A Level Economics 86: Zero or Low Inflation?

Governments target low levels of inflation instead of aiming for zero inflation (no inflation) for several reasons:

1. Price Stability: Low levels of inflation provide a degree of price stability, allowing businesses and individuals to plan and make economic decisions with more certainty. Moderate inflation encourages spending and investment, as consumers and businesses are motivated to avoid holding onto cash that loses value over time.

2. Avoiding Deflationary Spirals: Targeting a low, positive rate of inflation helps prevent deflation, which can be harmful to the economy. Deflation can lead to falling demand, reduced business profits, and negative expectations about the future, triggering a deflationary spiral that can be difficult to reverse.

3. Interest Rate Management: Having a small positive inflation rate allows central banks to use interest rates more effectively to control economic conditions. When inflation is too low or negative, central banks may reach the "zero lower bound," limiting their ability to further lower interest rates during economic downturns.

4. Nominal Wage Flexibility: Moderate inflation helps facilitate nominal wage adjustments in the labor market. Wages are typically sticky downward, meaning that employees are reluctant to accept nominal wage cuts. With moderate inflation, real wages (wages adjusted for inflation) can adjust downward more smoothly without actual cuts in nominal wages, allowing labor markets to respond to changes in economic conditions.

5. Balancing Debt Burdens: Low inflation helps reduce the real burden of debt. In economies with significant public and private debt, moderate inflation allows debtors to pay back loans with money that has lower purchasing power, easing the overall debt burden.

Winners of Low Inflation:

1. Savers and Lenders: Savers and lenders benefit from low inflation as the real value of their savings and lending returns is better preserved. They avoid the erosion of purchasing power that occurs during periods of high inflation.

2. Debtors: Borrowers benefit from low inflation as it reduces the real burden of their debts. They can pay back loans with money that is worth less in real terms, effectively reducing the real cost of borrowing.

Losers of Low Inflation:

1. Fixed-Income Earners: Individuals with fixed incomes, such as retirees living off pension funds, may struggle to maintain their purchasing power during periods of low inflation. Their incomes do not keep pace with rising prices.

2. Central Banks in Deflationary Situations: When inflation is too low or negative, central banks may face challenges in stimulating the economy through conventional monetary policy tools. This can limit their ability to address economic downturns effectively.

3. Economies in Deflationary Spirals: Low inflation can increase the risk of deflationary spirals, which negatively affect businesses and consumers. Falling prices can lead to postponed spending and reduced investment, perpetuating economic stagnation.

In summary, governments target low levels of inflation to maintain price stability, avoid deflationary risks, and enable more effective monetary policy management. While low inflation benefits savers and lenders and reduces the real burden of debt, it may adversely affect fixed-income earners and pose challenges for central banks and economies experiencing deflationary pressures. Striking a balance between price stability and supporting economic growth is essential for achieving sustainable economic performance.

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Yes,in theory, zero inflation would offer more price stability than a low level of inflation. With zero inflation, the general price level of goods and services would remain constant over time, providing the most stable prices for consumers and businesses. However, achieving and maintaining exactly zero inflation can be challenging and may not always be the most desirable target for central banks and governments. Here's why:

1. Deflation Risk: The pursuit of zero inflation can increase the risk of deflation, which is a sustained decrease in the general price level. Deflation can be harmful to the economy, as it can lead to falling demand, reduced business profits, and negative expectations about the future. Deflationary spirals can be challenging to reverse and can result in economic stagnation.

2. Nominal Wage Stickiness: Wages in the labor market are often sticky downward, meaning that employees are reluctant to accept nominal wage cuts. In a scenario of zero inflation, real wages (nominal wages adjusted for inflation) could be more rigid and unable to adjust downward. This may lead to higher unemployment, as businesses may not be able to adjust labor costs efficiently during economic downturns.

3. Interest Rate Management: In a low-inflation or deflationary environment, central banks may face difficulties in using interest rate policy effectively. Interest rates already near or at zero, known as the "zero lower bound," can limit the central bank's ability to further lower rates to stimulate economic activity during downturns.

