On the Money

Most people have finally accepted that the current inflation isn’t transitory. Now what? The time has come to turn our attention to anti-inflation policy. But first, I want to take a short diversion via Philippa Foot’s “Trolly Problem”.

Picture yourself taking a stroll along a railway line. It’s a lovely sunny day and everything seems right with the world… until you notice five people tied to the tracks. What’s more, there’s a runaway carriage heading straight for them.  

Wait… there’s a switching lever, you can divert the carriage to the other branch of the line. You’re just about to pull it when you see that the other branch has two people tied to it. If you pull the lever, they’ve had it. 

Do nothing and five people face certain death, but if you pull the lever, two people who were safe until you came along, die. What would you do? Most people opt to pull the lever, as the lesser of two evils. 

But what does all this have to do with anti-inflation policy? Well, there’s an unavoidable truth about anti-inflation policy: it hurts.

There’s no getting around the fact that an effective anti-inflation policy will bring serious financial hardship in its wake; there will be people and businesses who, through no fault of their own, will suffer. 

The trolly problem forces us to confront a situation in which there’s no painless way out. A trade-off is built into its structure: do nothing and people die; divert the train and different people die. Whatever you do, there’s no absolute win. The best you can hope for is the least-worst option.  

Unfortunately, the trade-offs involved in fighting inflation are even more difficult. To see that, we need to add a new wrinkle to the trolly problem, namely that with every moment that passes, another person is added to each branch of the line. Now, the longer we refrain from acting, the greater the number of people who are going to suffer.

Next, imagine the trolly problem as a societal choice in which the timescale of the collision is somehow slowed down but without the option of freeing the people. Political parties would coalesce around the options, and as always mud would be slung from all sides. 

“You just don’t care about the lives of ordinary people,” they’d shout, or: “Nature must be allowed to take its course, non-intervention is the moral choice.”  

Unfortunately, the most popular party is always going to be the one that says, “Wait, no one needs to die!” – the party that claims to have seen through the whole charade and claims there doesn’t need to be a trade-off at all. “Runaway carriages don’t really kill people; that’s just a myth that’s been debunked – it’s nothing more than ideology masquerading as science.” 

Of course, they’d offer no rational arguments. If questioned they’d quickly resort to that shibboleth of intellectual bankruptcy: abuse. Haranguing their opponents with emotive non-sequiturs such as: “You have no idea how it feels to be tied to a train track.”

The first thing the authorities need to do is to unambiguously announce a counter-inflation strategy

In recent times, the electorate has been progressively infantilised by the pretence that there are only wholly good, or wholly bad policy options. There’s an ever-growing tendency to believe that whatever one supports must be unqualifiedly good, and that what your opponents want must be unqualifiedly bad. This nuance-free nonsense has allowed the rise of a general conviction that if a policy has any negative consequences it must, thereby, be a bad policy. In reality, there are always trade-offs.

OK, with all that said, here’s what has to happen: the first thing the authorities need to do is to unambiguously announce a counter-inflation strategy. Credibility is key here. In terms of the analogy, a credible announcement of counter-inflation measures would stop additional people from being tied to the lines. 

What should those counter-inflation measures be? Here, it’s essential to keep in mind the distinction between necessary and sufficient conditions. A necessary condition for inflation to take off is an increase in the money supply. Of course, before the advent of fiat money; intrinsically worthless tokens owing their value to government decree, inflation only happened when there was a substantial discovery of precious metal. Now governments can create as much money as they wish at the click of a mouse. 

There’s some resistance to the link between money supply and inflation, but try as I might, I couldn’t find a single example of hyper-inflation in a country that wasn’t using fiat money. By the way, that doesn’t in any way imply that supply issues don’t contribute to inflationary pressure, but a necessary condition for the reduction of inflation is for demand to be reduced and that is what needs to happen. Government spending needs to fall and interest rates need to rise. 

However, as we’ve seen, that’s going to hurt innocent people. Accordingly, a series of safety nets must be put in place; measures designed to support the most vulnerable in society without, at the same time, stoking inflation. 

None of this will be politically easy. We’ve all become too accustomed to having our cake and eating it. This is where credibility comes in. We need a politician or a central banker who is prepared to say: “This is necessary, but it isn’t going to be easy.” 

Someone who is prepared to speak the truth.

Peter Lawlor is a trustee of the John Hicks Foundation in Oxford. He was formerly the Principal Economic Advisor to the German Stock Exchange (Deutsche Börse), and continues to act as an adviser to senior Wall St figures and political leaders. These are his own views and should not be imputed to any organisations with which he is, or has been, affiliated