Explaining Post-Traumatic-Inflation Stress Disorder

Paul Krugman and Steve Waldman having been puzzling of late about why inflation is so viscerally opposed by the dreaded one percent (even more so by the ultra-dreaded 0.01 percent). Here’s how Krugman phrased the conundrum.

One thought I’ve had and written about is that the one percent (or actually the 0.01 percent) like hard money because they’re rentiers. But you can argue that this is foolish — that they have much more to gain from asset appreciation than they have to lose from the small chance of runaway inflation. . . .

But maybe the 1% doesn’t make the connection?

Steve Waldman, however, doesn’t take the one percent — and certainly not the 0.01 percent — for the misguided dunces that Krugman suggests they are. Waldman sees them as the cunning, calculating villains that we all (notwithstanding his politically correct disclaimer that the rich aren’t bad people) know they really are.

Soft money types — I’ve heard the sentiment from Scott Sumner, Brad DeLong, Kevin Drum, and now Paul Krugman — really want to see the bias towards hard money and fiscal austerity as some kind of mistake. I wish that were true. It just isn’t. Aggregate wealth is held by risk averse individuals who don’t individually experience aggregate outcomes. Prospective outcomes have to be extremely good and nearly certain to offset the insecurity soft money policy induces among individuals at the top of the distribution, people who have much more to lose than they are likely to gain.

That’s all very interesting. Are the rich opposed to inflation because they are stupid, or because they are clever? Krugman thinks it’s the former, Waldman the latter. And I agree; it is a puzzle.

But what about the poor and the middle class? Has anyone seen any demonstrations lately by the 99 percent demanding that the Fed increase its inflation target? Did even one Democrat in the Senate – not even that self-proclaimed socialist Bernie Sanders — threaten to vote against confirmation of Janet Yellen unless she promised to raise the Fed’s inflation target? Well, maybe that just shows that the Democrats are as beholden to the one percent as the Republicans, but I suspect that the real reason is because the 99 percent hate inflation just as much as the one percent do. I mean, don’t the 99 percent realize that inflation would increase total output and employment, thereby benefitting ordinary workers generally?

Oh, you say, workers must be afraid that inflation would reduce their real wages. That’s a widely believed factoid about inflation — that inflation is biased against workers, because wages adjust more slowly than other prices to changes in demand. Well, that factoid is not necessarily true, either in theory or in practice. That doesn’t mean that inflation might not be associated with reduced real wages, but if it is, it would mean that inflation is facilitating a market adjustment in real wages that would tend to increase total output and total employment, thereby increasing aggregate wages paid to workers. That is just the sort of tradeoff between a prospective upside from growth-inducing inflation and a perceived downside from inflation redistribution. In other words, the attitudes of the one percent and of the 99 percent toward inflation don’t seem all that different.

And aside from the potential direct output-expanding effect of inflation, there is also the redistributional effect from creditors to debtors. A lot of underwater homeowners could have sold their homes if a 10- or 20-percent increase in the overall price level had kept nominal home prices from falling below nominal mortgage indebtedness. Inflation would have been the simplest and easiest way to avoid a foreclosure crisis and getting stuck in a balance-sheet recession. Why weren’t underwater homeowners out their clamoring for some inflationary relief?

I have not done a historical study, but I cannot think of any successful political movement or campaign that has ever been carried out on a platform of increasing inflation. Even FDR, who saved the country from ruin by taking the US off the gold standard in 1933, did not say that he would do so when running for office.

Nor has anyone ever stated the case against inflation more eloquently than John Maynard Keynes, hardly a spokesman for the interests of rentiers.

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,” who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. (Economic Consequences of the Peace)

One might say that when Keynes wrote this he was still very much of an orthodox Marshallian economist, who only later outgrew his orthodox prejudices when he finally saw the light and wrote the General Theory. But Keynes was actually quite explicit in the General Theory that he favored a monetary policy aiming at price-level stabilization. If Keynes favored inflation it was only in the context of counteracting a massive deflation. Similarly, Ralph Hawtrey, who famously likened opposition to monetary stimulus, out of fear of inflation, during the Great Depression to crying “fire, fire” during Noah’s Flood, favored a monetary regime aiming at stable money wages, a regime that over the long term would generate a gradually falling output price level. So I fail to see why anyone should be surprised that a pro-inflationary policy would be a tough sell even when unemployment is high.

