From: mss2@quads.uchicago.edu (Michael S. Schiffer)
Subject: Re: A square grand
Reply-To: mss2@midway.uchicago.edu
Organization: University of Chicago Computing Organizations
Date: Fri, 28 Aug 1992 01:31:21 GMT

In article <1992Aug27.233735.16822@sequent.com> rip@sequent.com (Paul T Taylor) writes:

>Well, luckily the Prez has no direct control over the Fed.  Anyway, it
>is alot more complicted than just screwing with the Fed....  And a
>certain amount of inflation is good, means the economy is growing.

	"Not as such.  The money supply has to grow _as_ fast as the
economy, or you get deflation and that has bad effects as well.
Whether inflation really has the stimulus effect Keynesians, among
others, believe is at least debateable (and debated).  Personally, my
economics knowledge isn't good enough to determine whether moderate
inflation or price stability (0% inflation, money supply tied to
actual growth) is better-- I've heard arguments both ways.  But it's
always a temptation to use inflation to solve a debt problem-- that
goes back to at least William Jennings Bryan's Free Silver movement
(bimetallism being a way to get inflation in the days before money
became entirely a matter of fiat), and inflation at first _looks_ like
prosperity-- everyone has more money, debts are easier to pay, etc.
I'm inclined to doubt that democracies have the self-discipline for
"reasonable" inflation-- they're far better off tying their money
supply to a stable basket of commodities which is harder to devalue.
(Yes, that's undemocratic.  So's leaving constitutional interpretation
up to nine unelected appointees.  Absolute democracy would be
dangerous, IMHO.)"

>One thing nasty about the nature of the economy is that you either
>have low interest rates and lower (relativly speaking) prices and alot
>of unemployment, which is not good because of the stagnation of the
>economy, or you have a fast growing economy with high inflation, and
>lower unemployment.  So if you are going to put all these people back
>to work, no matter how you do it, you are going to have a higher
>inflation rate.  The hard part is trying to balance the two, and no
>one that I know of has been able to do that, in peace time anyway.

	"I don't think that that's certain-- and recall the discovery
of stagflation back in the seventies.  It's possible to have stagnant
growth _and_ runaway inflation.  We had a high growth economy back in
the 19th century with minimal inflation, and we've had low growth
during a period of high inflation.  There's certainly nothing which
prevents having a stable money supply and a growing economy-- the
Germans have managed it from the fifties to just recently.  (They've
gotten a dose of inflation because they declared that East marks could
be exchanged for real money at 1:1, which had about the effect on the
economy that you'd get if you declared that Monopoly money could be
exchanged 1:1 for dollars, since the size of the eastern German
economy isn't anywhere _near_ it's value in East marks turned into
DMs.  It was necessary, I think, in order to avoid a permanent
regional underclass, but the inevitable result was a devaluation of
the currency.)"

>Yep, one sure fire way to stimulate the economy is to have a good
>war....

	"Not really, except in the most technical sense. Sure,
production goes up, but standard of living goes down for the duration,
and once it's over, you have a lot of excess capacity which has to be
retooled to civilian uses or scrapped.  There was a pretty severe
recession in the US right after WWII.  The later boom was indirectly
because of the war, but largely because all potential competitors had
been bombed flat (and then several, like Britain and France, proceeded
to build low growth welfare states which didn't really provide much
competition for a while).  Neither WWI nor WWII were particularly
luxurious times for the home front, even if we ignore the SOL costs to
the soldiers themselves."

Michael
-- 
Michael S. Schiffer, LHN, FCS	"Workers of the world, forgive me.
mss2@midway.uchicago.edu	 You had more to lose than I thought."
mike.schiffer@um.cc.umich.edu	 -- Karl Marx (1990) as imagined by
mss2@usite-next.uchicago.edu     Jim Koncz (konc@midway.uchicago.edu)
Organization: Senior, Math/Computer Science, Carnegie Mellon, Pittsburgh, PA