Inflation phobia: Is the cure worse than the disease?

 

Aversion to inflation has been the salient feature of economic thinking of our times. Keynes aside, the traumas of hyperinflation in interwar Germany and the Great Depression of 1929 have left scars deep enough to shape economists and policy-makers’ tenets for almost a century. The Economist reports that officials at the Federal Reserve, “a few of them anyway,” seem to be rethinking their views “in some dramatic ways.” Yet former Fed chairman Ben S. Bernanke has suggested in a blog post that they should curb their enthusiasm. Should they?  As The Economist’s blog suggests, reality has challenged a long held principle: the equilibrium point between unemployment and inflation. Basically, the Fed believed that the optimal unemployment rate hovered around 5 percent without the economy dangerously overheating. A rate much closer to full employment would lead to unbearable inflation, it was feared. Recent employment figures, however, have shown this concern to be unfounded. The U.S. economy has withstood low unemployment (matched with low productivity) without significant inflationary pressures building up. That this has been good is debatable, as one of its outcomes has been a sustained period of low growth. A U.S. economy at walking speed is as bad for the country and the world as, say, runaway inflation. The suggestion is, therefore, that there is a strong case to be made for higher wages. More disposable income drives up demand. Herein may lie a key for reactivating growth in the U.S. and the world. Like stagnant waters, a lethargic economy breeds diseases.

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