Stiglitz Performs Inflation Raindance

Here is yet another sign that the socialists are increasingly confident about winning the European elections in May. From EU Observer:

The European Central Bank (ECB) should scrap its target to keep price inflation at 2 percent, Nobel prize winning economist Joseph Stiglitz said on Thursday (6 March). Speaking at an event organised by the European Parliament’s Socialist group, Stiglitz said central banks should look to strike a balance between controlling inflation and supporting job creation. “The ECB’s mandate needs to be changed,” he noted.

They spend money on inviting Stiglitz, who probably cost them north of $25,000 including travel, accommodations and honorarium. He is not only a well-known economist but also a fervent supporter of the Venezuelan version of socialism that has sent a formerly prosperous nation into an economic tailspin of runaway inflation and reckless statism.

This alone is probably reason enough for Europe’s parliamentary socialists to invite him. But more important is Stiglitz’s recent recommendation that Europe should continue to grow government. Here is where he really appeals to an emboldened left, determined to restore the welfare-state spending cuts during years of austerity.

When Stiglitz tops off his praise of government with a jab or two at the ECB, there is no stopping the socialists from giving him all the money he wants in order to come over and talk to them. The EU Observer again:

Stiglitz is a long-standing critic of inflation-targeting by central banks, believing instead that monetary policy should be used to stimulate employment.

That is what both the ECB and the Federal Reserve have been doing. The Fed has been printing $85 billion per month for several years now to fund the U.S. government’s deficit. ECB still stands by its pledge to buy any amount of bonds from any “troubled” euro-zone country, any time. Both these monetary policy strategies aim precisely at what Stiglitz is after, namely rock-bottom interest rates to stimulate private-sector activity.

In other words, Stiglitz is breaking through open doors. But as the EU Observer reports continues, so does Stiglitz. Through the open doors, that is:

Stiglitz’s remarks came as ECB president Mario Draghi kept the bank’s headline rates, including its main interest rate, at the record low of 0.25 percent, following a meeting of the bank’s governing council the same day. Draghi said the bank decided to leave the rate unchanged because of continued signs the eurozone economy is slowly recovering. “We saw our baseline by and large confirmed. There is a continuation of a modest recovery,” he told reporters in Frankfurt.

Yes, the recovery

It is unlikely that Stiglitz is really flying all the way from New York to Strasbourg to talk propose a monetary policy that is already in place. More likely, he is on a crusade to pave the way for higher inflation. A faster rise in prices is a wet dream for many statists, as it would inflate tax revenues and close budget gaps without either a need for spending cuts or a pesky fight with those who think taxes should go down, not up.

If this is what Stiglitz is really after, then as the EU Observer reports he has a staunch ally in EU Commissioner Olli Rehn – also known as the Grand Master of European Austerity:

New forecasts published by ECB staff estimate that inflation will stay at 1.0 percent this year, 1.3 percent in 2015, and 1.5 percent in 2016 – comfortably below its 2 percent target all the way through the projection. Last month, the bloc’s economic affairs commissioner, Olli Rehn, warned that low inflation is making price cuts in the peripheral economies less effective at boosting their competitiveness, making it harder to geographically rebalance the economy.

The EU Observer notes that the ECB is not allowed to let inflation rise past two percent…

However, the ECB’s main mandate under the EU treaty is tightly restricted to the maintenance of ‘price stability’ across the eurozone at a rate of around 2 percent per year.

…which explains what Stiglitz really flew over to Europe for: to give the socialists some fuel for pursuing a constitutional change to the ECB mandate.

It is regrettable that anyone is arguing for inflation. It is even more regrettable when that anyone is a reputable economist. And the whole matter gets a bit scary when you consider that the Inflation Raindancer from Columbia University may just have spoken to the people who will actually govern Europe over the next five years. Where is the concern for the standard of living of hundreds of millions of Europeans? Where is the concern for real wages, the value of savings, the predictability of contracts?

So long as inflation stays within 3-5 percent the economy is not going to run away (although five percent is beginning to smell macroeconomic mismanagement). The problem is that politicians who think they can cause inflation won’t know how to rein it in once they have created it.

None of this is apparently of any consequence to Stiglitz. But before he flies over to Europe again, perhaps someone should ask him if he thinks inflation in his beloved Venezuela – reported to be up to 35 percent now – is something for Europe to strive for.