Ask HN: Why don’t governments target zero inflation?
Asking here since I don’t know here else to start.
Western governments all seem to target 2% annual inflation. Why is this?
Why not target 0% to make financial projections simpler for businesses and households?
111 comments
[ 4.4 ms ] story [ 185 ms ] threadWere they finit 2000 years ago as well?
Are you infinitely dense? (I am not; I can't prove it, but I suspect you are less than infinitely dense.)
Stop spreading this shitty nonsense about limited resources please.
Although recent years have been a puzzling exception, it is typical for real interest rates (nominal rate minus inflation rate) to be positive. If someone is inclined to just live off their accumulated savings, this is just as possible with inflation as without, as long as the real interest rate is the same. It is true that the value of savings tend to be destroyed in episodes of hyperinflation, when real rates don't keep up, but hyperinflation is certainly not a road to a well functioning economy.
I'm not sure idle speculation on corruption is what OP was asking for or helpful to anyone else for that matter.
The ~2% target they aim for is really "this is probably what we can get away without without prices exploding so fast that people notice and start protesting our policies."
If they can get away with >2% they will. With a convenient excuse like COVID, they will not miss the opportunity to enrich themselves as much as possible, because its easy to shift the blame on price increases away from themselves.
Can guarantee they're eagerly awaiting the next emergency where creating trillions of dollars is 'the only solution.'
Contrast this to the status quo of negative real rates. Speculative mania, valuations over dividends and FOMO driving investment cycles into increasingly absurd tulip bubbles.
Despite increases in productivity, consumer prices continue to increase. Families have two spouses working and less leisure time. There's nothing wrong with deflation. This is the natural result of increased productivity and technological advances.
If government statisticians measure inflation to be less than 2% for a period of time, they will claim that inflation above this rate is required to achieve a symmetric rate of 2%. Even if we accept these premises, why then is a lower rate not "symmetrically" targeted when government statisticians measure inflation to be 8%?
The system is better understood as a method of rationalization for gov. spending, political favors and "stimulus".
The question is a good one, but I think you would be better served by questioning some of the underlying premises before proceeding.
Why not allow the market to set interest rates? Why must capital be allocated by government technocrats? How can fallible men with imperfect information determine prices better than decentralized market mechanisms? When in history has price fixing been beneficial? What were the results of emperor Diocletian's edicts on maximum prices?
Also note the shifting definition of inflation itself. Price inflation vs. the original definition, inflation of the money supply.
When the UK sold most of its critical infrastructure - using exactly the same arguments you're using - the reality wasn't a rational and perfectly organised free market utopia, it was an explosion of higher prices and lower service quality for customers, and huge profits for the buyers.
Most of which were shipped offshore, because the new owners weren't even British.
Even as we spesk privatised energy price gouging - there is no other word for it - is quite literally making electricity and gas unaffordable for anyone who isn't in the top decile of earnings.
Not incidentally, it's also causing a burst of inflation which is being used as a transparently flimsy pretext to raise taxes, cut public services, and clamp down on wages.
>You're assuming "markets" aren't at least as technocratic, open to manipulation, or just straightforwardly political.
Where "experts" fail in the market, they are subject to competition. The conditions where they fail upwards are generally related to non-market political largess.
>When the UK sold most of its critical infrastructure - using exactly the same arguments you're using...
>privatized energy price gouging
There's a large gulf between neoliberalism and laissez-faire. I do appreciate that the two are often conflated and that the distinction isn't always clear as they are often maligned together in popular discourse.
>the reality wasn't a rational and perfectly organised free market utopia
Utopia is a high bar to achieve. I'm just suggesting that having centrally planned interest rates is akin to price fixing. Overall a market rate of interest would be less bad IMHO.
Rail infrastructure is a difficult issue, but the Japanese seem to have a successful private system. Maybe another commentor who is more familiar with Japan can elaborate on that.
If the markets set the rate directly we'd have more wild swings than an olde time musical.
When currencies operated via the gold standard. Inflation of gold was out of their control, gold mining, gold rush etc. Which tended to be about 2%. This goes back to antiquity. Roman emperors clipped metal off their coins and thus created inflation. Inflation doesn't exist in economics, inflation is a political tool.
This is it though, that's why it's 2%, nobody has ever had the courage to aim at anything lower.
