Monday , April 23 2018
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The American Public Only Thinks It Likes Motherhood and Apple Pie

Summary:
After all, in a big enough apple pie, you would drown. Scott Sumner has a curious post at EconLog, titled, “The public only thinks it likes low inflation.” He says that such a view is reasoning from a price change, and that low inflation is actually really undesirable–even from the public’s own viewpoint–when it’s caused by tight money. To make his point, Scott gives (what I think) is a really bad analogy: [T]he public’s view of the economy fell sharply during the first half of 2008, as an adverse supply shock drove inflation higher. But by early 2009, inflation had fallen to roughly zero, the lowest level of my entire life (since 1955.) And yet the public’s view of the economy continued to fall to extremely low levels. Some would argue that I am not holding other things equal—unemployment was rising sharply during early 2009. That’s true, but unemployment was rising sharply precisely because tight money was driving inflation down to zero. (It would be like saying the public doesn’t mind falling out of 100 story buildings, just hitting the ground.) The public may say it likes low inflation, but it behaves as if it likes low unemployment. As I say, Scott’s analogy seems almost exactly wrong for this situation.

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After all, in a big enough apple pie, you would drown.

Scott Sumner has a curious post at EconLog, titled, “The public only thinks it likes low inflation.” He says that such a view is reasoning from a price change, and that low inflation is actually really undesirable–even from the public’s own viewpoint–when it’s caused by tight money.

To make his point, Scott gives (what I think) is a really bad analogy:

[T]he public’s view of the economy fell sharply during the first half of 2008, as an adverse supply shock drove inflation higher. But by early 2009, inflation had fallen to roughly zero, the lowest level of my entire life (since 1955.) And yet the public’s view of the economy continued to fall to extremely low levels.

Some would argue that I am not holding other things equal—unemployment was rising sharply during early 2009. That’s true, but unemployment was rising sharply precisely because tight money was driving inflation down to zero. (It would be like saying the public doesn’t mind falling out of 100 story buildings, just hitting the ground.) The public may say it likes low inflation, but it behaves as if it likes low unemployment.

As I say, Scott’s analogy seems almost exactly wrong for this situation. The reason it’s silly to say “I don’t mind falling out of 100 story buildings, I just don’t like getting crushed on the ground” is that the one just about necessarily follows from the other, at least in normal experience. A more analogous statement would be something like, “I like flying in airplanes, I just don’t like crashing.” And notice that there is nothing absurd about such a statement.

Contrary to Scott’s assertions, high price inflation is bad, per se. To see why, consider this: Would Scott endorse an outcome whereby the Fed locked in perfectly stable–down to the day–NGDP growth, except that the annualized rate of growth was 1 billion percent? I’m pretty sure he wouldn’t. The reason is that the dollar could no longer function as a useful medium of account if prices were rising so rapidly. It would be very difficult to make long-term financial plans at such outrageous rates of price inflation. (I’m assuming real GDP wouldn’t spike accordingly, so that the 1 billion percent of NGDP growth would translate to almost 1 billion percent price inflation.)

In sum, I think the layperson is being quite reasonable when he says, “I would prefer low to high (price) inflation.” Yes, there are scenarios where low inflation goes along with other undesirable things, but that’s true about a lot of goals in life. I recognize that Scott thinks tight money is the great villain in Western economics nowadays, but I think his periodic efforts to convince free-market readers that inflation has gotten a bad rap, miss the mark.

Robert Murphy
Christian, Austrian economist, and libertarian theorist. Research Prof at Texas Tech and author of *Choice*. Paul Krugman's worst nightmare.

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