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10/30/2013

Comments

Kasey Canon

Economists are making strong arguments to create more inflation. As the article points out, there are many positives about increasing inflation. Higher inflation is a way to "boost growth without additional government spending." By increasing the inflation rate, real interest rates would decrease. This would give people more incentive to spend and invest--both of which could only positively effect the economy. Furthermore, higher inflation would reduce the real value of debt which allows there to be more money for consumers to spend. The article also argues that high inflation could increase US exports by reducing the value of the dollar. Unfortunately, although models can depict the likely outcomes of increasing inflation, the only way to find out the effects of high inflation is to actually put it into action in the economy.

Katie Barnes

Paul Krugman along with many other liberal economists have advocated for increased inflation. Conservative economists have even spoken in support of higher inflation as a mode of stimulating government revenue and expenditures. 4% and 6% are the numbers being thrown around, in comparison to the targeted 2% now. The prospective numbers of inflation reducing the real value of debt, including "$13 trillion of mortgages and $12 trillion of government debt held by the public" seem promising. The article doesn't address the negative aspects of inflation, such as the decline of the standard of living if incomes do not keep up with inflation. Since a small amount of inflation is acceptable as long as it is managed, perhaps increasing to 4% would be all right, only if it were managed properly by the federal reserve.

Emily Utter

The idea of increasing inflation, is to get people to increase their spending, and to decrease their debt. I think increasing peoples spending has always been the governments and economics idea for fixing this recession. But in the past, no other initiatives have worked. So, I'm wondering if increasing inflation will even make people think about spending more. I think people are still scared, and are still resistant to spending more than they absolutely need to, which is what our economy needs to get back to where it was in 2007. Also, like Katie said, this article only focuses on the benefits of inflation, and does not go in depth about the negatives. The only negative even talked about is how over-spending might cause the economy to deflate. Which is the complete opposite view that other economists, like Paul Krugman, have. Increasing the inflation rate is very complex, and this article only grazes the surface of it.

Jean Turlington

The constant discussion about the interplay of inflation and the state of the economy as a whole, especially inflation and unemployment is crucial in macroeconomic policy. Right now the government is keeping that steady rate of 1-2 percent inflation but in doing so it is hard to fix the recessionary gap that has occurred since the end of 2008. This article argues with higher inflation the recessionary gap will be more easily fixed and the potential for investments will increase because the interest rate could in theory go to a negative number and be less than 0. People also might want to spend more instead of save their money because the value of their money would decrease over time. With any decision about trying to influence the macroeconomic economy as a whole there are definitely trade offs. This article like the other commenters mentioned did not focus very much on those trade offs and both situations should be very carefully considered before anything is done.

Matt_Kiser

I would argue that most people do not factor inflation into their consumption. When was the last time you decided to buy something at that moment because inflation would make it "more expensive" in the future? Probably never, I know I haven't. I would go further and argue that a lot of Americans do not really know what inflation is. Since they do not know what it is, how will it effect their spending? It probably won't. Also, if you you look at inflation rates of other countries, most developed countries have inflation below 3 (Germany has 1.2, the Netherlands have 2.45, U.K. has 2.7, Canada has 1.1) and most of the countries with rates between 4-6% are middle eastern, african, and south asian countries. While many of those countries with inflation between 4-6% have unemployment around the natural rate, the growth in their GDPs isn't any better compared to America's growth rate of 2.5% and often lower. (http://www.tradingeconomics.com/country-list/inflation-rate)

For years, the Fed has kept interest rates low, and it hasn't done that much. So targeting interest rates in a different way might not be the most efficient strategy. The government or private companies need to do something that encourages borrowing in a completely different way. I'm not sure what that would entail, but taking action in other areas might be effective at poking the economy towards where it was pre-recession.

Maddie Kosar

In response to Matt, inflation may not be a factor that we consider for future purchases, but it is certainly something that comes into play for the present. Higher inflation means a higher price level, and since price level is higher, wages theoretically will also be higher, therefore consumer spending should increase. This would lower relative debt and allow them to consume more. It is important to note, however, that using policy to change our aggregate supply might not be necessary because wages are sticky in the long run and eventually aggregate supply will shift to meet aggregate demand at our potential output. Since we have not been at potential output for so long, inflation could be a good choice to combat our current level of unemployment. There are obvious downsides to inflation, but as we have found no answer to our unemployment problem yet, it could be the answer to our problems. The only question is if it is the answer in the long run or the short run, which can only be found out through experimentation.

Syed Ali

I think Matt brings up an interesting point, in that consumers may not be adequately aware of what inflation is and what tangible effects different inflation levels have, and that they therefore won't be as responsive to changes in inflation as we hope. Perhaps this is factored into the "perfect information" assumption of the perfect competition model, that is so often applied to our economy.
The article itself summarizes how various economists, on both sides of the spectrum, are arguing that increased inflation rates will encourage consumer spending; by both reducing the relative value of debt, and by disincentivizing the hoarding of money. As we discussed in class, a high inflation rate will eventually move us from a recessionary gap to the natural rate of employment, which lies on the vertical LR Aggregate Supply curve. I think the idea of raising inflation to return our economy to maximum employment follows sound economic principles (at least, the ones we’ve learned in class) and has potential. However, I also recall the book mentioning several drawbacks to having high inflation, and the large detrimental effect of high inflation in both the US and Portugal in the past century. According to the book, the Federal Reserve chairman at the time was forced to keep the US in a state of partial recession to lower inflation rates to a manageable level. I am a little bit worried about whether we would choose to lower the inflation rate in the future, and how we would go about doing that, if we raised it now. What negative consequences could result? Would reaching maximal employment today justify creating a recession in the future?

Matt Kinderman

There is usually a trade off between unemployment and low interest rates. In recessions, there is the paradox of thrift--decreased spending due to saving more leads to decreased income for others which furthermore leads to less spending and less economic growth. To reverse this downward trend in the short run, the government must somehow stimulate spending, whether through lowering interest rates or trying to decrease unemployment. With a high unemployment rate, since the unemployed's spending obviously is drastically decreased during unemployment, it seems as if the most efficient way of increasing spending is by increasing the spending of a population that is currently spending at a greatly reduced rate--through providing jobs and reducing the unemployment rate. Although there is a trade-off and this has not been the traditional status quo, it is gaining traction with more economic scholars as more creative approaches are being sought to stimulate this sluggish economy.

Sam Sheppard

I do agree with this article in the notion that an increase in inflation would be a possible positive conclusion for our economy. The main point brought across is that at 2% inflation, there can only be a minimal real interest rate decrease, where as if the government were to increase inflation, it would allow more real interest rate leeway and in turn "to provide a more robust boost to investment and spending" which has been the key problem in our current economy, the paradox of thrift.

Kelsey Richardson

In his article King writes about how, although it has a frightening stigma, many economists, both liberal and conservative, have been arguing for an increase in inflation. Their beliefs are that an increase would stimulate economic growth by reducing the real value of debt in our economy and would encourage more consumer spending. The idea seems to be that pumping more money into the economy would allow for decreased interest rates and more demand for goods and services. However, Matt brought about an interesting argument that perhaps growth would not change in our economy much from how it exists now by increasing inflation. At least in the article he cited, most countries keep their inflation rates low like ours and those who keep a higher inflation rate do not seem to be faring much differently than America in terms of growth. From this standpoint it might be worthwhile to consider alternatives to lowering interest rates. There are definitely pros and cons to increasing inflation, especially if the effects are unpredictable to the consumer. Regardless, there is definitely much to consider regarding the issue of inflation changes economically.

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