More Inflation Needed
Alex Tabarrok noted this morning:
I wish Arnold Kling were correct that inflation is around the corner. We could use some inflation to get back on track. Nominal wages are simply not flexible enough to get the job done in short order and there is much to fear from populist backlash.
I wish Tabarrok could do more to convince his fellow free market types that this is correct. Because instead the political system seems to be dangerously obsessed with the idea that we need to start fighting inflation.
Another data point in the inflation-would-be-good direction comes from this recent Wall Street Journal article on how businesses have started hoarding cash. The idea of “risky investments” has come to be associated with financial firms gambling on financial assets, and now there’s a backlash against the very concept. But the reality is that for the economy to grow, businesses need to be making investments in their own capacity. And all such investments always involve some risk. One problem with these traumatic downturns is that everyone starts getting extremely risk-averse and hoards money out of fear that investments won’t pay off. That belief becomes, in turns, self-justifying since with so little investment happening there’s little growth and investments don’t pay off.
One way to alleviate the cycle, however, is to have some inflation. Inflation makes it very costly to sit on piles of cash, and makes it look better to go out and do something with it instead. A period of zero or falling inflation, by contrast, makes hoarding look like a pretty reasonable course of action.
70 Responses to “More Inflation Needed”
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November 5th, 2009 at 4:06 pm
Inflation is also good for debtors with fixed rate debt, and very bad for banks, which is why large financial institutions (and their media lapdogs) fear and hate inflation.
November 5th, 2009 at 4:08 pm
Hey I am hoarding my pennies right now…
November 5th, 2009 at 4:12 pm
I’m not sure about the need for inflation, but it seems to be somewhat well founded. Am I the only one who has noticed, or at least felt like, prices are a little lower than I am used to paying. My leftover balance (which I transfer to my savings) from each paycheck when my next one is deposited seems to be growing lately. I kind of like it, but could sacrifice it for a better recovery..
November 5th, 2009 at 4:13 pm
Inflation is also good for debtors with fixed rate debt, and very bad for banks, which is why large financial institutions (and their media lapdogs) fear and hate inflation.
It is also horribly bad for renters and savers. Which is why inflation is a regressive tax on the poor.
November 5th, 2009 at 4:14 pm
A normal target for inflation is 2% per year. There is no need for inflation above that. The real need is for increased aggregate demand and many more jobs.
November 5th, 2009 at 4:19 pm
I wish Tabarrok could do more to convince his fellow free market types that this is correct. Because instead the political system seems to be dangerously obsessed with the idea that we need to start fighting inflation.
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If you really, really, really want the Democrats to lose elections you’ll keep going with this. It destroyed the Carter presidency
November 5th, 2009 at 4:20 pm
Through inflationary policy the government can actually pay off people’s debts for them. Hopefully Obama realizes this in 2012 – “yeah, the economy may suck. But I paid off your debts for you!”
November 5th, 2009 at 4:20 pm
Saying inflation is good because it creates an incentive to move money around is like saying it’s good to acquire a tapeworm because it keeps you weight down.
The benefits of inflation are vastly outweighed by its many, many negative consequences. And once inflation gets going, its very difficult to bring back under control. Didn’t they teach you that at Harvard?
November 5th, 2009 at 4:24 pm
…and once deflation gets going, it’s even *more* difficult to bring under control.
Separately, the WSJ chart seems to show a somewhat surprising trend towards cash holding. I’d like to see a longer series. I’d also like to see something like a Debt/Asset chart: maybe cash-holding has increased along with leverage.
November 5th, 2009 at 4:25 pm
N Says:
November 5th, 2009 at 4:20 pm
Saying inflation is good because it creates an incentive to move money around is like saying it’s good to acquire a tapeworm because it keeps you weight down.
The benefits of inflation are vastly outweighed by its many, many negative consequences. And once inflation gets going, its very difficult to bring back under control. Didn’t they teach you that at Harvard?
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Very good with the tapeworm! And Philosophy majors don’t learn about inflation
November 5th, 2009 at 4:25 pm
It is also horribly bad for renters . . .
Landlords can be borrowers too, and for various reasons specific to this downcycle, inflation in rents is likely to lag general inflation, and indeed probably inflation in wages, for some time.
. . . and savers.
