Another reason why inflation is a good idea

By Felix Salmon
April 7, 2009

Megan McArdle is unhappy with the state of green consumption:

When I look back at almost every “environmentally friendly” alternative product I’ve seen being widely touted as a cost-free way to lower our footprint, held back only by the indecent vermin at “industry” who don’t care about the environment, I notice a common theme: the replacement good has really really sucked compared to the old, inefficient version.

(Scare quotes Megan’s, natch.)

The problem, as Megan admits, is that she’s looking at the “cost-free” replacements: the bottom-of-the-line green products which can be used to replace legacy products which are the result of decades of development and economies of scale. It’s hardly surprising that these first- and second-generation products can’t compete on price.

But my feeling is not that the new products are too expensive, so much as that the old products are too cheap. That’s certainly the case with food: chicken, beef, and other corn byproducts — including the famous high-fructose corn syrup — are so underpriced that their cultivation is destroying the planet and causing mass obesity.

And more generally, the story of both Greenspan bubbles is that the Fed was happy to bring interest rates down to extremely low levels because of the massive amounts of disinflation being imported to the US by China (again, at huge environmental cost).

My hope is that the world which emerges from the present crisis will be one where goods, in general, have a price which is commensurate with their cost. I remember walking down Broadway last year, in Soho, and overhearing a woman coming out of H&M explaining to her friend that the clothes there were great: they were so cheap that you could wear them once and simply throw them away, without having to worry about how they stood up to washing or dry-cleaning. And although it was easy to conjure up lots of high moral dudgeon to direct at the woman in question, the fact is that incentives matter, and the prices at H&M were clearly incentivizing her to feel that way: as a general rule, it’s not good for the planet when a frock costs roughly the same as the cost of dry-cleaning it.

So it would be great to have some targeted inflation here: not just to help solve the housing mess, but also to bring the cost of many everyday products up to a point at which people become much more careful about using them — and much more inclined, too, to pick a green alternative.

48 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Good idea, Felix. Targeted inflation to make food, shelter and clothing more expensive. That should help put the uppity poor back in their place.

Posted by NickJ | Report as abusive

Inflation is a regressive tax. You still endorse it?

Is the argument here that we need to internalize the externalities? Good idea in theory….

Posted by maynardGkeynes | Report as abusive

Is the argument here that we need to internalize the externalities? Good idea in theory…

Posted by maynardGkeynes | Report as abusive

But my feeling is not that the new products are too expensive, so much as that the old products are too cheap.

Remember, relative prices are what drive consumption decisions. Holding utility constant, increasing the price of Good A is equivalent to decreasing the price of Good B. If inflation is uniform (which of course it never is) then the relative prices remain unchanged, but fewer goods are produced and consumed, leaving society worse off.

I don’t understand this post, Felix.

Posted by Zach | Report as abusive

I understand your point that many clothes that we buy are not only cheap and hence they can amortized in only one season. However they are also poor quality and wouldn’t last many washings and seasons (same reasoning applies to other items). We need higher prices but also more durability probably.
Is always durability is more environment friendly. For example, buying a new IKEA cabinet every 10 years is more environment friendly than buying one old style oak cabinet every 30 years?

Posted by Stefano | Report as abusive

The idea that “inflation” would necessarily drive up the price of, say, clothing more than dry cleaning seems to have been addressed, at least indirectly, above; I’ll make the point that there’s no law of nature that throwing away clothes after one use is the wrong thing to do. I could imagine someone coming out with a corn starch product tomorrow, something quickly biodegradable and cheap to produce, that would cost far less in environmental and other resources than dry cleaning — which isn’t super environmentally friendly itself. That current prices don’t prove this to be the case is a good point; that the result itself disproves the current price structure is not.

There are two issues at the core of this argument, which lend themselves to a deeper analysis.

First, we have embraced cheap products, to the detriment of quality. To clarify, quality is not evident just in the material of a garment, or the fit and finish of a vehicle, its an underlying ethos, that governs the behavior of a company, both regarding its products and its way of doing business. Quality encompasses how a company treats it’s employees, the importance of safety, environmentally sensitive manufacturing, etc. As a country, we have been conned into thinking quality is solely the workmanship, or outward appearance, or even, as Felix points out, the initial cost-benefit of the item. The United State’s has become especially susceptible to this illusion, due to its reliance on cheap and unregulated Chinese imports. However, I believe that most Americans have up until recently assumed that the quality of Chinese products is not especially worse, and they have had little inkling of the various invisible quality issues associated with this perception.

