Krugman’s blog, 3/31/15

There were two posts yesterday.  The first was “Missing Deflation and the Argument for Inflation:”

Matthew Klein has been going through Fed transcripts from 2009, and notes that the Fed was surprised at the persistence of inflation despite the Great Recession. Oddly, however, he seems to suggest that this episode weakens the case I and others have been making for a higher inflation target. Actually, it strengthens that case.

First of all, the Fed wasn’t alone in being surprised by the failure of actual deflation to emerge; so were many of us, and we treated it as a problem to be solved. And what emerged as at least one likely culprit was downward nominal wage rigidity, which has been overwhelmingly obvious in recent years, with a clear spike in the distribution of wage changes at precisely zero:

What does this have to do with the case for a higher inflation target? That case rests on the problem of the two zeroes: it’s very hard both to cut interest rates below zero (not impossible, we’ve learned, but hard), and it’s also very hard to get cuts in nominal wages. Both problems are much more likely to be serious problems for the economy with, say, 1 percent inflation than with 4 percent inflation.

Now, economists and central bankers were aware of the two-zeroes problem back when they converged on the 2 percent inflation target. That’s why the target was 2, not 0. But they wrongly believed that 2 was enough — that with a 2 percent target neither zero would be binding except in rare cases.

What we’ve learned since then is that the zeroes are a much bigger issue than the consensus had it; that you can spend 6 years and counting at the zero lower bound on interest rates, that you can face many years of grinding, painful adjustment as countries or regions try to achieve “internal devaluation.”

So the failure of inflation to fall as much as predicted in 2009 was part of a series of events that were trying to tell us that the initial inflation target was too low.

Yesterday’s second post was “Food For Thought:”

I once had a conversation with some Times people about reader interests, which are something the paper knows much more about than it did in the pre-digital age. And what they said, ruefully, was that what readers really seem to care about is food — sure, they may email a hard-hitting column or a revelatory piece of investigative reporting, but the sure-fire stuff is about eating (and health, and using animal training techniques on your husband).

Actually, I’m fine with that. Most people don’t live their lives obsessed with policy and world events, nor should they. In fact, a time when political or economic analyses are at the top of the agenda is almost surely a bad time, with everything going wrong, whereas a return to food-and-lifestyle is an indication of at least a partial return to normalcy.

Still, the top of today’s most-emailed list is striking:

Now excuse me while I throw out that piece of salmon I was going to cook and prepare some steak with nuts instead.

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