4/15/02
“Zero Inflation
May Not Be All It’s Cracked Up to Be.”
By Michael
Meeropol
The Federal
Reserve would try to lower inflation rates down to zero in order to spur
investment from a drop in personal income taxes, raise productivity: each 1%
point decline in the inflation rate is met by an increase in productivity by 3%
point, lower interest rates, and ease other costs. The last point being
that contracts built on the expectation of high or low inflation would be easier
to negotiate.
The author is
neither for or against zero inflationary policies, he is simply stating the
fallacies about the benefits of these inflationary policies as well as stating
that some of these benefits might exist if the government can convince
businesses that it will stick with these policies.
Many economists
believe that the economic squeeze needed to thwart price increases would lower
investment and cause irreparable damage to the economy. The long-term
benefits of price stability might not even exist because it has never
successfully been done before. Some forecast that the Fed’s
anti-inflation campaign could cause a recession and a rise in unemployment due
to the fact that a dramatic decrease in inflation will cause previously
developed contracts between workers and employers to benefit workers by giving
them higher wages with no price increases. Therefore, in order to cut
production costs, producers will lay-off workers. The Fed says the gradual
decrease in inflation will occur over five years but critics are quick to point
out that the economy could lose $160 billion in capital investment during a
five-year campaign to reduce inflation.
A reduction in
inflation will also inevitably cause the drop in wages for some markets of
goods. A visible wage drop could impair efficiency of that particular
market and hurt the economy as a whole. A little inflation is needed to
make the economy run smoothly. Studies show that workers are happier if
their wages increase along with the rate of inflation, rather than decrease
along with a decrease in inflation, essentially leaving their standards of
living unchanged.