The second aspect, which ties into the first, is that quality does not have to be proportional to its price. For example, on the renewable energy front, while some alternatives are high quality, they can be very expensive, so the cost benefit is prohibitive. However, look at the case of the compact florescent light bulb. It is a quality replacement, has a positive economic and environmental impact, and the actual cost is relatively unchanged, with little need for a new supporting industrial base. It also has probably had a greater impact on the energy supply of the US, then all the renewable energy based powerplants combined. So maybe we should redefine the concept of quality, whether of an item or an approach, as the one that has the most benefits across a spectrum of relevant factors, while having the least cost, whether financially, environmentally, socially, etc. As a country, we must get away from the price trap, that hides the true cost of a product or service.

Posted by Greg | Report as abusive

It’s not bad enough that workers’ incomes are flat and miniscule in relation to those who are in power and those commenting about those in power; but now we have a push to raise the price of ordinary living to it’s ‘real’ cost to the planet.

I believe further comment unnecessary.

EB

Posted by Eli Baker | Report as abusive

1) One should not forget that disruptive technologies, which many of the so-called green alternatives embody, take time to establish themselves in the marketplace:

http://en.wikipedia.org/wiki/File:Disrup tivetechnology.gif

2) One should also remember that there is no one demand curve for any good: aggregate demand comes from a multitude of different consumers with different demand/utility curves. Not every American values low cost over quality for every good, and not every consumer will pay extra for “green” products, no matter what they are.

Give this time to sort itself out in the (phosphate-free) wash.

“it’s not good for the planet when a frock costs roughly the same as the cost of dry-cleaning it”

That is only the case if the impact on the planet from dry cleaning it than it is to make it … Im not saying I disagree its just that you have made a very big assumption there …

Chris

Posted by Chris Allison | Report as abusive

Is it too great a burden for the green movement to show that we can do something about global warming before requesting drastic price increases in?

P.S. Yes, I’ve given up hope that anyone will bother to prove that global warming will be as expensive as the costs we have already undertaken trying to stop it.

Posted by Eagle | Report as abusive

I’m hearing just a huge pushback on Felix here. Yet you folks claim to be interested in economics. Some of you might claim to be experts.

Let’s be a bit charitable to Felix here. He’s saying that he wants a world where people make better decisions about purchasing goods and services, in the interests of sustainability. (Maybe I’m sympathetic to him because I agree). Rather than be a Meghan, and stupidly rant about CF lightbulbs, why don’t we look at this as a problem to solve. How would we get there?

There are two main barriers: Failure to price in externalities, and the advantages that established products have over new ones in scale economies.

1. Externalities. So, in a perfect world, the pollution tax on a frock is the same in the US as in China. Actually, it might be much higher in China because the US has great infrastructure (e.g. sewage treatment and efficient power grid), and in China the factory might have to provide it’s own water treatment and power. Similarly, labor and health care standards for workers should be properly priced in, but they are not. How do we resolve? Global standards and global standards enforcement are truly required.

2. Scale economies. Perfect example is the CF bulb. We all know it is a dramatic improvement in bulb life and energy consumption, but it is a few millions of bulbs, with relatively complex construction, against hundreds of millions of incandescent bulbs, with simpler construcion and a century of operational and manufacturing refinement. Government and utility incentive programs have helped narrow the gap in cost and performance, but much more R&D work (reliability, instant on, dim-ability) still needs to be done, and then amortized across a large manufacturing base. Again, without either prohibitive carbon taxation or a government mandate, the scale economies just can’t be achieved in the US.

You think the CF problem is hard? Think about shifting to electric automobiles. The challenge of the new overcoming the established is huge. And remember, the established ICE auto is established precisely because it was best at *avoiding* the true cost of its externalities.

Bottom line is that Felix is right. But you Meghans would have to think outside your Reaganaut box to see how we would achieve what he is suggesting.

