Thursday, April 23, 2009

Williamson: Is Inflation Theft?

I want to comment on Justin's Post. I just covered how inflation can be a tax in my principles course. Students found this very interesting as another way that government can ‘trick us.’ I followed this with how anticipated vs. unanticipated inflation really drives how quickly we return to our long run equilibrium. The next topic I am covering is specifically how inflation can be costly it terms of relative price distortions and misallocation of resources. Nowhere in this discussion will ‘inflation is theft’ be covered.

My reason is that I try to teach my students that economics is about means/ends analysis. When students bring up moral issues such as any taxation is theft, I try to stay away from a moral/natural rights debate. Instead, I push my students to understand the costs/benefits of any scenario presented in class, such as the deadweight loss from taxation, not how taxation is morally wrong. Following this logic, I do not see why inflation is theft because we understand the consequences of the government printing more money, i.e. inflation. Since we know this, we can alter our behavior today to try and offset the negative costs. Just like we alter our labor supply in response to the income tax, we can alter our response to an increase in the money supply. There are significant costs to inflation, but I do not see how invoking the argument that inflation is theft helps to illuminate these costs.