"Paul Ryan Declares War on Math"

More Jonathan Chait:

Paul Ryan has emerged from his long post-election period of repositioning, soul-searching, and secretly but not secretly visiting the poor. He had been caricatured as an Ayn Rand miser and attacked as a social Darwinist, merely for proposing the largest upward transfer of wealth in American history. Ryan has identified the root cause of his difficulties, and it is fiscal arithmetic.

The new Ryan, now fully formed, emerges in an interview with Philip Klein that

is revealing precisely for its evasiveness. The overview of Ryan’s new strategy must be pieced together from several elements.

1. Tax cuts for all! Ryan has found himself caught between his career-long obsession with cutting taxes for the rich and the problem of what happens to the revenue that would be lost. During the 2012 campaign, he swept aside the problem by couching his plan as “tax reform,” promising not to cut taxes for the rich. Ryan’s new plan is just to go ahead and cut taxes.

He tells Klein, “Those of us who live in the tax system want to lower everybody’s tax rates.” If you lower everybody’s tax rates, then everybody will be paying less in taxes, and then the government will have less revenue, right? That’s where Ryan’s solution comes in: He plans to press the government budget agencies to adopt the optimistic assumption he prefers, which is that cutting tax rates for the rich creates faster economic growth. Ryan spent much of the Bush years assailing what he called “static scoring,” which is the standard budget practice of measuring the fiscal impact of tax cuts as if they do not contain magic pixie dust.

As Danny Vinick has noticed, Ryan has announced his intention to change the rules. Ryan reaffirmed that plan in his interview with Klein: “I’d like to improve our scorekeeping so it better reflects reality,” he said. “Reality” is Ryan’s description for a world in which Bill Clinton’s punishing tax hikes on the rich hindered the economy, which was restored to health when George W. Bush cut taxes.

Inflation hysteria - hilarious

 CNBC nutcase Rick Santelli loses it!

Credit where credit is due - conservative tells right-wing inflation hysterics to accept the fact of low inflation and shut up !

American Enterprise Institute economist James Pethokoukos calls out his fellow conservatives as inflation cranks: 

Are conservatives forever and always doomed to be obsessed by fear that inflation is perpetually just around the corner? Perhaps, since it was the Great Inflation of the 1970s that helped give rise to Reagan and Thatcher and the conservative revival. Even worse, this inflation obsession spawns conspiracy theories that government is manipulating the data to hide skyrocketing prices.

"Predictions and Prejudice" among that cohort of right-wing hacks posing as social scientists

Krugman @ NYT on the shame - or should I say "shamelessness" - of too many in his profession:

The 2008 crisis and its aftermath have been a testing time for economists — and the tests have been moral as well as intellectual. After all, economists made very different predictions about the effects of the various policy responses to the crisis; inevitably, some of those predictions would prove deeply wrong. So how would those who were wrong react?

The results have not been encouraging.

Brad DeLong reads Allan Meltzer in the Wall Street Journal, issuing dire warnings about the inflation to come. Newcomers to this debate may not be fully aware of the history here, so let’s recap. Meltzer began banging the inflation drum five full years ago, predicting that the Fed’s expansion of its balance sheet would cause runaway price increases; meanwhile, some of us pointed both to the theory of the liquidity trap and Japan’s experience to say that this was not going to happen. The actual track record to date:

Tests in economics don’t get more decisive; this is where you’re supposed to say, “OK, I was wrong, and here’s why”.

Not a chance. And the thing is, Meltzer isn’t alone. Can you think of any prominent figure on that side of the debate who has been willing to modify his beliefs in the face of overwhelming evidence?

Now, you may say that it’s always like this — but it isn’t. Consider the somewhat similar debate in the 1970s over the “accelerationist” hypothesis on inflation — the claim by Friedman and Phelps that any sustained increase in inflation would cause the unemployment-inflation relationship to worsen, so that there was no long-run tradeoff. The emergence of stagflation appeared to vindicate that hypothesis — and the great majority of Keynesians accepted that conclusion, modifying their models accordingly.

