Books, Uncategorized

Inflation In India:A Reading List

The plain truth is that our political leaders have brought on inflation by their own money and fiscal policies.

Government action is the reason why inflation exists. The monetary base is under the Fed’s complete control, and it virtually always goes up. Thus, if the Fed took no action, inflation would almost always be lower. In fact, as George Selgin emphasizes, the natural tendency of a growing economy is mild deflation. If you think this is obvious, let’s see what happens if inflation gets much higher. Not only will the public hunt for scapegoats; but even a lot of economists will avoid pointing the finger at the Fed. (And needless to say, the Fed will not point the finger at itself!) The Fed (like all central banks) virtually never “fights inflation.” Of course, sometimes the Fed creates less inflation than at other times. But popular talk about the Fed moving into “fighting inflation” mode is pure obfuscation. It makes about as much sense as saying that an orange farmer who cuts back orange production by 20% is “fighting oranges.” If you’ve taught monetary for years, you may dismiss this as obvious, too. But when I was an economic novice, it was a revelation. And if you don’t hit your students over the head with it, most of them will never get it.-Bryan Caplan, What The Mainstream Can Learn From Murray Rothbard

It would be hard to improve over the 2-3% inflation combined with stable output and employment that central banks delivered in the 90s and 00s. But why have central banks have out-performed other state-owned enterprises? My best guesses: 1.) The public exaggerates the harm of inflation, and angrily punishes incumbents who allow inflation to spike. Normally, such exaggeration encourages politicians to inefficiently make large sacrifices for small gains. Luckily, though, low inflation turns out to be, in the long run, a free lunch. The public’s inflation paranoia conveniently drives politicians to accept this free lunch. 2.) The people who run central banks are usually economists. Whatever their problems, economists are – compared to other government officials – unusually likely to adopt economically efficient policies if you give them a chance. So contrary to Rothbard’s populist complaints, giving independence to central bankers has relatively good results.-Bryan Caplan, Econlog

The U.S. government has a technology, called a printing press that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.-Ben Bernanke, Deflation: Making Sure “It” Doesn’t Happen Here

Governments want to spend money and sooner or later, governments are going to want to spend money without taxing it and the only way to do that is to print money—to create inflation. Inflation is a form of taxation. How long will governments be able to resist the temptation? And particularly as people become adjusted to being in a world of stable inflation. They will be bigger suckers as it were. It will be easier to get a lot out of it. If everybody anticipated inflation, you couldn’t get anywhere by inflating. The intellectual environment understands today that inflation is caused by a rapid growth in the money supply. I think that’s clear and the last 30 years, last 20 years I should say, has done a great deal to rub that in because every central bank has come to accept the view that it’s responsible for inflation. They use the short-term interest rate as a way of controlling the quantity of money. The Fed says the short-term interest rate should be 4.5 percent. How do they keep it there? By buying and selling securities on the open market. Now you’re Mr. Bernanke; you’re Mr. Greenspan. You’re watching that. And with the current short-term interest rate, you find that the quantity of money is starting to creep up more rapidly than you really want. Well, then you will tend to be favorable to raising to a higher rate of interest.  At that higher rate of interest, the demand for money is less and so the supply of money under that phenomenon, instead of having to sell government bonds to keep it there, they have to buy government bonds to keep it there or vice versa. Maybe I’m getting it mixed up. But in any event, the short-term interest rate is a tool with which you can control the quantity of money. But they don’t talk about it that way.-Milton Friedman, Interview with Econlib.

