Engle Joins Krugman Suggesting Higher Inflation for U.S.

New York University professor Robert Engle said policy makers should consider allowing slightly higher inflation as a way to spur the U.S. economy, joining fellow Nobel Prize winner Paul Krugman who says it could reduce unemployment.

“A little bit of inflation would do a whole lot of good for the U.S. economy, would certainly do a lot of good for the housing market,” Engle, who won the Nobel Prize in economics in 2003, said at the Bloomberg Washington Summit hosted by Bloomberg Link today. “If we had just a little bit of inflation and house prices went up, all the sudden they’d be above the mortgages.”

Krugman’s suggestion that the Federal Reserve tolerate inflation of 3 percent to 4 percent to boost the economy has been rejected by Fed Chairman Ben S. Bernanke, who said such a policy would be “reckless.”

The Bernanke-Krugman debate started with Krugman’s April 24 article in the New York Times Magazine, titled “Earth to Bernanke.” In it, Krugman, who won the Nobel Prize in 2008, argued that allowing a more rapid increase in consumer prices would align with Bernanke’s comment in 2000 that the Bank of Japan should pursue faster inflation to escape deflation.

While recognizing its potential cost, Engle said slightly higher inflation may be the easiest way to help the U.S. economy as other proposals meet resistance from polarized political parties.

Housing Remains Depressed

An improving labor market and mortgage rates near historic lows are helping to stabilize housing. At the same time, the industry remains depressed by foreclosures, which are hurting property values, and stricter lending rules.

The problem with faster inflation, which some governments have historically used alongside other measures to reduce large debt loans, is that it’s an “opaque tax” that policy makers tend to “overdo,” said Vincent Reinhart, chief U.S. economist at Morgan Stanley, who also spoke on the panel, along with Daniel Yergin, chairman of IHS Cambridge Energy Research Associates.

“It worked in the 50s and 60s because there was a little bit of inflation, it didn’t work in the 70s because if it’s too much then you wind up eroding the controls and making everything worse,” Reinhart, who was the Fed’s director of monetary affairs from 2001 to 2007, said at the summit.

Engle, a professor of management at NYU’s Stern School of Business, said higher inflation would also help Europe, where some countries such as Spain face recession while implementing austerity policies to stem a sovereign debt crisis.

“We as a global society may need to rethink our hatred of inflation,” he said. “Our notion of what these inflation targets are should be revised.”

The Fed in January set a 2 percent inflation goal, joining at least 12 other central banks in specifying a target and concluding years of debate that Bernanke advanced after becoming chairman in 2006.

To contact the reporters on this story: Sandrine Rastello in Washington at srastello@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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