But, in thinking about all this, I believe it may help to distinguish between two types of post-traumatic-inflation stress disorder. One is a kind of instinctual aversion to inflation, which I think is widely shared by people from all kinds of backgrounds, beliefs, and economic status. After arguing and pleading for higher inflation for over three years on this blog, I am a little bit embarrassed to make this admission, but I suffer from this type of post-traumatic-inflation stress disorder myself. I know that it’s weird, but every month when the CPI is announced, and the monthly change is less than 2%, I just get a warm fuzzy feeling inside of me. I know (or at least believe) that people will suffer because inflation is not higher than a measly 2%, but I can’t help getting that feeling of comfort and well-being when I hear that inflation is low. That just seems to be the natural order of things. And I don’t think that I am the only one who feels that way, though I probably suffer more guilt than most for not being able to suppress the feeling.

But there is another kind of post-traumatic-inflation stress disorder. This is a purely intellectual disorder brought on by excessive exposure to extreme libertarian dogmas associated with pop-Austrianism and reading too many (i.e., more than zero) novels by Ayn Rand. Unfortunately, one of the two major political parties seems to have been captured this group of ideologues, and anti-inflationary dogma has become an article of faith rather than a mere disposition. It is one thing to have a disposition or a bias in favor of low inflation; it is altogether different to make anti-inflationism a moral or ideological crusade. I think most people, whether they are in the one percent or the 99 percent are biased in favor of low inflation, but most of them don’t oppose inflation as a moral or ideological imperative. Now it’s true that that the attachment of a great many people to the gold standard before World War I was akin to a moral precept, but at least since the collapse of the gold standard in the Great Depression, most people no longer think about inflation in moral and ideological terms.

Before anti-inflationism became a moral crusade, it was possible for people like Richard Nixon and Ronald Reagan, who were disposed to favor low inflation, to accommodate themselves fairly easily to an annual rate of inflation of 4 percent. Indeed, it was largely because of pressure from Democrats to fight inflation by wage and price controls that Nixon did the unthinkable and imposed wage and price controls on August 15, 1971. Reagan, who had no interest in repeating that colossal blunder, instead fought against Paul Volcker’s desire to bring inflation down below 4 percent for most of his two terms. Of course, one doesn’t know to what extent the current moral and ideological crusade against inflation would survive an accession to power by a Republican administration. It is always easier to proclaim one’s ideological principles when one doesn’t have any responsibility to implement them. But given the current ideological commitment to anti-inflationism, there was never any chance for a pragmatic accommodation that might have used increased inflation as a means of alleviating economic distress.

22 Responses to “Explaining Post-Traumatic-Inflation Stress Disorder”


  1. 1 Lorenzo from Oz September 9, 2014 at 9:48 pm

    Which is why inflation is the wrong framing, it is nominal income which is the key. But Scott Sumner and lots of folk have been saying that.

  2. 2 whatever September 10, 2014 at 1:59 am

    The anti-inflation bias is deeply rooted in human brains.

    People instinctively think of money as something which is scarce and difficult to forge.

    We no longer live in a world in which that has to be true, but human brains haven’t had the time to catch with that.

    So, yes – pontificating about the virtues of a higher inflation target is never going to win you votes. That’s just the way it is.

    Incidentally, I think this is the best possible argument in favour of doing away with central banks. Or at least replacing the FOMC with a futures market.

  3. 3 Jacques René Giguère September 10, 2014 at 6:50 am

    Since most people ( including economists) confuse inflation with real price increases ( such as the ’70’s oil crisis), they are convinced it means a reduction in purchasing power. Since they also beleive (correctly) that the 1% will use the occasion to lower their real wages, their fear is totally understandable.

  4. 4 numawan September 10, 2014 at 12:01 pm

    We should also accept that 99% of people have absolutely no understanding of monetary policy, and certainly not when monetary policy has to take unusual paths. They are totally unable to see a link between low inflation and excessively high real interest rates for example.

  5. 5 David Glasner September 10, 2014 at 1:27 pm

    Lorenzo, Well, I think that what is correct framing depends on the context, but if we want a 20% increase in NGDP to recover from a depression, isn’t disingenuous to suggest that there wouldn’t be an increase in inflation?

    whatever, I agree that there is a predisposition to think that the value of money should be stable; whether it is instinctual or culturally transmitted, I am not prepared to say. I think that as a general rule, stability in the value of money remains a good thing, but it is a great mistake to think that there is a single rate of inflation that is optimal under all circumstances.

    Jacques, Understandable, yes. Correct? I don’t think so.

    numawan, Yep, monetary policy is hard, and we (the economists) are still struggling to get it right.

  6. 6 Lorenzo from Oz September 10, 2014 at 10:27 pm

    David: yes, but there is a difference between intention/target and consequence. If the point is to make an attractive argument in public policy debate reaching to non-economists, then income or total spending is the framing to use, not inflation.

