by Tyler Cowen
For conservatives, current high rates of inflation should not be too upsetting — and not because they might help Republican candidates in the next election. Rather, there are intrinsic reasons that higher inflation, at least for a while, might not be as bad as it looks.
I myself am not happy about an inflation rate of 4% to 5%, which seems embedded in the economy right now. Yet on reflection I am less concerned than I was initially.
One advantage of a higher inflation rate is that it reduces the outstanding value of government debt. That debt was fixed in nominal terms, and higher prices mean it will be easier to pay off. Since debt and deficits have been a continuing economic problem for the U.S., that counts as a partial benefit.
According to one estimate, over the two-year period from 2020 to 2022, inflation “reduced the debt-to-GDP ratio for advanced economies by almost 6 percentage points of GDP.” Thus there is a plausible scenario in which higher inflation today will end up meaning lower taxes tomorrow.
From a conservative point of view, that may be a welcome trade-off. When taxes are raised, very often it is forever, especially if the increased taxes are needed to fill holes in the budget. But when inflation is higher than average, as it is today, there are strong political pressures to bring it back down.
To be clear, it is not easy to reap very large gains through this inflationary mechanism. If high inflation continues for too long, interest rates will adjust upwards to the point at which inflation may be increasing the burden of future debt. The past debt may be worth less, but the higher costs of future borrowing may, on net, push government budgets further out of balance. In that scenario, the US might end up with both tax hikes and high inflation.
So the risks are real. But there is a decent chance it will work out, at least if the Federal Reserve can get inflation back under control again fairly soon.
It’s also worth asking which groups are most hurt by inflation, and which least. On the one hand, inflation helps debtors, and the debtor class is often relatively poor. Yet there is also a large set of distributional effects through wages, and those effects might prove more congenial to conservative values.
One obvious loser from higher inflation is someone with a tenured job, either de facto or de jure. To use an example close to home: Many professors cannot easily switch jobs and duplicate their current working conditions, nor can they easily demand and receive offsetting raises. A lot of them are locked into their current posts — which is hardly surprising, since the nature and incentives of tenure do not require those who have it to stay at the top of their game to keep their job.
Many conservatives wish to abolish academic tenure altogether. That’s unlikely to happen (though Florida is making moves in that direction), but a dose of inflation might make tenure less appealing.
Many government bureaucrats also often have de facto tenure, and many of them are not so marketable to the private sector. For them, higher inflation is a pay cut. Again, just as inflation will not abolish tenure, so it will not eliminate bureaucracy. But it may make the less dynamic parts of the public sector less attractive, helping to slow the growing bureaucratization of society.
In contrast, consider a private entrepreneur who will attempt seven start-ups over the next 20 years, with some succeeding and others failing. That person probably will not suffer much from inflation, as he is starting from scratch with new nominal values on a fairly frequent basis. More generally, productive people who have flexibility and the ability to adjust to circumstances will emerge relatively unscathed as well.
At least within labor markets, inflation tends to redistribute resources to more mobile and more productive individuals. While that may be a mixed blessing overall, it does satisfy some of the policy preferences of many conservatives. In the longer run, once people know that some re-emergence of inflation is always possible, they will invest more in keeping a mobile and flexible position. On the margin, this will favor entrepreneurial pursuits.
Of course the Fed should put such considerations aside and stick to its mandate for price stability. The rest of us, however, are free to appreciate some of the benefits of higher inflation, at least for a while.
