Monday, December 03, 2012

Inflation: the Friedman Solution

Just to be clear, we are talking about Milton Friedman here, and the Japanese economy. Most of the West is in the economic doldrums right now, and nobody has been longer becalmed in those dread seas than the Westernmost of the West, Japan. The political party currently leading in Japan has proposed a radical solution, which I call the iCure.

. . . Shinzo Abe, the overwhelming favorite to lead the Liberal Democratic Party to victory, is running on a bold platform of unlimited quantitative easing and more inflation. If this works—and the odds are that it will—Abe will not only cure a great deal of what ails Japan, he’ll light a path forward for the rest of the developed world.

Given that the original idea came from conservative economist Milton Friedman, and that it has been strongly backed by Japan experts of the center Ben Bernanke, and liberal Paul Krugman, why is the idea so radical?

Because the rentier classes really, really hate it.

What is proposed is inflation. Now everybody knows that inflation is a dangerous drug - the economic equivalent of chemo-therapy. The Germans have turned fear of inflation into a sort of cult religion.

Of course there is a moral dimension, or at least a dimension of morality play melodrama. Your attitude toward the actual effects of a policy of moderate inflation might depend on whether you regard the rentiers as thrifty savers reaping the rewards of their virtue or as blood-sucking parasites draining the economy of all vitality.

The crucial question though, is not the virtue of one class or another, but the vitality of the economy. If policies advocated by one group or another are bad for the overall economy, they need to be changed. In modern society most of us play both roles as worker and rentier, at least at some point in our life.

So just how radical is the proposed Japanese plan? The central bank, the BoJ, would pursue a goal of 2% inflation, rather than the current 0% target. For comparison, the inflation rate in the US over the last thirty years has varied between a high of 5.4% (1990) and a low of 1.5% (1998), with an average near 3%. Germany averaged 1.9% over the last twenty years.