The Secret Target : Planet Money Their plan was dangerous, risky, and extremely unpopular. But America copied them anyway. Today on the show: how a tiny country on the other side of the world changed how America runs its economy.
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The Secret Target

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The Secret Target

The Secret Target

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There's this number. It's probably the most important number in the world.


This number determines how many people in the U.S. have a job. It has the power to wipe out our savings accounts.

GONZALEZ: This delicate, fussy little number is the inflation rate. A bunch of what the Federal Reserve does all day is try to get this number just right. And for the longest time, the Fed didn't want us to know what number they were targeting.

DUFFIN: But on January 25, 2012, the then-Fed Chair Ben Bernanke told us...


BEN BERNANKE: The committee judges that inflation at the rate of 2 percent...

GONZALEZ: Ben Bernanke said the Fed had an explicit goal of keeping this powerful number at 2 percent.

DUFFIN: This was a huge shift in American economics, and we've actually talked about this on PLANET MONEY before.

GONZALEZ: But what we didn't know at the time was that this big bombshell announcement was the end of a much longer story that starts on a tiny island full of kiwis and hobbits.


DUFFIN: Hello, and welcome to PLANET MONEY. I'm Karen Duffin.

GONZALEZ: And I'm Sarah Gonzalez. Today on the show, the real secret history of 2 percent. We take you on a trip around the world to just about the furthest place from the United States, and we find the true origin story behind the most important number in the world.

DUFFIN: And when we get back, we find out that we might have just spent the last 22 years targeting the wrong number.


GONZALEZ: The whole reason Ben Bernanke told us that the U.S. was targeting inflation was because one guy in New Zealand, decades earlier, had proven that sharing your economic secrets is a good thing. His name is Arthur Grimes.

DUFFIN: Arthur completely reimagined the role of central bankers, changed the way whole countries keep their economies stable. He is one of the most important economists in the world.

GONZALEZ: How do you think New Zealanders view you?

ARTHUR GRIMES: They probably never heard of me. That's fine (laughter).

GONZALEZ: Arthur used to be the chief economist at New Zealand's central bank. He is a current professor of well-being.

DUFFIN: Wait. Like, well-being like we're happy?

GONZALEZ: Yeah, like he wants to see children smiling in the world.

DUFFIN: OK. All right.

GONZALEZ: No, it's like economic well-being. And he's a jazz musician - a saxophone player.

GRIMES: Tenor saxophone, yeah. And, actually, I've got a duo called Duopoly. You'd like that as an economist.

GONZALEZ: (Laughter).

GRIMES: The other guy's got a Ph.D. in economics, too, so what else would we call it?

DUFFIN: For most of Arthur's life, New Zealand had massive inflation, which meant prices were going up, and everyone's money was losing value. This can happen when there's too much money floating around in economy and everyone tries to spend it on not enough stuff. And the government had tried everything to lower inflation for nearly two decades.

GONZALEZ: There were carless days - days the government didn't let you drive your car to try to stop gas prices from going up. There was a time the government banned businesses from raising prices for a year.

DUFFIN: And finally, they turned to Arthur. They say, you're a smart economist. You go find a way to fix this. Go see what other countries do. And around 1985, 1986, they sent Arthur on a trip around the world.

GRIMES: When you're in a small country that's on the other side of the world from virtually everywhere, it's just natural for us to actually see, what do other people do? You know, how do other people do these things?

GONZALEZ: Arthur meets with a bunch of smart people in the U.S., the U.K., Germany, Canada. They all have different methods for controlling inflation.

DUFFIN: Some central banks have a monetary supply target, which just means they're capping how much money is printed every year. Others have an employment target, like what's the perfect amount of people with jobs for the healthiest economy? And some have an interest rate target. They're trying to pin down, what's the right interest rate for loans?

GONZALEZ: But all these targets were aimed at keeping inflation low. So Arthur thinks, why not just cut to the chase?

GRIMES: Let's target the ultimate goal, which is inflation. It became inflation targeting.

DUFFIN: Inflation targeting - set an ideal level of inflation and drive the economy toward that. It took the central bank three years to develop this whole new system.

GONZALEZ: But people had talked about inflation targeting before, right?

GRIMES: No, not at all. No.


GRIMES: No, not at all. No, no, no. It was only after New Zealand had done it that that term was actually invented.

GONZALEZ: You invented inflation targeting?

GRIMES: There was no such thing as inflation targeting at the time.

GONZALEZ: So the government says, OK, central bank, give us a number so we can hold you accountable. Inflation is at 9 percent right now. What should we shoot for?

DUFFIN: Arthur says, I'm not going to give you a number. I will give you a range.

GRIMES: Zero to two by '92.

