Aiming for Zero Inflation, Research Paper Example

In simplest terms, zero inflation refers to an economic situation or circumstance in which inflation or a consistent rise in the cost of products and services throughout a specific length of time, does not exist. In other words, inflation is held in check over a long period of time which results in a steady-state condition related to the cost of consumer goods and other merchandise that is generally used on a daily basis. As is the case with other economic and social issues that affect the lifestyles of all Americans, there are two opposing sides or positions with the first advocating for zero inflation and the second standing firmly against it. As Selgin points out, proponents of zero inflation maintain that a “stable price level or zero inflation should be the goal of monetary policy” in the United States.

In 1995, Federal Reserve Chairman Alan Greenspan openly supported a zero inflation policy as did certain members of the Federal Board of Governors and the House Subcommittee on Domestic Monetary Policy; however, speaking for the opponents, Selgin admits that a zero inflation policy in the United States is a more “realistic goal for monetary policy” than striving for full employment or tweaking the value of the dollar. But nonetheless, aiming for zero inflation is “far from being the ideal policy its advocates proclaim it to be (“Zero Inflation”), not to mention if such a policy is feasible or doable in today’s turbulent global economy.

As early as 1992, the U.S. Federal government and the Federal Reserve System was contemplating the benefits of zero inflation. As Stephen L. Neal relates, if the U.S. Congress could somehow come together as a unit and create federal legislation to establish zero inflation or “what economists call “price stability,” the citizens of the United States would soon “enjoy long-term government interests rates of 3 to 4%,” lower mortgage rates, and a decrease in the rates associated with business and consumer loans. Thus, by eliminating inflation, the United States would experience “the highest sustainable levels of economic growth, employment, savings,” the formation of capital for businesses, more consumer investment, higher productivity, a balanced competition in world markets, and a higher level of efficiency related to the workings of the Federal Reserve System (“The Case for Zero Inflation”). In addition, Neal maintains that zero inflation would “reduce the likelihood of future recessions,” and vastly improve the living standards for all Americans (“The Case for Zero Inflation”).

Neal also raises several excellent points about zero inflation. For example, what exactly causes inflation? Many Americans believe that inflation is the result of budget deficits at the U.S. federal level, and that inflation helps to stimulate employment. However, as was the case in the early 1990’s, countries like Japan and West Germany experienced low inflation rates with high levels of employment as contrasted with the United States which in the 1980’s and early 1990’s was experiencing high levels of inflation and low levels of employment. Therefore, since most recessions tend to lower inflation, it “cannot be good for long-term employment.” Also, “if there is no inflation, there is no need for recession” (“The Case for Zero Inflation”).

On the flip side or according to the opposition, zero inflation as a goal dates back to the theories of classical economics during the early years of the 20th century and as might be suspected has “inspired countless monetary reform proposals” that at first appeared to be “solidly grounded in theory.” However, the goal or ideal of zero inflation is based upon flawed ideas and the “unrealistic assumption of a stagnant or stationary economy where the productivity of labor and capital never changes” (Selgin, “Zero Inflation”).

Under normal conditions or when inflation is present in a given economy, the stability of consumer prices is directly related to the stability of total spending which economists refer to as aggregate demand which is calculated via the value of a nation’s currency. This type of currency stability “allows the typical producer to recover his money costs of production” and to avoid any “deviations of real output from its natural level.” However, true zero inflation can only work in an economy that is unchanging and one that is not affected by alterations in the value of foreign currencies. Overall, the aggregate demand in an expanding economy requires decreasing consumer prices; conversely, “in an economy where productivity is declining, stability of spending requires that prices” rise rather than drop. Thus, those who support zero inflation believe in the false assumption that “benefits of stable spending can be had by keeping the price level constant” (Selgin, “Zero Inflation”).

This viewpoint leads us to an important question–if zero inflation is not possible in a growing and expanding economy, then what is the alternative? Selgin makes the claim that the only alternative is a national monetary policy that stabilizes “total dollar spending as measured by the money value” of the gross national product in relation to consumer spending for vital products and services (“Zero Inflation”). Selgin adds that the creation of a national central bank (not the Federal Reserve System) would help to stabilize the value of America’s currency via the gross national product (“Zero Inflation”).

Selgin’s suggestion of a national central bank dates back to the earliest days of the American colonies and to the founding of the country; in fact, Alexander Hamilton, the first Secretary of the Treasury, was adamantly against a central bank. But perhaps after taking into consideration the history of inflation in the United States, Hamilton may have been misguided if not patently wrong about the creation of a central U.S. bank. Lastly, Selgin declares that although zero inflation “has its merits as a rough-and-ready policy goal,” it would be superior to America’s historical “inflationary chaos” that seems to have started at least in the 20th century shortly after World War II in 1945. But overall, zero inflation as an “ideal policy leaves a lot to be desired and is plainly inferior” to the goal of achieving stability related to federal spending (“Zero Inflation”).

From a personal standpoint, zero inflation appears to be the most ideal condition to aim for in relation to the current U.S. economy which over the last ten years has gone through some rapid changes, such as the so-called economic collapse in relation to the housing market circa 2008. But as an economic theory, zero inflation is just not feasible, due to the fact that the American economy is founded on capitalism. What this means is that zero inflation cannot be achieved when the cost of consumer goods and products is controlled by the manufacturers whose true business goal is simply to make a profit.

Works Cited

Neal, Stephen L. “The Case for Zero Inflation.” Cato Journal (12)1. Spring/Summer 1992, 179-183.

Selgin, George. “Zero Inflation: A Flawed Ideal.” 1995. Web. 23 November 2013.