In keeping with the CT tradition of bringing you tomorrow’s talking points today, I thought I’d look a bit further than the current election campaign and consider the implications of a Bush victory. On past form, there’s no reason to suppose that a second term will lead Bush to abandon his tax cuts, or to propose any significant net reduction in expenditure. At least not when there’s an obvious alternative, that only a few shrill Democrat economists and some incredibly out-of-date Republicans would ever object to. The US government has at its disposal and endless source of costless wealth – the printing press that turns out US dollars. Hence there’s no need to do anything tough like raising taxes or cutting Socil Security benefits. The only problem is that, according to some economists, reliance on the printing press as a source of government finance is likely to cause inflation.
As a first line of defence, the views of these economists can be criticised. There are plenty of Keynesian critics of monetarism who’ve pointed out that there’s no simple or automatic relationship between the money supply and the rate of inflation, and probably there are some who’ve been incautious enough to deny that there is any relationship at all. In any case, in the new era, the dynamism of the US economy is such that everyone wants to buy US dollars as fast as the Treasury can print them (ignore any recent observations on currency markets that might suggest otherwise).
Still, these are only delaying tactics. What will really be needed is a set of talking points showing that inflation (properly referred to as price appreciation or something similarly positive) is actually a good thing. In the hope of bringing the debate forward a bit, I’ve advanced a few.
* There’s a trade-off, in the short run, between unemployment and inflation. If you go back far enough, you can find plenty of Keynesian economists asserting that this trade-off also occurs in the long run.
* Inflation turns ordinary working people into millionaires. Democrats are opposed to inflation. Indeed.[1]
* Inflation hurts the poor. So its a way to make the lucky duckies who pay no income tax share the pain of those who do, and learn to vote against big government, or any government
* Inflation is anti-Communist. For several years now, one of the biggest buyers of US government bonds has been the Chinese central bank. No doubt, they think they’re buying leverage, but all they’re really going to get is pictures of Ronald Reagan. Heh.
* Inflation will destroy trust in government money and encourage the creation of private-sector alternatives.
* Inflation is part of the American patriotic tradition. Like Bush, George Washington and Abraham Lincoln faced the threat that the nation would be destroyed by war, and responded by printing money. To complete the trifecta, ex-Democrat neocons may wish to add FDR or JFK, while Southern Republicans might manage a quiet allusion to that great patriot and exponent of inflationary finance, Jefferson Davis
fn1. I’m not making this one up. As Brad de Long pointed out a while ago, Stephen Moore has actually defended the record of US capitalism on the basis of figures for the number of millionaires, unadjusted for inflation.
{ 16 comments }
Eugene Koontz 07.02.04 at 9:17 am
Also, the prospect of higher inflation can help revive the struggling American wheelbarrow industry (just like in Germany in the 30’s where you’d take a wheelbarrow full of cash to the store to buy a loaf of bread).
Oh, wait, the wheelbarrows are all made in China now. Never mind!
bad Jim 07.02.04 at 10:34 am
On first looking into this post I considered suicide. Contemplating inflation was a bit of relief.
I guess I’d have to bail out of municipal bonds and consider investing in a sounder currency than greenbacks, being imperfectly assured that multinational equities equilibrate exchange risks adequately.
On second thought, if suicide is painless…
Kevin Donoghue 07.02.04 at 10:51 am
My favourite argument for inflation is that it deprives cowardly investors of a safe refuge from the risks associated with holding real assets, thereby forcing them to put their wealth to productive use.
Peter Murphy 07.02.04 at 11:03 am
I remember a few years back when Pauline Hanson was asked about her – ahem – “economic policies”, and the problem with a lack of cashflow. The gist of her answer was: “print more money”. Needless to say, every journalist jumped on this assertion, screaming “Weimar”. She was not beloved of the establishment for many reasons. (Yes, racism was the biggie, but with a little bit of social snobbery mixed it. Appalling strine she had.)
The sad thing about JQ’s article is a) it is so believable; b) the press would probably let the Republicans get away with it.
Of course triple-digit inflation would occur over Greenspan’s body. Or letter of resignation. But being the vindictive sods that neocons are, they would toss AG on his ass than admit their error. They’ve got short memories that lot.
Motoko Kusanagi 07.02.04 at 11:58 am
“When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has ever been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though frequently by a pretended payment. The raising of the denomination of the coin has been the most usual expedient by which a real public bankruptcy has been disguised under the appearance of a pretended payment.”
– Adam Smith
bull 07.02.04 at 12:00 pm
Other than the opportunity to make a few not particularly amusing jabs at Republicans, was there a point to this post?
