@newspaperarticle {67851,
	title = {The I-Word},
	year = {2011},
	month = {Aug 28, 2011},
	publisher = {Boston Globe},
	abstract = {Like corruption, crime, and asbestos, {\textquotedblleft}inflation{\textquotedblright} is a word that many 
Americans imagine in all-red capital letters, flashing across TV screens
 amid warnings of crisis. For anyone who remembers the gloomy, scary 
1970s, when the inflation rate in the United States reached double 
digits, the word is shorthand for an economy that has spiraled out of 
control, the dollar losing value and prices climbing feverishly. 
{\textquotedblleft}Inflation is as violent as a mugger, as frightening as an armed robber,
 and as deadly as a hit man,{\textquotedblright} said Ronald Reagan in 1978, as nervous 
citizens imagined the day when they{\textquoteright}d have to push a wheelbarrow full of
 cash to the grocery store in order to buy a loaf of bread.That
 particular nightmare never came to pass, thanks to drastic measures 
taken by the Federal Reserve. For the better part of the past 30 years, 
the dollar has stayed stable, reassuring American families and the 
nation{\textquoteright}s trading partners, with the central bank standing guard over the
 economy and doing everything necessary to keep inflation low.You
 might say that Kenneth Rogoff has been one of the guards. As a research
 economist at the Federal Reserve during the first half of the 1980s, he
 helped ensure that the word {\textquotedblleft}inflation{\textquotedblright} would never again flash across 
American TV screens. His reputation as a conservative-minded inflation 
hawk followed him from the Fed to the International Monetary Fund to his
 current position in the economics department at Harvard.But then
 came the financial crisis of 2008, and the ensuing slump. And as the 
economy has continued to stagnate, Rogoff, 58, has become the 
flag-bearer for an unlikely position: that as we struggle to help the 
economy find its way out of the darkness, inflation could be the answer.
 It{\textquoteright}s time, Rogoff says, to put Reagan{\textquoteright}s {\textquotedblleft}hit man{\textquotedblright} to work for the good 
guys.Over the past several years, Rogoff has emerged as one of 
the world{\textquoteright}s leading experts on the history of financial crises and how 
they work, a unique perch that has given him a long view on what is 
happening to our economy and what lies ahead. In the bestselling 2009 
book {\textquotedblleft}This Time Is Different,{\textquoteright}{\textquoteright} he and Carmen Reinhart, currently a 
senior fellow at the Peterson Institute for International Economics , 
laid out a detailed analysis of financial crises that have taken place 
around the world going back 800 years, and they put forth an alarming 
idea about our current predicament. What we{\textquoteright}re going through, they 
argued{\textemdash}what we{\textquoteright}ve been going through ever since the subprime mortgage 
crisis{\textemdash}has not been just a typical recession, as our leaders have been
 treating it, but something much worse, something that demands 
altogether different tools to stop it.One
 of these tools, Rogoff believes, is a temporary burst of inflation. And
 for the past several weeks, as the stock market has convulsed and 
debate raged over the Fed{\textquoteright}s next move, he has been making his case 
publicly, through syndicated opinion columns, high-profile TV 
appearances, and numerous interviews. It{\textquoteright}s an argument that Rogoff 
himself admits is {\textquotedblleft}radical,{\textquotedblright} and one he says he{\textquoteright}d rather not be making. 
But as he sees it, what{\textquoteright}s holding the country back from recovery is not 
just a lack of consumer confidence or suppressed demand, as in a normal 
recession, but an immense overhang of debt: thanks to the collapse of 
the real-estate bubble, millions of American families owe so much to 
banks that they{\textquoteright}re focusing all their energy on paying down their debts 
instead of spending their money on new investments. There will be no 
recovery until the painful process of working through that debt is 
behind us, Rogoff argues, and an increase in the annual inflation rate, 
which has floated around 2 percent since the early 1990s,would make it 
easier for debtors to pay down what they owe.{\textquotedblleft}There{\textquoteright}s
 no penicillin for this,{\textquotedblright} he said in an interview. {\textquotedblleft}There{\textquoteright}s no quick 
getting better. What you{\textquoteright}re really talking about is taking the edge off 
the downturn and coming back to normal growth somewhat faster.{\textquotedblright}Rogoff{\textquoteright}s
 call to raise inflation has come under attack from several different 
directions. Some economists think it wouldn{\textquoteright}t do any good{\textemdash}that trying 
to raise inflation wouldn{\textquoteright}t create demand or spur growth the way Rogoff 
thinks{\textemdash}while others believe that, given that prices actually seem to 
be in danger of falling at the moment, the Fed couldn{\textquoteright}t make it happen 
if it wanted to. But perhaps the biggest problem for Rogoff is that, for
 most policymakers, elected and otherwise, the idea of courting 
inflation on purpose sounds downright crazy{\textemdash}not to mention politically
 disastrous.{\textquotedblleft}Going around the country saying, {\textquoteleft}We need more 
inflation{\textquoteright} is not going to be a big seller,{\textquotedblright} said Michael Mussa, a 
senior fellow at the Peterson Institute and a former adviser to Reagan. 
