In keeping with the blog tradition of bringing you tomorrow’s talking points today, I thought I’d look a bit further than the current election campaign and consider the implications of a Bush victory. On past form, there’s no reason to suppose that a second term will lead Bush to abandon his tax cuts, or to propose any significant net reduction in expenditure. At least not when there’s an obvious alternative, that only a few shrill Democrat economists and some incredibly out-of-date Republicans would ever object to. The US government has at its disposal and endless source of costless wealth – the printing press that turns out US dollars. Hence there’s no need to do anything tough like raising taxes or cutting Socil Security benefits. The only problem is that, according to some economists, reliance on the printing press as a source of government finance is likely to cause inflation.
As a first line of defence, the views of these economists can be criticised. There are plenty of Keynesian critics of monetarism who’ve pointed out that there’s no simple or automatic relationship between the money supply and the rate of inflation, and probably there are some who’ve been incautious enough to deny that there is any relationship at all. In any case, in the new era, the dynamism of the US economy is such that everyone wants to buy US dollars as fast as the Treasury can print them (ignore any recent observations on currency markets that might suggest otherwise).
Still, these are only delaying tactics. What will really be needed is a set of talking points showing that inflation (properly referred to as price appreciation or something similarly positive) is actually a good thing. In the hope of bringing the debate forward a bit, I’ve advanced a few.
* There’s a trade-off, in the short run, between unemployment and inflation. If you go back far enough, you can find plenty of Keynesian economists asserting that this trade-off also occurs in the long run.
* Inflation turns ordinary working people into millionaires. Democrats are opposed to inflation. Indeed.[1]
* Inflation hurts the poor. So its a way to make the lucky duckies who pay no income tax share the pain of those who do, and learn to vote against big government, or any government
* Inflation is anti-Communist. For several years now, one of the biggest buyers of US government bonds has been the Chinese central bank. No doubt, they think they’re buying leverage, but all they’re really going to get is pictures of Ronald Reagan. Heh.
* Inflation will destroy trust in government money and encourage the creation of private-sector alternatives.
* Inflation is part of the American patriotic tradition. Like Bush, George Washington and Abraham Lincoln faced the threat that the nation would be destroyed by war, and responded by printing money. To complete the trifecta, ex-Democrat neocons may wish to add FDR or JFK, while Southern Republicans might manage a quiet allusion to that great patriot and exponent of inflationary finance, Jefferson Davis
fn1. I’m not making this one up. As Brad de Long pointed out a while ago, Stephen Moore has actually defended the record of US capitalism on the basis of figures for the number of millionaires, unadjusted for inflation.
John Quiggin 
(Provided the Fed is slow to act) Inflation also helps out battling mortgagees, and it will probably increase the ‘value’ of their property as well.
The Greenspan Fed does appear to be doing its best to create some inflation. While some of Greenspan’s colleagues may think they can manage to create just a little bit inflation, I think there is a real chance that things can get out of control. I don’t know much about the 1970s, but I would guess even the Fed then only intended to create a little bit inflation. Things just got out of hand — you know, it’s hard to do monetary policy in the face of negative supply shocks.
What about Marx’s idea, that printing money could help destroy the status quo and bring about genuine change?
Or what about the cunning trick used by the Dutch to finance setting up the culture system in the East Indies? In the long run (this is like real bills theory, I suppose, only for more than just working capital) printed money that goes into real assets will be backed by the production of those assets that it created. (The Dutch got their culture system by issuing a copper coinage that was depreciated two for one, and of course scrip money backed by land releases helped open up the US frontier – look up Morrill.) I won’t go into the risks of this approach, e.g. how sometimes wealth (in the form of underlying productive assets) is only transferred, not created, and sometimes the returns aren’t there after all.
John,
What do you say to your critics?
Jane Galt at Asymmetrical Information,
http://64.235.242.204/~janeg/cgi-bin/MT/mt-tb.cgi/4159
and Steve Verdon at
http://www.steveverdon.com/archives//001570.html
think you’re making a joke at best, or being deliberately dishonest at worst.
I’m a rare visitor (and so I guess you could say I’m not a fan) so I’m not familiar enough with your writing style to be sure if you are joking, at least in part. If so, which parts?
If you’re not joking, then what do you say to their serious, and pretty specific charges
Stan,
Read Prof Quiggan’s post again. He’s trying to anticipate how the GOP will defend the Bush deficits and the inflation they are likely to cause. I read Steve’s post and thought he had missed the point entirely. Of course the GOP would probably not attempt hyperinflation; only the seriously irony-impaired would assume such a thing. But it’s not implausible to me that a continued GOP dominance of the political landscape would result in a decade of 12-18% inflation.
