The merits of inflation as a solution to the rich world’s problems are easily overstated

IT HAS long been considered a scourge, an obstacle to investment and a tax on the thrifty. It seems strange, then, that inflation is now touted as a solution to the rich world’s economic troubles. At first sight the case seems compelling. If central banks had a higher target for inflation, that would allow for bigger cuts in real interest rates in a recession. Faster inflation makes it easier to restore cost-competitiveness in depressed industries and regions. And it would help reduce the private and public debt burdens that weigh on the rich world’s economies. In practice, however, allowing prices to rise more quickly has costs as well as benefits.

The orthodoxy on inflation is certainly shifting. A recent IMF paper* co-authored by the fund’s chief economist suggests that very low inflation may do more harm than good. Empirical research is far clearer about the harmful effects on output once inflation is in double digits. So a 4% inflation target might be better than a goal of 2% as it would allow for monetary policy to respond more aggressively to economic “shocks”. If the expected inflation rate rose by a notch or two, wages and interest rates would shift up to match it. The higher rates required in normal times would create the space for bigger cuts during slumps. ...

Najib wavers over undoing affirmative-action policies

WHEN Najib Razak took office last April as Malaysia’s prime minister, the timing could hardly have been worse. The export-led economy was in recession. The ruling coalition was in the dumps after an unprecedented near-defeat in elections in March 2008. Opponents warned that Mr Najib’s government would crack down on political dissent to save its skin.

Against the odds, though, Mr Najib, a British-educated economist, has emerged as a more sure-footed, and less scandal-prone, leader than many expected. He has stimulated the economy back to life and liberalised some financial services. Growth is likely to exceed 4% this year—reaching 6%, in his own optimistic forecast. There are ambitious new targets for cutting crime and building roads, among other populist policies. Foreign businesses have been encouraged by Mr Najib’s promises to liberalise the broader economy, spur innovation and raise productivity. Everyone agrees that Malaysia needs to move beyond run-of-the-mill electronics and focus on knowledge-based industries. ...

Most Europeans are doing better than they think, and can take more fiscal austerity

IMAGINE two cousins. One comes from continental Europe, France, perhaps. A hypochondriac, his life is filled with vague complaints—stress, fatigue and mysterious aches—for which he takes fistfuls of pills. He is sure that strenuous exercise is a menace to his fragile health. The other cousin is American (or British, take your pick), a risk-taker devoted to extreme sports. Shunning doctors, he feels as strong as an ox, although he has been drinking and overeating for years. Eventually, in 2008, he succumbs to a massive heart attack while out jogging. As far as his French cousin is concerned, a deep truth has thus been confirmed: that exercise is bad for you.

Substitute free-market competition for exercise, and you have the European debate over the financial crisis. Sober discussion about how to manage the instability of markets is giving way to a simpler fable. Too many voters now believe that the credit crunch has proved that globalisation is bad for you. And too many politicians are happy to endorse such views. In a televised meeting with voters in January the French president, Nicolas Sarkozy, denounced Renault for planning to build a new car in Turkey, saying “I do not accept that cars sold in France should be manufactured abroad.” ...

Does India’s government pay any heed to its economic advisers?

ECONOMISTS like nothing better than giving advice to governments. But why do they, of all people, imagine that anyone listens? In their models economists assume that governments, like other actors in the economy, have objectives of their own, which they seek to advance as best they can. They are not disinterested servants of the public good. So governments will ignore a recommendation from their advisers unless it suits them, in which case they would have done it anyway.

In his book “Prelude to Political Economy”, published in 2000, Kaushik Basu of Cornell University wrestled with this paradox. “If, seeing high unemployment in an economy, a person… advises entrepreneurs to employ more labourers, or consumers to demand more goods, this typically causes economists to share a laugh.” And yet economists routinely advise governments to act in the economy’s interests rather than their own. ...

A difficult time for a fund-raising spree

Correction to this article

A SENIOR World Bank official describes its efforts to secure an additional $3 billion-5 billion in paid-in capital as a “once-in-a-generation increase to deal with the effects of a once-in-a-generation crisis”. The bank agreed to lend $32.9 billion to poor countries in the year to June 2009, two-and-a-half times the previous year’s outlay of $13 billion. If it carried on at this rate, Robert Zoellick, the bank’s president, warned in October, its lending would face constraints by the middle of this year. ...