So this time is different — and these people are different. And I think we need to try to understand why. Were the freshwater guys always just pretending to do something like science, when it was always politics? Is there simply too much money and too much vested interest behind their point of view?

Dooming the long-term unemployed via inflation hysteria

Matthew O'Brian @ The Atlantic:

Are the long-term unemployed just doomed today or doomed forever?

That's the question people are really asking when they ask if labor markets are

starting to get "tight." Now, it's hard to believe that this is even a debate when unemployment is still at 6.7 percent and core inflation is just 1.1 percent. But it is. The new inflation hawks argue that these headline numbers overstate how much slack is left in the economy. That the labor force is smaller than it sounds, because firms won't even consider hiring the long-term unemployed. That our productive capacity is lower than it sounds, because we haven't invested in new factories for too long. And that wages and prices will start rising as companies pay more for the workers and work that they want.

In other words, they think that the financial crisis has made us permanently poorer. That the economy can't grow as fast as it used to, so inflation will pick up sooner than it used to—and we need to get ready to raise rates. (Notice how that's always the answer no matter the question).

There are only two problems with this story: There's not much evidence for it, and we should ignore it even if there is. It's pretty simple. If tighter labor markets were causing wage inflation, they'd have caused wage inflation. But they haven't, not really. Now, it's true that average hourly earnings ticked up in February, but, as Paul Krugman points out, that was probably a weather-related blip. All the snow kept 6.8 million people from working full-time like they normally do, and, historically-speaking, that tends to affect hourly workers more than salaried ones. So higher-paid people probably made up a bigger share of the workforce last month—and voilà, it looked like wages rose. But that was just statistical noise, and if you look at the bigger picture, wage growth is still far below its pre-Lehman levels.

"Japan's pump-primed recovery proves US deficit hawks wrong"

Dean Baker @ The Guardian:

Many of the people who ridicule efforts at using government spending to boost the economy and create jobs like to turn to Japan to warn countries from following that route. After all, Japan's budget deficit last year was more than 10% of GDP. That would be more than $1.6tn in the US economy today. Its gross debt is more than 245% of GDP. That would imply a debt of almost $40tn in the United States, which would mean a debt of $125,000 for every man, women, and child in the country.

Those are the sorts of numbers that policy types in Washington find really scary. Fortunately for the Japanese people, the folks currently running their economy are more interested in sound economic policy than pushing scare stories about debt and deficits. Rather than rushing to reduce the deficit, Japan's new prime minister, Shinzo Abe, went in the opposite direction. He deliberately increased spending to create jobs.

He also appointed a new head of Japan's central bank who is committed to raising the inflation rate. Japan has been suffering from near-zero inflation, or even deflation, since the collapse of its stock and housing bubbles in 1990. Abe's pick as head of the central bank has committed the bank to raising the inflation rate to 2%. Implicit in this commitment is the notion that the bank will buy up as many Japanese government bonds as needed to reach its inflation target.

In other words, the bank is prepared to print lots of money.

While we are still in the early days of Abe's program (he just took office at the end of 2012), the preliminary signs are positive. The economy grew at a 2.4% annual rate in the second quarter, after growing at a 3.6% rate in the first quarter. By comparison, GDP in the United States grew at an average rate of just 1.4% in these two quarters.

Inflation-Mania Cranks & Crackpots

Conservative policy analyst Bruce Bartlett @ NYT's Economix on the "Inflationphobes," who are apparently a...uh...bunch of cranks and crackpots:

When the most recent recession began in December 2007, there was no reason at first to believe that it was any different from those that have taken place about every six years in the postwar era. But it soon became apparent that this economic downturn was having an unusually negative effect on the financial sector that threatened to implode in a wave of bankruptcies. The Federal Reserve reacted by doing exactly what it was created to do — be a lender of last resort and prevent systemic bank failures of the sort that caused the Great Depression and made it so long and severe.

As the Fed lent freely to banks and other financial institutions, its balance sheet grew very rapidly. The reserves of the banking system grew concomitantly; reserves are funds that banks have available for immediate lending that theoretically should lead to credit expansion and new investment by businesses, durable goods purchases by households and so on.

