Paul Krugman: Not Enough Inflation

Inflation is the wrong thing to worry about:

Not Enough Inflation, by Paul Krugman, Commentary, NY Times: Ever since
the financial crisis struck, and the Federal Reserve began “printing money”
in an attempt to contain the damage, there have been dire warnings about
inflation…

And now, sure enough, the Fed really is worried about inflation. You see,
it’s getting too low. …

It’s not hard to see where inflation fears were coming from. In its efforts
to prop up the economy, the Fed has bought more than $2 trillion of stuff —
private debts, housing agency debts, government bonds. It has paid for these
purchases by crediting funds to the reserves of private banks, which isn’t
exactly printing money, but is close enough for government work. Here comes
hyperinflation!

Or, actually, not. From the beginning, it … should have been obvious that
the financial crisis had plunged us into a “liquidity trap”… Economists
who had studied such traps … knew that some of the usual rules of
economics are in abeyance as long as the trap lasts. Budget deficits, for
example, don’t drive up interest rates; printing money isn’t inflationary;
slashing government spending has really destructive effects on incomes and
employment.

The usual suspects dismissed all this analysis; it was “liquidity claptrap,”
declared Alan Reynolds of the Cato Institute. But … the liquidity trappers
seem to have been right, after all. …

So all those inflation fears were wrong…, at this point, inflation — at
barely above 1 percent by the Fed’s favored measure — is dangerously low.
…

So why is inflation falling? The answer is the economy’s persistent
weakness, which keeps workers from bargaining for higher wages and forces
many businesses to cut prices. And if you think about it,,,, you realize
that this is a vicious circle, in which a weak economy leads to too-low
inflation, which perpetuates the economy’s weakness.

And this brings us to a broader point: the utter folly of not acting to
boost the economy, now.

Whenever anyone talks about the need for more stimulus, monetary and fiscal,
to reduce unemployment, the response from people who imagine themselves wise
is always that we should focus on the long run, not on short-run fixes. The
truth, however, is that … by letting short-run economic problems fester
we’re setting ourselves up for a long-run, perhaps permanent, pattern of
economic failure.

The point is that we are failing miserably in responding to our economic
challenge — and we will be paying for that failure for many years to come.