Tuesday, May 19, 2009

Economists and the "Zimbabwe Solution"

It seems that the madness among at least some economists is not abating. Harvard University apparently is vying with Princeton to see who can create the most outrageous policy prescriptions. While Paul Krugman has been leading the pack, it is disheartening to see Greg Mankiw (who at one time made sense once in a while and was George W. Bush's chief economic advisor) and also Kenneth Rogoff, the former chief economist at the International Monetary Fund. Apparently, they like what has happened in Zimbabwe so much that they believe we need a dose of the same thing: inflation.

What the U.S. economy may need is a dose of good old-fashioned inflation.

So say economists including Gregory Mankiw, former White House adviser, and Kenneth Rogoff, who was chief economist at the International Monetary Fund. They argue that a looser rein on inflation would make it easier for debt-strapped consumers and governments to meet their obligations. It might also help the economy by encouraging Americans to spend now rather than later when prices go up.

“I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.”

This falls into the OMG category of policy prescriptions. Note that what they really are advocating is the repudiation of debt via monetary debasement. Now, when you and I receive debased products, such as lower-quality food and other goods, we don't like it and believe we are being cheated.

However, now the Great Minds of the Ivy League are claiming that if we do the same thing to money, we will have prosperity. Somehow, I think we are dealing with an economic non sequitur, not that it matters at the Ivies.

Makiw and Ben Bernanke claim that the Great Enemy is deflation:

For the moment, the Fed’s focus is on preventing deflation -- a potentially debilitating drop in prices and wages that makes debts harder to repay and encourages the postponement of purchases. The Labor Department reported May 15 that consumer prices were unchanged in April from the previous month and were down 0.7 percent from a year earlier.

“We are currently being very aggressive because we are trying to avoid” deflation, Fed Chairman Ben S. Bernanke told an Atlanta Fed conference on May 11.

Keep in mind that deflation is nothing more than money regaining previously lost value and the re-aligning of the economic fundamentals into lines of sustainable production. What Bernanke and company are saying is that they are going to do everything they can to prevent economic recover -- all in the name of putting the economy back on the road to recovery.

This is not economics, folks. It is madness.

(Hat tip to Matt Moselle)

1 comment:

Chris Halkides said...


I am old enough to remember the stagflation of the 70s and 80s. I don't want to go back there. If I were setting out to defend the inflation idea, I would say that it is better than deflation, but I don't think that these economists are trying to avoid deflation. I agree with you in giving this proposal a thumbs down.