The inflation thread

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Gadianton
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The inflation thread

Post by Gadianton »

I ran across the ultimate sound-byte knockdown of Monetarism in a recent YouTube video, but there wasn't much elaboration, and a cursory search hasn't turned up the source of the argument for me, but I think it's a great way to introduce the topic of inflation.

1) Afghanistan is experiencing hyperinflation.
2) Afghanistan outsources money printing to countries with sanctions against Afghanistan.

Well then, case closed.

Given that I can't find any real economists who speak with the supreme confidence about the causes of inflation that politicians and pundits do, I think it's safe to say that though it's easy to put out the sillier tantrums we see flare up, particularly from the right wing, an acceptable understanding of our situation might still prove elusive.

Rather than dive into monetary theory, a topic I myself need to brush-up on and get current on and most people will skip anyway, I figured I'd start by explaining the basic political divide over what is and isn't supposed to cause inflation. This divide has fully broken down in today's world of identity politics, by the way.

Right-wingers and libertarians generally see inflation as ostensibly connected to the money supply. But why is that? Our money supply is controlled by a third party, the Federal Reserve. Alan Greenspan, the most recognizable name in Federal Reserve history was Chairman for about 20 years. He was a nut job in terms of right-wing ideology: a disciple of Ayn Rand, and he believed in the gold standard. A conservatives conservative if there ever was one. Paul Volcker, (not Ronald Reagan, Ajax), a Democrat, infamously stopped inflation in its tracks by raising interest rates against a direct order from Reagan himself, and stifled GDP in the process -- some call it the Volcker recession. (can't kill inflation without killing growth, they go together)

So how is it that money supply theories of inflation are so embedded in right-wing thinking, when left-wingers have no more to do with the Federal Reserve than right-wingers?

It's because right-wingers have their wires crossed. If you're on the libertarian side of things, today's right-wingers argue for the right thing with the wrong reasons.

Inflation is a natural consequence of economic growth, and it isn't all bad. Left and Right economists both worry far less about inflation than deflation, because inflation stimulates spending (moves the economy) while deflation encourages hoarding (if money is gaining value, why spend it?).

The divide between left and right isn't so much about inflation as it is economic growth, and the role of government in economic growth. Long story short, traditional economists, basically macroeconomics as we know it, is left-wing theory. If you've heard terms such as "cost push inflation" --- prices go up, employers must pay more, that's all left-wing doctrine. Stimulus spending is a part of that left-wing doctrine. That is, the idea that you can move the economy by deficit spending. It was Keynes who invented the idea of aggregate (national) demand and the basic macro building blocks, with government as the deficit spender that moves the whole thing. And so, in theory, deficit spending -- issuing government bonds and building bridges -- is left-wingism.

How did the United States pull itself out of the Great Depression?

WWII. National aggregate demand built tanks and bombs and ships and a huge army by declaration of war. <-- This is left-wing doctrine.

Why?

Because if the government can move the economy, then big government has a place in the economy. That's what liberals are supposed to believe. Right-wingers have to believe government can't help the economy, it can only hurt it. So I have to laugh my ass off every time a right-wing politician talks about "stimulus" because in theory, government shouldn't be able to stimulate anything. And if a government can't stimulate anything, then surely, it can't overheat the engine and cause inflation.

So back to monetarism. The reason why monetarism is a right-wing theory, is because it says that government can't move the economy through stimulus. That is, you can sell bonds and go build bridges, but a set of curves will show if you stimulate one sector of the economy, you'll crowd out another sector of economy, leaving GDP unaffected. Instead, they do believe that money can stimulate the economy, something that the left wing also accepts, and so lowering interest rates is something both sides can agree can move the needle. It might be more appropriate to say that the left-wing invention we call macroeconomics was found to have a sliver of truth to it by Friedman, in terms of monetary policy. But even then, it's a short term fix, with an equilibrium condition called the long-term neutrality of money that says it can only help a little bit.

So-called Austrians who are usually non-academic anti-vaxxers who don't know anything, go further and say central banks are the cause of boom and bust cycles. since they do away with that last holdout for policy, the central bank, they are even more libertarian.

So, generally speaking, right-wingers are supposed to want small government, and believe that unfettered private enterprise will optimize all facets of economic activity with little to nothing for government to do. Left-wingers are supposed to believe government policy is crucial to a strong economy. When, in particular, right-wingers start arguing for anything that implies a role for government, then they are in danger of straying from the path. Trump as economic planer in chief is like going back to Stalin or something.

That doesn't help explain anything about inflation today, but a bit about where the vested interests are supposed to be in economic theories that are used to explain inflation.
Res Ipsa
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Re: The inflation thread

Post by Res Ipsa »

I missed this excellent post when it was originally posted. From back in college days (econ major), my recollection that the monetarist criticism of Keyensian economic was not that stimulus didn't work, but that it was difficult, if not impossible, to time the stimulus correctly. For example, when the economy is running strong, the last thing the government should do is cut taxes. But that's what the political pressure leads politicians to do.

After graduating, I went to law school, where my only contact with economics was Chicago school law and economics. Did the monetarist critics of fiscal policy eventually switch to claiming that fiscal stimulus was impossible? Or was that just part of the whole monetarist critique that I'm just not remembering?
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Gadianton
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Re: The inflation thread

Post by Gadianton »

I think I should return to the source of my understanding, and then I'll report back.
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