It is probably fair to assume that most people would be in favor of “price stability.” The Federal Reserve would have people believe that its policies regarding inflation promote price stability. It could also be stated that the Federal Reserve’s policies aim to make life more expensive for everyday Americans. In the eyes of the Fed, aiming for 2% inflation is the same as promoting price stability. Non-economists might argue that price stability is actually 0% inflation.
Why does the Fed want to make life more expensive for everyday Americans? If you polled every adult American that has to care for him- or herself (the people who pay their own bills) and asked those people whether they would like to see consumer prices stop going up, I have a hard time imagining more than a small fraction of those polled would answer “No.” Many economists would have you believe that the public doesn’t know what’s good for it, and that a Federal Reserve target of 0% inflation would lead to layoffs and perhaps no raises for millions of workers. One could argue, however, that corporations, having already been in cost-cutting mode for more than five years, would, at worst, simply continue their current policies under a 0% Federal Reserve inflation target. Additionally, one can argue that a 2% raise in a 2% inflationary environment is the same as a 0% raise in a 0% inflationary environment. If people came to view a raise as something that only occurs based on merit rather than simply as a “cost-of-living” adjustment, it might even cause some people to work harder, benefitting the economy at large.
There is no doubt that the inflationary environment promoted by the Fed benefits certain people. A couple of percentage point changes in inflation help investors and corporations realize far greater returns. But even though over the past few decades there has been a growing percentage of the population that owns financial assets, the sum total of financial assets ownership has become more and more concentrated at the top. This coincided with a time period during which middle- and lower-income Americans struggled just to maintain their standards of living, turning to debt in ever greater amounts to plug the hole left by inflation. As the table below shows, through 2010, the wealthiest 10% of Americans owned 93.9% of all financial securities and 80.8% of all stocks. I doubt those numbers have declined over the past few years, given the stock market’s rise since 2010.
I could go on for many more thousands of words but will instead conclude this article with the following:
Under certain economic circumstances, an inflationary policy might be acceptable. Under other economic circumstances, an inflationary policy might not be acceptable. Given today’s realities, is a Federal Reserve policy of promoting rising costs of living the best path forward for Americans? Corporations (as a collective whole) are extremely focused on stock buybacks, raising dividends, and cutting costs, at the expense of providing solid “real” wage growth to their employees. Furthermore, there is quite a large skills mismatch that has resulted from an education system not properly structured to help people learn the skills needed to find well-paying jobs in today’s economy. Last, given the sluggish growth in revolving credit in recent years, one could argue that Americans are showing a desire to avoid increasing debt when possible. With all that in mind, this might not be one of those times during which an inflationary policy is the right tool. The problem, of course, is that the Fed has pushed the inflationary policy so far that it has created a huge misallocation of capital in the economy. This makes it extremely difficult to materially improve the financial circumstances of the bottom 90% of Americans (bottom from a wealth perspective) without causing a major recession.
The inflationary bias among those in power is well entrenched, and I don’t think it’s worth holding your breath waiting for change. But if you are interested in discovering solutions to problems, rather than continuing the same actions that have left tens of millions of Americans in the dust, it might be worth exploring the role that an inflation/deflation target range of, say, negative one percent to positive one percent might play in changing financial circumstances for the better. I’m not referring to any type of deflation similar to what happened during the Great Depression. The deflation during the Great Depression was much more serious than anything I’m mentioning in this article.
Economists should consider honestly debating the merits of the inflationary policies that have left millions of Americans behind, and think about whether changes to those policies might provide more stability over the long run.
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