Comments by "JP 72" (@739jep) on "The Fed's target inflation rate should be zero, not 2%: Economist Judy Shelton" video.

Low inflation has empirically linked to low growth and higher unemployment. It’s also a riskier target , if you fail and fall short there are economic concerns that it could lead to a deflationary spiral which is difficult to escape from (think Great Depression) Low inflation gives incentives to delay consumption , if prices are falling why wouldn’t you wait. This is bad for business. Low inflation makes it harder for wages to adjust to maintain purchasing power. If prices are falling businesses would need to cut wages to maintain profit levels , historically wages have been hard to decrease even though purchasing power of the employee wouldn’t change. This would likely result in higher unemployment. There’s a reason why almost every developed nation has a target inflation rate higher than 0.
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No the inflation target should not be 0% I also think current inflation is likely not caused by expansive monetary policy.
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@nellyx8051 maybe not at 0. I did say ‘if prices are falling’ which means deflation. If you’ve ever delayed purchasing something because you know if you wait then there will be a sale (think Black Friday sales) then I think you understand. It matters how much of a price decrease is expected as well of course. If inflation and deflation are at moderate levels and seem controllable there maybe isn’t as much of an issue. It’s the same thing in the other direction - one of the reasons we have forward guidance is to control inflation expectations- if people expect inflation to be bad in the future there is incentive to purchase more now while they’re cheaper - which can create more inflation. It’s also not an on/off switch situation either. Of course you can’t wait to buy food because prices are falling , you can’t wait to pay rent. People put off consumption now in order to enjoy more consumption later in any environment. But what matters is the impact on the general level of consumption. Regardless, there are other issues, not just effects on consumption incentives, with a long term 0% inflation rate.
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@nellyx8051 I’m not so sure it’s an argument in favour of inflation but rather an argument for ‘accepting’ a certain level of inflation in order to pursue other economic objectives. What would it mean to pursue long term 0% inflation? Would you be willing to accept low wage growth for instance ? If deflation occurred would you be willing to accept pay cuts? Woudl you do this consistently for many years? If so do you think others would? What measures would need to be taken to achieve 0% inflation?
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@nellyx8051 I’m not quite sure i follow what you mean with ‘psychological game’. I don’t think we have a good enough understanding of what inflation is, how it’s caused , how to measure it or even if we have much control over it for anyone to be playing any kind of game with it. Maybe you could explain what you mean here ? I’m not sure those measures would achieve a 0% inflation rate. Lowering mortgage rates would increase lending , which may or may not be inflationary , but it’s only one type of lending anyways. Regardless you’d be interfering with banks, their bottom line and their mgmt of risk? What do you perceive as the main benefit of having a 0% inflation target over a 2% target is?
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@nellyx8051 ‘the supposed benefits are just tricks to lower peoples purchasing power…’ again I’m not suggesting there are inherit benefits to inflation , just that it makes sense to accept a manageable level of inflation. Tbh this statement sounds rather ideological / sounds a little like a conspiracy theory. Over the last 100 years individual wealth has increased not decreased , so who needed to be fooled? I agree that controlling government spending could be an effective measure , but that gets very complicated. It’s not just a simple matter of reducing spending. How government money is spent affects production of goods and services. Fiscal theory of the price level would suggest that inflation is a function of govt spending as a percentage of future surpluses. Only thing is government spending today affects future surpluses. I’m not sure how much of an impact monetary policy, in the given economic environment, has on inflation levels. If inflation is currently being driven by supply chain issues and government spending , I’m not sure raising rates will help a lot. Quantitative easing didn’t seem to influence bank lending a lot , so not sure quantitative tightening will help much either. Could changing bank reserve requirements help? Maybe , but inflation would have to be driven largely by consumer demand in this circumstance though wouldn’t it? If 0% is better than 2% then would deflation be better than 0% ?
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@nellyx8051 I admit it would be nice if I didn’t have to calculate it, but what the target is really wouldn’t change that I think- countries can fail to hit their inflation target. Japan has an inflation target of about 2% and has struggled to get above 0 for decades now. There are probably things more important than me having to work out my real wage increase anyways 😂
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@harpstermatt the biggest lies told to every econ 101 kid is M*V = P*T and that the monetary theory of the price level has any merit.
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