Tuesday, May 2, 2023

Galle: Incentive Compatible Inflation Policy

Brian D Galle (Georgetown; Academic google), Incentive Compatible Inflation Policy108 Cornell L. Rev. Online ___ (2023):

In most highly developed economies, governments have turned over inflation management entirely to their central banks, and for good reason. With inflation largely beaten by central bankers for nearly five decades, there has been little effort to design, let alone implement, other legal institutions that could help stem the sharp price increases facing consumers. This paucity of good ideas is unfortunate, because it turns out that relying solely on central banks may not be ideal. While central banks say today they are aiming for a “soft landing” in which inflation slows but major economies avoid significant further damage, top bankers are also predicting a significant probability of recession and widespread unemployment. There are reasons to think that many central bankers will be prone to “exceeding” or fighting inflation more aggressively than would be optimal for their economy. Central banks also implement inflation-fighting tools that can hurt government budgets, raise taxes, or both.

In a sense, the tools to fight inflation (outside the doors of a central bank) are obvious. But we don’t see governments applying such policies, for the obvious reasons that they would be very unpopular and would have very undesirable side effects. But what if there were policies that could curb inflation and at the same time command a significant degree of political support?

This essay attempts to outline what such a policy should look like and offers some concrete examples. The key insight is that putting people out of work and taking their money are not the only ways to cool consumer demand. We can also reduce spending today by encouraging families to delay consumption for the future, for example by saving for retirement or buying insurance. However, we must be careful that incentives to encourage savings and insurance do not end up simply stimulating more current spending. I argue that retirement savings and health insurance policies targeted at low-income families have a special chance of hitting this sweet spot. For example, providing a government-funded bonus to Obamacare marketplace plans, or simply making it much easier to enroll and stay enrolled in those plans, would improve the situation for families, typically a key element of any electorally viable policy. , at the same time that it would encourage to defer spending.

More broadly, we should reduce the “taxes” on our collective attention and patience that keep us from saving and insuring – nobody likes hassle, so making our lives easier that way would probably be popular. But unlike many other ways governments often find to get more votes, making people happy without giving them cash should be inflation-neutral at worst.


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