debt ceiling debate; we will see it again at some point in relation to the "fiscal cliff."

The economy is caught in an unstable "equilibrium". When total credit contracts, there is deflation. When total credit matches deleveraging (USG runs $1.2 trillion deficits as far as the eye can see), the economy is in stasis.

If they can create enough credit, there will be inflation, but it will be the inverse of 2008. I think they can do it, but the private sector is deleveraging. USG needs to run a much bigger deficit. Obama needs to commit to running $2 trillion deficits all 4 years of his second term: announce a big tax cut soon and win the election! Otherwise, USG needs to run a $3 or $4 trillion deficit in one year. I worry that only wars will allow spending of that magnitude.

And if debt is the problem?

What I never see addressed in lines of reasoning like yours is why it's not a problem that we have a system that requires constant debt expansion.

8, +1 Ask Japan if incrementalism worked.

Don't agree though with the tax cut--that only reaches those with a job or wealth, and they will use it by saving to delverage as they did with the last tax cuts.

"I worry that only wars will allow spending of that magnitude."

Don't you worry, we'll step into that Mediterranean cauldron yet. Then Iran.

The Fed already buys half of all UST issues, not to mention foreign central banks trying to beat the USD's race to the bottom. How do we fund $2T deficits? Who's going to pay that debt? We can start digging up the national parks, but after we've strip-mined, slash-cut and built-out everything to the Pacific, what then?

What about Japan and their most eminent critic Bernanke running our decline implies that anything will "work"?

Everyone ELSE is just masochistic? Why would Bernanke really care about The Fed's long-term credibility over his own reputation?

The fact that the stock market is captured by The Fed's actions indicates that the underlying fundamental economy is not in control. The ultimate job of The Fed is to make itself irrelevant.

Wasn't the idea a century ago just to avoid bank runs? Nobody seems to be thinking about consequences of the Fed's enormous footprint in the capital markets.

Economists who would laugh a socialist out of the room for centrally planning the price and supply for paper cups seem to believe there's an exception for money and credit.

Why not replace the lost money with cash.

BTW if you did want to do that a payroll tax holiday for the employer and employee would be the way to go.

Too bad the Fed did not reach Tyler's conclusions many many months age.

My naive mind says inflation can occur in one of two ways: 1) demand really picks up and society starts buying things again (but is this realistic given many surveys of business both big and small indicate that demand is the critical problem and expansion plans hence resultant hiring are being put on hold until it picks up; the classic Catch 22 problem) or 2) shortages within the current screwed up US economy occur leading to higher prices (we'll know the answer to this one within the next six months if the corn harvest turns out to be the predicted failure and food prices start to go up). All the rest is just commentary. Bernanke is doing the only thing he can because Congress and the President cannot agree on a budgetary agreement to stimulate the economy. How anyone can preach austerity in light of the current economic situation in Great Britain which should be the really good test case for this approach is beyond me. I know that most who read posts on this blog don't like Krugman, but I find his current argument the most persuasive out there. I find John Taylor's the least persuasive.

Ergo, if corn prices go up, that's inflation but if the price of computer components goes down, then that must be deflation, right? The fact that there is less corn than demanded means the price of corn gets bid up so the dollar is worth less, at least in corn terms. But, at the same time, it's worth more in computer chip terms. But we eat more corn flakes and tortillas, and burn more government-mandated ethanol in our Smart Cars than we use computer components in our new Androids or whatever. It's just a question of balancing the books then. Seems pretty simple to me.

Chuck, I guess we need to control the weather to control corn prices, and if we can't, it sure makes a whole lot of sense to base monetary and fiscal policy on the weather.

On the other hand, if you take out food and energy, you get a different index, reflecting what you can control. But, if you want, BLS puts out the index WITH food and energy, so you and the market are aware of it.

Don't you trust the market, or do you believe that analysts are ignorant of how to chose whatever index they want.

See below on bls inflation indices.

Yeah, let's take out food and energy, I never eat or heat the house..

Chuck, Are you confused or simply an advocate?

See the discussion of BLS statistics below and the different indices and their uses.

The problem with economics is that people find a good model they like and then try to use it to explain EVERYTHING. Sumner is a good case in point. Everything comes down to NGDP. Everything! Always! Never reason from anything else! And even if you do reason from NGDP, he will explain to you why you haven't, really!