4. Avoiding Economic Stagnation: A small positive rate of inflation, often targeted by central banks (e.g., 2% inflation target), can provide some buffer against deflation and help avoid stagnation. Moderate inflation encourages spending and investment, as consumers and businesses are motivated to avoid holding onto cash that loses value over time.

5. Monetary Policy Flexibility: A low, positive rate of inflation allows central banks to use interest rates more effectively to manage economic conditions. They can implement conventional monetary policy tools to adjust interest rates in response to changes in the economy.

In practice, many central banks aim for a low, positive rate of inflation rather than zero inflation. They typically target inflation rates around 2%, which allows for some price stability while providing a buffer against deflationary risks. A moderate and stable rate of inflation can facilitate nominal wage adjustments, allow for more flexible interest rate management, and avoid the adverse effects of deflation. Striking a balance between price stability and supporting economic growth is a key consideration for monetary policy and inflation targeting.

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The definition of "low inflation" is not fixed and can vary depending on the context and the specific economic conditions of a country. It is not a scientific term with a standard numerical value universally applicable to all economies. Instead, what constitutes "low inflation" is often a normative judgment made by policymakers and economists based on the desired economic outcomes and the prevailing economic circumstances.

Subjectivity of Low Inflation: What may be considered low inflation in one country or at a particular time may not be deemed as such in another context. Policymakers, central banks, and economists typically consider various factors, such as historical inflation trends, long-term economic growth objectives, and the overall stability of prices, when determining the target level of inflation.

Examples of Target Inflation Rates:

1. United States: The Federal Reserve, the central bank of the United States, has a dual mandate of promoting maximum employment and stable prices. It has typically targeted an inflation rate of around 2% as conducive to economic growth and stability.

2. European Central Bank (ECB): The ECB, responsible for monetary policy in the Eurozone, aims to maintain inflation below, but close to, 2% over the medium term. This target is based on the belief that a moderate level of inflation is beneficial for economic activity and helps avoid deflationary risks.

3. Japan: The Bank of Japan (BOJ) has had difficulty achieving its target of 2% inflation amid decades of deflationary pressures. In response, the BOJ has implemented aggressive monetary policies to combat deflation and boost inflation expectations.

Evaluating the Normative Nature of Low Inflation: The normative nature of low inflation means that there is ongoing debate and differing viewpoints on what the ideal inflation rate should be. Some arguments in favor of low inflation include:

1. Price Stability: Low inflation contributes to price stability, making it easier for households and businesses to plan and make economic decisions without significant concerns about rapidly changing prices.

2. Wage and Price Stability: A moderate and stable inflation rate allows for nominal wages and prices to adjust more smoothly, facilitating labor market flexibility and resource allocation.

3. Avoiding Deflation: A target for low inflation helps avoid deflationary pressures, which can be harmful to economic growth and can lead to negative expectations and delayed spending.

On the other hand, some economists and policymakers argue that there are potential drawbacks to persistently low inflation:

1. Deflationary Risks: If inflation consistently falls too close to zero or turns negative, it can increase the risk of deflationary spirals, leading to economic stagnation and challenges in policymaking.

2. Monetary Policy Constraints: Extremely low inflation can reduce the effectiveness of conventional monetary policy tools, such as lowering interest rates, especially when interest rates are already close to zero (zero lower bound).

3. Real Debt Burden: Very low inflation can increase the real burden of debt, making it more challenging for borrowers to service their debts.

In conclusion, the definition of "low inflation" is subjective and varies across countries and economic circumstances. It is typically a normative judgment based on the desired economic outcomes and the prevailing economic conditions. While low inflation is generally viewed as conducive to economic stability, there are ongoing debates on the ideal inflation rate and the potential drawbacks of persistently low inflation, such as deflationary risks and limitations in monetary policy effectiveness. Striking the right balance between price stability and supporting economic growth remains a key challenge for policymakers.

