Inflation Is the Last Thing We Need
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By Sheldon Richman
“Some economists say more inflation is just what the American economy needs to escape from a half-decade of sluggish growth and high unemployment,” the New York Times reports.
One is Harvard economist Kenneth S. Rogoff, quoted in the Times: “Weighed against the political, social and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about. It should be embraced.” He favors an annual rate of 6 percent.
“I think higher inflation would help,” economist Jared Bernstein of the progressive Center on Budget and Policy Priorities added.
The Federal Reserve is another place to find advocates of inflation. This includes President Obama’s choice to succeed Ben Bernanke as Fed chair, Janet Yellen.
These people are saying, in effect, that you and I have too much purchasing power. Got that? Too much purchasing power.
Raise your hand if you think you have too much purchasing power. Anyone? I didn’t think so.
Why would anyone want inflation? Because, the Times says, “Rising prices help companies increase profits; rising wages help borrowers repay debts. Inflation also encourages people and businesses to borrow money and spend it more quickly.” (Got that? It helps people to borrow and pay off debts.)
To see if this makes any sense, let’s step back. Strictly speaking, inflation is what happens when a government central bank -- in our case the Fed -- increases the supply of money and credit out of thin air. When these increase and the supply of goods does not, prices will generally rise -- that is, the value of the dollar will fall -- and it will take more money to buy things than previously. That’s common sense. If people have more money to spend, not because they produced and sold more goods, but only because the central bank printed it, prices will rise with the rising demand.
Generally, a rise in prices is called (price) inflation, but it’s actually just the consequence of (monetary) inflation.
When the value of the dollar falls, our incomes fall, even if wages are nominally unchanged. With price inflation, one hundred dollars buys less today than it did last year. Or, to put our monetary history in perspective, what five dollars bought in 1914, when the Fed first opened its doors, today costs about one hundred dollars. A wage increase might make up some lost ground, but people on fixed incomes don’t get wage increases, so they’re out of luck. Also, prices typically rise faster than wages during an inflationary period.
The advocates of inflation say it will raise business profits. Aside from the fact that raising profits is not the government’s job, does that really make sense? While businesses will be able to charge more for their goods during an inflation, they will also have to pay more for the things that they buy, including labor. Where’s the real gain?
As for the Times’ claim that inflation encourages people to borrow and to spend money more quickly (because its value is vanishing), what’s so good about that? Again, government has no business trying to prod us to borrow or to go on shopping sprees. For one thing, this discourages saving, which cuts against the need for more investment, research, and development -- the real stuff of economic growth and rising living standards.
Moreover, the Fed can’t be trusted to produce only a “little” inflation.
Inflation is even worse than I’ve suggested. Because Fed-created money enters the economy at particular points (through banks and bond dealers), a select few people get it sooner than the rest of us. Those who are thus privileged are able to buy at the old, lower prices, while the rest of us don’t see the money until prices have risen. That is an implicit tax and transfer.
And the problem isn’t simply a rising price level. Relative prices are what provide entrepreneurs and investors the information required for rational economic calculation and service to consumers. Inflation changes relative prices. Thus, it distorts the price system and, in turn, the multidimensional economic structure. That means any stimulus is unsustainable because the inflationary policy will eventually end and unemployment must follow as the inflation-induced errors are revealed.
Inflation serves the governing class. Honest, hardworking people should abhor it.
Sheldon Richman is vice president and editor at The Future of Freedom Foundation in Fairfax, Va. ( http://www.fff.org).