Categories:
Economic and Political Philosophy
Back in 2008, I told my lunch buddies that the bailouts were worse than four years of 10% inflation. Now I think that’s an understatement. Crazy new policy initiatives will probably end after the next election, but the idea trap‘s been awfully ugly this time around.
Challenge inspired by Sumner’s latest post: Put all the American policy disasters of the last three years on one side of your mental scales. Put the 2008-2012 U.S. inflation rate on the other. What rate would it take to make you morally indifferent?
P.S. If you’re worried about the indirect effects of inflation, remember that bailouts, fiscal stimulus, Obamacare, and the rest have indirect effects, too. Big ones.
READER COMMENTS
Fabio Rojas
Jun 16 2010 at 2:02am
Don’t you get into the classic concentrated vs. dispersed costs issue? 10% hurts everyone directly. Bailouts may have an aggregate effect that is larger, but a smaller slice of the population will be affected by bailout policy. IIUC, bailouts will (a) increase taxes sometime down the road as the gov’t comes up with the funds to cover the bailout and (b) encourage risky behavior, which is also in the future and affects mainly borrowers and some creditors.
fundamentalist
Jun 16 2010 at 8:48am
Of course inflation doesn’t have many costs if you’re a mainstream economist. It does nothing but raise prices. But if you understand the damage to the structure of capital that inflation causes, and the resulting boom/bust, waste of wealth, unemployment, businesses destroyed, etc., then you will place a much higher figure on the cost of inflation.
Yancey Ward
Jun 16 2010 at 8:50am
And when you reach the end of the four years of 10% inflation, what then?
Bob Murphy
Jun 16 2010 at 9:21am
Good question, Yancey.
Et tu, Bryan? Are you agreeing with Sumner that all our economic problems would have magically disappeared if Bernanke just created more green pieces of paper?
Your “challenge inspired by Scott Sumner” sounds to me like this: Put all the bailouts etc. on one side, and on the other have Americans losing a limb in a car crash. Now, how many lost limbs would it take for you to be indifferent?
David R. Henderson
Jun 16 2010 at 11:09am
@Bob Murphy,
I notice that you didn’t take up Bryan’s challenge. I will. I would take 10% inflation annually for 4 years to avoid all the policy disasters of that time. Note that that includes not just the bailouts but also the health care bill.
Best,
David
Philo
Jun 16 2010 at 1:07pm
If inspired by Sumner, shouldn’t your question begin: “Put all the American policy disasters of the last three years *that would have been avoided by a more inflationary monetary policy* . . . ? It is not clear that inflation would have derailed Obamacare, for example.
Silas Barta
Jun 16 2010 at 2:26pm
I don’t consider this an insightful question, because it leaves the important issues underspecified.
1) It’s not inflation per se that bothers me, but the fact that interest rates don’t make up for the loss of purchasing power. If there were a way to protect my savings from that loss, I would gladly take inflation. (No, TIPS doesn’t count because the bond prices would be bid up to the point where the return would be less than inflation.)
2) Are we talking about *true* inflation, or *government-reported* inflation? The official stats are very disconnected from the prices consumer face, in part because they never seem to adjust *up* for *decreases* in product quality, only the opposite. And they don’t have the facilities that would detect product degradation in the first place.
A *true* 2% inflation rate would be much better than these policy disasters, but the government’s 2% would mean more like 10%. To answer the question, I would say that a government-reported 8% inflation rate would be the highest rate that would be preferable to the policy disasters.
Of course, I reject Sumner’s reasoning entirely. Injecting free money into the vaults of politically powerful banks would *not* cause a genuine recovery; it would just wiggle phony stats into the right place.
Niko
Jun 17 2010 at 3:45am
@David R. Henderson:
There is no challenge because there is no real choice. I don’t know what they teach you in school, but you people really have to get your facts checked. There is no easy way out of these.
Let me rephrase Caplan’s “challenge”:
We have two huge pits. I screamed that the one on the left is preferable, but hey, the idiots choose the one on the right.
PS: I apologize for the tone.
azmyth
Jun 17 2010 at 8:54pm
Bryan: 20%
Bob: An arm from the elbow down.
Comments are closed.