John Krehbiel
The madness of the inflation hawks – Paul Krugman Blog – NYTimes.com
by John Krehbiel on 19 November 2009
I’d add that the Fed really should be raising its inflation target, meaning an even longer pause before it raises rates.
via The madness of the inflation hawks – Paul Krugman Blog – NYTimes.com.
Greg once asked why I listen to anything Paul Krugman says.
Well, he agrees with my views a lot, so he must be right, right?
2009-11-19 » John Krehbiel
19 November 2009 @ 8:49 pm
Just remember that one definition of inflation is the government intentionally devaluing the money in your pocket.
19 November 2009 @ 9:22 pm
Since there is no money in my pocket, that’s not a problem.
In fact, the value of my house might get back up to what I paid for it, while the mortgage would be easier to pay. Inflation is the cure to the housing crisis.
A small number of people with a lot of cash have been very successful at convincing people who don’t have money that the interests of those without money are served by giving advantages to those with money. Why else would someone living in a trailer on $150 a month be worried about a “death tax?”
19 November 2009 @ 9:39 pm
Uhh… Because they are principled and dislike punitive taxes that steal from people’s legacies arbitrarily?
I know, that’s right, the poor can’t be principled. They are just stupid poor people, right?
20 November 2009 @ 10:51 am
Inflation is the cure for the housing crisis?
I thought it was the cause….
We will not be “better off” with higher housing prices: And you contradict yourself. The small number of people with cash – um, home owners, don’t serve the interests of everyone by giving the advantage (runaway housing prices, again!) of higher home prices to others.
I don’t have any problem with the article, except that someone ought to teach that poor Taylor fellow how to come up with a formula which doesn’t include negative interest! What would that be, like a bank charging you a percentage for keeping your money safe?
20 November 2009 @ 11:38 am
The cause of the housing crisis was very low interest rates, which were supposed to stimulate the economy. What they did instead was enable a series of debt-financed bubbles. As interest rates got lower, people were able to afford to spend more on houses, so the price went up. Consumer spending was supported by easy money in refinancing, not by actual earnings and wages, which were stagnant or even falling in real terms.
Most homeowners don’t have cash. They used to have equity, but then it became easy to use their homes as ATMs…
I’m not talking about another housing bubble. I’m talking about a moderate rate of inflation, say 6 or 7 percent. Workers get COLAs and the value of their home recovers. The mortgage gets easier to pay, but refinancing is reigned in by higher interest rates, so they can sit on their equity.
On inheritance taxes, the largest part of taxable estates (and they have to be pretty big to be taxable at all) is unrealized capitol gains. This is not money that has already been taxed.
Oh, and before somebody starts carping about how the government “made” those banks lend to people who couldn’t pay back, you should be aware that most of the distressed mortgages were not government mortgages at all, but conventional mortgages which those regulations had nothing to do with.
20 November 2009 @ 12:13 pm
The cause of the housing crisis was not low interest rates, but artificially low interest rates. I.e., interest rates that were pushed below where they ought to have been because of government intervention in the economy.
And when you consider the inheritance tax in conjunction with government-caused inflation, it’s more clear that it’s unfair.
A man buys a house. The government devalues money, which makes the dollar value of the house go up. He dies and leaves it to his kids, who have to pay taxes on the (now inflated) value of the house.
20 November 2009 @ 1:12 pm
That would have to be a heck of a house. The inheritance tax doesn’t kick in until the estate is 3.5 million dollars.
Besides, if those capitol gains are taxable anyway, why should they escape being taxed because they are part of an estate?
And why do you say “the government devalues money”? That’s only one way inflation could happen, and not the way it happens in the US as far as I know. What happens, as happened with houses, is that people are more willing to spend money, so sellers raise prices. Why were people more willing to spend more on houses? Because interest rates were low. The only interest rates the government directly controls are short term interest rates between banks. The market sometimes follows, sometimes it doesn’t
20 November 2009 @ 1:41 pm
3.5 million would be a big house, but it wouldn’t be a big farm. I don’t see why something should be taxed when it’s handed down from father to son.
Government devalues money by increasing the money supply. I’m pretty sure that’s part of why we have inflation in the U.S. But you’re right that there are other causes.
20 November 2009 @ 3:09 pm
My accountant says if you have assets over one million dollars, you need estate planning to avoid your children paying inheritance taxes.
I believe him.
Now I just have to work on that million……
Plus, John, if you support inflation of 6-7% with the idea that Wrokers will get COLAs – even if they all do – what will happen to retirees? Inflation helps No One. At All.
20 November 2009 @ 3:35 pm
I’m not sure I’d go that far. Wikipedia, the fount of all knowledge, has this to say.
