More Inflation Needed

Alex Tabarrok noted this morning:

I wish Arnold Kling were correct that inflation is around the corner. We could use some inflation to get back on track. Nominal wages are simply not flexible enough to get the job done in short order and there is much to fear from populist backlash.

I wish Tabarrok could do more to convince his fellow free market types that this is correct. Because instead the political system seems to be dangerously obsessed with the idea that we need to start fighting inflation.

Another data point in the inflation-would-be-good direction comes from this recent Wall Street Journal article on how businesses have started hoarding cash. The idea of “risky investments” has come to be associated with financial firms gambling on financial assets, and now there’s a backlash against the very concept. But the reality is that for the economy to grow, businesses need to be making investments in their own capacity. And all such investments always involve some risk. One problem with these traumatic downturns is that everyone starts getting extremely risk-averse and hoards money out of fear that investments won’t pay off. That belief becomes, in turns, self-justifying since with so little investment happening there’s little growth and investments don’t pay off.

One way to alleviate the cycle, however, is to have some inflation. Inflation makes it very costly to sit on piles of cash, and makes it look better to go out and do something with it instead. A period of zero or falling inflation, by contrast, makes hoarding look like a pretty reasonable course of action.