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Home Publications Blogs Beat the Press It's Hard to Get Good Help: The Case of the European Central Bank

It's Hard to Get Good Help: The Case of the European Central Bank

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Monday, 31 March 2014 06:51

Many economists have difficulties with simple arithmetic. That is why so many of them failed to recognize the rising and unsustainable ratios of house prices to rent and income. Apparently arithmetic problems still figure large in policy at the European Central Bank (ECB).

The NYT noted a slightly lower than expected inflation measure for February and told readers:

"The ECB, which targets inflation of just below 2 percent, left borrowing costs unchanged at 0.25 percent in March and has argued that deflation risks in the bloc are limited.

"ECB President Mario Draghi suggested after the ECB's March meeting that the bank will either do nothing or take bold action should the outlook deteriorate.

"He has also said the bank has been preparing additional policy steps to guard against possible deflation, and that the longer inflation remained low, the higher was the probability of deflationary risks emerging."

Of course those familiar with economics and arithmetic know that there is no special problem associated with deflation. The problem is a lower than desired inflation rate. This makes the real interest (the nominal interest rate minus the inflation rate) higher than desired and it also means that debt burdens will be more difficult to bear, since the debtors were anticipating a higher rate of inflation. It also means that it will be more difficult for peripheral countries like Spain, Italy, and Greece to restore their competitiveness within the euro zone since they will have to see actual price decline if they are to improve their position relative to countries like Germany with very low inflation rates.

But these issues do not change when the inflation rate crosses zero. The drop from 0.5 percent inflation to 0.5 percent deflation is no worse than the drop from 1.5 percent inflation to 0.5 percent inflation. People who know economics understand this simple point. Apparently the shortage of skilled workers is hitting the ECB. 

Comments (6)Add Comment
Meaning of deflationary risks
written by Anon, March 31, 2014 10:25
People use "deflationary risk" as shorthand for "risk of inflation that is too low or negative". People who know English understand this simple point. Why do you have so much trouble.
Inflation is already too low
written by Dean, March 31, 2014 1:34
Anon,

your defintion cannot explain ECB behavior. Inflation is already too low. It doesn't make sense to say that you are worried about the possibility of a fire if the house is already burning.
...
written by John Stephanus, March 31, 2014 5:55
The difference is not in the math.

It is in the differing effects each has on our leveraged world.

How many more people will default on their home loan for example if we have persistent deflation? Even if only 0.5%.
skills shortage
written by jonny bakho, March 31, 2014 6:15
There is a skills shortage in the media.
They keep hiring doofuses who don't understand policy. Must mean there is a lack of talent.
More people will default at 0.5 percent inflation than 1.5 percent inflation
written by Dean, March 31, 2014 7:15
John,

the problem is a low inflation rate, crossing zero means zero.
...
written by Larry Signor, March 31, 2014 7:56
"the bank will either do nothing or take bold action should the outlook deteriorate.". This is what passes as ECB guidance? There seems to be no reason to comment further on Draghis Dribble.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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