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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