Sunday, November 15, 2009

Inflation And Its Consequences

Inflation is a somewhat complicated issue. However, one thing is clear -- it hurts creditors and helps debtors. Since poor people and the federal government are on the debtors side the equation it's no surprise that progressives like Matt Yglesias and Paul Krugman would be on the side of inflating our way out of our current economic situation.

Not that this invalidates the policy by itself, but does make me skeptical.


Andrew Stevens said...

Let's not forget that inflation also hurts the poor who are not debtors (and the really poor rarely have debt, since nobody will lend them money). Inflation eats up their savings and makes it impossible for them to accumulate anything.

The Ancient said...

Cheap money and the ability to escape one's debts has been Democratic policy since Jackson's destruction of the Bank of the United States. It's the bright glittering thread that runs through the party's history from its inception. (One difference today: Instead of Bryan's hapless farmers in the Midwest, the modern beneficiaries of cheap credit and debt-abandonment are Wall Streeters.)

I agree with Andrew Stevens, but I would add that inflation in practice creates a climate of uncertainty and an unwillingness to invest which hurts the poor most of all -- even as it lines the pockets of the state.

(I can remember Alan Greenspan arguing that inflation hurt the asset-holding class most of all. This is rather like referring to "the glorious days of the Depression," when servants were cheap and plentiful.)

FLG said...

Andrew, good point about the very poor. I didn't really think about that.

On the longer term problem of inflation making it impossible for the poor to save anything and The Ancient's point about the climate of uncertainty, those types of consequences don't concern liberal because they are short-termed focused. In the long run we are all dead and all that.

Lastly, interesting point about Jackson and the Bank of the US (the 2nd if I remember correctly). I would never have connected the dots back to that. Wasn't his concern, at least the proximate one, corruption and fraud? Again, if I remember correctly.

The Ancient said...

FLG --

I commend you to Bray Hammond's Banks and Politics in America, the second best thing ever written about the banking industry in the U.S.

Among other things, he argues -- persuasively in my view -- that the abolition of the Bank of the United States retarded the economic development of the United States by two generations.

Think about that.

RP Johnson said...

While I agree with Andrew, it appears to me that the effect on the "really poor" is perhaps on "the second order of smalls" since not only do they rarely have debt, they typically also rarely have assets or savings either. I imagine that it would be difficult for the really poor to chose which condition would be worse for them in inflation. Their condition is crummy no matter what.

Andrew Stevens said...

Jackson did protest the alleged corruption of the Second Bank of the United States, but that can't really be the reason for his opposition because he opposed it before it even existed.

Jackson gave many reasons for opposing the Bank - it was unconstitutional, it had too much power for one institution, it exercised too much control over Congress and interfered too much in elections, and it favored the Northeast to the detriment of the West and South.

In general, banks were viewed with great suspicion in the West and South and Jackson was no exception. Jackson was fond of borrowing money to speculate on land and, when facing bankruptcy after the Panic of 1795, blaming the evil banks for having the temerity to want their money back.

Andrew Stevens said...

Depends on what you mean, RP. There are plenty of working poor who live frugally and save cash to buy a house or for some other goal. Inflation is quite capable of crippling these people.

You can argue, of course, that the people I am talking about are not really poor. They have wealth, after all, even if they have low incomes. I beg to differ.

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