Tuesday, August 13, 2013

inflation targets can't be ...lifted ? but wage rate targets can

simon jerry:

" imagine 
given a history of  frequent   ZLB episodes and their costs
 after much analysis
a clear majority of the macroeconomics profession
 decided that it's  a good idea to raise the inflation target "

enter stage right

" imperfections in representative democracy

 what can policy design do about  these imperfections "

(btw "it seems to me Japan shows my question is a very good one:
 despite what would appear to be a macroeconomic disaster,
 it took two decades before the political process tried
 a fairly obvious remedy" )

"So what are the barriers here?
 Why would politicians not just say:
‘economists are the experts,
 and if that is what the clear majority recommend,
so be it’.
" two reasons why this would not happen.
first  this policy, like most macroeconomic policies,
would not be a Pareto improvement:
even if the majority gain, some would lose.
If - and this is an important if -
 those who lose out have political power,
then they would contest this ‘recommendation by experts’.
 second  public debate operates a discourse on macroeconomics
 that does not necessarily reflect how macroeconomists view the world
and  also contains some fairly basic misunderstandings.
 In this discourse, inflation is always and everywhere a ‘bad thing’,
because it means people can buy less with their money
. Many people think inflation by definition means falling real wages"

" it is the combination that is critical.
 Simple misconceptions could be overcome by politicians
 if their attempts to do so were uncontested."
" the political process is all about
a contest between different groups in society,
" so if this were all there was
then at least we should see a debate
 as long as each side had its advocates.
putting the two factors together can kill debate.
We get argument by ridicule:
‘How can anyone seriously suggest raising inflation is a good idea,
when everyone knows it makes us all worse off.’
As a result, even politicians who might favour the idea
 conclude that it is far too risky to champion."

moral of story .

"Inflation targets are not the only macroeconomic example
 of where this problem arises.
 Government borrowing is perceived by the public
to be so obviously bad
that no political party thinks it can be seen
 to advocate additional borrowing ".

now comes the elitest crap:
" If you buy this reasoning, 
 it can be used as a justification for delegation,"
"a  different point.
 Economists should take this kind of problem into account
 when they think about policy design.
In the case of inflation
 the popular misperception
 in part comes from, and is encouraged by,
 the identification in public discussion
 of inflation with consumer prices."
"" inflation targets are defined in terms of consumer prices."
" There is no compelling reason for this "
"plenty of proposals involve focusing on either output prices or wages"
"why not have an inflation targeting regime that involves a composite index:
 for example
one that gave a third weight to the CPI, GDP deflator and average earnings. "

"The advantage of a composite target that involved wage inflation
 as well as price inflation is that it would help make the real meaning of inflation clearer
 in the public mind."
" This in turn would make it easier for politicians
to raise the inflation target
 if and when the economic case for doing so became clear."