 

Federal Reserve Bank of St. Louis

 

During the inflation of the 1970s, most economists became convinced that if the Fed adds too much money and credit to the financial system it will inevitably cause prices to rise. Since the increase in the money supply in 2008 and 2009 was unprecedented, many economists reacted fearfully to the Fed’s actions.

Given the order of magnitude of the increase in bank reserves, from virtually nothing to more than $1 trillion almost overnight and now to more than $2 trillion, it was not unreasonable to be concerned about the potential for Zimbabwe-style hyperinflation.

But inflation fell rather than rising. In the five and a half years since the start of the recession, the consumer price index has risen a total of 10.2 percent. In the five and a half years previously, it rose 17.7 percent. That is, the rate of inflation fell by almost half.

Now, I don’t expect all the people who filled The Wall Street Journal’s editorial page in 2008 and 2009 predicting an imminent rise in inflation to offer a mea culpa, but at some point I think the inflationphobes should at least stop saying that hyperinflation is right around the corner.

Bernanke: Congress itself poses the greatest risk to growth

Binyamin Applebaum @ NYTs:

WASHINGTON — The Federal Reserve’s chairman, Ben S. Bernanke, emphasized on Wednesday that the central bank remains committed to bolstering the economy, insisting that any deceleration in the Fed’s stimulus campaign will happen because it is achieving its goals, not because it has lowered its sights. 

Mr. Bernanke said he still expected to reach that point in the coming months but, in what may have been his final appearance before the House Financial Services Committee, he cautioned that Congress itself posed the greatest risk to growth. 

“The risks remain that tight federal fiscal policy will restrain economic growth over the next few quarters by more than we currently expect, or that the debate concerning other fiscal policy issues, such as the status of the debt ceiling, will evolve in a way that could hamper the recovery,” he told the committee. 

The sluggish economy has been a constant background for Mr. Bernanke’s biannual testimony. Unemployment, at 7.6 percent, remains stubbornly above the Fed’s goals. 

Inflation has sagged to the lowest pace on record. Growth continues at a “modest to moderate pace,” the Fed said Wednesday in its monthly beige book survey of economic conditions across the country, released separately from Mr. Bernanke’s testimony.

"The Always Wrong Club"

Paul Krugman, via Floyd Norris, rounds up the usual suspects:

Aha. Floyd Norris reminds us of the 23-economist letter from 2010, warning of

dire consequences — “currency debasement and inflation” — from quantitative easing. The signatories are kind of a who’s who of wrongness, ranging from Niall Ferguson to Amity Shlaes to John Taylor. And they were wrong again.

But that won’t diminish their reputations on the right, even a bit. How do I know that? Well, also on the list — presumably because they asked him to be there — is Kevin Hassett, co-author of Dow 36,000 and also a prominent denier of the existence of a housing bubble. Fool me once, fool me twice, fool me yet again — hey, never mind.

Quite amazing.

Inflation is too damned low!

We constantly hear noise about the inflation bugaboo. Not because we're experiencing inflation, but because it's a convenient scare word in certain circles wedded to the economics of austerity. But, of course, inflation is the least of our problems - in fact, if anything "inflation is too damned low!"

Binyan Applebaum @ The New York Times' Economix shows that "Yes, We Have No Inflation":

 

      Source: Bureau of Economic Analysis 

Inflation remained sluggish in May. Prices continued to rise at the slowest pace in at least half a century, up just 1.1 percent over the previous year, the Bureau of Economic Analysis said Thursday. While some other measures of inflation are rising a little more quickly, the Federal Reserve regards this one as most accurate.

Slow inflation may sound like a good thing, but it’s not. Particularly not now.
Economic research suggests that inflation is best in moderation. Price increases lead to wage increases, which makes it easier to repay existing debts, like mortgages, and more attractive to incur new debts, like borrowing to start a company.

Inflation also functions as a kind of economic WD-40, easing shifts in the allocation of resources.  It is easier for struggling companies and industries to adjust by withholding cost-of-living increases than by seeking to impose wage cuts.