James
Is it ironic that a Democrat congressman hasn’t been born yet that will cut taxes or social security benefits?
Sure there’s plenty of criticism for Bush’s policy, and there’s plenty of that from within the Republican party, or at least conservative circles (see the constellation at Jane Galt or Andrew Sullivan).
No, the funny part for me is that we have left of centre commentators hassling a right wing administration for spending money. Isn’t it normally the other way around?
Joking aside, I don’t really think the Democrats will do much different aside from spending in different places. No, I think if you’re really serious about curbing spending then you’ll have to take your argument to within the Republican party because that’s the only place where you’ll find a receptive audience.
It surprised me how rapidly a mildly ironic post on economic policy produced a full-scale violation of Godwins Law. Jane Galt referred to Weimar, Steve Verdon headlined with it and Steves commenters were all over it.
Seriously, James MacLean got the point of the post and the critics did not.
The Adminstration won’t need any of those rationalisations. It will discover that price indices need a much bigger adjustment for improvments in product quality. Statisticians who don’t agree can be prosecuted under the Patriot Act.
Article on John Kerry in the New York Times today:
Of course, the centrism still comes through loud and clear in speeches and in interviews. But in the heat of the policy debate, deficit reduction appears to be taking a back seat to what is easily Mr. Kerry’s most significant economic proposal: an expensive expansion of government-financed health insurance.
He says he would subsidize health insurance for millions of people not covered now. That is the jewel of his economic plan. An omnibus health insurance bill would be the first legislation sent to Congress in a Kerry presidency, he says. But while the centrist Kerry still advocates shrinking the budget deficit, a bolder Kerry, less noticeable so far in the campaign rhetoric, adds that if the deficit threatens to rise rather than fall, well, so be it – he’ll go ahead with his health plan anyway.
—
Joke all you like guys, but if it’s deficit reduction you want the only place you’ll find it seriously being discussed is in Conservative circles.
Look, I’m the last person who can be accused of being a Q wannabe… but I thought that post was most amusing. Pictures of Ronald Raegan. Heh. 🙂 As for reducing deficits, have we forgotten Clinton already?
To be honest, I can’t see direct inflation-financing of deficits. They will be debt financed.
Joke all you like guys, but if it’s deficit reduction you want the only place you’ll find it seriously being discussed is in Conservative circles.
stan, having given the ok to joke around, must simply be demonstrating how it’s done.
The responses to Professor Quiggin’s post from Jane Galt and others is a rather interesting demonstration that as far as a sense of humour goes, the cultural divide between Australia and the US is still pretty stark.
Hear hear Sir Humphrey! well put! I was racking my mind to think of a way of not accusin’ those yanks of needing an irony transplant – I’d concede a cultural divide – can’t figure ’em at all.
Frivolity aside, it may be mundane to point out that there is a difference between supply and demand driven inflation.On the one hand supply side inflation (oil shocks, droughts, wars) has little redeeming features and often calls out for direct government intervention into the market.
On the other, demand side inflation may well be benign insofar as it makes up for the loss of money as a result of failed ventures, bankruptcy etc. As PML pointed out, printing money has financed colonization in the past.
Of course, as many have commented this is a two edged sword once investors get wind that there losses will be covered and your set for speculation and disaster.
However, IIRC, historically both demand and supply factors are found together. The oil shock combined with LBJ’s deficit financing springs to mind. I’m inclined to the view that supply side externalities are far more important than the latest version of ‘monetary theory’.
For the sake of argument, I would contend that money gets in the way of good economic theory which should be about the sustainable supply of wheat,or computers and of skilled and unskilled labour and artifice at least as much as money.
Lastly, anyone who contends that there is any discernible difference in the policies of Democrat/Republican or Labour/Liberal governments when it comes to decisions about money supply has got rocks in their head!
“The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” John Maynard Keynes
Inflation, as defined in Webster’s dictionary:
1: undue expansion of the currency of a country, esp. by the issuing of paper money not redeemable in specie
2: a substantial rise in prices caused by an undue expansion in paper money or bank credit.
The term millionaire was coined in France, some time around 1720, when John Law was running the royal bank of France.
While a little inflation might be a good thing, history shows that too much is catastrophic. Regarding fiat money, history again shows that, chances are, inflation spirals out of control.