Mike the Mad Biologist

Isn’t This High School Economics?

Jonah links to a recent paper in the Journal of Political Economy. Here’s the summary (pdf here):

This study quantitatively assesses the effects of inflation through changes in the value of nominal assets. It documents nominal asset positions in the United States across sectors and groups of households and estimates the wealth redistribution caused by a moderate inflation episode. The main losers from inflation are rich, old households, the major bondholders in the economy. The main winners are young, middle-class households with fixed-rate mortgage debt. Besides transferring resources from the old to the young, inflation is a boon for the government and a tax on foreigners. Lately, the amount of U.S. nominal assets held by foreigners has grown dramatically, increasing the potential for a large inflation-induced wealth transfer from foreigners to domestic households.

I don’t mean to sound snarky (really), but the idea that creditors prefer (and are enriched by) low inflation, while debtors prefer high inflation isn’t exactly new: that’s what Bryan’s “Cross of Gold” speech was all about. It also doesn’t seem particularly novel that bondholders would be disproportionately wealthly and old–nothing novel there either. That such a paper would be seen as a challenge to the prevailing mindset (or for that matter, even need to be published) just shows how depauperate our political and economic discourse is.


  1. #1 Michael Schmidt
    December 18, 2006

    That’s what I learned in high school…

  2. #2 Troublesome Frog
    December 18, 2006

    I’m not by any stretch a professional economist (although I did get a BS in econ while getting the degree that feeds me), but from the looks of it, this paper is out there because it does actual quantitative work to capture exactly how significant the effects it discusses are. You’re right–the ideas are all common sense and introductory econ principles. Even so, it’s possible to get some credit for formalizing it or doing the work with real data. You see, economists are sometimes pleasantly surprised when theory actually pans out in the real world. 😉

    In a place where anybody can tell you whether a price will go up and down, one would hope that a good economist could give you a solid estimate as to how much. Without burning too many neurons reading the paper, I gather that’s what the authors are trying to do.

  3. #3 Maria
    December 22, 2006

    Well, the inflationary tax is usually considered to be pretty regressive – at least it is in other countries. The idea is that the rich are likely to have assets that withstand inflation more than the poor, who don’t own houses but must pay rent, etc.

    The interesting thing here, I think, is that because of the extent to which Americans are in debt, the redistribution isn’t necessarily from rich to poor, but rather from the old (who own assets) to the young (who are heavily indebted). In other words, the paper’s contribution is not that creditors do worse than debtors, but to find who the debtors and creditors are.

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