Hard money is not a mistake
Paul Krugman is wondering hard about why fear of inflation so haunts the wealthy and well-off. Like many people on the Keynes-o-monetarist side of the economic punditry, he is puzzled. After all, aren’t “rentiers” — wealthy debt holders — often also equity holders? Why doesn’t their interest in the equity appreciation that might come with a booming economy override the losses they might experience from their debt positions? Surely a genuinely rising tide would lift all boats?
As Krugman points out, there is nothing very new in fear of inflation by the rich. The rich almost always and almost everywhere are in favor of “hard money”. When William Jennings Bryan worried, in 1896, about “crucify[ing] mankind on a cross of gold”, he was not channeling the concerns of the wealthy, who quickly mobilized more cash (as a fraction of GDP) to destroy his candidacy for President than has been mobilized in any campaign before or since. (Read Sam Pizzigati.)
Krugman tentatively concludes that “it…looks like a form of false consciousness on the part of elite.” I wish that were so, but it isn’t. Let’s talk through the issue both in very general and in very specific terms.
First, in general terms. “Wealth” represents nothing more or less than bundles of social and legal claims derived from events in the past. You have money in a bank account, you have deeds to a property, you have shares in a firm, you have a secure job that yields a perpetuity. If you are “wealthy”, you hold a set of claims that confers unusual ability to command the purchase of goods and services, to enjoy high social status and secure that for your children, and to insure your lifestyle against uncertainties that might threaten your comforts, habits, and plans. All of that is a signal which emanates from the past into the present. If you are wealthy, today you need to do very little to secure your meat and pleasures. You need only allow an echo from history to be heard, and perhaps to fade just a little bit.
Unexpected inflation is noise in the signal by which past events command present capacity. Depending on the events that provoke or accompany the inflation, any given rich person, even the wealthy “in aggregate”, may not be harmed. Suppose that an oil shock leads to an inflation in prices. Lots of already wealthy “oil men” might be made fabulously wealthier by that event, while people with claims on debt and other sorts of equity may lose out. Among “the rich”, there would be winners and losers. If oil men represent a particularly large share of the people we would call wealthy (as they actually did from the end of World War II until the 1960s, again see Pizzigati), gains to oil men might more then offset losses to other wealthy claimants, leaving “the rich” better off. So, yay inflation?! No. The rich as a class never have and never will support “inflation” generically, although they routinely support means of limiting supply of goods on whose production they have disproportionate claims. (Doctors and lawyers assiduously support the licensing of their professions and other means of restricting supply and competition.) “Inflation” in a Keynesian or monetarist context means doing things that unsettle the value of past claims and that enhance the value of claims on new and future goods and services. Almost by definition, the status of the past’s “winners” — the wealthy — is made uncertain by this. That is not to say that all or even most will lose: if the economy booms, some of the past’s winners will win again in the present, and be made even better off than before, perhaps even in relative terms. But they will have to play again. It will become insufficient to merely rest upon their laurels. Holding claims on “safe” money or debt will be insufficient. Should they hedge inflation risks in real estate, or in grain? Should they try to pick the sectors that will boom as unemployed resources are sucked into production? Will holding the S&P 500 keep them whole and then some, and over what timeframe (after all, the rich are often old). Can all “the elite” jump into the stock market, or any other putative inflation hedge or boom industry, and still get prices good enough to vouchsafe a positive real return? Who might lose the game of musical chairs?
Even if you are sure — and be honest my Keynesian and monetarist friends, we are none of us sure — that your “soft money” policy will yield higher real production in aggregate than a hard money stagnation, you will be putting comfortable incumbents into jeopardy they otherwise need not face. Some of that higher return will be distributed to groups of people who are, under the present stability, hungry and eager to work, and there is no guarantee that the gain to the wealthy from excess aggregate return will be greater than the loss derived from a broader sharing of the pie. “Full employment” means ungrateful job receivers have the capacity to make demands that could blunt equity returns. And even if that doesn’t happen, even if the rich do get richer in aggregate, there will be winners and losers among them, each wealthy individual will face risks they otherwise need not have faced. Regression to the mean is a bitch. You have managed to put yourself in the 99.9th percentile, once. If you are forced to play again in anything close to a fair contest, the odds are stacked against your repeating the trick. It is always good advice in a casino to walk away with ones winnings rather than double down and play again. “The rich” as a political aggregate is smart enough to understand this.
As a class, “the rich” are conservative. That is, they wish to maintain the orderings of the past that secure their present comfort. A general inflation is corrosive of past orderings, for better and for worse, with winners and losers. Even if in aggregate “we are all” made better off under some softer-money policy, the scale and certainty of that better-offedness has to be quite large to overcome the perfectly understandable risk-aversion among the well-enfranchised humans we call “the rich”.
More specifically, I think it is worth thinking about two very different groups of people, the extremely wealthy and the moderately affluent. By “extremely wealthy”, I mean people who have fully endowed their own and their living progeny’s foreseeable lifetime consumption at the level of comfort to which they are accustomed, with substantial wealth to spare beyond that. By “moderately affluent”, I mean people at or near retirement who have endowed their own future lifetime consumption but without a great deal to spare, people who face some real risk of “outliving their money” and being forced to live without amenities to which they are accustomed, or to default on expectations that feel like obligations to family or community. Both of these groups are, I think, quite allergic to inflation, but for somewhat different reasons.
