Inflation Hawks

 Well, the inflation hawks have swooped in full force now, and they are only gaining in number and strength. The first whisper I heard of this line of attack came from an occasionally-Republican friend of mine, who serves as a sometime-informant as to what is going on in the larger conservative hive-mind. Back in that early week in May, when the Colonial Pipeline was hacked and a temporary gas shortage resulted, my friend told me the following: "People [in Republican circles] are already saying it's like the 1970s all over again. The Democrats have only been in office for a couple months and we're basically back to the Carter administration." "How so?" I asked, not getting his drift. "Well," he replied, "People are waiting in line for gas, and inflation is already out of control."

Inflation... out of control? But then I started to see this talking point everywhere. In newspaper headlines. In the op-ed pages. And now, it has even become a line used by the self-declared "moderate Democrats" to torpedo their own party's legislative ambitions. Joe Manchin took to the Wall Street Journal opinion pages this week to pen what reads very much like, but which I earnestly pray is not, the death knell for the Biden legislative agenda—specifically, the diverse set of social policy, climate, and immigration initiatives set to be included in the $3.5 trillion budget reconciliation package the Democrats still want to get through the Senate on a party-line vote. "An overheating economy has imposed a costly 'inflation tax' on every middle- and working-class American," Manchin wrote—hence, he argued, Dems should "pause" for a time on further spending. 

I don't want to pretend that inflation is a frivolous concern or that it has no negative consequences. Manchin is not wrong that it constitutes a real loss of value to people in a way somewhat like a tax, albeit one that is partially invisible due to the strength of money illusion. But I wish we could stop the criticism for long enough to do just one victory lap. After all, the reason inflation is happening at all is precisely because the fiscal and monetary policies we pursued over the last several years were an enormous success. They did exactly what they were supposed to do: stimulate the economy, encourage economic growth, and spin off enough jobs to achieve something close to full employment. If some mild level of inflation followed upon these actions, it is because macroeconomics is always a matter of trade-offs, in which the virtues of one policy choice also engender its vices. 

For decades, after all, the Federal Reserve treated inflation as the ultimate evil. The result was that this particular wolf was kept from the door, but it came at the cost of the permanent underutilization of the U.S. workforce, and the resulting human suffering that comes from both unemployment and low wages. Indeed, the Fed set it as a deliberate goal to put the breaks on the U.S. economy as soon as we threatened to approach genuine full employment, out of fear that a labor shortage would drive up wages, and in turn consumer prices. The result was that some percentage of the workforce was kept redundant at any given time, and—as progressive economists railed against for decades—wage rates stagnated across the board and failed to keep pace even with otherwise positive economic developments when they came. 

Then, two very important shifts happened. First, a Republican president and Republican Congress came to power, and—partly because of the "Only-Nixon-can-go-to-China" effect, and partly because they went about it in precisely the way Republicans love best, namely through enacting big tax cuts on businesses and the wealthy—pursued a massive program of deficit spending. This regime of running huge annual deficits achieved exactly what it is supposed to under the classic Keynesian model. Namely, the economy expanded, asset prices shot up, and the stock market roared to record highs even as a global pandemic roiled the world's supply chains and seemed likely to cause economic damage. Secondly, the Fed made a historic choice to stop prioritizing the fight against inflation as the end-all-be-all, and instead declared themselves open to pursuing full employment. 

So what has been the result? The economy continues to grow. The number of jobs available expanded to the point that a labor shortage resulted. Wages had to go up in order for companies to recruit workers who now had significantly more bargaining power. In other words, deficit spending and the Fed's new full employment policy worked. We should be ecstatic, particularly because all of this happened in the midst of a pandemic that could well have tanked the whole economy, as it has in many parts of the world that do not have the power to enact significant stimulus programs or monetary interventions. Macroeconomics was vindicated. Was there, in turn, a downside to this overall rosy story? Yes. As the economy has grown and prices rose, it does seem that some inflation has started to result. But this is a foreseeable consequence of the policy choices we have made, and perhaps a necessary cost of the up-sides of those choices. 

As Saul Alinksy reminds us, in Rules for Radicals, "the resolution of a particular problem will bring on another problem." Such is the nature of social change. We don't wake up one day having achieved a perfectly just society; there's always an element of fine-tuning to any effort at creating effective public policy. In this case, solving the problem of massive unemployment and economic contraction, that could otherwise easily have been the effect of the pandemic, spun off a new problem. And even while we recognize the severity and importance of that second problem, we should also thank our lucky stars that it is the only one we have to deal with right now.... Think where we could be, after all, eighteen months into a public health emergency that has disrupted global supply chains, fundamentally altered consumer behavior in uncountable ways, all on a timeline with no definite end point...

Part of what this story shows us, of course, is that—beneath the simplistic assessments we all hear on a daily basis of whether the economy is doing "well" or "poorly"—there is no single standard for economic health. There is, instead, a choice between policies that will have different effects on different groups of people. Those with a lot of monetary assets, for instance, will tend to favor a strong dollar, because it gives them more purchasing power in foreign markets. Those out of work in steel mill towns, by contrast, would stand to benefit enormously from a weak dollar, because it would increase the demand for U.S. exports. Something similar happens with inflation. People who work low-wage jobs and have a lot of personal debt have very different feelings about inflation than people sitting on big cash reserves. 

This, as one gathers from reading Richard Hofstadter, is a big part of what those vehement turn-of-the-twentieth-century debates over silver versus gold—so hard for many of us to relate to today—were actually about. The demand for "free silver" was in part a demand for inflation, because it would ease the burden on debtors (including the small-scale farmers who made up the backbone of the Populist movement). Meanwhile, a gold-backed currency would be good for creditors, in part because it would be deflationary, and therefore preserve or even augment the value of the payment they could demand from their various debtors. In broad terms, therefore, this made more inflation the clarion call of the poor, and deflation the chief policy goal of the rich. 

Of course, there are limits to this. It is not only the rich who stand to lose from too much inflation. Workers, for instance, who may benefit from higher wages in a tight labor market, will also lose much of the value of those wage increases in practice, if inflation simply steps in to raise the cost of living. Likewise, it is not only rich people who are sitting on cash reserves. People who have retired and are trying to live on what's left over in their bank accounts will obviously be severely disadvantaged if too much inflation occurs and substantially wipes out the value of their savings. Charles Bukowski offers a haunting image in one of his poems of "old people on pension" counting pennies in a supermarket: "now, having worked a lifetime," he writes, "inflation has trapped them."

So there's no sense in which inflation should be disregarded or seen as a boon for social justice. It is not solely a redistribution of wealth from creditors to debtors, and the people who are hurt by it are not exclusively those who can afford to lose some of the value of their cash. We should be careful not to overheat the economy so much that it leads to harmful levels of inflation, therefore, and Manchin is not 100% wrong about this more limited point. It does seem, in other words, that the Modern Monetary Theory (MMT) contention that the U.S. government can spend infinitely with no negative macroeconomic repercussions does not seem totally vindicated by the natural experiment of the past several months (indeed, the MMT proponents seem somewhat quiet of late, compared to about this time last year)...

But we must be equally impatient with the people who insist on seeing only the negative side-effect of inflation, without acknowledging the many positives that came from the same set of policy choices that yielded this outcome. Deficit spending works... and it can work even better if we spend it on the many much-needed programs for social and human betterment contained in the budget proposal.