Asking his audience a version of a politician's favorite stump-speech question — "Are you better off now than you were four years ago?" — Federal Reserve Board governor Edward M. Gramlich, speaking at Bates Sept. 24, argued that consumers easily tolerate some price inflation in the economy.

A guest of the Department of Economics, Gramlich also contrasted two worldwide approaches to battling inflation. Given the Fed's particular success at achieving U.S. price stability since the 1980s ("We fought inflation and won," Gramlich says), it wasn't surprising that he championed the home team's approach.

In the 1980s, newly aggressive monetary policies worldwide helped to stem chronic economic inflation. In Gramlich's words, the world's central banks "ganged up on inflation and defeated it." By tightening money supplies, the banks forced worldwide inflation from 12 percent annually to around 2 percent now.

Defeating inflation "is the biggest economic news of the last two decades," says Gramlich, who as a member of Alan Greenspan's open-market committee helps determine U.S. monetary policy, including the setting of Fed interest rates.

Over the years, countries have carried out their monetary policies in two ways, Gramlich explained. One camp, including Australia, Canada and the United Kingdom, has targeted specific inflation goals, sometimes legislatively. In the United States and elsewhere, however, the central bank has merely made "a determination" to control inflation.

Which method is better? Gramlich offered a handout to his audience listing annual inflation rates for 18 industrialized countries, some inflation targeters and others non-targeters, for the period 1994-2002. He noted that while all 18 countries have held inflation to around 2 percent annually, countries that mandate inflation-rate goals do slightly worse than non-targeters.

"It is tempting to conclude that the determination to fight inflation is what's important, not the trappings of a targeting system," he said.

Regardless of approach, annual inflation rates among industrialized nations have hovered around 2 percent in recent years. So if inflation is in check, Gramlich asked his audience in Pettengill Hall's Keck Classroom, should the Fed pursue a zero inflation rate? Indeed, how low is low enough? Who should decide?

After offering some theory to explain why zero inflation doesn't help the economy (modest inflation can help the economy make needed, downward adjustments in real wages where labor productivity is falling), Gramlich offered novel approach to assessing price stability — "Ask the people."

Conducting a thought experiment with his audience, he asked his listeners to imagine two catalogs. One catalog features prices on every product in the economy five years ago, while the other offers prices on every product available today. "If you had $1,000 to spend, from which catalog would you buy?" Gramlich asked, making sure to mention that today's catalog would include all the sundry and improved technology available to consumers.

With the audience voting around 90 percent in favor of the current catalog, Gramlich had made his basic point. Despite apparent inflation in the economy, the influx of new and better goods ("College students are suckers for new technology — but then again so are my colleagues," he quipped) tends to bolster consumer confidence in overall price stability.

"People are comfortable with 2-percent inflation," he concluded, adding a plug for the Fed's handling of the economy: "If the system ain't broke, don't fix it."