Sunday, April 8, 2012

Inflation Devalues Everything

Paul Krugman thinks that inflation will solve all of our problems. He seems to be saying that inflation is just the therapy the economy needs.

While inflation seems to solve one problem, it also causes plenty of others.

For example, inflation robs you of your savings. If $10 used to buy 5 gallons of gas and now it buys you a little over 2 gallons, your savings have lost value. As has your work.

If thrift is a positive social value, then inflation will discourage people from saving and encourage them to be profligate. If money becomes really cheap they will be smart to spend borrowed money.

And why not? If you borrow $1,000,000 to buy a house you cannot afford, and if runaway inflation makes that $1,000,000 the price of a latte at Starbucks, then you have made a good deal on your mortgage. 

People who saved their money, however, get destroyed by inflation.

It does not seem quite right to reward overspending and punish thrift.

Inflation devalues everything it touches. And it does not just touch money.

So, The Economist has just explained. In a great column it made the most important points, namely that inflation—or, as the author calls it, “panflation” —has become epidemic in our culture and that it devalues everything.

Ben Bernanke assures us that the Federal Reserve has all the tools it needs to crush monetary inflation. Yet, the other kinds of inflation are not so easy to control.

How, The Economist asks, can you turn back grade inflation?

Today, grade inflation is endemic in academic institutions. In the old days an A was precious; it was handed out infrequently, if at all. Those who wanted to receive one needed to work harder and longer than anyone else.

An A used to mean something because very few people received it. Decades ago, when I was in college, a friend of mine once received an A in a notoriously difficulty history course.

No one ever received an A in this particular course. Most people could, at best, hope for a B. The professor gave out more than a fair share of Cs.

Thus, my friend’s A was news around the campus. What was not news, and what would be news today, was that a couple of hundred students signed up for this course every year, their GPA be damned.

They knew they were not going to get excellent grades, but they were avid to learn history from this professor.

How bad is grade inflation today? The Economist reports:

In American universities almost 45% of graduates now get the top grade, compared with 15% in 1960. Grade inflation makes students feel better about themselves, but because the highest grade is fixed, it also causes grade compression, which distorts relative prices. This is unfair to the brightest, whose grades are devalued against those of average students. It also makes it harder for employers to identify the best applicants.

Grade inflation corrupts the university system by telling students that they need not strive or excel: they will get an A anyway. It promises the excellent student the same recognition that it offers to the dolt who never attends class and can barely write a coherent sentence.

It’s all about self-esteem. Grade inflation, along with other ways that society devalues values, exists because we have come to believe that it is therapeutic.

It is also saying that we need to devalue the work ethic.

If everyone is rewarded, regardless of whether they get the right or wrong answers, why bother to work to get the right answer. If everyone wins, as happens in some anti-competitive schools, why bother to work to achieve victory.

Today’s liberal thinkers are all agog over the new ways that behavioral economics allows them to manipulate citizen behavior. They want to “nudge” people into doing what they believe to be in their best interest. As you know, liberal academics know better than you what is in your best interest.

Have they ever studied the effect of grade inflation on academic performance? How much does grade inflation devalue the entire educational experience, making it a less than serious endeavor? How much does grade inflation produce a culture that devalues learning and merit? And why, one might ask, is it doing so at a time when the cost of university education is rising far faster than the rate of inflation?

A society that systematically devalues things warps our sense of reality.

Take “size inflation.” Everyone knows about it and no one dares question it.  

To the best of my knowledge it only happens with women’s clothing. Yesterday’s size 12 yesterday is a size 4 today. And so on, down the line. More than a few women now wear size 0 or size 00. I realize, better than most, that many women are proud to wear a size 0. But really, how proud can you be to feel like a 0, like your body is nothing?

The Economist explains:

Fashion firms seem to think that women are more likely to spend if they can happily squeeze into a smaller label size. But when three out of four American adults and three out of five Britons are overweight, the danger is that size inflation reduces women’s incentive to eat less. Meanwhile, food-portion inflation has also made it harder to fight the flab. Pizzas now come in regular, large and very large. Starbucks coffees are Tall, Grande, Venti or (soon) Trenta. “Small” seems to be a forbidden word.

Correctly, the article connects size inflation with the epidemic of obesity. If we are being tricked into thinking that we are thinner than we are, doesn't this nudge us toward thinking  that we are underweight and need more food? Doesn’t it nudge us toward eating more than we should?

There are forces afoot in our culture that insist that “size inflation,” like grade inflation, is therapeutic. They enhance self-esteem, especially the kind that helps you to stay detached from reality. 

After all, in our therapy addled culture, we have been led to believe that self-esteem need not have any direct correlation with achievement, academic or otherwise, or with good health, physical or mental?

I look forward to the day when behavioral economists set their sights on the damage the self-esteem industry is doing to America’s values. I do not expect it to arrive any time soon.

Of course, the problem of devaluation manifests itself in many other ways. The Economist reports some others:

A five-star hotel used to mean the ultimate in luxury, but now six- and seven-star resorts are popping up as new hotels award themselves inflated ratings as a marketing tool. “Deluxe” rooms have been devalued, too: many hotels no longer have “standard” rooms, but instead offer a choice of “deluxe" (the new standard), “luxury”, “superior luxury” or “grand superior luxury”. Likewise, most airlines no longer talk about “economy” class. British Airways instead offers World Traveller; Air France has Voyageur.

This might mean that people are too sensitive, too thin-skinned to face reality, whether it is the reality of their achievement, the reality of their status or the reality of their figure. Of course, if you treat everyone as thought hey are hypersensitive, eventually they will want to fulfill your expect

It also tells us how we got into this mess in the first place. Our government officials came up with the idea that people would feel better about themselves if they could all have big houses. It didn’t much matter whether they could afford to buy the big house, because having it would make them feel successful. And, as the self-esteem industry tells us, feeling more successful will make you more successful.

Until you have to make the mortgage payment, that is. 


Dennis said...

I just wish more people would ask themselves what is money and why does it exist. It is a "medium" of exchange. It has to be exchanged for something of value backed by the work that gives it value.
If I print more money, give it where no exchange for value is concerned, et al I lessen its value. I can multiply its value if I can create other forms of value from its use. The less I create value the less the multiplicative factor is for any exchange.

Brennan's Law said...

Sounds like Prof. Quigley's course at Georgetown U.