A small but positive rate of inflation can be good for an economy
The resolution is "A small but positive rate of inflation can be good for an economy."
For my first debate on this site as pro, I will be arguing that some inflation can be a good thing. In the debate inflation has the meaning from http://www.merriam-webster.com... #2
: a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services.
First round acceptance only. No new arguments in final round.
I thank my opponent for accepting the challenge to debate this very important topic.
Because it’s a necessary antecedent to my argument, I will briefly touch on why deflation is bad for an economy. Since the economic health of a society is dependent on the amount of real goods and services that can be produced, to grow an economy means to invest in increased production. When an economy goes into deflation, holding cash becomes a profitable “investment” since it will be exchangeable for more real goods in the future. This effect reduces investment in otherwise profitable projects. Additionally, deflation means nominal wages have to fall in addition to prices. Since there is resistance to cutting wages (contracts and the like) the only way to have a decrease in aggregate wages is to have a rise in unemployment.
Point 2. Inflation encourages investment over saving
Money sitting in bank accounts or cash in a safe does not stimulate the economy. Construction of new factories and research into better production methods do. A small level of inflation discourages hording of money and encourages the holding of assets, either through outright purchase or by financing their creation. It is this creation of new assets, which in turn produces more goods, that grows the economy.
Point 3. Inflation is caused by a growing economy
Inflation (in a sovereign currency) is naturally caused by a growing economy. Central governments should not seek to prevent this. Generally speaking, a company needs to pay its costs (materials and labor) prior to receiving payment for finished goods. If a company expands (either by hiring more people or paying more for higher skills) it has increased the total demand in the economy (those new or higher paid workers will want to buy things). However, the new goods they are producing have not yet come on the market. Now imagine a similar phenomenon across the economy as a whole – companies are expanding and producing more. This causes a temporary jump in prices. Once the new goods come on the market, prices stop rising, having reached a new equilibrium. If, however more businesses expand, that will push prices up again. If businesses are expanding continuously, the price rise will be continuous and we have inflation. Yes, if businesses expand too rapidly, you can have a bubble. However, not all expansions are bubbles. If there were never an expansion, we would all still be tilling our own farms, and there would be no cars or iphones.
 http://krugman.blogs.nytimes.com... (cited for the internal quotes, not the author’s opinion)
Today, in the United States, the main concern is the economy. This current recession that we find ourselves in has many culprits, but one unmistakable cause of the troubles is inflation. Inflation in the housing markets, in tech markets, and others. This alone would seem evidence enough that inflation is not a positive change for an economy. This is not enough though, as the inflation that occurred in these markets was rapid and uncontrolled. It was not a small rate of inflation, as my peer is stating is a good thing in economic terms. My peer makes a mistake though, in not explaining, how inflation is to be controlled so it remains a steady increase and does not become rapid. Is it even possible to control inflation? Well, it depends on what is meant by control. If by control one means to raise/lower interest rates, as the Federal Reserve does, print more money, and cross your fingers hoping it works. Then yes, it can. However, markets are anything but controllable, and attempts to control inflation have been far from successful. A small rate of inflation easily spirals out of control into a bubble. At this point a reasonable question can be asked:No matter what the positive effects, if something is harmful, cannot be controlled, and because of this lack of control quickly becomes far more harmful, are any positives relevant?Now I will attempt to refute my peers points:
Point: - That inflation is a natural-by product of growth.
Starting, my peer has falsely stated the inflation is a by-product of growth. Common sense dictates that as an economy grows, more product will be available and thus price will fall so as to ensure the product sells. It even makes mathematical sense as well.
"Some simple arithmetic will help clarify. Start with the famous equation of exchange, MV = Pq, where M is the money supply; V is the velocity of money, that is, the speed at which money circulates; P is the price level; and q is the real output of the economy. If the growth rate of the economy increases, that is, if the growth rate of q increases, then, if the growth rates of M and V are held constant, the growth rate of the price level must fall. Since the growth rate of the price level is just another term for the inflation rate, the inflation rate must fall. An increase in the rate of economic growth means more goods for money to purchase, which puts downward pressure on the inflation rate. Assume, for illustrative purposes, that the money supply grows at 6 percent a year and velocity is constant. Then, if annual economic growth is 3 percent, inflation must be 3 percent. (Actually, inflation must be 2.9 percent, which is approximately 3 percent)."
Further, my peers antecedent that any kind of deflation is bad, is not entirely true. The truth, however, is that deflation need not be a recipe for depression. On the contrary, deflation can be a good thing, provided that it is the right kind of deflation.
