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Making Economic Sense
by Murray Rothbard
(Contents by Publication Date)

Chapter 82
Inflation And The Spin Doctors

We are all too familiar with the phenomenon of the "spin doctors," those political agents who rush to provide the media with the proper "spin" after each campaign poll, speech, or debate. What we sometimes fail to realize is that the Establishment has its spin doctors in the economic realm as well. For every piece of bad economic news, there is a scramble to provide a pleasantly soothing interpretation.

One perennial favorite is our permanent state of inflation. During the halcyon days of the 1950s and 1960s, the Fed and the  other monetary authorities believed that inflation was out of control if it went above 2% a year. But such is the narcotizing effect of habit and desensitization that nowadays our standard 4% rate is held to be equivalent to inflation having disappeared. In fact, the implication is that we have no need to worry so long as inflation stays below the dread "double digit," reached for the first time in peacetime during the inflationary recessions of the early and late 1970s.

Well, in January 1990, the cost of living index at least reached well over double-digit proportions. During that month, the cost of living shot up by 1.1%, which amounts to more than 13% per year, reaching the disturbing inflationary peaks of the 1970s. Was there any grave concern? Did the Fed and the Administration, at long last, reach for the panic button?

Certainly not, for the economic spin doctors were quick to leap to their tasks. You see, if you take out the fastest rising price categories food and energy--things don't look so bad. Food went up by 1.8% in January--an annual rise of almost 22%; while energy prices went up by no less than 5.1%--an annual increase of over 61%. But that's OK, because the culprit was the record cold snap in December, which drove food and vegetable prices up by 10.2% the following month (an annual rise of over 122%), and pushed up heating oil prices by 26.3% (an annual increase of over 315%).

Take out those volatile (though important) categories of food and energy, then, and we get a far more satisfactory "core rate" (defined as consumer price movements minus food and energy) of "only" 0.6% for January, an annual rise of 7.5 %. This, the establishment admitted, is definitely cause for concern, but it is, after all, well under the baleful levels of double-digit.

But, we must remember, there are often cold snaps during the winter, and the allegedly random effects of the weather always seem to work more strongly in the inflationary than in the deflationary direction.

The concoction of the "core rate" is a plausible-seeming example of a racketeering general principle: if you want to make inflation go away, simply take out the price categories that are rising most rapidly. Lop off enough prices, and you can make it seem that there is no inflation at all, ever. Find some excuse for taking out all the rising categories, call whatever is left the "base rate," and presto-changeo! inflation is gone forever.

Thus, during the early years of the Reagan Administration, housing prices were going up by an embarrassing degree, and so they were simply taken out of the index, on the excuse that consumers pay annual rents, actual or imputed, and at that point rents had not yet caught up to the increases in the prices of housing. During the infamous German hyperinflation of 1923, for another example, there were respected establishment economists who maintained that there was no inflation in Germany at all, but rather deflation, since prices in terms of gold (which was no longer redeemable for marks) were going down!

Unfortunately, the poor benighted consumers are paying through the nose in higher prices for all the goods in the index (and even more for goods that never get on the index, such as brandname products and books), even including houses, food, and energy. We consumers don't have the privilege of paying only for "core" goods; nor, unfortunately, do we enjoy the luxury of paying in gold.

Since even the core rate is getting disturbingly high, the establishment economists are beginning to look around for explanations. One old candidate for blame has therefore resurfaced, with several economists pointing out that wage rates went up by a disquietingly high 5.0% last year; but since prices went up by the now traditional 4.5 %, this hardly seems a major point of worry.

Wage rates have been lagging behind price increases for years. The real culprit for the accelerating inflation is the one candidate that the establishment always tries its best to avoid fingering: the money supply created by the federal government itself.

After years of the government's creating new money and pouring it into the economy, the people are now spending that money, and hence driving prices upward. But the last group the federal government wants to blame is itself; besides, money creation is too pleasant for the creator and his beneficiaries to give up without a struggle. And only when the power to create money, that is, to counterfeit, is taken totally out of the hands of government will the curse of inflation truly disappear forever. 

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