No subject is so much discussed today — or so little understood — as inflation. The politicians in Washington talk of it as if it were some horrible visitation from without, over which they had no control — like a flood, a foreign invasion, or a plague. It is something they are always promising to “fight” — if Congress or the people will only give them the “weapons” or “a strong law” to do the job. Yet the plain truth is that our political leaders have brought on inflation by their own money and fiscal policies. They are promising to fight with their right hand the conditions brought on with their left. Inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit. In fact, inflation is the increase in the supply of money and credit. It is true that a rise in prices (which, as we have seen, should not be identified with inflation) can be caused either by an increase in the quantity of money or by a shortage of goods — or partly by both. Wheat, for example, may rise in price either because there is an increase in the supply of money or a failure of the wheat crop. But we seldom find, even in conditions of total war, a general rise of prices caused by a general shortage of goods. Yet so stubborn is the fallacy that inflation is caused by a “shortage of goods,” that even in the Germany of 1923, after prices had soared hundreds of billions of times, high officials and millions of Germans were blaming the whole thing on a general “shortage of goods” — at the very moment when foreigners were coming in and buying German goods with gold or their own currencies at prices lower than those of equivalent goods at home.-Henry Hazlitt, What You Should Know About Inflation

In recent decades we always have had federal deficits. The invariable response of the party out of power, whichever it may be, is to denounce those deficits as being the cause of perpetual inflation. And the invariable response of whatever party is in power has been to claim that deficits have nothing to do with inflation. Both opposing statements are myths. Deficits mean that the federal government is spending more than it is taking in in taxes. Those deficits can be financed in two ways. If they are financed by selling Treasury bonds to the public, then the deficits are not inflationary. No new money is created; people and institutions simply draw down their bank deposits to pay for the bonds, and the Treasury spends that money. Money has simply been transferred from the public to the Treasury, and then the money is spent on other members of the public. On the other hand, the deficit may be financed by selling bonds to the banking system. If that occurs, the banks create new money by creating new bank deposits and using them to buy the bonds. The new money, in the form of bank deposits, is then spent by the Treasury, and thereby enters permanently into the spending stream of the economy, raising prices and causing inflation.-Murray Rothbard, Ten Great Economic Myths

The government may think that inflation — as a method of raising funds — is better than taxation, which is always unpopular and difficult. In many rich and great nations, legislators have often discussed, for months and months, the various forms of new taxes that were necessary because the parliament had decided to increase expenditures. Having discussed various methods of getting the money by taxation, they finally decided that perhaps it was better to do it by inflation. But of course, the word “inflation” was not used. The politician in power who proceeds toward inflation does not announce, I am proceeding toward inflation.” The technical methods employed to achieve the inflation are so complicated that the average citizen does not realize inflation has begun. Today the techniques for inflation are complicated by the fact that there is checkbook money. It involves another technique, but the result is the same. With the stroke of a pen, the government creates fiat money, thus increasing the quantity of money and credit. The government simply issues the order, and the fiat money is there.-Ludwig Von Mises, Inflation

The supporting evidence for Friedman’s proposition is straightforward. For virtually any country one examines, even in a bad year real income seldom falls by more than two or three percentage points. Velocity has been known to rise over long periods, but seldom more than one percentage point year after year. When high-inflation and low-inflation countries are compared, differences in money growth are much greater from country to country than differences in either real output growth or velocity. As a result, the rate of monetary expansion is the dominant factor accounting for differences in inflation rates across countries. High-inflation countries are countries with rapid money growth. Likewise, the dominant factor accounting for different inflation rates over decades in the same country (e.g., the lower U.S. inflation rate in the 1990s compared with the 1970s) is different money growth rates. High-inflation decades are decades with rapid money growth.-Inflation, Lawrence H White