Posted by DollarEd | Report as abusive

It sure is fantastic that even with more and more people not even being able to afford food and clothing at all that we have these spoiled, self-righteous hippies all over the internet asking the poor, the laid-off, or the just plain unemployed to give more and more of him or herself to ‘help the planet’. I understand recycling, not running lights all day, etc. But to insinuate that we should raise food/clothing prices so your over priced ‘green’ products can compete with what we’ve been using for decades is completely insane. You are whining because no one wants to buy organic bread at 6 dollars a loaf. News flash, no one can afford to buy ANY bread.

People come first. Since I doubt you’ve ever had to go without in your entire life (you are, after all, a ‘columnist’), than I’m sure you can’t understand what it’s like to be hungry, or to have a family you can barely feed and clothe. Let me paint you a picture: I am from southern Detroit, MI. My state, and even more specifically, my town, has been hit extremely hard by the recession. Do you think I care at all if the humble amounts of food and clothing I scrum by working all day is green? Do you think I mind if the few things I can afford are good for the environment?

I am more grateful to have enough money to be able to buy anything at all.

I can’t decide what is more ridiculous: you’re closed off, other-side of the tracks view of life where everyone can afford whatever they want, or how sad it is that you think we as people would actually consider your idea.

Posted by Jake | Report as abusive

Yes, Felix is Naive, oh, Right, sorry.

Felix, do you know what inflation is?

Prices are inaccurate because of government regulation.

The low-price of poisonous corn syrup foods is from tariffs on sugar and other subsidies for corn. There are also restrictions on food production that prevent food producers from selling nutritious food. Have you heard about the non-pasteurized milk issue?

But the real subsidy to imports is the artificially low interest rates we have, coupled with the tax-deduction on debt interest. This means debt allows businesses to scale production beyond what would normally be prudent. And at such scales, labor must be cheaper – so we move factories overseas. (High domestic corporate tax rates also chase production overseas).

Want to include the currently externalized costs of ‘bad’ goods in the price in order to level the playing field with green products?

Enforce private property rights. If I could sue a producer for its pollution, their production costs would increase, thus the polluting product would cost more.

Currently, it is government regulation that allows all externalities to occur. Say thank you to the EPA and other executive branch agencies that grant privileges to some groups to pollute, destroy land and other resources.

Just to clarify – inflation is not increases in prices. It’s increase in the money supply. AND, there is no phenomenon ‘disinflation’ being ‘imported…by China’. Read a book, please.

By the way, this blog has the best CAPTCHA display I’ve ever used. I hope it becomes the new standard.

How is this idea, make the products of any country who does not endorse Kyoto expensive (bump up the customs duties). If you choose not to help the planet we you will pay a fee, that money can then be used on green projects.

Posted by Hakers | Report as abusive

the article is stupid
inflation is the cause of the problem not the solution.
Americans are throwing things away , the rest of the world is not.

Why americans are doing it ? It is not because prices are low (they are high for many of us abroad) but because americans are used to cheap money. If you had to live at or below your incomes then you would notice.

Solution is simple – take away credit cards from americans make no consumer loans

Posted by lupas | Report as abusive

Yes, it is a bad thing for the planet when dry cleaning costs more than the clothes. But that is only so because we rely on SLAVES to give us these cheap clothes, and we hire CITIZENS to clean them.

Would you prefer we legalize slavery in the States as well to make you feel better about the growing landfills, or do you think maybe we should stop supporting slavery through NAFTA, CAFTA the WTO and the UN?

Posted by Stuart | Report as abusive

I find it funny how people focus on chickens or corn. Chickens, pigs and goats are cheap sources of meat. We have several on a farm and if the dogs didn’t kill them then they wouldn’t need to be fed because there are plenty of bugs, grass, etc. Pigs and chickens can eat leftover table scraps. Maybe if we ate the 20+ million dogs and cats that were euthanized every year or able to eat horses that got a bit too old, infirm or simply mean meat would be cheaper and environmentally friendly. Same with those deer or feral hogs overrunning the environment.

