Stabilizing prices is immoral

The first thing to recognize is that a policy of enforced “price stability”, whether implemented in terms of levels or rates, is a form of goverment-provided social insurance, just like unemployment or disability benefits. For all of these programs, there are states of the world in which some individuals might suffer misfortune. The government acts to counteract that misfortune, imposing costs on other individuals in order to fund a transfer of resources. With unemployment insurance, business owners and employed workers pay unemployment premiums, which fund benefits for workers who lose their jobs. A similar dynamic holds for stabilizing prices.

Consider an adverse supply shock. Absent government action, the effect of a reduction of the supply of goods and services would be higher prices. The only way to prevent higher prices is to concomitantly reduce aggregate demand. The reduction might be implemented by raising interest rates or other monetary operations, or it might be effected via taxation. In either case, some people will pay a cost, which will show up as a reduction of demand. Other people will enjoy a benefit from the absence of price inflation.

Who are these people? Can we identify them? Sure. People who benefit from nonincreasing prices are people who hold nominal-dollar assets. That includes most obviously creditors — people with money in the bank, bondholders, etc. — but also people with stable employment but little bargaining power to pursue raises. These groups would see their purchasing power fall in an inflation. If the government restrains prices by reducing aggregate demand, it helps these groups by shifting costs to others. If prices are stabilized via monetary policy, debtors pay: both the increase in interest rates and the reduction of aggregate demand increase the burden of repaying debts. If prices are stabilized via increased taxation, then obviously whoever bears the incidence of the new tax pays. In both cases, marginal workers pay, by enduring an increased likelihood of becoming unemployed or a diminished likelihood of finding a job. [1]

It is fairly obvious, then, that restraining prices in the face of a supply shock effects a transfer from debtors, taxpayers, and marginal workers to creditors and secure workers. A policy of price restraint is a form of insurance for creditors and secure workers, who are absolved of the risk that the purchasing power of their nominal assets will suffer an unforeseen decay. It is financed with a guarantee written by debtors, taxpayers, and marginal workers, who are put at risk by the policy. [2]

So far, we have considered an asymmetric policy, price restraint. But suppose that the state targets a price level or an inflation rate symmetrically? Then don’t the losers from potential price restraint become the winners from potential price support when the state acts to prevent deflation? Absolutely! Under a symmetric price targeting regime, if by monetary policy, debtors enjoy the benefit of a positive supply shock in terms of lower interest rates and increased aggregate demand from which to draw income. If by fiscal policy, the benefit of the happy shock is distributed to whoever captures tax cuts and to recipients of government transfers and expenditures. Whether monetary or fiscal, an antideflationary response to a supply shock implies an increase in aggregate demand which helps keep marginal workers employed. Creditors and secure-but-stagnant job-holders lose out, as the increase in purchasing power they otherwise might have enjoyed via deflation is distributed to other parties.

So is a symmetric price targeting regime “fair”? Absolutely not. Sure, it involves an exchange of risk and benefits, rather than distributing only risks to some and benefits to others. But for this sort of swap to create value, benefits must be matched to losses. Risk-averse individuals seek insurance that pays off in bad times. All groups are at greater risk when an economy is poor following a supply shock. Under any policy of price restraint, creditors and the securely employed enjoy an insurance benefit. Under an asymmetrical policy, that insurance is free, the premiums are paid by other people. Under a symmetric policy, creditors and the securely employed purchase their insurance against bad times by foregoing some benefit during good times. That’s still a fine deal. Their overall risk is reduced.