Perhaps most importantly, moderate inflation keeps the economy at a safe distance from deflation, or general price declines, which can freeze activity as would-be buyers wait for lower prices. Such a buffer would be particularly valuable now because the Fed is already stretching the limits of its ability to stimulate the economy, leaving the United States unusually vulnerable to any new shocks...

More on the persistence of low inflation

Catherine Rampell @ New York Times Economix:

The personal consumption expenditures, or P.C.E., price index, which the Fed has said it prefers to other measures of inflation, fell from March to April by 0.25 percent. On a year-over-year basis, it was up by just 0.74 percent. Those figures are quite low by historical standards, and helped push consumer spending up. (Measured in nominal terms, consumer spending fell slightly in April. After adjusting for inflation, it rose.)

When looking at price changes, a lot of economists like to strip out food and energy, since costs in those spending categories can be volatile. Instead they focus on so-called “core inflation.” On a monthly basis, core inflation was flat. But year over year, this core index grew just 1.05 percent, which is the lowest pace since the government started keeping track more than five decades ago.

                             Source: Bureau of Economic Analysis, via Haver Analytics. The core P.C.E. price index refers to the price index change for personal consumption expenditures, excluding food and energy.

Low inflation may be one reason that consumers have proven so resilient in recent months (in addition to the lift they’re getting from rising home prices). A measure of consumer sentiment released Friday by the University of Michigan surged in May, and is at its highest level since July 2007.

The Inflation Is Too Damned Low!

Professor Krugman @ New York Times:

Larry Ball makes the case that we would be a lot better off with a 4 percent inflation target rather than the 2 percent that is now central bank orthodoxy.

Intellectually, this position is hardly outlandish; indeed, Ball’s case is very similar to the case Olivier Blanchard made three years ago, just stated more forcefully and with more evidence.

The basic point is that a higher baseline for inflation would make liquidity
traps, in which conventional monetary policy is up against the zero lower bound, less likely and less costly when they happen. Ball estimates that if we had come into this crisis with an underlying inflation rate of 4 percent, average unemployment over the past three years would have been two percentage points lower. That’s huge — it amounts to millions of jobs and trillions of dollars of extra output.

"Austerity for Dummies"

A "layman's guide" to anti-austerity from Stephanie Kelton @ New Economic Perspectives that does a pretty good job of tackling the central arguments in non-econospeak terms:

1. When we allow our economy to operate below full employment (as now), we are sacrificing trillions of dollars in lost output and income each year. We can never go back and recover it.  It is gone forever.  You’ve seen the debt clock?  Here’s the lost output clock.

2. Capitalism runs on sales. In survey after survey, we find that the Number One reason businesses are slow to hire and invest in new plant & equipment is a lack of demand for the things they produce.  Businesses hire and invest when they’re swamped with customers.  See this story in The Wall Street Journal.

3. The two decades after WWII certainly aren’t the only time that robust growth reduced the DEBT/GDP ratio.  During the late 1990s and early 2000s, the economy grew at an above average clip.  Unemployment fell to 3.7%.  Inflation remained modest.  There was a job vacancy for every job seeker in America — genuine full employment.  Because people were working, there was less spending to support the unemployed (food stamps, unemployment compensation, etc.) and more people paying income taxes. The deficit disappeared, and the national debt fell to around 40% of GDP.  So you do not need post-WWII conditions to support the argument that economic growth is the way to reduce the debt.

4. The debt/GDP ratio falls when the denominator grows faster than the numerator.  Right now, just about everyone is fixated on using austerity (raising taxes and slashing spending) to reduce the numerator (DEBT).  The problem, as Europe has kindly shown us for years, is that austerity “works” by crushing incomes, which in turn crush sales (or what we call GDP).  So instead of bringing the ratio down, austerity hampers growth, which causes deficits and debt loads to rise.

Can't get enough of Krugman waving his arms

The Professor on perils of low inflation @ NYTs:

Ever since the financial crisis struck, and the Federal Reserve began “printing money” in an attempt to contain the damage, there have been dire warnings about inflation — and not just from the Ron Paul/Glenn Beck types.

