American inflation has been in the news a lot this year. That includes, of late, on the highly popular cable TV opinion show of Tucker Carlson Tonight. In the episode on 11/11, entitled None of This is an Accident, Tucker’s first guest, after his opening monologue on “inflation nation”, of Ned Ryun of American Majority, quoted the Chicago School economist Milton Friedman: “Inflation is always and everywhere a monetary phenomenon[.]” I used that quote in my most recent inflation article back in June of The Inflation Iceberg Beneath The Economic Waves Of CPI, where I also pointed out that: “rising prices, however measured, are the effect -- not the cause -- of inflation [and instead it is] simply inflation of the money supply.”
It is not unusual for those on the Right, more so libertarians than conservatives, to decry inflation. And likewise, it is not irregular for those on the Left, from Keynesians to Marxists, to denounce inequality. The latter is sometimes with reference to such measures as the Gini coefficient, where 1 is max inequality and 0 is equality. The graph below provides a timeline for the past 30 years of this metric. What is less common, be it from the Left or Right, is to put the two together as inflation inequality.
To see the chart, click here.
View from the Left I
A paper was released in October 2013 called Banking, Finance and Income Inequality. This was by the group PositiveMoney who are devoted to “reform [of] our money and banking system” out of concern for wealth concentration, democracy and environmental sustainability. Highlights from this paper are:
“Inequality is important…because it may provide human society with its dynamism but, if allowed to become extreme, threatens established norms and social and financial stability.”
“[T]he current banking and financial system encourages the perversion of the behavioural traits of aspiration and emulation (which can otherwise be socially beneficial) into greed and envy, and a socially destructive distancing of the majority from an increasingly wealthy and powerful elite.”
“What is peculiar to the current banking system is the creation of money through debt. Banks don’t lend money in the sense of removing it from the possession of one to place it in the possession of another. They create liabilities against themselves which serve as money. The central role of rising asset prices in creating both the climate and the funding for extreme remuneration suggests that the money-creating consequences of bank lending is a driving factor in the generation of extreme income inequality.”
View from the Left II
Inflation, Interest, and the Secular Rise in Wealth Inequality in the U.S.: Is the Fed Responsible? is an October 2021 paper by Edward N. Wolff. He is “a professor of economics at New York University and a research associate at the National Bureau of Economic Research” (NBER). NBER pertinently “was founded in 1920, largely in response to heated Progressive-era controversies over income distribution.” Highlights from this paper are:
“Two hallmarks of U.S. monetary policy since the 1981-1982 recession have been declining interest rates and moderation in inflation. Coincident with these trends has been a surge in U.S. wealth inequality, with the Gini coefficient up by 0.070 between 1983 and 2019. … Contrary to expectations, the paper finds that these two monetary effects have reduced wealth inequality rather than increasing it. The effect is sizeable, with the Gini coefficient declining by 0.045 over these years. … Moreover, they have helped lower the racial wealth gap rather than enlarging it. These results are at odds with previous literature[.]”
“A lowering of the Federal Funds rate often leads to a rise in stock prices as investors foresee an uptick in future profits. However, this is not a direct consequence of Fed policy, which is reflected only in the change in the discount rate used to compute the present value of future profits. My view is that market reactions are not the responsibility of the Fed and should be ignored in assessing the effects of monetary policy on household wealth.”
“One could say that the Fed has already been successful in reducing wealth inequality and the racial/ethnic wealth gap and in promoting household wealth growth. However, boosting inflation somewhat ironically would lower wealth inequality and the racial/ethnic wealth gap even more and promote even greater growth in household wealth.”
View from the Center
The Wolff paper above has shades of MMT in it, or at least is consistent with it, as is the Biden Administration’s Treasury and Federal Reserve. This is important because, as I said in The Inflation Iceberg, whereas “the aim of QE was to stimulate the real economy[,] MMT aims to stimulate the political economy[.]” Former chief economist to President George W. Bush, prominent Never Trumper and Harvard economics professor N. Gregory Mankiw wrote a January 2020 paper for NBER entitled A Skeptic's Guide to Modern Monetary Theory. Highlights from this paper are:
“MMT burst on the scene in an unusual way. … MMT was developed in a small corner of academia and became famous only when some high-profile politicians—particularly Senator Bernie Sanders and Representative Alexandria Ocasio-Cortez—drew attention to it because its tenets conformed to their policy views.”
