Robin Sloan
May 2021

Defending inflation

A golden coin stamped with a rather wizardly-looking figure.
Coin of Kanishka, ca. 130, Pakistan

It looks like inflation has re-entered ~the popular economic discourse~ and will remain there for a while. It bothers me that the term is so often used in a vague, scolding way, with the inten­tion of (it seems to me) stopping conversations — investigations — rather than sharp­ening them. So, I wanted to share some tools for thinking about infla­tion that I’ve found useful: not as a pundit, econo­mist, or investor — I am none of those things — but simply a curious, critical citizen.

The infla­tion defender has LOGGED ON.

(Parts of this newsletter are drawn from a previous post on the same subject, but most of it is new.)

What inflation isn’t

The aphoristic econ 101 defin­i­tion of infla­tion is “too many dollars chasing too few goods”, which is actually pretty useful.

Inflation scolds tend to focus exclu­sively on the first part of that formulation, “too many dollars”. Some will tell you that an increase in the number of dollars circu­lating is infla­tion, almost by defin­i­tion. This faction is perma­nently critical of new dollars, especially the kind “printed” (electronically) by central banks, which they see as unfairly, even ruinously, diluting the value of all existing dollars.

And honestly, there’s something seduc­tive about their breezy assertion: “If you print more dollars, each one is worth less.” I mean… it sounds axiomatic, doesn’t it?

But, give it two seconds of thought, and you’ll realize it’s not true, because it presumes a kind of auction-house universe that doesn’t actually exist. The real economy isn’t a crowd of consumers with fistfuls of cash bidding up the price of a fixed number of goods on display. It’s much more dynamic than that: a dance between demand and supply, in which the presence of new dollars becomes powerful incen­tive to produce new goods. That dance is complex, and it changes depending on all sorts of factors, many of them non-economic. Think politics; think weather. Think, even, of etiquette. In many contexts, it is simply not cool to suddenly raise your prices. Can such a flimsy social contract really have any power in the cold-blooded economy? It can. It does!

The key, I believe, is to under­stand infla­tion not as an abstract axiom but a physical process that unfolds unevenly in time and space. Maybe that’s why I appreciate “too many dollars chasing too few goods”; the verb “chasing” almost forces you to imagine a dynamic activity (with perhaps a bit of Wile E. Coyote in it?) rather than a fixed relationship.

So, yeah, I’m not sure I can improve on the aphoristic defin­i­tion, other than to insist that both parts are crucial: “too few goods” as much as “too many dollars”.

And what’s the result of this process? I would say you’ve experi­enced infla­tion when the same number of dollars gets you fewer of the things you want from the real world. This sounds uniformly bad, but, as we’ll discover, it’s not.

This message was emailed to Businessland. The assumed audience is subscribers interested in thinking together about processes in the American economy. (Here’s more about assumed audiences.)

A specter is haunting the op-ed page

A neat defin­i­tion isn’t enough, though, because in the popular economic discourse of the United States, “infla­tion” operates less as a technical term and more as a dark word of power, intended to conjure a particular period in American history; indeed, a particular view of that partic­ular period.

I mean, you know this: an infla­tion scold cannot finish a sentence without invoking the specter of the 1970s, raising the revenant of the “bad old days” before Reagan. It’s not real economic history they are offering; rather, a kind of scary “cultural memory” groomed into a powerful rhetoric tool.

It’s a ghost story, truly.

Of course, there really was high infla­tion in the 1970s! But it wasn’t driven only, or even primarily, by government spending; there were also severe “supply shocks” caused by oil produc­tion politics and a poor global grain harvest. There’s your “too few goods”. The “too many dollars” came into play as the U.S. govern­ment borrowed money into existence, only to discover it couldn’t budge the under­lying reality of those short­ages.

(There was another impor­tant factor, the end of the wage and price controls insti­tuted by the Economic Stabi­liza­tion Act of 1970, but, candidly, I don’t under­stand the details, so I’m not going to like, read the Wikipedia page and pretend I’m an expert.)

Let’s exorcise this ghost at last. In the 1970s, the supplies of two founda­tional goods, oil and grain, were terribly constrained — not by economics, but by politics and weather, respectively. Too few barrels, too few bushels. Yet, somehow, through the caresses of selec­tive memory, it’s the demand side, the money chasing those barrels and bushels, that has become the bogeyman.

(For curious nerds, this analysis of that period by Alan Blinder in 1982 is very good, and this paper from 1978 dissects the food supply problems in detail. This more recent review from the Federal Reserve is also useful.)

Let me now remind you that the 1970s were fifty years ago. The global economy has been utterly remade in the time since. Fifty years ago, there wasn’t any internet; businesses didn’t even use fax machines. Fifty years ago, China’s produc­tive capacity hadn’t come online; Mao was still alive!