But the opposite is true for debtors, taxpayers, and marginal workers. Just when these groups need a break, when the economy is bad due to an adverse supply shock, they are hit with additional costs in the name of price stability. Sure, when things are good all over, they get some frosting on their cake. Their highs are higher, but their lows are lower. Symmetrical price targeting turns debtors, taxpayers, and marginal workers into high-beta speculators on the state of the broad economy, while reducing the risk exposure of creditors and secure workers. It represents a vast subsidy, a transfer paid in risk-bearing, from debtors, taxpayers, and marginal workers to creditors and secure workers. A symmetric price target is a better deal than asymmetric price restraint for debtors, taxpayers, and marginal workers — better to have some benefit than no benefit for the burden of guaranteeing other peoples’ purchasing power! But a symmetric price target is still a raw deal. Debtors, taxpayers, and marginal workers are forced to bear costs when they are most burdensome and receive payoffs when they are least valuable.

In the real world, of course, we usually see something between a policy of pure price restraint and a symmetrical price targeting regime. And usually, price stabilization is implemented via monetary policy. We assiduously provide insurance to creditors and the securely employed, but haphazardly reward debtors and the marginally employed when they least need help. Price stabilization is social insurance we provide to the most secure members of our society, while the bill is paid in lost purchasing power and increased risk by the least secure. Further, the benefits of price stabilization accrue disproportionately to the largest creditors and to holders of high-salary secure jobs. Preserving the purchasing power of a billion dollar stash is a lot more valuable than preserving the value of fifty bucks in a bank account. Price stabilization is an incredibly regressive form of social insurance, a program whose distributional ghastliness would be abhorrent to most people if it were not conveniently submerged. But the transfers engendered by price stabilization are invisible, obscured by the money veil. Since they benefit the most influential and harm the most marginal in our society, this ghastly policy is politically untouchable.

It is certainly true that there are groups in our society whose purchasing power we ought to collectively insure: retirees on fixed incomes, savers with moderate nest eggs. It is great that Social Security payouts are indexed, so that retirees enjoy some protection of purchasing power. But indexing is a visible, and visibly costly, form of social insurance. Because it is visible, we transparently ration its provision and allocate its costs. I do not argue that purchasing power insurance is immoral. On the contrary, we need purchasing power insurance and the state should invent explicit means to provide it. What is immoral is to hide what is arguably the government’s largest social insurance program behind the technocratic phrase “price stability”. This a scheme that forces the most precarious members of our society to insure the purchasing power of the most secure, without any limit or even any accounting of the scale of the transfer.


Addenda:

  1. In the argument above, I have considered only the effect of supply shocks, not of shocks to aggregate demand. Price stabilization, in the counterfactual that it were fully symmetric, would seem less awful if we considered demand shocks. But it is silly to do so. The tools that we use to stabilize the price level all work through aggregate demand. To the degree that it is possible to stabilize prices, it is possible to stabilize aggregate demand directly. I am not opposed to macro stabilization in general. Aggregate demand stabilization is a great idea, although I have preferences with respect to means that might differ from those of the market monetarists who most famously advocate the policy. But since aggregate demand manipulation is our instrument, it is simpler to stabilize that variable than to stabilize prices. Causing aggregate demand to deviate from a planned growth path in order to stabilize prices is what is immoral. The price level should have no weight whatsoever in macro policy, which should simply target an NGDP path.

  2. I’m aware of New Keynesian models that predict “divine coincidence”, where stabilizing prices would stabilize real production as if by an invisible hand. The conditions under which we might rely on “divine coincidence” even in theory are unlikely to hold in practice. The models that predict divine coincidence posit one “representative household”, and so are blind by construction to the distributional concerns discussed here. I consider “divine coincidence”, in almost any forward-looking context, to be another name for “error”.

  3. I’ve neglected term effects when discussing the effect of interest rate changes on creditors. For creditors holding long-maturity debt, raising interests rates to restrain prices helps by supporting the purchasing power of the principal lent and by increasing the interest they might earn on reinvestment. But it also harms by provoking a capital loss should they need to liquidate and spend their term debt prior to maturity. For long-term savers, the reinvestment effect compensates the capital loss. Creditors as a group are clearly made better off by a policy of price restraint, but some long-term creditors do get burned by rising interest rates.


