Fighting Inflation as Class Warfare

by Henry on November 29, 2004

I spent a chunk of the Thanksgiving Weekend reading Mark Blyth’s Great Transformations: Economic Ideas and Institutional Change in the Twentieth Century, on which more later. Before doing a proper post, though, I want to point to an interesting claim that Blyth makes in passing; I’ve seen versions of this argument before, but never stated as punchily. Blyth argues that there is no very good reason why we should be worried about the general effects of inflation on the economy – the empirical evidence shows that there is no statistically significant relationship between growth and inflation for inflation rates under twenty per cent per year, as acknowledged even by inflation bears such as Robert Barro. The argument that moderate-to-highish rates of inflation create real economic costs is, at the very least, contestable. Yet low inflation is one of the shibboleths of modern macroeconomic policy. Why? Blyth’s explanation (borrowing from Brian Barry) goes as follows:

Inflation acts as a redistributionary tax on holding debt. Stock prices stagnate and bond prices increase as bond holders demand a premium to guard against the effects of inflation. Investment is hit as inflation eats away at depreciation allowances and stock yields … In short, inflation is a class specific tax. Those with credit suffer while those with debt, relatively speaking, prosper. Given then that the benefits of inflation control (restoring the value of debt) are specific while the costs of inflation control (unemployment and economic decline) are diffuse, the reaction of business, particularly the financial sector, to inflation is best understood as the revolt of the investor class [italics in original]

Thus, Blyth argues that efforts to combat inflation are the result of rent-seeking by a small class of individuals (investors/creditors) with sharply defined interests who are able to push government to protect their investments even when this conflicts with the common weal. Creditors don’t want inflation – especially when it’s unexpected – while debtors benefit from it.I’m not a macroeconomist, but the basics of this argument seem plausible, even if you don’t agree with Blyth’s implied Keynesian alternative. Is there a credible alternative explanation of the clear anti-inflationary bias of most advanced industrial democracies, one that, for example, identifies real social benefits attached to low inflation? Arguments against hyperinflation don’t count, since the causal relationship between middling-to-high inflation and hyperinflation is at best underspecified.



Kieran Healy 11.29.04 at 4:37 pm

I think John Goldthorpe made something like this argument, too: Goldthorpe, John H. [1978] The current inflation: towards a sociological account. In: J.H. Goldthorpe/F. Hirsch (eds), The Political Economy of Inflation. London.


Eric 11.29.04 at 4:45 pm

Inflation only helps debtors who borrow at a fixed rate. Home owners with adjustible rate mortgages will get soaked, as will credit-card holders. (Have a look at universal default for a common way to raise credit-card interest rates.)

Also, for those of us who scrupulously avoid debt (at some cost to our standard of living) and who try to save, how will inflation affect us? Can we figure out how to make investments which stay ahead of inflation?

And what reason is there to think that middle-class salaries will keep up with inflation? We’re already watching wages sink in a time of no inflation. Do you think we’ll start getting 5% raises if inflation goes to 5%?

And if we do embrace (say) 5% inflation, then creditors will simply loan money at variable rates. They’re not dumb.

I didn’t understand the pro-inflation argument when I read William Jennings Bryan’s call that we should not “crucify mankind upon a cross of gold”. And I don’t really understand it now. It seems just a little bit to easy.


dm 11.29.04 at 4:46 pm

The effect of inflation on pensioners on fixed incomes?


David 11.29.04 at 4:47 pm

The issue I’d raise is, “who’s a creditor?” People living on fixed incomes are creditors; workers with unpaid wages are creditors. The notion that “creditor vs. debtor” is equivalent to “rich vs. poor” [which I presume is what you mean when you invoke “class”] is itself awfully tricky. To be sure, social security recipients can be handled with indexing and unionized workers [yeah, right] can bargain their wages up–but that still leaves a lot of people disadvantaged by inflation who are by no means rich.


