Wednesday, April 11, 2007

What was so bad about inflation ?

Was inflation a huge problem in the USA in 1980 ?
It is clear that the public saw it to be a huge problem (often in the 70s inflation was listed as the worse problem faced by the USA).

This is related to tax policy, because inflation has huge effects on taxes given the use of nominal quantities in the tax code. The one good point which supply siders (meaning Feldstein) made according to Krugman was to argue for adjusting the tax code so that real capital gains, real interest income and real corporate income was taxed instead of nominal amounts which make real taxes insanely high during periods of inflation. Without other changes this would imply a large drop in revenues, but the point is that tax rates should not change exogenously due to inflation.

Aside from that, mainstream economists generally don't understand what is so horrible about inflation. Economists who wish to be policy relevant accept low inflation as a policy goal (because it is). However, many economists (e.g. Robert Solow) argued that inflation wasn't a big problem in 1980 (at a debate at the K school).

Some economists (including this one) think the hatred of inflation was based on totally silly logic in which inflation meant price increases and people assumed that nominal wage increases had nothing to do with inflation. That is people said they would like their real wages to grow 10% more a year (assuming they would keep their jobs).

It remains taboo to say that, say 12% inflation, is no big deal. I hereby violate that taboo.

15 comments:

Anonymous said...

Remember, I promise I will not vote for any Democratic candidate who does not pledge to leave Iraq immediately and completely. And, I will actively work against Hillary Clinton and any Democrat who joins her on Iraq.

Enough.

anne

Anonymous said...

So far, that leaves Bill Richardson only among the viable candidates. Fine with me. We must leave Iraq immediately.

anne

Anonymous said...

Should Hillary Clinton gain the nomination, I will not vote because of her immoral destructive stance on Iraq.

anne

Anonymous said...

Agreed on inflation completely; nicely done.

anne

Anonymous said...

Remember that Barack Obama has not only still not had a reasonable word to say on health care, but has made no promise to pull American soldiers from Iraq completely and fast. I will support no candidate who does not address both issues. Obama has addressed neither, and I want to support Obama or John Edwards who has at least addressed health care.

anne

Anonymous said...

I wonder at the extent to which the continual inflation emphasis worry allowed for an easier and easier bashing of unions in the 1980s.

What a fine post.

anne

Anonymous said...

http://www.nytimes.com/2006/10/11/washington/11veterans.html?ex=1318219200&en=57988c04bbbbd7d4&ei=5090&partner=rssuserland&emc=rss

October 11, 2006

Data Suggests Vast Costs Loom in Disability Claims
By SCOTT SHANE

Nearly one in five soldiers leaving the military after serving in Iraq and Afghanistan has been at least partly disabled as a result of service, according to documents of the Department of Veterans Affairs obtained by a Washington research group.

The number of veterans granted disability compensation, more than 100,000 to date, suggests that taxpayers have only begun to pay the long-term financial cost of the two conflicts. About 567,000 of the 1.5 million American troops who have served so far have been discharged.

"The trend is ominous," said Paul Sullivan, director of programs for Veterans for America, an advocacy group, and a former V.A. analyst.

Mr. Sullivan said that if the current proportions held up over time, 400,000 returning service members could eventually apply for disability benefits when they retired....

anne

Anonymous said...

So, then, 17.8% of soldiers returning from Iraq are found in time to have various traumatic brain injuries and thinking of a disability rate of 1 in 5 returning soldiers becomes terrifyingly reasonable.

While the casualty figure the military has recently changed to is given as 26,000, we understand easily from the statistics that more than 100,000 returning soldiers had been granted disability status as of October 1966. The figure is easily comprehensible simply from the impossibly sad finding for traumatic brain injury effecting 17.8% of returned soldiers.

What have we done?

Anonymous said...

The military changed and lowered casualty figures when Linda Bilmes pointed out that according to the military there were more than 50,000 casualties, but Bilmes was already low in her sad count. Nonetheless, even the Dean at Kennedy was called by an Assistant Secretary of Defense to complain about Bilmes.

anne

Anonymous said...

http://www.latimes.com/news/opinion/la-oe-bilmes5jan05,0,3457599,print.story?coll=la-opinion-rightrail

January 5, 2007

The Battle of Iraq's Wounded: The U.S. is poorly equipped to care for the tens of thousands of soldiers injured in Iraq.
By Linda Bilmes - Los Angeles Times

THE NEW YEAR brought with it the 3,000th American death in Iraq. But what's equally alarming — and far less well known — is that for every fatality in Iraq, there are 16 injuries. That's an unprecedented casualty level. In the Vietnam and Korean wars, by contrast, there were fewer than three people wounded for each fatality. In World Wars I and II, there were less than two.