GONZALEZ: Zero to two by '92.

GRIMES: Yeah. That sounds good, doesn't it?

GONZALEZ: Zero to 2 percent inflation by 1992 - this was the target.

DUFFIN: Here's the thinking behind this, aside from it being catchy. If you have 0 percent inflation, that is true, absolute price stability. The price of carrots, sugar, your rent - it never changes.

GONZALEZ: If you have 1 percent inflation, that means that the price of carrots goes up by 1 percent, but you're not skipping meals over this. You just buy turnips instead of carrots now. One percent inflation doesn't affect your well-being, so economists in New Zealand consider 1 percent inflation kind of like neutral inflation.

DUFFIN: And then Arthur thinks, we need some wiggle room. And so he says, let's give ourselves plus or minus 1 percent. So that's how they got zero to two. But they knew that reaching this target would be much easier said than done.

GRIMES: None of us in our lifetimes, almost, had experienced 2 percent inflation. We'd all been brought up with double-digit inflation. And it was considered extremely difficult to get to 2 percent.

GONZALEZ: New Zealand was going to dramatically force inflation down from 9 percent to under 2 percent.

DUFFIN: And having low inflation like 2 percent - that's good. But the process of bringing it down - that hurts people. It is a painful process.

GONZALEZ: And if they were going to meet their target, they needed someone who could say, I don't care what happens to people while we deflate. We're doing this, and we're not looking back.

DUFFIN: They chose a guy appropriately named Don Brash.

DON BRASH: Yup. Don here.

GONZALEZ: This is Don Brash.

BRASH: I head to portray myself as someone who didn't give a fig.

GONZALEZ: You had to present yourself as someone who didn't give a fig?

BRASH: Yeah. That's what I said, yeah. There's probably an American expression which is more vulgar than you want to include.

DUFFIN: Don's job was to force the inflation rate down. He did it by restricting how much money regular banks had in their vaults, which affects how much money everyone has.

GONZALEZ: That was the easy part. He literally just had to snap to make it happen.

DUFFIN: But that easy thing would cause a huge spike in unemployment.

GONZALEZ: At the time, inflation was really high, so people needed high wage increases just to break even. And Don is telling people, those wage increases you need - they're going to make unemployment last longer.

DUFFIN: But you can help shorten this pain if you just believe me. Have a little faith.

GONZALEZ: Start acting like inflation is already at 2 percent, and we will get to 2 percent much faster.

DUFFIN: He was basically New Zealand's Smokey the Bear. Only you can prevent long-term unemployment.

GONZALEZ: So you were going around New Zealand telling workers, listen; I know that inflation is almost 6 percent right now, but trust me. I'm going to bring it down, so just don't ask for a 6 percent wage increase in your salary. That's what you're doing?

BRASH: That's roughly what I'm doing.

GONZALEZ: And then you're also going to businesses and saying, businesses, we know the inflation rate is almost 6 percent, but we're going to bring it down, so just don't charge more for your goods.

BRASH: That's right. That's right.

DUFFIN: But nobody believes him. Employees keep asking for high raises, even though, technically, they don't need them anymore. And companies are continuing to give them because the employees are demanding them. And so companies now cannot afford to pay everyone at such high rates, so they lay people off. And then they lay more people off.

GONZALEZ: Unemployment goes up past 11 percent. One in 9 people who wanted to work couldn't.

BRASH: Well, it didn't look good at all, and I make no apology for that. It looked very bad, and I was as concerned about it as anybody else, believe it or not. I mean, you'd have to be an awful, miserable so-and-so not to care.

DUFFIN: And, look; it wasn't all on Don. The government was also announcing all kinds of other reforms at the same time, like they were privatizing public companies. So there were a bunch of factors.

GONZALEZ: And if New Zealand had some old softy running the central bank, they might've been like, whoa, this is getting really bad. Maybe we should stop. We're creating a terrible recession. But not Don. Don is like, too bad. We can't back out now, even if it means people suffer - people like Sue Bradford.

DUFFIN: Sue led an unemployed workers group, and they decided to rush Don's central bank.

SUE BRADFORD: They weren't obviously expecting us, so it was pretty easy. We just ran through.

GONZALEZ: It's not a customer-focused bank.

BRADFORD: But it does have security because - yeah, 'cause it was a bank.

GONZALEZ: The doors lock behind them. Sue hung up banners across the windows and sat on the floor of the main room waiting for Don until police drag her out and throw her in a cell.

What was the charge? Do you remember?

BRADFORD: I'd have to look at my record, which I don't have with me (laughter). I have an extensive record for protest actions.


DUFFIN: The next day, Sue got a phone call from Don Brash.