I personally prefer a world where obesity is a bigger problem than starvation. I also prefer one where people aren’t toiling for 12 hours a day trying to feed themselves. Maybe I am just a humanist who realizes that having clean water, more forest cover, electricity to store food, and medicines are a good thing.

Posted by Ronald | Report as abusive

Inflation is good same time need the correction which current market condition shows. No one want uncertainty in the life. We create modern era with lots of open end question in every field. more awareness and global support program, incentive would save world green, We balance the life or it may balance automatically.

Posted by Kirupa Karan | Report as abusive

Targeted inflation? Yeah, about as senisible as spot reducing. Another product of public schools.

Posted by Martin Rice | Report as abusive

If inflation is what you want, I can assure you that hyper-inflation of the pre-WW2 is on the way. But inflation is not what we need. With regard to the food products you mention, what we need is the elimination of the corn subsidy and every other FDA interference that has supported corn use. And what about corn-based ethanol? It takes a gallon of gasoline and/or diesel to produce a gallon of ethanol, so where is the advantage? It takes 1700 gallons of water to produce a gallon of ethanol, so where is the advantage? Automobile milage is not as high with ethanol as with gasoline, so where is the advantage? Ethanol is raising food prices, so where is teh advantage. Ethanol is hurting the environment, so where is the advantage? I’ll tell you where the advantage is: in the fattening wallets of agri-business corn producers and their lobbyists. Inflation is not the answer to this nonsense. Cut the subsidies.

Posted by George Seevers | Report as abusive

How did this person get his own blog on a financial website?

Posted by Todd | Report as abusive

Hello ? Deflation means stuff we buy is cheaper. We want cheaper ! It means our savings, those who have responsibly saved, is worth more….. after many years of erosion. Savings good ! Deflation good ! Rethink please…

Posted by Fred | Report as abusive

Inflation for inflation sake is not a great idea. What we need is a shift in consumer mentality where people once again become willing to pay more for higher quality items. For example, I’ve been through 3 or 4 $15 dollar hair dryers in the last 5 years. In contrast, the hair dryer at my Grandma’s house has been there 20+ years and works just fine. Nothing lasts as well as it used to. The quality issue is seen in food as well (note the comment on corn syrup). Why do you suppose manufacturers use corn syrup in place of sugar- because it’s cheaper and until recently consumers have not complained about it. I think we will see a change towards consumers demanding better quality products. In fact the recession may actually help to bring this about. In the past shopping seemed to be more about quantity. Now that people are buying less they might actually start being more selective about the products they do buy. I’ve personally been thinking about this a lot as I spring clean of my closet. It doesn’t make sense to me to go through 5 pairs of 20$ black pants in a year. Why don’t I just buy one pair of $100 pants that will last much longer? I realize that when I’m actually at the register the $20 seems a lot easier to part with but, I’ve also started realizing how frustrating it is to constantly be shopping for new pants, especially since last thing I want to be doing these days is shopping all the time. I know not everyone might come around to think like this but, I’ve seen some recent articles and posts which indicate more people and companies are considering the quality issue.

Posted by Laura J. | Report as abusive

Good thought piece. Inflation is a natural result of certain policies getting out of balance. Chinese goods have not been priced at par. I wish we had graphs of common items to prove this point. What clothing costs today is simply absurd: some people even talk of throwing outfits away, to buy new, rather than paying for dry cleaning.

But people rightfully fear inflation. Especially the kind that is so aggressive that it causes social chaos.

Posted by Brad | Report as abusive

Probably I’m missing something. Either I’m not capable to grasp the logic, or I’m looking for it where there’s none.
Inflation as the way out of the economic conundrum – there’s nothing new in it, and it’s not necessarily a bad thing if done right. Shafting the Chinese in the process thereof – I’m all for it, they deserved it by their currency manipulation. They didn’t want to let Yuan appreciate against US$ as the market conditions demanded – the same result will be arrived at by de facto devaluation of US$. No dramatic announcement of devaluation is required – just keep printing them at the rate the Administration does, and it will happen.
But who or what made you think that the prices will go up on everything, except “green” products? Except that the Administration can make it happen by subsidizing them, but it’s not a market based mechanism. Inflation has nothing to do with it.

