This is the second in a series of articles about what we can do to reduce our unacceptable levels of income and wealth inequality. The first was on the Estate Tax. This one discusses how our society’s obsession with low inflation exacerbates income and wealth inequality.
When I was in middle school, we took some kind of class on critical thinking. I remember there being a question about building a parking lot and whether it ought to be perfectly level. It shouldn’t, because you want water to drain off it. I think about that example a lot when the issue of inflation comes up. A lot of people think that having no inflation would be perfect. Some libertarians have even argued that negative inflation would be good. After all, the “good” people who saved their money would see it go up in value. What could be wrong with that?!
Well, as it happens, there is something really wrong with that. Having zero inflation (much less negative inflation) encourages people to hoard money. Instead of spending it so that people can have jobs providing products and services, the economy stagnates. Clearly, this situation is bad for income inequality. It would be disastrous for employment. But it would be bad in another way. Almost by definition, poor people owe rich people money. That amount continues to grow because of the interest they must pay. In a negative inflation situation it is even worse: the principal actually grows over time even without interest.
It should come as no surprise that the rich want inflation to be really low. But as you must know, the rich are a very small number of people. Oh, let’s say they represent about 1% of the population. So why is it that the rest of us buy into this idea that inflation ought to be kept down? Part of it is the media who are the lapdogs of the power elite. And part of it is just that the Federal Reserve is the power elite and there’s no way they are going to put the needs of the unemployed and over-extended above the “needs” of the rich. This is why they target a 2% inflation rate instead of the much more reasonable 4%.
But most people who I talk to who are concerned about inflation are not rich and powerful. (In fact, I don’t think I know anyone who fits into that category.) For them, I think it is a matter of fairness. It seems right that if you earn a dollar, that dollar ought to keep its value. What’s more, if you borrow a dollar, you should have to pay it back and not be helped out by a bunch of inflation. I get all of that. I’m a big believer in fairness. But by focusing on this kind of fairness, people are missing other kinds of unfairness.
I’ve already talked about how low inflation keeps unemployment high and hurts those who owe money. But it also hurts those who live hand to mouth. They aren’t going to see any impact of a 4% inflation rate when they spend their entire check every two weeks. The rich, who don’t have to spend all their money just to survive, will be hurt by the higher rate of inflation. Or to put it the other way: low inflation doesn’t help the poor, but it does help the rich. None of this is fair; it all helps the rich relative to the poor.
I got thinking about this because this morning, Paul Krugman wrote, “Talk to gold bugs and they’ll tell you that paper money comes from governments, which can’t be trusted not to debase their currencies.” He’s definitely right. There is almost nothing more frustrating than talking to a libertarian about monetary policy and the gold standard. What’s interesting about this is that these people are worried that the government will allow high levels of inflation (debased currency), but it is just the opposite of what they should be worried about. The government is overly worried about inflation because our government is primarily of the rich, by the rich, and for the rich.
Clearly, hyperinflation would be bad. But we don’t have to worry about that, because it would be as bad or worse for the rich. But trying to get the inflation rate up to 4% would do a world of good. It would help the poor reduce their debts. It would stimulate spending and thus increase employment. And it would reduce the value of the cash that the rich hold on to — encouraging them to spend and invest. A higher inflation target would help reduce income inequality.
Gold Is Not a Good Investment—At Least for 500 Years
Conservative Inflation Hysteria