The "Inflation Moralist" View

By Tyler Watts
I’m trying to wrap my brain around the recent wave of ‘respectable’ economists coming out in favor of higher inflation. Some of the more prominent names include Ken Rogoff, Christina Romer, and the blogging sensation Scott Sumner. Although it’s often dressed up in fancy sounding jargon like “Nominal GDP targeting,” the inflationists’ arguments are pretty straightforward, standard fare of macroeconomics courses—even the ones I teach. The core argument is actually a pretty old one, predating even J.M. Keynes by almost 200 years. David Hume was the first to explain how, when new money enters the economy, the prices of goods tend to rise faster than the price of labor. This “wage stickiness” means that, with more money and price inflation, business profits will rise and businesses will increase output, expand investment, hire more workers, and so on. The next argument centers on one of the most well known effects of inflation: the transfer of wealth from creditor to debtor. If high, unexpected inflation erodes the value of a loan’s principle faster than the fixed interest rate augments it; the lender gets less than he bargained for, and the borrower comes out ahead—sometimes way ahead, as when inflation is very high. Sometimes the “real” interest rate can actually go negative, creating a situation where debtors are essentially getting paid to borrow. Finally, we could toss in some arguments about “wealth effects” and the money illusion—how people feel richer when their house and stock portfolio values go up, leading them to spend more, thus boosting business output and employment. So a stiff dose of unexpectedly high inflation (it must be unexpected, mind you—a “monetary surprise,” lest people wise up and adjust contracts in advance) stands to boost output and employment and whittle away people’s real debts. And what are the big problems again? Unemployment and over-leveraged consumers and governments? Then voilà!—now must be the perfect time for some inflationary medicine! Now normally, this being the Sound Money Project, my rejoinder to the pro-inflation argument would focus on the potential bad side effects of this inflationary cure, and the prospect that, as with many medicines, overdoses might kill the patient. In all fairness, the inflationists—mostly very intelligent, seasoned economists—have admitted that the higher inflation they’d like to see does have its drawbacks, but that the benefits exceed the costs at this rare moment in time. So let me instead concede for the moment that the inflation medicine would generally work as intended, albeit with some painful side effects. Why am I still stubbornly opposed, in knee-jerk, reactionary fashion, to this prescription? It comes to this: inflation is theft. (And I’m not the only one to experience such a blunt, visceral reaction to the inflationists’ proposals). The kind of money-printing that these people so glibly promote manifests itself as an illicit transfer of real resources from investors to borrowers, from savers to reckless spenders, from the people to the government. The early recipients of new money get to spend before prices go up, thus increasing their consumption of real goods. The late recipients suffer, facing rising prices first, and higher incomes later. The same is true for debtors and creditors; borrowers benefit from inflation to the extent their real debt and interest burden is reduced, while creditors suffer repayment in a fixed amount of depreciating currency. And don’t forget that anyone with a savings account is a creditor in the broad economic sense. This fact of inflation is nowhere more evident than when government prints money to finance wars, like the US did directly in the 1770s and 1860s, and indirectly in the 1910s, 1940s, 1960s, and arguably 2000s-now. Here’s a test to illustrate the point: ask yourself, could I do the same thing (print money and use it to buy assets) myself? No? (OK, hang on while I unplug my color printer…) Then how come Ben Bernanke gets to do it? And if the Fed is really trying to ease the household debt burden, why does it buy government bonds and MBS (Mortgage-backed securities) from well-connected bankers, and not, say, my old shoes? If they shelled out $1,000 for my worn-through loafers I’d swear to use the money to pay down my credit cards, or at least replace the shoes; heck, that would “stimulate” spending, right? But somehow Joe Six-Pack is strangely left out of the equation. And herein lies the problem. The inflationists say “it’s for your own good.” But in reality, the inflation is done by the power elites, for the power elites. It benefits, in this order: the government, the large banks, large corporations, government contractors, etc. In other words, inflation is done behind the scenes, by special interests. But with the “scientific” cover provided by the pro-inflation economists, it’s claimed to be done “to help the economy,” to provide jobs. So, to put it bluntly, inflation is just plain wrong. Forget about whether it can “help the economy.” Look, I could incorporate a gang of street thugs to go on daily purse-snatching and mugging raids. Think of the benefits! I’d give jobs to otherwise unemployed miscreants, and don’t worry, we’d only target the super-rich who weren’t doing anything productive with the money anyway. If I structured this right, it would clearly boost employment, and not just for my gangsters; think about the subsidiary effects with rich people hiring extra security guards, buying more pistols and pepper spray, etc. Even if this “helps” boost economic activity, you know in your heart it’s wrong (and you know it’s going to hurt, not help, in the long run). I think this is why so many Americans have a visceral reaction to inflation. We still have a strain of thrift and virtue running through our cultural DNA. It’s okay to be rich, as long as you earned it. It’s not okay to be rich merely because you had a license to counterfeit money, or you were closely connected to those who do so. And it’s not okay to steal, even in the name of helping people. (Ed. To paraphrase Emma Goldman: If inflation really helped the people, they would make it illegal.)Tyler Watts is an assistant professor of economics at Ball State University.Image: Salvatore Vuono/

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