BRADFORD: And he said, I heard you came to visit us yesterday. And I said, yes, sir. And he said, well, I'd quite like to come and find out why you were protesting, why you occupied the bank. And so I invited him to come to Auckland where our group was located.

GONZALEZ: They just wanted to convince Don to ease up a little bit.

BRADFORD: I was a sole parent of twin babies living on welfare and trying to get a job but failing.

GONZALEZ: So did anything change after Don Brash met with you?

BRADFORD: Of course not (laughter).

GONZALEZ: Don was supposed to get inflation between zero and two by 1992.

BRASH: And sure enough, we achieved it not only by '92. We actually achieved it by '91, which was a little earlier than planned. And there were people who said, look; by getting there early, you have subjected the real economy to more pressure than you needed to do. And there was some truth on that.

GONZALEZ: How did people feel about you in New Zealand?

BRASH: (Laughter) Well, it varied greatly depending on who you were talking to.

GONZALEZ: No, people hated him. Even though inflation went down, unemployment was still high. And it stayed high for years.

DUFFIN: Even today people still have issues with Don, in part also because he's said some controversial things about the indigenous population in New Zealand.

GONZALEZ: But he did lower inflation in this new way that no one ever had before. And, yes, there were still problems, but economists understood the logic behind inflation targeting.

DUFFIN: And the world's biggest economies, they start following in this tiny country's footsteps. They announce inflation targets of their own - Canada first, the U.K., then Australia.

GONZALEZ: They all chose different ranges, and they all told their citizens just like Don did. But here in the United States, it went a little differently.

SEBASTIAN MALLABY: What happened was really rather strange.

DUFFIN: This is Sebastian Mallaby. He is the person who uncovered the bizarre way that the Fed settled on 2 percent. It happened at this one central banker's meeting.

GONZALEZ: And we have prepared a dramatic recreation of this meeting.

DUFFIN: We have the transcripts, which we have slightly tweaked for your entertainment purposes.

GONZALEZ: It is the summer of 1996. The Fed is considering whether they should target inflation like all the other cool countries have.

DUFFIN: And Janet Yellen, a central bank governor at the time, says bringing inflation down to 2 percent sounds good.

STACEY VANEK SMITH, BYLINE: Two percent very likely is a good idea. I mean, not surely but very likely.

GONZALEZ: And men being men sometimes were like, did somebody say something?

DUFFIN: And the meeting moves on. And then later one guy goes, I think maybe someone else already suggested this, but I have the best idea.

UNIDENTIFIED PERSON #1: Why don't we have a 2 percent target?

UNIDENTIFIED PERSON #2: Two percent - brilliant. I second that.

UNIDENTIFIED PERSON #1: This is the most progress we've made in over a decade.

GONZALEZ: And like every woman at some meeting in their life, Janet Yellen is probably sitting there, thinking...

VANEK SMITH: Yeah, I said that earlier, guys. Yeah, that was me.

DUFFIN: And then Alan Greenspan, the Fed chair at the time, is like...

CARDIFF GARCIA, BYLINE: Wait, Janet. Didn't you say that?

VANEK SMITH: That is what I said. What you've all been talking about this whole time, that was me.

GONZALEZ: And for about 30 seconds, they do consider a different inflation target.

GARCIA: What about zero?

VANEK SMITH: Let's do two.

GONZALEZ: Zero's basically two.

DUFFIN: This is of course a major economic decision. But after that Greenspan just says, quote...

GARCIA: "Could we leave it at that? Let us now move on."

MALLABY: It's almost like they didn't come up with it.

GONZALEZ: This is Sebastian Mallaby again, the one who surfaced the transcripts.

MALLABY: They just kind of landed on it by some quirk of how the conversation flowed. I thought that was the most extraordinary way to have made this epochal decision.

DUFFIN: This decision was huge. And Alan Greenspan started getting nervous. So the next day, he came back into the room, and he said, that big thing that we decided yesterday - how about let's not tell anyone?

MALLABY: He said, I will tell you that if the 2 percent inflation figure gets out of this room, it is going to create more problems for us than I think any of you might anticipate.

GONZALEZ: So the U.S. has this explicit target to devalue our currency by 2 percent every year, and they weren't telling us. And there was a second when Alan Greenspan thought, is this fraud against the saving public?

MALLABY: He said, you know, if we have 2 percent as our target, we're essentially taking 2 percent of people's savings away every year. And he made this snide comment. He said, we just have to make our dollar bills smaller and smaller every year to reflect the loss of purchasing power.

DUFFIN: OK, so he's being tongue-in-cheek there. But the point is the U.S. is keeping this a secret. And Sebastian says this doesn't make any sense because remember what we learned from New Zealand. Telling people that you're going to force inflation down is part of how you achieve it.