Only net savers, and only if their savings are in fixed-rate assets.
Which is why inflation is a regressive tax on the poor.
The poor tend not to be big net savers, and thus disemployment is a much bigger problem for the poor than moderately-high levels of inflation.
November 5th, 2009 at 4:27 pm
So let’s get this straight:
You want higher inflation – none of which, none, will be manifested in wage increases, considering how none of the profits of the last thirty years were given over either – at a time when nearly a fifth of the country is out of work or close to being there, and possessing no engine to drive job growth other than nebulous big picture ideas like “green jobs”.
And you claim to be on the side of the poor and working classes?
Jesus H. Christ.
November 5th, 2009 at 4:30 pm
To clarify, I’m saying everything that we see will be price inflation, while wages will remain stagnant.
Moreover, I’m pretty sure that in an employment climate like the one today, pretty much all of those price increases will occur only in the things people actually need, as opposed to things they merely want.
Great, Matt, let’s go back to 70s era food and energy costs. (I do, however, agree with DTM; there’s a lot of reasons that housing costs will stay down)
November 5th, 2009 at 4:31 pm
And once inflation gets going, its very difficult to bring back under control.
This is the exact opposite of the truth. Deflation is very hard to get back under control. Moderately-higher inflation is relatively easy to get back under control (painful if let unchecked too long, but not tremendously hard to do).
If you really, really, really want the Democrats to lose elections you’ll keep going with this. It destroyed the Carter presidency.
We are facing completely different economic problems right now. It amazes me that some people still seem to think that all periods of economic distress require identical responses.
Oh well, I guess idle dreaming about Carter is all Republican hacks like Campesino really have going for them these days.
November 5th, 2009 at 4:33 pm
inflation in rents is likely to lag general inflation
Only if inflation is low. If you want more inflation, then no, it will be passed on.
Only net savers, and only if their savings are in fixed-rate assets.
To have assets that are not fixed rate, they have to take on risk. To ask an uniformed person to, as a retail investor, take on risk is ridiculous. They do not have the skills or resources to get ahead in this game.
November 5th, 2009 at 4:33 pm
We are facing completely different economic problems right now. It amazes me that some people still seem to think that all periods of economic distress require identical responses.
The problem is that with Rubin All Stars like Summers and Geithner in charge, I have little faith that we’ll be seeing adequate responses to those completely different problems.
If employment doesn’t improve significantly, the Democrats are going to get *raped*.
November 5th, 2009 at 4:34 pm
“If you really, really, really want the Democrats to lose elections you’ll keep going with this. It destroyed the Carter presidency.
The Carter Presidency was destroyed by failing to respond to imaginary inflation? And here I always thought Carter had to deal with real inflation. Learn something new every day, I guess.
November 5th, 2009 at 4:37 pm
Greg,
Wages may or may not lag general inflation under the current conditions, but the mechanism you are missing in your analysis is the conversion of cash savings into job-creating purchases and investments.
And so when you are facing a tradeoff between inflation and unemployment, and inflation is negligible and unemployment is shooting through the roof, it is pretty obvious which way the balance should be shifted.
November 5th, 2009 at 4:38 pm
Inflation is currently running at 2% – 2.5%. The headline you see about deflation is entirely the result of a one-time drop in energy prices last fall.
November 5th, 2009 at 4:40 pm
If you really, really, really want the Democrats to lose elections you’ll keep going with this. It destroyed the Carter presidency.
We are facing completely different economic problems right now. It amazes me that some people still seem to think that all periods of economic distress require identical responses.
Oh well, I guess idle dreaming about Carter is all Republican hacks like Campesino really have going for them these days.
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How did you ever get my saying “all periods of economic distress require identical responses” out of a comment stating that inflation probably isn’t a good idea?
November 5th, 2009 at 4:43 pm
Wages may or may not lag general inflation under the current conditions, but the mechanism you are missing in your analysis is the conversion of cash savings into job-creating purchases and investments.
How, exactly, is the conversion of savings into purchases of increased essential goods going to drive job creation?
I was suggesting that people are going to end up spending more for things like food and energy, which under their current production models, cannot act as engines of job growth.
Agriculture requires practically no one, and energy companies need engineers and skilled laborers to expand production or bring new fields/mines/etc into operation.