"Since the disastrous 1930s, economists and central bankers seem to have lost sight of the fact that there are two kinds of deflation, one malign, the other benign. Malign deflation, the kind that accompanied the Great Depression, is a consequence of shrunken spending, corporate earnings, and payrolls. Strictly speaking, even in this case, it is not so much deflation itself that is harmful as its underlying cause, an inadequate money stock. The hoarding of money, or its actual disappearance (the quantity of money in the U.S. Economy actually shrank 35 percent between 1930 and 1933), causes the demand for goods and services to dry up. In response, firms are forced to curtail production and to lay off workers. Prices fall, not because goods and services are plentiful, but because money is scarce. Benign deflation is something else altogether. It is a result of improvements in productivity, that is, occasions when changes in technology or in management techniques allow greater real quantities of finished goods and services to be produced from a given quantity of land, labor, and capital. Because an increase in productivity is the same thing as a decline in unit costs of production, a productivity-driven decline in the prices of finished goods and services need not involve any decline in producers earnings, profits, or payrolls. Lower costs are matched by correspondingly lower consumer prices, not by lower wages or incomes. Such productivity-driven deflation is actually good news to the average breadwinner."(Selgin, George)
So in the same ways my peer has stated deflation is intrinsically bad, I have shown that deflation can actually be beneficial to an economy(as it is a sign of growth) and is not entirely bad, but just like inflation, are any positives even relevant in light of the negatives of the outcome? It is logical to see that my peer agrees with this in dismissing deflation in much the same way. That positives are not relevant, as deflation can turn catastrophic as evidenced by the Great Depression, central bankers would agree as well,
"Central bankers believe that deflation is always harmful, no matter its cause. They are convinced (1) that deflation is unfair to debtors, because it arbitrarily increases the real value of their debts; (2) that deflation means falling wage rates and increased un-employment; (3) that a stable, or slowly rising, price level is the best means of avoiding booms and busts; (4) that deflation may mean artificially high real interest rates, because nominal interest rates can never go below zero; (5) that deflation is painful to sellers, who will therefore resist cutting prices; and (6) that a variable rate of deflation must be a source of avoidable entrepreneurial confusion and error. In truth, none of those beliefs is valid so long as the deflation in question mirrors the economy's rate of productivity growth."(Selgin, George)
Furthermore, my peer makes a mistake in stating that the amount of money a country has, has little effect on the actual value in a fiat currency. That is far from the case, as over and over again we have seen, that the more money The Federal Reserve(U.S. Central Bank), the weaker the dollar becomes. Under fiat currencies value is purely speculative,
"A little historical background is useful. By definition, fiat�currency only has value because of government regulation or law; it is not convertible into anything, like silver or gold, and is declared as legal tender by the issuing country. When citizens and foreigners lose faith in a fiat currency, the value can turn to the price of confetti."(Sherman, John)
Common sense dictates that under a fiat currency, more money printed= devaluation of currency, devaluation leads to higher prices, higher prices = inflation. Under a fiat currency, inflation is inherently negative simply because inflation is actually the by-product of a reduced demand for the currency itself. Given the speculative nature of fiat currencies, a small rise in inflation can easily turn into hyperinflation. As I am short on space I will finish by stating that next round I will further elaborate how under a fiat currency hyperinflation is a likely outcome, and why the U.S. Dollar has not yet succumbed to it.
Cato Policy Report, Vol. 21, No. 3 "A Plea for (Mild) Deflation" George Selgin, May/June 1999
"U.S. Dollar Is The Next Financial Shoe To Drop" Jonathan Sherman, Forbes.com, 2011
Cato Policy Report, Vol. 21, No. 6 "Does growth cause inflation?" November/December 1999.
I thank my opponent for a very well thought out response. It looks like we're going to get deeper economic algebra than I expected, and I'm excited by the challenge of getting into some math while still trying to make my arguments accessible to the casual reader. As a side note, I use the terms "floating" and "fiat" currency interchangeably. As I said in the last round a non-convertable or "fiat" currency has not fixed exchange rate to any other currency or thing. Thus its exchange rate floats vs. any other currency or item.
I'm glad my opponent introduced the topic of the quantity theory of money (QTM) through the equation MV=PQ. Now, I'm going to make a simplifying assumption that the economy we're talking about has net zero real and nominal balances of trade. This allows us to ignore the capital account and net imports and exports. Most of what I'm going to say will apply even i the trade balance is not zero, but this will simplify the math considerably.
Now, I have one preliminary point and two rebuttals to QTM and the conclusions my opponent draws from it. When Fisher and his contemporaries formalized the theory into the formula above in 1911, they were studying a very different monetary regime than either was present in my described economy or in the United States today. 1911 was before the Federal Reserve was created and most countries were either on the gold standard or had currencies tied to one that was . Thus they really weren't studying either the Bretton-Woods system or the truly fiat system that has existed in the U.S. for the last 40 years since Nixon closed the gold window. I would ask my opponent, in the current U.S., British, Canadian, or Japanese, or Swiss economy, what is M? Is it printed currency, M1, M3, what?
