Inflation Nation

Inflation, it’s a word that sends shudders through most Americans. This is mostly because inflation is an invisible bandit that robs you slowly year after year. It is one of the reasons we are having this big discussion about the national debt (but that is another post). What is rarely discussed though is how inflation affects different members of our society. The truth is some people have more to lose from inflation than others. It is necessary to understand this point to understand why our current irrational aversion to inflation hurts our economy more than it helps it.

Let me first be clear that, for the purpose of this discussion, we are talking about a marginal increase in our annual inflation rate of a few percentage points. We are not referring to hyper inflation the likes seen in Germany between World War I and World War II. Nor are we talking about the runaway inflation seen in South America during the 80’s in places like Brazil and Argentina. We’re talking about a planned expansion of the available currency to meet the needs of the population.


There are of course troubles with inflation. Inflation can hurt the poor, obviously those who with little money would be hurt if the money they had was worth a lot less. Inflation also hurts the elderly and those on fixed incomes, because their savings are not going to last as long. Inflation also reduces the value of anything the middle class have managed to amass. Finally and most obviously the rich lose vast amounts of wealth. If all this is true, when would it possibly be a good time to advocate a policy that would spur inflation?


The answer is now. To understand the benefits of this approach we must go back and first describe the problem, or should I say problems. Our economy is continuing to struggle for growth at an anemic pace. The latest job report indicates the marginal gains we were making are beginning to subside. People can’t find jobs; businesses are struggling with a lack of demand, home prices are the lowest in years and there are still an alarming number of foreclosures on a daily basis. Meanwhile states are still struggling to provide services for the poor and elderly (as an aside is anyone else disturbed that these two groups are still so inextricably linked).


With this many problems there are bound to be a variety of solutions being bandied about and indeed there are. Sadly the only ones getting any oxygen look at these problems and believe the solution to the problem should be have the government do less. The case should be made that a targeted inflationary policy could assuage many of these issues. How can the federal government effectively use inflationary policy? Ideally it would need to target a large enough sector of the economy to generate change in the nations overall prospects. Attacking the still crippling housing crisis is an ideal location for such a policy.


Most middle class Americans draw their measure of wealth not from their 401ks but from their homes. As a result the meteoric crash of the housing market affected not just housing prices, but most Americans ideas of making it in this country. As it stands homes on average have fallen in value by 25-33 percent depending on your sources. This means that as a result of the financial crises homeowners have experienced an inflation rate of roughly 25%. Aid to home owners would help alleviate this loss. The aid would also help states as most states obtain significant revenue from property taxes. Homes in foreclosure do not generate revenue, and reduce the value of all neighboring properties further reducing revenue for services. Finally aid would buoy consumer confidence and spur consumer spending.


Unfortunately unless more people begin discussing the matter in these or similar terms it is unlikely that we will see policies directed in this way. For those with influence (read the wealthy) a 4 or 5 percent inflation rate looks terrible on balance sheets even In the short term. Our crisis was largely caused by the collapse of housing market yet little has been done to address it. Meanwhile cities and towns are decimated by plagues of foreclosures that erode the American dream. Perhaps inflation isn’t the worst of our problems.