Friday, December 04, 2009

How to create artificial inflation

What do you do if you've used all your monetary policy, but want to nip a deflationary spiral in the bud? You create some artificial inflation. I've read some very silly proposals about how to do this (by putting expiration dates on money, for example), but the solution needn't be silly. Here's how:

You make an announcement that, starting next month, there will be a 0.1% Federal sales tax on everything. The following month, the rate would increase to 0.2%, then 0.3%, and so on. It's providing the same rising price impact of inflation, but it helps the budget and doesn't lend itself to bubbles in a variety of things, as monetary policy is wont to do.

As a side bonus, a universal sales tax would provide effective devaluation, as imports would pay the tax but exports wouldn't, making you more competitive precisely when you were trying to avoid deflation and a rising currency.

2 Comments:

Blogger Noumenon said...

It really doesn't jibe with my instincts about inflation that both government spending and a new government tax could cause inflation. But the state of California agrees with you (link)

12:14 PM  
Blogger Octavo Dia said...

Given the state of California's finances, I don't think that's a recommendation. :-)

My fear would be that a government would become accustomed to the higher revenue, and then continue to extract revenue when it's not needed.

3:56 PM  

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