“To be sure, a currency-issuing government can always print more money when a bill comes due. That ability might seem to release the government from any financial constraints.”
“But the ever-expanding monetary base will eventually [be] spurring inflation. [Thus], the increase in inflation reduces the real quantity of money demanded. This fall in real money balances, in turn, reduces the real resources that the government can claim via money creation. Indeed, there is likely a Laffer curve for seigniorage.”
View from the Right I
Another, but far lesser known, paper from January 2020 is The impact of monetary systems on income inequity and wealth distribution: A case study of cryptocurrencies, fiat money and gold standard. The five authors are, quite surprisingly (to me at least), from the International Islamic University Malaysia (IIUM). Highlights from this paper are:
“The redistributive impacts of money creation were called ‘Cantillon effects’, which denotes the change in relative prices resulting from a change in the money supply. At the beginning of the 18th century, Richard Cantillon realised that those who receive the newly created money had incomes that continued to increase, while the last receivers of the newly created money experienced declines in purchasing power due to an inflation effect.”
“This phenomenon accelerated and spread globally, especially after August 1971, when the Bretton Woods system was abandoned. … [Their literature review of 13 cited empirical studies, including Romer and Romer (1998), essentially] found that high price inflation is highly correlated with income inequality. … [Plus] Balac (2008) examined the monetary inflation’s effect on wealth inequality distribution in Australia to validate the Austrian monetary inflation theory that claims that changes in the money supply are disproportionately distributed throughout an economy, and as a result wealth is coercively redistributed.”
“This study uses [an] econometric approach to investigate empirically the effects of cryptocurrencies, the gold standard and traditional fiat money on global income inequality[.] … The findings indicated that cryptocurrency and gold standard monetary systems contributed significantly to reducing global inequality of income and wealth distribution. Conversely, the traditional fiat money system contributes positively to global income and wealth inequality while also contributing significantly to their fluctuation.”
View from the Right II
The IIUM paper above mentioned the Austrian monetary inflation theory. The Mises Institute of Alabama are the global leaders in this and they published that Balac (2008) paper in August of that year. The title was Monetary Inflation's Effect on Wealth Inequality: An Austrian Analysis by Zoran Balac. Highlights from this Austrian School of economics paper are:
“The idea of an ‘inflation tax’ has been well documented since as early as the 1700s, when David Hume formulated his quantity theory of money. … Hume recognized that money changes are not implemented proportionally and as a result wrote: When any quantity of money [comes] into a nation, it is not at first dispersed into many hands but is confined to the coffers of a few persons[.]”
“Mises (1996) and Rothbard (1994) elaborate on Hume's theory on disproportionate monetary distribution, claiming that increasing the money supply is tantamount to a tax that penalizes those who see the new money last. This view of monetary redistribution is a cornerstone of Austrian inflation theory.”
“That this redistribution tends to favor those who already possess wealth over those who do not provides the link to wealth inequality. ... Whether through the use of open market operations or issuing discount loans to banks, the Fed clearly has a select clientele to whom it issues new money directly, namely banks. This relationship is certainly a benefit for the banks involved as they can loan out the newly printed money, keeping only fractional reserves.”
I wrote in August 2017 for LibertyWorks regarding Inequality, an Indicator in Search of a Problem that: “One having sufficient and growing wealth ‘pays the bills', not whether someone else has even more sufficient and growing wealth.” However, as I also wrote then: “Inequality only makes economic sense as one possible indicator that something may be askew with real net wealth … be it the levels, trajectory, distribution and especially sources.” And then I added: “What is meant by the latter is whether a person, business or charity sources one's wealth from: A) free market exchange; and/or B) government facilitated exploitation.” Inflation and it’s inequalities both arise from B not A.
The weight of evidence presented here is that inflation hurts unequally. The weight of evidence from The Inflation Iceberg was that inflation was caused by “government facilitated exploitation” not “free market exchange”. So these are two answers to the questions what and how. But why? Public Choice economics. Policy has a marketplace where concentrated special interests seek relatively large benefits for themselves at the relatively small costs to the dispersed masses. The winners from inflation inequality are the insiders of politics, bureaucracy and finance along with their growing list of cronies in activism, education, entertainment, media, technology, etc. The losers are the rest of us outsiders.