How Steve Bannon captured America's spirit of revolt

Thomas Frank in The Guardian

 

Illustration by Matt Kenyon



So our billionaire president hangs a portrait of Andrew Jackson on his wall, spits on his hands, and takes a sledgehammer to the Dodd–Frank Act. The portrait is of the banks’ all-time arch-enemy; the reality is that the banks are going to be deregulated yet again. And in that insane juxtaposition we can grasp rightwing populism almost in its entirety: fiery verbal hostility to elites, combined with generous government favours for those same elites.

Donald Trump’s adviser Stephen Bannon presents an even more striking combination. A former executive at Goldman Sachs, Bannon is also the product of what the Hollywood Reporter calls a “blue-collar, union and Democratic family” who feels “an unreconstructed sense of class awareness, or bitterness – or betrayal”. Bannon is a founding member of the objectionable far-right website Breitbart and an architect of Trump’s unlikely victory, the man at the right hand of power. And yet almost no one in Washington seems to understand how he pulled this off.

Let me propose a partial explanation: that one of the reasons Bannon succeeded is because he has been able to unite the two unconnected halves of American populist outrage – the cultural and the economic.

Start with the latter. In a 2014 interview on the recent financial crisis, Bannon proclaimed: “The way that the people who ran the banks and ran the hedge funds have never really been held accountable for what they did has fuelled much of the anger in the Tea Party movement in the United States.”

Fair enough. I myself am outraged that financiers were not held responsible for the many obvious mistakes and even acts of fraud they appeared to commit.

But when we turn to the specifics of Bannon’s indictment, accountability gets a little blurry. In 2010 Bannon wrote, directed and produced a documentary film about the 2008 financial crisis called Generation Zero – a documentary that explicitly tries to get laissez-faire capitalism off the hook for this colossal capitalist disaster. Remember the roll-back of banking rules under Bill Clinton and George W Bush, or the hapless regulatory agencies filled with former bank officers and lobbyists? Evidently none of that really mattered. As one of the movie’s many experts intones, “Deregulation is not the problem.” The first sentence in the promotional copy on the back of the DVD case is just as blunt: “The current economic crisis is not a failure of capitalism, but a failure of culture.” 

What culture do you think Bannon means? The buccaneering culture of the Wall Street traders? The corrupt culture of the real estate appraisers or the bond rating agencies? The get-rich-quick culture of the mortgage originators?

No, no and no. He means … the counterculture of the 1960s. Bell bottoms. Drum solos. Dope. That’s the thing to blame for the financial crisis and the bailouts. Not the deregulation of derivatives in 2000. It was those kids having fun at Woodstock in 1969.

I am not joking. This really is Bannon’s argument, illustrated again and again in Generation Zero with 40-year-old footage of hippies dancing and fooling around, which is thrown together with stock footage of dollar bills being counted, or funny old cartoons, or vacant houses, or really mean-looking sharks, and then back to those happy hippies again.

One way of assessing this is that Generation Zero is the transition from the culture wars to Trumpism. What Bannon is doing is bringing the strands of outrage together. He’s saying that the culture wars and the financial crisis both share the same villain: the bad values that supposedly infected our society in the 1960s. The same forces that made the movies and pop music so vulgar also crashed the economy and ruined your livelihood. Here is how Roger Kimball of the New Criterion makes the case in Generation Zero:

“A lot of what we have just seen is a kind of a real-world dramatisation of those ideas that became popular in the 60s and 70s, and that had a dry run then. And that, I think, has been a prescription for disaster in some very concrete ways. Take, for example, the financial crisis. What we have just seen in the irresponsible lending by banks and the irresponsible leveraging by many hedge funds is an abdication of responsibility.”

That gives you a taste of how Bannon’s logic unfolds. The decade of the 60s supposedly introduced Americans to the idea of irresponsibility and self-indulgence, and now that we are suffering from an epidemic of irresponsibility and self-indulgence a mere 50 years later, it’s obviously the fault of people from that decade long ago. Blame is thus offloaded from, say, the captured regulators of the Bush administration to the pot-smoking college students of the Vietnam era. Unfortunately, just because something makes moral sense doesn’t mean it’s true. Take the phenomenon of “stated income” or liar’s loans, the fraud that came to symbolise so much of what went wrong in the last decade. One of the movie’s experts, Peter Schweizer (later the author of Clinton Cash), seems to blame this dirty business on … Saul Alinsky, an author and community organiser who died in 1972. Alinsky, he maintains, “applauded activists who used lying effectively. You end up where applicants lie on their applications, mortgage lenders lie when they pass that to the underwriters, and then these mortgages are sold as mortgage-backed securities on Wall Street ... It’s a chain of lie after lie after lie, which eventually undermines even the most effective system.”