But now that it's not gold standard, what is the 2%? This is actually government being able to print money for free. 2% of total money supply pays for quite a significant amount of government. This is compounding obviously, so it's not a long term strategy. However, this is what makes large currencies so powerful.
>Why not target 0% to make financial projections simpler for businesses and households?
The government has to raise taxes(not going to work) or reduce spending(very very not going to happen)
So aiming for 0% isn't plausible not because of economics, but because of politicians.
Something did happen in 2020, usa/canada/others no longer targeted 2%. They targeted >10%. The government printed a ton of money to pay for extreme spending. Canada for example put more debt on the books in the last few years than all other prime ministers in history combined; inflation adjusted. Someone will pay for this eventually or retirees are coming back to work.
Holding onto money is bad because every dollar you spend, another man earns. A lack of spending from one party is a lack of earning for another. The economy functions not on people having money, but on people continually spending that money and moving it from one party to another to incentivize work being done and problems being solved.
In addition inflation benefits entities with lots of debt, such as homeowners and governments. Since homeowners are often a significant voter block in most democracies and governments are, well, governments, it is easy to see why appeasing both those groups would be appealing to politicians.
Further, the administrative effort of any wealth tax is enormous (if you're trying to reach the equivalent effect of taking 2% of the purchasing power away from the money that's literally in my jeans pocket) and subject to substantial judgment (what is my family pizza place really worth?).
Inflation has no judgment required and no per-person book-keeping, reporting, nor auditing effort required.
Arguably we should be running closer to 5% inflation which corresponding increases in interest rates, which would put a damper on our asset bubble economy.
Work on more and more meaningless tasks and resolve more and more meaningless problems
Once upon a time money moved with a purpose, now the purpose _is_ moving the money
We're more productive than any time in human history
Productivity for the sake of productivity is the same as moving money for the sake of moving money. It would be nice if it translated to real world improvement in quality of life, which the average westerner hasn't experienced since at least the 70s.
Internet, smart phones, better and cheaper consumer electronics, microwave ovens, highly reliable/low maintenance automobiles, very affordable air transportation, more comfortable/efficient/pervasive HVAC, many medical advances, wide variety of foods (some not so good for you, but others are) in most grocers, and scores of additional things I haven’t thought to list.
Yes, we might work a few more hours per week than 50 years ago us did, but that’s evidence that we’d prefer more comforts over more free time.
What percent of westerners would give up all of those things in exchange for a full migration back to 1975? I think it’s under 5% and probably way under it.
These are extremely marginal "improvements" if you compare them to central heating, penicillin, food sterilization, running water, electricity. Most of the ones you cited come with heavy drawbacks that can't be eliminated (ecologically, socially, &c.). Most of the food is junk food (diet cause 30%+ of cancers), most transportation systems are extremely wasteful and a major cause of pollution (which causes another 30% of cancers), globalisation killed local economies/communities, people are lonelier than ever, teen suicide is through the roof, the internet became a big distraction machine. Of cours tech as a whole comes with nice things, especially medically, but when you look at the whole thing and weight the pros and con it's hard to miss the plethora of cons.
I personally don't wake up thinking about how great everything is but thinking about how I can opt out of most of it
> What percent of westerners would give up all of those things in exchange for a full migration back to 1975? I thinks it’s under 5% and probably way under it.
Stockholm syndrome imho + they'd give all of that away in a heartbeat if they could get a 1970s house, food, etc. while working 3 hours per day, which is what technocrats were promising if we followed their automation dreams, instead we work as long, are more isolated, more depressed, are less fulfilled, but sure enough we have 4k netflix and smartphones more powerful than the entire early NASA .
Also it's not a full migration back to the 70s, it's using modern tech to live sustainably and giving up and the impossible quest of infinite growth.
But I guess it's too late to even discuss that, virtually no one even talks about alternatives anymore, just buy your iphone X max pro 14 and forget about your dreams while doom scrolling the social media of the year while patting your own back about how productive and efficient the whole system is !
Speak for yourself. People are perfectly able to move to bumfuck and live at a 50s quality of life while working less, they just don't want to.
https://en.wikipedia.org/wiki/Shoe_leather_cost
Yes it does! When cash is hoarded instead of invested, it stops it being used for transactions that increase value. Imagine it happening at scale.
What is the reason that you think that governments care about the size of their debts? Do not assume that "government debt" is anything like "household debt".
There are significant differences, but in the end governments also pay back debt.
https://www.forbes.com/sites/francescoppola/2018/04/30/gover...
