Months of speculation and prediction can now cease: the Labor Department last week reported that inflation is in fact happening and at a higher than expected pace. If you’ve been following this topic at all over the last year or so, you know that there has been considerable debate about whether we should worry about inflation, about exactly how inflation will impact Americans, and what are the fundamental causes of current inflationary pressures. Those are certainly important questions, but they are not the ones I want to address. There is another set of valuable inquiries that demands our attention—namely, we need to examine how we think about these questions and what it means to think in principle about inflation.
Pushing ourselves to consider the types of thinking behind the debates about a topic like inflation requires a commitment to intellectual openness and, ultimately, rigor. For me, this in turn necessitates reading fairly widely both in terms of the venues and the authors I choose. Despite my lack of deep expertise in monetary economics, I have certain instincts and priors when it comes to inflation and it would be easy to amass a list of sources that could confirm my sense of the issue. Over the last year and a half, though, I have cultivated a slightly different approach, but one that I believe is vital if we want to improve our thinking. I’ve been intentionally reading against my own grain.
Because of this, I have been paying specific attention to Paul Krugman and others like him, which is what led me to some of the insights I want to share today. In the months leading up to the publication of the consumer price index (CPI) numbers this past week, Krugman had been downplaying the threat of inflation. Indeed, he embraced the role of captain of Team Transitory—the group of economic analysts who believed that any observed inflation was temporary and due to unique circumstances that would both disappear and not instigate wider inflationary pressures on prices. Yet this week, Krugman admitted that this new inflation is real and more significant than he expected, though he still claims that it is no cause for concern. Others, of course, disagree, and even his old “pal”1 Lawrence Summers has called on “Team Transitory” to stand down.
I had to chuckle a bit when Krugman so thoroughly embraced the “team transitory” moniker as he has something of a reputation for flip-flopping on his beliefs. Doing so, he certainly ran the risk of being accused of having transitory views that swayed with the political winds. Krugman is definitely aware of his own reputation. Back in 2019, he took to Twitter to explain the futility of catching him in a “gotcha” about his evolving views on everything from the minimum wage to the threat of debt to the ideal top marginal tax rates. Despite my strong disagreements with him on a whole host of issues, I think the thread raises an important point worth considering, though it is not the one he’s making.
In his series of tweets, Krugman argues for changing one’s views in the face of new evidence. As a public intellectual, he says, it “is what you’re supposed to do.” If you never “change your mind in the face of new arguments and evidence, you're probably a propagandist, not a real economist.” Buried in the smug self-aggrandizement that flavors so much of Krugman’s commentary is the simple point that intellectual honesty and a scientific mindset require being open to evidence and a willingness to question basic assumptions. Fair enough. The deeper point I think it raises, and which the often sneering and nakedly partisan Krugman misses, is one about what it means to be intellectually honest and have a scientific mindset about policy questions in the first place. In other words, to shuttle back to the question that got me to reading Krugman in the first place, how do we think about how to think about inflation. How do we know we’re thinking in fundamental, principled terms?
This is where so much of the debate about economic and political policy falters. Krugman’s examples of refining his views are narrowly focused on empirical questions—the exact employment effects of raising the minimum wage, for example. No doubt, when Krugman the opponent of minimum wages read the empirical work of David Card and Alan Krueger, he switched his policy preference as a result and became Krugman the proponent of raising the minimum wage, which seems like a significant alteration. In a wider context, has Krugman really moved that far?
Within the narrow framework of questions about how exactly the government should fine-tune the economy, Krugman hasn’t moved at all. In fundamental terms, though he now differs with economists and policy wonks who work against raising the minimum wage, he still adheres to the broader view that government intervention into the economy is a default, and one that is not open to question. Flip-flopping on the net employment effects of a higher minimum wage doesn’t really move the needle of deep thinking. It fails to ask a more fundamental question—why do we have minimum wage laws in the first place? By what right does the government claim the power to intervene in the bargaining of two free, competent adults who are voluntarily exchanging money for services? What moral justification exists for society to shut the labor market to the typically low status individuals whose skills and ability are valued below the imposed price floor for labor as well as to the employers who can find useful, productive work for those individuals at lower wages?
Obviously, in the case of the minimum wage, I am suggesting that we could easily advocate thinking more fundamentally about the issue. Thankfully some voices in the debate do just this. Instead of taking the conventional approach of analyzing whether the minimum wage is too low or just right, or discussing which jobs it might impact on the margin, we could demand that proponents of raising it state their moral claims about why government compulsion in this area is justified. I doubt in the short term that such an approach will end the federally mandated minimum wage, of course, but I think it would help achieve a kind of moral clarity in the perspectives on each side.
