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.

Tags

More like this

Is inflation really so bad? The great scourge of the American economy - and the economic phenomenon that gives Greenspan and Bernanke nightmares - turns out to have some pretty progressive side-effects. This paper is from the December 2006 issue of the Journal of Political Economy: This study…
And in non-goat news.... According to the study, the inflation-adjusted median wealth among Hispanic households fell 66% from 2005 to 2009. Black households suffered a 53% drop in net worth over the same period. By contrast, whites saw a decline of 16% in household wealth. In 2009, the typical…
Ziel points me to an amusing post, The Credit Snobs: I rather like the title "voodoo priest of free market economics" so I am happy to take the blame for the sub-prime mortgage defaults and at the same time stick a few pins in Nouriel Roubini. Roubini and others generating hysteria about defaults…
Bill Mitchell smacks down some silliness from Peggy Noonan about the supposed looming insolvency of the U.S. (italics mine): She [Noonan] should hang her head in shame for providing further myths that will certainly agitate all the ignorant - uneducated (despite long lists of credentials) - and…

That's what I learned in high school...

By Michael Schmidt (not verified) on 18 Dec 2006 #permalink

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.

By Troublesome Frog (not verified) on 18 Dec 2006 #permalink

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.