Marginal Revolution University
Published on 2 Feb 2017The inflation rate can be somewhat volatile and unpredictable. For example, let’s take the period between 1964 and 1983 in the U.S. The inflation rate jumped around from 1.3% in 1964 to 5.9% in 1970, and all the way up to 14% in in 1980, before dipping back down to 3% in 1983. These dramatic changes, though still fairly mild in the realm of inflation, caught people off-guard.
Peru’s inflation rates in the late 1980s through the early 1990s were on even more of a rollercoaster. Clocking in at 77% in 1986, its inflation rate was already quite high. But by 1990, it had jumped to 7,500%, only to fall to 73% a mere two years later.
High and volatile inflation rates can wreak havoc on the price system where prices act as signals. If the price of oil rises, it signals scarcity of that product and allows consumers to search for alternatives. But with high and volatile inflation, there’s noise interfering with this price signal. Is oil really more scarce? Or are prices simply rising? This leads to price confusion – people are unsure of what to do and the price system is less effective at coordinating market activity.
Money illusion is another problem associated with inflation. You’ve likely experienced this yourself. Think of something that you’ve noticed has gotten more expensive over the course of your lifetime, such as a ticket to the movies. Is it really that going out the movies has become a pricier activity, or is it the result of inflation? It’s difficult for us to make all of the calculations to accurately compare rising costs. This is known as “money illusion” – or when we mistake a change in the nominal price with a change in the real price.
Inflation, especially when it’s high and volatile, can result in some costly problems for everyone. Next up, we’ll look at how it redistributes wealth and can break down financial intermediation.
September 6, 2018
Costs of Inflation: Price Confusion and Money Illusion
Trans-partisan planning
At Coyote Blog, Warren Meyer offers a plan to address man-made climate change, pitched to avoid being dismissed as “typical” of one or the other side:
While I am not deeply worried about man-made climate change, I am appalled at all the absolutely stupid, counter-productive things the government has implemented in the name of climate change, all of which have costly distorting effects on the economy while doing extremely little to affect man-made greenhouse gas production. For example:
- Corn ethanol mandates and subsidies, which study after study have shown to have zero net effect on CO2 emissions, and which likely still exist only because the first Presidential primary is in Iowa. Even Koch Industries, who is one of the largest beneficiaries of this corporate welfare, has called for their abolition
- Electric car subsidies, 90% of which go to the wealthy to help subsidize their virtue signalling, and which require more fossil fuels to power than an unsubsidized Prius or even than a SUV.
- Wind subsidies, which are promoting the stupidist form for power ever, whose unpredictabilty means fossil fuel plants still have to be kept running on hot backup and whose blades are the single largest threat to endangered bird species.
- Bad government technology bets like the massive public subsidies of failed Solyndra
Even when government programs do likely have an impact of CO2, they are seldom managed intelligently. For example, the government subsidizes solar panel installations, presumably to reduce their cost to consumers, but then imposes duties on imported panels to raise their price (indicating that the program has become more of a crony subsidy for US solar panel makers, which is typical of these types of government interventions). Obama’s coal power plan, also known as his war on coal, will certainly reduce some CO2 from electricity generation but at a very high cost to consumers and industries. Steps like this are taken without any idea of whether this is the lowest cost approach to reducing CO2 production — likely it is not given the arbitrary aspects of the program.
These policy mess is also an opportunity — it affords us the ability to substantially reduce CO2 production at almost no cost.
Feature History – Chinese Civil War
Feature History
Published on 25 Jul 2017Hello and welcome to Feature History, featuring a civil war that done happened in China.
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I do the research, writing, narration, art, and animation. Yes, it is very lonely
QotD: Freedom of speech
A metaphor: we have freedom of speech not because all speech is good, but because the temptation to ban speech is so great that, unless given a blanket prohibition, it would slide into universal censorship of any unpopular opinion.
Scott Alexander, “You Are Still Crying Wolf”, Slate Star Codex, 2016-11-16.
