Regional President Speech

Speech Outline Zero Inflation W. Lee Hoskins City Club (at Fed) 4-17-90 I. Introduction and Welcome A. Pleasure to welcome members of the City Club to the Federal Reserve Bank of Cleveland 1. the City Club is called a "Citadel of Free Speech" 2. American Heritage dictionary describes citadel as "a fortress in a commanding position in or near a city" 3. later you will receive a tour of this fortress we call the Federal Reserve Bank of Cleveland, and I think you will agree that we can similarly call the Fed Cleveland a "Citadel of Money" 4. as you know, one of the Fed's responsibilities is to control the nation's supply of money a. recently, Harry Figgie, Jr. addressed the City Club on the costs of hyperinflation b. supplying the correct amount of money for the economy's growth and well-being has been an issue of longstanding debate 13, Why is there so much attention paid to a little inflation? 1. "A little inflation is like a little pregnancy -- it keeps growing." Leon Henderson (1895- ) 2. "Prices grow and grow, just like mushrooms." Valentina Shevchenko, soviet legislator, pondering recent inflation in USSR 3. Danger: once inflation becomes embedded in the economy, it is very difficult and very costly to remove 4. I fear that there is a complacency in the U.S. over current rate of inflation in U.S, today a. recent Washington Post article, "As far as economic analysis can tell us, a steady inflation rate of 4 or 5 percent does very little harm." Paul Krugman, WP, 3-25-90 b. not enough support in the House of Representatives to bring the Neal Resolution to the floor C. Today, I would like to discuss with you 1. The economic benefits of price stability 2. What some of the misconceptions surrounding the goal of price stability that result in stumbling blocks to obtain this goal 3. How would proposal recently introduced in the House of Representatives (H.J. Res. 409) help us realize the goal -2- n. Benefits of Price Stability A. Stabilizes the economy and society 1. U.S. experience since WWII reaffirms notion that inflation is a leading cause of recessions 2. High and variable inflation has long been associated with financial crises 3. Brazil's war against inflation a. in February, inflation was 2,700% per year b. new government imposed draconian measures against inflation 1. froze prices for 30 days 2. froze most bank deposits for 18 months 3. created a new currency 4. violators of the price freeze face a 2-4 year jail term c. some complain that the programs violate civil liberties; however, public opinion polls show 94% approval rate for jail sentences for "economic crimes" d. Antonio Kandir, secretary for economic policy, "Hyperinflation would probably wreck tne democratic system" B. Maximizes economic efficiency and output 1. Money functions efficiently 2. International studies show that higher inflation or higher uncertainty about inflation is associated with lower real growth 3. Avoids arbitrary redistribution of income a. especially evident to people on a fixed-income b, in Hungary, inflation has recently ranged from 20-60%; many pensioners no longer able to afford meat, instead must buy bones and pigs nails for stew C. Costs of unanticipated and variable inflation 1. Let us not forget the disruptions and misallocations of resources of the late 1970s and early 1980s 2. Inflation hampers productivity by adding risk to decisionmaking and retarding long-term investments 3. Inflation causes inefficiencies by causing people to invest scarce resources in activities that have the sole purpose of hedging -3- III. Why isn't there widespread support for this goal? Perceived costs of disinflation A. General belief — Costs of fully anticipated, stable rate of inflation are less than the costs of transition to stable prices 1. Transition costs are difficult to estimate a. temporary reduction in output b. costs would be reduced by the Neal Resolution 1. Resolution mandates the Fed to eliminate inflation over 5 years 2. maintain price stability thereafter c. many of the cost estimates are generated by large-scale econometric models, where 1. expectations are based on experience 2. expectations are altered only gradually over time 3. in such a model, inflation is eliminated only through a recession 2. Steady, fully anticipated inflation a. by interacting with the tax system, 4% inflation reduces the capital stock b. studies at the Federal Reserve Bank of Cleveland indicate that the present value of income loss associated with current rate of inflation is much higher than the output loss during the 1980 to 1982 recession periods B. Transition costs depend on the adjustment of decisionmakers 1. formulation of expectations 2. credibility of the Federal Reserve IV. Chasing Multiple Goals and Expectations A. People expect the Fed to keep one eye on inflation, one on economic frowth, one on unemployment, etc. . legislative precedence a. Employment Act of 1946 b. Humphrey-Hawkins 2. Fed's credibility suffers 3. expectations in this environment will not adjust very quickly B. Neal Resolution would help 1. make Congress and the Fed commit to the one variable that the central bank can control in the long run — price level 2. people would know that the Fed is serious C. In the final analysis 1. proof will be in the pudding — Fed's actions must give people something to believe in ’ 2. successful policy a. may not be a zero rate for CPI, PPI, IPD, etc. b. but correctly stated in the Neal Resolution — "inflation will deemed to be eliminated when the expected rate of change of the general level of prices ceases to oe a factor in individual and business decisionmaking" c. why no inflation? as the soviet legislator implied, the only way to prevent big mushrooms is to prevent little ones -4- V. Should We Let Anything Stand in the Way - Current Fiscal Policy A. We are all familiar with the argument that large federal budget deficits cause high interest rates, forcing the Fed to ease monetary policy in order to keep interest rates at levels consistent with full employment B. Some are concerned that a monetary policy that strives for zero inflation will reverse any progress that we have made over the past several years 1. Not clear that fiscal policy puts upward pressure on interest rates 2. Even if was clear that current fiscal policy putting upward pressure on interest rates, not clear that the Fed could correct the situation with monetary policy 3. It is the real interest rate that affects the consumption and production decisions of individuals and businessses and allocation of resources C. Monetary policy cannot offset whatever harm may result from fiscal policy — it can only add to those costs VI. Conclusion A. We have been taught an important lesson, let's learn it 1. Inflation is disruptive to economic growth 2. Once inflation is started, it is hard to stop B. We should support monetary policy that strives for price stability, we should support zero inflation

W. Lee Hoskins (1990, April 16). Regional President Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/regional_speeche_19900417_w_lee_hoskins

@misc{wtfs_regional_speeche_19900417_w_lee_hoskins,
  author = {W. Lee Hoskins},
  title = {Regional President Speech},
  year = {1990},
  month = {Apr},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/regional_speeche_19900417_w_lee_hoskins},
  note = {Retrieved via When the Fed Speaks corpus}
}