The alternative is not "default" that pathological case is not what anyone was talking about at all, the alternative is a government continuing to be in debt, servicing it and rolling it over. Public debt is private wealth, that's who holds the bonds.
> There are significant differences, but in the end ...
But in the end, "The analogy has been characterized by economists as misleading and false, as the functions and constraints of governments and households are vastly dissimilar"
https://en.wikipedia.org/wiki/Government-Household_analogy
That's the way HN works, and it's a good thing, but if you insist, here I am.
It's true that governments don't see it the same way as households. But inflation provides them with a free way to reduce their debts (at the cost of their country's savers and earners, effectively). Every dollar not spent on servicing the debt can be spent on something else instead.
Point is, when it comes to households, you can meaningfully say "Every dollar not spent on $x can be spent on something else instead". When it comes to a government that controls the supply of dollars, that statement is not directly meaningful. There is no "every dollar" - the money supply is expanded or contracted when it's necessary and beneficial to do so. The misconception hasn't moved on since grandparent post.
Can a government get this choice wrong? Sure. Does a government count dollars and allocate them like a household does? No.
Is this spending "depleting the bank account" - not usually, it's literally circulating money into private hands. It depends on other factors like who gets it, do they pay taxes and what other public good is done thereby.
In most Western countries, this is the function of the central bank, not the government.
But this is
a) not in the private sector, it is acting to "manages the currency and monetary policy of a state" to "implement a country's chosen monetary policy" State. Country.
b) more importantly, this is still utterly unlike a household, where no such function exists in any form.
Thank you for the pedantry unrelated to any of the main points though.
1) https://en.wikipedia.org/wiki/Central_bank
Because reaching a steady level of inflation is hard due to the nature of the markets, economy and the tools available to central banks they aim for 2% so it can wiggle around that - rather than around 0%
It's interesting that more recently economists have started to disagree that a little deflation is a bad thing - for example Switzerland last decade (but Switzerland is a small very stable economy).
https://www.investopedia.com/articles/markets/111715/can-def...
The real problem is economics isn't a science, it is more akin to reading pig entrails or sheep's bones than anything that is scientific.
* I know it's not actually printing money, it's changing the reserve rate, playing with interest rates etc.
> That may have made sense before fiat currency, but I literally can't think of what could be simpler than print more money
If it were actually that simple, I'm sure governments would act differently (especially since helicopter money is in no way a novel idea). Since they don't, it's almost certainly more complex.
Macro, and especially inflation is largely about expectations. Central banks work very hard to maintain trust. Empirical evidence has shown that deflationary spirals can be difficult to escape.
I don't think that my situation is particularly uncommon.
If my washing machine breaks, I don't have to buy another one immediately. I could repair it; I could use a laundromat; I could use a neighbor's; I could wash by hand.
On one hand you want the velocity of money to stay up, so people use the tool frequently, and WANT to use the tool, because that's where it derives its usefulness from, from being used. On the other hand, you don't want to disincentivize savings, but may want to disincentivize hoarding. What's the difference?
I've thought for a while now, that an optimal solution may be multiple currencies. In Singapore they have a savings account that acts like an HSA and you can pay rent from. Other nations have sovereign wealth funds propped up by the extraction of natural resources.
Maybe it is time to have a forced checking account and a savings account and a living account trichotomy, denominated in three different currencies. Maybe the checking account is pure USD, the living account is untaxed TIPS, and the savings account is a conservative state managed investment portfolio. They can then control the exchange rate between these accounts if people need to move money from one to the other. Force point of sale systems to correctly tag what is eligible to be spent from the living account, and deduct part from each. There is room for a lot of automation, especially when you add a one month line of credit.
This sounds like an absolute nightmare scenario. Christ, can you imagine what would happen if we actually addressed carbon emissions with monetary policy instead of just begging people to "reduce, reuse, recycle" in PSAs with teary-eyed Native Americans whilst running a monetary policy explicitly designed to redline consumption?
A good thing for government policy makers and employers? It is.
Conclude from that what you will.
Also, the more money you print tomorrow, the less today's debt is worth.
Indeed, this situation as described would be deflationary. OP asked about targeting zero rather than negative.
This is not the reason.
Is 2% a good target? Probably not. Probably there should be a better connection to the population growth rate.
Ultimately the goal is price stability.
I take it you're not living in the EU?
But it must be tied to growth.
