Tuesday, February 5, 2019

John T. Harvey — Inflation…Huh…What Is It Good For?

Unfortunately, there are a great many misconceptions out there about inflation. Since I can't possibly address them all in a short blog post, I figured I'd take on just one: the idea that it is a net loss for everyone. The reason people believe this is partly because of the manner in which most economists teach the concept and also because we naturally transfer how a phenomenon affects us individually to the macro level. If inflation reduces my standard of living, then it must be doing the same to everyone. But what this ignores is the simple and fundamental fact that if I’m paying more, someone else is getting more. Every expenditure for one person is income for another. Hence, inflation can’t possibly be a net loss for everyone, but is instead a redistribution of income.….
Inflation is always and everywhere a redistribution of income. If you truly want to understand an episode of inflation, you have to ask, "Who's winning from this?"
Sometimes your answer will lead you to the conclusion that it's bad and sometimes not. From a broader perspective, what this means for government policy is that it should be tailored to the specific situation. We should not treat all inflation as the same....
Forbes — Pragmatic Economics
Inflation…Huh…What Is It Good For?
John T. Harvey | Professor of Economics, Texas Christian University


Konrad said...

Housing price inflation, for example, makes banks richer. It is true that banks create loan money out of thin air, and that loan money is gradually destroyed as a loan is paid off. However with higher loan amounts come higher interest payments. That’s where the profit lies.

Cue one of our resident trolls who will now write that private banks should instead be private instead of private, and they definitely should and should not have “government privileges” and Old Testament and et velit ac purus commodo meaningless gibberish sit amet ut mauris blah blah blah.

Andrew Anderson said...
This comment has been removed by the author.
Andrew Anderson said...

[corrected quote attribution]

"Inflation is always and everywhere a redistribution of income." John T. Harvey

Then someone please explain how income is redistributed by means of the inflation that might be caused by an equal fiat distribution to all citizens, i.e. a Citizen's Dividend?

So deflation can be countered in a way that cheats no one*.

*except, in their own minds, those who think they are entitled to lazy, risk-free real gains proportional to account balance from deflation, i.e. the Austrians.

Jure Jordan said...

Moderate inflation is beneficial to almost everyone. Moderate means for me up to 20-30%.
It works in multiple ways all across the economy.
The most important way it is beneficial is to debtors which is almost everyone.
Debt on fixed rate is even more susceptible to be eaten away by higher inflation.
Inflation basically means that wages grow and those on fixed interest rate are left with much more disposable income then without inflation. This enlarged amount of disposable income is responsible for rising prosperity and rise in number of jobs that will satisfy increased demand.

Those on pensions get a raise with inflation.
Those invested in interest income get a raise too. II = real interest+inflation

Only ones that loose from inflation are those that are sitting on money and do nothing with it, and they are not doing anything because they do not need it anyway and will die with large amount of saving. Everyone else is protected from inflation while debtors gain big time.

Changes in prices also allow economy to adjust and balance the inequalities in market power where some gained from monopoly, monopsony power. Inflation is very beneficial to economy because it allows constant adjustments to real value relationships between firms.

Did anyone warn about dangers of deflation? No, even though the low inflation or deflation has shown to be very dangerous to economy and people nobody was warning about. Only inflation gets a bad rep while it should be opposite.

Inflation eats away on debt and those on fixed interest debt gain big. Since almost everyone is in debt, moderate inflation benefits almost everyone.

Inflation is not redistribution of income, it is balancing the imbalanced distribution of prices gained by market power.

Noah Way said...

The only inflation we have is price inflation due to rentiers in every activity from real estate to food to energy to finance - which profits on them all for the benfit of a tiny minority.