Gimme Mo Money

This is pretty much how most economists view inflation and why most can speak of it fondly, as if it’s no big deal. It really isn’t, all other things equal.

Timothy B. Lee:

Of course, unexpected changes in the price level can cause losses (or gains) for savers. But given how easy it is to invest in inflation-protected assets, it’s hard to see why this should be regarded as an injustice perpetrated against people who hold dollars. If I invest my life savings in oil, and then Saudi Arabia discovers a massive new oil well that causes the price of oil to drop by 10 percent, it would be silly to say that Saudi Arabia has stolen 10 percent of my life savings. I just made a bad bet. Exactly the same point applies to money.

Of course, not all other things tend to be equal. The problem isn’t inflation; the problem is what other things aren’t equal. There are too many benefits to 2-4% inflation to want to keep inflation at or below 0%. The other things that aren’t equal are people with low incomes who cannot invest so readily. The answer isn’t so much to argue for low inflation, though – it’s to argue for an increase in their incomes.

While people still argue the negative effects of minimum wage increases, we can go over their heads and argue for a higher Earned Income Tax Credit which should be tacked to inflation. EITC is means tested and can deliver higher incomes to families who need it, which can drive up demand (which is desperately needed in today’s demand-starved perma-recession).

I defer to Matt Yglesias who never really takes a joke lying down: “Sheila Bair is being ironic, but this is a perfectly sound idea if you do it as $10,000 rather than $10 million.”

He was referring to this piece by Bair: “Fix income inequality with $10 million loans for everyone!” It’s an attempt to make fun of the idea that throwing money to the problem is a solution, but it actually is the solid economic solution even among non-Keynesians.


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