> Western governments all seem to target 2% annual inflation
2% is seen as a sweet spot: it still allows governments to print extra money but the inflation rate is not so high that it would lead to an inflation spiral that would run out of control.
A few I've seen:
(1) it seems to be difficult for central banks to implement negative nominal interest rates (cash can go under the matrress), and so a positive inflation target will allow a government a bit more scope to cut interest rates during a recession without running into a 'zero lower bound'.
(2) 0% nominal pay rises seem to be a focal point in wage negotiations, and so positive inflation will allow nominal wages to fall in a recession.
There are other arguments I have seem, but all seem quite weak. I don't think there is some definitive justification for 2% vs 5% vs. 0% that can be derived from first principals.
Milton Friedman actually pointed out some theoretical benefits of negative inflation [1].
https://en.wikipedia.org/wiki/Friedman_rule
Solution: Just have everyone's real wage go down 2% a year, unless the employer specifically raises the wage to compensate for inflation. Supposedly, people are too dumb to realize that not raising their wage when there is inflation is the same as decreasing their wage when there is no inflation. Maybe they are that dumb - I haven't looked at the data.
[0]: https://www.investopedia.com/terms/b/biflation.asp#toc-the-c...
High (hyper) inflation is very bad, and hard to escape. It can also happen to developed economies. Even if you discard 2022 energy-induced inflation, look at Turkey.
Deflation - less examples, but Japan comes to mind. Deflation is associated with economic stagnation (others are commenting on causation, I'll leave it be).
There's another argument, as to whether we need GDP growth. Japan doesn't have any, and seems like a pleasant place to live, if you're Japanese at least. I'm not convinced, but the basis is, inflation around 2% is seen as a kind of prerequisite to GDP growth, which is assumed be good and necessary.
Inflation is a hidden tax on the population. Instead of taking the numbers out of their bank accounts or dollars out of their hands, they can just print the money. This erodes purchasing power of individuals but also allows the government to spend more than they could from traditional tax hauls alone. The people think that they’re getting something for nothing, and politicians get re-elected. Additionally, such a scheme allows for the military actions that the USA loves to engage in. Without inflationary spending, the taxation becomes onerous enough that people wouldn’t passively accept it.
The other reason is “growth”. With low interest rates and a decent amount of printing, you get two major effects. First, lenders are more willing to lend because they’re not paying high interest. The price of money is lower, and therefore money is easier to part with. The second reason is a follow on from that, monetary velocity increases. Monetary velocity generally helps your local government as sales taxes get paid.
The problem with low interest and moderate inflation is that the lenders do not scrutinize things very well (because money is cheaper), so you get a lot of investments that don’t play out as a consequence. Likewise, the inflation is typically tied to assets at first (land, equities, metals) but eventually it does hit product prices and this results in moments of severe inflation. This usually occurs when the P/E ratios get bad enough and the equities markets crash. It also creates problems like 2008 given a long enough cycle. Every time these crashes occur, governments usually try to assume more power as they advertise themselves as the saviors for the problems that their own monetary policy created.
Full disclosure, in a philosophical sense I consider myself a bit of an anarchist (just straight black flag, non-aligned), but in a practical sense I consider myself a mildly left but small government person. For example, I would happily trade constant war and standing armies for a public health care option, or even trade the war on drugs for a national rehab service. Due to the realities of finance, however, I do not believe that everything can be had, and giving the most corrupt people in a society (the politicians) unlimited power is Avery bad idea imho.
So they need to make money worth less over time if you just hold onto it.
There's absolutely no need to artificially incentivize spending. Humans naturally require and desire goods and services. Allowing people to store their economic energy without risk of devaluation would actually help bring people out of poverty. Inflating the money supply incentivizes high time preference behavior like excessive spending and borrowing. This leads to boom and bust cycles, and an increasingly growing wealth gap.
All inflation does in terms of growth is increase the nominal value of things in the economy. It does not encourage the growth of real wealth. The increase of wealth we experienced is due to the markets functioning despite an inflationary monetary policy and excessive regulation.
The real reason why the government is in favor of a "slightly inflationary" monetary policy is because they're incentivized to do so. They can spend it before price adjustments due to the new inflows of cash can happen in the wider economy. Its essentially a hidden tax. Governments, central banks, and their political/economic allies can benefit from this effect at the expense of everyone else in the economy.
https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_the...
https://archive.ph/Y5tvm