Turner Turns (7) Moral Flaw

My turn now.

The basic flaw in Adair Turner's talk is his assumption that a gradually increasing supply of money is needed to ensure that economic growth is not constrained. Turner says that a problem with metallic money is that it does not grow fast enough. The implication is that as the economy grows, prices and wages have to slowly decline. He says that this was the situation during much of the nineteenth century. This statement is a bit odd, because this was a time of rapid economic growth arising from the industrial revolution.

Turner says that most economists believe that it is difficult to get downward flexibility and that it is more sensible to run an economy with nominal GDP growth of 4-5% price inflation of 2-2½ and real GDP growth of 2-2½. Monetary growth is needed to ensure GDP growth is not constrained.

There is a moral flaw to this argument. Monetary inflation robs savers of their wealth. Over twenty years, the purchasing power of savings is halved, if inflation averages 3% per year. That is painful, if you are living on your savings, as many people do. Over the last few decades, inflation has been much greater than 3%, so the loss have been even greater. This is theft, so it is morally wrong.

The argument that prices are sticky downward is wrong. Every time we go shopping, we see specials and offers of discounts. Clearly, retailers are quite happy lowering prices. Prices of electronic goods have declined continuously over the last few decades, without any disruption of the market.

Wages are sticky downward, but that does not matter. If all prices are declining slowly, and nominal wages are unchanged, then real wages are increasing. This is what should be happening in a vibrant economy. Improvements in productivity due to technological advances should allow business to reduce their prices. So over time, prices should be declining slowly. This increases the real value of wages, without any need for industrial pressure. This is the true trickle down.

Gradual inflation robs workers of this technology dividend. If prices are rising slowly, real wages will decline, unless employees can persuade employers to pay more. This is hard, because the truth is that wages are sticky upwards too. Under inflation the benefits of technology are captured by the richer people whose income comes from capital gains, which benefit from price inflation.

Contrary to Turner and other economists, an economy with gradually falling prices would be better for wage earners and people on fixed incomes. They would share in the benefits of technology and improvements in productivity without having to use industrial muscle of political power.

Gradual inflation encourages people to go into debt. If prices were slowly falling, people would thing twice about going into debt, because the real value of their debt would gradually increase over time. The inflationists have taken away one of the best protections against excessive data.