Tuesday, July 19, 2011

Inflation expectations

Any time I discuss the economy with conservatives I almost invariably hear that uncertainty is a problem, though pretty much only when Democrats have power. Its not that I think uncertainty isn't a problem. But I don't see why uncertainty would change much depending on which party is in power. Nor do I see an easy way to measure uncertainty and then draw a causal line from those feelings to what the president or congress is doing with economic policy.

So most of the time I think its just a crutch that conservatives trot out when they can't explain things in a supply side manner. Along the uncertainty lines, you will often hear concerns about inflation. The Ron Paul types like to say that this whole paper money thing is a big hoax that is stealing people's money and thus we should get back on the gold standard. And in a broader context I think conservatives don't like the idea of the gov't printing money because they hate the gov't except when its charged with protecting their lives (which is odd because that job involves the most trust).

Unlike the vague notion of uncertainty, inflation can be more easily measured. Matt Yglesias has been pointing out for years that inflation is low and that the Fed could be increasing it in order to help bring down unemployment. He has even quoted Ben Bernanke as saying such an increase in inflation would do such a thing. Today Matt linked to this article by the Cleveland Fed showing inflation expectations. Here is the graph:


As you can see inflation is expected to be low, especially compared to other times of good economic growth. Reagan ran consistently higher inflation, and deficits on top of that. So as Matt points out, there doesn't seem to be any good reasons to continue to keep inflation so low until the economy gets better. Even the Wall Street Journal had an article (paywalled) up last night that said the majority of economists they polled though the economy was suffering from lack of demand.

But instead of addressing these problems by using the tools we have available the gov't is focused on doing something, massively cutting spending, which could have a negative impact on the economy. Maybe Obama can offset some of the spending years down the road and get some stimulus now. But Republicans don't really have an incentive to do that. And many of them believe that not raising the debt ceiling wouldn't be a problem. The whole situation doesn't make sense outside of purely political reasons. Even then I'm not sure it makes a ton of sense. And all the while the rest of us pay the price with our lowly inflated money.

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