Inflated Worry of Inflation

I’m not sure why I get certain “suggested posts” in my Facebook feed, but I assume it’s the company I keep. For instance I get articles on Native American issues (which I like getting) despite being as Euro-American as they come, and frequent articles from the Tablet (which, in fact, I do find interesting) despite being as goyim as they come. And then I get the goldbug articles, which I don’t like and don’t find interesting and which make me roll my eyes in wonder.

I’m not going to bother linking to it, as it’s just a thinly veiled ad trying to sell you gold. And as my one brother said to my other brother once, if these folks really believed what they were saying about the need to buy gold they wouldn’t be selling it to you for your paper dollars.

But what irks me is their focus on how the American dollar is buying less and less!!

Which is true, but generally irrelevant. If we have enough more of those dollars, then the fact that each one buys less just doesn’t matter. If I have $1 and a burger costs $1, I can buy a burger. If the price of the burger increases to $2, but I also now have $2, then I’m not a bit worse off than I was before. That’s why the best way to really understand price changes is to consider how long a person has to work to afford something. If I used to work 1 hour to get that $1 for that $1 burger, but now I work 45 minutes to get the $2 to get the $2 burger, I’m better off, regardless of the fact that each dollar buys less.

This is why intelligent people focus on the real dollar value, not the nominal dollar value, and, consequently, on real prices, not nominal prices, and real wages rather than nominal wages. Because the real issue is your purchasing power, not that piece of paper’s purchasing power.

That’s not to say inflation can’t be bad. I’m actually something of an inflation hawk. If the dollar loses value too quickly, then people do lose purchasing power. But the steady 3% annually that the Fed shoots for is not a purchasing power problem. Especially when technological and efficiency gains keep pushing down so many prices, sometimes even in nominal terms (which means the real price declines are phenomenal).

A lot of the folks who over-worry about inflation consider themselves in the Austrian economic strain. I consider myself so, too, to the extent that I am quite Hayekian and find a lot of value in reading the economists associated with GMU’s Mercatus Center. Autrianism doesn’t require shallow thinking, though. In fact a lot of Austrians, in my experience, like Bastiat, who emphasizes looking past the superficial to see the fuller dynamic. Or Hazzlit’s Economics in One Lesson, where that one less is,

The bad economist sees only what immediately strikes the eye; the good economist also looks beyond.

We can criticize the Federal Reserve, of course. It’s an institution run by humans, and subject to human error. It may not be the best system for managing a society’s monetary status (although I’ll argue it’s a damn sight better than letting electorally responsive parts of government do so). But keep in mind that part of its dual mandate is to keep inflation in check (maintain stability of (real) prices), and since President Carter’s appointment of Paul Volcker as Chair of the Fed, it’s taken that part of its mandate seriously. The Fed could go haywire under some future Chairs, of course. But anyone telling you the 3% inflation mandate is destroying your standard of living is trying to sell you something.

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About James Hanley

James Hanley is Associate Professor of Political Science at Adrian College and a Fellow of the Institute for Social Policy and Understanding. The views expressed here do not reflect the views of either organization.
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2 Responses to Inflated Worry of Inflation

  1. the steady 3% annually that the Fed shoots for is not a purchasing power problem.

    The Fed’s stated target is 2%, and in practice that’s a ceiling rather than a central target. Over the past 25 years they’ve actually averaged quite a bit less than 2%.

    The problem with low inflation is that it’s a very short way to actual deflation, which tends to run away because any debts (in nominal dollars) balloon, causing people to cut spending, which causes more deflation, etc. Economists of all stripes agree that deflation is a very, very Bad Thing. The current worry in economic circles is that the 2% ceiling was set somewhat arbitrarily in times when the risk of deflation was very low, and might not have had enough searoom for times like now.

    Several economists, most famously Paul Krugman and Brad DeLong, have been arguing that the Fed explicitly raising its target to 3% would stimulate the economy today and provide more searoom tomorrow. So your 3% target may not reflect Fed policy, but might well be a good idea.

  2. ppnl says:

    Well the current prime rate is 3,25%. The last time it was that low was 1955. That would seem to give the fed all the head room it needs to deal with inflation. In fact it seems to me that the fed would really like to see some inflation so they can get the prime off the floor. As it stands they have very little room to deal with an economic down turn.

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