I guess what I mean to say is, when you encounter someone who, rather than engaging curiously and creatively with the partic­ularities of the present, anchors their warning about infla­tion in the 1970s — “we don’t want to go back to THAT, do we?”—you should take that as a warning: a sign that they are, somewhat literally, trying to cast a spell on you.

A physical process

For ten years, no matter what central banks have done, no matter how much money they’ve printed — and they have printed a lot — inflation hasn’t budged, locked around 2%, the target these insti­tu­tions osten­sibly struggle to maintain. For ten years now, there has been no struggle. This really stresses central bankers out. Why is infla­tion so low??

My personal (crackpot?) theory is that the answer has to do with (a) the digiti­za­tion of more goods and services — demand for Netflix can’t suddenly outstrip supply, because Netflix can repro­duce its service instantly and infinitely — along with (b) the “perfection” of physical supply chains.

In late 2019, the real economy could, in a way unimag­in­able in the 1970s, spin up additional produc­tion of many goods very quickly. This was especially true of electronics, which consti­tute so much of the world’s consump­tion these days. You want twenty million flat-screen TVs? They’re already on a boat!

But it’s not 2019; we live in a different world now, and the pandemic has disrupted those “perfect” supply chains. The produc­tion of lumber is a well-publicized example; as I’m writing this, sawmills don’t have the capacity to keep up with surging demand. It takes a while to build new mills and, in the meantime, the lumber that is avail­able is being sold at shock­ingly high prices. This is, to be clear, an example of real infla­tion! (If you’d like to learn more about these lumber supply woes, this deep explainer is exquisitely detailed.)

There are plenty of other examples, chronic and acute. Bay Area housing has suffered from runaway inflation for decades, the result of polit­i­cally constrained supply. The latest gener­a­tion of snazzy GPU cards has suffered from both rationing and (resale price) infla­tion, because their produc­tion hasn’t kept up with demand that has been multi­plied by a cryptocur­rency boom. (Snazzy GPUs can be used to play video games; they can also, unfortunately, be used to mine Ethereum.)

But these specific examples in specific markets only reinforce the point: infla­tion is a physical process that unfolds unevenly in time and space.

So I don’t mean to suggest that citizens of the United States ought never to be worried about infla­tion; all three short­ages mentioned above are causing real problems, real pain. (Well, two out of three. The GPU shortage might just be an annoyance.) Rather, I think those worries ought to be focused on clogs in physical produc­tion and distribution, not merely the circu­la­tion of new dollars.

Because I am strongly in favor of the circu­la­tion of new dollars.

A silver coin stamped with a stern-looking helmeted warrior-king.
Tetradrachm of Seleucus I, ca. 304-294 B.C., Iran

Pick a side

Here’s where things get somewhat sharper.

As you think about and discuss infla­tion, and how much of it is toler­able and/or desirable, I encourage you to culti­vate a bit of “class consciousness”.

A person with, say, a million dollars in the bank, plain liquid cash, might reason­ably be concerned about dollar infla­tion, even a modest amount.

But I am, uh, not such a person, and I don’t really care about their concerns. I don’t think you should, either! One strange feature of the popular economic discourse is that the rarified troubles of the very rich often get discussed as if they were “normal”, but: they are extremely not normal.

The million-dollars-in-cash-havers can fend for themselves.

Going further: if you are a person with a mortgage or a student loan, when it comes to inflation, your inter­ests are directly at odds with Mr. Monopoly up there. Modest inflation is good news for you, because your debt is counted out in dollars, and it would be nice to pay it back in dollars worth less than the ones you were loaned. (The polit­ical econo­mist Mark Blyth has pointed out that the high infla­tion of the 1970s was, in this respect, a gift to Ameri­cans with mortgages at that time: a discount on the price of their homes.)

If you have more debt than assets, infla­tion is like the wind filling your sails: it pushes in the right direction. There are a lot of people in the United States for whom that first state­ment is true, and it’s like… folks, show a little self-interest!

Finally, if you live paycheck to paycheck — part of a class whose concerns I care about much more than I do the million-dollars-in-cash-havers — modest inflation is basically neutral. Prices go up slowly over time, but so do wages. (This process is, again, uneven in time and space, and I acknowledge that wage inflation can lag behind price inflation, which is: not good. A tight labor market helps in this regard; workers can be more selec­tive, insist on higher wages. For more on this, see the addendum.) Over time, you pay inflated prices with dollars equally inflated, and the urgent economic questions of your life don’t have much to do with infla­tion at all.

The underrated specter

For the past twenty years or so, econo­mists have worried about defla­tion as much as infla­tion. It’s not part of the popular economic discourse in the United States, though, so many Ameri­cans can’t describe it — or even imagine it, really. Here’s a quick scenario.

First: I want to buy a hammock. It is summertime.

Second: overnight, some crypto­coin with a fixed supply becomes the official currency of the United States. The infla­tion scolds cheer; at last, “hard money” reigns supreme!

