Inflation and the Dragon

One of the hardest things for many people to grasp during the Great Recession has been the idea that inflation is too low. We generally talk about inflation as pure economic evil, something that could never possibly be too low. But it is.

If you say inflation is too low, some people will bring up the high inflation of the 1970s or, more hysterically, the hyper-inflation in Weimar Germany during the rise of the Nazis as proof that Inflation Is Bad. But that doesn't really make sense. Inflation is bad when it gets too high, but that doesn't make a modest amount of inflation bad. The sun is bad in Death Valley when it's 130 degrees, but that doesn't make sunshine a universal menace. 15% inflation would be a very bad thing, but that doesn't mean 1.5% inflation is a good thing. 130 degrees Fahrenheit is murderous, but so 13 degrees is also a killer. A lot of our public debate about inflation is like trying to treat a case of frostbite while people keep shouting that heat is a terrible thing and then angrily tell you a long story about forest fires.

Some of the people warning against any inflation under any circumstances either should know better or actually do. They have various political or ideological motives. Some are under the spell of fringe economic theories, like Hayek's. Some are simply seeking short-term advantages for particular business interests, such as the banking sector, that benefit directly from low inflation although the wider economy might suffer. Some, including a healthy slice of libertarians, take their economic thinking from science-fiction or fantasy media and games. The enthusiasm in some quarters for the fictional virtual currency BitCoin is partly driven by genre-fiction economics. Bitcoin imitates gold to the degree that the processing of making it is called "mining"and there is a fixed maximum that can be generated, in imitation of the old gold standard, so that eventually the BitCoin money supply will become inflexible and incapable of expansion. This will make BitCoin immune to inflation (assuming anyone accepts it at face value), and in fact make the currency deflationary. Inflation and deflation are about how much money there is compared to how much stuff there is to buy with the money; when the money supply grows too fast, prices grow too fast. If the amount of goods and services money could buy kept growing, but the money supply didn't because all the money had already been created, as in the BitCoin plan, then the existing money would become more and more valuable as prices kept dropping, as in the Great Depression. BitCoin enthusiasts think this a good idea, partly because they read books like Neal Stephenson's Cryptonomicon and partly because World of Warcraft has been on the gold standard for years.

So I'm going to stoop to the fantasy-example level. Let me use The Hobbit to illustrate the dangers of an inflation-free world.

Tolkien's world, like most fantasy worlds, seems to feature virtually no inflation. A piece of gold is a piece of gold, with value that never ebbs. (This kind of tidiness and solidity is part of the appeal to many digital goldbugs, who like fixed numbers and find the arbitrary and negotiable nature of money 
unsettling.) In fact, Tolkien's world is probably deflationary, in that ancient treasures seem only to appreciate in value. Treasure just gets more precious with time because, as in most heroic fantasy set in an idealized pre-industrial world, there is virtually no economic progress.

The Hobbit of course features a dragon, Smaug, who is sitting on a vast hoard of gold and jewels which represents basically the entire money supply for several hundred square miles. Smaug is quite literally wallowing in his wealth. He has made a big pile of it and is sleeping with his belly on it, while everything else around him for miles and miles is a wasteland. This is all sensible enough draconian behavior because there is no inflation, and therefore Smaug has nothing to lose.

In fact, a deflationary world is excellent for Smaug. The money underneath his scaly belly only gains in value as he naps. If prices in the rest of the economy keep falling, then Smaug's gold will actually buy more this year than it would have last year, and buy more next year than it would this year. He doesn't have to worry about investing his money, or making more, because the money he has keeps gaining in value. The rich get richer by doing nothing.

But this is the problem. Deflation creates an incentive not to invest money, and not to spend it. So that money and the economic value it creates get sucked out of the economy. In deflation, you should never buy anything before you have to, because it will get cheaper the longer you wait. And you don't need to bother investing, because money just gains value by sitting there on the floor. Deflation rewards you for becoming, in the most literal sense, a hoarder. Maybe all that saving sounds virtuous. But if no one ever buys anything, then no one makes any money either. And if no one invests their money, no new businesses can grow. In fact, there is no new money; there's just the old money that gets more and more valuable while everyone else becomes poorer and poorer.

And so the area around Smaug is a wasteland, not simply because he's set it on fire at one point but because no one else can make any money or do any business. Nobody mines any more gold, or works gold into objects. Nobody grows any food. Respectable hobbits turn to lives of crime. No business can take place, because there is no capital. Capital is an accumulation of resources set aside for further investment; money that just gets piled up in a cave for years is not capital. And in fact, Smaug could only burn the area down because he had no further economic need for it. He'd grabbed all of the existing wealth and had no interest in anyone creating more, because his wealth would grow in value by itself. The Desolation of Smaug is actually the Depression of Smaug. And it's the platonic ideal of a deflationary economy: an enormous hoard of money with virtually no goods or services worth buying.

