Inflation's Social and Political Costs: Lessons from the 1970s, vol. 2

(MoneyWatch)  In addition to the primary and secondary economic costs that come with high inflation, which we considered yesterday, there's a third level of effects -- social and political -- that comes with chronic rising prices. To generalize, I believe that high inflation hurts poor people more than rich people, political liberals more than conservatives, and the old more than the young.

Veteran economics coumnist Robert Samuelson of Newsweek and the Washington Post suggests that inflation's broader effects may equal or exceed the purely economic consequences. "The one major effect that you allude to but don't elaborate very much is that inflation is a political and social phenomenon, not just an economic one," he told me yesterday in an e-mail. Samuelson is the author of several insightful books, the latest of which (The Great Inflation and Its Aftermath) was published late last year, and to be honest, inspired this series of posts.

The macro facts: from 1973 through 1983, the CPI rose an average of eight percent per year, for eleven years. Not steadily, though: there were two surges, with peaks of 12 percent at the end of 1974, and 15 percent in mid-1980. Incomes actually outpaced inflation, rising 10 percent per year on average, but in my view it's the non-average cases we should consider.

On the social dimensions, first let's consider the dimension of rich versus poor. The rich, as the saying goes, have more money, and since basic expenses such as food and gasoline demand a smaller part of their available income, they're better able to absorb any sort of price increase.

But when prices shoot up as they did in the 1970s, people on lower incomes have to do more than just switch to the store brand -- they likely will make major lifestyle changes, while those better off might only have to complain about the higher prices. The graph below plots the overall CPI and the index excluding food; the small difference illustrates that food prices went up as much as everything else.


Of course, for the rich/poor dimension, you can substitute men versus women and white versus nonwhite, as these groups tend to earn stubbornly different levels of income.

On the other socioeconomic variables -- liberal and conservative, young and old -- I would submit that political liberals would make up a greater share of schoolteachers and blue-collar workers, and thus earn lower wages, while conservatives are your doctors, lawyers and accountants. On the other hand, the former group is more likely to be represented by labor unions, and able to keep up with inflation through their labor contracts. (In The Great Inflation, Samuelson cites a 1970s steelworkers' contract with a first-year wage increase of 15 percent. Yikes.)

The young versus old dichotomy is straightforward: young people are better equipped to tough things out for a few years, or take on a second job, while older people have fewer such opportunities. And watching your money drain away is harmful to a senior's health, as we probably have all seen first-hand in the last couple of years.

Samuelson posits that the well-off may in fact be harmed more than the poor, because they own more monetary assets that dwindle in value, and that in the seniors' case, much of their income is indexed to inflation through Social Security and Medicare. But he sums up the tertiary effects of inflation this way (and I agree):

Inflation really upsets people, makes them fearful and anxious. Even if there were no adverse economic effects, these social and political effects would make the battle against high inflation worth fighting.