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

To Refudiate (verb)

So the whole blogosphere has been tweeting and retweeting about Sarah Palin's accidental coinage of the word "refudiate," and her subsequent comparison of herself to William Shakespeare. (If that's the standard you want your prose judged against, sister, be my guest.) It's a big serving of the regular Palin-coverage stew: mockery of ignorance, defensive anti-intellectualism, just enough genuine condescension to lend the anti-intellectuals credibility.

So let's get this out of the way: Palin did not misuse the word "refudiate." She used it exactly as it was meant to be used.

Now, if you're going to ask people to do something, as Palin's original tweet pretends to do, you don't want to use a word like "refudiate," because it's not really a word and people might not understand what you'd like them to do. But Palin was not really asking anyone to do anything. There's nothing she actually wants to happen, and she's not really speaking to the "peace loving Muslims" her sentence addresses.

Palin's tweet is doing something else, which politicians have come to do far, far too much: pretending to ask someone to do something the politician doesn't actually want done. Palin wants to make a public show of demanding some people do something, so she can get credit for demanding that thing and so she can blame those people for not doing it. The audience for the statement is not the people she is pretending to address, about whom Palin does not care a wet rag. Her audience is her own following, and she wants to show herself standing up to the dastardly villains of whom she makes her basically fictional demand. It's a posture, not a request.

Palin has to know, somewhere, that Muslims aren't going to repudiate building mosques, the same way Christians never repudiate building churches and Jews never repudiate building synagogues. If you repudiate building mosques, you're really not a Muslim anymore. (And yes, of course, it's actually a Muslim community center and it's actually not at Ground Zero. Palin doesn't give a wet rag for facts, either.) Who is going to say, "That's right, the basic practice of our religion is a terribly insensitive thing to do, inseparable from religious-based terrorism?" Palin knows perfectly well that no one is going to do that. That's why she demanded it.

She's also not interested in actually communicating with "peace loving Muslims." She's interested in defining Muslims as NOT peace loving and in suggesting to her followers that no peace loving Muslims exist. First off, she's addressing "peace loving Muslims" as if the people building a community center in Manhattan, who got permission from their neighbors, were somehow not "peace loving." She's calling on some imaginary alternative group of "peace loving" Muslims to intervene against the villainous community-center builders, who are by implication a bunch of damned warmongers. Her first rhetorical goal is to disguise the peace-loving nature of the community-center builders, who are trying to do public outreach and promote non-violent Islam, and who Palin wants to demonize. (For those of you confused at home, it's like this: the Muslims putting up the buildings in Lower Manhattan are the peace lovers. QED.)

Palin's second rhetorical goal, which is even more insidious, is to define what a "peace loving Muslim" is. What she's implying, of course, is that we'll know the peace loving Muslims when they "refudiate" the mosque. And when nobody does speak out against building a place to peaceably worship their God, it will just go to show that none of the Muslims want peace! They're all confrontational warmongers, who want to put up thirteen-story buildings exactly at the moment in American construction industry badly needs work! How much more devious could they get? (Hint: it's about zoning. The evil plan is always, always about zoning.) See that? Sarah Palin asked the peace lovers to do the peace loving thing and "refudiate" and none of them had the common decency to refudiate anything! They're monsters, I tell you!

Again, if you're asking people to actually do something, it's important to use commonly accepted words to communicate what you want. But when you only want to make a theatrical demand that parties unknown do something that you're secretly hoping won't happen, then using real words doesn't matter. Actually, it kind of helps. If you can get people to buy it, demanding that people do something that actually isn't anything, because there's no such thing as "refudiating," is a kind of insurance policy. If you asked people to denounce or repudiate or deplore something, there's a tiny chance that someone will actually do that and mess up your plan. But if you make a demand that isn't actually in English, demanding they do something that you don't quite describe, then they can't actually do it. And if they try, you can say they did it wrong, because you didn't mean that; you meant refudiate.

If Palin could swing it, she'd make more phony demands using even sillier and less meaningful words. What she would really like to say, on national television is something like: "I think Barack Obama owes it to the American people to schnarfenoggle right away, and to keep schnarfenoggling until this country's frablejam is back oshkenizing again!" Then she'd go on Fox News every seventeen minutes and hammer Obama for not schnarfenoggling enough. And Obama would never be able to schnarfenoggle satisfactorily, because it's Palin who gets to decide what schnarfenoggling actually is.

Calling her stupid misses the point. Her words follow the same malicious logic that Humpty Dumpty uses:

`When I use a word,' Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean -- neither more nor less.'

`The question is,' said Alice, `whether you can make words mean so many different things.'

`The question is,' said Humpty Dumpty, `which is to be master -- that's all.'

Sarah Palin wants to make up the words and define what they mean, however and whenever it suits her. She doesn't intend the rest of us to get a say in it. In her private language, putting up a building and blowing up a building are pretty much the same thing. And whatever else that is, it's not funny.

