Bill's Notes

Because inflation refers to the changing value of money, rather than the changing prices of goods. If prices double and you double everyone's bank account (assume no case for simplicity's sake), that's 100% inflation, but nothing costs any more in unadjusted dollars.

In any economy, if the supply of money were to stay the same, the price of everything would gradually go down, because more and more things will be available for purchase, but the number of dollars would go down to pay with them for. This has never happened in the history of humanity, because no one ever leaves the supply of money alone. When you increase the supply of money, the price of all goods should go up, because there are now more dollars around to pay for the same stuff. This is called inflation, because you're inflating the currency. You're making more of it, but without substance.

Thus, theoretically, you want to balance the amount of new money that you print up out of thin air to be equal to the increase in the value of goods available, so that prices stay constant. Again, no one really does this, though it was closer to this back when you had to (1) find and (2) dig new money out of the ground. The advent of paper money made the # of dollars in circulation purely discretionary, rather than limited by anything real.

Now, despite this being the goal, we see inflation anyway. There are three main reasons for this, here listed in increasing order of importance: First, this balancing act is hard. No human being actually knows the complete state of the economy or how much real value there is in it, so no one can perfectly balance the money supply to it. Second, a very slight inflationary force has a tendency to lubricate economies mostly because of psychological reasons. Every year in which there's inflation but you fail to get a raise, you've actually taken a pay cut. Except that it doesn't feel that way, because the numbers change. (the same is true, to a lesser degree, if you get a raise below inflation.) This creates a certain natural atrophy which helps to encourage the rearrangement of resources in the economy to places where they're more effective. I'm talking about like 1% to 2% inflation per year, here. Nothing major. As a result, slight inflation is desired by those who regulate the money supply, because it actually stimulates real growth. Third and probably most importantly, inflation is really helpful to the people who actually print the money. This largely speaks for itself, though I should point out that this is probably more useful in that inflation devaluates the value of the debt that you have to other people, so inflation is a nice indirect way to pay for things that the government wants by reducing the real value of its debts, since monetary loans are not inflation-adjusted.

So, this is a low-inflation economy, because the value of money isn't going down. That's not at all to say that some things — even some important things — aren't getting more expensive. But inflation is a technical economic term.

That's why in the last election Kerry tried to create a "misery index". It had a truly idiotic title that just fed into Kerry's image as a negative depressing downer, and it's hard to believe that he didn't cherry-pick the items he used to make Bush look bad, but the fundamental idea is sound, as far as it goes. The real cost of basic stuff isn't necessarily going to stay the same over time. The cost of housing is subject to the laws of supply and demand just like everything else. What we're seeing now is huge demand and relatively low supply, so the price of houses goes up relative to the price of most other stuff, like bread and milk and steel and so on.

If what you were seeing was inflation, the price of homes would be going up, but people would also be making a lot more money, and it would be (mostly) a wash (the economy isn't perfect, of course, so in reality inflation tends to ripple rather than instantly spread).

Incidentally, the reason that inflation is bad doesn't have anything to do with prices directly. If we double how much money everyone has and double the price of goods, nothing has really changed except the numbers. Inflation's bite is that it destroys monetary investments. If I lend you $10,000 for a year, and in that time it becomes worth $5,000 (keeping everything in today's dollars), I've lost a lot of money. I'm not bloody likely to do this again. Of course, if the inflation is long-term predictable, I'll just handle this by charging you an absurdly high interest rate. The real problem is that any new inflation is by definition new and thus unpredictable to everything which just happened.

In its extreme forms, where you see inflation measured on a daily basis, the money that you get in your pay check will be worth significantly less by the time that you go to buy bread for it. But inflation like this is just the death throws of an economy; any time you see inflation like this happening you're just seeing the transition to a barter economy or the transition to some other currency. (In both cases, unofficial transitions.)

The other problem, by the way, with talking about "utilities" is that they've changed. Utilities now generally mean: water, sewer, garbage disposal, electricity, gas, cable, phone, internet. But that's a longer list than 20 years ago, when utilities didn't include cable or internet. The inclusion of cable and internet would drive up the cost of "utilities", but that's because "utilities" includes more stuff nowadays. That may increase the real cost of living, but it's not economic inflation because the extra money is buying extra stuff.

Virginia Postrel was talking about this problem as applied to hotels recently. There was a wave of gentrification of hotels, where they were retrofiting their rooms with all sorts of luxurious things, and charing more money. Was that inflation, or just a move in the market towards providing more goods for more money?

So, yeah, that's why we're in a low-inflation economy.