Suddenly, every trans­ac­tion in the economy requires the use of this cryptocoin. Strong and growing demand bids up its value steadily, and it becomes clear to me that, rather than buy a hammock today, I can wait a month, allow defla­tion to work its magic, then buy a luxury hammock with the same number of crypto­coins. Another month and I can buy a luxury hammock and an automatic banana peeler!

Seems pretty sweet for me… but what about the hammock factory? Sales plummet. What’s the deal? It’s hammock season! Ah, but Sloan and the other hammock-wanters are all out there waiting, waiting… and by the time we deign to part with a few of our precious crypto­coins, the hammock factory has gone out of business, sent all its weavers home.

I am rich with defla­tionary currency in a hollowed-out, hammock-free economy.

This isn’t just a cute story: it really happens. It has been a deep and recur­ring problem for Japan over the past ~twenty years. In 2016, the governor of the Bank of Japan defined “defla­tion” as

a situation in which prices of a broad basket of goods and services declines in a consistent manner, thereby causing all consumer prices to continually fall. When looking at the overall economy, deflation causes a decrease in sales, and therefore profits, which spurs employee layoffs and/or wage decreases. Consumers then hold back on spending as the future looms with uncertainty. Subsequently, competition between firms becomes fiercer, causing price races to the bottom. Deflation is thus self-perpetuating: the economy falls into a “bad equilibrium, in which economic activity is shrinking.” This has been the state of Japan’s economy for 15 years […]

This is a really, really bad situation; it deserves as much worry and conster­na­tion in the public imagi­na­tion as runaway infla­tion.

Modest infla­tion is a good thing for an economy. It encour­ages people to spend their money today, not next month. Anyone who produces or sells anything ought to be rooting for it.

In other words: where are my defla­tion scolds??

To summarize

The infla­tion defender has LOGGED OFF.


Many of the replies I received from subscribers poked at this idea of wages and prices slowly rising together, basically asking some form of the question: do they really? Because, of course, if they don’t, then more-than-modest infla­tion becomes a bigger problem for the person living paycheck to paycheck.

This is a very fair question, informed by the reality of general wage stagna­tion in the U.S. over the past twenty years.

Here’s a view from the Atlanta Fed. I chose this one so we could focus on the first and second quartiles, the workers earning the lowest wages:

A graph showing wage growth since the late 1990s, oscillating around 2-3%.
Wage Growth Tracker, Federal Reserve Bank of Atlanta

If you compared a graph of price inflation over the same time period, you would see it hovering in roughly the same range. (The excep­tion is 2008-2009, when inflation spiked to about 5%, then dipped below zero before returning to the 2-3% zone.) So, wages have been growing, slowly, in dollar terms; it’s just that they’ve been balanced by infla­tion, leaving their real value basically flat. For decades!

(If you’re interested, I recommend exploring the other view options; it’s a really rich, useful visualization.)

The thing to consider, I think, is that usually, the “too many dollars” contributing to infla­tion — stimulus checks, infrastruc­ture projects, unemploy­ment insur­ance payments, loans to businesses, etc.—are also tight­ening the labor market, which allows workers to be more selec­tive and demand higher wages.

Which is, I acknowledge, a little bit hard to imagine against the backdrop of the past twenty years. It is reason­able for an American to feel skeptical that wage negota­tion even like, happens. But it does! There’s evidence it’s happening right now; it will be inter­esting to see how wages look in a year.

It’s worth saying again that the process is uneven in space and time. I think, for example, of the minimum wage increase recently voted into law in Florida, which will take it to $15 gradually. That repre­sents a meaningful increase for a lot of people whose wages have been lagging for decades. It will show up on the Atlanta Fed’s graph, above, as a shallow rise over the next six years, the Florida $15 diluted in the national numbers; it will look smooth, gradual, continuous; but of course, it will have been the result of a distinct event in space and time, a kind of state-level “negotiation” long overdue.

None of this is meant to wave away the question; if you’re going to keep any concern front and center, this is the one. Talk about “cultural memory”, though; I think the United States has maybe never known (?) what a truly tight labor market looks and feels like. The appeal of “full employment” isn’t only, or even mainly, that everyone has a job; it’s that everyone has the power to turn down a job.

Was anything about this discussion confusing? I am striving for a tone that is not “economics know-it-all” (which I’m not) but like… “engaged co-investigator”, though I don’t know if I quite achieved it. I’m curious to know if you found this dispatch clarifying, muddling, meh, or anything in between.

And if you have any specific follow-up questions, I will do my best to answer them!

Whatever you choose, Robin will see that this response is coming from . Please also sign it with your preferred name ✌️

A silver coin roughly stamped with a tree and the word MASATHVSETS.
Sixpence, ca. 1667–1682, John Hull

Sent to Businessland in May 2021