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Everywhere and Always

Posted By Russ Roberts On March 20, 2006 @ 8:37 am In Prices | Comments Disabled

One of Milton Friedman’s greatest achievements [1] 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.

"Unthinkable,"
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 [2] as an epidemic or even better, a tsunami, [3] 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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[1] greatest achievements: http://www.amazon.com/gp/product/0691003548/103-9679528-6795022?v=glance&n=283155/invisiblehear-20

[2] obesity: http://www.invisibleheart.com/Iheart/PolicyFat.html

[3] tsunami,: http://cafehayek.com/2005/03/the_obesity_tsu.html

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