What is Inflationism?

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Inflationism is a heterodox economic, fiscal, or monetary policy that predicts that a substantial level of inflation is harmless, desirable, or even advantageous. Economists who advocate for an inflationist policy are known as inflationists. In short, Inflationism is an economic theory that goes against the mainstream view on inflation.

Core Beliefs:

  • Inflation is desirable: Inflationism argues that a moderate to high level of inflation can be beneficial or even necessary for a healthy economy.
  • Focus on Full Employment: Advocates of inflationism often prioritize achieving full employment through government intervention, even if it leads to some inflation.

Mainstream Economics Perspective

Mainstream economics views inflation as a necessary evil, advocating for a low, stable level of inflation. While some inflation is considered necessary, levels beyond a low threshold are seen as undesirable. However, deflation is often perceived as a worse or equally dangerous threat, particularly within Keynesian economics, Monetarist economics, and the theory of debt deflation.

Acceptance and Association

Inflationism is not widely accepted within the economics community and is often conflated with Modern Monetary Theory (MMT), which uses similar arguments, especially in relation to chartalism.

Schools of Economic Thought

Inflationism is most associated with, and frequently criticized by, schools of economic thought that advocate for government action—either fiscal policy or monetary policy—to achieve full employment. These schools often hold heterodox views on monetary economics.

Historical Example: Birmingham School of Economics

  • Early 19th Century: Advocated for expansionary monetary policy to achieve full employment and was criticized as “crude inflationists.”

Contemporary Example: Post-Keynesian Neo-Chartalism

  • Neo-Chartalism: Advocates for government deficit spending to achieve full employment. Critics argue that such deficit spending leads to hyperinflation, a charge Neo-Chartalists reject. The Center for Full Employment and Price Stability, a Neo-Chartalist organization, exemplifies this stance.

Neoclassical Economics and Deflation

Neoclassical Economics:

  • Historically argued for deflationist policies, especially during the Great Depression, where mainstream economists believed nominal wages should fall to return prices and employment to equilibrium.
  • Keynesian Opposition: Argued that general wage cuts would reduce demand, worsening the crisis without improving employment.

Contemporary Advocacy for Higher Inflation

While few economists argue that inflation is beneficial in itself, some advocate for a generally higher level of inflation, either in general or during economic crises. Deflation is widely agreed to be very harmful.

Arguments for Higher Inflation

1. Added Flexibility in Monetary Policy

  • A high inflation rate with a low nominal interest rate results in a negative real interest rate, which can stimulate the economy.
  • Olivier Blanchard: Chief economist of the International Monetary Fund, argues that the inflation rates during the Great Moderation were too low, causing constraints during the late-2000s recession. He suggests a target inflation rate of 4% instead of 2%.

2. Wage Stickiness

  • Inflation decreases the real value of wages in the absence of corresponding wage rises.
  • Theory of Wage Stickiness: A cause of unemployment in recessions is the failure of workers to accept pay cuts, which decreases real labor costs. Inflation erodes real costs without requiring nominal wage cuts.
  • Examples: Collective bargaining in the Netherlands and Japan has at times yielded nominal wage cuts, believing that high real labor costs caused unemployment.

3. Decreasing Real Burden of Debt

  • Theory of Debt-Deflation: High levels of debt can cause economic crises, and inflation helps reduce the real level of debt.
  • Example: If the debt to GDP ratio is 300% and the economy experiences 10% inflation for a year, the debt level would reduce by approximately 30%.
  • Impact: Inflation transfers wealth from creditors to debtors, reducing the real value of principal and potentially preventing defaults.
  • Related Argument by Chartalists: Nations issuing debt in their own fiat currency can print money to pay off debt, avoiding default. However, printing money without matching taxation can result in inflation if pursued beyond full employment. Chartalists generally do not argue for inflation.