Why not “change the label”

Tim Harford wastes time in – “Why inflation remains best way to avoid stagnation” . That “wine” has remained “unsold” on the shelves for more than 4 years. He writes:

People who were not born when the financial crisis began are now old enough to read about it. We have been able to distract ourselves with two Olympics, two World Cups and two US presidential elections. Yet no matter how stale our economic troubles feel, they manage to linger.

Given the severity of the crisis and the inadequacy of the policy response, it should be no surprise that recovery has been slow and anaemic: that is what economic history always suggested. Yet some economists are growing disheartened. The talk is of “secular stagnation” – a phrase which could mean two things, neither of them good.

…If secular stagnation is a real risk, we need policies to address it. One approach is to try to change the forces of supply and demand to boost the demand for cash to invest, while stemming the supply of savings, and reducing the bias towards super-safe assets.

There is a simple alternative, albeit one that carries risks. Central bank targets for inflation should be raised to 4 per cent. A credible higher inflation target would provide immediate stimulus (who wants to squirrel away money that is eroding at 4 per cent a year?) and would give central banks more leeway to cut real rates in future. If equilibrium real interest rates are zero, that might not matter when central banks can produce real rates of minus 4 per cent.

If all that makes you feel queasy, it should. As Prof Summers argues, unpleasant things have a tendency to happen when real interest rates are very low. Bubbles inflate, Ponzi schemes prosper and investors are reckless in their scrabble for yield.

One thing that need not worry anyone, though, is the prospect of an inflation target of 4 per cent. It will not happen.

What practical policy options remain? That is easy to see. We must cross our fingers and hope that Prof Summers is mistaken.

So why write about something you know will not happen?

Instead of “crossing your fingers and hope it doesn´t happen”, try a marketing ploy: Keep the wine and change the label. Try, for example, selling a spending level target labelled wine. It´s not “more inflation” people want. They want higher nominal income (spending).