SamChevre 11.29.04 at 4:52 pm

This argument is very much a “yes, but” argument. It is true that low inflation per se is not particularly important; what is key is predictable inflation. So long as inflation is predictable, however, the effects of inflation will be figured into interest rates, depreciation, and etc–so it will not materially advantage debtors.

The wider benefits of predictable inflation are pretty clear; it makes investment (capital spending) easier to finance effectively. If inflation is unpredictable, protecting onesself against inflation will take precedence over investing in productive activity. This can take the form of capital flight, equity-based rather than debt-based funding, requiring physical collateral for debt, etc–all of which reduce overall productivity.

The reason for pushing for LOW inflation is that it is easier to maintain within narrow bounds–in other words, the benefits of low inflation are mostly because low inflation is predictable, rather than because it’s low.


Giles 11.29.04 at 4:59 pm

I think this is true in a young society but in an aging society most creditors are pensioners and they are not necessarily rich.

Its probably truer now to say that inflation transfers wealth from the old to the young.


bob mcmanus 11.29.04 at 5:00 pm

As someone who has no right to be, I have been convinced of this since the mid-80s, based on the well-known patterns of wealth distribution during the fifty years. The seventies were quite good to the bottom three quintiles, save for the awakening of the economic elites to their interests, and the counter-revolution that started with Thatcher/Reagan. ARM’s, IIRC, was part of that new class war, and were rare before 1980.

“The effect of inflation on pensioners on fixed incomes?”

The movement from indexed corporate pensions to 401k’s (or nothing, the attack on unions in general) and the “ownership society” is probably part of the class war.


Brett Bellmore 11.29.04 at 5:20 pm

“Thus, Blyth argues that efforts to combat inflation are the result of rent-seeking by a small class of individuals (investors/creditors) with sharply defined interests who are able to push government to protect their investments even when this conflicts with the common weal.”

Or, alternatively, efforts by a small class of individuals to NOT be subject to rent seeking by the larger class of debtors.


Bruce Baugh 11.29.04 at 5:22 pm

Eric made the same point I would: inflation is bad for workers when management won’t adjust wages to keep up with inflation. It used to be that many companies would basically suck it up and treat compensating for inflation as a cost of doing business. Now they’re much more likely not to do so, along with the increasing use of tricks of scheduling to keep people below the hours required for benefits, heavier use of temp and contract workers, and the like. We have a management culture more willing to play the game of class warfare – with honorable exceptions both large and small, to be sure – and this ought to influence our comparison between past and present.

We have a social situation more like the Populist and early Progressive era than the ’70s.


Silent E 11.29.04 at 5:26 pm

Why fight inflation?

1. Wages are stickier than prices. Ergo, inflation will raise the costs of consumer goods that workers need faster than workers’ salaries will rise, leaving workers with lower real income.

2. Macroeconomic Risk. Government programs, union wage bargains, employee expectations – all are tied to inflationary expectations. Higher inflation will lead to greater demands for increases in minimum wages, social security or unemployment benefits, pension benefits, and salaries. Thus, higher inflation is more likely to accelerate *into* hyperinflation than lower inflation.

3. “Stagflation.” Higher inflation means that creditors charge higher nominal interest rates. Wages are also stiekier than interest rates, so debtors with adjustable interest rates (e.g., homeowners), or debtors who consistently take on new debt even as they retire old debt, (e.g., credit card users whose rates may change rapidly) will face interest payments that increase faster than their wages.


Matt 11.29.04 at 5:26 pm

The argument also doesn’t work for all countries (maybe it’s not supposed to, but it’s good to make this clear, I think.) Consider Russia: for the last several years inflation there has been something like 13%, give or take a few percentages. But almost no one there has debt, as it was essentially impossible for most people to get a loan until the last year or so, especially outside of the Capitals. Of course salaries didn’t keep up w/ inflation, to say nothing of pensions. So, even under this modest inflation the majority of people suffered in a pretty obvious way. Even though lending is becoming more common there now, it will certainly be a long time before it’s enough to balance out in the way suggested, I’d guess. I don’t know what it would take to control inflation in Russia, or if this would be better or worse than the inflation itself, but it’s just silly to say that inflation has no bad effect on most people or the poor or whatever in this case.


