Comments on: Lifting up the inflation debate

By: Top Blogging for the Weekend « Left Outside

Top Blogging for the Weekend « Left Outside — Sat, 19 Dec 2009 13:05:24 +0000

[...] Giles Wilkes tries to inject some sense into our inflation debate. [...]

By: Why I don’t think promising a VAT hike gets us out of the liquidity trap « Freethinking Economist

Fri, 18 Dec 2009 10:11:20 +0000

[...] Aggregate Demand, Aggregate Supply, Economics, VAT. Leave a Comment In response to Tim’s very interesting idea that we could break out of a deflation-depression scenario by promising inflation through the VAT [...]

By: freethinkingeconomist

freethinkingeconomist — Fri, 18 Dec 2009 07:57:51 +0000

Finally, following Wadwhani’s letter to the Times, you cannot predict that the £ would fall. remember 1980? If it makes the fiscal situatoin less risky, it would rise.

And as for higher wages – if companies face simultanous reduced real demand because of the income effect of the VAT rise, and employees demanding higher wages, would not the result be higher unemployment as well? Again, it seems very like a supply hit that is driving inflation up.

By: freethinkingeconomist

freethinkingeconomist — Fri, 18 Dec 2009 06:49:44 +0000

To enlarge further, what I have found attractive about your idea of higher inflation is the effect on the real debt burdens of private sector people.

But I would not see the inflation generated by a VAT rise as ‘useful’ unless it helped increase the ability of private incomes to repay debts – reducing those debts in real terms by reducing the number of hours’ work etc needed to pay them down. A VAT rise would not help there – by sheer income effect, it would only help for the govt, shifting income away from the private sector which would find those debts more difficult to pay off.

By: freethinkingeconomist

freethinkingeconomist — Fri, 18 Dec 2009 06:42:20 +0000

And I have always found real difficulties with this idea, because I think the point of the inflation raising is to raise aggregate demand, not damage aggregate supply, and measures that withdraw demand from the economy, such as sconsumption taxes, are unlikely to achieve the ultimate aim. A promise to raise VAT in the future may bring forward some future consumption, but it ultimately taxes it.

In the same way, a government could produce higher inflation by destroying productive capacity in the economy, forcing shopworkers to work 20 hours a week maximum, say. I am not sure it would have the effects that we wanted.

I think the government can ‘guarantee’ inflation only by having power over both money printing and its use. Personally, I agree with Scott Sumner that the real point is raising NGDP, not just P, and I can’t quite see how reducing its deficit through consumption taxes raises NGDP . ..

By: tim leunig

tim leunig — Fri, 18 Dec 2009 00:05:40 +0000

a government can guarantee inflation by promising to raise VAT or some other sales tax or excise duty if inflation is too low. By promising to do so, inflation is credible, and becomes self-reinforcing (the £ falls, people start asking for higher pay, etc). I have always thought that this was a good way to prevent deflation, if we that looks like becoming entrenched.