How on earth is that going to help us?
November 5th, 2009 at 4:43 pm
LaFollette Progressive Says:
November 5th, 2009 at 4:34 pm
“If you really, really, really want the Democrats to lose elections you’ll keep going with this. It destroyed the Carter presidency.
The Carter Presidency was destroyed by failing to respond to imaginary inflation? And here I always thought Carter had to deal with real inflation. Learn something new every day, I guess.
======================================================
You guys are really having to reach today. By “keep going with this” I meant actually implementing a policy to increase inflation – not just talking about it. Lame
November 5th, 2009 at 4:46 pm
wow – you people are dangerously uninformed.
A bit of inflation is the best solution. It is even better than zero inflation. Why? For the exact reason that Matt Y outlined above – it creates an incentive for people with money to invest it.
We are nowhere near real inflation right now. We have 20% of the population unemployed or underemployed, so there is no chance of wage or push inflation. Then, least 10% extra capacity available until we face capacity constraints.
The U.S. is so far from diluting anyone with inflation that I cannot believe that we are even talking about inflation being a threat. We have a zero interest rate policy right now, and the proper rate of interest is probably negative 5% to get the economy started. The GDP inflation measure came in at what 0.8%?
Then the reasons you all have for hating inflation are simply wrong. The best times we had as a nation for working people were the 50’s and 60’s. This period had high nominal inflation, but wage growth was even higher. It was common to get 5-8% nominal raises every year, simply for doing the same job! Not for getting better at your job – if you did that you got even larger raises!
Plus, you are not recognizing the fact that the late Carter years were the high point of the last 75 years for power of labor. We are not in the same situation 30 years later.
November 5th, 2009 at 4:47 pm
Only if inflation is low. If you want more inflation, then no, it will be passed on.
That makes no sense. More inflation is not going to solve the twin problems of overbuilding and low rates of household formation, so it is very likely that rent prices will continue to lag general inflation for some period of time. Now it is true that if there is higher general inflation, there may be more rent inflation, but the lag will almost surely still be there.
To have assets that are not fixed rate, they have to take on risk. To ask an uniformed person to, as a retail investor, take on risk is ridiculous. They do not have the skills or resources to get ahead in this game.
There can be risk with fixed-rate assets as well. In any event, I’m not asking people to do anything, I’m just pointing out that unless you are in fact a large net saver with a lot of fixed-rate assets, then your personal balance sheet may not suffer from moderately higher inflation. And there are not a lot of people who fit that description (and most of them are quite wealthy).
I have little faith that we’ll be seeing adequate responses to those completely different problems.
That is an entirely different topic. Matt is right that more inflation would be a good thing right now, and Campesino is wrong that this is the same economic situation that Carter found himself in. But how the relevant policymakers will actually act and how that will actually play out politically is all a very different question.
November 5th, 2009 at 4:47 pm
Rule #1: Arnold Kling is always wrong.
Rule #2: If you think Arnold Kling is right, see Rule #1.
November 5th, 2009 at 4:51 pm
Saying inflation is good because it creates an incentive to move money around is like saying it’s good to acquire a tapeworm because it keeps you weight down.
And in fact, in the first half of the 20th Centure, a number of people in sports requiring a low body weight (jockeys, coxswain, etc.) deliberately injested tapeworms to lose weight.
November 5th, 2009 at 4:51 pm
How did you ever get my saying “all periods of economic distress require identical responses” out of a comment stating that inflation probably isn’t a good idea?
I got it from you claiming higher inflation would lead to the same result as Carter got. Of course by providing you with any sort of logical chain of inference to arrive at that conclusion, no matter how ill-informed, I am still probably giving you too much credit.
November 5th, 2009 at 4:57 pm
How, exactly, is the conversion of savings into purchases of increased essential goods going to drive job creation?
Exactly by employing people to produce those goods, and wherever else firms start seeing increased margins and start increasing output accordingly.
I was suggesting that people are going to end up spending more for things like food and energy, which under their current production models, cannot act as engines of job growth.
General inflation can’t just show up in food and energy over periods of significant length. The basic problem is that too many people spend too much money on too many other things, so if there is more money floating around looking for stuff to buy, it won’t all end up in food and energy.
