Inflation – Bad for the Economy, Bad for Society

In The Great Wave, his history of price revolutions and inflation, David Hackett Fischer associates waves of inflation with social instability, and a pessimistic culture as reflected in the art and philosophy of that time.  If he’s correct, we could be in for much more than just a bout of price instability.  Indeed, it’s possible that the recent increases in gas prices and food prices may already be stirring some dark forces we’d probably rather leave along.

The FBI reports a continuing drop in both property and violent crime.  It’s important to remember that the BJS report and the FBI report draw from two difference sources, and that they are intended to complements each other, like the household and employer surveys of employment.  One might show changes sooner than the other, for instance, or simply be more volatile.

There’s plenty of evidence for this even in the last century.  Germany was primarily destabilized by inflation, not so much by the relatively quick Depression.  It was the brief but horrid inflation of 1923-24 that wrecked people’s faith in the institutions of Weimar.  In the meantime, the US was wracked by a long, deflationary Depression, which didn’t come close to tearing the country apart.  Compare that to crime rates in the 60s and 70s, which only began to subside once people recognized that inflation was dead and buried, at least for the time being.

Crime isn’t just the poor and lower middle-class losing faith in their futures, it also eats away at the social fabric generally, because the middle class ends up being the most victimized.  It results in frustration an anger.  Wages go up, masking price increases that always stay ahead of wage increases, and nobody knows what their savings or earnings are worth any more.

I’m obviously not the first one to propose this relationship.  It’s been observed in other countries, as well as the United States.  According to that study, macroeconomic factors don’t explain more than 15% of the changes in property crimes over time, but almost all of that explanatory power comes from inflation.

None of this is to say that you can’t have serious social upheaval in times of deflation or even price stability.  Gold standard enthusiasts point to the 19th Century as a sort of golden age of macroeconomics.  But the changes wrought by industrialization, along with the over-expansion and inevitable contraction of the railroads, led to serious social unrest and the first stirrings of mass unionization.  Walter Russell Mead has been sounding the alarm about a similar reconfiguration now, we just don’t yet know what the other side is going to look like.

But if we are going through a Great Recalculation, a metaphor preferred by Arnold Kling, it’ll be a lot easier to meet without the complicating destabilization of people not knowing what their dollar is worth.

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