Michael Kinsley in The Atlantic:
In short, I can’t help feeling that the gold bugs are right. No, I’m not stashing gold bars under my bed. But that’s only because I lack the courage of my convictions.
My fear is not the result of economic analysis. It’s more from the realm of psychology. I mean mine. The last time I wrote about this subject, The Atlantic’s own Clive Crook called me a “fiscal sado-conservative.” I would put it differently (you won’t be surprised to hear). Maybe, at least on economic matters, I’m a puritan. The recession we’ve been going through did not occur for no reason. Even though serious misbehavior by the finance industry triggered it, sooner or later it was bound to happen. For a generation—since shortly after Volcker saved the country, and except for a brief period of surpluses under Bill Clinton—we partied on borrowed money. We watched a real-estate bubble get larger and larger, knowing but not acknowledging that it had to burst. Then it did burst, and George W. Bush slunk off to Texas, leaving Barack Obama to clean up the mess. Obama has done the right things, mostly, pushing through a huge stimulus package and bailing out a few big corporations and banks. Krugman says we need yet another dose of stimulus, and maybe he’s right.
But this cure has been one ice-cream sundae after another. It can’t be that easy, can it? The puritan in me says that there has to be some pain. That’s not to say that there hasn’t been plenty of economic pain. But that pain has come from the recession itself, not the cure.
My specific concern is nothing original: it’s just the national debt. Yawn and turn the page here if you’d like. We talk now of trillions, not yesterday’s hundreds of billions. It’s not Obama’s fault. He did what he had to do. However, Obama is president, and Democrats do control Congress. So it’s their responsibility, even if it’s not their fault. And no one in a position to act has proposed a realistic way out of this debt, not even in theory. The Republicans haven’t. The Obama administration hasn’t. Come to think of it, even Paul Krugman hasn’t. Presidential adviser David Axelrod, writing in The Washington Post, says that Obama has instructed his agency heads to go through the budget “page by page, line by line, to eliminate what we don’t need to help pay for what we do.” So they’ve had more than a year and haven’t yet discovered the line in the budget reading “Stuff We Don’t Need, $3.2 trillion.”
There is a way out. It’s called inflation. In 1979, for example, the government ran a deficit of more than $40 billion—about $118 billion in today’s money. The national debt stood at about $830 billion at year’s end. But because of 13.3 percent inflation, that $830 billion was worth what only $732 billion would have been worth at the beginning of the year. In effect, the government ran up $40 billion in new debts but inflated away almost $100 billion and ended up with a national debt smaller in real terms than what it started with. Ten percent inflation for five years (if that were possible) would erode the value of our projected debt nicely—but along with it, the value of non-indexed pensions, people’s savings, and so on. The Federal Reserve is independent, but Congress and the White House have ways to pressure the Fed. Actually, just spending all this money we don’t have is one good way.
Compared with raising taxes or cutting spending, just letting inflation do the dirty work sounds easy. It will be a terrible temptation, and Obama’s historic reputation (not to mention the welfare of the nation) will depend on whether he succumbs. Or so I fear. So who are you going to believe? Me? Or virtually every leading economist across the political spectrum? Even I know the sensible answer to that.
And yet …
Matthew Continetti at The Weekly Standard:
Welcome to the team! Slight addendum: Contrary to Kinsley, one guy has put out a way to get out from under the national debt (though right now he might not be in “a position to act”).
If Kinsley seriously believes that inflation is on the way, he and his wife could take their entire household portfolio and go short 20-year Treasury bonds @4.43% and long 20-year TIPS @2.11%. Each year over the next 20 that inflation is above 2.32% they make money.
I’m not one who pledges to always believe that markets have gotten it right. But I do believe that someone who doesn’t think that market prices are aggregating information needs to tell a story about why markets have gotten it wrong before they set pen to paper.
That is all.
Derek Thompson at The Atlantic:
First, inflation doesn’t just chew up the debt. It also swallows the value of non-inflation-indexed savings. For savings tied to inflation, like Social Security, inflation would in nominal terms cost tax payers more money down the line.
Second, inflation at a level high enough to quickly reduce fiscal deficits could spiral out of control back home. If you’re setting prices in an economy where future prices are expected to rise, your temptation is to set prices higher. In this way, inflationary expectations can outrun the Fed’s target.
Third, there’s a decent chance that inflation won’t actually reduce our deficit in the first place. If inflation begins to creep up, investors will demand higher interest rates on US debt to beat expected inflation in the future. As Anne Vorce, director for the Fiscal Roadmap Project of the Committee for a Responsible Federal Budget at the New America Foundation, told me this morning, “Our creditors would go nuts. The Chinese premier specifically said he was concerned about inflation in our debt. Inflation is tempting in the short run. In the middle or long it has costs.”
So neither leading economists nor Michael Kinsley himself believe that hyperinflation is just around the corner, and yet the thesis of Kinsley’s piece is that “when and if the recession is well and truly over, there is a serious danger of another round of vicious inflation” and that “[t]his time, inflation will be a lot harder to stop before it turns into hyperinflation.”
