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. Last Updated: 07/27/2016

Populists: O Inflation: 1, Don't Blink

Populist economists, who for too long held the government's ear, will react ambivalently to the news that in August for the first time since the start of reforms, the monthly inflation figure was zero.

They say that reversing the slump in industry and increasing production should be a higher policy goal than crushing inflation. They argue that the government should be spending more money to help the needy and boost struggling industries.

If inflation is a problem, they say, it can be brought under control without the dreary textbook methods now used by the government based on reducing expenditure and stopping the printing of money.

These populist arguments are both wrong and irresponsible. Keeping inflation low must be one of the government's top goals and relaxing the government's tight monetary and fiscal policies will only produce more inflation.

Reckless spending will not help the poor who will be hit hardest by high inflation since their incomes invariably fall behind the rise in prices.

Industry will not gain from a boost in inflation either. The past few years have shown that the money injected into the economy by government spending does not end up as investment in new production. With business conditions buffeted by price instability, investment is instead directed into speculation, usually on the foreign exchange market.

Of course, inflation has now been falling for almost a year and the government's critics may argue that this has failed to produce the promised benefits. GDP continues to fall and the lot of the poor remains desperate.

But this is not the fault of the basic thrust of the government's anti-inflation policy. Low budget deficits that are funded exclusively by borrowing must be defended. The printing press must be cast aside for good.

But there is plenty that could be improved in macroeconomic policy. The government's high borrowing program has kept interest rates far too high, making it impossible for businesses to raise credit.

Interest rates must be driven down and that can only be achieved by cutting the deficit and by finding alternative sources of borrowing, probably off-shore.

In cutting the deficit, the government must both reform the tax code to raise more revenue -- especially from close friends -- and also reduce expenditure in a rational way. Subsidies to loss-making industries can be cut in favor of retraining and relocation. More money can still be found for a social safety net providing cuts are made to the huge bureaucracy and political slush funds like the National Sports Fund.

These are the issues that should be the new focus of economic debate.