If only

In July of 2008, 12-month CPI inflation hit 5.5%. That was really bad.

But in what way was it bad? It was bad because the inflation rate was too low. It would have been much better if inflation had hit 6% or 6.5% in mid-2008. Because inflation was only 5.5%, we fell into the Great Recession and the economy remained severely depressed for many, many years.

If only we could have 6% inflation in mid-2008. So sad.

Today, inflation is 6.8%. That’s also really bad. Inflation is too high. Today, it would be better if inflation were 5.5%.



22 Responses to “If only”

  1. Gravatar of Jeff Jeff
    10. December 2021 at 12:45

    Who’s to say we wouldn’t be better off now if the Fed had just tightened in 2008 and accelerated the collapse of the financial sector? Is there any way to eliminate a debt overhang faster than bankruptcy?

  2. Gravatar of ssumner ssumner
    10. December 2021 at 13:08

    “Is there any way to eliminate a debt overhang faster than bankruptcy?”

    Yup, faster NGDP growth. How’d the Japanese approach work in the 1990s?

  3. Gravatar of Jeff Jeff
    10. December 2021 at 14:47

    >How’d the Japanese approach work in the 1990s?

    Maybe they didn’t liquidate aggressively enough? Didn’t they have zombie companies for years?

    >Yup, faster NGDP growth.

    Forcing holders of currency to accept losses so third parties can pay their debts… Can anyone truly model the destruction of moral authority and rending of the social fabric that that entails?

  4. Gravatar of Effem Effem
    10. December 2021 at 17:09

    I’m not sure about the continued use of Japan as some negative outcome. A comment on your econlog post pointed out that japans real per capita gdp growth (including only working age population) has been just as high as the US. has Japan actually suffered in any way from below target inflation? They almost seem fortunate now compared to the rest of the developed world which is at risk of losing control of inflation. Maybe stable and below target is highly preferable on target but volatile.

  5. Gravatar of David S David S
    11. December 2021 at 07:13

    If inflation right now is “really bad” what’s the best path forward for the Fed? They’ve stated that the QE taper will probably be accelerated, but should there be a rate hike in early spring?

    Effem asks a fair question. I find Japan puzzling, but certainly not headed towards disaster. The odds of Godzilla attacking their country are greater than a fiscal default in the next 100 years.

  6. Gravatar of ssumner ssumner
    11. December 2021 at 08:54

    Jeff, You said:

    “Can anyone truly model the destruction of moral authority and rending of the social fabric that that entails?”

    From 4% NGDP growth?

    Effem, Read my comment again. I was talking about debt, not RGDP growth. I was responding to Jeff.

    David, I don’t know precisely what they should do, but they need to signal a sincere commitment to get inflation below 2% in the near future. I’m not seeing that sort of communication.

    Once they communicate sound policy, the interest rate setting required will be much different from the case where they do not. So it’s hard to pick a number.

  7. Gravatar of Jeff Jeff
    11. December 2021 at 14:57

    >From 4% NGDP growth?

    Ok, what is the threshold, then? The title of this blog suggests that the hoi polloi are often possessed of a belief that money has, or can be expected to have, an approximately constant value over time. How far can you “bend” that presumption before there is an irreparable “break” in the social order?

    It’s not clear to me that there is a single critical threshold that applies to all societies at all times.

  8. Gravatar of Ken P Ken P
    11. December 2021 at 17:03

    “Today, inflation is 6.8%.”

    Bill Ackman has some tweets pointing out that 30% of the CPI calculation is OER and estimate was 3.8% increase in housing costs, while largest owners of nationwide rentals are reporting a 17% increase.

    Then there’s just my sanity check. How much of what I buy has went up less than 10% in the past year?

  9. Gravatar of David S David S
    11. December 2021 at 18:12

    Scott, thanks for answering my question. Although I’m doubling down on my position that the Fed shouldn’t change QE or interest rates until January/February it would good if they made a clear statement of policy intent before Christmas. Like they should have done a month ago.

  10. Gravatar of ssumner ssumner
    11. December 2021 at 20:14

    Jeff, Inflation is a problem, but not because money loses value. Most people hold very little wealth in the form of cash. And other assets rise with inflation over the long run. (recall the Fisher effect.) The main problem with inflation is that it raises the real tax rate on investment income.

    Ken, If you are implying the actual inflation rate is over 10%, I’m not buying.

    And no, most renters did not see their rents go up by 17%.

  11. Gravatar of BC BC
    12. December 2021 at 01:51

    “The main problem with inflation is that it raises the real tax rate on investment income.”

    So, if there were no taxes on investment income, then inflation wouldn’t be a problem?

    “Most renters did not see their rents go up by 17%.”

    Anecdotally, my rent (in downtown Boston) did go up by more than 17% this year. My nominal monthly rent has remained constant throughout 2020, 2021, and 2022. However, I received a 2-mo rent concession on a 12-mo lease for 2021 (17% YoY decline), signed in Nov/Dec 2020 before vaccines were widely available and before many people had returned to the city. For 2022, there will be no rent concession (20% YoY increase, but 0% increase compared to 2 years ago). I guess that’s transitory deflation (and sticky nominal rent).

  12. Gravatar of BC BC
    12. December 2021 at 02:07

    Nominal wages are sticky, especially to the downside. So, deflation tends to cause disequilibrium in the labor market (unemployment and recession). If nominal prices are not all equally sticky to the upside, then wouldn’t we expect inflation to cause disequilibria in various markets for similar reasons? For example, might we see shortages in some goods and labor as we do now? If prices are not equally sticky across all markets, then would we expect high inflation, especially unanticipated inflation, to disrupt market prices’ effectiveness in communicating information?

