The Three Percent Solution

Building on yesterday’s idea, borrowed from Brad DeLong, that the Fed could stimulate the economy by raising its long-term inflation target from two percent to three percent it’s worth noting that there are other arguments for thinking that this would be a good idea. First off, it’s worth noting that three percent inflation is still pretty low. There’s nothing magical about the two percent number, and a somewhat higher figure is still very much consistent with the basic idea that low inflation is good.

Second, a higher inflation rate would speed the process by which households climb out from over-indebtedness. Third, a higher inflation rate would ensure that in the future the Fed has more “running room” for conventional monetary policy before hitting the zero bound and getting into this madness. Fourth, a higher inflation rate would speed the process by which real wages and prices adjust to whatever real shocks the economy may or may not be suffering from.

This course of action seems to be anathema to the powers that be, but it seems strongly preferable to a prolonged period of ten percent unemployment and a possible series of trade wars and the like.