I note that not only does Kinsley’s column explicitly discuss the lack of evidence for Kinsley’s thesis, but it also details the theoretical error Kinsley is making—thinking too moralistically about the economy. He says “on economic matters, I’m a puritan.” And also that “The recession we’ve been going through did not occur for no reason.” He feels, metaphorically speaking, that it was sent by God to punish us for our overindulgence. And that while we’ve had plenty of economic pain over the past 24 months, that’s not enough: “that pain has come from the recession itself, not the cure.” Kinsley’s view is that recovery has to come with some episode of ritual purging and mass suffering over and above the suffering caused directly by the recession. In his view, a greater punishment must be over the horizon for the sake of the moral order. And since recession is, by his lights, not enough the only other economic calamity on the menu is inflation. And so, he deduces, we must be heading for inflation, even though he himself recognizes the reasoning as so specious that he won’t use it as the basis for investment decisions.
Andrew Leonard at Salon:
Matthew Yglesias does such a scintillating job of eviscerating Michael Kinsley’s bizarre hyperinflation hyperventilation in the April issue of The Atlantic that it would be unsportsmanlike to pile on and offer my own line-by-line exegesis of his confounding nervous-nellyism. I’ll just note that it requires some very clever rhetoric to explain how you can’t sleep at night because of your inflation fears, even as you acknowledge that there is no evidence that your nightmare is something to worry about right now, and all the economists you respect don’t see it as a significant problem. Kinsley is a heck of a writer, but he’s not that good.
Hyperinflation is actually a quite well understood phenomenon, and its causes aren’t especially controversial among economists. It’s basically about revenue: when governments can’t either raise taxes or borrow to pay for their spending, they sometimes turn to the printing press, trying to extract large amounts of seignorage — revenue from money creation. This leads to inflation, which leads people to hold down their cash holdings, which means that the printing presses have to run faster to buy the same amount of resources, and so on.
The kind of inflation we had in the 1970s, the famous era of stagflation — high inflation combined with high unemployment — was quite different. Deficits weren’t the issue — actually, US deficits were much smaller in the inflationary 70s than in the disinflationary 80s. Instead, what you had was a combination of excessively expansionary monetary policies, based on an unrealistic view of how low the unemployment rate could be pushed without causing accelerating inflation (the NAIRU), plus oil shocks that pushed up inflation across the board thanks to widespread cost-of-living clauses in contracts. There was never any risk of hyperinflation; the only question was whether and when we’d be willing to pay the price in high unemployment of bringing inflation back down.
Kinsley seems to be confusing the logic of the natural rate argument, which says that expected inflation gets built into price-setting, so you need an accelerating inflation rate to keep unemployment below the NAIRU, with the very different logic of hyperinflation, which is about people fleeing money.
Brian Doherty at Reason:
Those with reasonable doubts as to the stability of this whole freakin’ system are in the unenviable position of, if struggling to be “prudent,” making lots of big decisions that are going to seem really short-sighted, depending on whether or not things go seriously awry. That is, going gold will make you either King of the World or the nuttiest of chumps. Well, that’s what hedging is all about, I suppose, but most hedging is done within the ol’ dominant paradigm. Gold seems more like a “all bets are off” bet.
I’m going to defend Kinsley a bit. One reason is that although he freely talks about the inner demons that prompted his heresy, he does, in fact, also offer up a concrete reason for his fears: “My specific concern is nothing original: it’s just the national debt….We talk now of trillions, not yesterday’s hundreds of billions.” This is not a completely nonsensical concern, even if it would be better expressed as a percent of GDP rather than in raw dollars. What’s more, if Kinsley had wanted to write something a little more sophisticated, he could have spent some time on the Fed’s likely problems unwinding its trillion dollar balance sheet over the coming years, something that has at least the potential for sparking inflationary pressures if it isn’t timed pretty delicately.
But that’s not the real reason for defending Kinsley. The real reason is this: I sort of agree with him. Is it because we were both around for the 70s and remember what happened then? Maybe, though Paul Krugman and Brad DeLong were around then too and they’re not worried. And intellectually, like Kinsley, I agree with them: inflation just doesn’t seem like a big issue right now. But what about a few years from now? It really does look as if our political system is going to find it next to impossible to control our long-term federal deficit, and at the same time the dollar is going to have to come down in value eventually. Both of these things, along with the Fed’s operations, pose inflationary potential. And I have a fairly healthy respect for the proposition that if the Fed loses its reputation as an inflationary hawk, it’s much harder to get back than you might think.
So here’s the question: if all the people you respect say that inflation isn’t a big issue; if all the market evidence points toward moderate inflationary expectations; and if your fears of inflation are almost certainly grounded in demons from your youth — if all that’s true, but you still feel the fear anyway, what should you do? Nothing? Or should you write about it, being honest along the way about what’s driving you?
UPDATE: Kinsley responds to Krugman:
Krugman says that I mistakenly conflate inflation and hyperinflation, although “textbook economics…makes a real distinction” between the two. I will confess that I was not aware of this distinction. I thought hyperinflation was inflation out-of-control. Mea culpa. However:
(1) Krugman should stop bullying people with accusations of economic ignorance. I would never pretend to know a tenth of economics Paul knows. But if he means, in calling this distinction a matter of “textbook economics [subtext: you idiot],” that economic textbooks make this distinction, he is wrong. Or at least no such distinction between inflation and hyperinflation is made, despite an extensive discussion of inflation, in the leading economics textbook, by Harvard Professor Gregory Mankiw.
