An article in the New York Times entitled “The goal of 2 percent inflation, rethought” shows the improbable evolution of this important economic target.

According to the piece by Times senior economics correspondent Neil Irwin, “A 2 percent inflation target is now the norm across much of the world, having become virtually an economic religion.”

But the article shows that the goal was far from a carefully thought-out decision and that some economists now question whether it is appropriate, given our economic malaise.

Here’s the backstory.

In 1989, New Zealand, an archipelago of 3.4 million people, became the first country to establish an inflation target. Its then Central Bank chairman, Donald Brash, convinced other countries to adopt the policy because New Zealand had used it successfully to bring down its high inflation rate, according to the Times. Once New Zealand’s central bank set its inflation goal, businesses, labor unions and other decision-makers across New Zealand conformed.

But how did New Zealand select this goal? Brash said in a recent interview: “It was almost a chance remark. The figure was plucked out of the air to influence the public’s expectations.”

As more countries announced an inflation target, the actual number has become controversial. Former U.S. Federal Reserve chairman Paul Volcker believed we should have zero inflation. Volcker’s successor as Fed chairman, Alan Greenspan, argued that inflation needs to be low enough that it does not have to be factored into business decisions. Either of those approaches would imply that a proper target should be between zero and 1 percent.

According to the Times piece, current Fed chairwoman Janet Yellen believes that near zero inflation could paralyze the economy during slumps.

In a 1996 Fed debate over what the U.S. inflation goal should be, Yellen, then a Fed governor, raised several points:

The Fed should focus not only on inflation but its other responsibilities of growth and jobs. She believed that inflation helps overcome recessions because employers can hold workers’ pay steady during a downturn yet have it decline in inflation-adjusted terms. For example, an assembly line worker may keep making exactly $20 an hour through a downturn, but in inflation-adjusted terms that pay falls by 2 percent a year. This makes the factory less likely to resort to layoffs.

Inflation depreciates the value of money sitting in the bank earning zero percent interest, because its buying power is diminishing. This in turn provides incentive to spend or invest, bolstering economic growth.

Some economists would like to see the inflation target be set as high as 3 or 4 percent. Laurence Ball, an economist at John Hopkins University, advocates an inflation target of 4 percent, according to the Times. He said he believes that higher inflation is a trivial negative compared to high unemployment. Higher inflation would encourage more spending and investing.

The Times article is an eye opener because it undermines the religious zeal associated with a 2 percent inflation target.

We now know that even its New Zealand authors just grabbed a number out of the hat. Furthermore, while a low inflation target was a wonderful recipe against high inflation, reputable economists now wonder if our current low interest rate policies are hampering our efforts to decrease unemployment and underemployment.

For example, low bond rates have forced investors to allocate more money to riskier investments such as equities.

Alternatively, if central bankers promoted a 4 percent inflation rate, it would punish people on fixed incomes and undermine savings.

The Fed needs to take appropriate steps to achieve full employment and stable prices. If that requires the heresy of setting an inflation target above 2 percent, then so be it.

Originally published in the Sarasota Herald-Tribune