  7. 7 Kevin Donoghue September 11, 2014 at 2:53 am

    Jacques René Giguère: that suggests that the 1%, which dominates policy debates, ought to be very amenable to Woodford-style proposals for a higher trend-rate of inflation. But in fact conservative pundits and economists tend to be very hostile to such proposals. That’s what Krugman and Wren-Lewis find puzzling. I think David Glasner and Nick Rowe are confusing the issue somewhat by focussing on that attitude of the general public.

    Personally, I think there’s two things going on. (1) Creditors lose out when inflation is higher than they anticipated when they advanced the money. (2) Employers have greater bargaining power when unemployment is on the high side, so tight money helps them even if it’s bad for sales. Keynes emphasized the first point, Kalecki the second. I hear both these themes humming in the background when, for example, British conservatives sing Thatcher’s praises. She rewarded savers and put the unions in their place. You can pick up similar strains when American conservatives talk of the Reagan-Volcker era.

  8. 8 Peter K. September 11, 2014 at 6:40 am

    I agree with Donoghue but with regards to the 99 percent, we are bombarded by propaganda by the corporate press and even the academy is pretty bad about the issue. (Both DeLong and Krugman point to this is a major problem). When even Republican economists like Mankiw and Rogoff were suggesting 4 percent inflation like Reagan and Nixon suffered, economists like Robert Lucas said in exasperation that we tried that in the 1970s. Then Mankiw and Rogoff stopped talking about and towed the party line.

    Wage and price controls are discussed about Nixon’s inflation, but what about Reagan? Was there any clamor against 4 percent inflation of the Reagan years? It just seems that any mention of inflation as a solution is greeted with the insistence that things will easily become very bad like the 1970s (which weren’t that bad), just as with any proposal to increase government spending we are told we’ll turn into Greece or Detroit. It’s political hyperbole. This was overcome during the emergency years of 2008-2009, but once the economy began growing again and there was little danger of deflation, they were taken off the table. Donoghue mentions Kalecki. As he saw way back in the 40s, any intervention in the economy by the government to increase employment is seen by the dreaded one percent as bad. It was a necessary evil while Lenin and the Communists were in the wings, but now that they are gone, the Keynesian compact can be scrapped.

  9. 9 David Glasner September 11, 2014 at 10:14 am

    Lorenzo, You may be right, but the anti-inflation ideologues will not be fooled for a moment.

    Kevin, What exactly is the confusion that I am perpetrating?

    If, as you say, the conservatives are merely doing the bidding of the one percent by supporting tight money, why is the 99 percent not resisting the policy? In fact they are either quietly acquiescing in it or actively supporting it. My own view is that the conservatives are partly sincere but even more likely just being opportunistic in opposing anything that they can associate with big government and intervention and Obama. If they were actually in power, their incentives would change drastically. However, if they gain power, their extreme rhetoric will have made it very difficult for them to behave pragmatically.

    Peter, I think it is just as likely that Mankiw and Rogoff gave up on raising inflation when they saw that even Democrats were opposed to that idea, as that they were coerced into backing down by their Republican benefactors. But that is pure speculation on my part. Do you have any evidence for your hypothesis? I suppose we could ask them, but would you believe any answer you got from them?

    No there was no clamor against 4 percent inflation during the Reagan years. Everyone was happy with that. In those days anti-inflationism pragmatic not a sacred cause. But having made it a sacred cause, would Republicans be able to take a pragmatic view towards inflation if they were returned to power on a pop-Austrian platform?

  10. 11 Benjamin Cole September 11, 2014 at 10:25 pm

    I posted over at Historinhas-Nunes an actual recorded conversation of Nixon pushing Burns to loosen up…the Reaganuats wanted to move the the Fed into the Treasury Dept to end run Volcker…

    Sumner has a great post on how difficult it is to even measure inflation….

    So we today have people fixated on inflation that is hard to measure…and what does the Taylor Rule mean if you measure inflation 2 percent high?

  11. 12 Kevin Donoghue September 12, 2014 at 1:57 am

    “If, as you say, the conservatives are merely doing the bidding of the one percent by supporting tight money, why is the 99 percent not resisting the policy? In fact they are either quietly acquiescing in it or actively supporting it.”

    In the US, the 1% is the top 2.6 million (I’m assuming Piketty is right in saying there are about 260 million adults). I seriously doubt that any significant number of people outside that set believe they can influence monetary policy. In fact even within the 1% there are few who could hope to do so, even in a small way.