(2) Krugman’s definition of hyperinflation–“when governments can’t either raise taxes or borrow to pay for their spending, they sometimes turn to the printing press”–is more or less precisely what I wrote that I was afraid of. I suppose there’s a difference between the government printing money to pay off its debts (Krugman’s definition) and the government printing money to reduce the real value of its debts (my fear). But not much of one.
(3) Krugman, Brad DeLong, Matt Yglesias and others make the point that there is no current economic evidence of inflation on on the horizon. I conceded as much in the original piece. But using Krugman’s definition, hyperinflation is the result of explicit policy choices by public officials. There is a “real distinction” between this and inflation ordinaire, which results naturally from the interplay of economic forces. Therefore, the fact that there is no sign of inflation today says very little about whether there may be hyperinflation tomorrow.There are reasons to worry that our political leaders may opt for inflation even if there is no economic evidence of it happening naturally. (Of course the interplay of economic forces can force the hand of public officials. But if we go down this road, we are muddying that key distinction between hyperinflation and inflation.)
I have been waiting for Paul Krugman to tell me how we are going to handle the debt, once we get this recession out of the way. No, really. There’s no economist whose judgment I trust more. (About economics, that is.) I’ve been all for the stimulus and the jobs bill and even, I guess, the sundry bailouts. But don’t we at some point have to start paying the money back? And how are we going to do that? Krugman’s failure (unless I’ve missed it) to give us an answer to that question is one of the things that makes me worry.
Ryan Avent at Free Exchange at The Economist:
Contra Mr Kinsley, there is a massive difference between printing money to pay off debts and printing money to erode the real value of debt. In the immediate postwar period, America experienced annual rates of inflation up to 10%, which eroded the value of America’s war debt by some 40%. Hyperinflation was never a problem. And there is a big difference between governments that are reluctant to opt for painful budget fixes and governments that absolutely cannot do it. Moreover, the pain of hyperinflation is every bit as bad as and worse than the pain of tax increases, or spending cuts, or default. No politician would risk it, and even if the politicians were willing to, America’s independent Fed wouldn’t let them.
The truth about hyperinflation is that it isn’t so much an economic phenomenon as a political one; it corresponds to the complete breakdown of a country’s political institutions. It is no coincidence that episodes of hyperinflation are typically associated with very poor developing nations, those exiting major conflicts, and those suffering from other major economic dislocations (like the end of Communism).
To get from America’s current situation to one in which hyperinflation is a realistic possibility, one must pass through an intervening step in which America’s political institutions utterly collapse. And I submit that if Mr Kinsley has reason to believe that such a collapse is imminent, he should be writing columns warning about that rather than the economic messes which might follow.
The logic here is that simply running large fiscal deficits is an “explicit policy choice” by officials who “opt for inflation”. Just by spending money, the government is pressuring the Fed to, um, what, exactly? Keep interest rates too low? Print money?It’s true that the Fed isn’t looking particularly independent these days, but that’s largely because inflation isn’t a problem, and therefore the Fed is rightly concentrating on the second part of its dual mandate, which is reducing unemployment through loose monetary policy. Fiscal policy and monetary policy should both be pulling in the same direction right now — which is the direction of trying to extricate the country from the deepest recession in living memory.
It’s also hard to see the dynamics by which hyperinflation — or even plain old ordinary high inflation, for that matter — could emerge. If there’s a panicked run away from the dollar and dollar-denominated assets, that would hurt both the stock market and the bond market, hitting wealth hard. It would also send the cost of imports up. But the US doesn’t import so much that import-price inflation would pass through into domestic hyperinflation. And with the markets in turmoil, weak unions, and unemployment surely rising, I don’t think that workers would be in any position to ask for double-digit wage increases on an annual basis. In any case, to have any hyperinflation you need a maniac helming the printing press, and Ben Bernanke is not a maniac. Yes, he’s expanded the money supply significantly, but only when disinflation was the greatest risk facing the economy. It’s almost impossible to imagine the Fed continuing to print money once consumer prices start rising sharply on Main Street — and, frankly, it’s hard to imagine the Obama administration putting pressure on the Fed to do so.
As Krugman notes, it’s instructive to take a hard look at Japan, which ran enormous deficits for many years and which still has no sign of any inflation any time soon. Deficits, in and of themselves, do not cause inflation. And while Kinsley is right that there’s no obvious way out of America’s current fiscal problems, he’s wrong that politicians can simply choose inflation as an option. Just as the Treasury secretary does not control the value of the dollar, the president does not control the trajectory of consumer prices. So in order for his fears about hyperinflation to be remotely justified, Kinsley first has to explain how the Fed is going to transmogrify into the Reserve Bank of Zimbabwe. And he hasn’t come close to doing that.
UPDATE: Paul Krugman responds
UPDATE #2: Kinsley again