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Article Artículo

That Two Percent Inflation Target and Silly Things Economists Say

I see Paul Krugman has picked up on my friend Jared Bernstein's post asking where the Fed's 2.0 percent inflation target came from. He argues that it is a pretty much arbitrary compromise between the idea that the target should be zero (the dollar keeps its value constant forever) and the idea that we need some inflation to keep the economy operating smoothly and avoid the zero lower bound for interest rates. This is far too generous.

I recall reading the literature justifying the 2.0 percent inflation target last year when I was researching my book with Jared, Getting Back to Full Employment. I was shocked to see how weak the argument was. Not only is there not much justification for 2.0 percent, there is not much justification for any target. After all, most central banks have not had any explicit inflation target for most of their existence. These countries didn't get hyperinflation and their economies did fine. There isn't much evidence that an inflation target will prevent bad things from happening.

While as a rule stable prices are better than unstable prices, economists have been largely untroubled by unstable prices in other areas. Look at the real value of the dollar over the last three decades. Rises and falls of 20 percent over a two or three year period are not uncommon. This means that the price of large chunks of our economy fluctuate in large and unpredictable ways, apparently without negative effect, or at least not enough of a negative effect to concern the bulk of the economics profession. So if these big changes in relative prices of imports and exports  don't have much consequence, what's the big deal if inflation is 2.5 percent rather than the 2.0 percent we all are supposed to treasure? (If the dollar falls by 20 percent, as a first approximation, exporters are getting 20 percent more for their products, measured in dollars. They get the same amount of foreign currency, but it buys 20 percent more dollars.)

The other part of the 2.0 percent story that I really loved is that some economists argued for it by saying that it could be reconciled with the dream of zero inflation because of errors in measurement. Krugman briefly refers to this view, but doesn't explain the meaning of this claim. The argument here is that our price indices overstate the true rate of inflation and that the overstatement is on the order of 2.0 percentage points annually.

If you just read that and your hair didn't stand on end, read it again. Many of us have been writing on the stagnation of wages and income over the last three decades. (For example, Thomas Edsall had a good piece in the NYT earlier this week, although he gets the dates wrong.) If we have been overstating the true rate of inflation by 2.0 percentage points annually then wages and income have actually been rising very rapidly. Instead of near zero growth since 1980, real wages have risen by more than 96 percent. (Take 1.02 to the 34th power.)

Dean Baker / September 26, 2014

Article Artículo

Brazil

Latin America and the Caribbean

World

Police Violence and Forced Evictions in São Paulo: An Interview with Benedito “Dito” Barbosa

Brazil has a housing shortage of around 5.8 million units, while there are around 6 million vacant units in empty houses and buildings located mainly in the downtown areas of its large cities. Urban social movements have historically tried to resolve this problem by coordinating squatters’ occupations of empty buildings, and they have successfully pressured the government to legalize these activities, resulting in some of the world’s most progressive property rights. Articles 182 and 183 of Brazil’s 1988 Constitution guarantee that the social function of property overrides the profit motive.  After a decade of protests and advocacy, in 2001, these amendments were further defined through the complimentary Statute of the City legislation. According to Brazilian law, buildings that do not fulfill their “social function,” that are left vacant and owing property taxes can, after a certain period of time, be taken over by people who don’t own any property of their own and converted to low income housing at the government’s expense. Unfortunately this law, like many other progressive laws of its kind in Brazil, is ignored by many local governments.

According to Evaniza Rodriques, from the União Nacional de Moradia Popular (National People’s Housing Union, or UNMP) there are around 35,000 people squatting in 60 abandoned buildings in São Paulo’s downtown region, trying to pressure the government for ownership.  Currently, 30 of these buildings are undergoing legal processes to be returned to their former owners. As the violent eviction of hundreds of people from a building on São João Avenue in downtown São Paulo last week shows, military police violence against squatters groups is increasing.

Benedito “Dito” Barbosa is a lawyer and founding member of the Central de Movimentos Populares (People’s Movements Central, or CMP).  Earlier this year, while trying to communicate with his clients during a technically-unconstitutional mass forced eviction in downtown São Paulo, Dito, a man of humble origins in his 50s, was beaten, choked and dragged down the sidewalk by Sâo Paulo military police.  It was not an isolated incident. There have been seven cases of lawyers beaten by police while trying to perform their duties during mass evictions in São Paulo this year.

CEPR and Brian Mier (Guest post) / September 25, 2014

Article Artículo

If Children Are Being Crowded Out, It is Being Done by Rich People

There is a well-funded effort (think Fix the Debt and the Peter G. Peterson Foundation) to distract people from the upward redistribution to the rich through claims that the problem is really the elderly living high on Social Security and Medicare. Catherine Rampell contributed to this effort with a column warning the spending on the elderly threatens to crowd out spending on our children. Just about every claim in the column is either seriously misleading or outright wrong.

To begin with we get these two paragraphs:

"Spending on kids as a share of the budget is projected to decline dramatically in the coming decade — to just 7.8 percent by 2024. If you exclude health spending, spending on children falls in raw, inflation-adjusted dollars, too, not just as a percentage of total spending.

"'Kids’ share of federal spending isn’t tumbling because children are suddenly becoming a smaller fraction of the population. Nor is this happening because we live in an “age of austerity”; the sizes of both the economy and tax revenue are at all-time highs, after accounting for inflation, and are expected to keep growing. Federal spending overall is likewise projected to swell in coming years."

Okay, why would we exclude spending on health care for kids, unless we are trying to deceive readers? After all, the piece doesn't exclude spending on health care when it discusses spending on the elderly. Also, we know that the main avenue for spending on kids is education. This is done primarily at the state and local level. Rampell acknowledges this point later in the piece, but then why the histrionics over the age composition of federal spending?

Also saying that we are not in an age of austerity is bizarre. Tax revenues as a share of GDP have fallen to levels not seen since the 1950s. Yes, the economy is growing and the budget is growing along with it, but what matters are the shares of the GDP going to tax revenue.

Then we are told:

"Entitlements that benefit older Americans increasingly dominate the U.S. budget, and not just because the population of older people is increasing. We’re spending way more per elderly person, too. Per capita federal outlays on children rose by about $4,600 in the last half-century (from $270 in 1960 to $4,894 in 2011, after adjusting for inflation); during the same period, per capita outlays on the elderly rose by about $24,000 (from $4,000 to $27,975).

"The chasm between per capita funding received by seniors — even after taking into account all the taxes they have paid — and children looks likely to widen substantially, given the way Social Security, Medicare and child program benefits are structured."

The numbers for spending on seniors might sound dramatic, but it is important to remember that they paid for their Social Security benefits in full. In fact, according to the Urban Institute, which provided much of the basis for this column, the typical senior will have paid somewhat more in taxes to Social Security over their working lifetime than what they can expect to receive back in benefits. Complaining about what seniors get paid out without noting what they paid in would be like complaining about the interest payments that rich people get on their government bonds without noting that they paid for their bonds.

Dean Baker / September 23, 2014