Some good in inflation? Hardly, one economist says
Boston — "What's so bad about inflation?" some Americans ask. After all, social security and government pensions are indexed to the consumer price index. Most people find their wages almost keeping up with rising prices, especially if the cost of buying a house is eliminated from the price index. In fact, some economists -- especially in Latin America -- believe modest inflation helps stimulate economic growth. That could help keep unemployment lower. Well, Robert Weintraub, now a senior economist with the Joint Economic Committee of Congress, doesn't buy those views at all.
First, in a recent staff report he prepared for the House subcommittee on domestic monetary policy, Mr. Weintraub found that faster growth in the nation's money supply may produce a temporary increase in the output of goods and services. It also results in more inflation and, over a three-year period, the rise in gross national product (GNP) is canceled out by later slower growth as a result of that extra inflation. So, in the longer run, inflation is neutral to GNP growth.
Second, inflation does considerable harm to the economic system. In fact, some of the growth in an inflationary economy may be illusionary, not adding to the real standard of living.
For instance, the clerk spending full time marking up prices in a catalog does not provide anyone with a new product or service. His or her activity may actually annoy many consumers. But his pay boosts the GNP.
Mr. Weintraub notes that inflation causes many such transaction, search, or shopping costs.Many buyers will spend extra time shopping about for information about price changes from all potential suppliers. "The resources employed to disseminate and acquire the new price information represent a dead-weight loss," his study states.
Other damage to the economy from inflation includes:
* Inflation prompts increased trading in financial hedges and existing physical assets such as the precious metals, real estate, stamps and antiques, jewelry, and works of art. These activities depress the nation's living standards, taking time and effort but adding little in new goods or services.
* Inflation increases uncertainty and requires new ways of coping. "It gives rise to new contractual arrangements such as cost-of-living clauses in wage contracts, variable interest rates on mortgages and other debt instruments, indexation of prices of goods sold for future delivery, etc. Implementation of these arrangements is beginning to spread in the United States. Putting them into effect is not costless, and the failure to do so is even more costly."
* Inflation invites a wide variety of attempts to keep individual prices from rising, particularly in areas where supply problems exist. The federal government has imposed price ceilings on domestic crude oil and gasoline and other oil products. Many municipalities have launched rent controls.
"As a result of these inflation-repressing policies," the study says, "the allocation of resources becomes less and less responsive to underlying supply and demand forces as inflation generating money growth accelerates. More of some goods is produced than is warranted, and less of others."
* Inflation encourages cartel behavior. In industries where conditions are favorable to cartel behavior, costs and prices are pushed up relative to costs and prices elsewhere. As a result, production falls below what it would otherwise be. This can result in "transitional unemployment."
* Inflation produces frequent requests for price increases, and litigation in opposition, by utilities and other regulated producers (including landlords in rent-control areas). High-priced executives and legal talent spends much time arguing these cases rather than producing new ideas and better services.
Mr. Weintraub points out that all the above "deadweight losses" to the economy are "far from trivial."
One final point he makes: "Inflation enriches some and impoverishes others. It enriches homeowners with fixed-interest-rate mortgage contracts entered into at lower inflation rates. It hurts those whose resources, including labor, are employed in producing goods whose prices are controlled or regulated, or which cannot be raised frequently, such as the prices of advertised goods. It tends to impoverish those who hold fixed-interest-rate bonds and fixed-income annuitants. Some of the latter are rich.
"However, it is difficult to say whether, on balance, inflation makes the rich richer and the poor poorer, or the rich poorer and the poor richer; i.e., whether it makes the distribution of real income and buying power more, or less, equal. Some argue that inflation makes the distribution more equal because the rich are the ones who buy fixed-interest-rate bonds. However, the rich also buy metals, land, et al. Moreover, pension funds also have brought fixed-interest-rate bonds, and thrift institutions and insurance companies have made fixed-interest-rate- mortgage contracts. Their beneficiaries are unlikely to be as well hedged in land, jewelry, and works of art as the rich are."
Mr. Weintraub ended his comments on inflation with a quotation from John Kenneth Galbraith, the Harvard economist, about how inflation "undermines all the arrangements that civilized man makes and maintains with the greatest difficulty. Schools, hospitals, churches, public services, law and order, cure of the sick and ag ed, all suffer."