Why Joe Manchin is wrong about inflation

In high school, everyone learns about hyperinflation — the terrifying devaluation of currency that, we're told, destabilized Germany. Good, upstanding middle-class people had to pile up wheelbarrows full of banknotes to buy bread. The moral of the lessons is clear: inflation is bad. It will lead to the decay of civil society and the rise of fascism.

But just because the ocean can drown you, that's not a good reason to refuse to drink water. Inflation, like H20, can be beneficial in reasonable quantities. Political animosity to inflation is not a response to historical fact. It's a talking point embraced by those who have an ideological commitment to the politics of aridity and inequality.

As one example, consider West Virginia Senator Joe Manchin's recent dabbling in anti-inflation rhetoric. Manchin has said he is opposed to social spending in Joe Biden's Build Back Better infrastructure program because he is worried too much spending will result in "runaway inflation." Among other changes, Manchin is scaling back the child tax credit that was passed in the covid-relief funding bill earlier this year. The credit reduced food insecurity among Manchin's constituents in West Virginia from 11.6 percent to 8.4 percent in the month of July.

Manchin is worried that large scale spending will cause prices to rise. Prices go up when there is a lot of demand for goods. If the government spends money, people have more money and want more goods and services. Then demand increases, and you get inflation.

Many policymakers (somewhat simplistically) believe this is what happened in the 1970s. Lyndon Johnson largely funded the Vietnam war through borrowing, rather than through taxation. That meant that government spending boomed and prices went up. People began anticipating further price increases, which meant that they demanded higher wages, which pushed prices up further. This is the scenario Manchin worries about when he talks about runaway inflation.

Manchin's worries are overblown for two reasons.

In the first place, there is little indication that more spending would create the kind of hyperinflation he fears. Prices did rise 4.3 percent year to year in August, which is a 30-year high. However, they have fallen slightly since August — hardly a sign that inflation is running away. Moreover, part of the reason energy prices are spiking is because worldwide demand contracted during the pandemic. It's taking some time for suppliers to ramp up production again.

Even if the Build Back Better act is passed without cuts, government spending is going to fall by about $1 trillion and borrowing is going to drop by $2 trillion from 2021 to 2022 as the covid-relief package is used up. That doesn't suggest an inexorable upward pressure on pricing analogous to what happened during the Johnson era.

So Manchin is overstating inflation risks. He also, like most politicians, neglects to mention that inflation can be helpful for some people.

When the value of money goes down, the real value of debts also goes down. People who have credit card debts or student loans will find it easier to pay down those debts if prices and wages rise across the economy. In contrast, people who hold debts — like credit card companies and banks — will end up being paid back in less valuable dollars. Since creditors are generally wealthier than debtors, inflation can shift resources to less affluent people. Which, one suspects, may be a reason why millionaires like Senator Joe Manchin dislike it.

This may be part of the reason that some research has found a link between very low inflation and high levels of inequality. The evidence is contradictory and more study is needed. But one thing is clear; inflation in the United States has been at historic low levels over the past 50 years, even as income inequality has ballooned.

Inflation has been stable and low for the past 30 years. At the same time, between 1983 and 2016, upper-income families increased their share of aggregate wealth from 60 to 70 percent, while middle-income families saw their share drop in half from 32 to 17 percent, and lower-income households saw a fall from 7 to 4 percent. Household incomes have stagnated; they grew .3 percent between 2000 and 2018.

Even if low inflation didn't fuel income inequality, it's clear that you can have low inflation and an economy that is unhealthy in other ways. And in fact, inflation fears can be used to justify government disinvestment that leads to higher prices in important sectors.

The obvious example here is higher education. States have been cutting funding to their college systems steadily for some 30 years. This has accelerated since the 2008-2009 recession; state funding in the last decade for higher education has fallen by $9 billion. All of these cuts aren't passed onto students, but some of them are. Tuition rose 20 percent at public four-year colleges between 2010 and 2020, and in some states by much more. In Louisiana it leaped by 99 percent. And this again is occurring at a time when low inflation has helped creditors and hurt students struggling under gigantic debt loads.

Public spending isn't just spending. It's investment. And disinvestment in public goods can have long-term effects that make goods and services more expensive for the less affluent. If you don't spend on public transportation, people have to spend more to get to work. If you don't spend on broadband, it's more expensive for people to get online. Childhood poverty in the US costs more than $1 trillion a year, or more than a quarter of the federal budget. If Manchin wants to save money, he should want more spending on child poverty, not less.

There are other options to reduce spending if Manchin is really concerned that too much investment would boost inflation. He could call for a decrease in defense spending or ethanol subsidies. He could cosign the Democrats' billionaire tax, so that those with the most can contribute to ameliorating the conditions for the poorest children.

But Manchin declared the billionaire tax "divisive." He said, "I don't like the connotation that we're targeting different people. There's people that basically, that contribute to society, that create a lot of jobs, and invest a lot of money, and give a lot to philanthropic pursuits."

But refusing to tax billionaires means more children will live in poverty, just as focusing on inflation tends to prioritize the needs of creditors over debtors. Economic decisions do require tradeoffs. But when politicians say inflation means they can't invest in better lives and a better future, they are generally trying to avoid admitting who they're willing to trade and for what. We don't want to devalue money too much. But we shouldn't let that be an excuse for devaluing people.