Jindal's Trivial Autobiography

Plenty of others have written about the many, many things wrong with Bobby Jindal's response to President Obama Tuesday night, especially its intellectual bankruptcy and Jindal's ghastly delivery. But at the risk of piling on, I want to talk about something else that's been bothering me about that speech, something which seems to have passed without comment: Jindal's bizarre decision to begin his response by discussing his biography.

I understand that this is the Age of the Memoir, both in politics and in the arts. We have a President who published a memoir before beginning his political career, and whose volunteers were trained to tell their own personal stories as a means of persuading voters. We have an entertainment landscape increasingly rich in nonfictional and allegedly non-fictional personal narratives. But was I the only one who appalled when Jindal, speaking on national TV during a national economic crisis, began prattling about his family history and the things his father used to tell him? With the banks failing and the economy in shambles, what Jindal wanted to talk about was, well, Jindal.

I found that approach grotesque, and eerily disconnected from reality. This was a moment to speak to a worried nation about its legitimate worries, to talk about where we are and what we need to do. The occasion demanded an explicit focus on the audience, not on the speaker. Hundreds of thousands of Americans are losing their jobs; this is not about Jindal.

Of course, such an autobiographical preamble is expected and necessary in a campaign speech, especially when a candidate being introduced to a new group of voters. Jindal's little family stories make sense if he's running for President, but to respond to a speech about a major crisis, a month into a new President's administration, by beginning to run for President oneself is similarly grotesque and irresponsible. The televised pundits took it for granted that Jindal would do this, and to them it evidently seemed natural. They are interested in political "personalities" they can shape stories around, and on simple horse-race storylines they can cover without thinking. They're artificial public "personalities" themselves, dedicated to publicizing their personal brands; Jindal's grossly inappropriate behavior was simply the kind of thing the media talking heads do every day. And they have been interested in the run-Bobby-run storyline for some time now: it's a new storyline they want to roll out, with a new character they want to introduce, as if the American political process were merely a game show like Survivor.

After Jindal blithely ignored the economic crisis, various pundits (including bloggers I like very much) asked whether or not Jindal had harmed his presidential aspirations in 2012. This is a profoundly stupid question. In ordinary times, there is nothing wrong with such speculation. But these are not ordinary times, and there are more pressing questions: Will there still be an American auto industry in 2010? Will we have functioning banks six months from now? Will we be able to recover from the recession by 2011? Questions like these not only dwarf the significance of questions about Candidate Jindal, but they obviate them. Bobby Jindal has no political hopes separate from the fate of the nation or of its economy. The success or failure of the economic recovery will determine the political landscape in 2012. Asking whether Jindal helped or hurt his "chances," as a question distinct from the fate of the country, is as stupid as wondering about how the tie you wore to lunch with the boss might affect your career prospects at Citibank. The real questions are whether Citibank will continue to exist, and in what form. The question the pundits natter about can only be answered by the questions that they, like Jindal himself, ignore.

It's clear from the speech what Jindal wants. He's hoping that Obama's attempts to rescue the economy fails, so that Jindal can run on a blame-Obama platform. Thus Jindal's refusal to offer any constructive suggestion, and his urgency to go on record as opposing Obama's policies. That Jindal chose to position himself politically in case of an economic failure, in fact to pin his hopes to four more years of economic disaster, should in itself disqualify him for national office. No one who chooses to play a private game when the public stakes are this high can be trusted.

The Standards of Civility for Democrats

So, Andrew Sullivan has a round-up of the instantaneous reactions, mostly complaints, from right-wing bloggers about the Inaugural Address. There are some moments of gracious or grudging acknowledgment, but there's also carping on matters so small that in fact they do not exist. One complaint is that Obama, who campaigned against Bush's policies, should have given more praise to Bush and his policies. Why this might be so is beyond me. Perhaps I have forgotten the fulsome praise that FDR lavished upon Hoover, or Jefferson upon Adams.

At least a couple of bloggers, to wit Jennifer Rubin and Jay Nordlinger, take issue with Obama's thank-you to to Bush, which they view as insultingly brief. Rubin calls it "unduly perfunctory." Nordlinger calls it "the barest minimum: 'I thank him for his service,' or something." The idea seems to be that Obama rudely and pointedly truncated a gesture of thanks which one would normally expect to be fuller.

For reference, what President Obama said during his Inaugural Address was this:

"I thank President Bush for his service to our nation, as well as the generosity and cooperation he has shown throughout this transition."

Apparently, this is much shorter and less classy than what George W. Bush said in his inaugural address in 2001:

"As I begin, I thank President Clinton for his service to our nation."

That's it.

So, you see how classless Obama is: to give Bush (who leaves behind an economic meltdown, a massive deficit, and two unresolved wars) only slightly more praise than Bush gave his own predecessor (who left behind peace and a budget surplus). But of course, from such pundits' perspective, Clinton was owed no praise, because Clinton "had no class" and Bush did. Meanwhile, Bush is entitled to more deference from the mere parvenu who succeeds him. It's not about what they say at all.