Silent E 11.29.04 at 5:35 pm

There may also be a perception argument, hinted at by samchevre: low inflation *appears* to be less volatile because rises and falls are nominally smaller. You can plug 3% into your business model and be within a percentage point year after year. This reduces inflationary expecations and increases stability, which is the real benefit (stability being more conducive to growth than volatility).


SamChevre 11.29.04 at 5:52 pm

Silent e,

It’s NOT just a perception difference. If you expect inflation in the next year to be 2% and are off by 50% (it’s 3%), your purchasing power at year-end will be 99% of what you expected; if you expect inflation to be 20% and are off 50% (it’s 30%) your purchasing power will be only 92% of what you expected.


Monica 11.29.04 at 5:53 pm

This is a great discussion–but which of the proposed reasons for fighting inflation have, historically, been the *actual* reasons why we fight inflation? I’ve been wondering about that for a while. Any historians of the Fed here?


Kimmitt 11.29.04 at 6:17 pm

I’m not a Fed historian, but it is something of a commonplace that the reason for fighting inflation is precisely the one of macroeconomic stability.


Silent E 11.29.04 at 6:26 pm

samchevre, we agree! It is a real difference. It is ALSO a perception difference.


Walt Pohl 11.29.04 at 6:26 pm

Living through the 70s, I think the argument is simpler: People just hate inflation. The average person, even if they’re a debtor, just doesn’t the idea that the dollars in their pocket are becoming steadily less valuable.

I’m not sure that the argument about creditors holds up. Creditors are against unexpected inflation, but they can plan for expected inflation. In a time of moderate inflation, though, you can point to an opportunity for rent-seeking by creditors: if everyone is expecting a certain inflation rate, but then there’s a sudden drop, then creditors will see a windfall.


Brett Bellmore 11.29.04 at 6:38 pm

And visa versa; Why is it that when we’re talking inflation, it’s only the creditors who are suspected of rent seeking? A sudden increase in inflation is a dandy way for debtors to renege on their debts.


luci phyrr 11.29.04 at 7:01 pm

most creditors are pensioners and they are not necessarily rich

Like the argument that most of the people who received tax cuts in the US recently were in the middle class, this doesn’t address the distribution.

Most pensioners aren’t rich, and might suffer under inflation. That doesn’t mean that a very wealthy class wouldn’t suffer much more, and have greater incentives and organizational advantages to influence policy.

Not that I wholly buy the “revolt of the investor class” explanation for anti-inflationary bias. But, inflation does impact asset-owners more: obvious for bond-holders, but I could see inflation having a negative effect (or no effect) on equity prices too.


Walt Pohl 11.29.04 at 7:28 pm

Brett: That’s a fair point, one that I meant to agree with in my last comment but forgot.


Doug Turnbull 11.29.04 at 7:33 pm

I’m far from an expert, but I think right now is a uniquely unauspicious time to see significant inflation. FIrst, we’re utterly dependant on foreign creditors to buy debt from us to finance government. They’re already getting a little antsy about the size of the deficit. If inflation starts nosing up, suddenly buying dollars is much less attractive and they look elsewhere. If that happens, then all sorts of nasty economic things could result.

Second, what growth the country has managed the last few years has been financed by consumer spending, which in turn has been largely fueled by home equity loans based on increasing housing prices. If interests rates go up, then housing values drop, and spending dries up. Oh, and if that happens, Fannie Mae goes belly up too, and it makes the S&L crisis look like child’s play.

There’s also the related issue of whether consumer debtors could enjoy the inflationary reduction of their debts before the rising interest rates on their credit cards drove them into bankruptcy. Pop the credit bubble with a rash of bankruptcies, throw in a crash in the housing market, a flight of foering capital, and you’re starting to get a perfect economic storm that wcould absolutely crush the US economy.

