Friday, 15 December 2017

Richard Murphy’s weak grasp of economics.

He advocates a rise in inflation to above the 2% target because that would help debtors*. As he puts it in reference to increased inflation: “….the country could do with some to assist those in debt manage the burdens they face.”

Well now there’s a teensy problem there, namely that creditors and savers are not complete idiots: that is, once they see that an increased percentage of what they save and lend will be eaten away by inflation, they’ll be reluctant to save and lend. Hey presto: interest rates are forced up, which is not exactly of “assistance” to “those in debt”. 

Indeed, that’s exactly what seems to have happened for several years after the 1970s inflationary episode: that is, it took several years of low inflation to convince savers and creditors that inflation had in fact come down PERMANENTLY. Thus debtors were faced with several years of elevated interest rates.

Next, Murphy claims (2nd half of the para in which the above “assistance” point is made) that stagnant incomes are deplorable, and a way out of that is extra demand and inflation.

Well if inflation above the 2% target really does give us extra real GDP, why did no one think of that before? Put another way, the whole point of the 2% target is that economists think that while inflation above that rate clearly gives a faster rate of growth in GDP in nominal terms (i.e. in terms of £s, $s, etc), that is one big illusion. I.e. the consensus in economics is that once inflation rises much above the 2% target, the costs of inflation exceed the benefits. Or put another way, the consensus is that GDP growth is maximised when inflation is around the 2% level.

Of course that consensus might be wrong. It could be that GDP growth is actually maximised when inflation is 4%, 6% or some other figure. But those who want to make that claim need to set out some very detailed reasons to back that claim. 


* Article title: “On interest rates, growth and the need for the most massive rethink.”


  1. I don't find any detailed reasons for the consensus to be the 2%. Why is that? When did the 2% emerge as a magic number that cannot be discussed? I'm not economist, and in my view (perhaps simplistic) the common sense suggest a target of 0%.

    1. There are actually some who advocate 0%, and there are others arguing for 3 or 4% at the moment. One argument for a small positive rate is that it does not involve big costs in the form of firms having to constantly update their price lists, but at the same time, it acts as a tax on people with loads of money who can't think of anything to do with it other than stuff it in a bank.


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