This is my answer to a piece by George Melloan in today's WSJ editorial page, pg. A19. It really is a fascinating catalogue of economic myths and urban legends. I am still flying a little high over Nick Rowe leaving a comment in my post.
For the original post, which contains not only his comment but my answer to his comment please click here http://diaryofarepublicanhater.blogspot.com/2011/11/on-scott-sumners-intellectual.html?showComment=1320418939169#c783077183913597011
For my post that discussed the his comment and my answer to his comment-LOL-please see
However, Mr. Melloan has brought us back to reality here, giving us a heaping, helping, Marx's economic filth to wade through.
Let's get started. His whole piece is predicated on the fallacy that inflation is bad for the little guy as the title suggests, "Obama's Perplexing Populism."
It is a minefield of intellectual snares and logical traps. His appeal could well work on those who don't understand economics all that well-let's be honest a large part of the U.S. electorate. Intuitively it might well seem that with high oil and food prices we are drowning in a sea of inflation.
But inflation is about more than food and gas prices. If deflation were simply a case were every other dynamic in the economy would be left constant but oil and food prices would go down then this would be a great thing for the little guy at least in the short term. Still bear in mind that between July 2008 and March 2009 we saw oil prices collapse from $147 to 30 and this was the worst part of the recession. During this period of harsh deleveraging, we saw unemployment reach it's peak and the economy move to job losses of 750,000 a month.
I will go out on a limb and say few benefited from this period of low oil prices and the few that did were not in the "99 percent."
Oil and food prices are kept out of the core inflation index which is more accurate about long term inflation trends. The bottom line is that paying over $3 a gallon sucks quite honestly-though my car has been repoed so it doesn't effect me either way. But it really is a factor that might in some ways make things even harder but are not the cause and not the long term problem.
As my own case suggests, if gas went back to $2,50 it would not help me or many others in similar circumstances. Deflation is not good for the economy. During the worst period of our recession, oil prices collapsed, When the economy stopped bleeding jobs and started mildly gaining them, oil prices rose, The reality is that higher oil prices may be the long term trend.
It's cyclical in large part. I don't know how much of it is about speculators either as there were speculators in the 80s and 90s as well yet oil was as cheap as $10 and never more than 30 during that whole period. If oil goes up however it probably would be good not because it is so in itself but because it would also go hand in hand with a growing economy.
Let's look at a few knee slappers that Mellhoan gives us.
"Contrary to the myth of "independence" the Fed responds to the pressures from elected officials. It is following a deliberately inflationary policy in an effort to pump up asset prices and dilute the cost of financing a profligate government."
I'm not sure where this profligate government is, is it the one that has instituted a total of $100 billion spending cuts this year and has put in place a Federal hiring freeze? But the idea that the Fed is following a deliberately inflationary policy is the one that any real economist better not be drinking anything when he reads this as he'll end up spitting it all over himself.
"if prices continue their rise-as is likely-it could be devastating to household balance sheets. Inflation is a tax that hits lower-income people especially hard."
The old "inflation is a tax" canard. Let's read his description of what is happening:
"The economy picked up a little steam in the third quarter, growing at an annual rate of 2.5% on the strength of higher consumer spending and business investment. But personal disposable income, inflation adjusted, dropped 1.7%, the first decline since the 2009 recession. The personal savings rate fell back to the recession level, a meager 4.1% of personal income. Why should anyone save, when money-market accounts yield only a skimpy half a percentage point? What we have here is the early stages of stagflation."
To that last question the answer is obviously that is not an incentive to save. But we are not-or we shouldn't be-looking for a high savings rate right now but more consumer spending. The way to get it back is not deflation but rather jobs and mortgage relief. Our real problem is not lack of savings, or inflation, but hoarding as you can learn from Keynes or Irving Fisher.
The idea that we are approaching "stagflation" shows that Melloan is one of those who really needs an intervention as he is stuck in the 70s. Today's environment could not be more dissimilar. Let's take it home with one more knee slapper:
"Giving stocks an artificial boost is mainly a policy that serves those millionaires and billionaires the president rails at as he targets them for higher taxes. Warren Buffett and George Soros will make another billion. It does little for Joe Six-Pack other than perhaps saving his pension if he retires soon enough."
The oppoisition to stimulus rather is led by millionare and billonare creditors would be closer to the truth who don't want anyone to ever escape their grasp, let the economy drown. Joe Six-Pack will benefit from getting a job, getting mortgage relief, and maybe even getting some relief from crushing student loans.