First QTM rebuttal: The equation MV=PQ is really an accounting identity, not a description of an economy's behavior. What turns QTM from an equation into a theory is the implicit assumption that V (the number of times per year each dollar, on average, changes hands) is constant. This is quite an assumption, and while my opponent also implicitly assumes it, he offers no evidence why it should be. In his example, if production (i.e., Q) increases and M (that is the total quantity of money), he concludes that P must decrease. However another possibility is that V would increase. My opponent gives no reason why it should be one over the other.
There is good reason to believe that V is not constant in a modern economy. Since PQ is essentially equal to the GDP (technically GDP-I, but lets assume all goods are sold quickly) the equation becomes MV=GDP. So, if V is held constant than two banks loaning money to each other (nominally increasing the money supply) would increase GDP. This is clearly an absurd result. What would actually happen if extra money is created in some purely financial is that the number of transactions would be divided by a large pool of money and V (the average number of times a given dollar is spend) drops.
Second QTM rebuttal: My opponent also ignores the transient effects of growth. In his hypothetical, he held M and V constant and asked what happens if Q is rising. Q rising is another way to say that the rate of change of Q (also written dQ/dt, or change in Q / unit time) is positive. However, he doesn't ask how why Q was increasing. If Q increases, it means that more is being produced. Everything produced requires inputs (only God can make something out of nothing) and one needs to buy the inputs before one sells the finished goods. Thus, economic growth (i.e., positive dQ/dt) creates an increase in demand before it creates an increase in supply. Under exponential growth, the current rate of growth is always increasing. That is to say that today's growth creates more of a bump in demand than yesterday's growth creates a bump in supply. This leads nicely into my next point.
1. Average positive inflation prevents deflation
My opponent didn't really rebut this point other than to argue that deflation isn't always bad. I still maintain my disincentive to invest argument about deflation though. However, as we've seen, even if we take my opponent's assumption that V is constant, rising Q will create falling P (i.e., deflation) over the long run unless M increases. A central government should thus increase M to keep P from falling. Because dQ/dt is unpredictable, a central government should increase M by slightly more than is necessary, causing a small amount of inflation, so that if dQ/dt falls suddenly we don't enter a deflationary period.
2. Inflation encourages investment
My opponent chose not to rebut this point. Thus, I have established a reason why inflation can be good for an economy.
3. Inflation is caused by growth
I have discussed this at great length above in my QTM rebuttal and my discussion of point 1. Factories buy steel before they make cars. To make more cars in the future they must buy more steel now.
Rebuttal on money supply
My opponent makes a few points on "money printing" that I do feel I need to address. First I would note that the term money printing is largely irrelevant to the type of economy I said last round I would be discussing. Concern over money printing really derives from a time when we had a convertible currency because there was a risk that if too much money was "printed" then there could be a run on the nation's gold reserves. This is no longer the case in the U.S., nor in my proposed economy as both have strictly floating currencies.
My opponent also makes a mistake when he says that fiat currencies have value because of law. This is false. If law set the value of a currency then, by definition it would be a convertible currency. This would be true whether its value was set to be equal to a gram of gold (like old times), a gallon of milk (like Brazil at one point), or 0.13 Euros (like Denmark). What truely gives a floating currency value is three fold: that the government offers to buy things with it, that the government only accepts that currency for tax payment, and that the citizens agree to accept it.
I would also like to make a few side points before concluding this round. My opponent seems to be confusing bubbles with inflation at some points. I agree that bubbles are bad and bubbles can be one cause of inflation, but they are not the only cause. Also, you cannot have inflation in one product type. From the definition, it must be a "general" rise in prices. Soaring real estate and falling wages is not inflation under the definition.
My opponent suggested that normal inflation can, itself trigger hyperinflation. I dispute this point strongly, but since he has not argued why this is true there's not really anything to rebut. I will point out that the U.S. has had continuous, positive inflation since 1955 and Australia has for 35 years and neither has triggered hyperinflation. When trying to explain this, I do hope you include a real world example.
My opponent complained: "My peer makes a mistake though, in not explaining, how inflation is to be controlled..." I would love to address this, but alas do not have space. This debate was on whether a small but positive rate of inflation could be a good thing, not whether it is easy or hard to achieve in practice. I'd be happy to discuss that point in another debate on that topic. Though, I note that the U.S. has done just that for over a half century.
 well sort of http://www.npr.org...
Buddamoose forfeited this round.
Buddamoose forfeited this round.
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