Thus, in 2009, the influential conservative monetary economist Allan Meltzer warned that we would soon become “inflation nation.” In 2010, the Paris-based Organization for Economic Cooperation and Development urged the Fed to raise interest rates to head off inflation risks (even though its own models showed no such risk). In 2011, Representative Paul Ryan, then the newly installed chairman of the House Budget Committee, raked Ben Bernanke, the Fed chairman, over the coals, warning of looming inflation and intoning solemnly that it was a terrible thing to “debase” the dollar.

And now, sure enough, the Fed really is worried about inflation. You see, it’s getting too low…at barely above 1 percent by the Fed’s favored measure...

Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse.

Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low.

So why is inflation falling? The answer is the economy’s persistent weakness, which keeps workers from bargaining for higher wages and forces many businesses to cut prices. And if you think about it for a minute, you realize that this is a vicious circle, in which a weak economy leads to too-low inflation, which perpetuates the economy’s weakness.

And this brings us to a broader point: the utter folly of not acting to boost the economy, now.

Whenever anyone talks about the need for more stimulus, monetary and fiscal, to reduce unemployment, the response from people who imagine themselves wise is always that we should focus on the long run, not on short-run fixes. The truth, however, is that by failing to deal with our short-run mess, we’re turning it into a long-run, chronic economic malaise...

Low inflation isn't necessarily a good thing

Jared Bernstein digs deep into the problems brought by very low inflation:

The Fed announced today that they’ll continue to be the only ones in town trying to do something about the stubbornly high unemployment rate:

The Federal Reserve said Wednesday that its stimulus campaign would press forward at the same pace it has maintained since December, putting to rest for now any suggestion that it was leaning toward doing less.

Another symptom of our demand-weak economy, along with high unemployment and weaker job creation, is the recent deceleration in price growth, shown in the figure below.

The Fed’s “…statement also noted that the pace of inflation had slackened, a potential sign of economic weakness, but it showed little concern about that trend.”

Me, I’m pretty concerned about that trend.  On the one hand, lower price growth means higher real wages, all else equal, and that’s important as slower nominal wage growth is another problem right now.

But on the other hand, low inflation is problematic in ways that are less obvious than the real wage story above.  First off, faster inflation means lower real interest rates, and since the Fed’s already at zero (and can’t go lower), a bit more inflation would help in that regard.  I’d bet we’d see more investment bucks move of the sidelines if that trend in the figure were to reverse course. 

Higher inflation also chips away at nominal debt burdens and thus hastens deleveraging.

But the deeper, and more interesting, reason one worries about too-low inflation right now comes out of the work of Ackerlof et al back in the mid-1990s.  It has to do with sticky wages, something Keynes recognized as contributing to intractably high UK unemployment back in the early 1920s.

"A Modest Proposal for (Treasury Secretary nominee) Jacob Lew: Acknowledge Three Simple Facts about U.S. Fiscal Reality"

Robert Pollin @ "Back to Full Employment":

It is clear that debate over the fiscal deficit and austerity will dominate Lew’s confirmation hearings and at least his initial period in office, if he ends up getting confirmed. But without pursuing any deep explorations about who should be taxed more or less, or whether 47 percent of U.S. citizens are indeed freeloaders, I would just propose that Lew be willing to recognize three sets of very simple, irrefutable facts about the current U.S. fiscal condition. Here they are:

Fact #1: The U.S. government is not facing a fiscal crisis.

In any common sense meaning of the term “fiscal crisis,” we would be referring to the government’s inability to make its forthcoming payments to its creditors. By that common sense definition, the U.S. federal government is in just about the best shape it has ever been. Figure 1 below tells the story.