November 5th, 2009 at 5:03 pm
13
To clarify, I’m saying everything that we see will be price inflation, while wages will remain stagnant …
That’s the point. Tabarrok wants inflation to make it easier to cut real wages.
November 5th, 2009 at 5:03 pm
DTM Says:
November 5th, 2009 at 4:51 pm
How did you ever get my saying “all periods of economic distress require identical responses” out of a comment stating that inflation probably isn’t a good idea?
I got it from you claiming higher inflation would lead to the same result as Carter got. Of course by providing you with any sort of logical chain of inference to arrive at that conclusion, no matter how ill-informed, I am still probably giving you too much credit.
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Wow. Our last bout with inflation (under Carter) led to a whole series of circumstances that the American voters really didn’t like. The anti-inflation attitude of our political class that MattY bemoans came about as a result of experiencing all that pain. Of course he’s too young to remember any of that.
Your hand-waving theorizing assumes none of the malign side-effects of inflation would appear.
The political truth is just about any voter from about the age 50 or older flinches at the mention of inflation. They would turn against just about anybody that brought it back
November 5th, 2009 at 5:04 pm
Also, I have to ask what cash savings?
The US saving rate’s been awful until very, very recently, and many, if not most of the citizenry is in debt.
Those people who’ve just lost their jobs aren’t going to be buying shit, they’re worried how they’re going to make payments on their house, car, or even food supply.
November 5th, 2009 at 5:06 pm
Heh, for once DTM is absolutely correct. We really do need inflation. However, getting the powers that be to accept the hit that inflation would cause them is almost impossible. Inflation effectively reduces debt, and since they hold all the markers and congress only listens to the elite…
When you realize that politicians only exist to serve millionaires, their supposed ‘ignorance’ begins to look a whole lot like malice.
November 5th, 2009 at 5:07 pm
Like I said, Campesino, you are apparently incapable of understanding all the many differences between the economic situation now and in the late 1970s. But if clutching to your Carter-inspired wet dreams makes you happy in these dark days for Republican hacks, far be it from me to interfere further with your personal bliss.
November 5th, 2009 at 5:08 pm
The political truth is just about any voter from about the age 50 or older flinches at the mention of inflation. They would turn against just about anybody that brought it back
I don’t usually agree with you, mate, but in Germany, you can replace “any voter from about the age 50 or older” with “anyone”.
I’d say once people get through gymnasium they’ve had the terror of the Hyperinflation firmly imprinted on their frontal lobes.
November 5th, 2009 at 5:10 pm
Heh, for once DTM is absolutely correct. We really do need inflation. However, getting the powers that be to accept the hit that inflation would cause them is almost impossible. Inflation effectively reduces debt, and since they hold all the markers and congress only listens to the elite…
Well, yea.
No one was willing to take a haircut at all on AIG. Why would they then turn around and take a haircut on *everything*?
November 5th, 2009 at 5:11 pm
Also, I have to ask what cash savings?
The US saving rate’s been awful until very, very recently, and many, if not most of the citizenry is in debt.
Right, and the real cost of that debt would be reduced for most of those people by modestly higher inflation.
Conversely, most of the entities with large cash savings are wealthy people, wealthy institutions, and large corporations. Those are the entities behind a lot of this squawking about inflation, despite inflation clearly being a far lower concern than unemployment right now.
November 5th, 2009 at 5:12 pm
Then the reasons you all have for hating inflation are simply wrong. The best times we had as a nation for working people were the 50’s and 60’s. This period had high nominal inflation, but wage growth was even higher. It was common to get 5-8% nominal raises every year, simply for doing the same job! Not for getting better at your job – if you did that you got even larger raises!
=============================================================
You’re completely wrong. Look here
http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=3
There was hardly any inflation in the 50s and early 60s. It didn’t start picking up until the late 60s.
And yes I’ve gotten those “cost of living adjustment” style raises and it wasn’t that great
November 5th, 2009 at 5:13 pm
Yeah, the poor definitely benefit from moderate inflation.
I know some are convinced that profits are not passed to low end workers, which is frequently true, means that inflation for those workers is bad. But that last part is false. What we are talking about is wage inflation. If credit is cheap and companies are forced to invest… guess what investment is? Yeah, it’s paying people money to do jobs. So inflation driven by fed policy is directly the kind of wage inflation that is good for poor people (since by definition their wages are going up even if in real terms they aren’t).
