Chris Hayes, Washington editor of The Nation and one of my colleagues at the New America Foundation, has written a policy paper calling for a period of moderate, sustained inflation. My guess is that many readers will strenuously object to this idea, but I strongly recommend that you give Hayes’s paper a close read.

Hayes is drawing in part on arguments made by economists like Greg Mankiw and Ken Rogoff, who believe that moderate inflation can facilitate a sustainable recovery. Rogoff has maintained that we need an inflation rate in the 5-6 percent over the next two years to slow the pace of job losses and ease the debt burden. In his view, we’ve simply gone from a financial crisis to a long-term government debt crisis.

We are constantly reassured that governments will not default on their debts. In fact, governments all over the world default with startling regularity, either outright or through inflation. Even the US, for example, significantly inflated down its debt in the 1970’s, and debased the gold value of the dollar from $21 per ounce to $35 in the 1930’s.
For now, the good news is that the crisis will be contained as long as government credit holds up. The bad news is that the rate at which government debt is piling up could easily lead to a second wave of financial crises within a few years.
Most worrisome is America’s huge dependence on foreign borrowing, particularly from China – an imbalance that likely planted the seeds of the current crisis. Asians recognize that if they continue to accumulate paper debt, they risk the same fate that Europeans suffered three decades ago, when they piled up US debt that was dramatically melted down through inflation.

It’s easy to angrily denounce thinkers like Rogoff for contemplating an effort to increase core inflation — but what is the alternative? We could eliminate Medicare, Medicaid, Social Security, and the United States Navy, or we could certainly radically pare back spending on all four programs. This isn’t very likely. We can raises taxes, and we’ll probably need to do so. But raising taxes enough to close the gap and start paying down the debt could threaten the economic recovery. We need some combination of spending cuts and tax increases, and even in that case we might need moderate inflation. Overall, it’s an extremely depressing picture, one that puts the fiscal and monetary policy failures of the past fifteen years in sharp relief.

One concern I have is that generating moderate, sustained might prove extremely difficult. Weak consumer demand and globalization mean that we’re not likely to see wage/price spirals that derive from very tight labor markets, as Hayes explains. We could see a sharp spike in, say, oil prices, but this won’t necessarily increase core inflation. Rather, higher oil prices will just hammer consumers without any of the salutary consequences. What looks like an easy-ish way out is in fact a puzzle.