George Will: Temptation to Raise Inflation Targets

Was this a pebble that presaged an avalanche? The chief economist of the International Monetary Fund recently recommended that central banks raise their inflation target from 2 percent to 4 percent. The inflation temptation is back.

Just 18 years of 4 percent inflation would cut currency's value in half. Furthermore, governments have neither the skill to precisely calibrate inflation at 4 percent nor the will to hold it there. But as an alternative to tax increases that would extinguish economic growth, or to spending cuts that would extinguish political careers, inflation—the surreptitious, slow-motion repudiation of debt—may look to elected officials to be the prudent, or least imprudent, policy.

Briefly pausing in his campaign for a vast new health-care entitlement that would increase the deficit by a trillion dollars over the next decade, Barack Obama recently created a commission to suggest deficit-reduction measures. The commission's Democratic co-chair, Erskine Bowles, knows bankruptcy: He was on General Motors' board of directors, a.k.a. the Board of Bystanders, as GM went bankrupt. The commission is supposed to submit its ideas after November's elections, naturally, but it could issue a seven-word recommendation right now: Stop doing almost everything you are doing.

The administration will spend $289 billion of the "stimulus" money during the next nine years, when, the administration says, the economy will be humming. The administration projects that between 2011 and 2019, the economy will be growing faster than the norm since 1945.

To make amends for his damaging disparagements of business conventions in Las Vegas, Obama went there shortly after announcing the deficit commission and announced a $1.5 billion program for housing aid targeted at a few states, including Nevada. That is a paltry sum—a rounding error relative to Obama's grander undertakings—as is the 10-times-larger $15 billion House-passed jobs bill. Both are trivial interventions in the nation's $13.2 trillion economy, but both also are emblematic of the fact that the deficit has no inhibiting effect on the president who created the deficit commission, or on the Congress his party controls.

Today's "dollars for dishwashers" policy—federally funded state programs subsidizing appliance purchases—aims to replicate the eccentric success of Cash for Clunkers, which last summer accelerated many car purchases from the fourth quarter of 2009 to the third quarter, at a cost of $3 billion. In December, sales of previously owned homes fell at the fastest rate on record. One reason? Government helpfulness. The tax credit for first-time buyers, which had been expected to expire in November (it was ex-tended, and expanded to include other buyers), accelerated many home purchases to earlier months. Such distortions multiply as an economy becomes increasingly dependent on government-engineered demand.

One way government tries to foster demand is by keeping interest rates very low. If rates fuel a rise of the stock market, they can make people feel wealthier and consume more. This was the effect of the increase in housing prices, a.k.a. the housing bubble, which did not turn out well.

One fifth of homeowners with mortgages are still underwater, owing more than the value of their homes, and the pace of foreclosures has not improved, with 3 million more expected this year. Now the commercial-real-estate crisis is just beginning.

Its vortex will be the almost 3,000 community banks that have a high ratio of real-estate loans relative to their capital. Such loans are generally more than 50 percent of their lending. In the next three years, $1.4 trillion of commercial-real-estate mortgages—most are paid off or refinanced every five years—must be rolled over. These were acquired in the real-estate bubble years of 2005–07. One expert estimates that half of commercial-real-estate mortgages will be underwater by the beginning of 2011.

The unvarnished truth is that, with bank lending in 2009 having declined more steeply than in any year since chaotic 1942, the economy's recovery remains nascent and fragile. And American governance has become a downward-spiraling shambles.

It consists of constantly increasing government's conscription of the wealth of "the rich," who are most of the job-creating investors, while nevertheless hoping that increasingly rapid economic growth will generate revenues to pay the pensions and medical costs of an aging population. Intellectually, this model of political economy is what it eventually will be actually—bankrupt.

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