Knifonomics (part 37): inflation (and income tax) should not be regarded as normal

Here’s a recent letter from Michael Romberg in the FT. Perhaps it is too unrealistic, but we should always revisit economic concepts that government would prefer us to think are set in stone. The Overton Window can always shift. Income tax is another – why do we hand over our dosh in such huge amounts, when it began as an emergency levy to fund war? Who realises that it “remains a temporary tax, which expires on April 5 each year, and has to be renewed as a provision in the annual Finance Bill. “?  Just saying…

This is Mr Romberg’s smart letter:

Sir, The year 2015 was one of zero inflation for the UK (, January 19). I suggest that zero inflation should be our target for the future.

We have now had 100 years of continuous inflation since the start of the Great War. But for a period of more than 200 years before then, prices were broadly stable in the long term, with periods of rising prices offset by periods of falling prices. The average price in London of a loaf of bread was about 5½d in both 1694 and 1894.

There are two main economic arguments for inflation. First, it makes downward wage adjustments easier as workers will accept a fall in real wages but not in nominal wages. However, relying on money illusion is hardly an ethical policy. Second, unanticipated inflation moves resources from “unproductive” savers to “productive” borrowers. But with only one-fifth of UK debt held by non-financial corporations that argument is overstated.

Zero long-term inflation would bring benefits. Long-term planning would be easier. Relative price movements would be clearer. The economy would be neutral between borrowers and lenders, with the interest rate reflecting only time preference and the balance of supply and demand.

Nor should we worry so much about deflation, periods of falling prices to offset previous price rises. Concerns about deferring spending apply only to investment goods — few would skip lunch because it will be cheaper next year. Eventually everything needs to be replaced. And many pay extra to have the latest piece of kit. Those who draw apocalyptic lessons from Japan are looking only at gross domestic product without considering the falling working age population.

Not bad. I quite like price stability personally, and I’ve certainly had a fall in real wages.

Everything 51/2 d!

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