The Social Principles, Austrian Economics, and Inflation

The United Methodist Church that I have been attending for the past couple of months has been going through the UMC’s Social Principles in its Sunday School class.  Last week, one of the people in the class was talking about economics.  We were in the section of the Social Principles about “The Economic Community,” and economics is a subject of interest for one of the regular attendants of the Sunday School class.  He has read a lot about the subject, and, essentially, he adheres to the Austrian school of economics.  He describes himself as a libertarian, which means that there are two libertarians in the class.

I understood some of what he was saying, but not everything.  He is against the government borrowing a lot of money and creating money out of thin air, since that leads to inflation.  He is for personal savings and thinks that even private citizens should be reluctant to go into debt.  He laments that Federal Reserve notes are not redeemable by gold, and he believes that John F. Kennedy’s assassination may have related to JFK challenging the Federal Reserve (see here).  He is critical of lowering interest rates, saying that interest rates are a critical indicator of whether one should save or go into debt.  He also said that booms can lead to busts and that 2% economic growth a year is sustainable.

The progressives in the group were not challenging what he was saying, and I think that was because they identified with some of it.  He was criticizing the Iraq War and how that led to lots of debt because the government preferred to go into debt to pay for it rather than to collect a war tax.  That would definitely resonate with progressives, who think that the Iraq War was a bad idea.  He was saying that there are people with vested interests in the current economic system.  That resonated with a progressive in the group who opposes Citizens’ United, even though the two of them may disagree on Citizens’ United.  And he was criticizing going into debt and not having enough savings, and I am sure that a number of progressives can respect that as common-sense wisdom—-when one can save and avoid debt, that is.

Often, critics of Austrian economics have maintained that inflation right now is not much of a problem.  Bruce Bartlett said more than once during the Obama Presidency that all this money is out there but that people are not spending much of it, and so the abundant money supply is not contributing to inflation; rather, deflation is the problem.  Yesterday, I was watching a video by Robert Reich that was saying that the Federal Reserve should not raise interest rates (my friend Laurie discusses the video on her political blog).  Reich was saying that low interest rates stimulate the economy and allow people to spend more money on necessities rather than debt, and he also said that, overall, inflation is currently not a problem.  He said that high prices are a problem in certain big companies where competition is lacking, but not overall.  Reich was making this point because the conventional economic wisdom has long been that there is an inverse relationship between inflation and interest rates.

Indeed, according to this chart, inflation is low.  At the same time, I have difficulty saying that inflation is not a problem.  I know that, during the four years that I was living in upstate New York, my Mom and her husband complained often about the high prices of groceries, and how the prices continued to rise.  That was difficult for us, especially in a time when every single dollar mattered.  Now that we live in Washington and shop at a grocery store that has low prices, that is not as much of a problem for us, and there is a little more flexibility in our finances.  But high prices were a problem for us, for a long time.