Paul Krugman has kicked off a meandering blogosphere discussion of why hard money policies are so stoutly defended, despite overwhelming evidence of the damage they are causing (see Martin Wolf on Europe today). As Wolf says, this is not just sad, it’s dangerous.  He is right: it is difficult to imagine an important agenda that right now wouldn’t be helped with a load more NGDP growth*.

Krugman’s first stab is to look at the beliefs and motivations of the ultra-rich, and comes up with a puzzle: they really don’t gain from low rates, low asset prices, depressed economies, so why the anti-inflation hysteria?   False consciousness perhaps, searing memories of the 1970s?

The peerless Interfluidity sees things differently: the very rich are not concerned with aggregate outcomes:

To the extremely rich, wealth is primarily about status and insurance, both of which are functions of relative rather than absolute distributions. The lifestyles of the extremely wealthy are put at risk primarily by events that might cause resources they wish to utilize to become rationed by price, such that they will have to bid against other extremely affluent people in order to retain their claim.

The ultra-rich like the stability of the graveyard, because there the gravestones are fixed, and they kinda like where they are positioned.  A really stimulative policy, risking a little extra inflation for a chance to get a lot more growth and break out of this trap, risks shaking everything up.  When you’ve climbed so far that you can look down on 9999 out of every 10,000 people you don’t like things being shaken up. So the rich are being highly rational.

Implicit in Krugman’s approach is the assumption that the rich and the decision-making elite intersect closely. But David Glasner says it’s not just the rich: when have you ever seen a worker’s rally in favour of a bit more inflation? Why have the Democrats never voted against the renewal of the Fed’s mandate? Can you imagine Labour attacking the Coalition from this angle, at the same time as pushing their Cost of Living assault?

In my grim mood, this leaves me with little hope.  More NGDP might risk a little more inflation, and a lot more growth, plus a useful, gentle redistribution from creditors to debtors.  I think it may be a missing part of the Piketty analysis (I haven’t read enough to know); while really high inflation hurts everyone, the moderate levels after the War helped enable the sorts of redistributive policies that brought inequality down. It allows a little more fiscal drag.  But just about every section of society can be brought to campaign against it.

 

*OK, you might retort “Carbon emissions?”.  But weak state finances have critically undermined the ability of nations to make the sort of deep, long investments needed to fix this one

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3 thoughts on “Is weak demand a conspiracy of the scheming rich?

  1. Isn’t Waldman’s thesis just that the rich generally favour conservative policies and the poor revolutionary ones? And that’s hardly a revolutionary thesis (forgive the pun). And, to be honest I have not seen many very rich people actually taking a position either way. Anyone know what are Buffet’s or Gates’ thoughts on the subject? Carlos Slim’s? The Duke of Westminster? Branson’s? Etc. Rich people can protect themselves very easily against inflation anyway, so I doubt high inflation is really at all on their radar screen as something to worry about in terms of lowering their relative status.

    I think the real reason anti-inflationary postures are popular is much more simple than a rich person conspiracy theory. It is the fear of the majority of the population that their costs will go up without a corresponding increase in their income. Inflation is something done to you, without your permission, which raises your costs. People hate that (see petrol prices). Maybe inflation was more popular in the 70″s as those in union’s felt fairly confident that they would receive inflation plus raises. With the decline of the unions, that is no longer a given.

    I don’t think bringing back strong unions would be either feasible or desirable. So how can we deal with inflation phobia today? Possibly by saying we are targeting wage increases, not prices? By “helicopter drops” of printed money deposited into people’s bank accounts? By adapting technical changes to the inflation target that confuse the masses – howabout – “The Chancellor today announces that the BOE will now be targeting a long term NGDP target of 6% consisting of an expected long term average 2.5% inflation rate and 3.5% real rate of growth. Inflation will be allowed to vary around this target to increase flexibility during times of depressed demand.” And when and if the inflation rate gets above 2.5%, just ignore it as long as NGDP is on target. This is the effective policy of the BOE anyway, so what are they afraid of? It’s the Parris approach I suppose, look after the constituents real interests and ignore their opinions.

  2. I can’t help wondering if the story is a little wrong here, I’m not sure this is really the story of the rich, the 1% or similar being pro inflation. What I think it might be instead is the story of the decline of the power of many of the counterveiling political forces.

    The mainstream left leaning political parties are afraid to to come out in favour of fiscal expansion, trade unions are far weaker than in the past (I don’t think these groups were pro inflation, I think they just generally didn’t concern themselves with the inflationary consequences of their demands). I think the hard money crowd have always been there, it’s just in the past they’ve had far more political opposition.

    I also with ChrisA in that the anti-inflation argument is quite a popular one, anecdotally, the inflation fallacy seems quite widespread.

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