Schweizer is right that loans based on lies undermined the system. By 2005 they had become an enormous part of the mortgage market, and the story of how that happened is a really fascinating one. Many books have been written on the subject. But filmmaker Bannon shows no interest in any of that. He makes little effort to find out who was issuing such loans, what kind of houses they were used to purchase (McMansions?), who packaged them up into securities, or why regulators didn’t do anything to stop it. Instead, the movie just implies that the diabolical Alinsky had some vague something to do with it and then walks away. This is not history, it’s naked blame-shifting.

In fairness, Bannon’s movie also makes plenty of valid points and has some fine moments. The director obviously cares about the working-class people who were ruined by the recession. He correctly portrays the Democratic party’s love affair with Wall Street in the 90s (although he downplays the amorous deeds of Republicans). He understands the cronyism between government and high finance, and one of his sources aptly describes the bailed-out system as “socialism for the wealthy but capitalism for everybody else”. Which kind of sounds like something that old 60s radical Bernie Sanders might say.

The putative moral of Generation Zero is that we all need to grow up and take responsibility for our actions; and yet as I watched it I was bowled over by how profoundly irresponsible this documentary is. Other than a single quote from Time magazine circa 1969 and the old TV footage of hippies doing their dance, Bannon doesn’t really try to nail down what “the 60s” stood for or meant. None of the leading participants in that decade’s bacchanals are interviewed. Skipping ahead to the financial crisis, we never learn whether it’s the dishonest home-buyers who were hippies, or the fly-by-night mortgage lenders or the Wall Street traders who were hippies. Which set of hippies are we supposed to crack down on? We never find out.

All we know, really, is that there was once a dreadful thing called the 60s, and then there was a terrible financial crisis four decades later, and because the one came before the other, it somehow caused it. The effort to bridge that evidence gap is almost nonexistent. In a typical moment, Bannon shows us Republican treasury secretary Hank Paulson desperately trying to stop the money haemorrhage in September 2008, and then cuts immediately to footage of the Black Panthers, holding a rally many decades ago. Why? What is the connection? Does Paulson, the devout Christian Scientist, the teetotalling college football star, have some secret affiliation with 60s radicalism?

Worst of all is the former presidential adviser Dick Morris (Bill Clinton’s Steve Bannon, come to think of it), who appears throughout Generation Zero blowing hard about this outrage and that. Here is what Morris tells the camera about the threat of hyperinflation, which loomed so large in the rightwing mind back in 2010: “The real catastrophe is going to come in about a year, a year and a half, or two years, when all of this money that the Fed has been printing comes out of hiding all at once and causes explosive inflation.”

The movie’s most far-fetched proposition is also its most revealing. Generation Zero asserts that history unfolds in a cyclical pattern, endlessly repeating itself. Historical crises (such as the Depression and second world war) are said to give rise to triumphant and ambitious generations (think Levittown circa 1952), who make the mistake of spoiling their children, who then tear society apart through their decadence and narcissism, triggering the cycle over again. Or as the movie’s trailer puts it: “In history, there are four turnings. The crisis. The high. The awakening. The unravelling. History repeats itself. The untold story about the financial meltdown.”

In a word, the theory is ridiculous. It is so vague and squishy and easily contradicted that the viewer wonders why Bannon included it at all.

And then it hits you. He included it because this rainy-day Marxism is pretty much the only way you can do what Bannon set out to do in this movie: get deregulated capitalism out of the shadow for the financial crisis and blame instead the same forces that the family-values crowd has been complaining about for years. Blame the hippies for what arch-deregulator Phil Gramm did 40 years later and call it a high-flown theory of history: the “fourth turning”, or some such nonsense. Of course Bannon’s fans believe it. It makes perfect sense to them.

