Economists Are Different From You and Me

The newly minted Nobel laureate Robert Shiller reported in a 1997 paper, based on polling data, that economists worry much less about inflation than does the general public. The poll asked, for example, whether “preventing high inflation is an important national priority, as important as preventing drug abuse or preventing deterioration in the quality of our schools.” Eighty-four percent of Americans agreed but, among economists, only 46 percent agreed.

Professor Shiller’s paper came to mind Monday morning as yet another academic study arrived in my inbox pointing to the benefits of inflation - specifically, arguing that higher inflation is the best way to reduce unemployment.

The paper, by the Columbia University economist Guillermo Calvo and two co-authors, found “that large inflationary spikes appear to help unemployment to get back to pre-crisis levels” in emerging market economies. They note, however, that real wages generally fell sharply during these episodes. So: More jobs at lower wages.

Professor Calvo and his co-authors contrast this pattern with the post-crisis experience of developed countries, which have avoided inflationary spikes or wage cuts and, as a consequence, have struggled to cut unemployment.

The findings suggest that countries face a rather bleak choice between fewer jobs and lower wages. But the authors do see a partial corrective. Countries, they write, should focus on making it easier to borrow money â€" “Only direct credit policies that tackle the root of the problem seem to be able to help unemployment and wages simultaneously” â€" a version of the Larry Summers dictum that crises are caused by too much borrowing and solved by more borrowing.

I wrote in October that a growing number of economists share Professor Calvo’s view that higher inflation may be a useful treatment for the problems afflicting developed economies. The responses that I got from readers were almost uniformly negative: Not just disapproving but outraged, regarding more inflation as not just harmful but immoral.

Professor Shiller’s 1997 paper helps to explain the divide between economists and most everyone else. People generally regard higher prices as eroding their standard of living, because they do not expect wages to keep pace. Economists who favor higher inflation, by contrast, tend to see this erosion as beneficial in the short term and a non-issue in the long term. Unemployment rises after a crisis, they argue, precisely because wages are slow to fall. Higher inflation helps to solve that problem by quietly eroding the real value of wages. That, in turn, makes it profitable for companies to hire more workers, increasing output and consumption and, in time, allowing wages to catch up with prices.

Professor Shiller fretted at the time that economists might be showing too much concern about inflation.

“We must ask whether the extent of public concern with inflation really makes sense, or whether the economics profession has been influenced from without into devoting too much attention to inflation,” he wrote.

The economists whose views about inflation matter most are the ones who run the Federal Reserve and, in their 2009 book “Animal Spirits,” Professor Shiller and George Akerlof delivered a sharpened version of that warning.

“We are in great fear of ideologues on a future Federal Reserve Board who will take natural rate theory as more than a useful parable, consider it their duty to define price stability as zero inflation, and see no great cost in achieving it,” they wrote. “It would take only a handful of believers in this theory - which is only partially right - to bring about the ‘Great United States Slump.’”

Professor Akerlof, also a Nobel laureate, is lately more famous as the husband of Janet L. Yellen, the Fed’s vice chairwoman and President Obama’s nominee to head the Fed for the next four years, once Ben S. Bernanke retires.

In that context, it’s particularly striking to read the next paragraph, in which Professors Akerlof and Shiller urge “the chair of the Fed and her board” to resist pressure from people too much worried about inflation and too little about unemployment.

The authors use female pronouns throughout the book, so one shouldn’t give them too much credit for prophecy. But it’s certainly worth keeping in mind that this is the advice Ms. Yellen is likely to get at the dinner table.