The scary part is that all this might happen no matter what the Fed, or anybody else, does.


Kevin Carson 11.29.04 at 7:46 pm

There is another angle to the inflation-fighting as class warfare theme, as well.

When the fed increases interest rates, it usually leads to higher levels of unemployment and reduced bargaining power of labor.

Indeed, in Greenspan-speak, “inflationary pressure” translates almost exactly into “increased bargaining power of labor.”

Back in the ’90s, when unemployment was down around 5%, some members of the Fed board of governors were pressing for an increase in interest rates because such low unemployment would be “inflationary.” Greenspan’s response: normally, it *would* be inflationary. But job security is so much lower in the high-tech economy, that even with low uneployment rates workers are still desperate to hold onto their jobs at almost any cost. So in terms of reducing the bargaining power of labor, the high-tech economy was almost as good as high unemployment!

There’s a pretty good Tom Tomorrow cartoon in which superhero Greenspan, responding to the increased inflationary threat from “uppity workers” demanding higher wages, saves the day by throwing the prime rate lever on his unemployment machine.

That’s pretty much the way it’s supposed to work.


Guy 11.29.04 at 7:59 pm

Presumably this varies by country? In developing countries where poor people have little access to the banking system, inflation can be a disaster.


Anthony 11.29.04 at 8:03 pm

As Doug Turnbull points out, the housing market has a huge impact on the effects of inflation in the US. While things are likely different in other countries, most Americans own their own home, which changes the impact of inflation.

Outside of California, inflation increases the taxes on homeowners. (Which also increases rents, if all else is equal).

Unrelatedly, I don’t underdstand how even from within the discredited class-warfare model of society, one can approve of a policy which hurts millions of poor and not-rich folks just because it also hurts rather more a few very rich people.


Geoff Robinson 11.29.04 at 8:26 pm

Hypothesis: Inflation encourages collective action by workers to keep up and hence encourages trade union membership. Higher trade union membership means more egalitarian social policy and higher levels of support for left parties. Low inflation in Australia since the early 1990s has contributed to falling union membership and lower left party votes.


Giles 11.29.04 at 8:40 pm

“That doesn’t mean that a very wealthy class wouldn’t suffer much more”

Generally the very wealthy dont suffer from inflation since they have a higher proportion of their assets in liquid funds that can hedge against domestic inflation – say by investing abroad or in gold.

This option is typically less available to the middle class old saver.

Overall I think that inflation is more like a revolution – it tends to over throw the old order (credit) but this is no guarantee that the subsequent redistribution will be fairer. For example in the wiemar inflation, lots of peoples wealth was wiped out but (I think) alot of the aristocaray and big businees then did quite well under hitler.


John Quiggin 11.29.04 at 9:05 pm

I think the fundamental problem with Blyth’s argument is that expectations are not predictably biased in the long run. A period of unexpectedly high inflation will benefit debtors, but interest rates will go up as expected inflation increases. Then, if inflation declines again, expectations will be slow to adjust and debtors will bear high real interest rates on the way down, as happened in the 1980s.

Of course, this doesn’t happen if the rate of inflation consistently accelerates, but that route leads to hyperinflation.


abb1 11.29.04 at 9:45 pm

It’s good to hold a long-term fixed-low-rate loan (home-owner mortgage, for example) when inflation escalates – unless it’ll cause you lose your house by losing your job.

For everything else it’s not good. OK?


Jason McCullough 11.29.04 at 9:57 pm

“Thus, Blyth argues that efforts to combat inflation are the result of rent-seeking by a small class of individuals (investors/creditors) with sharply defined interests who are able to push government to protect their investments even when this conflicts with the common weal. “

Well, yeah. Central bankers are run by finance types, after all. Has there ever been a union-aligned person in the Fed?