It’s obvious why the moderately affluent hate inflation. (I’ve written about this here.) They rationally prefer to tilt towards debt, rather than equity, in their financial portfolios, because they will need to convert their assets into liquid purchasing power over a relatively short time frame. Even people who buy the “stocks for the long run” thesis (socially corrosive, because our political system increasingly bends over to render it true) prefer not to hold wealth they’ll need in short order as wildly fluctuating stocks, especially when they have barely funded their foreseeable expenditures. To the moderately affluent, trading a risk of inflation for promises of a better stock market is a crappy bargain. They can hold debt and face the risk it will be devalued, or they can shift to stocks and bear the risk that ordinary fluctuations destroy their financial security before the market finds nirvana. Quite reasonably, affluent near-retirees prefer a world in which the purchasing power of accumulated assets is reliable over their planning horizon to one that forces them to accept risk they cannot afford to bear in exchange for eventual returns they may not themselves enjoy.
To the extremely rich, wealth is primarily about status and insurance, both of which are functions of relative rather than absolute distributions. The lifestyles of the extremely wealthy are put at risk primarily by events that might cause resources they wish to utilize to become rationed by price, such that they will have to bid against other extremely affluent people in order to retain their claim. These risks affect the moderately affluent even more than the extremely wealthy — San Francisco apartments are like lifeboats on a libertarian titanic. But the moderately affluent have a great deal to worry about. For the extremely wealthy, these are the most salient risks, even though they are tail risks. The marginal value of their dollar is primarily about managing these risks. To the extremely wealthy, a booming economy offers little upside unless they are positioned to claim a disproportionate piece of it. The combination of a great stock market and risky-in-real-terms debt means, at best, everyone can all hold their places by holding equities. More realistically, rankings will be randomized, as early equity-buyers outperform those who shift later from debt. Even more troubling, in a boom new competitors will emerge from the bottom 99.99% of the current wealth distribution, reducing incumbents’ rankings. There’s downside and little upside to soft money policy. Of course, individual wealthy people might prefer a booming economy for idealistic reasons, accepting a small cost in personal security to help their fellow citizens. And a case can be made that technological change represents an upside even the wealthiest can enjoy, and that stimulating aggregate demand (and so risking inflation) is the best way to get that. But those are speculative, second order, reasons why the extremely wealthy might endorse soft money. As a class, their first order concern is keeping their place and forestalling new entrants in an already zero-sum competition for rank. It is unsurprising that they prefer hard money.
Krugman cites Kevin Drum and coins the term “septaphobia” to describe the conjecture that elite anti-inflation bias is like an emotional cringe from the trauma of 1970s. That’s bass-ackwards. Elites love the 1970s. Prior to the 1970s, during panics and depressions, soft money had an overt, populist constituency. The money the rich spent in 1896 to defeat William Jennings Bryan would not have been spent if his ideas lacked a following. As a polity we knew, back then, that hard money was the creed of wealthy creditors, that soft money in a depression was dangerous medicine, but a medicine whose costs and risks tilted up the income distribution and whose benefits tilted towards the middle and bottom. The “misery” of the 1970s has been trumpeted by elites ever since, a warning and a bogeyman to the rest of us. The 1970s are trotted out to persuade those who disproportionately bear the burdens of an underperforming or debt-reliant economy that There Is No Alternative, nothing can be done, you wouldn’t want to a return to the 1970s, would you? In fact (as Krugman points out), in aggregate terms the 1970s were a high growth decade, rivaled only by the 1990s over the last half century. The 1970s were unsurprisingly underwhelming on a productivity basis for demographic reasons. With relatively fixed capital and technology, the labor force had to absorb a huge influx as the baby boomers came of age at the same time as women joined the workforce en masse. The economy successfully absorbed those workers, while meeting that generation’s (much higher than current) expectations that a young worker should be able to afford her own place, a car, and perhaps even work her way through college or start a family, all without accumulating debt. A great deal of redistribution — in real terms — from creditors and older workers to younger workers was washed through the great inflation of the 1970s, relative to a counterfactual that tolerated higher unemployment among that era’s restive youth. (See Karl Smith’s take on Arthur Burns.) The 1970s were painful, to creditors and investors sure, but also to the majority of incumbent workers who, if they were not sheltered by a powerful union, suffered real wage declines. But that “misery” helped finance the employment of new entrants. There was a benefit to trade off against the cost, a benefit that was probably worth the price, even though the price was high.
The economics profession, as it is wont to do (or has been until very recently), ignored demographics, and the elite consensus that emerged about the 1970s was allowed to discredit a lot of very creditable macroeconomic ideas. Ever since, the notion that the inflation of the 1970s was “painful for everyone” has been used as a cudgel by elites to argue that the preference of the wealthy (both the extremely rich and the moderately affluent) for hard money is in fact a common interest, no need for class warfare, Mr. Bryan, because we are all on the same side now. “Divine coincidence” always proves that in a capitalist society, God loves the rich.
Soft money types — I’ve heard the sentiment from Scott Sumner, Brad DeLong, Kevin Drum, and now Paul Krugman — really want to see the bias towards hard money and fiscal austerity as some kind of mistake. I wish that were true. It just isn’t. Aggregate wealth is held by risk averse individuals who don’t individually experience aggregate outcomes. Prospective outcomes have to be extremely good and nearly certain to offset the insecurity soft money policy induces among individuals at the top of the distribution, people who have much more to lose than they are likely to gain. It’s not because they’re bad people. Diminishing marginal utility, habit formation and reference group comparison, the zero-sum quality of insurance against systematic risk, and the tendency of regression towards the mean, all make soft money a bad bet for the wealthy even when it is a good bet for the broader public and the macroeconomy.
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- 6-Sep-2014, 9:50 p.m. PDT: “The marginal value of their dollar is primarily about managing
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