A funny thing about Bannon’s stinky pudding of exaggerations and hallucinations: in the broadest terms, it’s also true. The counterculture really did have something to do with both our accelerated modern capitalism and the Democratic party’s shift to the right – it’s a subject I have written about from The Conquest of Cool to Listen, Liberal.

The Clinton administration really did strike up an alliance with Wall Street, and this really did represent a new and catastrophic direction for the Democratic party. Trade deals really did help to deindustrialise the US, and that deindustrialisation really was a terrible thing. The bankers really did get bailed out by their friends the politicians in 2008 and 2009, and it really was the greatest outrage of our stupid century. And there really is a lot of narcissism mixed up in modern capitalism. Just look at the man for whom Bannon presently works.

Generation Zero acknowledges these visible facts but connects the dots by means of a vast looping diagram of confusion and blame evasion. It is a fantasy of accountability that actually serves to get the guilty off the hook.

Then again, another way to judge this alternative theory, with its alternative facts, is to set it off against what the Democratic establishment was saying at the time. Which was pretty much nothing.

Centrist Democrats simply don’t talk about their alliance with Wall Street – it’s like the party’s guilty secret, never to be discussed in a straightforward way. Try asking former President Obama or former treasury secretary Geithner or former attorney general Holder why they were so generous with the bankers and why they never held them responsible, and see what kind of answer you get.

And that, in short, is the story of how the right captured the spirit of revolt in this most flagrantly populist period in modern times. Want to take it away from them, liberal? Start by understanding your history.

India's ancient contribution to science

Shashi Tharoor on NDTV

The unseemly controversy over ancient Indian science at the ongoing Indian Science Congress reflects poorly on all the parties involved, including the conference itself, which is now in its 102nd year without ever having discussed the ancient roots of our indisputable national scientific tradition till yesterday.

First, it reflects poorly on the traditionalists, who have turned revivalism into a form of revisionism with their outlandish claims of improbable Vedic accomplishments. The victory of Narendra Modi in the general elections this year has propelled a number of true believers of Hindutva into positions of unprecedented influence, including in such forums as the Indian Council for Historical Research, the University Grants Commission, and, it now seems, the programme committee of the Indian Science Congress, which scheduled a talk on "Vedic Aviation Technology" that elicited howls of protest from many delegates. 

It has also given a licence to unqualified voices who gain in authority from their proximity to power - none more significant than the Prime Minister himself, who suggested in a speech at a hospital, no less, that Lord Ganesha's elephant head on a human body testified to ancient Indians' knowledge of plastic surgery. Such ideas, because they are patently absurd, except in the realm of metaphor, have embarrassed those who advance them, as well as those who cite them in support of broader, but equally unsubstantiated, claims to past scientific advances, from genetic science to cloning and inter-stellar travel. Petty chauvinism is always ugly, but never more so than in the field of science, where knowledge must be uncontaminated by ideology, superstition or irrational pride.

But the controversy also discredits the modernists who, in their contempt for such exaggerated and ludicrous claims, also dismiss the more reasonable propositions pointing to genuine Indian accomplishments by the ancients. As I pointed out on Twitter yesterday, it is not necessary to debunk the genuine accomplishments of ancient Indian science in order to mock the laughable assertions of the Hindutva brigade.

As I have been repeatedly saying, not everything from the government-sponsored right is necessarily wrong. A BJP government choosing to assert its pride in yoga and Ayurveda, and seeking to promote them internationally, is, to my mind, perfectly acceptable. 

Not only are these extraordinary accomplishments of our civilization, but they have always been, and should remain, beyond partisan politics. It is only if the BJP promoted them in place of fulfilling its responsibility to provide conventional health care and life-saving modern allopathic medicines to the Indian people, that we need object on policy grounds.

Similarly, in asserting that ancient Indians anticipated Pythagoras, Dr Harsh Vardhan was not incorrect and should not have been ridiculed. In fact he could have added Newton, Copernicus, Kepler and Galileo as well, every single one of whom had been beaten to their famous "discoveries" by an unknown and unsung Indian centuries earlier.

