Sunday, December 30, 2012

The Age Old Question: Is Inflation the Price of Civilization?

    Or is it just an unmitigated tax, particularly on the poor? I've never believed that inflation is an unmitigated evil or that it's worse for the poor at least on every level. Back when I had my radio show, I got in an on air argument with my co-host Turbo Kitty after she insisted that inflation is indeed an unmitigated tax on the poor. For more on my argument with her

     I just found it found it astonishing at the time that she thought that inflation was an unmitigated evil, and that deflation would benefit the poor. Since then, I've learned that there are many who would agree with her. Our radio collaboration soon ended when she wanted to spend more time on Occupy Wall St. I don't know that this argument helped our relationship. From my stand point it was really motivated by a desire on my part to understand this, it was nothing personal.

    It did seem to me like her views on many things sounded very Right wing for a gal who was something of a radical leftist-she wanted to blow up the banks-preferably literally, etc. Yet she thought the fairest tax system would be a flat tax and that inflation is an unmitigated tax on the poor. Just sounds very conservative to me. Major Freedom would love her.

  Again, I see now that at least based on the consensus, there is a lot of disagreement among economists-it depends what school you ask among other things. The Austrian school in particular sees inflation as unmitigated evil. It's "theft" and hurts the poor more. To me, the issue is at least somewhat ambiguous.

   After all, even if inflation raises prices, it also reduces the amount of debt you owe; I think we can plausibly presume that generally speaking the creditor class is a wealthier group than the debtor class.

   Still, I also now see that I was mixing a number of different issues up in this inflation debate. One thing is I've always instinctively hated the idea of the neutrality of money: for me, I've always felt it's absurd. I'm now finally reading people who are helping me understand why it's wrong. As a layman in economics that's kind of how I have to grapple. Often I here some macro guys make these claims that I instinctively don't trust but lack the theoretical background to really show why they're wrong, though I think they are. Later, I learn more theory and see why.

  Yet, the neutrality of money is a different question than whether inflation is absolute bad or not. You can think it is and still not believe in the neutrality of money-in the short or long term. As to the kind of argument Turbo Kitty was making, I can better see where her mistake was now.

  She was arguing along the lines that if the price of gas was $.10 per gallon in 1950 and $4.00 today, then we have been robbed to the tune of 4000 percent: ie, we're 4000 percent poorer. That's clearly totally wrong. Again, though, it's not necessarily about whether or not inflation is an absolute social evil.  The trouble with her analysis-and it's very common I think among the man in the street with no knowledge of economics-is that she is not comparing apples to apples.

  We are not 4000 percent poorer while the greedy oil companies are 4000 percent richer as this is in nominal values.To really judge today's oil price you have to look at it in constant dollars. For this reason, while gas right now is about $3.50 per gallon and most Americans find this very high, it actually hasn't gone up during the President's time in office as it was at this level or higher in 2008 prior to the big sell off in commodities during the deflation of the second half of 2008-the financial crisis.

   Here's an analysis that argues that gas prices by historical standards are not high. Indeed, they are very low by relative national standards as Britain pays over 50 percent more than we do and much of the Eurozone pays over 100 percent more.

    Even if the price of something is after being adjusted in real dollars, historically high, that doesn't tell us that we're worse off. After all, you have to factor in other prices, and then wages.

    As to inflation itself, my tendency is still to think that while certainly it's no unmitigated social good, neither is it an unmitigated evil. Certainly there's nothing good to say about hyperinflation. However, I don't see that modest amounts of inflation is an evil. What is more unmitigated is the effect of deflation, particularly the poor. Yes, maybe prices are down, but this is cold comfort when you're out of work becasue of the deflation or your debt burden becomes more and more heavy.



  1. Interestingly, those who proclaim the neutrality of money, which suggests that one can simply look at the underlying exchanges as barter like, should not be frightened by hyperinflation. Hyperinflation renders money meaningless and worthless and restores us to pure barter, which according to the neutral money types is where we are anyway.

    Seems a bit of an intellectual pickle to me.

  2. Their argument is that we must let the market do it's work absolutely unfettered. Inflation distorts the price system-in their minds.

    It is interesting that if money doesn't matter it can do so much harm

  3. Its the price system which they use to measure inflation in the first place. Its a little disingenuous to say inflation distorts prices and when asked how we know how much inflation is they use prices. This is the trick that Friedman pulled on the American people and, in my view, the whole lie of monetarism.

    Art Shipman has some great analysis of Friedmans sophistry

  4. Thanks for the link Greg! This is funny enough what I am reading about right now-Friemdan's sophistry-in Steve Keen.