Sunday, October 16, 2011

Fear of Inflation is a bad thing (and a little inflation is good for us)

Fear of inflation is a bad thing, especially now, because it is the number one justification used by conservative politicians and conservative economists to justify austerity policies, that is cutting back on government spending in the midst of the greatest economic depression since the 1930's.

Right now, because of economic depression, governments should be increasing spending*, and increasing government deficits as necessary (though tax increases on the wealthy and on financial transactions and carbon would all be good things even now, and would help reduce the deficits resulting from increased spending)  in order to increase employment.  And right now, because of the depressed economic condition know technically as a "liquidity trap," there is no danger of such spending, even in the absense of good tax increases, significantly increasing inflation over what it will otherwise be.  But under other circumstances in the past, this has not always been true, and there are many conservative economic theories and theorists that would predict that increased government spending and deficits recommended by liberal economists would increase inflation even now.  Those conservative theories which falsely predict that government deficits always lead to destructive inflation have actually been proven wrong by recent history, but conservative theorists (as well as many populists) continue to believe in them, and often propagate misleading statistics about inflation in order to support their anti-spending views and tight money theories.  Populists, who often see inflation as simply yet another way the system screws them, often fall prey to believing in those misleading statistics and erroneous conservative economic theories, without seeing the connection between them and the anti-spending policies.

(*In the USA, the federal government did, at least temporarily, increase spending in 2009 in a somewhat failed effort to restore economic prosperity.  It failed, because the spending increase was too small and too short.  And also it failed because while the federal government was increasing spending, state and local governments were hit by shortfalls in tax revenue due to huge decline in the value of real estate and depression in taxable sales and income and were forced to cut back on spending.  Combined government spending at all levels has actually declined.  And this has only made the economic situation even worse.)

It will take me some time me to accumulate the actual numbers, and many may find this hard to believe, but the true story is that there has not actually been much overall inflation overall (on average, across all things people buy, not just things people worry most about like groceries and gasoline which have little connection to government spending) since 2008, by recent historical standards.  And liberal economic theorists argue this is a bad thing.  By liberal economic theories, a modest overall inflation of about 3-4% is actually desireable for maintaining full employment and general prosperity, and lower than average overall inflation (around 2%) since 2008 has contributed to a failure to significantly increase employment.

It might be nice to imagine a world with both full employment and zero (or negative) inflation, but the better you understand liberal economics, the more you realize these goals are incompatible in modern capitalist economies.  A sustained period of negative inflation is actually the key sign of a collapsing economy in which more and more ordinary people are losing their jobs and assets.  That is known as a "deflationary spiral" and it is exactly what was seen in the great depression and it similar to what we are seeing today, even though overall prices are not actually declining overall but merely increasing somewhat more slowly than would be expected based on factors such as resource availability.

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