Dean Baker, reacting to Neil Irwin, feels that he needs to make the perennial point that zero inflation is not some kind of economic Rubicon. Below-target inflation is already a problem, and a very serious problem if you don’t have an easy way to provide economic stimulus.
Think about it. Suppose that you have a 2 percent inflation target, but you’ve cut interest rates close to zero and the inflation rate is 1 percent and falling. Then you’re already experiencing a cumulative process that will pull you deeper into the trap unless you get lucky.
How so? Actually, a couple of mechanisms. As inflation falls, real interest rates will rise, tending to depress the economy further. Also, debtors will find their debt growing because inflation isn’t as high as they expected, so that you have a debt-deflation cycle even if you don’t yet have deflation.
So Europe’s low and falling inflation isn’t a problem because it might turn into deflation — it’s a problem because of what it’s doing right now.
Oh, and a word on Sweden, where the central bank is indeed on the edge of deflation but say never mind because output is currently growing. Um, does the bank have an inflation target or doesn’t it? Yes, the economy can expand some of the time even if inflation is below target — but because the inflation rate is low, there isn’t as much room to respond to adverse shocks. So missing the target is a policy failure whatever the current output indicators.
Anyway, back to Europe: it’s not that something could go wrong, but the fact that it already has gone wrong.
And remember, above all, that the risks aren’t symmetric. Controlling inflation may be painful, but we do know how to do it. Exiting deflation or lowflation is really, really hard, which is why you never want to go there.
Jonathan Chait has an extended discussion and takedown of the Fox News All-Star Panel reaction to the National Climate Assessment, which I won’t try to summarize. But I do want to delve a bit more into one point. Chait quotes Charles Krauthammer dismissing the scientific consensus because
99 percent of physicists were convinced that space and time were fixed until Einstein working in a patent office wrote a paper in which he showed that they are not.
As Chait notes, this logic would lead you to dismiss all science — hey, maybe tomorrow someone will write a paper showing that the germ theory of disease is all wrong, so why bother with sterilized instruments in the hospital? But there’s something else wrong here — the complete misunderstanding of what Einstein did.
Yes, Einstein showed that space and time were relative concepts. But did he show that everything physicists had been doing up to that point was all wrong? Of course not — classical physics was an incredibly useful and successful field, and almost none of what it said had to change in light of relativity. True, Einstein showed that it was a special case — but one that applied almost perfectly at the speeds and accelerations we encounter in normal conditions.
So if we had an Einstein equivalent in climate science, he or she would find that existing models were right in 99.9% of what they assert, even though under extreme conditions they might be misleading.
Or maybe the simpler way to put it is, Dr. Krauthammer, you’re no Einstein.