In January, U.S. inflation hit a 40-year high of 7.5%. Before the Ukraine war, my guess was that inflation from 2022-2024 would peak at 8.6%. Now I expect that peak to be around 10%. My suspicion is that the Fed will delay tightening until after the midterm elections, then become sharply contractionary in December or January, desperately hoping that the Misery Index will be low in time for the 2024 election.
What’s so bad about inflation, anyway? Economists have struggled to come up with a good answer. The best story, in my view, is that inflation causes recessions via politics: Voters hate inflation so much that politicians willingly endure severe recessions to get it under control. So while there’s a long-run trade-off between inflation and unemployment at low inflation rates, high inflation is a leading cause of high unemployment.
Recently, though, I noticed a novel and noteworthy benefit of inflation. Namely: Given current cost-of-living adjustments (COLAs), inflation is swiftly eroding the real salaries of federal workers. Biden’s official adjustment for 2022 is only 2.7%, almost 5 percentage-points less than current inflation.
If, like me, you believe in austerity for liberty, this is great news. We need to shrink the public sector at the expense of the private sector, and the simplest way to make this happen is to cut the real federal budget to bone.
If that seems overly libertarian, there are more ecumenical reasons to cheer low COLAs. Key fact: The Congressional Budget Office has found that almost all federal employees are paid far above market. Low COLAs are a simple way to drag their sky-high compensation back to Earth. Low COLAs help restore horizontal pay equity; why should federal employees get paid so much more than equally-qualified private-sector workers? Low COLAs help restore labor market efficiency; when the federal government overpays, this tends to fill jobs with overqualified workers.
If high inflation goes on long enough, I suspect that federal COLAs will start to catch up. For now, however, we’re in a strange situation where high inflation indirectly causes austerity. Let’s enjoy this side effect while it lasts.
The Myth of the Rational Voter: Why Democracies Choose Bad Policies - New Edition, – Illustrated (2008)
The greatest obstacle to sound economic policy is not entrenched special interests or rampant lobbying, but the popular misconceptions, irrational beliefs, and personal biases held by ordinary voters. This is economist Bryan Caplan's sobering assessment in this provocative and eye-opening book. Caplan argues that voters continually elect politicians who either share their biases or else pretend to, resulting in bad policies winning again and again by popular demand.
TRANSCRIPT: The Myth of the Rational Voter by Bryan Caplan is worth the read. In case anyone is wondering why we link to Google Books versus Amazon, it's not because we receive monetary compensation for one versus the other. We, at planksip, support Google Books over Amazon simply because our Journalists use a shared copy for commenting. Of course, we have to purchase individual copies for each contributor on any given project or story, but the ability to create a shared Google Doc directly linked to the book, research or citations is extremely valuable.
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