India is not unique in facing supply shocks. Indeed, the recent rise in commodities prices, especially oil, has been unprecedented. Despite this, inflation across the world is still averaging in the single digits, unlike in the 1970s. The reason is that central banks across the world have acquired credibility that they will fight spillover effects, and prevent generalized inflation. Maybe our politicians have kept India’s inflation low through extremely short-term and distortionary policies, but it is not that we are unique in the world. Many others have done so with far fewer distortions. Perhaps there is something to be learnt? What about the argument that India is unique in that our politicians will always intervene? The “India is unique” argument is intellectually bankrupt. It is the natural response whenever anything is proposed that goes against the status quo. We have to offer better arguments than that, documenting precise reasons why India is different and why it matters. The truth is other countries also have politicians who worry about getting re-elected. And other countries also have poor people who are hurt by inflation. The move to make central banks responsible for inflation management was also an attempt to get the politicians out of the price setting and inflation process. If Brazil, with historically dysfunctional politics and hyperinflation not so long ago, has lower inflation than India today, we may want to ask whether its central bank’s mandate of price stability is precisely what has enabled it to withstand political pressures and achieve the goal. The consensus that maintaining low inflation is the central bank’s job, and its only job, did not develop overnight in those countries, it took time. It is our hope that this consensus will develop in India also.-Raghuram Rajan And Eswar Prasad,Monetary Policy Myths

Almost everything we know in macroeconomics, worldwide, is rooted in the United States. There is no other country which has long time-series of data under the conditions of being a market economy. Almost all the discussion about monetary policy and inflation in Australia is rooted in the US literature. The US is the lab in which macroeconomics was forged. I focused on the US in the 1960s and the US in a fuller perspective as the Philips curve was invented with the US data, and died when the US data stopped showing this relationship existed. It is this graph which embellished numerous textbooks, which have been studied by essentially anyone who thinks that there is a Philips curve. The guys who claim that there is a Philips curve in India are not showing such a graph with Indian evidence. The basic logic of what we’ve figured out in the US has been transplanted in myriad countries with success. India is no different, particularly as we move forward towards becoming an ordinary market economy.-Ajay Shah, Why Is Solving India’s Inflation Crisis Important

Central banks of most major countries are high quality inflation targeters. They deliver on their mandate of delivering low and stable inflation. As a consequence, inflation in the global tradeables basket tends to be low and stable. Tradeables prices are a helpful source of price stability, most of the time. That a large part of the CPI basket is tradeable, and seemingly beyond the control of the central bank, is no excuse. There are dozens of high quality central banks visible in the world, with very large shares of the CPI basket in tradeables, who are delivering on inflation targets. We in India should not accept excuses.-Ajay Shah, Reining In The Inflationary Dragon

In many other countries, the political landscape has been one where politicians are relatively reckless about inflation, and the economists and central bankers are the ones preaching the virtues of low and stable inflation, asking for an independent central bank which does only one thing: deliver low and stable inflation. We find the opposite configuration in India: the RBI (and the economists who run with RBI) criticise inflation targeting, and preach in favour of non-transparency and multiple objectives. I suppose this is a reflection upon the professional skills of economists and central bank staff in India. Most economists in India are brought up on traditional `development economics’, which is a different skill set when compared with macroeconomics. Somehow, left wing economists (e.g. the EPW) have come to think that price stability is not that important, and leftist ideas have a remarkably big footprint in India, when compared with what we see in economics worldwide. Another dimension is the self-interest of RBI, which is likely to be pleased at being a central planning agency for Indian finance, and to not be held accountable for anything.-Ajay Shah, Opposition Moves Today

“India is a very poor country. We know very little about how to establish institutions or regulate markets that can support a sophisticated economy where a billion people can enjoy high productivity. Nobody in the world wants Indian-style monetary or financial policy-making. Our path ahead lies in learning how fiscal, financial and monetary institutions work in countries where per capita GDP is many times bigger than what we have in India. Our hope for making progress lies in learning these things with an open mind, and demanding a pace of change in India so that we can become more like an OECD country. A villager with no roads may foolishly boast of having no accidents, but he cannot teach people how to regulate traffic on busy intersections. It is important for policy-makers to remember that India has no lessons to offer to regulators operating in the sophisticated world of finance, and proposals suggesting that they should learn our style of regulation only make us look foolish.”-Ila Patnaik, No One Like Us, The Indian Express


Leave a Comment

Your email address will not be published. Required fields are marked *