David Andolfatto thinks we’re wrong to talk about our inflation “problem.”
He sees it as more of a solution. And one that’s not so bad, given our other options.
“Much of that discussion is predicated on the assumption that inflation was bad, and that the inflation could have been avoided,” said the Canadian-born chair of the economics department at the University of Miami.
“Inflation was desirable.”
Having spent 2022 dealing with consumer prices rising faster than they have in four decades, such an assertion sounds outrageous. Central banks are raising interest rates through the roof to quell it. Experts disagree on what drove inflation to where it is today – whether supply shocks or runaway demand – but few would argue that this isn’t a problem.
Prof. Andolfatto is among the few. The veteran of U.S. central banking – he spent 13 years as a senior adviser at the Federal Reserve Bank of St. Louis before joining the University of Miami earlier this year – calls himself part of “the radical middle.” Basically, he thinks that we’ve been looking at inflation all the wrong way.
He suggests that we need to go back and look at the conditions that ultimately led to the rise of inflation – namely, a severe recession caused by a global health crisis and temporary widespread economic shutdown – and consider what the policy response by governments and central banks was all about, and how we chose to pay for it.
Inflation is, in effect, the tax we are paying to cover our COVID-19 pandemic bills.
“I want to push back against this notion that we could have sailed through this crisis with no inflationary repercussions.”
Here’s the argument that Prof. Andolfatto lays out.
When the pandemic hit in 2020, the crux of the issue facing policy makers – on a massive scale – was one of “redistribution.” The lockdowns sent large numbers of workers home. Some were able to continue working remotely, more or less as normal, and continue earning their full income. Many others could not work at all, and were laid off.
Policy makers would need to find a way to fund those without jobs so that they could continue to buy food and cover their necessities. And, logically, those who maintained healthy incomes would have to be asked to pay for it, one way or another.
That sounds a lot like a tax system, doesn’t it? Governments collect money from those with incomes – at higher rates from those better off – and transfer funds to those in the most need. But in this case, the existing tax system wasn’t nearly adequate to account for the skyrocketing costs to help the huge numbers of people in immediate, even dire, need.
Now, governments could have decided to actually impose a new, higher tax – for some temporary period, say, maybe a couple of years – to facilitate this massive and necessary income redistribution. In the midst of a crisis and recession, that would not have been popular, or, perhaps, economically desirable.
The other option was to, effectively, print money. Governments (in Canada, the United States and elsewhere) took on debt, central banks expanded balance sheets to absorb that debt and new money was created to fund the redistribution.
The result is a textbook recipe for inflation: more money chasing a limited supply of goods and services. That supply was, of course, even more limited by the nature of the global health crisis – and further complicated by additional shocks, most notably Russia’s invasion of Ukraine.
“The net effect is essentially the same thing,” Prof. Andolfatto said. Costs go up for those earning incomes, to pay for supports for those in need. Only in this case, those increased costs are in the form of higher consumer prices instead of higher tax bills.
“This is a de facto tax.”
This is a point that Conservative Leader Pierre Poilievre has been making for a long time – often referring to inflation as a “tax” brought on by excessive government spending and soaring deficits. But Mr. Poilievre paints it as an evil – a result of irresponsible government, abetted by a central bank that couldn’t resist the monetary sin of creating new money out of thin air.
Prof. Andolfatto, in contrast, sees this “tax” as an entirely reasonable and defensible means of facilitating a massive redistribution in an unprecedented crisis. To him, this outcome was necessary, even virtuous.
“Few people sit back and ask, ‘To what extent is the inflation we’re experiencing just a byproduct of a desirable redistribution scheme, in the context of an economy that was hit by a sequence of very, very bad shocks?’ ”
He suggested central bankers could have been delivering this message to the public in 2021 – that they expected inflation to remain elevated for a couple of years in order to facilitate this “desirable redistribution scheme.” They could have accepted inflation as part of the price to pay for what had to be done, rather than first dismissing it as an aberration and then demonizing it while racing to bring it back under control.
“If central banks had said that, they’d be in a lot less trouble.”
David Parkinson