Low Inflation & the Wealthy

A few days ago, a good friend of mine sent me one of Paul Krugman’s blog posts. In the end, I wrote back to him with some comments. However, the ideas stuck with me, so I thought I would expand on them here.

Krugman is talking about an old link between unemployment and inflation rates. Long accepted economic theory has a link between the two, described by the Phillips curve [1]. All together, Kruegman’s conclusion is quite valid - 4% may be a more reasonable target inflation rate. The idea of the current 2% target emerged in the 1990s. Taking a look back at the last 25 years, it is pretty easy to see some significant changes in how we interact with businesses and the economy at large.

The most drastic change is the amount of automation that is possible - and especially the amount in use. A single worker in many occupations is vastly more productive today than they would have been a few short years ago.

In 1957, Desk Set was released staring Katherine Hepburn in a reference library for a television network. Imagine that job existing today - researchers answering phones, searching through books, and inquiring with other libraries in the aid of a TV network’s writing staffs. The punchline of the movie is that the computer simply makes too many mistakes to replace a person - but that is exactly what we have today. Google and Wikipedia replaced the corporate librarian.

All of this productivity enables some interesting possibilities[2], but the one that we ended up with is a continued concentration of wealth. Inflation counters that. If you put your money aside and it slowly disappeared, you would want to put it elsewhere. In an economy where the distribution is tending one way - to the few - a bit more inflation could be just the kick it needs to re-engage with the economy and invest in employing some more people.

In the end, the real challenge to this change is not from reasoning about it or tweaking it to the right number. It is ever harder to test ideas and the political will is largely missing - especially when it is not as simple as “cut the taxes.”


Notes:

  1. The Phillips curve is largely modified in modern economics, but the principle behind it remains. The broad generalization - like nearly all broad generalizations - is not without issues. Wikipedia has a nice discussion on the issue. The biggest takeaway is that you can mostly rely on the curve itself staying still for the short term and long run expectations moving it around.
  2. The most interesting possibility was John Meynard Keynes’ 1930 prediction of a 15-hour work week.