  13. Gravatar of ssumner ssumner
    12. December 2021 at 09:31

    BC, The cost of inflation would be much less, but as you point out there are other costs associated with sticky prices.

  14. Gravatar of Robert Simmons Robert Simmons
    12. December 2021 at 14:05

    I know what you’re saying, but you wrote this in the form of reasoning from a price change.

  15. Gravatar of Brian Donohue Brian Donohue
    13. December 2021 at 06:33

    What was really bad was allowing CPI to fall 4% in the second half of 2008.

  16. Gravatar of Kester Pembroke Kester Pembroke
    13. December 2021 at 11:04

    This is the Keynesian point in a nutshell.

    People plan to do something, and then reality forces those plans to change. The point at which the plans are forced to coincide with reality is the point of effective demand.

    That means consumers get what they want, or are forced to wait because either there isn’t anything to buy, or it is too expensive for them.

    Similarly suppliers sell what they have produced, are left with inventory because they have overproduced, or left with irate customers because they have underproduced.

    What we want is a particular response to these conditions. We don’t want purchasers to start demanding more income because they can’t afford anything, and we don’t want producers ignoring irate customers who are faced with empty shelves.

    What we want is purchasers to understand that if they ask for more money they will likely lose their job because the firm they work for will go bust. And we want the firms scared that if they don’t serve the irate customers, they will lose market share to other firms that work harder to satisfy irate customers.

    Problems start to happen if consumers are emboldened to ask for higher wages because the job market is tight and firms are bidding up salaries. Similarly if firms start to push up prices to try and maintain their mark up without changing their quantity. In both those cases there must be a sharp, severe and immediate cost to discourage those behaviours. The consumer must lose their job, and the firm must go bust.

    Pour encourager les autres.

    The mainstream response to all inflation is to assume it is demand side true inflation and crush spending. This favours incumbent firms who then push the cost down onto workers. It also stops new competitors showing up, since that requires strong demand.

    In reality most of what mainstream calls inflation is Keynesian semi-inflation and is an indication that there is a lack of competition in the market place with increasing prices. The firms aren’t scared enough that they are going to get eliminated by the competition

    MMT is the true supply-side analysis of inflation, since the approach the view recommends is to free up the blockages on the supply side and make more stuff. But it doesn’t give free reign on the consumer side either. Wage requests must be backed by more productivity, or you will be transferred down to the Job Guarantee.

  17. Gravatar of Kester Pembroke Kester Pembroke
    13. December 2021 at 11:06

    This lacks any analysis of the the Job Guarantee’s ability to expectational manage inflation.

    The core to MMT’s inflation control is ensuring that competition operates properly, and that the firms respond by quantity adjusting because they know they will be out of business if they price adjust.

    The correct level and type of competition is what keeps prices down, and is the reason we allow competitive markets in the first place. After all, every production operation could just be done by a single nationalised public provider.

    f a firm tries to raise its prices because they now can’t pay sweat shop wages, then that negates the “non-competitive” protection in the JG and JG labour can be used by social enterprises/local democracy to replace the operation trying to raise its prices.

    The result is that firms that drive quantity expansion by automation are favoured. Firms can shed labour as automation proceeds, safe in the knowledge that the JG will catch those people and make sure they have a job and an income in the area they want to live in.

    Demand stays up and productivity is driven forward, and that is where the higher level wage increases can come from.

    It seems that some of the finer points of MMT understanding are getting lost.

  18. Gravatar of Rodrigo Escalante Rodrigo Escalante
    13. December 2021 at 14:08


    Is actual persistente inflation 6.8%? If that were the case shouldn’t interest rate be much higher? From my expeirence it’s a shortage of goods including housing that has caused such price level increases, but wages are not keeping up. Its hard for me to beleive tight money would help the economy aside from maybe givin manufacturers time to alleviate lead times. The yield curve has already flatened since Powell anounced the farster tapper, would tighter money not further flaten the curve?

  19. Gravatar of ssumner ssumner
    13. December 2021 at 20:28

    Kester, MMT is idiotic.

    Rodrigo, You said:

    “Its hard for me to beleive tight money would help the economy”

    This terminology is not helpful. The Fed should hit its targets. It’s that simple. Whether you want to call that “tight money” is immaterial.

  20. Gravatar of rinat rinat
    13. December 2021 at 23:22

    When people say the inflation is too low, they haven’t thought things through.

    Hazlitt broke this down in the 1940’s. Indeed, it has now been 80 years since he destroyed your Keynesian theory, and yet you continue to debase the currency and saddle posterity with debt. The market would have had a sharper downturn if you simply let it collapse, but it would have recovered quicker.

    Instead, and like usual, you chose to transfer wealth from posterity to yourself. There is no greater theft than stealing the lives of those who have yet to be born.

    You are selfish in every way imaginable.

  21. Gravatar of Rodrigo Rodrigo
    14. December 2021 at 04:53

    Sorry for the terminology, but you have said on many occasions that for the fed to generate inflation (pre 2021 when it was “imposible” for the fed to generate inflation)they should ease until long term rates rise. That this would indicate market expectation for higher inflation in the future. I don’t see this happening here, a flattening curve plus some market volatility points more towards policy error. I am just looking for a deeper understanding on why you don’t believe current inflation is due to idiosyncratic risk, be it transient or not, but rather to a more systemic persistent “monetary phenomenon”

    Your comments are much appreciated.


  22. Gravatar of ssumner ssumner
    14. December 2021 at 15:35

    Rodrigo, I expect NGDP growth to exceed 4% in the near future. If I did not, then I’d agree it was entirely transitory. But I do expect excessive NGDP growth (6% to 8%). So I think the Fed will fail to hit its 2% AIT target for the 2020s.

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