Exchequer

Economy & Business

Ben Bernanke and the Second Deficit

Arguing that the Fed should embrace a more aggressive growth agenda, David Leonhardt writes in the New York Times:  

By any standard, joblessness is a bigger problem than inflation.  

Never mind those pesky Austrian-econ types and their argument that many of our economic problems are caused by artificially low interest rates (cheap money = boom built on sand = bust). That “by any standard” stuck in my head.  

As Rush Limbaugh says when he sees something interesting in the New York Times: I wonder if that’s true?  

Because inflation acts slowly and because its costs are dispersed, most people do not much notice it when the rate is very low. But inflation is a pernicious tax on savings and investment. How much does it cost us?  

Since inflation reduces both the value of savings and the value of debts (since you get to pay off your debts in devalued dollars, which seems to be the main attraction of inflation for Uncle Sam), you don’t consider inflation against present income, but against net worth. In 2010, , the net worth of the United States was about $70 trillion. That’s household wealth, savings, investments, non-farm non-financial businesses, tangible assets like real estate, etc., minus household debts, business debt, etc. A very low rate of inflation — say a measly 2 percent — therefore costs a big fat $1.4 trillion a year, i.e., it’s a second deficit. (I know that this is an imperfect measure for lots of reasons, but it gives a good idea of the scale  of the thing.)  

So, about that $1.4 trillion: Is that a smaller problem than unemployment “by any standard”?   In the most recent BLS report, Joe Government put the number of unemployed Americans at about 13.7 million.   Meaning that the cost of 2 percent inflation every year is, give or take a little, about equal to what we’d spend writing a check for $102,189.78 to every unemployed American. That’s a bunch of jack.  

I’m a poet, not an economist, but I find it hard to buy the argument that we must — must — devalue all of our savings every year (which is what inflation does) in the name of monetary stability. I think a trillion bucks is too much to pay for monetary stability, especially when it doesn’t offer all that much, you know, monetary stability.

Of course there are trade-offs from inflation: but practically all of the costs fall on savers and investors, and all of the benefits accrue to debtors and spenders. I do not much like those incentives.

Two percent inflation costs $1.4 trillion a year: Don’t forget the second deficit.

—  Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, just published by Regnery. You can buy an autographed copy through National Review Online here.

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