Monday, February 14, 2011

Inflation is Good?

Here is a sign that uncontrollable inflation is on the horizon - an article originally from the Guardian and picked up by Huffington insisting that inflation helps the common worker.

In other words, controlling inflation is about making sure that the wages of less-educated workers don't rise relative to the wages of more educated workers. And, the central banks have a license to push as hard as they like in this direction.

This is an incredible thing for someone with a doctorate in economics to say. Inflation hits the people at the bottom the worst. They have the least ability to handle rising prices in staples and the least ability to demand higher wages.

In the classic wage/price spiral, prices rise for whatever reason. Workers demand higher wages in order to stay even. This causes the cost of production to rise which leads to further price hikes which lead to higher wages, etc. Workers tend to come out behind on this because their request for wage increases are a reaction to inflation that has already happened. Worse, wage increases are usually, at best, annual. Trying to make up for a year's worth of inflation in a losing proposition.

At the same time, savings accounts are hit hardest. During periods of high inflation, banks never pay enough interest for accounts to stay even. The rich have alternatives, lots of them, and have no trouble staying ahead of inflation.

Anyone who was an adult in the late 1970s knows how hard inflation is on the lower-class. One reason that Reagan is so well-regarded is that he tamed it. Inflation it 13.5 percent in Carter's last year as president. That means that, for every dollar you made in 1979, you had to make $1.14 to try to stay even (the income tax was not indexed to inflation then so keeping up with inflation was not enough, you had to stay ahead of it in order to stay even). If you were lucky your bank might pay 6% interest so your savings would only decline by 7.5%.

By the end of Reagan's first term, inflation had dropped to 4.3 percent and the income tax was indexed to inflation.

During the 1970s, people gave up on savings accounts. People invested gold, collectibles, and real estate as hedges against inflation. Most of these were poor investments. Everyday people suddenly knew the current rate that money market certificates paid but those tied up your money for months at a time.

Times of high unemployment are the worst to have high inflation because it gives workers to little leverage in trying to negotiate pay raises.

Why would anyone want to bring those days back? I don't think that he does. I think that the left sees inflation increasing and is trying to convince us that it is a good thing.

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