Notes:

[1] Unemployment contributes to price restraint by reducing worker bargaining power and therefore the cost of a major factor of production, and by diminishing consumption of goods that might be in scarce supply, as people without jobs sharply curtail consumption. In theory, unemployment might also lead to price increases due to a reduction in supply from goods and services not produced by idle workers. But if the unemployment is caused by restraint of aggregate demand (rather than, say, destruction of a productive factory), the effect of reduced consumption will dominate, as the people fired will be people who provide more exchange value by refraining to consume than by producing, after consumption baskets shift under tighter budget constraints. What the unemployed do not eat is the basis of everyday low prices for the rest of us. Note that these workers are “zero marginal product“, but only in a narrow and artificial sense. The marginal product of workers as reflected in hiring and firing patterns is clearly sensitive to aggregate demand policy, demonstrably over the short-term and almost certainly over the long-term. Those who appear to offer “zero marginal product” when nominal income is scarce and prices stable might provide a high marginal product when income is plentiful and prices are flexible. Ones marginal product today is a function of policy as well as intrinsic qualities, and economic activity is very path dependent.

[2] Of course, these various groups are not exclusive. One can be both a debtor and have a stable job, both a creditor and a taxpayer. Each individual enjoys some benefit, and bears some burden, from a policy of enforced price stability. But on net, there are winners and losers from such a policy. If price restraint will be implemented via monetary policy, large creditors and secure non-indebted workers enjoy the largest net benefit while marginally employed debtors bear the largest risk. Securely employed debtors would experience a mix of risk and benefit, depending on the scale of their salaries and debts.

Update History:

  • 24-Jun-2012, 12:40 a.m. EEST: Shifted what was originally the last paragraph of the piece into the Addenda section; it is now the first addendum — makes for a punchier ending.
  • 24-Jun-2012, 1:00 a.m. EEST: The ending is too punchy now. Removed last sentence, “It is detestable.” I think my disdain comes through well enough without so artlessly overpunctuating it.
  • 24-Jun-2012, 1:20 a.m. EEST: “are politically invisible”
 
 

44 Responses to “Stabilizing prices is immoral”

  1. vbounded writes:

    Mr. Waldman: “What is immoral is to hide what is arguably the government’s largest social insurance program behind the technocratic phrase “price stability”. This a scheme that forces the most precarious members of our society to insure the purchasing power of the most secure, without any limit or even any accounting of the scale of the transfer.”

    Mr. Waldman missunderstands the problem. There is extreme disagreement over how to resolve the fiscal imbalances in the developed world. Consequently, the majority of the people support stopgap and under the table solutions, like inflation. Mr. Waldman’s solution is immoral because it conflicts with the public’s desire to delay dealing with these issues until there is majority support for some explicit solution.

  2. Mike C. writes:

    Mr. Waldman – you write as if a cup of coffee is $.05! We have had what – 7% inflation for almost 100 years?

    Those in positions to absorb liquidity as it enters the economy (corporations and their owners) are favored disproportionally from any inflation because inflation IS excess liquidity in the system. That is what it is – excess liquidity which ultimately acts as a tax increase on the purchasing power of all earners. A 2% inflation target can literally not be achieved. Why? Because you are talking about credit without talking about the ability to service that debt. You can create all the credit in the world but without any economics supporting all of that credit, you would have to exponentially create credit until the Fed became some sort of perpetual inflation machine? And a greater and greater % of that excess credit would go to fewer and fewer people (which is what is happening now). How would a bank even “lend” money into the economy? What if the demand for new money ceased? Where would the inflation be created? Wall street? Would the Fed hand bags of newly printed bills out in the mail to maintain asset prices?

    Folly!

