Commentary on Political Economy

Friday 12 February 2021



What Inflation Debates Miss: Inflation

Focusing on consumer prices allows economists to miss all the other social danger signs of bad prices.

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Something extraordinary is breaking out at the moment: a debate about inflation. The trigger is the $1.9 trillion stimulus bill President Biden and Capitol Hill Democrats intend to ram through on a party-line vote.

The sum is so outlandish it’s making even veteran spendthrifts nervous. “There is a chance that macroeconomic stimulus on a scale closer to World War II levels than normal recession levels will set off inflationary pressures of a kind we have not seen in a generation,” Larry Summers warned last week.

Never fear. “I can tell you we have the tools to deal with that risk if it materializes,” Treasury Secretary Janet Yellen reassured the world Sunday. Federal Reserve Chairman Jerome Powell presumably agrees. He has lobbied for months for a fiscal blowout at the same time the Fed expects the risks to financial stability—a pillar of Mr. Summers’s worry about inflation—to be only “moderate.”

Don’t underestimate how silly this debate is. Even Mr. Summers’s attenuated warning about inflation is based on his precise calculations of things that are unknowable.

With an assist from the Congressional Budget Office, he starts with a guess about the “potential output” the U.S. economy could achieve in a fantasy world without a global pandemic, proceeds onward to a hunch about the actual level of output America might produce this time next year, and then calculates an “output gap” that amounts to the level of stimulus the economy “needs” to cover the difference. That the Democratic stimulus far exceeds this output-gap estimate is what gives Mr. Summers palpitations about inflation.

This is a common enough method for assessing fiscal policy in the respectable economics literature. It’s also entirely fictional, for reasons easy to spot if you reread the preceding paragraph. But the Yellen-Powell assertion that stimulus spending will create “full employment” (another meaningless term in the economics wonk lexicon) without inflation isn’t any more factual. It’s merely differently made up.

Meanwhile, inflation already is here.

“Inflation” in the academic and policy jargon has come to mean a specific event: a rapid run-up in consumer prices. This is the great horror remembered from the stagflation of the 1970s and the wheelbarrows full of Papiermarks in Weimar Germany in the 1920s. By this standard, the great mystery is that recent monetary expansions have not triggered consumer-price inflation. But this crimped definition of the problem blinds us to all the other inflationary pressures afoot.

Insight emerges from a browse through Adam Fergusson’s 1975 history of Germany’s hyperinflation, “When Money Dies.” The run-up in consumer prices was only part of the way the monetary excesses of the early 1920s destroyed German society. Other evils abounded.

Middle-class investors found the value of and income from their capital wrecked by a phenomenal bid-up in prices for financial assets, whose nominal gains masked inflation-adjusted plunges. Financial disorder stoked growing unease bordering on panic on the part of a bourgeoisie that had relied on its capital investments to fuel German economic growth and also to fund its consumption.

A consequence of chaotic financial markets was a new boom in speculation. The economic miseries of the era were not uniformly distributed, and the divergence between new classes of haves and have-nots stoked political and personal resentments alongside rampant corruption. Does any of this sound familiar?

In other ways too, faint but eerie echoes of the Weimar era are starting to sound. A curious phenomenon of that time was the emergence of Notgeld, or emergency money, printed by local governments or larger corporations to facilitate commerce amid the collapse of national money. Is bitcoin the Notgeld of our day? Elon Musk might think so, given Tesla’s recent $1.5 billion bet on the alternative currency and his tweet contending: “Bitcoin is almost as bs as fiat money.”

Taking a broader view, Western democracies have not for at least 15 years acted like societies where economic conditions are benign, despite all the data professional economists cite to the contrary. We are witnessing vicious political polarization, rapidly deteriorating social trust, a breakdown in economic relations between the generations—even peasants’ revolts as varied as Brexit and GameStop.

Going back at least to the 14th century, such events most often have occurred in an environment where malfunctioning price signals (read: inflation) make it impossible for a society to allocate its resources with any rationality or fairness.

This is why confining debates over inflation to consumer-price inflation, however poorly measured, is a dodge. Most of the social factors about which economists really care when discussing inflation, broadly construed, are flashing red. Whatever other effect a $1.9 trillion stimulus bill and the attendant debt and monetary blowouts might have, it’s unlikely to help.

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