Posted by Anonymous | Report as abusive

It’s interesting to read the posts espousing the virtue of deflation. Deflation driven by productivity gains are a good thing. Deflation driven by uncertainty, pessimism, and contracting demand are not. The former makes both producers and consumers better off while the latter causes reduced investment and a downward spiral of income and prices that’s hard to escape.

It’s also interesting to read the posts that suggest inflating our way out of debt (i.e. seigniorage) is the way to go. Yes, this would certainly “punish” China. But perhaps the posters don’t realize that that is a surefire way to raise borrowing costs. When running trillion-dollar deficits, is that really what we want to do?

Posted by Zach | Report as abusive

“Another reason why inflation is a good idea”

Another one? I don’t know of this first reason. Inflation (which is increasing the money supply) is never good. It’s a hidden tax on Americans, and punishes the responsible savers the most. Quit trying to rob taxpayers to fund your agendas.

Posted by Liberty | Report as abusive

So Felix,

I tuck away $500 and in thirty years I give it to my grand kids. By then, it buys them lunch. Inflation is TAX. I shouldn’t have to RISK my money investing it just to keep my purchasing power.

So I must say, as an apparent new blogger to Reuters, you suck. Your answer is to ruin our money even more! Wow Felix, wow…

Posted by ryan | Report as abusive

So Ryan,
How about that:
You tuck away $500 (stashed it under the mattress or in a savings account – doesn’t matter). But then you have to withdraw/pull from under the mattress $490 taxed from you. Taxed because Uncle Sam must pay off all the treasury bonds hoarded by China. Uncle Sam has only 2 ways to make money: either collecting taxes or printing new money. Which way you like better? Oh, there’s one more way – to default on foreign debt, but surely neither you, nor the Chinese, nor anyone with even half brain would like it because today’s financial crisis will be nothing comparing to that. Speaking in your language, it sucks.

Posted by Anonymous | Report as abusive

in fact, every countries has it own targeted inflation. A reasonable iflation rate will help to boost national consumption.
It’s must be a reasonable inflation rate.

Posted by ha vy | Report as abusive

Felix,

Were the comments on your previous home this terrible? I don’t agree with this post like many of the other commentors (sp?), but the comments they have (mostly) nothing useful to add.

Posted by Zach | Report as abusive

Some people lack the common sense to come in out of the rain.

Low prices for luxury items it what has allowed Americans and Europeans a higher standard of living. It has ensured a longer life expectancy, higher birth rate, lower childhood mortality, etc. Inflation will essentially take money, goods, services, etc. away from those that need it most in this country.

It is easy for us to look around at all the waste in our society and say, “Boy, wouldn’t it be great if…”; but the IF kills people.

Posted by Name | Report as abusive

Craziest blog I’ve ever read on reuters. Thank God the commenters on here get it, the people who are going to be hurt the most by our soon to be rapid inflation are the poor and lower middle class.

Making the cheapest ways for children to eat and be clothed should be made more expensive, yes that sounds wonderful.

Hopefully we can get enough inflation that we can make the world greener with the fertilizer from all the dead starved lower class children, how’s that sound Felix?

This just sounds like a way for a blogger to justify the criminals in the federal reserve and their unrelenting demand of creating more money in order to give to their favorite cronies and CEO’s to have their way with. Dispicable.

Started about 27 years ago when Reagan started printing our way out of debt, then Bush/Clinton/Bush/Obama thought this was a good idea and continued the trend. It’s no wonder the middle class standard of living is significantly lower than it was 40 years ago and it’s no wonder our economy can’t ever sustain 5 consistent years without some type of meltdown.

Posted by Michael | Report as abusive

Inflation will rob all the wealth of a people over time. The real problem is low labor costs for imported goods that compete with similar goods made here at home in a high wage economy. Economic dependence is never a good thing. A nation that is economically self sufficient is not susceptible to the economic woes of their critical suppliers of goods and resources. In a self sufficient economy plenty of competition from smaller manufacturers is the answer to monopolies that do not improve products or innovate to meet consumer demand.