November 5th, 2009 at 5:19 pm
So basically, you guys are saying is that you don’t like inflation for emotional reasons.
November 5th, 2009 at 5:24 pm
Inflation doesn’t give you more wealth; it makes each dollar you have worth less, and able to by less. Why you want more of it is beyond me. Maybe you just hate the working poor.
November 5th, 2009 at 5:25 pm
DTM Says:
November 5th, 2009 at 5:07 pm
Like I said, Campesino, you are apparently incapable of understanding all the many differences between the economic situation now and in the late 1970s. But if clutching to your Carter-inspired wet dreams makes you happy in these dark days for Republican hacks, far be it from me to interfere further with your personal bliss.
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Of course the economic situation is different than the late 70s. I’m just amazed you really believe that the hard-earned 20th century empirical data we have on the bad effects of high inflation can just be ignored.
Why don’t you stop talking theory and give us some recent historical examples of how this approach has worked out so well. I’d love to read them.
So go ahead and swallow that tapeworm. It’s a political loser in this country
November 5th, 2009 at 5:30 pm
iluvcapra Says:
November 5th, 2009 at 5:19 pm
The political truth is just about any voter from about the age 50 or older flinches at the mention of inflation. … [someone else] I’d say once people get through [German high school] they’ve had the terror of the Hyperinflation firmly imprinted on their frontal lobes.
So basically, you guys are saying is that you don’t like inflation for emotional reasons.
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He he! You could put it that way if memory of pain is the emotion. Sort of like saying you don’t like going to the dentist to get a tooth pulled “for emotional reasons”.
November 5th, 2009 at 5:37 pm
I’m just amazed you really believe that the hard-earned 20th century empirical data we have on the bad effects of high inflation can just be ignored.
But you aren’t claiming that every situation of economic distress is the same?
Thanks for proving my point. There is no such thing as “the bad effects of high inflation”. There are different effects to higher (not necessarily “high”) inflation in different situations.
But back to your wet dreams of Carter–sorry to interrupt again.
November 5th, 2009 at 5:39 pm
Still waiting for your historical examples of inflation success
November 5th, 2009 at 5:52 pm
My retail inflation numbers tell me that the retail sector will be near zero inflation, rising from the deflation bottom, in two months. Oil will be around $85/barrel, or about $3.25 a gallon.
That seems soon enough, why rush it?
November 5th, 2009 at 5:53 pm
Seriously, DTM, I’d think the examples of how the approach you advocate has succeeded in the past would just be tripping off your tongue
November 5th, 2009 at 5:58 pm
Re: Only if inflation is low. If you want more inflation, then no, it will be passed on.
Inflation is too much demand for too few goods. Right now we have a huge surplus of housing, courtesy of the recent bubble. Much of it has landed on the rental market because it cannot be sold. Unless you flunked Econ 101 (or never took it) that should tell you that rental inflation will not be a possibility, even if other prices are going.
Re: The Carter Presidency was destroyed by failing to respond to imaginary inflation?
Granted I was just 12 at the time, but I seem to recall a little kerfuffle involving Iran being instrumental in Carter’s departure from the Oval Office.
Re: Our last bout with inflation (under Carter)
Our last bout of major inflation actually began under LBJ (guns and butter), was shifted into overdrive under Nixon, briefly halted under Ford (via a severe recession), then resumed under Carter and finally whimpered off stage under Reagan. Blaming Jimmy Carter for the howl of it is just plain wrong.
November 5th, 2009 at 6:08 pm
JonF Says:
November 5th, 2009 at 5:58 pm
Re: Only if inflation is low. If you want more inflation, then no, it will be passed on.
Inflation is too much demand for too few goods. Right now we have a huge surplus of housing, courtesy of the recent bubble. Much of it has landed on the rental market because it cannot be sold. Unless you flunked Econ 101 (or never took it) that should tell you that rental inflation will not be a possibility, even if other prices are going.
Re: The Carter Presidency was destroyed by failing to respond to imaginary inflation?
Granted I was just 12 at the time, but I seem to recall a little kerfuffle involving Iran being instrumental in Carter’s departure from the Oval Office.
