The Morality of the Other Side in the Class War

The Washington Post and Robert Samuelson did their part in publicly passing along the marching orders from the rich and powerful to Ben Bernanke and the Federal Reserve Board.  The word from these folks is “No Inflation!”  If that means millions more people will suffer unemployment for a few more years, that’s a price that the Post and Samuelson are willing to pay.

Of course the rich and powerful have numerous channels for making their concerns known to the Fed, they don’t need the Post and Samuelson to put them into print.  So, this really is a public service.

What’s neat about this picture is that there is little dispute about the basic facts surrounding inflation.  Inflation is a problem that stems from an overheated economy.  Apart from war or political collapse there are no instances of inflation just shooting up from low levels into Weimar-type hyper-inflation.  This means that, if we are going to have a problem with inflation, it will arise gradually and we will first have to get back to something near full employment.  It will not just creep on us overnight when we are sleeping.  (There can be supply-induced inflation.  Suppose Saudi Arabia’s oil fields are blown up and the price of oil goes to $400 a barrel.  This would cause inflation, but the Fed’s actions are not going to affect this outcome.)

The other basic fact is that moderate rates of inflation do very little harm.  The economy operates every bit as well with 4-5 percent inflation as it does with 1-2 percent inflation.  This is a heavily researched topic and the overwhelming majority of this research has found little or no negative effect from moderate rates of inflation (e.g. here and here).

Yet, both the Post edit board and Samuelson argue strongly that Bernanke should not risk higher inflation to try to reduce the unemployment rate.  The edit told readers: “the core rate of inflation (price increases excluding food and energy costs) has crept up to within striking distance of the Fed’s 2 percent target.  Printing more money might push it above that, unleashing dangerous inflationary expectations.”

Ooooooh, dangerous inflationary expectations.  That’s really scary.  Since the core inflation rate has been above 2.0 percent for most of the last 50 years, it’s hard to see what anyone would be worried about.  But then the Post gets to the substance of the matter:

The Fed recently promised to continue making funds available to the financial system at nearly zero percent interest.  While perhaps necessary in the short run, this policy amounts to a penalty on prudent savers and a reward to over-leveraged debtors.

Yep, we should really be worried about rewarding those over-leveraged debtors — lazy bums, many of them are not even working.  And the “prudent savers?”  Yes, that would include all those wealthy people with large amounts of money to invest.  But hey, no class issues here.

Robert Samuelson also notes how more expansionary policy has the effect of transferring wealth from creditors to debtors in the context of discussing a proposal by a Harvard economist to deliberately target 6 percent inflation for a couple of years:

To be sure, higher inflation represents a wealth transfer to debtors (who repay in cheaper dollars) from creditors (who receive cheaper dollars).  That’s unfair, Rogoff says, but it may be less unfair and disruptive than outright defaults by overborrowed debtors.

Samuelson concludes that the risks of inflation are just too great and then wrongly tells readers: “Remember: The economy’s basic problem is poor confidence spawned by pervasive uncertainties.”

As noted in today’s lesson on accounting identities, the share of GDP devoted to investment in equipment and software is almost back to its pre-crisis level.  And, the saving rate is still below its post-war average, meaning that consumption is high, not low.  The economy’s basic problem is that the dollar is too high, which is causing a large trade deficit.

When we think about the trade-offs between inflation and unemployment, it is important to remember that the tens of millions of people who are unemployed or underemployed today did not do anything wrong.  It was people like Alan Greenspan and Ben Bernanke who messed up.  And of course other actors in national policy debates, who were too obsessed with budget deficits to notice an $8 trillion housing bubble, did not help either.


Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C.  He is the author of several books, including False Profits: Recovering from the Bubble Economy.  This article was first published in CEPR’s Beat the Press blog on 25 August 2011 under a Creative Commons license.  Cf. Mike Konczal, “Avoiding That Other Mistake of 1937” (New Deal 2.0, 18 August 2011).




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