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What You Think Inflation Is, It’s Not


Inflation remains the topic du jour. The problem is that much of what the pundit class imagines inflation to be quite simply isn’t inflation. Take a recent column by the Wall Street Journal’s James Mackintosh. Good writer that he is, he mistakes higher prices for inflation, a common error at the moment.

Mackintosh writes that “Doubling up production and supply chains directly reduces productivity, meaning more inflation for the same amount of economic growth.” The first part of Mackintosh’s sentence is correct, but it discredits his inflation argument. Reduced productivity born of shrunken global cooperation certainly results in higher prices, but that’s not inflation. If evisceration of the supply chains of old causes certain goods and services to rise in cost, by definition other goods and services must cost less. This is simple economics. If Macintosh has $100/week in disposable income only for broken and shrunken production relationships to result in higher costs, then he has to spend more dollars for certain goods, meaning fewer dollars for others.

Mackintosh then tacks to geopolitics. He predicts “bigger military budgets” in Europe, but since the “the military doesn’t boost productivity, increased spending adds to upward pressure on inflation.” Mackintosh is surely correct that military spending doesn’t boost productivity (something most economists don’t understand given their horrifying belief that war boosts economic output), but this too has nothing to do with inflation. Neither does the desire among political types stateside to fight what they imagine to be “global warming.” Mackintosh believes the latter could result in higher fuel costs, but those too aren’t on their own inflationary. It cannot be stressed enough that higher prices born of rising demand, reduced production, government meddling, command-and-control, or all four logically result in lower prices too. See above.

As a strong believer in free markets, it’s hard to disagree with Mackintosh that a switch “from free-market capitalism to more government intervention and industrial policy” will reduce productivity. This is very true. And it’s also true that soaring productivity logically results in lower prices; something else most economists don’t get given their belief that economic growth causes inflation. It’s the opposite as Mackintosh knows. But just as more command-and-control that leads to higher prices doesn’t signal inflation (see above yet again), neither does freedom that results lower prices cause “deflation.” That is so simply because productivity that results in lower prices doesn’t cause money saved to lie dormant as much as lower prices introduce new wants and new demands that result in higher prices for goods formerly out of reach.

From there, Mackintosh pivots to “demographics.” He contends that lower prices in modern times were a consequence of China “adding tens of millions of well-educated, low-cost workers to the global economy every year.” As is so often the case, Mackintosh’s analysis here is half right. No doubt the introduction of myriad “hands” to global production resulted in huge productivity gains that brought all sorts of market prices down. It wasn’t deflation because productivity isn’t deflation. See above.

Where Mackintosh misses with regard to China is in presuming that all this production took place without a commensurate increase in demand. More realistically, production is demand. The Chinese didn’t enter the workforce so that they could continue to live in desperate fashion as they long had, but even if they did do just that, no act of saving ever subtracts from demand. Short of stuffing money into coffee cans, what we don’t spend is shifted to others who will spend. Basics of banking.

Furthermore, Mackintosh’s focus on demographics presumes a static quality to human productivity that has no basis in truth. Put another way, the humans entering the workforce today have machines at their disposal that will increasingly aid their productivity in multiplicative ways, and even better, aid their thought in multiplicative ways. In a world that grows more automated by the day, birthrates will lack much in the way of economic meaning; and that assumes they ever had meaning. The view here is they never did. Goodness, if birthrates were economically relevant then Botswana would be the world’s richest country while South Korea would be its poorest.

Mackintosh then closes his column (“Four Reasons Why Inflation May Be a Long-Term Problem”) with boilerplate analysis about the Fed that contradicts his correct point that free-market capitalism results in productivity advances that push down prices. Writing about the Fed, Mackintosh suggests that inflation can be kept in check “if the Fed is willing to do what it takes to control inflation” through the “higher rates required if inflationary pressures persist.” Such a view isn’t serious. If we ignore Macintosh’s correct point that investment boosts productivity as is, the Fed doesn’t control the amount of or cost of credit in the U.S. economy. In reality, the Fed projects its well-overstated influence through banks that are but a small – and shrinking – player in a world of credit flows. To pretend as Mackintosh does that the Fed could essentially erect a red light to credit flows isn’t serious.

Worse, it ignores what inflation is. Inflation is a devaluation of the unit of account. In our case, it’s a devaluation of the dollar. The only problem is that the dollar has risen in recent years. This should have Mackintosh wondering, as should his odd focus on rising prices. To finger them as the cause of inflation is like blaming wet sidewalks for rain.

Still, Mackintosh is certainly right that an evisceration of supply chains has and will bring on higher prices. But as readers can hopefully see by now, there’s an ocean of difference between higher prices and inflation. What Mackintosh thinks is inflation quite simply is not.



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