Re: Our last bout with inflation (under Carter)
Our last bout of major inflation actually began under LBJ (guns and butter), was shifted into overdrive under Nixon, briefly halted under Ford (via a severe recession), then resumed under Carter and finally whimpered off stage under Reagan. Blaming Jimmy Carter for the howl of it is just plain wrong.
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You’re correct about the history of inflation in the 60s and 70s. My intent wasn’t to blame Carter for it – I just think he suffered most for it politically. The “Misery Index” (inflation rate + unemployment rate) was about 22% under Carter at the time of the election – the worst it ever was. I think that was more reason for his demise than the Iranian situation
http://en.wikipedia.org/wiki/Misery_index_(economics)
November 5th, 2009 at 6:08 pm
What? Thousands of engineers have been laid off in this recession due to the lack of capital available for projects that will provide energy that we will in fact need in a couple years.
These engineers are making middle incomes that would support both the purchase of necessities and non-necessity durable goods if they were earning it. Speaking as an engineer (for an energy company), I can assure you that if I didn’t have to worry about my job, I could sure use a new TV right now, but I certainly won’t buy one with my savings until this is over. I bet those making (low-skill assembly workers) and designing the TV would like for people to be making these purchases tho.
November 5th, 2009 at 6:12 pm
What jobs do you think will in fact stimulate growth if not those in tech heavy, specialized fields like energy and ag (ag is very labor intensive.. do you know how many people are employed by companies like John Deere and their suppliers to make all the modern machinery necessary to make the actual farming so not labor intensive?)
November 5th, 2009 at 6:26 pm
All of these people arguing over a laughably made-up school of social science.
Maybe if economists took a course explaining to them how science works and what scientific method is, then they would stop being such idiots. However, given that the “science” only exists to tell rich people what they want to hear, it’s doubtful economics will ever be a real science.
November 5th, 2009 at 6:30 pm
DTM Says:
November 5th, 2009 at 5:37 pm
I’m just amazed you really believe that the hard-earned 20th century empirical data we have on the bad effects of high inflation can just be ignored.
But you aren’t claiming that every situation of economic distress is the same?
Thanks for proving my point. There is no such thing as “the bad effects of high inflation”. There are different effects to higher (not necessarily “high”) inflation in different situations.
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I didn’t claim that at all. I was merely pointing out that we have many historical examples of “high” (double-digit or higher) inflation and that we can see that they have many malign effects in common. A pattern.
You seem to have taken the position that every situation is unique and we should ignore the pattern. But you haven’t given us any reason as to WHY we should ignore the pattern.
*There is no such thing as “the bad effects of jumping off the roof of a 4 story building”. There are different effects to jumping off the roof of a 4 story building in different situations*
There’s always the chance that you’ll land in a deep swimming pool and you’ll be fine!
Still waiting for those examples
November 5th, 2009 at 7:01 pm
Wages may or may not lag general inflation under the current conditions, but the mechanism you are missing in your analysis is the conversion of cash savings into job-creating purchases and investments.
For the exact reason that Matt Y outlined above – it creates an incentive for people with money to invest it.
If credit is cheap and companies are forced to invest… guess what investment is? Yeah, it’s paying people money to do jobs.
But for those investments to pay off, there need to be enough savings to complete the investment. People invest when they believe that there enough resources available to turn the investment profitable. If people invest in too many ventures or too much expansion without the necessary savings, the savings run out and lots and lots of hte investments fail.
That’s what causes recession; that people invested in too many ventures so that the resources were not available to support them all.
Saving and hoarding is part of creating the buffer so that investment can go smoothly. The buffer has been depleted through the inflationary bubble of the past 5-6 years, or >15 years if you include the 90s internet bubble (which the housing bubble was just a continuation of). There needs to be a replenishing of the buffer before all of these investments will have a high enough expectation of success to justify the risk.
Creating a job that winds up creating nothing; that results in a failed company that does not produce anything, does not actually help the economy in the long run.
I’m not saying that we need to be risk-averse, just that our assessments of the risks need to be accurate, and inflation tends to make us underestimate them.