The Rig Veda asserted that gravitation held the universe together 24 centuries before the apple fell on Newton's head. The Siddhantas are amongst the world's earliest texts on astronomy and mathematics; the Surya Siddhanta, written about 400 A.D., includes a method for finding the times of planetary ascensions and eclipses. The notion of gravitation, or gurutvakarshan, is found in these early texts. Lost Discoveries, by the American writer Dick Teresi, a comprehensive study of the ancient non-Western foundations of modern science, spells it out clearly: "Two hundred years before Pythagoras," writes Teresi, "philosophers in northern India had understood that gravitation held the solar system together, and that therefore the sun, the most massive object, had to be at its centre." 

Aryabhata was the first human being to explain, in 499 A.D., that the daily rotation of the earth on its axis is what accounted for the daily rising and setting of the sun (his ideas were so far in advance of his time that many later editors of his awe-inspiring "Aryabhatiya" altered the text to save his reputation from what they thought were serious errors). Aryabhata conceived of the elliptical orbits of the planets a thousand years before Kepler, in the West, came to the same conclusion (having assumed, like all Europeans, that planetary orbits were circular rather than elliptical). He even estimated the value of the year at 365 days, six hours, 12 minutes and 30 seconds; in this he was only a few minutes off (the correct figure is just under 365 days and six hours). The translation of the Aryabhatiya into Latin in the 13th Century taught Europeans a great deal; it also revealed to them that an Indian had known things that Europe would only learn of a millennium later.

The Vedic civilisation subscribed to the idea of a spherical earth at a time when everyone else, even the Greeks, assumed the earth was flat. By the Fifth Century A.D., Indians had calculated that the age of the earth was 4.3 billion years; as late as the 19th Century, English scientists believed the earth was a hundred million years old, and it is only in the late 20th Century that Western scientists have come to estimate the earth to be about 4.6 billion years old.

India invented modern numerals (known to the world as "Arabic" numerals because the West got them from the Arabs, who learned them from us!). It was an Indian who first conceived of the zero, shunya; the concept of nothingness, shunyata, integral to Hindu and Buddhist thinking, simply did not exist in the West. Modern mathematics would have impossible without the zero and the decimal system; just read a string of Roman numbers, which had no zeros, to understand their limitations. 

Indian mathematicians invented negative numbers as well. The concept of infinite sets of rational numbers was understood by Jain thinkers in the Sixth Century B.C. Our forefathers can take credit for geometry, trigonometry, and calculus; the "Bakhshali manuscript", 70 leaves of bark dating back to the early centuries of the Christian era, reveals fractions, simultaneous equations, quadratic equations, geometric progressions and even calculations of profit and loss, with interest.

The Sulba Sutras, composed between 800 and 500 B.C., demonstrate that India had Pythagoras' theorem before the great Greek was born, and a way of getting the square root of 2 correct to five decimal places. (Vedic Indians solved square roots in order to build sacrificial altars of the proper size). The Kerala mathematician Nilakantha wrote sophisticated explanations of the irrationality of "pi" before the West had heard of the concept. The Vedanga Jyotisha, written around 500 B.C., declares: "Like the crest of a peacock, like the gem on the head of a snake, so is mathematics at the head of all knowledge." Our mathematicians were poets too! 

Indian numbers probably arrived in the Arab world in 773 A.D. with the diplomatic mission sent by the Hindu ruler of Sind to the court of the Caliph al-Mansur. This gave rise to the famous arithmetical text of al-Khwarizmi, written around 820 A.D., which contains a detailed exposition of Indian mathematics, in particular the usefulness of the zero. It was al-Khwarizmi who is credited with the invention of algebra, though he properly credits Indians for it himself.

But the point is that, alas, we let this knowledge lapse. We had a glorious past; wallowing in it and debating it now will only saddle us with a contentious and unproductive present. We should take pride in what our forefathers did, but resolve to be inspired by them rather than rest on their laurels. We need to use the past as a springboard, not as a battlefield. Only then can we rise above it to create for ourselves a future worthy of our remarkable past.