American Consequences - January 2019

because if officials tried to get it close to zero, any mistake could result in deflation, which “might endanger the financial system and precipitate an economic contraction.” As Federal Reserve Chair from 2006 to 2014, Bernanke formally introduced inflation targeting in the United States in 2012, setting the annual rate at 2%, where it has remained ever since. But reducing uncertainty about prices by keeping the inflation target at 2% or more might actually increase a sense of uncertainty about real things like home values or investments. While it is right to worry about massive deflation, the historical relationship between deflation and recession is not all that strong. In a 2004 paper, the economists Andrew Atkeson and Patrick Kehoe concluded that most of the evidence of a relationship comes from just one case: the Great Depression of the 1930s. The news media’s tendency to fixate on new records serves their short-term interest in creating the impression that something really important has happened that justifies readers’ or viewers’ attention. But sometimes there is a bit of fakery in the record, especially when the record is described in nominal terms and we have steady inflation. As a result, the emphasis on records can encourage a disrespect for history and nurture a sort of disoriented feeling that we live in exceptionally uncertain times. For example, sometimes the stock market has set a new record, whether up or down, which is nothing more than the result of inflation. On February 5 of last year, the Dow Jones Industrial Average fell 4.6%, far less than the

record 22.6% decline on October 19, 1987. But media reports chose to point out that the February 5 drop was the biggest-ever one- day decline in absolute terms (1,175 points on the DJIA). Presenting a drop this way is misleading and might encourage some panic selling. The amplitude of stock market point swings invariably grows with general inflation in all prices. economy, as if a high level of GDP growth or a bull market are indicators of the health of something called the economy. GDP growth numbers are conventionally reported in real (inflation-adjusted) terms, and unemployment numbers are unit-free. But reporting of just about every other major economic indicator is generally not corrected for inflation. An inflation target of a few percentage points may seem to promote stability, and perhaps it really does. But we need to consider the possibility that it may lead to subtle misperceptions that have the opposite effect on the stability of our judgments. Robert J. Shiller , a 2013 Nobel laureate in economics, is a Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of U.S. house prices. He is the author of Irrational Exuberance , the third edition of which was published in January 2015, and, most recently, Phishing for Phools: The Economics of Manipulation and Deception , co-authored with George Akerlof. The money illusion even bleeds into impressions of the “strength” of the

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