{\textquotedblleft}Inflation means that the costs of everybody{\textquoteright}s goods and services are 
going up {\textellipsis} And I believe it{\textquoteright}s a substantial symbol of mismanagement by 
the government and the central bank.{\textquotedblright}Rogoff, however, remains 
convinced that as the situation grows more desperate, our leaders will 
feel pressure to start considering their options with more open minds. 
{\textquotedblleft}As more and more people realize that we{\textquoteright}re not quickly going back to 
normal,{\textquotedblright} he said, {\textquotedblleft}they become more flexible.{\textquotedblright}Though Rogoff speaks with unflinching steadiness, hearing him explain how 
badly our leaders misdiagnosed the economy after the crash, one imagines
 a doctor banging his fists against the door of a surgery ward, trying 
to warn his colleagues that he has checked their patient{\textquoteright}s chart and 
realized they{\textquoteright}re about to make a huge mistake.The mistake we all 
made, as Rogoff sees it, was thinking this was going to be nothing more 
than a regular recession, the same kind of thing that has happened in 
the United States once or twice every decade for the past 150 years. 
These cyclical recessions come and go, and we have a pretty reliable 
playbook for dealing with them: usually, an increase in government 
spending and lower interest rates to encourage money to flow. Recessions
 tend to end after about a year, at which point unemployment starts to 
fall and normal growth resumes.Far
 less frequently, something more serious grips an economy: a financial 
crisis that breaks the pattern, and from which it is much more difficult
 to recover. Rogoff and Reinhart{\textquoteright}s book suggests that such contractions 
are characterized above all by severe, widespread debt, which leads to 
long periods of economic stagnation and uncertainty. Rogoff puts our 
current situation in that category, along with the Great Depression, and
 he fears that if we do not act quickly and creatively to dig ourselves 
out of it, we risk settling into a long-term slowdown along the lines of
 what Japan has been going through since the 1990s. Mistaking this 
crisis for a typical recession, he says, is like mistaking pneumonia for
 a stubborn cold. {\textquotedblleft}They{\textquoteright}re very, very different animals.{\textquotedblright}The 
animal we{\textquoteright}re wrestling with today, of course, was born of the vastly 
overheated real estate market that collapsed in 2007, temporarily 
paralyzing the global financial system and taking some powerful banks 
down with it. Today, its legacy is a towering mountain of consumer debt,
 government debt, and millions of underwater mortgages that are gumming 
up the economy and preventing it from coming back to life.{\textquotedblleft}It{\textquoteright}s 
very unlikely that all these debts are going to get repaid in full,{\textquotedblright} 
Rogoff said. Banks have loans on their books that people simply don{\textquoteright}t 
have{\textemdash}won{\textquoteright}t have{\textemdash}the money to pay off, and expecting it to happen 
means we{\textquoteright}ll just stay frozen in place, waiting. What needs to happen, 
Rogoff says, is {\textquotedblleft}some transfer from creditors to debtors.{\textquotedblright} The ideal way
 for that to happen, he says, would be through loan renegotiation, 
whereby banks would forgive some homebuyers and strike repayment deals 
with others. But that sort of piecemeal renegotiation has proved very 
difficult to carry out.A
 more viable way to start fixing the nation{\textquoteright}s balance sheets, Rogoff 
argues, is by inducing a temporary bout of inflation. If the Federal 
Reserve raises its target inflation rate by several percentage points{\textemdash}up from around 2 percent, where it{\textquoteright}s been for the past decade, to 
somewhere in the neighborhood of 4 to 6 percent{\textemdash}and injects new money 
into the economy until it gets there, then debtors will get some relief 
and the wheels of the economy will once again start to turn.Rogoff
 first laid out the argument for embracing inflation in one of his 
columns in December of 2008{\textemdash}a move that came as such a surprise to 
people who knew his reputation that he got letters from central bankers 
who were sure they{\textquoteright}d misunderstood him. Rogoff had worked at the Fed 
under none other than Paul Volcker, whose mandate as Fed chairman was to
 drive inflation down at any cost. Under Volcker{\textquoteright}s watch, inflation fell
 from 13.3 percent in December of 1979 to just 3.8 percent four years 
later. And though Rogoff at the time was just starting out as an 
economist{\textemdash}indeed, he was still transitioning from his first career as a
 professional chess player{\textemdash}he soon became an intellectual force in the
 movement to make central banks the economy{\textquoteright}s first defense against 
inflation. In 1985, he published what would become one of his most 
widely cited academic papers in the Quarterly Journal of Economics, 
arguing that healthy economies depended on central banks being reliably 
committed to holding inflation down in all but the most extreme 
circumstances.Rogoff says he hasn{\textquoteright}t changed his mind on how 
central banks should behave, and still thinks our fears of runaway 
inflation are well-founded. He just thinks that right now, it{\textquoteright}s a risk 
worth taking. {\textquotedblleft}There{\textquoteright}s certainly some benefit in a society having a 
very, very strong conviction about keeping low inflation,{\textquotedblright} Rogoff said. 
