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Meanwhile, young tweeters seem to forget the Great Inflation happened, or perhaps that it was caused by some sort of oil shock. How oil shocks cause double digit NGDP growth has never been explained. Everything we learned about unreliable Phillips Curves and shifting inflation expectations seems to have been forgotten. You simply can’t have too much stimulus.

I suppose their ignorance is understandable. If parents expertly adjust the thermostat to keep the house temperature at 71 to 73 degrees for 20 years, with a 72 degree target, can you blame the kids who grew up in that house for thinking that thermostats don’t have much impact on temps? (Let’s hope Powell knows!)

My views are orthogonal to this intra-Keynesian debate. I don’t think the fiscal stimulus is a good idea, but not because I expect much inflation. The inflation rate will be determined by the Fed. Rather it’s a reckless policy because it will lead to higher tax rates in the future and won’t do much to generate growth beyond Q3. (Deficits do cause higher interest rates, but only slightly higher in a country like the US.)

For 250 years of American history, politicians have held the peacetime budget deficit in check because of fears of either inflation or higher interest rates (or perhaps a loss of confidence in the gold standard.) What would happen if they begin to sniff out that the actual risk is not inflation or much higher interest rates next year, rather the risk is higher taxes in 20 years, after they’ve safely retired? How would they respond to this information?

I fear that we are about to find out.

There is more at the link.  As an aside, I am amazed how much “but the job market recovered so slowly last time” is considered a relevant argument here.

While I agree with those who predict a higher rate of price inflation from the current stimulus plan, it just doesn’t upset me so much (I am much more worried about the poor way we are spending much of the money, and the political precedents being set for vote-buying).  It has long struck me as the utmost in complacency that the rate of price inflation has to be 1.8% every year.  Even if that is “the best inflation rate” (under what ceteris paribus conditions?), how important a regularity is that?  How well does a totally predictable rate of price inflation predict prosperity?  I would suggest we simply do not know, but it is far from obvious that the predictive power here is strong, if it is present at all.  The empirical case here is quite weak, especially if you adjust for the quality of the government in question.

I am thus happy with average inflation targeting over the previous operating regime of the Fed.

When someone says “The rate of price inflation has to be 1.8%,” what I really hear is “we cannot impose very large pay cuts on what are effectively tenured bureaucrats.”

That all said, I really do not regard higher rates of price inflation as any kind of tonic for an ailing labor market, and I see that many respondents are not able to outline what a mechanism might be connecting inflation and higher employment, rather they simply restate that one will lead to the other without telling us how.  The important thing is to prevent deflationary pressures in the first place.

Do read through my whole argument, here is just one segment from my latest Bloomberg column:

One theory about the benefits of an overheated labor market stems from the work of Robert E. Lucas in the 1970s, which in turn built upon ideas from Milton Friedman. In Lucas’s model, if the central bank boosts the money supply and the rate of price inflation, some people will work more or expand their businesses because they think there is a real and enduring increase in the demand for their output.

That makes sense theoretically, but subsequent empirical studies showed the effect is typically small. In 1986, Lawrence H. Summers wrote a critique of these and related ideas, and the economics profession rightly decided to move on. Inflation does change people’s work and production plans, but not by very much.

A second argument has remained more robust: the Keynesian idea of money illusion, outlined in Keynes’s General Theory. According to Keynes, a central bank can boost the rate of employment by inflating. If nominal wages are sticky, and the rate of price inflation goes from 0% to 5%, inflation-adjusted wages will suddenly be 5% lower. Businesses will hire more workers.

Even if you are an unreconstructed Keynesian economist, you might notice a problem with this mechanism: It boosts employment but not real wages. In fact, it boosts employment by lowering real wages, which is a pretty typical economic mechanism. So if the idea is to “run labor markets hot to raise worker pay,” this approach isn’t going to help. Instead it will increase the temptation to solve employment problems by looking for ways to cut real wages, not raise them.

“Running the economy hot” is a metaphor — it is better to respond with an actual model/argument, and noting the recovery was slow last time does not suffice!