One 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 rates.
What 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.
One 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.
Another 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.
The 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.
Another 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.
Yet 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.
In 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.
September 12, 2005