Yet the question about inflation masks a lot of these easy and easily referenced free-market solutions because inflation isn’t always easy to understand. Sure, there are lots of resources that can explain how it works, and many that even correctly identify that government monetary policy “controls” inflation, but I don’t typically see a lot of discussions of the moral dimension of inflation. The consequences of inflation are profound and profoundly devastating even if they are hard to understand. As one renowned and widely-respected economist noted: “there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
Yet exactly when I think no one is out there talking about inflation as something other than a purely economic issue, something pops up to reveal the essential issues. Writing at The Intercept this week, Jon Schwartz laid it out for all to see. Inflation is good for you, he argues, because it is ultimately about class conflict. Yes, that’s right—according to his analysis, “inflation is bad for the 1 percent but helps out almost everyone else.” Because most Americans have debt in the form of mortgages, credit cards, student loans, and so on, inflation can effectively “lessen the real value of that debt.” He tells readers to stop believing the hype—that inflation is bad and should cause us concern—because it will effectively transfer wealth to the majority of Americans. Since Schwartz naively and incorrectly assumes the creditors for all of that debt are hermetically sealed away in the mythical 1 percent, the über-rich, the elite, he concludes that this is, by his estimate, a pretty sweet $850 billion wealth transfer. Focusing on the supposed redistributionist effects of inflation, though, misses how profoundly it damages everyone’s savings. Whether you have a 401k or a simple savings account or simply a mindset of planning for the future, inflation negates the value of it all, but especially the future-orientation of economic activity.
Leaving aside the asinine errors of economic theory and history that Schwartz’s analysis relies upon (that debt is not in fact held just by the rich, that inflation does not raise wages and salaries equally and instantaneously with prices of goods, that not all inflationary cycles are inevitably followed by economic growth, that the value of the dollar affects international economic conditions and not just the consumer debt of Americans), consider the moral perspective that his thinking embodies. In effect, it’s fine that inflation is happening, he argues, provided that the rich are hurt by it. In Schwartz’s world, taking the rich down a peg or two is a positive good, especially if it hurts those who oppose more stimulus spending and increasing government debasement of the currency. This class conflict model also contends that the inverse—a Fed policy that keeps inflation low—is a “subsidy” or “transfer” from poor to rich. Perhaps Schwartz hasn’t considered that it might be possible to have a monetary system where neither rich nor poor has to suffer? He certainly hasn’t considered what a truly free market in monetary instruments would look like. He’s definitely accepted the long-held view that government must control, regulate, and direct the banking system and monetary policy. Has he ever considered why?
That is exactly the “thinking about thinking problem” I want to suggest is more important than understanding the precise ins and outs of our current inflation predicament. At the risk of sounding too dramatic, I often think that debates about inflation sound a lot like an economic version of rearranging the chairs on the Titanic of fiat money. Who today, aside from some very astute monetary economists, asks what life would be like and what life was like in the absence of fiat currency? How often, when people hear about inflation, do they immediately ask, by what right does the government compel the use of fiat currency and prohibit the enforcement of contracts with gold clauses? How often do Americans, who hear about inflation and get “hopping mad,” stop to think that inflation is not an inevitable force of nature nor an ineluctable consequence of the undulating periods of boom and bust that mysteriously accompany government “management” of the monetary system?
It is in that spirit I wanted to highlight a good recent piece in the Wall Street Journal, where economists William J. Luther and Alexander William Salter recount some of the details of how the gold standard, abandoned completely by the Nixon administration fifty years ago, actually experienced considerably less inflation than the Fed-guided fiat money system that prevails today. Luther and Salter are both involved with the Sound Money Project at the American Institute for Economic Research. Elsewhere, excellent thinkers like Larry White, George Selgin, Hu McCulloch and others are leading the Cato Institute’s Center for Monetary and Financial Alternatives. The historical and economic work by these scholars will be invaluable in pushing people back to considering a world that existed without a constant fear or threat of inflation. White and Selgin both have also documented the massive advantages of a fully free banking system. Similarly, Richard Salsman has produced two invaluable studies of the history of gold and banking.
So, if you happen to read another of the surging number of articles about inflation that are sure to be coming in the next few weeks or months, remember that there is a wider picture to consider. Thinking seriously about inflation today means asking where inflation comes from in the first place and why inflation is a problem in our economic system. As you observe how commentators and politicians have been discussing it, ask whether they are thinking in fundamentals or simply adopting a four stage strategy. Certainly, contra Jon Schwartz, you should consider challenging and opposing the kinds of redistributionist schemes that inflation facilitates and the wealth-destroying consequences it inevitably has. Ask yourself what gives anyone, let alone the government, a moral right to alter unilaterally the value of your savings, your labor, and your planning for the future. One might also ask what purpose it serves. “By a continuing process of inflation,” noted the same renowned and widely-respected economist I quoted earlier, “governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some.” For those who do not recognize these passages, that economist’s name was John Maynard Keynes.