George 11.29.04 at 10:04 pm

Fascinating discussion, thanks Henry and commentors. My one contribution is to observe that the whole dilemma is enshrined within the Fed’s dual (and contradictory) missions: to maintain price stability *and* to promote full employment. And lately (or so the WSJ editors claim) the Fed has virtually abdicated the former.


BigMacAttack 11.29.04 at 10:20 pm

I really liked what SamChevre said.

But remember Henry seems to be claiming that this Blyth person is asserting that the band of acceptable inflation, inflation that does not cause the undesirables mentioned by SamChevre, which in turn lead to reduced growth, is much greater than generally thought.

1% 7% same difference.

And the proof is presumablely in the pudding of no correlation between lower inflation rates and lower growth rates. Within that band.

So why should the Fed take a crap and raise interest rates, which lowers employment, over a little inflation?

Of course while ‘our’ assumptions are being challenged we should challenge his. Does higher inflation really mean lower unemployment. Why? Or is it lower real interest rates via the Fed that really makes the difference? But if that is so does that mean a nations I/S ratio really influences GDP growth? And if so how? And what is the correct ratio?

Please explain.


Keith Gaughan 11.30.04 at 12:02 am

Bugger this. I say we all start using negative interest currencies and be done with it.


Keith Gaughan 11.30.04 at 12:05 am

Sod it: let’s just all start using negative interest currencies and be done with it.


Tom T. 11.30.04 at 12:37 am

It’s interesting to see that CT’s famously cantankerous comment system managed to pick up comments from Keith Gaughans in two very slightly different (but equally profane) parallel universes. :-)


Jason McCullough 11.30.04 at 1:31 am

“…..Fed’s dual (and contradictory) missions: to maintain price stability and to promote full employment.”

I can’t remember the exact comment from Doug Henwood, but apparently the US is the only first world country apart from Germany (where it’s true for obvious reasons) with price stability in the central bank’s charter.


Antti Nannimus 11.30.04 at 2:05 am

Inflation is also a way for debtor governments to repay deficit financing with less valuable money. Lyndon Johnson’s irresponsible borrowing to finance the Vietnam War was repaid with double digit inflation during Carter’s term. George W. Bush’s irresponsible deficit financing of the Iraq War will be similarly repaid. The baby boomers Social Security benefits will also be paid with similarly worthless dollars.

Governments don’t have to repudiate debt. They simply makes the debt worthless through inflation. To some degree its a class issue, but in reality, we’re all invested in it. This is a very old game, and the public never catches on.


Lee Scoresby 11.30.04 at 3:22 am


Glad to see you’re reading Blyth’s book :-). Blyth’s argument about inflation is just one of many claims that add up the important one: the rise of neo-Hayekian/Friedman/Chicago-school economics was overwhelmingly political, rather than a result of their arguments being fundamentally better ways to get good macroeconomic policy. Moreover, the problem with the Democrats in the mid-1980s was that they cared more about their policies being *correct* (e.g., the rejection of managed trade) than being politically efficacious. Whether or not Blyth is right on this specific point is less interesting than the overall claim about the rise of dis-embedded liberalism in the 1970s and 1980s.


Keith M Ellis 11.30.04 at 4:07 am

This post and thread well demonstrates a cutural divide that has long puzzled me. The thing I think I distrust most about leftism—and which is most important to many leftists—is a conspiracy-esque political analysis of, well, everything. It’s not so much that these forces are often at work, they probably are, but that the explanatory power of the conspiracy theory is almost always preferred, mendacity assumed; and the beauty or seduction of it is that all things can be thus analysed within the same context—a single comprehensive explanation for everything.

It’s my experience that the world doesn’t actually work that way.

Far more likely to my mind is the possibility that the macroeconomic arguments against inflation are generally sound, but that those with vested interests are perfectly willing to sieze upon this reasoning to further them.


Lee Scoresby 11.30.04 at 4:34 am


There’s no conspiracy argument here, as far as I can tell. Nobody’s talking “elders of zion” or “smoking man.” The claim is that some groups have an elective affinity for believing arguments that may not be true.