November 5th, 2009 at 7:08 pm
I think the real takeaway point here is that Matt is an idiot, and there’s no reason whatsoever to listen to his posts on monetary policy. Inflation is good for debtors, but it’s equally bad for creditors. In an inflationary environment creditors get poorer and poorer over time. And what then? They reduce lending because they have less wealth to lend. Moreover, why would someone invest in capital equipment if he can’t be sure of what his dollar is going to be worth 5 years from now? Capital investments return 10% tops. Swings in the dollar can easily swamp that (look at the 15% decline this year). What’s needed is a stable dollar for a long period of time. Inflation as a spur to start spending money sounds good in theory, but has never in practice been shown to be a positive overall. So yeah, what Campesino said. Democrats should start campaigning on rising grocery prices with wages being very slow to catch up. It’ll be good business for Republicans.
November 5th, 2009 at 8:36 pm
Our ship is about to be swallowed by Charybdys, but some people even now are more concerned with old Scylla on the other side of the strait.
November 5th, 2009 at 8:56 pm
Exactly Matt. Pearls before swine, I am afraid.
November 5th, 2009 at 9:16 pm
Well, several hours now and still DTM has no real world examples of how the inflationary policy he advocates has ever really succeded. Kind of like I thought
November 5th, 2009 at 9:39 pm
I think the real takeaway point here is that Matt is an idiot, and there’s no reason whatsoever to listen to his posts on monetary policy.
Actually, the real takeaway is that inflation pisses many ordinary non-economists off, because they don’t take into account the macroeconomic effects and just think of it in terms of rising prices, which must be bad. Just about every macroeconomic expert, however, thinks that moderate inflation is an extremely good thing. The only economics types who don’t like it are people who follow debunked and intellectually bankrupt theories like the Austrian School.
November 5th, 2009 at 10:18 pm
Holy crap, where is Bob Roddis?
November 5th, 2009 at 10:27 pm
Holy crap, where is Bob Roddis?
Reading a pamphlet? Off pretending that the Ron Paul (blessed be his name) Newsletter is “cultural critique” and not racism? Stuffing his mattress with GOOOOLLLDDDD?
November 6th, 2009 at 5:00 am
I’m starting to think inflation is like cholesterol, there is good inflation and there is bad inflation.
Good inflation gently stirs the pot a little bit and get things moving. It adds a touch of spice.
Bad inflation is when oil goes up to $110/barrel and stays there for no good reason. $110/barrel oil isn’t going to gently stir anything. High priced oil is going to bring an inflationary/recession to an economy already in a deep downturn. As I flip through my Dictionary of Economic Terms, the proper definition for this double whammy effect is: FUCKED BEYOND BELIEF.
November 6th, 2009 at 9:23 am
Um, contrary to popular belief, I do not in fact post here 24/7.
Anyway, first, no one is talking about double-digit inflation. We are talking about somewhat higher inflation than we have now, which could still be well short of double-digit inflation.
Second, here is inflation by decade.
And here is real per capita GNP growth by decade:
1920-30 13%
1930-40 21%
1940-50 50%
1950-60 18%
1960-70 33%
1970-80 24%
1980-90 24%
1990-2000 24%
A few notes: the highest growth rate (1940s) was associated with an above-average rate of inflation (5.63%). The lowest growth rates (1920s, 1930s, and 1950s) were all associated with below-average rates of inflation (0.08%, -1.94%, and 2.05%). But it would be overselling this data to claim it demonstrates a neat correlation between inflation and real per capita GNP growth, because the 1960s had below-average inflation and above-average growth, and the 1970s, 1980s, and 1990s had similar growth rates but a variety of inflation rates.
Of course this is all old information to people who actually know what they are talking about: there is no neat correlation between specific inflation rates and general economic conditions, and thus moderately high inflation is not necessarily bad for the general economy. We do know, however, that in the Great Depression, and many similar downcycles prior to the Great Depression, and many similar downcycles in other countries, that disinflation/deflation has been associated with rising cash savings rates and deep and prolonged economic contractions/stagnations. And all the evidence available today is that we are facing a similar situation.
Or we could just randomly assert we are facing the same conditions as the late 1970s and have ourselves some wet dreams about Carter and some zombie-Reagan arising to save the Beck/Limbaugh/Palin-dominated GOP from the dustbin of history in 2012. I can guess which path a know-nothing Republican hack like Campesino will continue to choose.
