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Why the 2% inflation target? (2023)

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Re: Why the 2% inflation target? (2023)

#31

Post by codetrotter »

jxdxbx wrote: post #22
codetrotter wrote: post #17

> Although the idea of a more valuable dollar may sound great, many economists think it is worse than high inflation (Engeman, 2019). The problem is that the value of money would increase when people do nothing with it. This would be problematic since people would not invest or spend money to get the country out of a recession when they could just get a return from doing nothing. Yes, how terrible that would be. In r…

Deflation has always been a disaster.

You don’t need inflation to solve the problems. Adjust the tax rates instead.

Property taxes. Income taxes. Taxing people by the amount of savings they have. Importantly, don’t give the rich guys tax breaks. Give the tax breaks to the poor.

Re: Why the 2% inflation target? (2023)

#33

Post by borski »

hgomersall wrote: post #25
jdsully wrote: post #10

Earlier quoted context omitted.

Defalation has more risk of feedback spirals, it heavily incentives you to wait to invest as tomorrow it will be cheaper than today. This is why small positive inflation rates are preferred. You could target 0% but in practice you will oscillate around it and have potentially long periods of deflation.

Well clearly it doesn't, because people still need to live. We have many years of evidence that people still buy shiny tech gadgets despite knowing that in a year's time they will be much cheaper.

That’s not true. The issue isn’t that the same device will be cheaper in a year, but that the latest device will be the same or close to it. As a result, people are more likely to hang on to their devices (for example) if they assume that next year’s latest model will be cheaper than this year’s.

A great example is the Apple Vision Pro. How many people didn’t buy it simply because the price is too high? Betcha they would if it were cheaper, which they know it will be eventually.

The same is not true of phones, which don’t generally get cheaper for the flagship products.

Re: Why the 2% inflation target? (2023)

#34

Post by jncfhnb »

hgomersall wrote: post #25
jdsully wrote: post #10

Earlier quoted context omitted.

Defalation has more risk of feedback spirals, it heavily incentives you to wait to invest as tomorrow it will be cheaper than today. This is why small positive inflation rates are preferred. You could target 0% but in practice you will oscillate around it and have potentially long periods of deflation.

Well clearly it doesn't, because people still need to live. We have many years of evidence that people still buy shiny tech gadgets despite knowing that in a year's time they will be much cheaper.

Consuming is not investing

Re: Why the 2% inflation target? (2023)

#35

Post by SubjectToChange »

rvba wrote: post #7
willio58 wrote: post #6

> Once the bill became law, then an inflation target had to be chosen. In an off-hand remark in an interview, the former head central banker said the inflation target should be zero to 1 percent. However, Don Brash, the head of the central bank, claimed “It was almost a chance remark,” and “The figure was plucked out of the air to influence the public’s expectations ”(Irwin, 2014). They used this number as a starting…

They could have chosen 0 or -2% but they like to reap that 2% free money premium..

Slight inflation encourages money to be put towards productive use and punishes hoarding. Choosing a deflationary monetary policy is unconscionable, just think for a moment what the consequences would be.

Re: Why the 2% inflation target? (2023)

#37

Post by taneq »

Workaccount2 wrote: post #11
willio58 wrote: post #6

> Once the bill became law, then an inflation target had to be chosen. In an off-hand remark in an interview, the former head central banker said the inflation target should be zero to 1 percent. However, Don Brash, the head of the central bank, claimed “It was almost a chance remark,” and “The figure was plucked out of the air to influence the public’s expectations ”(Irwin, 2014). They used this number as a starting…

A pivotal moment in my career was realizing how much "winging it" was going on even at the highest levels of the craft. Yes, there is a lot skill and intuition behind it, but its still pretty off the cuff.

I had to double check to make sure this wasn't my comment because I'm getting amazing levels of deja vu right now. Everybody's winging it, nobody knows what they're doing, and the higher you climb the chain the more terrifying this fact becomes.

Re: Why the 2% inflation target? (2023)

#38

Post by mebazaa »

Paul Krugman covers that question here (gift link): https://www.nytimes.com/2023/06/09/opinion/inflation-target-... and argues that the theoretical assumptions that led to the 2 percent rate didn’t turn out to be true:

> On one side were economists who believed that the essential role of monetary policy — maybe even its moral duty — was to deliver stable prices. Money, after all, is a yardstick we use to measure economic activity, and they argued that this yardstick shouldn’t be constantly changing its length.

> On the other side were economists who worried that too low an inflation rate could inhibit our ability to fight recessions. The Federal Reserve and its counterparts in other countries try to manage the economy mainly through their control of short-term interest rates; but these rates can’t go much below zero, because negative rates would just lead people to accumulate stacks of $100 bills. A higher rate of inflation tends, other things being equal, to raise interest rates and makes it less likely that the Fed, faced with a recession, will hit the “zero lower bound” and be unable to cut rates further.

The zero lower bound turned out to be a real problem, given the amount of years we spent at a zero percent interest rate.

Re: Why the 2% inflation target? (2023)

#39

Post by jmyeet »

sob727 wrote: post #5

Yellen supposedly told Greenspan & co in the mid 90s that 2% was a good way for companies to be able to adjust labor costs down if needed (if you don't give someone a raise when inflation is 2%, you're effectively lowering their salary). It was the only way to have some flexibility there. If you admit that this is a desirable thing, this is defeated by wage negotiations (or say, benefits) than tend to be indexed to i…

That's not new or controversial (in economics circles).

This really took off in the Reagan years where real wages stagnated [1]. It was from the 1980s where you started to hear statements like "wage incresaes should be tied to productivity increases" [2]. If you parse that statement, it means no cost-of-living increases ie a decrease in real wages.

All of this is wealth transfer to the very rich and entirely intentional.

[1]: https://www.epi.org/publication/charting-wage-stagnation/

[2]: https://www.epi.org/productivity-pay-gap/

Re: Why the 2% inflation target? (2023)

#40

Post by vkou »

codetrotter wrote: post #31
jxdxbx wrote: post #22

Earlier quoted context omitted.

Deflation has always been a disaster.

You don’t need inflation to solve the problems. Adjust the tax rates instead. Property taxes. Income taxes. Taxing people by the amount of savings they have. Importantly, don’t give the rich guys tax breaks. Give the tax breaks to the poor.

Property tax is just inflation on 'land'.

It is also a useful tool for steering the economy.

> Taxing people by the amount of savings they have.

That's essentially what inflation does.

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