If Ed Miliband really wants to combine fiscal austerity with economic recovery, there's one thing he could do which he didn't mention in yesterday's speech; he could heed Simon's call to raise the inflation target. This would tell the Bank of England to loosen monetary policy to offset fiscal austerity, and help reduce the debt-GDP ratio over time by inflating the debt away - what Duncan calls successful debt management policies. It would have other virtues, described by Laurence Ball.
Why, then, did Miliband not mention this possibility?
One argument against doing so is obviously absurdly inadequate. It's that higher inflation would erode real wages still further. This fails to see that falling real wages are a real, not a nominal problem. Real wages are falling because productivity is falling and because capital has power over labour, not because inflation is high. In fact, looser monetary policy would (subject to caveats I'll come to) actually improve the position by labour by stimulating the economy and improving demand.
Instead, there are three possible counter-arguments:
1. It would raise gilt yields and hence borrowing costs. This is not wholly obvious. Gilts are substitutes for other government bonds, so their yields will stay low if others do, except insofar as a higher inflation target would add to currency risk on gilts. This would happen to the extent that markets believe in PPP, but it's not obvious that they do. It's possible that inflation would reduce borrowing costs if it raises demand for index-linked gilts more than it depresses demand for conventionals.
2. It would raise the savings, as people save more in order to make up for the fact that inflation is eroding the real value of their cash holdings; high inflation in the 70s, remember, was associated with a big rise in the savings ratio. But again, this isn't obvious. Higher inflation and negative real interest rates also reduce the real value of debt. And looser policy would add to housing and share prices, thus generating (arguably!) a positive wealth effect that would reduce the savings ratio.
3. A higher inflation target would be superfluous, because the Bank hasn't got the ammunition to actually increase inflation. Interest rates are likely to be very low when Labout takes power in 2015 - markets are pricing in rates then of only just over 1% - which means the Bank would have very little conventional monetary policy power. This would put a lot of onus upon other policies such as QE or forward guidance (pdf) or the hope of a powerful expectations effect. But the efficacy of these is doubtful.
The case for a higher inflation target is therefore not obvious. But there is certainly, surely, a fruitful debate to be had here. Which makes me wonder why - in public at least - Labour isn't having such a debate. I fear that the desire to look tough and macho is getting in the way of good policy-making.