Money as a drug

It is much easier to get re-elected if your policies cause inflation than if the voters see your administration as responsible for the destruction of some jobs. Half a century ago, economist William Phillips discovered a short-term inverse relationship between nominal wages and unemployment rates. Soon afterward, future Nobel laureates Paul Samuelson and Robert Solow popularized the Phillips curve. It became standard Keynesian policy wisdom that lower interest rates and deficit spending can cure recessions. Despite being discredited by theory (the monetarist counterrevolution) and practice (the experience of the 1970s), we're witnessing a revival of faith in the Phillips curve and the potency of countercyclical policies to deal with the vice of private thrift.

It may be expedient for politicians to accept inflation as a necessary price to be paid for saving their jobs. But there is more to inflation than an increase in the general level of prices. The redistributive costs of inflation disrupt social harmony, as pointed out by Ludwig von Mises and Milton Friedman. Those who get the funds first enjoy a temporary boost in living standards. Others get it later when prices are higher; some are on fixed incomes and are forced to consume less. Eventually, different professionals go on strike hurting people who have no fault--- teachers hurting students and parents, doctors hurting patients and their families, public transport drivers hurting commuters, garbage collectors hurting residents, tourists, and businesses. History is full of such examples.

Inflation increases uncertainty, forces people to waste additional resources trying to cope with myriad problems, leads to poor choices between current and future consumption, and distorts investment paving the way for the next economic bust. The Phillips curve relationship between inflation and unemployment falls apart in the long run and you end up with stagflation. This begs two questions. Why are politicians so often tempted to ignore the dangers of high inflation? Why are governments so reluctant to deal with the problem? It is because the good effects of inflation come first---additional spending causes a temporary "high" for some consumers and businesses. At the same time the cure is known for the immediate painful effects---recession until inflation gets squeezed out. Inflation is like drug addiction as observed by Milton Friedman. And it takes a lot of political courage to go through the withdrawal phase.