But it is not a uniquely Sumnerian problem. It is also a Bernankean problem. And a Krugmanian problem. And a DeLongian problem. And an etc. etc. etc.

It is either hilarious or ironic - depending on your perspective - that all these extremely intelligent, capable economists develop some fairly elegant economic models that can produce some satisfying results, and then just get lost in them. If something doesn't fit the model, they don't revise the model. They just explain why every dissenting voice is wrong, according to their model.

It's almost like every major economist has a handful of years as a young researcher to develop a lasting contribution before said contribution takes over their entire field of vision and they can't see anything else anymore. The only problem left over at this point is the fact that all these brilliant economists are tenured now and don't foster young, divergent opinions. Instead, they foster the talent of people who are good at parroting the old stuff.

Oh, well.

.....when all you have is a hammer everything looks like a nail.

I stopped reading Sumner because every other post (or almost!) talking about NGDP started getting annoying.

*cough* TGS *cough*

Rahul, maybe you can tell Dirk about this little life hack you've discovered.


I wish all these professional dial spinners would cease trying to fine tune the economy. The picture isn't going to get better, at least not because of anything they are doing.

Sumner talks a lot about NGDP because it is currently a relevant issue, before the downturn he was focused on neoliberalism (his "Great Danes" paper is the product of that). He views managing demand as one problem distinct from other issues in economics. Once NGDP is managed properly, we can focus on other issues with a rather standard micro lens. He explicitly says he doesn't want monetary policy to "solve problems".

"But according to economist John Williams writing at, the way inflation is calculated was altered in 1980 and then again in 1990 to provide a skewed number. If you revert back to the earlier way of calculating inflation, the purchasing power of Americans’ saved money is losing value at the annual rate of -9.3%. Over the next five years if nothing is done to correct this, the estimated $10 trillion in so-called time deposits will lose nearly 40% of its value. Americans might as well go back to stashing paper money under their mattress."

Money losing value at a negative rate... so stuffing it under the mattress is actually a good idea! :)

For a moment there I thought I had somehow stumbled onto zero hedge...

Is there a discussion somehwere of why this earlier method of calculating inflation is more accurate?

+1 jr, as you know, it wasn't a good method of calculating inflation, and that's why it was changed.

Good point.

As to why policy is to get you to take it out of your bank account, you would have to ask the question: where else do you put it. Bernanke et al wants you to invest THIS period, and save in a later he is penalizing current savings in bank accounts, and asking you to invest in newly issued corp bonds, or some risky asset, or new investments. He is also raising your asset values with this policy, hoping that you will suffer from money illusion, feel more wealthy, and spend more.

Yes taking fuel and food out of the equation was done because it made so much sense, and not at all for political reasons. You just have to explain to the people that their costs are barely going up, and they'll get it.

There are (to me) two methods of indicator use. One is accuracy, the other is consistency. If the government chooses a new way to calculate an indicator why wouldn't we assume it is done for their own purposes? As for consistency a change fails on that dimension by definition.

Anonymous Coward....Didn't Glenn Beck tell you the non-conspiratorial reason for taking out food and energy from one series?

Here are the facts per BLS:

"Has the BLS removed food or energy prices in its official measure of inflation?

No. The BLS publishes thousands of CPI indexes each month, including the headline All Items CPI for All Urban Consumers (CPI-U) and the CPI-U for All Items Less Food and Energy. The latter series, widely referred to as the "core" CPI, is closely watched by many economic analysts and policymakers under the belief that food and energy prices are volatile and are subject to price shocks that cannot be damped through monetary policy. However, all consumer goods and services, including food and energy, are represented in the headline CPI.

Most importantly, none of the prominent legislated uses of the CPI excludes food and energy. Social security and federal retirement benefits are updated each year for inflation by the All Items CPI for Urban Wage Earners and Clerical Workers (CPI-W). Individual income tax parameters and Treasury Inflation-Protected Securities (TIPS) returns are based on the All Items CPI-U."

You note, "Still, at the end of the day if we try further monetary expansion and it fails to stimulate employment, I don’t see a huge social cost to having a three or four percent rather than a two percent inflation rate."