And the left has no monopoly on conspiracy theories. The right has a history of doing plenty well in that department.


bob mcmanus 11.30.04 at 4:42 am

“the rise of neo-Hayekian/Friedman/Chicago-school economics was overwhelmingly political, rather than a result of their arguments being fundamentally better ways to get good macroeconomic policy.”

“It’s my experience that the world doesn’t actually work that way.”

Who needs conspiracies when you can use ideologies as explanatory factors? And ideologies are rarely deliberately mendacious, that is the point in creating them, as a tool for false conciousness. That is precisely how I see the social/political world working, on all possible sides, with rationalization and delusion.


Chris 11.30.04 at 8:18 am

Well, look how the working class enjoy inflation – it terrified them so much they pissed on Australia’s Gough Whitlam when the conservatives subversively sacked his government.

And talking myth and inflation as a weapon of false consciousness, look how Mugabe is destroying the living of the poor in Zimbabwe, while creating myths about land, race and colonialism.

Economist John Robertson (Harare) joked about livng through thirty years of historic inflation in just a few months, and what a great laboratory it is.


Tracy 11.30.04 at 8:40 am

Retired people make up a large proportion of people living at least partially off investments. Retired people are quite effective lobbiers, which may have something to do with them as a group having much more time on their hands than, e.g. two income families with small kids. And the group of retired people of course includes a fair number of people with contacts amongst the current set of leaders.

And, of non-retired people, a fair proportion have hopes of inheriting something from their elderly parents, or at least of not having to support them if all their income gets inflated away.

Even if we removed money from it entirely, the lobbying field would not be fair.

Plus I haven’t seen any evidence that holding inflation to e.g. 7% would be noticeably cheaper than holding it to 1% or 2%.


Matthew2 11.30.04 at 11:52 am

J Stiglitz makes the argument that most of the IMF’s decisions forced on many non-Western countries, were gripped by a relentless focus on stopping inflation, to the detriment of everything else, with disastrous consequences.
There is no conspiracy theory there: it’s simply that because of its nature, the IMF listen mostly to the creditors, the treasuries and the financial lobbies which have their ear, and like Blyth explains they have an interest (you could say “focus”) on low inflation.
Conspiracy or not the result is the same. Shame about all those ruined economies…


George 11.30.04 at 5:47 pm

Jason McC: I’m no economist, but I thought the opposite was true. For instance, the *sole* purpose of the ECB is to maintain price stability. (According to the Journal, anyway.)


Dubious 11.30.04 at 5:55 pm

Tracy makes an important point. Allowing inflation to rise to 15% (to be safely below our 20% threshold) from 1.5% would give us a one-time economic boost, but then the Fed would have to run the same monetary policy, with an inflation target of 15% instead of 1.5%.

Likely as not, you would get a one-time economic benefit from that. As several posters have pointed out, this can be particularly powerful as a way to partially repudiate government (esp. external) debt. But the zero-correlation between growth and inflation runs both ways.

As for distribution of income/wealth, does anyone have evidence that the Gini coefficient is lower in high inflation countries?


Kimmitt 12.01.04 at 9:27 am

There’s a pretty good Tom Tomorrow cartoon in which superhero Greenspan, responding to the increased inflationary threat from “uppity workers” demanding higher wages, saves the day by throwing the prime rate lever on his unemployment machine.

Yeah, well, one man’s “business cycle smoothing” is another man’s “unemployment machine.” It is worthy of note that Greenspan does turn on the spigot of easy money when the economy turns sour, which is something of an argument for the technocratic interpretation.


shooting star 12.01.04 at 11:35 pm

Minor grammatical question —

Do you really mean shibboleth? A shibboleth is a group identifier (In ancient Israel, Samaritans pronounced the word differently than Jews). If low inflation is a shibboleth, then what group does it identify and what is the contrasting group?


John 12.05.04 at 10:13 am

Are the Feds monetary tools more effective in stimulating or restraining the economy?

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