    I suggest to you Mr. Waldman that we GIVE price stability a chance for once! Do not complain about that which has not existed yet!!! You might be quite amazed what would happen to our economy if it were not run like a pyramid scheme desperately seeking infinite “growth” (on paper of course) rather than an economy of balance – where people (aka the economy itself) determine the amount of “liquidity” needed via fractional reserve and old fashioned collateral posted for those loans.

  3. Mike C. writes:

    Think of the real economy (not monetary one) as the support system for the inflationary train running overhead. Put too much weight on those supports and it will collapse.

    Guess what happened in 2008!

    Guess what will happen again!

  4. Mike C. writes:

    Even more absurdly – if the rate of inflation WERE controllable ad infinitum and had nothing to do with the real underlying economic system (aka things we mine, build, grow etc.), all one needs to do is buy some real estate, some 50 year zero coupon bonds and sit back and enjoy the ride! SO EASY!!!!

    And yet in Detroit…houses are worthless and pensions underfunded and the Fed balance sheet nearing $4T and still climbing and M2V still falling and debt to gdp skyrocketing etc etc etc.

    Why is that Mr. Waldman?

  5. Greg Taylor writes:

    Welcome back Steve! Enjoyed the post. I’m usually skeptical of macroeconomics but you provide a nice argument for rethinking the Fed’s mandate. Fed governance and social networks overwhelmingly favor creditor interests. So I’m pretty sympathetic to your analysis – it’s pretty much what I’d expect.

    One implication of this argument is that we need a mechanism for ensuring a balance of power between creditor and debtor interests at central banks. That would seem to require a complete governance overhaul at the Federal Reserve. Debtors are at a huge informational disadvantage but the government could potentially represent their interests. Policies that keep the Fed “independent” of government favor the creation of creditor friendly central bank policies such as those described in this post.

  6. rsj writes:

    The shock example referred to inflation volatility. The rest of the essays is about prices increasing, so it suggests inflation.

    I think stable (predictable) inflation, of whatever proportion, should not hurt the bond holding classes as they will price the inflation into the bond. It will not hurt any other classes, either.

    Rather it is inflation volatility that either benefits or hurts. I think the bond-holding classes benefitted from the secular decline in nominal rates since 1980, and were hurt by the secular increase prior to that. From 1950-1980, the public persistently under-estimated future inflation, and from 1980-2010 the situation was the reverse. It certainly seems like an argument for adaptive expectations. In one period, inequality was narrowing and in the other period it was increasing.

    Any kind of volatility is harmful, and who benefits will be a function of whose expectations happened to be wrong, and in which direction. I don’t think that one side always benefits and the other side always loses. If there is little volatility, then the situation reverts to simple power relations, and government can adjust the scales with a variety of techniques that don’t involve inflation at all.

    The unique set of circumstances we had from 1980 to 2010 — increasing asset prices, and an increasing willingness of households to borrow up to the maximum allowed by their monthly payment constraint, together with a belief that they were agreeing to lower real rates than they actually were — created a unique environment that made CB policy appear more effective in its ability to fine tune aggregate demand than is the general case.

    As we have now exited the secular decline in rates, and whatever the next 30 years will hold, it will not be a period in which small interest rate adjustments are viewed as an adequate response to the business cycle.

    Hopefully we will find economic models in that have more non-utopian ingresses other than interest rate policy, and that will provide enough intellectual cover to start dealing seriously with problems in industrial policy (particularly health care), worker income uncertainty, asset market distortions, credit availability, oligopolies, regulation, training, and infrastructure.

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  11. Andrew writes:

    But I thought economics wasn’t a morality play?

  12. Bill Woolsey writes:

    Great analysis.

    I think you are exactly correct.

    From the other comments, it appears you need to clarify regarding trend inflation.

  13. Nick Rowe writes:

    Agree with Bill. To deal with the trend inflation question, whenever you say “change in prices” that should be understood as “change in prices relative to what had previously been forecast”.

  14. Justin Cidertrades writes:


    reduction in supply from goods and services not produced by idle workers.