Ultimately free markets are guided profit motive. The need for alternative energy and sustainable resource use will only become appealing when the cost of fossil fuels have become prohibitively expensive. This was precisely the situation the U.S. found itself in last summer/fall. The ensuing economic collapse was so rapid that fossil fuel prices collapsed in months leaving alternative energy again too expensive. High unemployment made the prospect of a legal mandate to move us to sustainable energy an economic and political impossibility. This should have been done decades ago when we could afford it. The current form of capitalism is and will be unable to move this society away from fossil fuels towards green solutions. It is time for real change.

Posted by Anubis | Report as abusive

I’d heard that the middle class are still vastly better off today than they were forty years ago. Googling for support I found http://eh.net/encyclopedia/article/steck el.standard.living.us
which shows a near doubling of per capita income over 25 years.
Likewise, I understood inflation to come from Nixon taking the US off the Gold standard. Wikipedia supports this. The consequent inflation is can be measured by the fact Gold is no longer $35.00 per ounce.
Inflation is toxic to economies. The blog’s headline is badly phrased, implying as it does that inflation is a good thing, rather than that including externalities in prices is a good thing.
However, even this second proposition has a number of dubious assumptions. Is cure always more expensive than prevention? Would higher prices accurately reflect the cost of the externalities? Do the ‘green’ alternatives truly have the environmental benefits they allege, and on which it is proposed to interfere with market forces? Consider the environmental impact of mercury in compact fluorescent bulbs, the insane environmentalist phobias against genetic engineering and nuclear power, the externalities of biofuel causing starvation. The answer is we shouldn’t fiddle with markets, because we have only a little knowledge. It’s a dangerous thing. And at the end of the day, the green alternatives will still suck.

Posted by Leo | Report as abusive

Clothes aren’t too cheap. Dry cleaning is too high.

Leo, income being higher doesn’t equal standard of living being higher. The average american has less spendable income after their necessities and bills are paid for now than they did 40 years ago.

Posted by Michael Ham | Report as abusive

The US and western countries are living on credit, and consuming items produced by countries with much lower labour costs – this effect is ending now as free trade is equalising international labour costs.

If globalism is the aim – then wages and living standards will be equalised throughout the world – so averages will lie between African and American standards.

This is a pure outcome of free trade – labour is a commodity like any other, and if corporations are free to pursue competitive labour markets, they will chose the cheapest – and this obviously reduces the living standards of all western nations.

Posted by Amagnon | Report as abusive

Amen to everyone who said that this post is lame. If a store is actually selling clothes so cheaply that replacing them is almost as inexpensive as cleaning them, that’s a good thing, not a bad one. The notion that people ought to lead frugal lives when they don’t have to is ridiculous. Apparently, Felix feels that people have a moral duty not to spend money in a way that irritates him.

This is what the left believes: kill the economy to make life more “sustainable” and “fair”.

Kill America’s economy to bring equality for everyone in America and the rest of the world.

Increase fuel costs so we’re forced into alternatives.

These people are mindless leftists blithely chasing a NON-EXISTANT utopia. All it’s going to do is make everyone miserable and hateful.

Posted by Jojo | Report as abusive

Man, this guy Felix is pretty dumb.

Inflation acts like a drag on the economy as real as any wage DECREASE.

If you make $100 and your wages drop to $96, you have to cut $4 worth of stuff to buy.

If you make $100 and inflation increases prices 4%, you have to cut the same $4 worth of stuff.

Why don’t you ask Germany or any other country that experienced massive inflation how that works.

This piece is just a prelude to the MASSIVE inflation we’re going to see from this stimulus spending, and to convince everyone it’s all OK.

It’s not.

Posted by Jojo | Report as abusive

He’s very young. All these ideas are academic until one has more experience of life, and (for most of us) of real adversity. As soon as Mr. Salmon has a family, or loses his job, or someone gets sick, he’ll join the rest of us and realize that the middle class is greatly beleaguered, and that will hurt everyone.

Posted by brooklyn | Report as abusive

I do agree that we should axe the corn subsidies. But political reality forbids that from ever occurring. I mean, can you ever imagining being the president that was responsible for doubling the price of a McDonald’s hamburger?

Posted by Joel | Report as abusive

inflation is a good idea for banks and funds managers; for 90% of the population as well as for the REAL economy, the inflation is destructive

Posted by McChavelli | Report as abusive