Everywhere and Always

by Russ Roberts on March 20, 2006

in Prices

One of Milton Friedman’s greatest achievements was to teach the world that inflation is everywhere and always a monetary phenomenon.  Sometimes politicians find it convenient to ignore the reality of what causes inflation. In Argentina, President Nestor Kirchner has been selling a different theory.  The Washington Post reports:

Guillermo Ugartemendia has nothing against making sacrifices for his
country, but like millions of Argentines, he drew the line when the
president asked everyone to stop eating so much beef.

said Ugartemendia, 35, after polishing off a rack of ribs at a
steakhouse Thursday night. "It’s not a viable option."

Asking Argentines to slow their beef consumption — as President Nestor
Kirchner did last week in an attempt to curb inflation — is like
asking Italians to say no to pasta, Parisians to skip wine, or the
Chinese to eat less rice.

I understand the cultural challenge.  I wonder if President Kirchner understands the economic challenge of having a reduction in beef consumption leading to a decrease in inflation. It will lower one price, the price of beef, but the impact on inflation, the rate of increase in overall prices, will be zero. Other prices other than beef will rise if the underlying cause of the inflation, an increase in the supply of money, is not curtailed at the same time.

Argentines remember the hyperinflation of the 1980s, when it was
possible for a carton of milk to double in price in one day. Now
inflation is much lower — just over 12 percent last year — but
Kirchner is trying to stop the rate from creeping up again before it
spirals out of control.

I always like this kind of language for economic activity—creeping up, and spiralling out of control—as if inflation were a snake or a cyclone. It’s like talking about obesity as an epidemic or even better, a tsunami, as if it were a natural phenomenon out of our control rather than something caused by the individual choices of people eating too much or exercising too little.

But could it work?

Kirchner’s…supporters say the export ban is part of a valiant effort to help
them regain spending power and stabilize the economy. It was in the
same spirit last year that he called for a boycott of Shell gasoline in
the wake of price increases. Hundreds took up his call and picketed
outside the company’s service stations.

No word on how that gasoline boycott worked out, but I’m sure it was "valiant," another bizarre word to use about economic policy. I suspect most Argentinians would prefer "effective."

And as it turns out, this "valiant" call to boycott beef may not bring down inflation for another reason—people aren’t rallying to this patriotic vision:

An informal survey of butchers in the capital revealed that business
hadn’t changed significantly last week. In a market where several
butcher shops compete side by side in the San Telmo neighborhood, Jorge
Alejandro Santiago sharpened his knives and prepared to cut a chunk of
tenderloin into steaks.

"What are people going to do, buy
chicken?" said the skeptical 65-year-old butcher, whose shop sits
across the aisle from a poultry vendor. "Chicken’s no good — it’s full
of water. If you eat a piece of chicken for dinner, you’ll be hungry a
half-hour later."

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John P. March 20, 2006 at 9:19 am

"No word on how that gasoline boycott worked out, but I'm sure it was 'valiant,' another bizarre word to use about economic policy. I suspect most Argentinians would prefer 'effective.'"


An argentinian March 20, 2006 at 1:46 pm

The gasoline boycott was very effective, Russell.

nate March 20, 2006 at 7:25 pm

The flow of steaks at Gibsons in Chicago apparently was not interrupted – at least initially.

Xmas March 21, 2006 at 9:05 am

I've been wondering about this for a while, what's the downside of not printing more money? If inflation is a monetary problem, when the Argentinian treasurey stops (or simply tempers)printing money to keep inflation under control, what happens then?

Kevin Feasel March 21, 2006 at 12:32 pm

Xmas: then, if Argentina is like most other South American governments, they don't pull in enough revenue to pay for government programs. Basically, they are engaged in seignorage: each Argentinian dollar government officials print out costs a few pennies (for ink, paper, and so on, which make up the marginal costs). The way the government puts dollars into circulation is by purchasing goods and services or paying off debts. If I (being El Presidente) print out $15 million but do not put it into circulation, the price levels do not increase (i.e., there is no inflation). The moment I spend those $15 million, I am purchasing them at prices at time X. Then, as that money circulates, prices slowly (or quickly, depending upon a few factors such as how widespread circulation is, expectations of inflation, and how quickly information can be passed along among citizens) increase. The end result is that there are wealth transfers due to some people getting the new dollars before prices going up, while others only see their wages go up after the inflation. But there is also one additional transfer: the government was able to purchase $15 million worth of goods and services (or repaying debts). This comes out of the pockets of citizens.

So seignorage is a hidden tax. A lot of South American countries have had significant problems collecting taxes–because of the size of the underground economy, because of corruption of tax collectors and local officials (and national officials, too…), and so on–so they use seignorage as a funding technique. The problem, though, is that citizens aren't stupid, so they'll expect seignorage and switch over to some more stable currency or just put their wealth into assets.

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