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Inflation

7 min read

Part of Markets and money.

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Every episode (4)

Who argued it

Jonathan Bydlak · Don Boudreaux · Richard Epstein · Gary Johnson

Monetary Policy · Antitrust · COVID-19 · Climate Change · Foreign Policy · National Debt

Background

Inflation, in the accounts given on The Bob Zadek Show, is a reduction in the purchasing power of the money unit. Don Boudreaux defines it as taking more dollars to buy the same thing than in the past, caused by an increase of purchasing power beyond the increase in the amount of things to buy, which happens when government injects more purchasing power into the economy Liz Warren’s Crusade against “Big Grocery (2022). Bob Zadek frames the concept the same way, saying inflation means the value of a dollar—the purchasing power—declines The Future of Lending after COVID-19 (2020).

Definition and mechanism

Boudreaux ties inflation to a mismatch between purchasing power and goods. He says the past two years saw an unprecedented injection of purchasing power into the economy alongside a government-engineered obstruction of production, reducing the goods and services reaching market while increasing purchasing power in ordinary people’s hands, with a rise in prices as the inevitable result Liz Warren’s Crusade against “Big Grocery (2022).

Bob Zadek raises the objection that if everything goes up, wages ought to go up proportionally, making inflation revenue-neutral. Boudreaux answers that this is not how inflation works in the real world: money is injected at particular points, those who first spend it buy at low prices, and prices rise in a staggered fashion while wages usually lag the rise in prices of goods and services, so workers are made worse off and suffer a reduction in real income Liz Warren’s Crusade against “Big Grocery (2022).

Boudreaux also describes inflation as a source of uncertainty. Entrepreneurs read relative price movements as signals about what consumers want, but when a price rises merely because of inflation rather than consumer demand, they cannot tell why, and that uncertainty stymies entrepreneurial investment and creativity and reduces willingness to take real risks Liz Warren’s Crusade against “Big Grocery (2022).

The relative-currency view

In a 2020 episode, Bob Zadek offers a distinct emphasis: inflation is always a relative concept. If a dollar is going to decline, he argues, it has to decline relative to another currency, and there is no such thing as the buying power of a dollar inflating when all currencies inflate at the same degree. If there is too much of every currency, things will cost more in absolute dollars—what cost $2,000 will cost $2,300—but salaries and income will rise commensurately. The only losers, in his view, are those holding their investment as cash, since $100 will buy less; wealth tied up in home values, securities or commodities will appreciate at the same rate or depreciate at a lower rate. He concludes that because the phenomenon is worldwide and not just American, the negative effects will be noticeable only in the form of higher nominal prices The Future of Lending after COVID-19 (2020).

Inflation as a monetary phenomenon

Boudreaux invokes Milton Friedman, whom he calls the most famous monetary economist who ever lived, and quotes Friedman’s statement that inflation is always and everywhere a monetary phenomenon—meaning steadily rising prices can be traced to the money supply and purchasing power rising faster than output Liz Warren’s Crusade against “Big Grocery (2022). Bob Zadek recalls Friedman calling inflation a printing press problem, adding that government runs the printing press, making it a government-induced problem.

Blame, greed and price controls

Both speakers treat political blame-shifting as central to the politics of inflation. Boudreaux says politicians love to blame everyone but themselves, and that Elizabeth Warren blamed rising grocery prices on greed and alleged monopolization of retail grocery rather than on the government’s injection of purchasing power. He calls the grocery industry enormously competitive, listing Amazon, Walmart, Target, Kroger, Trader Joe’s and Whole Foods among the options, and says Warren is either economically ill-informed or mendacious Liz Warren’s Crusade against “Big Grocery (2022). Bob Zadek asks where the crime is other than earning a profit, and notes that if the grocery chains are monopolists they are bad at it because their profit margins are low.

Bob Zadek describes it as a standard device for government, when at fault, to look around for another demon and deflect attention from itself. He notes that some economists, having caused the problem, now resort to price controls, and asks Boudreaux to explain them. Boudreaux says price controls make it illegal for sellers to raise prices or restrict how high they can go, but do not control inflation. He compares them to putting a metal strip in a thermometer to stop the mercury rising: you can stop the thermostat registering the correct temperature, but that does not change the room temperature, and thwarting the thermostat removes the brake on the heating system. Price controls, he says, are a command to every seller to lie to the economy about the real value of what they sell Liz Warren’s Crusade against “Big Grocery (2022).

Boudreaux recalls August 1971, when Richard Nixon imposed a nationwide wage-price freeze on all prices and wages, calling it a terrific failure that Nixon himself understood would not work but did for political advantage. He says wage-price controls have never worked for anything they were used to do. Bob Zadek adds that price is information buyers and sellers use to allocate resources, and illustrates with a used car worth $25,000 that government dictates can be sold only for $10,000: the owner will either refuse to sell, denying both parties the deal, or transact in an underground garage in the black market. He notes that Jen Psaki, in a December press conference complaining about meat prices, indicated the White House and the Department of Agriculture were looking at wage and price controls to stem what was called corporate greed. Boudreaux adds that Ronald Reagan’s first official act as president in January 1981 was to eliminate price controls on energy, producing an immediate spike in energy and gasoline prices that then went right back down Liz Warren’s Crusade against “Big Grocery (2022).

Across episodes

The topic appears in three episodes. In the 2019 Venezuela episode, Bob Zadek asks how a country with the largest oil reserves on earth has a population starving while inflation is rampant Utopia Unmasked (2019). In the 2020 lending episode, he develops the relative-currency argument that worldwide inflation may leave relative buying power unchanged The Future of Lending after COVID-19 (2020). In the 2022 episode, Don Boudreaux supplies the monetary-cause account, the wage-lag argument and the critique of price controls, and the discussion turns to Elizabeth Warren and the Biden administration Liz Warren’s Crusade against “Big Grocery (2022). The later treatment is the most developed, but the episodes show no explicit exchange between episodes in which one speaker responds to another’s earlier formulation.

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