That means we now have more than 50,000 wounded Iraq war soldiers....

anne

Anonymous said...

http://www.nytimes.com/2007/01/30/us/30wound.html?ex=1327813200&en=d2702dd0edfb0b43&ei=5090&partner=rssuserland&emc=rss

January 30, 2007

Agency Says Higher Casualty Total Was Posted in Error
By DENISE GRADY

For the last few months, anyone who consulted the Veterans Affairs Department's Web site to learn how many American troops had been wounded in Iraq and Afghanistan would have found this number: 50,508.

But on Jan. 10, without explanation, the figure plummeted to 21,649....

anne

Anonymous said...

Possibly I simply do not understand, but thinking this morning, I am quite devastated by what is happening to us (as to the the Iraqis). I only hope that will not warrant a call to the Dean from another Assistant Secretary of Defense since I assure you I am not the least brave. Oh well.

You do not have to be brave either.

Anonymous said...

Yes; we are in the midst of a tragic lunatic $2 trillion and counting war and occupation, not to think of the American and Iraqi lives that can never be the same. What bothers me is even today, Laurence Kotlikoff who was mad with worry about Americans gorwing, say, old, even today in the Boston Globe has no decent sense of the cost of Iraq.

anne

Anonymous said...

http://www.boston.com/news/globe/editorial_opinion/oped/articles/2007/04/11/enlisting_iraqis_to_rebuild_their_country?mode=PF

April 11, 2007

Enlisting Iraqis to rebuild their country
By Laurence J. Kotlikoff

[Just to show what nuttiness is all about.]

Anonymous said...

I came here from JBD's site because I'm intrigued by the positive elements of inflation that I had been unaware of.

I previously just assumed that inflation = bad and that it was particularly regressive similar to sales tax. But I've been noticing how many people point out that wages & inflation are pretty closely tied. If wages do tend to automatically increase with inflation, then maybe it's not so regressive.

If inflation doesn't affect income so much, it just affects held wealth. That's interesting because it seems like it could be more progressive than regressive.

However, I'm worried the inflation particularly affects static, illiquid wealth. Important examples of which would seem to be real estate, low-risk retirement savings, and government bonds. These examples seem potentially important since devaluing the first 2 would hurt the middle class a lot, whereas devaluing government bonds is going to create complicated issues with respect to China since they hold so many.

Maybe these worries are overblown? For real estate, maybe most of it is held by corporate/commercial entities. Personally, I don't understand why my house has gone up so preposterously in value. I'm more than a little nonplussed by the fraction of my income being eaten by the mortgage payment as a result. I can't escape the sense that the combination of high productivity growth and low inflation over the past few decades dropped the percentage of income spent on goods but that it's gotten entirely eaten up by real estate. I could see some value in inflation that knocked down the value of my house, if paired with wages rising to match, restructured the percent of my income spent on the house.

I'm very unclear on what happens to market investments at higher inflation. My hunch is that it doesn't hit stock investments that hard. When prices of goods go up, income should tend to go up for corporations and they can maintain ROI over inflation. If anything, wouldn't it provide more pressure towards more risky high-growth potential investments and away from safe low-return investments? That seems like it would lead to overall growth.

On the other hand, that would suggest means that inflation doesn't actually work very progressively -- it rewards people who can afford to invest with risk, typically wealthy people.

But the biggest problem would seem to be the huge federal debt. If inflation went up, the U.S. would have to raise the interest rates on debt securities to make them attractive, which would massively increase the deficit. That would seem to make inflation a very bad thing in today's environment.

I suspect there's some other downsides to inflation due to imperfect synchronization between various costs. The delay between prices going up and wages going up has to be painful for earners. In business, if there's a delay between the price of materials going up and the increase in the price that can be charged for finished goods, that has to be painful as well. Maybe hyperefficient financial markets could bridge those. But the government debt issue seems like a killer.

Paul J. Reber