But what if instead, the cost of further monetary expansion is not higher inflation but rather a stock/commodity bubble? A global rise in commodity prices might reduce saving and investment, creating a headwind for future growth. Separately, that result might exacerbate income/wealth inequality (whether real or perceived), leading to political turmoil. A final thought, what if further monetary expansion convinces governments to contract? If fiscal stimulus (deficits) is preferable, than monetary expansion might deter the better policy from being enacted.

Really? A 2% inflation rate means a saved dollar loses half its value in 36 years. A 4% inflation rate means ever 18 years. Given that inflation constitutes a huge wealth transfer from those who pay before prices adjust to those who have access to the new money, don't you think that's relevant?

@Three Pipe - My comments were not meant to suggest that inflation isn't relevant/important but to point out potential costs even if the Fed is unable to create inflation.

The problem is the Fed can not buy the debt that Wall Street and the old defunct investment banks created because debt the Fed buys must be repaid.

When the investment banks were cheerleading the agents creating insolvent debt, the Fed chair decided that the economic laws of "intro to micro" have been suspended so prices were totally disconnected from the cost of adding a marginal unit, so making loans based on 100% of twice the cost of replacing a decaying asset was sound economic theory, and supported the investment bank activity.

But with all that insolvent debt dragging down the banks, the only thing the Fed can do is transfer wealth from the general public into all the banks to recapitalize them as they write off the insolvent-at-creation debt by paying 2.5% free money on deposit.

When the Democrats refinanced the mortgages in the 30s by having the government buy it, that debt was solvent because debt never exceeded 50% of price at origination in those days. The low income subsidized debt was for only 90% of price with the government taking an equity interest in the property - subsidized FHA loans to the poor prevents the poor from profiting from asset price inflation by requiring all subsidizes be repaid first. The Goldman's and Lehman's were perfectly happy to loan 200% of cost with no income to speculators because they were sticking the government with the liability by slight of hand AAA bond ratings.

So, the Fed is funneling in the cash by slight of hand, but it can only do it slowly. If the Fed did it faster, by paying 10% or 25% on deposits, the subsidies of past fraud would be obvious.

However uncomfortable you may be following the blogosphere herd, implicitly you yourself are an excoriator of Bernanke's inaction.

It’s not very glorious or motivational, but here goes: the costs of inflation, within reasonable ranges, are not very high.

What makes anyone think Bernanke has the ability to raise inflation and keep it "within reasonable ranges"?

I believe Volcker's tenure as Chairmen of the Fed makes people think Bernanke has the ability to "keep" inflation "within reasonable ranges". Even if inflation fails to remain within a reasonable range, we know how to force it back there.

Good lord these monetary policy posts really bring out the nutters.

" I don’t see a huge social cost to having a three or four percent rather than a two percent inflation rate."

1. There is definitely a real, private cost to anyone with any amount of savings. Do we want to penalize financial prudence? Might that result in a "social cost" by discouraging people from savings to the extent that we dip below some "optimal" savings rate, whatever that may be?

2. Where is the line between a "private cost" and a "social cost"? Let me propose an unrealistic scenario. If everyone in the country (even those without children) were to calculate the benefit to them of having an educated population, and sent a corresponding check to the educational institutions of their choice, would there no longer be a positive externality associated with education? If people contemplated and acted on ALL externalities in this manner, would we eliminate "social cost" all together?

We forget stagflation of the 70s at our own peril. After all, it was the direct result of this kind of thinking: a little inflation is a small price to pay for prosperity -- after all, elections are at stake. Well, those of us old enough to remember the 20% interest rates that were required to get us out of it are not eager to repeat the experiment that produced an inflation spiral without delivering any gains in real growth.

Contrarian! You have aligned yourself with 99% of the economic elite, all of whom are austerians. The Fed, the ECB, the IMF, the Germans and on an on. That's a strange definition of contrarian.

Inflation tends to hurt savers, which are scarce in the US right now.


???Today's report on economic growth says that incomes increased and it all went to savings. We have been dissaving, and we are now deleveraging (which means increased savings). Welcome to liquidity trapland.

Isn't ZIRP hurting savers just as much if not more?

As a saver I would take 4% inflation if my CD paid a 6% return.

What makes you think you wouldn't get 2% return instead?

I didn't realize only one bank sold CDs ...?