According to the most recent data from the third quarter of 2012 (which we term “2012.3”), the federal government spent 7.7 percent of its total expenditures on interest to its creditors. As the figure shows, that figure is less than half of the average figure under the full 12 years of Republican Presidents Reagan and Bush, when the government paid, on average, 16.8 percent of the total budget to cover interest payments. Right now, as we see, government interest payments are at near historic lows, not highs. As Treasury Secretary-designate, Lew needs to just state this obvious, and highly relevant point. To my knowledge, it has been heretofore completely left out of the insider-D.C. fiscal cliff debates, by Lew, Obama, and Geithner, to say nothing of the Republicans.

Fact #2: Interest rates on government bonds are at historic lows.

Two cheers for the central banks: "Saving Democracy from Itself"

Jeff Madrick at The Roosevelt Institute's "Next New Deal":

We may want more democratic control over the Federal Reserve, but its independence is allowing it to push back against austerity.

The Federal Reserve's recent announcement of aggressive new policies is more than a little welcome. It involved a new round of quantitative easing focused on mortgage-backed securities, but more importantly, a statement that the Fed would keep rates low for a long time, even if the unemployment rate begins to fall markedly. In other words, the Fed will be more tolerant of rising inflation. A couple of points are clear and have been widely discussed:

 

First, more inflation is what this economy needs. It will reduce “real” interest rates down the road. It will also reduce the level of debt, which will now be paid off in somewhat inflated dollars. Lenders will pay the price; borrowers will benefit.

 

Second, the Fed is at last accepting its dual mandate, which is not only to keep inflation in check but also to keep unemployment in check as well. Inflation got almost all the focus since Paul Volcker’s reign in the early 1980s.

 

Third, inflation targeting as almost the sole purpose of any government policy is now either not applicable to current circumstances or never really was the answer to our prayers. The main claimant on the uses of either hard or soft inflation targeting was none other than Ben Bernanke himself. He was the champion of the Great Moderation, which held that less GDP volatility and low inflation were admirable ends in themselves -- proof of a nearly perfectly managed economy.  

 

Never mind that growth in the late 1990s was supported by high-tech speculation in the stock market, or that growth in the early 2000s was supported by a housing bubble and crazy, risky practices on Wall Street. And forget that job growth was the worst of the postwar period under George W. Bush, even before the 2008 recession, and wages had been performing poorly for 30 years. It was all really great, said Bernanke, and only a few mainstream economists disagreed.

 

But there is another point that needs emphasis and is being passed over. This one is about democracy. Bernanke is acting aggressively because the American Congress and president are locked in an austerity embrace. Fiscal stimulus is now turning into de-stimulus. Even the president’s budget calls for fiscal restraint. The deficit bugaboo is strangling the world.   

 

Those who want to make the Fed more subject to democratic control – and to a degree, I am sympathetic -- should heed a lesson here. Democracy -- that is, a democratically elected Congress and president -- is choosing a damaging course of austerity. In Europe, it is far worse. 

 

Needed policies are coming from America’s central bank, which was deliberately created as an independent entity. Note that it is Romney who is saying he wants Bernanke out of there and crying wolf about inflation. Bernanke, not subject to the whims of democracy, has had the courage to change his own thinking. He knows the consequences of tight policy now.

 

So what do we do? We should be a little modest about the universal benefits of democracy. For example, I think democracy may yet work to end the severest levels of austerity in Europe. People are mad. Governments are changing for the better. Demoracy in America is the only answer to an ever-richer and more powerful oligarchic class in the U.S., which wants to lower taxes, limit regulations, and cut government into ever smaller pieces.

 

But we must also deal with the disturbing fact that one of the least democratic of our institutions, the Fed, is the only one saving the day now. The same is true in Europe, where the European Central Bank is now acting intelligently, in contrast to the fiscal hawks dominated by the German policymakers and apparently supported by a majority of the German people. This issue is not simple.

 

"A slick salesman..."

Economist Mark Thoma @ NY Daily News:

When Mitt Romney introduced Representative Paul Ryan of Wisconsin as his running mate in the presidential election, he emphasized that Ryan “has become an intellectual leader of the Republican Party” on economic policy. But a close examination of Ryan’s monetary and fiscal policy proposals makes it hard to understand why he is held in such high regard.