MALLABY: It's like that movie "Dr. Strangelove."

GONZALEZ: "Dr. Strangelove" is a movie about a defense scientist laying out the logic of nuclear deterrence.

MALLABY: He says, the whole point of the doomsday machine is lost if you keep it a secret. And of course what he means is that if you want to deter your enemy from attacking you, you've got to tell them that you've got this devastating weapon that could blow them up.

GONZALEZ: To not announce your inflation target undermines the whole point of it. But the reason the U.S. kept it a secret was so that they could change their minds at any time. And they gave themselves no deadline to reach their target. So it was far less risky than what New Zealand did.

DUFFIN: Also, the U.S. was almost at 2 percent inflation already. It was not a shock to our economy. So Sebastian says the main question this secret meeting raises is, why 2 percent?

MALLABY: There's no magical logic that justifies 2 percent more than 1 percent or 3 percent. And yet we've made a kind of fetish of this 2 percent target way out of all proportion to the logic that was deployed at the time when it was first embraced.

GONZALEZ: And by logic, he means lack of logic.

DUFFIN: Alan Greenspan never announced his secret inflation target. It was Ben Bernanke who announced it in 2012.

GONZALEZ: And it might not even be the right number.

DUFFIN: Valerie Wilson is an economist at the Economic Policy Institute. And she says there's no reason our inflation target should also be a number that we can, like, never, ever cross.

VALERIE WILSON: You know, a target doesn't necessarily mean it has to be a ceiling. The 2 percent target should - you know, could just be, say, an average.

GONZALEZ: She thinks the U.S. should have a range, not one explicit number, a range like New Zealand.

DUFFIN: Some economists say 2 percent inflation - that's just too low to get us out of a bad economic situation like a recession. They say a 3 or 4 percent target would give us more wiggle room. But Valerie says she does not think that it's likely the U.S. will raise it because keeping it low benefits some people.

WILSON: A higher inflation target benefits borrowers who tend to be those with less income. On the other side of that, those with higher income and greater wealth who are the lenders, you know, would not necessarily want to raise the inflation target.

GONZALEZ: The U.S. has been targeting the exact same number since 1996. And Valerie says that doesn't make sense. Our economy and the world are totally different now. We should evolve. Other countries have.

DUFFIN: New Zealand - their original target was zero to two, and they quickly raised it to zero to three. And now the target is 1 to 3 percent.

GONZALEZ: But remember Arthur Grimes, the jazz musician econ Ph.D. who invented inflation targeting? He likes the original 2 percent target.

GRIMES: No, I like under 2 percent. That's where we started, after all. Yeah.

GONZALEZ: This is Arthur's jazz duo, PLANET MONEY listeners, Duopoly.


GRIMES: (Singing) I just want someone that I can talk to. I want you just the way you are.

GONZALEZ: He wants inflation rates...

SARAH GONZALEZ AND KAREN DUFFIN: (Singing) Just the way they are.


GRIMES: The band also features the ukulele and the electronic wind instrument.


GONZALEZ: Today's show was produced by Alexi Horowitz-Ghazi. Special thanks to Sir Roger Douglas for helping us with fact-checking.

DUFFIN: That is a real sir. A knight helped us with this episode.

GONZALEZ: There were a lot of conflicting origin stories, so we have to thank Charles Goodhart, David Beckworth, David Wessel, Jerry L. Jordan and my friend in New Zealand, Geoff Cooper.

DUFFIN: They all helped us sort this out.

GONZALEZ: Also, super extra special thanks to PLANET MONEY's own Kiwi economist radio producer Darian Woods. He wanted the whole world to know that New Zealand is the reason the U.S. has an inflation target. And Darian knows Arthur Grimes.

DARIAN WOODS, BYLINE: Thanks so much for coming at short notice.

GRIMES: That's OK. How long have you been over here?

GONZALEZ: Wait; you guys know each other?

GRIMES: Yeah, Darian worked at my research institute.

GONZALEZ: Oh, cool.

WOODS: Yeah, I was an intern.

GRIMES: It's a small world.

GONZALEZ: How was Darian as an intern?

GRIMES: Oh, we had to get rid of him.


GRIMES: Hopeless (laughter). But...

WOODS: Sent him overseas.

GRIMES: Yeah, that's right. No, he went on to bigger and better things.

DUFFIN: We always love to hear your questions, ideas, thoughts about the show. We are on Twitter, Instagram, Facebook. We are @planetmoney. You're currently listening to a New Zealand band called Hans Pucket. You can check them out at

GONZALEZ: I'm Sarah Gonzalez.

DUFFIN: And I'm Karen Duffin. Thanks for listening.


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