But let's imagine the basic economic conditions changing just a little. Let's say that Mirkwood, Long Lake, and the areas to their east actually have an annual rate of, say, 5% inflation. Now Smaug is still enormously wealthy with his ill-gotten gold, but he's not actually getting richer. In fact. he's getting a little poorer every year he holds onto that gold without doing anything with it. Its value is slowly leaking away. This sounds terrible and unfair to some people, who respond by inventing dumb things like BitCoin, but in fact this leakage moves people to more economically virtuous behavior.

What is a dragon to do? He could just be satisfied with his diminishing net worth, but let's face it: he got where he is because of his overpowering greed. So he has to do something. The only thing to do is to make more money. And the quickest way to do that is to leverage the money he has. If inflation is slowly eroding the value of Smaug's gold, Smaug needs to invest his gold for a rate of return higher than inflation. 

So Smaug, with 5% inflation nibbling at his tail, wants to make a 7% to 10% annual return on his gold. So let's say he hires some dwarves, Thorin and Company, to reopen the mining shafts in the Lonely Mountain and to work new gold into new, value-added cups, rings, and whatnot. He tries to sell off some of existing inventory of goldsmithery to the local Elvenking, or to the men of Long Lake, in exchange for other investments. Naturally, the dwarves don't work for free, and neither men nor elves willingly make deals that lose them money. Smaug has to work out arrangements that are profitable for everybody, so that Thorin et al. make enough to keep them motivated while Smaug nets the 7%-10% he's looking for. And suddenly, we have capitalism. The gold is no longer piled up doing nothing, but actively fueling more enterprise; it has become capital. (The "saving" Smaug indulged in in the other scenario may sound virtuous to those who equate saving and virtue, but it is literally the least capitalist behavior possible.)

Now, Smaug's various partners, employees, and trading partners are also facing 5% inflation, so they are also going to want to build their money into more money by investing in new things. And they also have to eat, so some of their wages and profits are going to be consumed. But money someone spends is money someone else earns. The area around the Lonely Mountain will have to become less lonely, because all of those people are going to need places to eat, sleep, buy new shoes, and so on. Bilbo Baggins moves to town and starts selling everyone second breakfast. And Smaug needs all that to happen, because his business can't survive without those things around. He's not going to burn it down again. Instead, his gold is going to circulate out into the community, through many hands, and fuel growth. Pretty soon, you have a bustling Lonely Mountain Economic Zone.

And in fact, this is pretty much the happy ending in Tolkien; once the hoard gets broken up and distributed into many different hands, rather than re-hoarded by Thorin, peace, love, and commercial industry abound.

Of course, if inflation gets too high, the economy suffers. If inflation is devaluing your money faster than you can make it, the economic incentives break down pretty seriously. But deflation also wrecks the incentives and ruins the economic system. A little inflation, in moderate doses, provides a compelling reason to make more money from your money, and money making more money is what makes the economic world go round. Moderate inflation is good for nearly everyone. Deflation is strictly for dragons.

cross-posted from Dagblog

Eating the Turkey Soup: A Christmas Story

One December when my brother and I were around ten and twelve years old, our mother enlisted us in a holiday good deed she was doing. She wouldn't tell us who we were doing it for, and after we got caught up in our task itself we stopped wondering. When we were finished, we went back to thinking about other things. But on the afternoon of Christmas Eve someone came by our house with a pot of turkey soup to thank our mother, and we realized who we'd been doing that small good deed for.

The first lesson from that moment was immediate and overwhelming: we didn't think it so much as feel it, like a powerful physical reflex. We both knew right away that we were never talking about this again to anyone, ever: not even to each other. We were sorry that we knew. (If the version of the story I told above is vague and lacking in detail, well, good.) People are entitled to their privacy and their dignity. I could not have explained that in words, then, but I understood. And I remembered that lesson later, not because I talked about it, but because it provided the example that kept me from speaking about other things when I should not.

The other lesson I learned that week came more slowly, and I tried to refuse it. My brother and I did not want to eat the turkey soup.

We didn't especially like the soup. We preferred our mother's chicken soup (still a gold standard as far as I'm concerned), and there was no shortage of things to eat in our parents' house during the holidays. And anyway, the person who had given us the soup would never know whether or not we ate it.

But our parents insisted. Of course, we had to eat the soup. It was not because we liked it, or needed it ourselves. It was not because the person who had given it to us would know. It was because we would know. Eating that soup was part of our obligation.

