Oct. 8, Michael Davis, economics professor at the Cox School of Business, SMU Dallas, for a commentary warning new and older generations about the specter of inflation. Published in the Orange County Register under the heading Unexpected inflation is the broken promise of a generation: https://bit.ly/3Aqa62e
Prices are the words we use to make promises. Earlier today my plumber promised to fix a broken pipe and I promised to fill up his trucks with gas. Of course, he doesn’t expect me to meet him at the gas station every time a tank is empty. He expects me to give him $300 when he’s done with the work.
But the promise of plumbing for the promise of gas is what matters to both of us. And without the language of prices, it’s very hard to make such promises. Barter is a terrible way to do business. Prices make it easy to promise to give someone what they really want.
And that’s why we should worry more about inflation.
By Michael L.Davis
Prices are the words we use to make promises. Earlier today my plumber promised to fix a broken pipe and I promised to fill up his trucks with gas. Of course, he doesn’t expect me to meet him at the gas station every time a tank is empty. He expects me to give him $300 when he’s done with the work.
But the promise of plumbing for the promise of gas is what matters to both of us. And without the language of prices, it’s very hard to make such promises. Barter is a terrible way to do business. Prices make it easy to promise to give someone what they really want.
And that’s why we should worry more about inflation.
Civilized life depends on trust. We have to know that others will follow certain norms and that people will honor their promises. Prices aren’t simply another technical feature that helps make modern life more pleasant. Prices are an essential thread in the social fabric. Without prices we can’t make credible promises. If we can’t make credible promises, life is nasty, brutish and short
A plumber in Venezuela can’t trust the prices he sees. Of course we’re a long way from Venezuelan hyperinflation, but whatever inflation we have will tug on the fabric of trust. Inflation will make us less likely to believe in our economic system. It will make us less likely to believe in each other. In a country dealing with Covid and acrid politics, this will not help.
In 1980 the U.S. inflation rate was almost 14%. It was a time when, to put it bluntly, workers could not trust their employers. They could trust that they would receive the wages promised but they couldn’t trust that they would be able to afford the things they expected to be able to buy. This distrust cast a pall over the relationship, leading to brutal, exhausting wage bargaining.
In 1980 savers couldn’t trust their bankers. They could trust that the bankers would repay the amounts that were promised — that their nominal wealth would be preserved — but they couldn’t trust the bankers to preserve the promised purchasing power. This led to haphazard disintermediation as savers desperately tried to preserve purchasing power. The Savings and Loan crises of the mid 1980’s is sometimes blamed on deregulation in 1979. But the real culprit was tsunami of inflation that eroded trust in existing financial institutions.
About half of Americans living today are less than 40 years old. They have no experience with inflation. These adult millennials aren’t naïve, they’ve lived through two major recessions. In fact, we’re told they are uniquely discouraged by the economic system they’ve inherited. We’re told we need to spend $3.5 trillion on “social infrastructure” to rebuild the kind of trust that will capture their energy and ambitions. And we’re told that “moderate and temporary” inflation in the range of 5% to 10% is an acceptable burden to bear.
But remember that, especially for these millennials, this kind of inflation will come as a rude shock. Unexpected inflation breeds uncertainty, cynicism and distrust. Maybe borrowing that $3.5 trillion to pay for things like free community college, child care tax credits and electric cars is just the thing to win back the hearts and minds of a dispirited generation. But now even the most shameless progressive politicians admit that this spending risks serious inflation.
Don’t let them claim that this inflation won’t be a serious problem.
Michael L. Davis is an economics professor at the Cox School of Business, SMU Dallas.