Wednesday, June 23, 2010

Cheering On Inflation at NYT

University of Chicago economics professor Casey Mulligan doesn't think inflation right now would be a bad thing and he says so at NYT:

Clearly our government has promised a lot of public medical care, as well as much spending on pensions both for future Social Security recipients and for retired public employees. Few elected officials want to crusade for higher taxes. But our aging population and public medical spending that grows faster than the rest of the economy are nothing new to 2010.

History certainly has examples of high inflation that resulted from dire fiscal situations. But there are also many examples of governments that fueled new spending programs by raising taxes or by cutting other spending. Our government may well raise taxes, cut military spending or cut spending on certain types of health care.

So the real question is whether the economic damage from inflation is more or less than the economic damage of raising payroll taxes, implementing a national sales tax or paring some of the government’s spending promises.

The answer is that inflation is less costly now than it usually is. Inflation would alleviate some damage done by the housing market to the wider economy. Specifically, inflation would raise prices of homes, among other things. Higher housing prices would pull a number of mortgages out from under water – the case when more is owed on a mortgage than the market value of the house that collateralizes it – and thereby reduce the number of foreclosures.

So even if our government had its fiscal house in order, the reason to expect inflation is that inflation wouldn’t be so bad right now.
I really don't think that Mulligan realizes the kind of inflation he is discussing is a shell game. If you don't tax people but inflate the money supply and give the newly created money to those who would be the beneficiaries of increased tax revenues, what is the difference? Further, the hidden nature of an "inflation tax" is more distorting to an economy because many people won't see it coming and thus it could very well mean losses for them on money they save.

Inflation always promotes borrowing, reckless spending and provides disincentives for real saving. It is remarkable that anyone could call this "less costly" in any period. To further promote this as a boon to the housing market fails to recognize the fact that it was money printing in the first place that distorted the housing market upward and that a call for more inflation to "help" the housing market is simply to call for more distortions in the market that will have to be corrected down the road by a greater decline in the housing market or hyper-inflation. That is, you can't pump once into the housing market and stop there. It will just start to collapse at that point. You either stop and let prices fall back or you pump and pump to keep the distorted market aloft. This is what Mulligan is calling for, although he doesn't seem to understand the never ending loop of his inflation support.

His closing sentence

So even if our government had its fiscal house in order, the reason to expect inflation is that inflation wouldn’t be so bad right now.

doesn't even come close to making sense, so I am wondering if his NYT editors were simply confused, justifiably, about the entire column.

1 comment:

  1. The core idea of the Austrian School is economic calculation based upon information disclosed from free market prices. Fiat money distorts that information process.

    Anyone promoting inflation as a positive economic policy is telegraphing to the world their complete unfamiliarity with Austrian concepts.

    By the way, an interesting article on the contradictions of Krugman is found here.