    For the moment this “reduction” is partially refunded to the idle workers by government guys. Idle workaholics get SNAP food and a few pennies from unemployment check that go quickly to landlord just a few moments after they are ripped from the taxpayer. The growing problem of unemployment from labour outsourcing to foreign workers has been stop-gaped by CP, Central Planners who have not yet run out of other peoples cold hard cash. Flamboyant CP who summarily blew the budget surplus on their cronies who hardly noticed that the sudden increase in money supply had collapsed the money velocity enough to bring progress to a standstill. By the time CP announced with apologies that the imaginary surplus had been mysteriously syphoned off by persons unknown, UNDL, Unsustainable National Debt Level had increased treasury risk and its attendant yield to the point of putting our unique free lunch from printing the Worlds Reserve Currency into precarious jeopardy. With the free lunch all but gone forever we see looming within the future a peoples prophet, a prophet with another central planner’s scheme plus a dream. In his new speech to America the Beautiful he is about to announce,

    I have a dream
    !

  15. RueTheDay writes:

    It would seem that the more pronounced distributional effects described only take place within a fairly narrow range. For example, it’s fairly obvious which groups benefit from what’s typically considered stable prices (2-3% inflation) versus which groups benefit from mild deflation and which groups benefit from modest inflation (say 4-7%). Outside of those ranges, I’m not so sure this holds. Neither significant deflation nor significant inflation really seem to benefit anyone and a strong case can be made that they hurt virtually everyone. It’s somewhat cliche to say that inflation benefits the debtor and deflation the creditor. However, with significant deflation, default percentages skyrocket (which is of no benefit to the creditor), and with significant inflation it’s likely that purchasing power decrements due to the failure of the nominal wage to rise as quickly as the price level will more than offset any reduction in the value of nominal debt that would benefit the debtor.

    IOW, the specific inflation target matters from a distributional standpoint, but only up to some limit, beyond which everyone loses.

  16. [...] Stabilizing prices is immoral Steve Waldman [...]

  17. David Merkel writes:

    Harder question: is government interference in prices, including interest rates, immoral?

    Glad to to see you back blogging. :)

  18. Dana Hata writes:

    As a saver I have never asked for, nor would I ever suggest a price restraint during an inflation, *as long as* price collapses during a deflation are not prevented. Implementing counter-cyclical price manipulations (via any means) to produce desired “fairness” outcomes can only fail. I would sooner trust the ebb and flow of prices via supply and demand and business cyclicality to produce *long term* price-stability and fairness (fairness in the grand scheme of things) than any human produced manipulation, which ALWAYS has some group’s interests in mind, even if unwittingly, and often is either ineffectual or produces a different outcome from what was intended.

    Furthermore, why discard the notion of “price stability”, even if it is a presumed subsidy to the richest? Price stability is intrinsically desirable, and the subsidy is merely a side-effect, so why not then pursue price stability in conjunction with massively progressive taxation (or even outright confiscation!). The stability of the purchasing power of the currency (over the long term) for which I and others slaved, should be treated with the utmost sanctity, that is to say, the fruits of labor should be treated as such – even more sancrosanct than the rights of all classes to *never* be in a jobless state, and definitely more sacrosanct than the rights of the rich classes to preserve their rentier status.

    If you have a political objective, and you do, why not pursue it under the light of day with your intentions clearly visible and targeted specifically, as would be the case through taxation, rather than hidden from sight and targeted at all currency holders, even innocent ones, via blunt inflation?

  19. [...] most original thinkers on the internet, and I highly recommend you read his latest piece, “Stabilizing prices is immoral“. You might never think about central bankers quite the same way again, and indeed you could [...]

  20. David Beckworth writes:

    Great post Steve. Your analysis is not too different from George Selgin’s Productivity Norm idea.

