One of the things I find most disturbing about politics is that it is often about convenience. What I mean is that often perfectly logical people quite conveniently “forget” what they said in the past and support policies they would normally not support if “their” guy were not in office. I’m specifically referring to Paul Krugman, the Nobel prize winning economist who writes for the New York Times.
In 2003, when there was a Republican running the executive branch, and they controlled the Legislative branch as well, Krugman was deploring (and rightfully so) the deficit spending of the Bush administration and the inflation of the dollar by the Fed (led by Alan Greenspan at that time). Back in 2003 Mr. Krugman wrote that he switched his mortgage from an adjustable rate to a fixed rate as he was worried about inflation and deficit spending (3-11-2003 article titled “A Fiscal Train Wreck”). Now, in 2009 he insists deficit spending saved the world. What changed?
Well, since 2003 we have had a switch in the parties running our government. Now the Executive branch and Legislative branch are run by the Democrat party. But the policies themselves have not changed. In 2001 the CBO was projecting a 10 year budget surplus of more than $5,000,000,000,000 (trillion for those of you who are Manchester United fans and can’t count). Now it is projecting a 10 year deficit of $9 trillion (added onto the $10 trillion the debt is currently at. So that is a $14 trillion swing! And Mr. Krugman now thinks this is a good thing.
Some out there continue to insist that inflation is a good thing. ”What is wrong,” they ask “with inflation? At the worst it is a neutral force as the rise in prices will not hurt you seeing as how you have more money.” Stick with me and hopefully you will understand.
First, let us take a hypothetical situation (it wasn’t hypothetical less than a century ago, but now it is). Let us assume the nation is on a system of hard currency, in other words, the gold standard (or the silver standard, either one will do). In other words, the nation is following a policy of sound money. As Rothbard aptly pointed out “so long as the society remains on this pure gold or silver ’standard’ there will probably be only gradual annual increases in the supply of money, from the output of gold mines [or silver mines]. The supply of gold is severely limited, and it is costly to mine further gold, and the great durability of gold means that any annual output will constitute a small portion of the total gold stock accumulated over the centuries.” (Rothbard 20) Rothbard goes on to explain this will lead to gently falling prices. As the economy grows you will have either the same amount of gold chasing more goods/services or you will have slightly increasing amounts of gold/silver chasing an increasing amount of goods and services. This means your dollar will increase in purchasing power rather than decrease in purchasing power (the dollar today is worth less than 4% of its value in 1913). This will lead to greater prosperity for greater numbers of people. Imagine, if you will, how much cell phones would be selling for (or cars, or gasoline) IF a dollar was not worth 4% of its value from 100 years ago, but was worth 97% of its original value?
In our modern society we are used to prices increasing, not decreasing. Some economists insist the deflation I am describing is bad, yet from the start of the Industrial Revolution until around 1940 what we had was just that, a scenario in which the prices of goods and services was gently falling as efficiency and production increased. Because of the increase in productivity profits did not decrease. There was no major depression, even though we are told that is what will happen. Just look at the recent drop in price of say, cell phones or flat panel TV’s. That hasn’t caused a depression. In fact, you can trace the current depression and the panic of 2008 to the actions of government and it’s central bank, the Federal reserve (but that is a topic for another post).
What happens when government (in our case the Federal Reserve) inflates the money supply? Some, such as the “Chicago” school of economics, believe inflation is a good thing. They postulate, in essence, what I would call the “tooth fairy” theory. If the tooth fairy came by everyone’s home tonight and left us an amount of money equal to our current net worth, so they say, there is no net negative effect. Everyone is euphoric because they are now worth double of what they once were. At the worst, according to them, the net negative social effect is zero.
However, there is a fly in their ointment. It is this: the inflating of the dollar is not similar to our “tooth fairy” analogy (or Milton Friedman’s helicopter effect. This money is not spread out equally to all citizens in society. In fact, quite the opposite. The first group/persons to get the money are whom? Those who are printing it, the government. So they receive the greatest benefit, as they are able to go out and purchase goods and services before the flood of money is reflected in the prices.
Rothbard describes the effects far better than I. ”… The new money ripples out through the system, going from one pocket or till to another. As it does so, there is an immediate redistribution effect. For first the counterfeiters [or the printers], then the retailers, etc., have new money and monetary income which they use to bid up goods and services, increasing their demand and raising the prices of goods that they purchase. But as prices of goods begin to rise in response to the higher quantity of money, those who haven’t yet received the new money find the prices of the goods they buy have gone up, while their own selling prices or incomes have not risen. In short, the early receivers of the new money in this market chain of events gain at the expense of those who receive the money toward the end of the chain, and still worse losers are the people (e.g., those on fixed incomes such as annuities, interest, or pensions) who never receive the new money at all. Monetary inflation, then, acts as a hidden ‘tax’ by which the early receivers expropriate (i.e., gain at the expense of) the late receivers.” Thus it has changed the distribution of income and wealth. The ripple effect not only affects prices, but the distribution of effort toward production.
Rothbard concludes, “In sum, the Austrian insight holds that counterfeiting[or government printing of fiat currency] will have far more unfortunate consequences for the economy than simple inflation of the price level. There will be other, and permanent, distortions of the economy away from the free market pattern that responds to consumers and property rights holders in the free economy.”(Rothbard 26)
In our current situation of deficit spending, who is benefiting? For the most part so far it is “banking” organizations such as AIG and Goldmann-Sachs (I think most of us would be amazed at how many people in government were employees of the latter at one time or another), and the auto industry recipients of federal dollars such as GM and Chrysler. And they have received this largesse at our expense. No, Bush nor Obama, directly raised our taxes to do all of this. Instead they simply inflated the dollar. I will let you decide if it was/is ethical for them to do this.
