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.