    The 99% only make their presence felt at election time and monetary policy isn’t really an election issue. The puzzle discussed by Krugman and Wren-Lewis relates to the attitude of the governing elite. (That’s why I say that bringing the 99% into it confuses the issue.) The 1% are well placed to hedge against inflation, so why do they hate it so? My answer is lifted from Keynes and Kalecki. You suggest that conservatives are “just being opportunistic in opposing anything that they can associate with big government and intervention and Obama” and I’d agree that’s part of it. Krugman seems to agree somewhat, judging by today’s op-ed:

    Inflation cultists almost always link the Fed’s policies to complaints about government spending. They’re completely wrong about the details — no, the Fed isn’t printing money to cover the budget deficit — but it’s true that governments whose debt is denominated in a currency they can issue have more fiscal flexibility, and hence more ability to maintain aid to those in need…

  12. 13 David Glasner September 12, 2014 at 10:39 am

    TravisV, Thanks for the links. As usual Nick is right on the mark.

    Benjamin, Yes, I remember that post of yours, and indeed, I was thinking of you almost non-stop as I was writing this post.. And yes, that was a great post by Scott.

    Kevin, Are you saying that the 1% control inflation policy, or that they control everything? If the former, the please explain why the 1% has special powers over inflation that they don’t have over other stuff. If the latter, I give up.

  13. 14 Kevin Donoghue September 12, 2014 at 1:48 pm

    David, contrast monetary policy with something that the median voter is less likely to find hideously boring: schooling, healthcare, taxes, gun control, whether to send troops to some distant trouble-spot. People will have strong views on such matters even if they have no claim to expertise. Honestly, what proportion of Americans could tell you what “FOMC” stands for? My guess is it’s under 5%. Now in truth they might not know much more about Obamacare or how the theory of evolution should be taught, but they think they do. They might not be able to find Ukraine on a map, but that won’t stop them having a view on whether they want to send troops there. They don’t have much of an opinion as to whether Janet Yellen should be seeking advice from John Taylor or Michael Woodford. It’s too technical and remote from the concerns of the 99%.

    Add to that the fact that monetary policy has been taken out of the hands of politicians in most countries, which makes it seem even more arcane. The very fact that politicians were happy to hand that power over to specialists tells you that they didn’t see it as a hot-button issue. Indeed it suited them to be able to wash their hands of it, in a way they couldn’t possibly do with gun control, abortion or war. One result of central bank independence is that the number of people who can hope to influence decisions has shrunk.

    If you think I’m saying something controversial here, well, I can’t do better than borrow your own words: I give up.

  14. 15 Tom Brown September 12, 2014 at 10:21 pm

    “…brought on by excessive exposure to extreme libertarian dogmas associated with pop-Austrianism and reading too many (i.e., more than zero) novels by Ayn Rand.” Lol!

  15. 16 Ellis Goldberg September 14, 2014 at 11:14 pm

    Would the free silver/Populist movement count as a successful movement built on the demand for inflation. Not perhaps successful in terms of policy implementation but at least in terms of a broad and relatively long-lasting political movement that demanded an inflationary response to existing economic conditions and government policies. It did finally pass the Silver Purchase Act of 1890 although the Act itself was not a success.

  16. 17 David Glasner September 15, 2014 at 7:00 pm

    Kevin, OK, thanks for stating your view so clearly and concisely. Perhaps, another way to get at this is to say that the only people who are weighing in on monetary policy are a select group of people (even among the one percent) who have expertise in money and finance. And this self-selected group of people, who also tend to have extremely high incomes, and work in or near the high finance, tend to be very hostile to inflation. Nevertheless, I would venture to say that, at least on this blog, and people who engage in discussion about financial issues in the blogosphere who are extremely outspoken and opinionated and have very little grasp of the subject that they are commenting about with enviable self-confidence. So I am not totally persuaded by your argument that only a very narrow elite group of people are willing to venture opinions about monetary policy.

    Ellis, Not very knowledgeable about the free silver movement, but your suggestion certainly does seem plausible.

  17. 18 Akin Ogunsanya October 16, 2014 at 4:17 am

    Raising inflation and raising output may look like a plausible idea to increase employment in the economy. However, it comes at a cost of huge mis-allocation of capital and labour. Wrong jobs are created being paid inflated prices (wages) and over-investment occur over a time horizon. If your goal is having a fully employed society at much lower efficiency then be my guest but in the long run the economy suffers the consequences. The US suffers from this already with the growth of jobs being in the non-tradable sector while the tradable sector has shed jobs which over has manifested itself in ever lower labour productivity.


  1. 1 Is weak demand a conspiracy of the scheming rich? | Freethinking Economist Trackback on September 10, 2014 at 6:59 am
  2. 2 Many still believe the Great Recession was the result of a “modeling error” | Historinhas Trackback on September 10, 2014 at 5:38 pm
  3. 3 Nick Rowe on Money and Coordination Failures | Uneasy Money Trackback on September 11, 2014 at 7:35 pm
  4. 4 interfluidity » Links: UBI and hard money Trackback on September 26, 2014 at 6:34 am

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.

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