Overcoming Our Inordinate Fear of Inflation … Why do we care so much about preventing inflation? When I put this query to baby boomers, they tell me that if I had lived through the inflation of the 1970s and early 1980s, I would understand. But … why does it stand out so strongly in our collective memory? –Bloomberg
This Bloomberg editorial provides us with lots of reasons why moderate inflation is not a terrible development.
Noah Smith is one of Bloomberg’s more original columnists, though we almost always disagree with him. Once again, with this editorial, he misses the main point in our view.
He analyzes inflation from the standpoint of communal rather than individual harm.
Thus, he concludes that in moderate doses it is not terrible at all.
The harm of inflation cited in economics textbooks seems laughably unimportant. For example, inflation generates so-called shoe-leather costs — a term for the hassle of moving money from one’s brokerage or savings account to one’s checking account.
This hassle is larger when prices change a lot, since you have to put spending cash in your wallet more often. But in the age of digital-account management, this cost is nonexistent.
A more sophisticated argument against inflation is that when companies want to change their prices but for some reason can’t, inflation distorts prices from what they should be, which decreases economic efficiency.
Economists have tried to measure these costs, and found that they’re just as small as we might expect.
He explains that University of Chicago economics professor Robert Lucas researched the costs of inflation and developed a model that showed price inflation did not produce terrible effects.
According to Lucas, “10 percentage points of inflation is only about as harmful as a 1 percent reduction in gross domestic product.”
Recession is more to be feared than inflation.
The article then looks at inflation from the viewpoint of volatility and finds this may explain people’s concern more realistically. Fast-rising prices are volatile ones and make it harder to plan.
But Smith also makes the intriguing point that it is the volatility itself that makes the difference.
If inflation is at two percent or four percent, it really doesn’t matter, he argues, so long as prices are not volatile.
It is not the rate of inflation but the volatility that makes people miserable. The article then develops some interesting insights based on the idea that people are more concerned with volatility price appreciation.
It suggests that viewing inflation and recession as equal dangers is wrong. Recession is by far the bigger danger so long as the inflationary trend is not volatile.
In reality, a loss of one percentage point of GDP probably is many times worse than a 1 percent rise in inflation.
The article’s conclusion is that the Fed ought to worry more about price volatility than inflation itself – so long as the economy is growing.
The Fed should worry about employment, in other words, rather than inflation.
As stated, from our point of view, this argument misses the main reason why people don’t like inflation.
Inflation takes control out of their hands.
People can work as hard as they want, but if some nameless, faceless individuals in Washington DC decide to change monetary parameters and heat-up inflation, all that hard work is rendered valueless.
People resent it, now more than ever – as these days millions more understand how central banks really work and the price-fixing that takes place.
Inflation deprives people of money that they made by working hard and saving.
It makes a mockery of the idea that people have control over their own destinies.
Interesting that the article doesn’t recognize this.
In a way it is a perfect Bloomberg article, beating at the heart of the Bloomberg’s ever-present authoritarian impulse.
In this variant, people’s freedom and ability to control their own savings is seen as irrelevant so long as the Fed is able to generate increased employment.
The “good of the many” is viewed as far more important than individual freedom.
It is an immaculate rendition of the technocratic meme – the propaganda that places “experts” above individuals and celebrates the power of a handful of individuals over people’s own, hard-won, human action.
Inflation makes people feel out-of-control and mocks their ability to build a better and more secure life for themselves and their families.
What’s so hard to understand about that?
Conclusion: For the Fed and its supporters, higher “employment” is preferable to people’s control over their own money. This is a terrible state of affairs, and a persistent one. As long as we’re at it, we should probably add one more observation: At the root and heart of central banking is a destructive impulse. None of what is said to be for our benefit actually is. Many now realize that as well.
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