Monday, March 29, 2010
Inflation and hyperinflation
Ok, not a secret that I like to characterize my politics as anti-stupid. And it's rare in economics for folks to say something that's outright idiotic, since so many economists (and even more of their more Milquetoast brethren, the finance specialists) like to qualify every statement they make. As in, not "GDP growth will rebound to 2004 levels" but "given the extant data and current policy environment, there is the likelihood that growth in several measures of economic activity may achieve levels previously achieved for some sectors of economies on certain unspecified continents". It's the kind of Laodicean lukewarmness that makes you want to puke.
This is all to preface the fact that I DO really like it when people take a stand. Just not when they're so blatantly wrong and obviously fear-mongering. So what am I going out on a limb about? Hyperinflation. As in, the US will not have hyperinflation in my lifetime. See that period right after that sentence? It means what you think it does. Now if it was just these people equating US monetary policy with the Under Siege II style train wreck that is Zimbabwean monetary policy, I wouldn't be bothered (ok, maybe I would, but not seriously). Or even these people, with their fancy graphs and what not.
But no, reasonable people are weighing in on this, and by this, I mean Michael Kinsley of the Atlantic Monthly. Paul Krugman called him out on this, thankfully, and Greg Mankiw plays referee.
I'm not going to weigh too far into this, because Ryan Avent has done a fantastic job already. The key point is that he notes that hyperinflation is as much about political institutions as about economic activity and I'd add any comparison of countries that doesn't hold this key variable constant is ludicrous. And of course, comparing America to Zimbabwe on this dimension is pretty much like comparing A to Z. It's almost like everyone forgot it used to be called political economy.
The biggest open issue (after the Kinsley "apology") is the worry about how the US will pay back its large (and growing) national debt. Krugman has an answer here, and his reasoning is fairly along the lines of why I remain concerned, but unpanicked. The way I see it, there are really two ways out of the debt: grow faster or spend less (note that spend less also includes tax more). Both of these are in nominal terms as well, so if you could simultaneously fool all investors and index all wage contracts, then inflation would get you out as well. In reality, all of these things would be done simultaneously, and that means you don't need drastic revisions in any one of them. The small note I'll add to the discussion is that people seem to be missing is correlation. These factors are all self-reinforcing. That is, if we are growing faster, the deficit will be smaller, and inflation will be bigger, all of which combine to lower the deficit faster than looking at each factor in isolation. Similarly, standing at a point in time where growth and deficits are large, and deflation is a risk, the problem is likely to look insurmountable. Note that because of the positive feedback, large values of each factor aren't necessary to see large improvement over short periods of time. Remember the late 1990s?
So shockingly, since I'm quintessentially a half-empty sort of guy, this is NOT keeping me up at night. The Law and Order SVU marathon on the other hand, is.