In times of political and social unrest, inflation has often been at the root of the problem. When Russian peasants set fire to buildings in Moscow in 1648, it was due to a sharp rise in the price of salt. Similarly, riots 12 years later were sparked by a government policy equating copper money to silver coins, causing widespread price inflation. The French Revolution was fueled by a surge in bread prices and a poor government response.
Throughout European history, violence against minority groups has been linked to economic instability, with the most infamous example being the scapegoating of Jews for inflation in post-World War I Germany. In American history, panics and riots have erupted due to sudden price increases, such as farmers protesting monetary policies. Despite living in a wealthy society, modern Americans have also shown susceptibility to the psychological effects of inflation.
Inflation, as described by Milton Friedman, is primarily a monetary phenomenon, but it also has psychological impacts. It can lead to anger, irrationality, and poor policy decisions in democratic systems. Combatting inflation often requires unpopular actions, and it is crucial for officials to withstand public pressure and not give in to populist demands.
‘Paying Them Without Mercy’
From the Revolutionary War onwards, inflation has played a role in shaping American politics and society. The issuance of depreciated paper money during the war led to inflation, causing debtors to pay off debts in worthless currency, angering creditors. This resulted in postwar deflation, triggering events like Shays’ Rebellion in Massachusetts.
Throughout the early history of the United States, inflation and deflation cycles led to economic and political turmoil, prompting calls for protectionist measures and political intervention in the economy. The creation of the Federal Reserve system in response to financial panics aimed to stabilize prices and remove monetary policy from political influence.
The Federal Reserve’s main tool for combating inflation is raising interest rates, which can reduce the circulation of money in the economy. However, higher interest rates are also met with resistance, as seen in protests by homebuilders and farmers when rates were raised in the past.
Understanding why many Americans are unhappy about the economy today is crucial, despite inflation dropping significantly from its peak in mid-2022 and unemployment remaining low. The official narrative of inflation in the early 2020s is widely known, with the pandemic causing unprecedented government responses at all levels. Stimulus spending, supply chain disruptions, and shifts in consumer behavior led to a spike in demand and an influx of money into the economy, resulting in rapidly rising prices. Even though inflation has decreased since its peak in mid-2022, the current rate is still high compared to recent historical averages and above the Federal Reserve’s target rate of 2 percent.
The increase in borrowing costs, driven by the Federal Reserve raising interest rates to combat inflation, has not been factored into the official inflation calculation. This has led to concerns among Americans, with surveys showing inflation as the top worry for many despite the rate falling. The rise in borrowing costs has significantly impacted the affordability of big purchases like homes and cars, affecting consumers’ economic well-being. If inflation is worse than official numbers suggest, it could have broader implications for various social indicators.
Despite rising prices, wages have also been increasing, outpacing inflation since the initial surge in 2022. The Congressional Budget Office reported that average wages have grown faster than inflation at all income levels since 2019, offering a silver lining amidst the economic challenges. President Joe Biden has been promoting the idea of rising wages as part of the White House’s efforts to reassure Americans that the economy is thriving. However, the argument that wages are increasing faster than prices fails to acknowledge the impact of higher interest rates. Despite this, it appears that most Americans are not swayed by these facts.
Recent research by Harvard economist Stefanie Stantcheva reveals that people are less likely to recognize the benefits of inflation, such as higher wages, and instead focus on the negatives. In her study titled “Why Do We Dislike Inflation?” Stantcheva interviewed over 2,000 individuals and found that most believe wage increases are a result of their own performance, while inflation is blamed for making their paychecks go less far.
The issue lies in the fact that Americans see inflation as causing tangible negative effects on their finances and the economy as a whole, rather than just being a measure of value. This leads to stress and uncertainty, with nearly half of respondents in Stantcheva’s survey expressing anger towards inflation. Many blame President Biden and greedy corporations for the situation, while few point to monetary policy as a factor.
Worries about inflation extend beyond economics and into politics, with many fearing that it will harm America’s international reputation and domestic political stability. This concern can fuel discontent and potentially lead to radical responses. Moreover, the blame for declining living standards is often directed towards immigrants, as shown by recent Gallup surveys.
Economists warn that unchecked inflation can lead to conflict and scapegoating of certain groups. Presidents like Trump and Biden have made decisions that have exacerbated the risk of inflation, with their large spending measures contributing to the problem. It is crucial for officials to address inflation to prevent further political turmoil. Neil Irwin, The New York Times’ senior economics correspondent, initially highlighted the crucial lesson that a ‘hot’ economy with high deficits did not lead to runaway inflation. However, as history has shown, inflation eventually did rear its head. The question now is, what should be done?
When faced with high inflation in the past, the political system has often struggled to find effective solutions. Currently, there is a tendency to blame external factors like Vladimir Putin or corporate greed for inflation, rather than implementing tighter monetary policies that could risk a recession or higher unemployment. The political landscape is divided, with the right advocating for tariffs while the left focuses on antitrust laws to combat greed.
Despite these efforts, the root cause of inflation remains a monetary phenomenon, as famously pointed out by Milton Friedman. The challenge lies in finding a balance between addressing inflation and avoiding the negative impacts of higher interest rates.
In the midst of this inflationary period, it is crucial for officials to resist calls for policies that could exacerbate the situation. Public opinion may favor inflationary measures like low interest rates and fiscal stimulus, but these are unlikely to provide long-term relief. It is essential to remember that inflation control has been a core responsibility of the Federal Reserve since the 1980s.
As the battle against inflation continues, political leaders must resist the temptation of quick fixes and focus on responsible fiscal policies. Excessive spending and deficits only serve to fuel inflation, making it harder to control in the future. While there may be no easy way out of the current situation, it is vital for elected officials to prioritize long-term stability over short-term gains.
Inflation is not a temporary issue that can be ignored or blamed away. It is a complex challenge that requires thoughtful and strategic solutions. As the 2024 election unfolds, addressing inflation will be a key issue that demands attention and action from all stakeholders. This should stand as a cautionary tale for future political leaders: Proceed with caution when dealing with this powerful force.
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