Hold the presses: Some mainstream economists are questioning the Fed's inflation goal of 2%

You saw it here first. 

Some mainstream economists, and I emphasize the fact that it is only a small percentage, are now questioning the Fed and other banks’ target of keeping inflation at or below 2%. Why? Because of the “distributional effect” if my reading of the latest from Adam Tooze is correct. 

Tooze points out that while the wage/price spiral which may have been a major factor in previous periods of high inflation, the weakness of labor today makes that conflict irrelevant to inflation But important as that point is, the more important question is why in 2023 we are still talking about a situation half a century ago. 

What we most urgently need is not so much a revival of conflict theories (basically labor versus capital) of inflation that might have been appropriate to the 1970s and 1980s. What we need is an adequate model of inflation and policy-making under conditions prevailing in 2023, of extreme asymmetry of bargaining power, deadlocked democratic politics and a consequent lack of social contestation, even when real wages are taking a painful hit. Wherever we stand on the politics of organized labor, it is incumbent on us to at least register the novelty of our situation, today. 

 And from Meyerson On Tap: “The motivation for operating macro policy with low inflation targets is to establish price stability as the main goal of monetary policy ….. The operating assumption is that other macroeconomic policy goals—including economic growth, maximum employment, and overall macro stability—can be most effectively achieved when price stability is recognized as the first priority.” 

But, as Robert Pollin and Hanae Bouazza point out, “Research shows that economies perform better at modestly higher inflation rates.” These researchers amassed data from 1960 to 2021, for all 130 countries reported by the World Bank with populations over four million people. This data shows that average real GDP growth rates for countries experiencing less that 2.5 % inflation was significantly lower than that for countries experiencing 2.5-5% inflation (3.2% growth vs 4.1%). The gap was even greater between those with 2.5% or less inflation and those who had inflation rates between 5% and 10% (3.2% growth vs 4.7%) 

 When Pollin and Bouazza narrowed their sample to the 35 wealthiest countries, similar gaps were found and the same was true when they focused down to the US alone. So much for the myth that low inflation rates promote economic growth. 

 Now one has to assume that the people running the Fed have access to the same data, so the question is, why do the Fed and other central banks keep doubling down on the goal of keeping inflation under 2%? The answer, and I’m sure you already guessed it, can be found in who the central banks represent and who benefits from lower inflation rates. 

Creditors and those with lots of cash (liquidity). Could it be that one of the drivers of runaway inequality is very low inflation rates? Could it be that one of the drivers of financialization is very low rates of inflation? Could it be that the debt crises in countries of the Global South are related to low inflation rates in the US and Western Europe? And will the higher interest rates in order to restore low inflation result in a second blow to the countries of the Global South? 

If that’s not an indictment of the whole capitalist system, I don’t know what is?