But after spending a fortnight with my dear old mother on the farm in England, I'm begining to think those Austrians sort of have a point. And it's related to Simon Wren-Lewis' post about the political difficulties of increasing the inflation target to reduce the risk of hitting the Zero Lower Bound on nominal interest rates. And it's also related to arguments Scott Sumner has made about abolishing the concept of "inflation" and targeting NGDP.

Some Austrians (I can't remember which ones) define "inflation" as "a growing supply of base money". [Update: Jonathan Finegold gently corrects me .] This used to strike me, as it strikes most economists, as a bit daft. OK, I would think, you can define "inflation" that way if you want, but "rising prices" is what the rest of us mean by "inflation", and it just makes conversation harder.

Mother doesn't like inflation, and she's seen a lot of it in 90 years. And she kept telling me about it. I even suspect that if the Conservatives promised higher inflation than Labour she would switch to Labour. I didn't even try to argue with her, because I knew I would fail. Which confirms Simon's point.

Forget macro/money for a minute, and think about partial equilibrium/micro. Suppose you asked a microeconomist: "Is a rise in the price of apples a good thing or a bad thing?". She would look at you funny. She might say it depends on whether you are a buyer or seller of apples. She might say it depends on what causes the price of apples to rise. But basically she doesn't like the question, and doesn't want to answer it. She doesn't like the question because it's not a well-formulated policy question. If instead you asked "Would a government quota on apple production be a good thing or a bad thing?" she would be much more comfortable giving you an answer.

Back to macro/money. If we define "inflation" the way some Austrians define it (as a growing monetary base) then the question "Is inflation a good thing or a bad thing?" is a well-formulated policy question. Any macroeconomist would feel comfortable answering that question, even though (for all except a tiny minority of macroeconomists who want to target the monetary base) the answer would include a lot of "it depends on whether..." that would make for a very ugly answer. But because nearly all macroeconomists don't want to target the monetary base, and because we want to avoid ugly answers, and because everyone else defines "inflation" differently and we want to make conversation easier, we should not follow that Austrian definition of "inflation". But they do have a point, nevertheless.

When a macroeconomist hears the question "Is inflation a good thing or a bad thing" what the macroeconomist hears is: "Would a change in monetary policy that resulted in a higher rate of inflation, holding constant all those other things that would stay constant if monetary policy changed exogenously, be a good thing or a bad thing?"

That is not what my mother hears when she hears the same question. Mother doesn't spend her time thinking about monetary policy, so of course she won't hear the question the same way. What my mother hears is probably something like: "Would a change in any of those things that would result in a higher rate of inflation, holding constant all those other things that would stay constant if any of those first things changed exogenously, be a good thing or a bad thing?"

Admittedly, macroeconomists are usually a little bit more explicit than my mother about what's in the ceteris paribus clause, but you get the point. More importantly, if Mother did include "holding nominal income constant" in her implicit ceteris paribus clause there would be nothing logically wrong with her doing so.

"Would a change in any of those things that would result in a higher rate of inflation, assuming monetary policy holds the path of nominal income constant, be a good thing or a bad thing?" is a coherent question. And while one could dream up exceptions (everyone approaches Nirvana and gets everything they want without working) macroeconomists hearing this question would then agree with my mother that inflation (or the things that cause inflation) are a bad thing because they reduce our real incomes. Under NGDP targeting, the inflation fallacy is not a fallacy.

There are two ways to change monetary policy to reduce the risk that the Zero Lower Bound on nominal interest rates would be a binding constraint: raise the inflation target; switch from an inflation target to an NGDP level-path target. Draw a graph with "average inflation rate" on one axis and "risk of hitting the ZLB" on the other axis. Both are bads. Draw in your own indifference curves between those two bads. They slope down. Curves to the South-West are better. Now draw the curve showing the feasible trade-off under inflation targeting. It slopes down. The higher the target rate of inflation, the lower the risk of hitting the ZLB. Now draw the curve showing the trade-off under NGDP level-path targeting. It also slopes down. The higher the target rate of NGDP growth, the higher the average rate of inflation, and the lower the risk of hitting the ZLB. But the curve for inflation targeting lies everywhere North-East of the curve for NGDP targeting. That's because: NGDP level-path targeting has stronger automatic stabiliser properties than inflation targeting so nominal interest rates won't need to change as much in response to shocks; and because NGDP targeting will generate higher inflation when real growth is low, which is when the risk of hitting the ZLB is highest, and lower inflation when real growth is high, which is when the risk of hitting the ZLB is lowest. Therefore NGDP level-path targeting is a more efficient monetary framework that every macroeconomist who fears the ZLB but dislikes high inflation otherwise should choose.

Simon could try to convince my mother to move along the inflation targeting curve to a higher inflation target to reduce the risk of hitting the ZLB. He could try to explain to her that higher inflation caused by looser monetary policy (and not by all those other things that Mother thinks may cause inflation) would cause nominal income growth to rise at least in proportion to higher inflation (though in Mother's case it probably wouldn't) and would even rise by more if this reduces the ZLB risk. But Simon knows he would have a difficult job ahead, even though he has never met my mother.

Or he could try to persuade Mother that it would be a good thing if the Bank of England made people's incomes grow at (say) 5% per year, acknowledge that making people's incomes grow any faster might simply cause inflation to rise equally faster too, and happily agree with Mother that inflation really is a bad thing that makes people worse off. And if he added that he wants to do this because it would reduce the risk of her getting 0% interest on her savings account, I think he would get her vote (but maybe he shouldn't mention badgers).

Sometimes, just sometimes, policies that are economically right are also easier to sell politically. This is one of those times.