Infrequently Noted

Note: this post is far afield of my usual discussions. In the interest of not distracting those who read this blog because I usually discuss web-oriented things, the content of the post is beyond the jump.

Via Mark Thoma, the SF Fed's briefing numbers look really odd. The inflation expectation numbers look to depend on an extreme version of the commonly held assumption that workers have lost their collective bargaining power, thereby removing the wage/price linkage that caused so much damage in the 70's. That might be good for "the economy" (as defined by what's good for bankers), but if true, it seems bad for you and me.

What it means to you and I is that our economy has a chance of beating the rap on the fundamental inability of private markets (bankers) to judge risk accurately only because some percentage of our annual incomes will be shaved off and there's nothing we can do about it. And that is the good news. Put another way, we're staring down the last of the Bush Administration's regressive taxes and we just have to take it. The well-off pay a 17%-ish percent maginal tax rate on investment income, while those in "the productive economy" (the people those stimulus checks are designed to help out) pay well above that on every additional dollar they earn. Of course, it's basic economics that if you are in a situation in which you spend more of your marginal income than you save, then any tax on consumption hits you much harder than those who can afford to save. So prices increases without attendant wage increases hurt the middle and lower classes, particularly when the price increases aren't related to "core" inflation. When "core" inflation goes up, it really starts to squeeze asset values, but non-core inflation simply implies that it costs more to buy things like food, fuel, and all of the other daily necessities. While "core" inflation seems a good metric to talk about projected long-term inflation rates and linkages and embedding, its effects aren't the ones currently being felt by Americans.

Inflation is generically decried most heartily by the wealthy because it hurts them by reducing the real interest rate on savings, i.e. it reduces the return on assets invested. But not all inflation is created equal. The current situation is laying bare the difference between the average person's concerns about non-core inflation (the price of gas) and economists concerns about asset allocation (what's the rate of return on investment?). Put tersely: the current bout of inflation is hurting the people who can least afford it and those who can afford it are using the occasion to decry policies which they personally dislike even if their relationship is tenuous to the current trouble. There seems to be a lack of proportionality at work in the public dialog which I find deeply unsettling. Where did our conception of an adversarial press corps go?

The odd take-away is that inflation isn't so bad when it's tied to increases in productive output and income for those most at risk and when those increases promote stability, a fact that the "Washington Consensus" missed time and time again in its disastrous large-scale experiments in emerging economies. If those most at risk of income shocks are insulated by very low unemployment rates and a system that allows those in trouble to keep most of their (minimal) wealth in times of trouble (employment insurance, bankruptcy laws that don't strip people of fixed assets, etc.), then inflation is a tax that hurts the rich more, who incidentally are much more able to cope with such effects.

But inflation like we're experiencing? It's of a different sort. Non-core inflation is still in-check, which is good, but headline inflation is hurting those least able to cope at a rate not seen in decades. It's the last, grandest, "fuck you" of the current administration's policies to those who need to work for a living. Logic and data suggest that voting for regressive taxes isn't in my interest, or nearly anyone else's. Why then does a party looking to cling to power field bumbling fools who stand up for regressive taxation when logic, electability concerns, and basic math skills make plain how foolish that really is?

I'm a "right tools for the job" kinda guy. John McCain's economic and fiscal policy proposals certainly are making him look like a tool, but absolutely the wrong one.