(Incidentally, what distinguishes our current inflation from the "stagflation" of the carter years was that back then we had the inflation but it was higher, and the real growth in productivity wasn't there. This was in part caused by oil — when the price of oil went up, everything cost more, but no one was producing more. Thus money was simply worth less, which compensated for the increased costs of oil somewhat, but damaged savings and investments.)

But it is a good explanatilon. I just don't have time to fully digest it. I do appreciate the effort, though.

I should also point out that the economy definitely grew faster under the Clinton years than under Bush's years. Glancing at any historical GDP chart demonstrates that. There are of course more reasons than there are people in the US for this, but I'd like to touch on one of them: war.

The damage that 9/11 did to our economy was very considerable, but there are also the after-effects, especially the wars in Afghanistan and Iraq, as well as the generally increased anti-terrorism efforts. Wars are expensive and hurt the economy because they're net-destructive. I don't mean in the human-tragedy sense, but in purely economic terms, when you build a bomb and then blow drop it on someone, you have nothing to show for it besides a hole in the ground, which no one is going to pay you for. You've spent effort, money, and raw materials to build the bomb and transport it to that hole in the ground, but all of that money and effort just disappeared in a puff of smoke. Literally. Similarly, when you employ souldiers to stay in a country and shoot bad people, you're paying them money but they're not directly producing anything of economic value. (There are the secondary effects of increasing security, but that's really negating a negative, from an economic perspective, since all it's doing is prevent disruption.)

The same is true of security systems — no one wants a security system, they just want their possessions not to be stolen. But in a world without crime, all of that effort that went into security systems could instead be spent on things that people actually want.

The same is true of medical care, by the way. With a few very narrow exceptions, people only spend money on health care in order to stay normal. If people stayed normal on their own, all of that effort could be put to some creative use.

So all of the money that we've spent on the various wars we've been in have hurt the economy because they've taken resources without producing wealth. If we'd taken the Clinton approach of lobbing $5,000,000 worth of cruise missiles into $50 worth of tents to hit 5 camels in the butt, and been lucky enough not to get hit with any more terrorist attacks, our economy would currently be a lot more vibrant (all else being equal, of course).

Similarly, if we could just get the discipline to let nature cull the old and the sick from our population without spending so much money on trying to save them (i.e. if we could achieve health care reform like Europe and Canada have), we'd have a much stronger economy.

Now, you might object that military spending creates jobs, and our current health-care and insurance industries create jobs. And you'd be right. But the problem isn't the jobs that they create, but the things that they don't create. People work because they want things. Primarily basics like food and water and shelter. A near second is security, which means things like medical care and locks on their doors. Etc. I'm sure we've all heard the various hierarchies of needs. Finally, there's all the cool shit you can buy if you have money. These are things like blackjack and hookers, or beer and football, or paint and canvas, or tasty food, or a golden toilet, depending on your tastes. People may not be quite as motivated to work for these as for food and water, but people will work and be creative and take risks in order to be able to buy the cool shit which is available. Given how cheap lumber and mass farming has gotten, the cool shit makes up an enormous part part of our economy. We don't just want shelter, we want nice houses conveniently located with good school districts for our children.

It's this motivation for cool shit that really moves our economy. The more people have to spend on uncool shit, the less money that they have for cool shit, and the less appealing their work is (since it's producing so little perceptible benefit). The less appealing work is, the less people want to do it and especially the less that they want to do more of it. True, if you impose costs additional work that gets you over those costs let you buy cool shit, but human beings are rather limited animals, and we can only take so much aggrivation and frustration before we need a break; at some point the cool shit isn't worth the extra work, because there's too little of it (especially in the short term) to make up for what we have to suffer to get it.

In short, pleasure helps us to relax and be able to work more, because it balances out the pains of working. Other things can balance this out, too. For example, during WWII, FDR and Churchill understood that they needed to rally the population and keep their mind upon the greater good (and future security) that all of their sacrifices were achieving. They knew to demonize their enemies.

And this is, probably, Bush's greatest failing. He's an awful public speaker (I never watch his speaches, I only read them, because watching them is too painful). He's also way too aloof; when it comes to domestic politics, at least, he seems to have completely missed the point of "keep your friends close and your enemies closer". He let his political enemies get far away from him, and left them alone. He should have bitch-slapped the CIA into shape years ago. He may have very strong convictions, but the guy has no public force of personality at all. He's amazingly bad at answering stupid criticisms. He's something like shy — he doesn't speak out forcefully so much as answer. Technically he gives a weekly radio address, but I mean, compare this to this (this week's radio address to one of FDR's fireside chats about the progress of the war).

War is an economic drag, and Bush has done a terrible job of providing any other boost to our national morale to counterbalance that.