Let’s Debase the Dollar!
A lot of people, especially conservatives, complain about the so-called debasement of the U.S. dollar. For example, Craig R. Smith, who is apparently important enough to be interviewed by “FOX News, CNN, CNBC, ABC, NBC, CBS, PBS, CBN, TBN, Time, The Wall Street Journal, The New York Times, and Newsweek,” wrote a book last year that claims the value of the dollar has fallen by 98% in the 100 years since the income tax and Federal Reserve were established in 1913. He predicts terrible economic calamity will be the result of this debasement. Smith is not alone in this view; evidently Rep. Paul Ryan shares it, too (h/t Paul Krugman).
Mind you, this is a slight overstatement according to Bureau of Labor Statistics (BLS) inflation data (www.bls.gov, series CUUR0000SA0, set date range for 1913 to 2013). This shows that the Consumer Price Index has increased from 9.8 in January 2013 to 233.5 in June 2013, which implies a decline in the dollar’s purchasing power of only 96%. To put it another way, according to the BLS, today’s dollar is worth 4 1913 cents, while Smith says it only worth half as much, 2 1913 cents. Either way, sounds pretty awful, right?
Of course not. This is another example of something I wrote almost two years ago: “When someone tries to get you to focus on only one part of a complicated picture, it’s a safe assumption they are trying to mislead you.” The most obvious omission of the “debasement lobby” is the fact that pay levels have risen a lot since 1913. A single dollar does not buy as much as it did in 1913, but people get paid a whole lot more dollars per hour/week/year than they did, then, too!
What actually matters is not how much the dollar is worth, but the ratio of what people get paid to what the dollar is worth. If your dollars earned rise faster than the value of the dollar falls, that is the very definition of rising real wages! And the Lord knows I’m well aware of falling real wages for the majority of workers since 1972; a post I did on that subject is my second-most read of all time.
Ultimately, what the debasement lobby is mad about is inflation. Smith claims that “real everyday price inflation is running at 7 percent or more per year…” Krugman has been doing yeoman’s work on this issue. We should note that the BLS has been calculating the consumer price index since 1919 and probably knows a little bit about what it’s doing. If you want to doubt its validity anyway, Krugman points us to MIT’s Billion Prices Project, which comes up with results very similar to those of the BLS.
So high inflation is not the problem we face. Low inflation is. With inflation so low, people get no relief from their debts, and have to reduce their debt as much as possible. When that happens, they buy fewer goods and services, so unemployment gets worse, and it’s already bad enough at 7.4% in July. Government could offset weak private spending with jobs programs, but Republicans have made it clear that they aren’t going to pass any jobs bills, so that route is shut off for now.
As a result, millions of people are needlessly unemployed, still at near-record levels of long-term unemployment, and states like North Carolina are cutting unemployment benefits sharply. Shameful.
Let’s debase the dollar!
Cross-posted from Middle Class Political Economist.
Uh, the economic gap is being filled, sorry, but your wrong on that.
The recovery is probably nearing its final phase. Saying “millions” are needlessly unemployed is mumble. That is like saying in summer of 1985 the unemployment rate is 7.4%.
From 1983 to 1984 unemployment dropped by 2.1 percentage points (http://www.nidataplus.com/lfeus1.htm#annl). We have seen nothing like that during this very anemic recovery. There is a significant difference between interest rate recessions (as preceded 1985) and the balance sheet recession of today. Jobless growth (and we’re barely growing) is a hallmark of the latter, and that’s what we’re seeing today. Failure to enact more stimulus does indeed make millions of people out of work for no reason.
The purchasing power drop works out at an annual rate of inflation of 3.3%. Whilst wages may well have kept pace with this rate, there are two things which don’t:
1) Savings. Money that citizens hold in bank accounts or non-real assets lose their value over time at this rate. This is a blatant tax on the saver, and especially affects the nations pensioners.
2) Taxes. Income tax bands move slowly and are not linked to inflation. If prices go up by 5% and my salary goes up by 5%, I am worse off because I pay more income tax.
To say that inflation isn’t a problem as long as wages go up by an equal rate is short-sighted.
I agree with you, and with Lambert above. But a couple of thoughts need to be clarified>
First, as Chris Anderson indicates, “the rich” are not appeased by rising labor wage. if anything, they hate that too. They see inflation as robbing them of their savings.
Second, I don’t know what a billion prices told MIT, but I do not buy a billion items, and I am fairly sure (to be honest i haven’t kept records) that the stuff i buy has been “inflating” at a significantly higher rate than the official index. What I buy is what a poor person has to buy: food, gas, housing, taxes, basic transportation.
Third, some “inflation” at least is not inflation. It is rises in prices due to some resource limit, raising costs but not decreasing the “value of a dollar” if that distinction can be maintained.
Note, I am not asserting any “facts” here. Just raising some questions that might need to be answered if we are going to be clear in what we are talking about. I do not think I would agree with Anderson about much.
It’s not likely that the rich are hurt by inflation as they are most likely invested in assets that are likely to follow inflation’s movements.
How can we be hurt by dollar devaluation, indeed how can dollar devaluation even occur, given that the value of the dollar is little more than what the public thinks it is and their thoughts along that line are aligned. The dollar has no value other than what goods and services one can obtain in exchange.
Was a 1966 dollar more valuable than a current dollar is? That depends only on what one can exchange for either. In 1966 an annual income of $30,000 was pretty good upper middle income money. High line American cars were $3,000-$4,000. In 1963 a 12cyl. Ferrari was about $14,500. Same care today is about 30 times that amount. A real nice house in an up-scale area of Brooklyn, NY was less than $50,000 inn the mid ’60s. The point is only that the relative dollar values are not their comparative denominations, but what they can be exchanged for in their respective times.