Ryan’s views on monetary policy are, by his own admission, heavily influenced by Ayn Rand’s Atlas Shrugged. Concerns about inflation – currency debasement – are prominent in Rand’s novel, and those concerns drive Ryan’s monetary policy proposals. For example, Ryan introduced legislation in 2008 to replace the Fed’s dual mandate to stabilize both inflation and employment with a single mandate to stabilize inflation. Under Ryan’s proposal, the Fed would ignore employment when making policy decisions.

Ryan’s lack of concern over employment is disconcerting, but it’s at least possible to find economists who support a single inflation mandate for the Fed. It’s much harder to find anyone who will support another inflation prevention policy Ryan has proposed, a policy similar to a gold standard.

Inflation? Bring it on!

Michael Hiltzik @ LA Times explains why inflation, in current context, should be embraced as one piece of the solution to the lingering legacy of global financial crisis:

Wars and other crises have a way of remaking your oldest enemies into your best friends (and vice versa — just look at the history of U.S.-Soviet relations from 1939 to 1945). 

Given the depth and persistence of the financial crisis here and in Europe, isn't it time to embrace one of our oldest economic foes, inflation?

The way most people think about inflation is reminiscent of the old National Lampoon cover line about pornography: "Threat or Menace?" But the idea that inflation might be our friend is gaining traction, and not only among progressive economists such as Paul Krugman. The notion has been spotted recently on the Wall Street Journal editorial page, and its clearest expression yet has appeared in the most recent issue of the Milken Institute Review — neither venue being known as a breeding ground of the virus known as economic liberalism.

The discussion focuses on how inflation reduces the debt burden. Debt is a head wind against recovery right now. But if you're a debtor paying a fixed rate of interest, like many homeowners, inflation is good for you — as prices, and hopefully your wages, rise, your mortgage burden falls relative to your income. On the other side of the coin, though, your lender is getting paid back with dollars lower in value than the ones he lent you.

That's the point of the Milken Review paper by economists Menzie Chinn of the University of Wisconsin and Jeffry Frieden of Harvard. The idea, as they put it, is that debt is almost always denominated at fixed interest rates, so as prices and wages rise, the relative debt load falls.

To set up world economies for more growth, Chinn told me, "The important thing is to shrink the size of debt contracts." Up to now, European countries have been trying to do that through austerity — cutting government spending and services, forcing down employment and wages.

"You see people trying to grind their way to balanced budgets and hence stabilize debt levels," Chinn says, "and it's excruciatingly hard. Because of the political difficulties in taking austerity measures over the long term, you have to ask yourself if it's feasible."

"What Bernanke Can Do..."

 Dean Baker:

The Federal Reserve Board's open market committee meeting this week likely presents the FOMC with its last opportunity to boost the economy before the end of the year. While the FOMC meets every six weeks, as a practical matter, the FOMC has historically been very reluctant to take major moves close to an election...

The fact that the economy can use an additional boost should not be in dispute. The rate of job creation in the last two months understates the underlying growth path, since it is essentially a payback from the stronger growth due to an unusually mild winter.

Even the 165,000-a-month average rate of job creation for the last five months is far too slow. With the economy needing roughly 100,000 new jobs a month just to keep pace with labor force growth, it would take us more than 12 years to make up our 10 million jobs deficit at this point.

If there is a clear need for more rapid growth, the data also show there is no downside risk of excessive inflation. The consumer price index fell 0.3% in May. It has risen by just 1.7% over the last year. (The core index rose 0.2% last month and is up 2.3% over the last year.)

Of course, many of us have argued that higher than normal inflation would be desirable, in any case. It would reduce real interest rates in a world where the Fed has already pushed the nominal federal funds rate as low as it possibly can. That would provide businesses with more incentive to invest. Higher inflation should also help to lift house prices, helping homeowners to rebuild equity.

However, even if the Fed is unwilling to accept the idea that it should promote higher inflation, as Chairman Ben Bernanke used to recommend back in his days as economics professor, it should at least be confident that the data show no reason to be concerned about inflation exceeding its target... There are two routes the Fed can go.