Why Is Inflation So Popular?

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of the more remarkable features of “mainstream” economic debate
in nearly all countries at nearly all times is the enduring popularity
of inflationary monetary policy. You nearly never hear any prominent
politician or pundit attack the central banks for inflating too
much. At best, they will be silent or say they are pleased with
current policy as it is, but particularly if growth is sluggish
most will attack central banks for not inflating even more. Despite
the fact that the European Central Bank (ECB) is inflating far more
than it should not only according to Misesian standards but also
according to its own policy rules, it is nearly universally condemned
by politicians and pundits for its reluctance to cut interest rates
even further and inflate even more. As far as I can remember, the
only time a prominent voice attacked a central bank for being too
inflationary was when The Economist in May 1998 attacked
the Federal Reserve for creating the tech stock bubble through its
inflationary monetary policies and called for it to raise interest

then accounts for the popularity of inflationist policies? It’s
certainly not that inflation is universally beneficial, because
it isn’t. At best inflation will have a purely redistributive effect,
benefiting some groups at the expense of others, but mostly it will
be worse then that and ultimately destroy wealth. While some may
still benefit from it, the damage to others will likely be greater.

reason for the popularity of inflation is that it is always convenient
for politicians to blame “tight monetary policy” for lackluster
growth. That way people won’t blame their policies. Many of those
attacking the ECB are politicians in various slow-growing welfare
statist countries like Germany, France and Italy and George Bush
the elder famously blamed Alan Greenspan’s alleged “tight monetary
policy” for his 1992 election loss.

reason is that the people who benefit from inflation are better
organized and better informed than those who loses from it. As product
prices are usually less rigid than wages the short-term effect of
inflation is usually to boost corporate profits while lowering real
pay for workers. And as corporations are usually well organized
with effective lobbyists they have great influence. Meanwhile, the
labor unions, who claim to represent workers, are clueless on the
issue and are in fact often themselves promoting inflation even
though it hurts their members. This cluelessness is widespread among
left-wingers who usually favor inflation in the nave belief that
it will hurt old rich misers with large cash and bank account assets,
even though the rich usually have nearly all of their wealth in
tangible assets like stocks and real estate which in turn means
that they benefit from the asset price inflation that is generated
by an inflationary monetary policy. Interestingly, there was recently
an article
by Mike Whitney
in the leftist Counterpunch magazine
which recognized that inflation was not in the best interest of
people with low income. Unfortunately though, he is so far a lone
voice on the left.

perhaps most important reason is of course the widespread popularity
of economic theories like Keynesianism, monetarism and supply-side
economics which presents inflation as being beneficial to the economy
– at least as long as it is moderate. They mislead people partly
by presenting inflation as something which is needed for keeping
the economy growing. “Deflation” by which they mean falling prices,
is often claimed to be the worst calamity any economy can suffer
even if it is only moderate and even if it is a result of rising
output rather than falling money supply and therefore the central
bank must provide “liquidity” to prevent this. Rising money supply
is falsely claimed to be a necessary requirement for prosperity.

related way in which pro-inflation economists makes inflation popular
is through its use of various euphemisms for inflation. They almost
never say they want an inflationary monetary policy. Instead they
say they want an “expansionary” or “loose” or “stimulative” or “reflationary”
or “accomodative” monetary policy or that they want the central
bank to “provide liquidity”. That way they give everyone the impression
that their policy will raise production rather than prices or that
they are merely responding to market demand and market signals.

another related way in which pro-inflation economists makes inflation
is through the method of deception exposed by Frdric Bastiat and
Henry Hazlitt: by only focusing on the visible short-term effects
of inflation while leaving out the less visible and long-term effects.
Since the short-term effect of inflation usually (but not always)
is indeed to raise production and since the early receivers of the
newly created money can see the immediate effect of having more
money and getting loans at lower interest rates, the short-term
effects of inflation is seemingly positive. What is being left out
is how this will raise prices and thus reduce the purchasing power
of the late receivers who are outbid in the market for goods and
services by the early receivers and the negative effect this will
have on growth. As there is a time-lag between the creation of money
and the increase in prices it is not directly obvious to everyone
that the former caused the latter. And pro-inflation economists
are very active in denying this link as they tell everyone how some
non-monetary factor causes some specific prices to rise. They say
that gas-guzzling Americans or newly-rich Chinese or OPEC or greedy
oil companies are responsible for higher gas prices or that a “tight
labor market” or “irresponsible unions” have caused wages to rise
which in turn have forced companies to raise prices or that cold
weather caused the prices of some vegetables to rise and so on.
But many of these “non-monetary” factors are ultimately the result
of previous money supply increases and even to the extent they aren’t,
prices wouldn’t have risen as much without the money supply increase
and we would have seen other prices fall without the money supply
increase. By severing the link between rising money supply and rising
prices (or the absence of falling prices), pro-inflation economists
help give people the impression that the only result of monetary
inflation is the visible positive effects of the early receivers
of money while denying its link to the negative effects experienced
by the late receivers of money. Because of this people only see
the link to the early seemingly stimulative effect on the economy
while not seeing the link to the later weakness it causes.

short, we can see that the popularity of inflation is the result
of lobbying by active special interests in collaboration with economists
who deceive the public by denying its negative effects.

12, 2005

M.I. Karlsson [send
him mail
] is an economist working in Sweden. Visit his

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