  21. MJ writes:

    2 questions – the most wealthy and powerful view themselves as increasingly decoupled from domestic AD concerns because their companies are so globalized, limiting their short-term upside–is their view fair? also, does the built-in asymmetry from downward nominal wage rigidity change this story?

  22. Frank Strain writes:

    Great post. This is an important moral issue and I think you are correct here. My favourite (sorry I’m Canadian) quote of all time which I can not source right now is “unemployment is not a gentle rain which falls equally on everyone”. Can anyone deny this as a fact. I don’t think so. But neutrality assumes something like this. Unless neutrality holds one must conclude that some suffer from a bad economy more than others. And no one can deny central banks have induced recessions in the past and most of us believe central banks are currently keeping the economy more depressed than need be at this moment. Thus central bankers should be held accountable for the morality of their behaviour. And my guess is that the poor suffer more so this really matters if your definition of justice has even a small element of consequentialism.

    Actually , my belief is central banks probably should be immoral/amoral and that fiscal (tax) policy should try to keep losers (the unlucky minority)from losing too much and winners (the lucky majority)from winning too much as a result of monetary policy. If price level/inflation targeting is the way to go on technical grouds we need a compensating tax policy. But I also admit if NGDP targeting works as some suggest there may be little if any need for tax policy to correct income redistributions. Another argument for an NGDP target? Not sure but maybe.

  23. btw writes:

    Also, this font sucks

  24. [...] most original thinkers on the internet, and I highly recommend you read his latest piece, “Stabilizing prices is immoral“. You might never think about central bankers quite the same way again, and indeed you could [...]

  25. dwb writes:

    no you are wrong that “People who benefit from nonincreasing prices are people who hold nominal-dollar assets. That includes most obviously creditors”

    For risky assets, inflation can actually increase the value. this seems counter-intuitive so let me give an example.

    Consider homeowners who owe $168k on a mortgage but the home is worth $100k. Bankruptcy and foreclosure has costs (Fed research puts it at 50% of home value), so they are just at the edge of walking away.

    you need to weigh two nonzero probability cases:

    1. Homeowners continue to pay.
    2. Homeowners default, the bank forecloses and resells the house (for 80-90% of value due to costs, vacancy time etc), Homeowners move into a different and much cheaper place.

    (2) is clearly redistributive. there is about a 75k spread between the mortgage note and what the bank will get in foreclosure which gets erased. In that case some accrues to the Homeowners because they move into a cheaper place. The noteholder loses $68k, and some $$ vanish as costs, opportunity costs, etc.

    Note that in foreclosure *none* of the benefit accrues to the bank.

    Now consider a high-inflation policy. This devalues the debt and reduces the incentive for the Homeowners to default. In this case, some of the benefit that *was* accruing to the homeowners flows back to the noteholder, by preventing default.

    the least redistributive policy is the inflation rate that maximizes the chance of (1), that the homeowners continue to pay.

    Now: studies have been done and looked at, for example, the performance of corporate bonds, stocks, and other risky assets during the depression (and at other times). For example, currently, there is a high correlation between inflation expectations and asset prices.

    the fact that they rise with inflation expectations means that the reduction in delinquencies /defaults *outweighs* the loss due to inflation-devaluation.

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  27. dwb writes:

    also i want to note one other thing: currently “mortgage equity withdrawal” is about 2% of personal disposable income. That means that mortgage debt is getting written off at a rate of about 2% of PDI, most of which is due to foreclosures etc. This is a significant macroeconomic phenomena. A policy of higher inflation that prevents a good deal of that writedown raises the value of risky mortgage debt (along with corporate debt and stocks) and overall prevents more redistribution than it causes. And again, you can see that from the fact that stocks and corporate bonds track inflation expectations closely.

  28. [...] up, Steve Randy Waldman discusses the morality of price stability.   His case is, IMHO, brilliantly reasoned and straightforward.   What I especially enjoyed was [...]

  29. [...] interfluidity » Stabilizing prices is immoral [...]

