So now Krugman says inflation targeting is the first-best solution to our economic problems. This is consistent with everything he wrote about Japan over a decade ago, and also consistent with a wide majority of non-crazy macro economists across the political spectrum.
So why on earth has he not said this a lot more starting a long time ago? (Note that I've asked this question several times before--here are a couple early examples: 1, 2) Krugman blames stupid economics. He just sees misguided conventional wisdom against inflation as too much to overcome.
Huh? Krugman--the man who boldly, clearly, and effectively challenges establishment views on EVERYTHING--gets weak knees when it comes to inflation targeting?
I see and get that inflation is a four-letter word among some crazy economists and much of the media. But that's exactly why Krugman should be writing about it. Bernanke must have sympathy for this this view. After all, it is what he spent much of his academic career advocating. Conservative economists Ken Rogoff and perhaps Greg Mankiw would even back him, and many others on both sides of the political fence.
I'm annoyed because I think Krugman is in a unique position to raise the level of debate. If he wrote about inflation targeting a lot, others would have to agree with him or not. And those who didn't eventually would have had to back up their positions. If Krugman started boldly with this line of attack a year ago I think there's a chance we'd be in a better place right now.
Incidentally, my guess for what's restraining Bernanke, Geithner and others from more talk of inflation targeting is diplomacy with China, who would probably be unhappy if we were to target 3-5 percent inflation rather than 2 percent for the next five years or so.
Update: Krugman and others have said that the key challenge is technical feasibility, not political feasibility. They say the problem is developing credible expectations for future inflation. (See comments.)
I don't get that argument. I think that if Bernanke laid out a clear 5-year plan for inflation, first increasing and then decreasing target inflation, markets would respond big time. He could further enforce those expectations through purchases of and sales of treasury bills, especially the inflation-indexed variety.
One argument against this is that it takes too many purchases from the Fed to influence long-term rates enough. But I think those arguments were based on traditional Treasury bills, not inflation indexed bonds. The inflation indexed bond market is a lot thinner and would be easier to influence. And despite possible claims of "cheap talk", I think a clear announcement by the Fed of targets going forward would further increase the Fed's leverage.
Risky? Maybe. But I think its potential benefits far outweigh its expected costs. And unlike the other "second best" alternatives, it doesn't need to pass Congress.