A Two-Sided Inflation Argument

In a post on today’s NY Times Economix blog, Casey Mulligan argues many sides of the inflation prediction debate (The Next Inflation: When, Why and So What?). After reviewing the arguments as to why government spending is not typically inflationary and why an increase in the monetary base can be, Mulligan suggests why the Fed may permit inflation: it will help boost housing prices and reduce the number of underwater mortgages. Mulligan writes that “inflation will likely be a deliberate choice to reduce the housing market’s drag on the wider economy.”

This is a new variant on the “don’t worry about inflation” argument. It may be valid, though that is of course debatable. But I don’t like it. It basically says that the Fed could control inflation but may choose not to. Moreover, the inflation that the Fed allows could be beneficial. I don’t like it because it is a no lose perspective. If we get no inflation Mulligan can say, “See, I said inflation could be controlled.” If we get inflation Mulligan can say, “The Fed has chosen this course to help with home prices.”

There’s no testable hypothesis in this point of view. It doesn’t really answer the questions when, why, and how much, unless you like the answers: “sometime later,” “because the Fed prefers it that way,” and “a little or a lot.”

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