I was nowhere close to understanding this then, but that turkey soup taught me the difficult lesson of gratitude. And I owed the person who gave us the soup gratitude. I owed that person the opportunity to give something back. That wasn't merely a social obligation; it could not be satisfied through a polite pretense. It was a moral obligation and it had to be made real. I really had to eat the soup. I had to take it into my body, and accept the gift honestly.

It is better to give than to receive, they say. But you do an unkindness when you do not allow someone else to give to you. And when the person doesn't have much to give, you do them wrong to refuse their gift or deny them gratitude. It's not always an obvious lesson, and I didn't find it an easy one, but I am grateful to the person who taught it to me.

Happy holidays.

cross-posted from Dagblog

In Praise of the Late Term Paper

It's that time of year again, or actually one of the two times each year, when semesters end and bleary-eyed college professors scale mountains of ungraded papers and exams. One of my friends claims that he can track the academic calendar by the crescendo of professors griping on Facebook and Twitter about bad papers, worse excuses, and outrageous examples of student entitlement. Some of this is necessary foxhole camaraderie, some of it verges on the unprofessional, and some does a lot more than verge. Too many lame papers and excuses will put most people in an ugly mood. But I want to give two cheers to one group of students who never get any love at this time of year: the students whose papers are late because they take the assignments seriously.

I like an on-time paper as much as the next person. Meeting deadlines are an important adult skill that students should be learning. Of course, I admire the excellent students who always do their best work by the stated deadline. That is intrinsically admirable. And when every student is late, it becomes impossible to help any of them; the greatest obstacle to rescuing students from their last-minute emergencies is the sheer number of other last-minute student emergencies. 

But all that said:

I've read some papers in my time that should have been late. I have read papers that have been turned in on the due date or earlier but that the writer hadn't even begun to work on seriously. Oh, those papers were presentable enough. They weren't full of comical errors. There was nothing to quote on Facebook. The margins were correct. But the papers were nothing. The writers had done as little work on them as they felt they could get away with, and avoided most of all the labor of thinking hard about anything.

Some of those papers would have been good papers at a lower level. The writers just stuck with what had worked before, handing in a polished introductory-class paper in an advanced class, or a meticulous high-school paper in a college class. Faced with the problem of an assignment that explicitly demanded a rather different paper, some worked tirelessly to misconstrue the assignment and find some loophole that would justify writing a simpler, more familiar assignment. And then, hoping for extra points, the writers handed those easier pieces of writing in early. They preferred to be judged on promptness rather than thoughtfulness, and many of them reasoned that there was no more room to improve their essays, so spending a few more days won't help. The saddest part is, they were right. They had set themselves elementary writing tasks, using skills they mastered years before, and executed those tasks well. It is like watching a high school senior filling in a coloring book, or listening to a forty-five-year-old playing "Chopsticks" on the piano. There is no way to do those tasks better, which is why I did not assign those tasks in the first place.

Those are the most demoralizing papers that I read. The mess and chaos of students trying to write something that they are not yet quite capable of bringing off does not bother me. But the orderly, sealed-off neatness of a paper that refuses to learn or grow makes me ask myself what I'm doing in the first place. That refusal is polite but insistent and unbendable. And sometimes the only thing that breaks through that stubborn insistence is a grade that makes the student upset.

On the other hand, some of the students who do accept the assignment and try to do it honestly find themselves struggling. They are trying to work out new skills, in response to new demands, and that doesn't happen on a predictable timeline. The work is messy. Progress is non-linear. So sometimes the deadline rolls around while the student is still up to her or his elbows in wet clay, trying to find the piece's shape. Those students aren't late because they're lazy. They're late because they are working hard. Giving them a few extra days to complete an assignment is productive, because they will use that time productively. Their papers will genuinely be much better a few days after the deadline than they could have been on the appointed day. An extension leads to a better product.

Not that every student who needs such an extension will ask for one. Some do not feel entitled to one, and some students will simply abandon an entire class in despair because they don't have a paper written on time. Of course, the same class will contain some squeaky wheels who are trying to get themselves as greasy as possible, and who will have no qualms about asking for all kinds of special arrangements. Some of the more demanding students prompt eye-rolls, but the only real harm they do is distract the professor from the students who are suffering in silence. It's important to shake your head clear at the end of the semester and look for the students who are in danger because they haven't asked you for anything. Many times, those students are the ones who generally enjoy less privilege in their daily lives: more likely to be the first in the family to go to college, more likely to have gone to a troubled high school, more likely to find tuition a major burden. Those students don't expect to get any breaks because they usually haven't gotten any. They read the rules in your syllabus, which some of their more affluent classmates simply view as initial negotiating positions, and take those rules seriously. If they can't meet a deadline, they just assume they're done for, because that's consistent with their previous experience. The only way to persuade them differently is to show them differently, and you can't wait for them to come to you.