{\textquotedblleft}But I think right now it{\textquoteright}s not helpful. You can have a very strong 
conviction that you don{\textquoteright}t want to take medicines {\textellipsis} And I respect that, 
but there are times when there{\textquoteright}s really no choice.{\textquotedblright}Though 
Rogoff{\textquoteright}s idea about raising inflation has so far not gained much 
purchase in the economics profession - Mussa, for instance, called it {\textquotedblleft}a
 hare-brained crackpot scheme{\textquotedblright}{\textemdash} he is not alone in his thinking. 
Versions of the same call have been taken up by several prominent 
economists across the political spectrum, including Olivier Blanchard, 
the chief economist at the International Monetary Fund; Joshua Aizenman,
 co-editor of the Journal of International Money and Finance; Harvard{\textquoteright}s 
Greg Mankiw, a former adviser to George W. Bush; and Paul Krugman, the 
Nobel Prize-winning New York Times columnist.THOSE
 WHO disagree with Rogoff cite several key objections. One is that 
inflation can be hard to stop once it starts: if the Fed turned on the 
spigot, there{\textquoteright}s no guarantee they{\textquoteright}d be able to turn it off before 
inflation got out of hand. Another objection is that if the Fed does 
raise its inflation target, pumping more money into the system and 
allowing the dollar to lose some of its value, lenders here and abroad 
will lose faith in the currency and respond by raising interest rates, 
which would ultimately make it harder for Americans to borrow money. A 
third objection is practical: that even if the Fed tried to trigger 
inflation, it simply might not be able to. The problem with the economy 
right now, some critics say, is a lack of demand for workers and 
products, and blowing air into the money supply would not change that.{\textquotedblleft}This
 idea that there{\textquoteright}s some separate policy instrument called {\textquoteleft}creating 
inflation,{\textquoteright} I think, is a little problematic,{\textquotedblright} said Lawrence Summers, 
the former secretary of the Treasury and Harvard president who also 
served as the director of President Obama{\textquoteright}s National Economic Council. 
Increasing demand should be the primary goal, with inflation a possible 
byproduct, Summers said. {\textquotedblleft}I don{\textquoteright}t think the idea that you could simply 
get more inflation by saying you want more inflation is a promising 
one.{\textquotedblright}Rogoff is not swayed by these arguments. He emphasizes that 
the level of inflation he is calling for is very modest{\textemdash}and that 
there{\textquoteright}s no really no reason to think that the Fed would be incapable of 
inducing it or reining it in at will. As for damaging the central bank{\textquoteright}s
 credibility, Rogoff reiterates the extraordinary nature of the present 
circumstances. {\textquotedblleft}This is a very exceptional situation{\textemdash}a once in 
Halley{\textquoteright}s Comet kind of phenomenon,{\textquotedblright} he said. As he wrote in his column 
earlier this month, {\textquotedblleft}These are times when central banks need to spend 
some of the credibility that they accumulate in normal times.{\textquotedblright}Trying
 to persuade central bankers to go for that plan involves a different 
kind of problem: a political one. Inflation devalues the dollar and 
makes things more expensive, making it an easy political target. Earlier
 this month, as Wall Street and Washington waited to hear how the Fed 
would approach monetary policy going forward, Texas Governor Rick Perry 
more or less threatened Fed chairman Ben Bernanke with violence if he 
{\textquotedblleft}prints more money{\textquotedblright} before the next election. What he was talking about 
wasn{\textquoteright}t even inflation, but a policy called {\textquotedblleft}quantitative easing,{\textquotedblright} in 
which the Federal Reserve injects new money into the economy by buying 
billions of dollars worth of Treasury bonds from banks. The Fed has 
already tried this twice since 2008, and each time it has been 
controversial. While Rogoff{\textquoteright}s plan to raise the inflation rate target is
 conceptually different from quantitative easing, it would involve the 
same mechanism, and would push the same political buttons in an even 
more extreme way.Underlying
 that opposition is more than just patriotism: it{\textquoteright}s also a moral 
objection. 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{\textquoteright}t dispute 
that what he{\textquoteright}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{\textquoteright}s debt overhang 
is taken care of swiftly. Once that happens, and the economy starts to 
recover properly, we{\textquoteright}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.{\textquotedblleft}One way or another,{\textquotedblright} said Rogoff, {\textquotedblleft}we{\textquoteright}re going to be doing things we would not dream we would ever do before this is over.{\textquotedblright}},
	url = {http://articles.boston.com/2011-08-28/news/29938939_1_inflation-rate-financial-crisis-economy},
	author = {Rogoff, Kenneth S. and Neyfakh, Leon}
}