  30. Mike Sax writes:

    Steve! Glad to finally read another post of yours I was thinking you gave up on blogging or something.

    Overall I’m no fan of “price stability” either. What’ve I’ve been thinking lately is that part of our problem is we have a bad international monetary scheme now-the famous “Washington Consensus”

    Bretton Woods was better suited for national governments that care more about growth than stability.

    This is Europe’s problem esepcially right now. The BW system used to try to divide up the pain for trade deficit countries rather than put in all on a Greece with Germany not having to make any sacrifice.

  31. John Berkowitz writes:

    @Frank Strain

    As a Canadian, you should not be throwing all the dirt on the central banks. They are just a tool of the politics and big businesses. On the other hand, I agree with you that central banks should provide at least some basic protection to the “unlucky minority” as you happened to call it. I work in Canadian real estate and I know exactly how can a bad decision destroy your life (your assets, personal finances etc.). The regulation is necessary and if the government do not know how to regulate, it should be gone. Flaherty in the end started at least some reforms in the mortgage market.

    The worst thing that is happening right now is that so many people are so deeply indebted, and having debts is something normal in our society – 72% of Canadians are in debt; people aged 25 to 34 years are those who most likely hold some form of debt (84 per cent) together with those between 35 and 44 years (83 per cent) (quoted from Three quarters of Albertans are in debt!.

  32. Big Ern writes:

    Immoral? Nonsense. Price stability (within reason – 2-4% currency depreciation per annum) is a noble goal in and of itself. If the side effect emerges such that the wealthiest effectively become ‘subsidized’ by the poorer, then that economic inequality itself should be addressed directly and openly, e.g. it does NOT follow that ‘price stability’ is therefore immoral. The end. Don’t be fooled by a specious argument, merely due to its novelty.

  33. Quora writes:

    Do record corporate profits say more about state of US economy or say more about how US corporations fit into the new multinational world?…

    The state of the economy. The consensus among moderate Keynesians schooled in political economy appears to be roughly this: 1. Since the mid-1980s, the Fed has slowly but steadily ground down the base inflation rate in order to protect the interests of…

  34. [...] “Stabilizing prices is immoral” – Interfluidity We’re already in a “blindside recession” – John Hussman Price stability, [...]

  35. nemi writes:

    Another reason to question whether there is a relevant distinction between monetary and fiscal policy (not that I needed one)?

    Of course, every different action taken by the government (or anyone else) has different effects, but those actions that generally is categorized as “monetary” does not seem to share any characteristic that would set them apart from those labeled fiscal.

    This also further your theses concerning that many economists has more in common than they like to admit – at least to the extent that they prefer monetary or fiscal policy in general rather than specific actions (since there really isn´t any basis for that distinction).

    Sure, if we define monetary policy as whatever the CB does, and believe that the technocrats at the CB will act faster than the politicians, that might be a distinction – but by now that agility probably should be questioned. Also, what constitutes monetary or fiscal policy will be very different from country to country. Finally, if technocratic governance over democratically elected politicians is what economist really is looking for, they should have the balls to argue that directly rather than hiding behind “monetary” or “fiscal” policy.

  36. ezra abrams writes:

    i find it curious that there is no mention of temp issues (hurricane >oil platforms> prices spike) where limits prevent some from taking advangate of othees due to mother nature
    That is, aside from the repair costs, why should the oil company benefit from the temp surge in prices ?
    (or did I not understand the econ jargon of “shocks” ??)
    I also find it curious that there is no mention of outright collusion and lawless behaviour by sellers; I suspect that the magnitude of this is quite large – Wasn’t there a finding to that effect regarding the spike in price in the electricity market in California around when enron demised ?