Keeping Christmas at Home

Last Sunday was the first day of Advent, which means in the most traditional sense possible the beginning of the Christmas season. Of course, Retail Christmas Season began five minutes after Halloween ended, prompting me to some bleak reflections in my last post. But the truth is, I love Christmas, no matter how much this year's commercial display may be getting me down. Last Saturday I bought a wreath and a bunch of assorted greenery. My spouse made an Advent wreath from some of it, and decorations from the rest. Christmas lights frame our living room window, and I've got some nice holiday jazz on the stereo. I enjoy this holiday a lot. But the Christmas-Industrial Complex defeats the season's purpose.

This is not a post about the meaning of Christmas. "The Meaning of Christmas" has become one of those phrases that has been used in so many slippery ways that it's become hard to use straightforwardly, even with the best of intentions. This is a post about the uses of Christmas.

Christmas belongs to you. It does not belong to The Man, whoever The Man might be. It is not meant for you to work harder on your boss's behalf. It is not meant for you to spend more in order to make Wall Street happy. It is meant for you to refresh yourself, physically, spiritually, and emotionally, using whichever form of refreshment you need. What it was never, ever meant to be was an excuse for the Powers That Be to squeeze more work or more money out of you.

Like every medieval holiday, Christmas began as a break from daily labor, an interruption in the grind of ordinary time. Of course that break had an official religious purpose; every holiday was originally a holy day. Religious observance was the only acceptable excuse for a day when you didn't work. And of course, people did a lot of other things beside praying and churchgoing on those official holy days. Calling the "true meaning of Christmas" religious is not the whole truth, because the religious celebration (no matter how genuine, or how personally important to me) has never been the whole story.

In a comedy by one of Shakespeare's contemporaries, a character who's been tricked into marrying a prostitute (which is considered hilarious), consoles himself:

Marry a harlot, why not? . . . if none should be married but those who are honest [i.e. chaste], where should a man seek a wife after Christmas?

17th century Christmas was not a festival of childhood innocence. It was a holiday for adults to feast, drink, and make merry in adult ways, like a snowier Mardi Gras. (This is one of the reasons that the Puritans despised it, and did not celebrate it in early New England.) If it seems odd to have a holiday from the church calendar celebrated with drinking and sex, remember that Mardi Gras comes from the church calendar, too.

And to say that the "meaning of Christmas" is "the children" ignores most of the holiday's history. The 19th century re-invented Christmas as a family holiday centered on kids, but since Christmas has been celebrated in various ways since the 4th century AD, that's about 1500 years of Christmas not being about the children. (It was also the Victorians who turned Christmas into a shopper's festival to boost end-of-the-year consumption. The focus on children and the materialism arrived hand in hand.)

So I'm not going to tell you that modern Christmas is too secular or too materialistic. It has always been secular and excessive, just as it has always been spiritual and reflective. It has never been one or the other. The meditation and the merry-making are part of the same thing.

Christmas is a break from ordinary time: an annual pause. It is a day to suspend our everyday concerns and our anxious labor. That has been its use and purpose for more than a thousand years. Those who have no interest in its religious symbolism can still profit from that break. The body needs it. The mind and the soul need it. And it comes at the most necessary time, the darkest hour of the year, when nature, including our own nature, cries out for a rest and a respite. It is an annual snow day, scheduled in advance because we all need it.

There is nothing wrong with buying things for Christmas. There is something wrong with the pressure to buy things for Christmas, with the relentless campaign to make Yuletide consumers prop up our sagging economy, with the annual barbaric spectacle of Black Friday. There is something wrong with turning an annual day of rest into a fount of stress, competition, and financial anxiety. Christmas is meant to be a step out of our daily grind. This is true whether you spend the day drinking, giving gifts, or singing hymns: they are all faces of the same fundamental, necessary break from the everyday. And that purpose can be served by December traditions that have nothing to do with Christianity. The traditional Manhattan Chinese-restaurant-and-movie combination is a seasonal respite par excellence, specifically designed by and for non-Christians.

What Christmas was never meant to be is an intensification of the everyday routine, the rat race writ large. And that, no matter how many sentimental pieties it comes wrapped in, is deadly. It is inhumane at its heart. That takes the bleak midwinter and makes it bleaker.

Take a break this December. Your body and your spirit need it. Celebrate the official holiday any way you like, even if Jesus isn't involved. (It's not his actual birthday; he won't mind.) Some of you will have your batteries recharged by connecting with family. Some will feel better after a little quiet prayer. Some will benefit most from a new sweater and a stiff egg nog. But whatever it is, make sure you end the season more rather than less rested. The holiday is meant to nourish you, not the other way around. And there's a lot of winter left to go. This is the moment to turn on some lights and relax.

cross-posted from Dagblog