Boosting inflation isn’t the right policy, but it may just be the correct one.

There is an excellent article in this week’s New Yorker magazine by James Surowiecki in which he explains, with the help of Yale Professor Robert Shiller (co-author of Animal Spirits), the costs of inflation but also the need for prices to rise in the US economy.

Surowiecki suggests that if the Fed were to raise its inflationary target from around 2% and commit to higher prices it might change people’s behaviour especially as debt burdens would be reduced and money would lose value in the future. But central bankers are more concerned with stable prices than with lost jobs and they tend to look after the interests of lenders, for whom inflation is generally bad news.

Inflation helps debtors and spenders at the expense of creditors and savers and it seems to reward those who have conducted themselves irresponsibly, and to penalise those who were more cautious. But, according to Surowiecki “the economy doesn’t exist, in the end, to reward virtue and punish vice. It exists to maximize our well-being, and, currently, doing that may require helping the undeserving and irresponsible, if only because there are so many of them.”

Click here for the full article.