Political-Economy and Inflation

Paul Krugman devoted his column two weeks ago to the conduct of economic punditry as if the economy were a nineteenth century morality play: sermons about “debasing” the currency, longings for gold, fretting over inflation at the nadir of an economic crisis, a masochistic enthusiasm for “belt tightening” (“Misguided Monetary Mentalities,” The New York Times, 12 October 2009, p. A23). Taking off from this, Matthew Yglesias makes the point about the degree that class-parochial interests play in purportedly objective economic analysis (“The Monetary Hawks,” ThinkProgress, 12 October 2009):

… I would suggest that divergent analysis is in part driven by things that have relatively little to do with analysis. … if we have four or five years of near-zero inflation and 9-10 percent unemployment that will be fine for prosperous middle aged people and devastating to the interests of the poor and the young. Conversely, if we have four or five years of modest unemployment with four or five percent inflation, that will be fine for young people and poor people but potentially detrimental to the interests of wealthy people sitting on large piles of savings. Ultimately, I don’t think it helps the progressive cause to ignore the class / ideological elements to this dispute and just pretend to be engaging in a neutral technocratic dispute about the correct application of the Taylor Rule. What we’re talking about, after all, is decision-making under conditions of moderate uncertainty. What the hawks are proposing to do is to implement a policy that’s extremely attentive to minimizing downside risk to the currently wealthy whereas Krugman is proposing a policy that’s [attentive] to minimizing downside risk for people with below-average labor market prospects.

The problem is that we’ve adopted a manner of speaking about economic issues denuded of any mention of interest. The language of popular economics today is categorical: a strong dollar is good, a week dollar is bad; stable prices are good, inflation is bad; low unemployment is good, high unemployment is bad; rising house prices are good, stagnating or falling house prices are bad; et cetera. But none of these factors are categorically good or bad (few things in life are). What is omitted is the “for whom” of these characterizations of good and bad. Low employment may be good for job seekers, but high unemployment is good for employers: they have their pick of workers when hiring and they hold the majority of the bargaining power in wage negotiations. A strong dollar may be good for Wal Mart and their customers, but it’s bad for General Motors and their employees.

Real estate maintains some knowledge of contraposition with their talk of a buyers’ market versus a sellers’ market. We do not speak with a similar respect to the value of the dollar: of an investors’ dollar (strong) versus a producers’ dollar (weak) or an importers’ dollar (strong) versus an exporters’ dollar (weak). Or in employment, some people might think getting a raise or ease in finding a job are good, but these are what someone else might call labor price inflation (bad).

Economics isn’t free of the language of interest per se, so much as of one particular set of interests. The propaganda victory of the economic interests of Wall Street, the investing class, large business is so complete that their economic preferences have become de facto the whole language of economics. The awareness of the interests of all other economic actors has been totally expunged from the language of economics — well, not totally: there is the disciplinary ghetto referred to as heterodox economics, an exception that proves the rule.

To have asserted control over the linguistic territory is to have banished the political dispute; to have disappeared from the lexicon is to have ceded political legitimacy. Disputes over the political mixture of the interests of one economic class versus those of another are no longer about one set of economic relations versus another, but now take place in the frame of a rational economic order versus chaos, unreason and decline.

A firm separation between economics in its positivist, scientific role and economics in its normative, polemical and political role should be vigorously policed. Or perhaps economics is simply to value-laden, too embedded in the hurly-burley of human affairs for such a division to be tenable. Perhaps we should dispense with the notion of economics as a hard science in favor of a thoroughgoing political-economy. Even if we admit the possibility of a purely positivist economics, all that economics can do in our political deliberations is serve as a speculative tallyman of the opportunity costs of various policy options. The primacy of politics should come to the fore whenever economics crosses over from the academy to the public realm.

Target values for economic factors represent a political compromise between contending societal factions. The most well known of these is the NAIRU, the trade-off between inflation and unemployment codified in the statutory guidance of most of the world’s central banks. But inflation isn’t an unqualified evil. Its primary evils are that it has a tendency to run-away and, related, that it breeds uncertainty (a certain anticipatable regularity to the future is necessary to the function of capitalism). It used to be well known amidst the working (and indebted) classes that a certain amount of inflation served their interest and that “sound money” was merely the rallying cry of the investor class. The class conflict of easy versus sound money used to be a significant fault line separating progressive from conservative, populist from whig. Hence the advocacy of arch-populist William Jennings Bryan of an inflationary policy of bimetallism or “free silver” in the election of 1896.

There’s talk today about how vile it would be for the government to attempt to inflate away its debt (“debasing the currency” they call it), but the government doesn’t only inflate away its debt, it inflates away all dollar-denominated debts. A couple of years of higher than target inflation might be good for a country that has seen twenty years of galloping gains for the investor class, but racked up unsustainable amounts of debt among the middle and working classes. The investing class would scream bloody murder, but not because 3-5% inflation would be the end of economic reality as we know it, but because it would be a wealth transfer from creditor to debtor.