Sunday, 11 September 2011

Unemployment vs. Inflation: Why Do We Worry Too Much About One, Not Enough About the Other?

Something that's been kicking around my brain for a few months now:

Why do we get so bent out of shape about the threat of inflation? And why don't we get more bent out of shape about the reality of high unemployment?

I find this really, really puzzling. Inflation, it seems to me, is a bookkeeping problem. Unemployment (beyond the minimal frictional level) is a tragedy.

Thought experiment: Prices of all goods and services inflate exactly 10 percent a year, again and again, steady as clockwork. Manufacturers adjust by raising their prices 10 percent annually. Labor demands 10 percent higher wages. Savers and investors build this 10 percent inflation into their "risk-free return" expectations. Social Security checks increase 10 percent a year.

So who gets hurt? Nobody. Psychologically, you may feel dismayed that last year's $2 loaf of bread now costs $2.20, but your wages of $55,000 are $5,000 higher too.

Now try to create a similar thought experiment for 10 percent unemployment. Millions of workers in the labor force are idle. They're frustrated, angry. For every minute they lack jobs, we as a country lose part of our productive capacity. Their power to consume is weakened. They siphon resources through the social safety net, through food stamp and Medicare programs.

This is unquestionably terrible: for our economy, for our country's self-image, for social and political stability. You can't spin high unemployment in a neutral light. It's impossible.

Now, granted, I know inflation can be harmful. Runaway inflation (Zimbabwe) does have real costs. Also high inflation can inject uncertainty into economic forecasting and planning. And it often does produce classes of winners and losers.

But still: it's not net destructive, not like high unemployment. After all (from an illustrated encyclopedia of economics),
Ignoring menu and distortion costs for a moment, inflation is roughly what mathematicians call a zero sum game. For every loser during inflation (someone who must pay more for a given good), there is a winner (someone who receives a greater price for the things sold).
I dare you to find a respectable economist who maintains that high unemployment is a "zero sum game."

So one more time: Why do we care so much about inflation and so little about unemployment?

One (rather depressing) possibility -- look who's affected.

Unemployment tends to hit the more marginal members of the workforce. If they were any good, some of us think, they'd have jobs, wouldn't they? Inflation though tends to be more of a concern among savers, among those on a fixed income, among businesses (who might even like unemployment to be a bit high to keep their labor costs down). All these groups are politically strong and speak with a louder voice (and fling around more campaign cash) than those bitter, disenfranchised unemployed people.

So what do you think? How to explain our lopsided concern, especially with unemployment at 9.1 percent?