Inflation is all over the news and commentary today, particularly after a presidential election that was allegedly all about it. The problem remains that few who utter the word grasp its singular meaning.
This includes Stanford professor Jennifer Burns, who not-so-ironically wrote a book about Milton Friedman. Friedman had his own problems with the definition given his view that increases in so-called “money supply” that he somehow knew the non-inflationary quantity of was “always and everywhere” evidence of inflation.
In Burns’s case, a recent opinion piece for the Wall Street Journal indicates she wants inflation to be different things at different times. Quoting Keynes and his classic line about debauching the currency as the best way to overturn ‘”the existing basis of society,”’ Burns happened on the correct – and yes – non Friedman-ite view of inflation: a shrinkage of the unit.
The problem is that Burns also claims inflation “looms above all competing explanations for Donald Trump’s comeback.” That’s conventional wisdom, but it’s worth pointing out that there was no notable decline in the value of the dollar (versus foreign currencies or the more objective measure that is gold) in 2021 and 2022, those years the ones in which inflation allegedly broke out.
What did happen in 2021-2022 is that a global economy defined by immense global cooperation among hands and machines was in the difficult process of being put back together after lockdowns had eviscerated the cooperation. That prices would be higher after decades’ worth of painstakingly built production relationships had been broken up was a statement of the obvious. The problem is that neither command-and-control that fractures production relationships and its effects (higher prices) could ever be inflation. They couldn’t because economics is about tradeoffs, which means higher prices of some goods would logically be offset by lower prices of other goods. In other words, if you have $30 you can’t buy Burns’s book on Milton Friedman and my book (The Money Confusion) that rejects the monetary mysticism of the various economic religions, including Friedman’s. Sadly, it seems, readers chose Burns…
Burns then makes an odd pivot to the 1970s when there was an actual decline in the dollar versus gold and foreign currencies like the yen, deutschemark, and Swiss franc. Real inflation. The pivot was odd because Burns claims President Nixon, “Fearing Treasury would run out of the precious metal,” ultimately “slammed the gold window shut, killing Bretton Woods in the process.” Burns’s analysis for what was real inflation (devaluation of the dollar against gold and foreign currencies) presumes that Nixon’s hand was forced. No, not at all. It was what Nixon and his Treasury wanted. Had he simply made plain that Treasury would maintain the dollar’s value as 1/35th of a gold ounce, then the withdrawals would have stopped.
Burns claims “pervasive inflation” during the 1970s “pushed the economy toward financialization and simultaneously deepened inequality.” The view isn’t serious. No one buys, sells, lends or borrows with “money.” All money movements signal the movement of goods, services and labor among actual producers. Which means “financialization” was an effect of production.
Which is just a reminder that absent the 1970s inflation, the “financialization” that Burns views as a pejorative would have taken on even greater flight to reflect the much greater production that takes place when money is trusted. Evidence supporting the previous claim can be found in surging financial activity in the 1980s and 1990s, two non-inflationary decades (though Milton Friedman, ever distracted by so-called “money supply,” spread the word that the Ronald Reagan economy was inflationary) thanks to Presidents Reagan and Clinton largely embracing the notion of a strong dollar.
Lest we forget, to put money to work is to seek income streams and returns in money. Which means inflation is anti-financialization precisely because devaluation is a horrid tax on investment. Assuming a return to truly stable exchange rates, financialization would logically grow. No doubt currency trading would properly plummet, but monetary flows representing wealth creation and investment in future wealth creators would soar.
All of which addresses Burns’s odd assertion that the 1970s inflation “deepened inequality.” No, that’s similarly not serious. Inequality is decidedly not a pejorative, and it’s not simply because inequality is an effect of talent being matched with capital, only for the talent to meet and lead the needs of ever more people. Think Jeff Bezos and Amazon. With Bezos and others like him, the always and everywhere challenge is finding investors willing to back them. They’re logically a great deal more willing to back the visionaries when inflation is quiet to non-existent. See returns in “money” once again.
Bringing it all into the present, Burns writes that “inflation can be ignited by government spending, as the Covid-19 era demonstrates.” As mentioned previously, Burns has a rather casual, black can sometimes be white, definition of inflation. Furthermore, her assertion is not true. See the 1980s and 1990s again. Leaving aside deficits (1980s) or surpluses (late 1990s), the simple, logical, and unfortunate truth is that the surging growth (and wondrous inequality) that revealed itself in the post-inflationary ‘80s and ‘90s resulted in soaring tax revenues for the U.S. Treasury. The rising revenues also quite logically made it easy for Treasury to borrow as the rise in total national debt from 1980 to 2000 ably indicates. Yet naturally none of this was “inflationary” for two obvious reasons: for one, governments can only increase demand through spending or borrowing by commensurately shrinking private demand. For two, Treasury debt pays out income in – yes – dollars. To then pretend, as so many do, that government borrowing foretells devaluation doesn’t just presume market stupidity, but ferocious amounts of it.
Having tied Donald Trump’s election to “inflation” that miraculously occurred without any dollar devaluation, Burns concludes that “Mr. Trump shows little understanding of its dynamics.” So true, but as her own essay reveals over and over again, Burns is throwing stones from a house with some of its own glass.
