NEW YORK – Two high-profile economists are calling on the Federal Reserve to accept a higher rate of inflation in the coming years to reduce the burden of paying back the debt that American households and the U.S. government have racked up in recent years.
Kenneth Rogoff, former chief economist of the International Monetary Fund, and Gregory Mankiw, former chairman of President George W. Bush’s Council of Economic Advisers, told Bloomberg News the economy would benefit from a higher inflation target than the Fed’s traditional annual target of 1.5 percent to 2 percent. Both men are now professors at Harvard University.
“I’m advocating 6 percent inflation for at least a couple of years,” Rogoff, who has been a prominent expert during the financial crisis, told Bloomberg. “It would ameliorate the debt bomb and help us work through the deleveraging process.”
“There’s trillions of dollars of debt, in mortgage debt, consumer debt, government debt,” Rogoff said. “It’s a question of how do you achieve the deleveraging. Do you go through a long period of slow growth, high savings and many legal problems or do you accept higher inflation?”
Mankiw did not offer a specific number, but told Bloomberg the Fed should commit to allowing “significant” inflation in the coming years.
But other economists who talked to Bloomberg warned of the risks associated with such a policy, raising the specter of the double-digit inflation rates of the 1970s and early 1980s.
“Anybody who has been a central banker wouldn’t want to see inflation expectations become unhinged,” Marvin Goodfriend, a former official at the Federal Reserve Bank of Richmond and now a professor at Carnegie Mellon University, told the wire service. He added: “The Fed would have to create a recession to get its credibility back.”
At the moment, though, Fed Chairman Ben S. Bernanke has said his main concern is avoiding deflation – that is, a period when prices fall in real terms, raising the cost of debt repayment for consumers, businesses and governments alike.
Good idea to not be too worried about the general inflation rate. In the past decade of so called "low inflation," certain sectors of the economy inflated anyway. House values, for instance in many parts of the country.
Here in Bellingham, WA. I saw in our local paper that house values and prices went up over 20% in the boom year of 2005.
Amazing. This pushes up housing costs.
Health care costs have also been spiraling up faster than overall inflation also. It's like our economy has been shearing apart with rapid inflation in certain sectors while the general inflation rate remained low. Eventually, housing and health care became non affordable for people working in most sectors of the economy where wages and prices continued to show low inflation.
Part of the reason for this banking crisis is the foreclosures on all this overpriced property compared to wages. Government has stepped in to try and keep the banks solvent through this crisis, but huge deficits have resulted.
Government keeps being needed to stimulate the economy. Also to provide things like health care access for the growing segment of population that can't afford this privately.
It looks like large deficits will have to be with us for the foreseeable future. Monetary policy will have to take into account the fact that deficit spending will likely be high for a long time to come.