Saturday, April 18, 2009

Mankiw Calls for Greater Inflation

In a remarkable column scheduled for publication in Sunday's NYT and available online now, Harvard economist and best selling economic textbook author, Greg Mankiw, calls for the Fed to increase inflation. Mankiw doesn't differentiate between price inflation and monetary inflation, but it's clear he doesn't have a problem with either.

After reviewing and then discarding a number of truly bizarre methods to literally destroy the currency, he writes:

If all of this seems too outlandish, there is a more prosaic way of obtaining negative interest rates: through inflation. Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.

Having the central bank embrace inflation would shock economists and Fed watchers who view price stability as the foremost goal of monetary policy. But there are worse things than inflation. And guess what? We have them today. A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations.

Ben S. Bernanke, the Fed chairman, is the perfect person to make this commitment to higher inflation
This is remarkable advice from a man who was once, from 2003 to 2005, chairman of Council of Economic Advisors under President George Bush.

Not only is it obvious that the economy is re-heating, by anyone looking at the numbers in detail, but concerns about future inflationary prospects are coming from many different mainstream directions. Paul Volcker, Allan Meltzer and even Larry Summers have expressed concern.

Mankiw does hedge with weasel words, a but here and a maybe there, but his true beliefs shine thorough. And so does his lack of understanding about the current state of the economy.

His column is a three striker, it shows he doesn't understand the business cycle, he doesn't follow data close enough to know where the economy is (Hell, Krugman does a much better job at this) and he obviously has no clue about the connection of money growth and ultimate inflation. The man's recommendation would throw the economy into the type of inflation that Zimbabwe once had, until its currency was destroyed.

I marvel at the fact that so many professors use Mankiw's texts. He must throw one helluva a house party.


  1. This guys (not Mankiw) makes a "moral case for inflation" that is, at least, moral

    See here

  2. Mankiw's proposal is very dangerous and naive.

    The reality is that inflation will reduce the disposable income of most Americans. This, in turn, will make consumer debt repayment even more difficult than it is today. The inflation of the 2006 to 2008 time period was a significant cause of the economic problems we have today.

    Mankiw needs to realize that, for most Americans, their wages and salaries are far more "sticky" (perhaps "superglued") than the inflated prices they would be forced to pay every week for food and transportation.

    Only the wealthy can quickly and nimbly hedge against inflation. The rest of America will respond to inflation with the kind of consumer behavior that we have been witnessing in these recent months (curtailed spending).

    Bryan Kay