Sep 8, 2014

Inflation and the Class War


Rick Santelli's unhinged rant against underwater mortgage relief in 2009 (see above) marked not just the birth of the Tea Party, but also the turn of the American monied class: from desperately accepting gigantic piles of free government money towards frantically mobilizing to prevent anyone but themselves from getting the same treatment. Through a tsunami of political donations, and a slew of lavishly funded think tanks and foundations, they demanded austerity in the teeth of the worst economic collapse in 80 years, especially cuts to social insurance. They destroyed any chance at mortgage relief for ordinary people. And perhaps least appreciated, they have constantly demanded hard money policy.

So over the last several years, one question has been persistently nagging one percenter analysts: is this behavior stupid or evil? That is to say, are the rich just slickered by very poor economic advice (like that dispensed by Santelli, who would have lost you a ton of money over the last five years), or are they deliberately acting as a class to choke the prospects of the 99 percent?

I believe it's a mix of both. But the key thing to remember for ordinary people is that the class war goes all the way down. More people than in generations understand that, to a very great degree, economic policy is a zero-sum struggle for power between the rich and everyone else. This very much includes our money policy – whether we will prioritize creating as many jobs as possible, or preserving the value of the dollar at all costs (hard money policy, in other words).

But let's step back a bit. Folks like like Paul Krugman and Brad DeLong have wondered whether the rich's love of hard money is a simple intellectual mistake, since a strong recovery (which has been hindered by inflationista/austerian paranoia) would mean more sales, more revenues, and more overall profits. It ought to be good for everyone.

Steve Randy Waldman disagrees. After a certain point, more money is useless in concrete terms, and wealth becomes more and more like insurance. Stronger growth may mean more aggregate production and profits, but if it looks likely upsets the current hierarchy of wealth, incumbents will resist it. Thus, the rich have always favored hard money, everywhere and always:
“Full employment” means ungrateful job receivers have the capacity to make demands that could blunt equity returns. And even if that doesn’t happen, even if the rich do get richer in aggregate, there will be winners and losers among them, each wealthy individual will face risks they otherwise need not have faced. Regression to the mean is a bitch. You have managed to put yourself in the 99.9th percentile, once. If you are forced to play again in anything close to a fair contest, the odds are stacked against your repeating the trick.
As Waldman notes, there is a long history here: the rich of 1896 mobilized more money as a fraction of the economy to defeat William Jennings Bryan's campaign against hard money than any presidential election before or since. (Roughly 4 times as much, in fact.) Krugman admits this makes a lot of sense, but is still drawn to the idea that the rich are misleading themselves, mainly because they routinely espouse totally bankrupt ideas.

This is an interesting topic to ponder for the future, given the outsize power the rich possess (I think you can explain the rapidly shifting nuttiness by noting the need for an unselfish cloak for naked self-interest), but the important thing for the non-wealthy is that class conflict is an inescapable part of money policy. People understand this when it comes to tax or health care policy, where recent Democratic Party policy like ObamaCare features substantial transfers from rich to poor (and most Republican policy goes the opposite direction).

But money is a much more slippery beast. It's one of those things that everyone has daily experience with, but gets stranger and stranger the more you think about it. Both from conversations with friends, memories of how I used to think, and the famous paper about the economics of a POW camp, average people have a vague idea that money is something that just happens in society, and rising prices are always bad. When it comes to inflation, people tend to believe that if prices rise 10 percent that means they'll only be able to afford 10 percent less stuff.

That's the inflation fallacy, and it serves the interest of the rich. If prices – all prices – rise 10 percent, that includes the price of labor (your wages) and the erosion of the purchasing power of a dollar will be exactly counterbalanced by an increase in wages. Money goes in circles in the economy: my spending is your income, and your spending is my income.

But that's why the way Waldman writes is so valuable – he translates these arguments in a way that makes sense on an intuitive human level. What is money, after all? Among other things, it is a claim on future production. But productive capacity is not cast in stone:
Human wealth is not like acorns for squirrels, stuff that can be buried in a tree and consumed over time. Most of the goods and services we require are ephemeral. They have to be produced and reproduced every day. When you save, you are asking other people to do the work of expanding the productive capacity of the economy so that when you eventually redeem your scrip for stuff, there is enough not only to pay all the future workers and investors actually producing, but also to cover your ratty old claims on wealth.
Pushing productive capacity forward through time is a difficult, tricky business. It's not just the daily grind against entropy: the production, repair and replacement of worn-out equipment, the hiring and training of new workers, the education of the young, and so on. It's also dealing with, on occasion, huge macro-scale catastrophes.

Suppose for example that we discovered that the financial system had been madly, unsustainably incentivizing the production of exurbs out in the desert – doing their vaunted allocation of capital right into the garbage disposal. Banks must eat huge losses and large parts of the real economy must be reorganized. Effectively, we find we're not as productive economically as we thought we were. We could deal with this problem by doing all we can to make sure everyone stays employed, which because of the need to reorganize sectors will likely result in scarcity and a one-time burst of inflation. Or we could allow giant levels of unemployment, so that workers will not have the money to bid for goods and services and the value of dollars will be preserved.

This isn't just a theory – the U.S. chose unemployment, while Israel and Australia chose inflation and largely avoided the Great Recession.

So when it comes to inflation, it's time for the non-wealthy to forget the 1970s (badly misinterpreted anyway) and recognize that this is a zero-sum political struggle. There is likely still quite a lot of slack in the economy, so production can probably be expanded without too much inflation, but for the non-wealthy, it's clearly worth the risk (vulnerable creditors could also be protected). Full employment is far more important than stable prices.

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