November 6th, 2009 at 9:27 am
Max424,
The oil situation is an example of a commodity shock, not inflation in the general sense. Major commodity shocks can in fact lead to bad things economically, but whatever is happening with general inflation won’t really cause or prevent such shocks.
November 6th, 2009 at 10:04 am
Campesino, increased inflation will still be low inflation. Targetting even a number as high as 5% inflation will not result in hyperinflation. We didn’t even have hyperinflation under Carter, we just had very high inflation.
The inflation of the 70s was not primarily a result of US fiscal or monetary policy. It was a result of a spike in the cost of a necessary resource which was primarily purchased from foreign sources. Prices rose while our balance of trade worsened. Essentially, the increased cash supply was not in the hands of Americans.
What is proposed is creation of conditions that promote investment in American industry over investment in American dollars. We want to push foreign governments to use their huge reserves of American currency. We want them to either buy our exports directly, or to send their money into the US as capital investment. Creating conditions in which assets in the US will increase in value with respect to our currency promotes this.
November 6th, 2009 at 10:16 am
That’s bizarre. If someone thinks their dollar will be worth less in five years, they’re going to spend it on something that will increase with respect to the dollar. They’re going to invest it in something that is having its price inflate. If my dollars are going to decline in value, I’m going to buy a factory which will increase in value at the inflation rate.
People seem to have this crazy idea that inflation means that the prices you pay go up, but the prices you sell things for do not.
November 6th, 2009 at 10:46 am
People seem to have this crazy idea that inflation means that the prices you pay go up, but the prices you sell things for do not.
I think you put your finger on it. If people were consistently thinking about firms being able to sell their products for more instead of just consumers buying products for more, my guess is a lot of people would have an easier time understanding why a little higher inflation can lead to greater use of otherwise idle productive resources.
November 6th, 2009 at 11:31 am
People seem to have this crazy idea that inflation means that the prices you pay go up, but the prices you sell things for do not.
In particular, one of the things most people sell is their labor.
Although given the slack labor market and the declining real wages most people have suffered over the last 30 years, I can understand why they might be suspicious of the idea that inflation would be reflected in their paychecks.
The problem is, though, those same conditions are precisely why deflation is practically guaranteed to be reflected in their paychecks. If inflation might reach wages last, deflation will reach them first, which is just as bad or worse from a real standpoint.
Deflation will accelerate the slide in housing prices, cut into the dollar amount of your paycheck that you have to make a mortgage payment with, while doing nothing to the amount of the payment itself. Does that sound good to the average American to you?
November 6th, 2009 at 11:53 am
chris, the accepted scientific term for those people you described is “fucked”. Could have shortened your post, mate!
November 7th, 2009 at 11:12 am
[...] Matthew Yglesias agrees with Tabarrok. Possibly related posts: (automatically generated)Nomura: Inflation to surge in [...]
November 7th, 2009 at 11:14 am
I know CPI shows virtually no inflation, mainly because food and shelter prices have been declining. But agricultural prices have recently begun headed higher, especially in the last few weeks. And even the housing market is showing strong signs of life (see, e.g., Las Vegas, Riverside, and San Diego). Moreover, scratch beneath the surface, and you find plenty of signs of inflation outside of those two sectors:
* Car rental prices are up nearly 50 percent in the past year.
* small businesses are seeing their health insurance premiums rise by about 15 percent for the coming year.
* CalPERS is going to raise long-term care insurance premiums between 15 and 25 percent.
* Many companies are reporting that they have raised the prices of their products.
* The bond market is signaling the highest inflationary expectations in more than a year.
* Gas prices at the pump are increasing.
* 44 percent of companies that recently implemented pay cuts have rescinded them.
* Airlines are raising fares and instituting all manner of annoying fees.
* Cities are raising sewer fees and water fees.
* New cars and used cars are getting more expensive.
* College tuition costs increased 6.5 percent this fall.
That’s just a partial list of items covered at Inflation Watch (www.inflationwatch.wordpress.com) since I co-founded thatblog just over a month ago.
In light of the above (all of which are available at http://inflationwatch.wordpress.com/2009/11/07/blogger-yearns-for-more-inflation/), does Yglesias still think what the economy needs is *more* inflation?