“Today, most mainstream economists favor a low steady rate of inflation. Low (as opposed to zero or negative) inflation may reduce the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control the size of the money supply through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.”
I don’t know what that means (I don’t feel like looking up “liquidity trap”), but the point is clear enough. Most economists favor low inflation.
Now if they could just get all the psychiatrists to agree, we could be 100 percent certain it’s good advice!
20 November 2009 @ 7:38 pm
A liquidity trap is when increasing the money supply will not lower interest rates. When interest rates are essentially zero, it’s a liquidity trap (sorta).
Deb,
Even though my pension from Giant will not adjust for inflation, inflation will help me.
I have a fixed rate mortgage. (Why anyone would have gotten a variable rate mortgage when interest rates were at historic lows is absolutely beyond me, BTW) Inflation is a general decrease in the value of money. So if there were a moderate inflation rate, I would be paying back my mortgage with cheaper dollars. The nominal amount of my mortgage will not change. The interest rate will not change. The ease with which I will earn the monthly payment will change.
Everyone with a fixed rate mortgage is helped by inflation.
20 November 2009 @ 7:45 pm
But doesn’t the mortgage company take that into account? IOW, they know they’re going to be repaid with cheaper dollars, so they factor that into the equation.
20 November 2009 @ 10:50 pm
John,
The way I see it, inflation as you have described it only helps those who have been irresponsible, while hurting those who have been responsible.
For example, some Americans are in debt because they were reckless with their credit cards and bought more house than they should have. Inflation will make it easier for them to pay off their foolishly acquired debt. In essence, it will get them off the hook for their stupidity.
Other Americans, however, did not get into credit card debt, bought more modest homes and managed to put a little in savings. Inflation will hurt them as it will erode the value of their savings. And as they didn’t buy as expensive of homes, they aren’t as concerned with paying back their mortgage with cheaper dollars. Also, inflation sends them the message that maybe they should have lived it up instead of working hard and being thrifty. Maybe next time they should take the McMansion instead of the three bedroom brick ranch house. Maybe next time they shouldn’t save and should have fun on the credit card.
My wife and I don’t make that much money, but are in the second category of Americans. Inflation at 6-7% or more would really anger me. As a taxpayer, I’m already bailing out a host of irresponsibly companies and banks. So now you’re telling me that through inflation I should basically do the same to people who can’t be bothered to manage their money wisely? Sorry, but if I can help it, no thanks. We don’t need higher inflation. But some people need to learn a lesson or two about basic money management.
rr
21 November 2009 @ 10:15 am
Greg,
That’s the trick. You get a mortgage when inflation is low, and interest rates are low as well. Then you hope for a bit more inflation so you can pay it back with cheaper dollars. The mortgage bankers compete for loans, so they can’t just keep interest rates high in case there is future inflation.
That’s why I said that people who get variable interest mortgages when fixed rate loans were at historic lows were just plain stupid.
rr,
The economy as a whole is so debt based these days that we either need to scale way back on consumption (the deflationary recession economists are so afraid of) or increase real wages to where they used to be while making it harder to finance ordinary consumer spending with borrowed money. Some people see it as being responsible to save cash to pay for future purchases, but when too many people do that, the economy fails to grow.
Of course the Voodoo economists of the last 30 years don’t believe in Keynesian things like the paradox of thrift, but that’s based on ideology, not reality.
21 November 2009 @ 10:26 am
Of course, the Keynesians are completely ideologically pure.
You linked to an article a while back where Krugman admitted that Keynesians couldn’t explain the Carter economy.
The long slump that Japan is in right now is because people don’t trust the economy and save. People know. People are prudent when their leaders are saying “Spend! Spend! Spend!”
I’m not sure what good it does the American economy right now to spend more on Chinese goods. We could arbitrarily set real wages higher in the US and make our products even more uncompetitive with goods from China and Indonesia, but I don’t see that as a good long term plan.
21 November 2009 @ 1:54 pm
Two words:
Comparative advantage.
We are not profitably a manufacturing nation anymore. At least not in traditional manufacturing. (The Chinese, BTW, are no longer quite so competitive in the race to the bottom on wages either.)
21 November 2009 @ 3:52 pm
Sounds like Thomas Friedman.
I guess we’ll dine out producing the worlds lawyers and blockbuster movies while the rest of the world will specialize in making things like cars and food. Sure, we can go on like that forever.
22 November 2009 @ 11:06 am
Yeah, well sustainability is the fly in the ointment, isn’t it? I agree that it doesn’t lead to anywhere we really want to be.
That’s why economics is called “the dismal science.”