You should have pointed out that there were massive budget deficits in the 1980s, and just as critics predicted at the time, the 1990s were times of high inflation, low and negative growth, and deep cuts in popular government programs to fund runaway interest costs.
q 07.02.04 at 12:35 pm
I think you are too gloomy.
Interest rates will pick up a little over the next few years, but it should also be a good time for investment, especially in Asia. Financial disaster awaits many overstretched lower income families.
To avoid recession, income needs to be switched from the rich savers into the hands of those who save little or nothing: the poor, bottom 20%. An easy way to do this is to reverse some of the recent tax cuts, but then divert some of the tax clawed back into the pockets of those low-income 100% spenders. The only trick is to work out how to focus such tax-cuts.
gILES 07.02.04 at 2:14 pm
This is a pretty silly post which explains a great deal of the reason why inflation is likely to be a problem over the next year – namely that large sections of the chaterati are more interested in pinning the blame of inflation on BUSH as opposed to where responsibility really lies namely at the foot of Alan Greenspan. Of course the Republicans have to shoulder some blame for rubber stamping his reappointment without really questioning his actions but you do feel that the democrats seem strangely unquestioning of the guys performance.
But the more important missing point is the demographic effect – namely that inflation tends to transfer wealth from the (retiring) old to the (working) young. And this is where the biggest political split opens up since the old are mainly democrat while the young are Republican.
Henry 07.02.04 at 3:31 pm
bq. No doubt, they think they’re buying leverage, but all they’re really going to get is pictures of Ronald Reagan. Heh.
Neal Stephenson’s sf novel, Snow Crash, features a US ravaged, among other things, by hyperinflation, in which 500 million dollar bills are called “Meeses,” because they have Ed’s picture on ’em, and one billion dollar bills are “Gippers,” because they have Ronnie’s.
General Glut 07.02.04 at 5:09 pm
The Republican case for inflation is better than Quiggin admits, however. As interest rates rise, US debt obligations will rise as well. When financial income reverses as well, the US starts falling into a serious debt trap. And the best way to get out of a debt trap? Inflate your debts away.
Giles 07.02.04 at 5:56 pm
This article in the economist raises an interesting alternative scenario – namely that the the years of loose monetary policy has created a monetary trap and a future of deflation.
http://www.economist.com/displaystory.cfm?story_id=S%27%298L%2BQ%21%3B%23%210%234
dsquared 07.02.04 at 7:17 pm
General G has it right, IMO. I’ve been saying for a long time that there is just no point in being the global monetary and military hegemon if you’re not going to take advantage of it from time to time. Also note that an inflation tax has its main incidence on 1) the poor and 2) foreigners, so there’s not much not to like.
Adam Kotsko 07.02.04 at 9:08 pm
I was an English major in undergrad, so I don’t understand this… “economics”? That’s what you call it, right?
Anyway, would this hypothetical inflation also “inflate away” student loans?
Matt Weiner 07.03.04 at 3:19 pm
So Bull, you’re saying that (as happened after the 1980s) the government is about to be taken over by the opposition party, which will eliminate the deficit and usher in a period of prosperity? Sounds good.
Matt Weiner 07.03.04 at 3:22 pm
(Yes, the budget didn’t get back into balance until well into the Clinton boom, but fiscally responsible policies were put in place at the beginning of his Administration.)
Chris 07.05.04 at 8:02 pm
A few minor points:
“There’s a trade-off, in the short run, between unemployment and inflation. If you go back far enough, you can find plenty of Keynesian economists asserting that this trade-off also occurs in the long run.”
-And a reasonably good case can be made for a negative tradeoff in the long run, if real money balances and consumption are complementary. I happen to think that this is likely.
“Inflation turns ordinary working people into millionaires.”
-Quadrillionaires if we’re talking about lire. Imagine how Republican the Turks must be!
“Democrats are opposed to inflation. Indeed.”
-Only when Republicans are in power. LBJ and Carter didn’t seem to mind.
“Inflation hurts the poor….”
-How so? I would think that an unanticipated bout of inflation reduces the real value of debt, redistributing wealth from the rich to the poor.
“Inflation is anti-Communist. For several years now, one of the biggest buyers of US government bonds has been the Chinese central bank. No doubt, they think they’re buying leverage, but all they’re really going to get is pictures of Ronald Reagan. Heh.”
-Sounds like fun. Maybe throw in some pictures of Nixon.
“Inflation will destroy trust in government money and encourage the creation of private-sector alternatives.”
-Give those gold-standard cranks something to do, I guess.
“Inflation is part of the American patriotic tradition….”
-And of the Russian, French, German, and Hungarian patriotic traditions too. What better way would there be to reach out to our friends in Europe? Sounds like a John Kerry campaign promise to me.
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