Sunday, June 5, 2011

Good inflation, bad inflation

There is good inflation, and there is bad inflation. Good inflation is asset price inflation, because it makes powerful and middling groups richer. Bad inflation is wage-push inflation, caused by workers getting pay rises in excess of average productivity gains. As long as you have that straight, then you will have understood current economic policy orthodoxy, which is otherwise mind-bogglingly confusing.

Dean Baker is as ever the best source of analysis on this: the points he makes here, which are obvious now (although still beyond those in charge of policy), were less obvious back in 2006, when he was already making them.

So, we live in a world were rising fuel prices are bad (even though they effectively discourage us from doing things we should be doing less, like polluting and congesting), but rising house prices are good. Now, if we think about it, rising house prices are only unambiguously good for people who own multiple properties, or people with no or few children. People on middle incomes who have made big gains in the housing market, have not really gained that much, unless they are happy to move to a remote area to live in a mobile home. And if they have kids, their kids will be worse off, and will probably never leave home.

So, in these inflation-phobic times, we really should be targeting zero house price growth. But what chance is there that that will happen?