  37. [...] Dies ist ein sehr interessanter Beitrag, der die Effekte der Geldpolitik auf verschiedene Gesellschaftsgruppen analysiert. Das Fazit: Eine Geldpolitik, die eine konstante Inflationsrate als Ziel hat (also wie alle grossen Zentralbanken dieser Welt zur Zeit), stabilisiert den Wohlstand von Kreditgebern und Leuten mit einem sicheren Job (z.B. gewerkschaftlich organisiert, mittleres Alter), während sie den Wohlstand von Schuldnern und Leuten mit unsicherem Job (z.B. Teilzeit, junge Leute) volatiler macht. Das heisst, wenn die Wirtschaft gut läuft gibt man letzteren noch einen zusätzlichen Bonus, und wenn es schlecht läuft wirft man Ihnen noch zusätzlich Steine vor die Füsse. [...]

  38. A reformist commenter writes:

    vbounded:

    “Mr. Waldman’s solution is immoral because it conflicts with the public’s desire to delay dealing with these issues until there is majority support for some explicit solution.”

    This represents a common confusion of

    1) What should be discussed, in hopes of refining ideas and perhaps changing opinion, and
    2) What should be advocated as a target for immediate, unconditional implementation.

    Rejecting instances of (1) as if they were (2) tends to paralyze public discourse of the sort that may shift opinion regarding fundamental issues, and hence may ultimately shift politics.

  39. [...] prices is immoral.  (Interfluidity also FT [...]

  40. [...] of the clergy is what every wise legislator will study to prevent.”“What is immoral is to hide what is arguably the government’s largest social insurance program behind the technocratic phrase ‘price stability.’”“Opposition to inflation [...]

  41. [...] Stabilizing prices is immoral  Another way of trade switching wins and losses for political gains. Share this:ShareTwitterFacebookStumbleUponTumblrLinkedInRedditPinterestEmailLike this:LikeBe the first to like this. This entry was posted in Links by local.god. Bookmark the permalink. [...]

  42. [...] This is more than making sure the poor don’t drink thirty-six ounce Big Gulp Mountain Dews. This is generational warfare, explained by S. R. Waldman: [...]

  43. beowulf writes:

    “Indeed, if we are to control three major macroeconomic dimensions of the economy, namely the inflation rate, the unemployment rate, and the growth rate, a third control is needed that will be reasonably non-collinear in its effects to those of a fiscal policy operating through disposable income generation on the one hand, and monetary policy operating through interest rates on the other.
    “What may be needed is a method of directly controlling inflation that do not interfere with free market adjustments in relative prices or rely on unemployment to keep inflation in check. Without such a control, unanticipated changes in the rate of inflation, either up or down, will continue to plague the economy and make planning for investment difficult. Trying to control an economy in three major macroeconomic dimensions with only two instruments is like trying to fly an airplane with elevator and rudder but no ailerons; in calm weather and with sufficient dihedral one can manage if turns are made very gingerly, but trying to land in a cross-wind is likely to produce a crash.
    “One possible third control measure would be a system of marketable rights to value added, (or “gross markups”) issued to firms enjoying limited liability, proportioned to the prime factors employed, such as labor and capital, with an aggregate face value corresponding to the overall market value of the output at a programmed overall price level. Firms encountering a specially favorable market could realize a higher than normal level of markups only by purchasing rights from firms less favorably situated. The market value of the rights would vary automatically so as to apply the correct downward pressure on markups to produce the desired overall price level. A suitable penalty tax would be levied on any firm found to have had value added in excess of the warrants held.”
    http://www.columbia.edu/dlc/wp/econ/vickrey.html

  44. DK writes:

    Disagree.
    Stabilising prices is very moral. It shows the society commitment to people having savings for their future.
    It allows for Society not to have to support these people when they get older/retired..

    Not stabilising prices is IMMORAL, since it rewards the financial reckless. People who tried to get rich through Liar Loans and BTL schemes.

    Currently in the UK we have seen for the last 5 years, a huge transfer of wealth from the savers/pensioners/youth to the financial reckless property owning class.
    Surely this not moral at all!