For three, maybe five years I've listened to so may people forecasting run away inflation every time the Fed tried to stimulate

Guess what, they have been dead wrong.

Maybe it is time to recognize that we really have little or no understanding of what causes inflation or that the history we lived through in the 1970s may not be the relevant example.

Or maybe you can explain why it is different this time or why inflation would be a threat this time when the previous forecast proved to be so wrong.

It goes back to MV=PQ. Ask what happened to V during this period to get your answer. You are only looking at M, and you need to look at V too. But, you are not alone: one of the graduate faculty in a major business school was shocked, shocked I might say, when Bernanke did QE I and II, and told me, Bill, we're going to have this big inflation. I asked him: what do you think V was around the Lehman bankruptcy.

So, I guess you have been sitting on your money, eh, and so has your bank, and they have some stinky loans. What does that tell you about V.

As a retired person, current Fed monetary policy appears to be designed to bankrupt a couple of generations. But hey, as long as the big political contributors are doing fine , who cares? Actually I think someone miscalculated big time - O probably cannot be reelected without Florida. All hail big R (for a few hours at least).

As for the CPI, several have observed that a number about halfway between the Williams number and the published number is about right. I agree. The hedonic adjustment thing is nuts - if I buy an auto and am forced to include in the purchase a bunch of heavy and expensive junk that I would gladly pay to have removed - the additional cost is not included in the CPI calculation because the auto has been "improved" by the exact amount of the added cost.

Actually I think someone miscalculated big time...

They did. Pension funds can't stay afloat with UST's at negative real yields.

Is that mistake or design?

DC, Glad you haven't figured out what deflation will do with the value of your assets or any debt you have just yet.. Ignorance is bliss.

Deflation affects everybody equally. Assets fall in price, consumer goods fall in price. A penny saved really does become a penny earned. Asset-rich fools who overpaid see their property transferred to prudent savers. Asset-poor schlemiels can take shelter from the recessionary storm in falling prices. If you think this is a harmful phenomenon, you can always offer to pay Publix more for your groceries.

Inflation, by contrast, provides a grossly disproportionate benefit to upstream recipients of the new dollars. Which is precisely why Wall Street, the government and its economist satraps are always touting constant, grinding inflation.

Anti--You forgot to add: Banks fail, there is no lending, there is no borrowing, depositors lose their money, etc.

Ever read about what happened from 1929-32 in the US and Europe? Ever look at what happened in Japan?

Businesses fail all the time, nothing magic about "banks." If banks hand out more in bad loans at under-market rates than they have reserved for deposits, they go broke. Put them in receivership and seize the personal assets of the fiduciaries like any other company that bilks its creditors. Your parade of horribles only underscores how government cartelization of banking breeds moral hazard and systemic risk.

Savings increases the supply of loanable funds. Have you ever thought about the equation from that end? Does it occur to you that an economy which must continually pull forward future demand is unsustainable?

Anti, Have you ever thought that people are saving now and deleveraging (ie, not spending)....Savings doesn't necessarily lead to consumption, particularly when you are in a liquidity trap.

Would you be interested in reading any books on economic history?

If you are "forced to include in the purchase a bunch of heavy and expensive junk" when you purchase an automobile, how is that the Federal Reserve's fault?

This is what always get me about the debate over inflation numbers. The purpose of calculating inflation is not so that people can make curmudgeonly quips about how high prices are these days. The purpose is to measure the general tendency for prices to rise and, specifically, that tendency's relationship to monetary policy and the money supply. If people simply prefer bigger cars with more features than they did in the 1970s and, as a result, a new car is more expensive than it was back then, it's not clear how that is relevant to any policy discussion.

But thats not measured by CPI even with hedonic improvements. Technological and efficiency changes count opposite of monetary policy, so what you are measuring is something more like:

monetary effects + demand effects from population increases - efficiency increases

Prices are subjective, and debtor nations have a strong incentive to advertise low inflation, which calls into question policymakers' reliance on such reports.

If there is low cost and a chance it might work, why be agnostic? Let's try it.

why does scott sumner not advocate that people be able to counterfeit outright -to an extent of 5% of the GDP or whatever.why does the Fed have to be the agent of money printing?the fed needs the wall st banks .the average counterfeiter can do it more efficiently

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