Inflationary Pressure? Remember William Goldman

How to be a progressive and worry about inflation at the same time.

William Goldman is a legendary Hollywood screenwriter who most perfectly summed up macroeconomic policy debates (even if he was talking about something else):

Nobody knows anything.

I’m far more inclined to trust Paul Krugman, who really knows his economics, than Niall Ferguson, who really doesn’t. Moreover, it certainly helps that 1) all the conservatives now quailing about the deficit have been silent for the last 8 years; and 2) Martin Wolf, who is no left-winger, also thinks that the inflation talk is overblown. But Barry Ritholtz, whom I do regard as a straight-shooter, sees some merit in the inflation worries.

So what to do? Here’s a proposal. Focus federal spending on items that figure to expand long-term potential output. In other words, don’t try to get people to consume their way out of the recession, but use spending that also serves as a form of investment or otherwise reduces inefficiencies in the economy.

This is one reason why, I believe, Obama is focusing so much on health care. Health care is one-sixth of the economy; the US system is enormously inefficient; and long-term American strong economic growth is far, far less likely unless we can get that system fixed. Fixing it also means some upfront expenditures now. But that is a feature, not a bug, because it does provide more spending.

Infrastructure is another form of this sort of spending. Building a strong rail network isn’t just really cool; it makes the economy more efficient in the long run. (It also helps reduce the country’s carbon footprint, which reduces the potentially enormous health and environmental costs of climate change). Education, too, is very helpful in this way.

From a progressive perspective, this policy has downsides, because things like Food Stamps and unemployment insurance, which people really need and which have countercyclical punch, are not included. But the countercyclical point isn’t really a point if we are worried about inflation. And in any event, other kinds of spending — such as big defense programs that Robert Gates doesn’t want — are completely wasteful. They contribute nothing to long-term economic growth.

This is one other way of trying to finally start dividing expenditures into consumption and capital budgets. If you’re worried about stagflation, which has long-term conservative political implications, but not ready to drink the Friedman-Bush-Cheney-Ferguson kool-aid, then focusing on capital expenditure is the way to go.

UPDATE: I was wondering why I thought this was such a good idea. Now I know: Bob Frank wrote about a similar concept a couple of months ago.

Author: Jonathan Zasloff

Jonathan Zasloff teaches Torts, Land Use, Environmental Law, Comparative Urban Planning Law, Legal History, and Public Policy Clinic - Land Use, the Environment and Local Government. He grew up and still lives in the San Fernando Valley, about which he remains immensely proud (to the mystification of his friends and colleagues). After graduating from Yale Law School, and while clerking for a federal appeals court judge in Boston, he decided to return to Los Angeles shortly after the January 1994 Northridge earthquake, reasoning that he would gladly risk tremors in order to avoid the average New England wind chill temperature of negative 55 degrees. Professor Zasloff has a keen interest in world politics; he holds a PhD in the history of American foreign policy from Harvard and an M.Phil. in International Relations from Cambridge University. Much of his recent work concerns the influence of lawyers and legalism in US external relations, and has published articles on these subjects in the New York University Law Review and the Yale Law Journal. More generally, his recent interests focus on the response of public institutions to social problems, and the role of ideology in framing policy responses. Professor Zasloff has long been active in state and local politics and policy. He recently co-authored an article discussing the relationship of Proposition 13 (California's landmark tax limitation initiative) and school finance reform, and served for several years as a senior policy advisor to the Speaker of California Assembly. His practice background reflects these interests: for two years, he represented welfare recipients attempting to obtain child care benefits and microbusinesses in low income areas. He then practiced for two more years at one of Los Angeles' leading public interest environmental and land use firms, challenging poorly planned development and working to expand the network of the city's urban park system. He currently serves as a member of the boards of the Santa Monica Mountains Conservancy (a state agency charged with purchasing and protecting open space), the Los Angeles Center for Law and Justice (the leading legal service firm for low-income clients in east Los Angeles), and Friends of Israel's Environment. Professor Zasloff's other major activity consists in explaining the Triangle Offense to his very patient wife, Kathy.