Rogoff on Inflation

The Sunday Boston Globe has an interesting profile of Ken Rogoff, whose views I respect, despite many disagreements. His recent call for a burst of “moderate” inflation to reduce the debt overhang has gotten a lot of play in the press. I don’t favor the idea, but at least Rogoff acknowledges, not only the technical and pragmatic issues involved with inflation, but also the moral ones:

Transferring the debt burden from borrowers to creditors, after all, effectively bails out borrowers by punishing the banks that lent them money, as well as devaluing the savings of their more prudent neighbors. That kind of rescue plan strikes many as fundamentally unfair.

Rogoff understands this objection, and doesn’t dispute that what he’s proposing is on some level unfair. But ultimately, he argues, this contraction is dragging us all down together, and even those lenders and savers will be better off if America’s debt overhang is taken care of swiftly. Once that happens, and the economy starts to recover properly, we’ll be able to focus on designing better policies that will make us less vulnerable to financial crisis in the future. For now, a little inflation might just be the cost of getting us to where that might be possible.

The moral costs of inflation—not only in transferring wealth from savers tp borrowers, but also in promoting profligacy, imprudence, short-term thinking, etc.—were once at the forefront of economists’ thinking on money creation. Bresciani-Turroni devoted a chapter of his famous book to inflation’s social consequences. But today these issues are rarely discussed, presumably because ethics is not part of the standard economist’s “tool kit.” Too bad.