And place for that matter. The NY Times recently showed a beautiful Tudor style home with, I think four BRs. A knock out inside and out in Salt Lake City, and only $799,000. That same home in Westchester Cty, parts of Brooklyn or Queens and the north shore of LI would be $2Million or more depending on the exact location. So which of those dollars are more or less valuable?
“How can we be hurt by dollar devaluation, indeed how can dollar devaluation even occur, given that the value of the dollar is little more than what the public thinks it is”
Anyone who holds a dollar is affected by dollar devaluation, no matter how it occurs. If someone, somewhere, prints more dollars (i.e. inflation), then my dollar is suddenly worth less. I can buy less food with that dollar, clothing, education, or anything else. Yes, my wages might go up by inflation, so I have more dollars coming in, but the dollars I already have are now worth less.
You also need to make sure you don’t confuse inflation with supply and demand. There are a lot more rich people today than there were in 1963, which is why a Ferrari costs so much more: there is far greater demand. Lots of people want to live in nice areas (so high property prices), less people want to live in poor areas (low property prices), that doesn’t say anything about the value of a dollar, it says a lot about the supply of and demand for housing in particular areas.
But there are still a huge number of people out there who don’t care about the price of Ferrari’s or massive 4 bedroom Tudor homes. They care about the price of energy, food and rent, and these things generally are “inflation leaders” i.e. tend to rise by more than the headline rate of inflation.
maybe i will end up agreeing with you more than i thought.
but, subject to correction, i think you have the wrong idea about inflation.
i don’t think “printing more dollars” is a cause… usually. it is more likely a result.
i think… don’t really know.. inflation killed the Spanish empire, and they were on a gold standard… that is they had too much gold.
the only inflation i personally “witnessed” was the late seventies when the price of oil suddenly went up. this would not have caused inflation by itself. could just as easily caused a depression as people reacted to higher prices by buying less. instead people had some leverage to demand higher prices… both workers and sellers… and the banks at the same time were willing to lend money… which is a way of “printing” it.
The Fed tried to get control of this and ended up creating a recession, apparently because at first it didn’t know what “money” is (accounts in savings and loans?) and then because it was afraid to stop fighting inflation after inflation was dead and the economy was dying.
i can’t claim i have real knowledge of any of this… but it’s something to look into before you base your theory of inflation on “government printing money.”
The example you’ve given of inflation was a very special case, the OPEC cartel in the 1970’s held a virtual monopoly over the world oil supply, and so was able to continually bump up prices. I wouldn’t extend that example to make large generalisations about inflation.
I simplified the case for effect in my last post, printing money is not the only cause of inflation, but it’s one of the most stark causes. Take Zimbabwe for example, which printed lots of money in order to finance wars. Eventually this printing worked its way down to the real economy and its inflation rate spiked up to over 90 sextillion percent (that’s 90 followed by 21 zeros).
At a more general level, have a look at the graph here to see inflation vs growth in the monetary supply of lots of countries:
You can come to your own conclusions but it sure looks to me that the countries with higher monetary growth have higher inflation.
There are obviously other ways in which inflation can occur. New ways to extend credit, lower bank reserves, a destruction in some form of the supply chain (for example, if a steel factory blows up, suddenly there’s less steel, so prices go up). But one of the most easy ways to limit inflation in the long term is to limit the growth in money.
I welcome any arguments, I’m always happy to learn and debate.
you won’t get much argument from me here.. except maybe one point.
inflation has indeed been caused by governments “printing money” or debasing coins, etc.
my sense is that modern governments which are not run by gangsters know better than to print money to the point where it leads to inflation.
doesn’t mean they don’t, or shouldn’t, print enough money to keep the economy working… just enough to match increases in productivity and (maybe) the “demand” for cash.
you say some things here that i agree with, therefore i think you are not one of those who believes the u.s. government is irresponsibly “printing money”, though they may from time to time misjudge the needs of the economy and allow or encourage the growth in the money supply at the wrong time.
“It’s not likely that the rich are hurt by inflation as they are most likely invested in assets that are likely to follow inflation’s movements.”
and yet the rich favor low inflation.
i think they may not always be able to “follow inflation’s movements”
but i think that even if they did, they would still see inflation as robbing them, because “without it, their returns would be so much more.”
just as they cannot see that if they paid higher taxes, the economy would improve and they would make more money.
At some level, inflation is tax on capital, which is why the rich hate it so.
Chris: Income tax brackets “have been indexed for inflation since the Reagan era.” http://www.forbes.com/sites/beltway/2011/07/10/should-congress-cut-the-deficit-by-changing-how-it-indexes-taxes-for-inflation/
Moreover, Social Security and pensions in general tend to be indexed for inflation. That only leaves pensioners with savings to worry about. They tend to be richer on average, and the rich don’t like inflation. As William Greider wrote in “Secrets of the Temple,” inflation has definite distributional effects. Obviously hyperinflation is no good, but it is not going to happen. Moderate inflation (maybe 4% a year) helps create full employment and contributes to income equality, of which we are in short supply in the U.S.
while I tend to agree with you, I think it’s important to remember that
“pensioners…. tend to be richer than average” obscures the very real point that lots of “pensioners” are poor. very poor. and they are not, in general, inflation protected.
even the states are playing politics with “inflation adjustments” on their pensions. and Obama is still trying to give us a “more accurate” inflation adjustment for Social Security… shortly to be followed by replace the wage adjustment for initial benefits with inflation adjustment. you see average wages are a measurable fact, while inflation is whatever the government says it is.