Public Perceptions of Inflation: Dislike, Impact on Standards - Prof. Sebastián, Apuntes de Macroeconomía

¡Descarga Public Perceptions of Inflation: Dislike, Impact on Standards - Prof. Sebastián y más Apuntes en PDF de Macroeconomía solo en Docsity! COWLES FOUNDATION FOR RESEARCH IN ECONOMICS AT YALE UNIVERSITY Box 2125, Yale Station New Haven, Connecticut 06520 COWLES FOUNDATION DISCUSSION PAPER NO. 1115 Note: Cowles Foundation Discussion Papers are preliminary materials circulated to stimulate discussion and critical comment. Requests for single copies of a Paper will be filled by the Cowles Foundation within the limits of the supply. References in publications to Discussion Papers (other than mere acknowledgment by a writer that he has access to such unpublished material) should be cleared with the author to protect the tentative character of these papers. WHY DO PEOPLE DISLIKE INFLATION? Robert J. Shiller March 1996 Why Do People Dislike Inflation? Robert J. Shiller Yale University March 1996 Abstract A questionnaire survey was conducted to explore how people think about inflation, and what real problems they see it as causing. With results from 677 people, comparisons were made among people in the U.S., Germany, and Brazil, between young and old, and between economists and non-economists. Among non- economists in all countries, the largest concern with inflation appears to be that it lowers people’s standard of living. Non-economists appear often to believe in a sort of sticky-wage model, by which wages do not respond to inflationary shocks, shocks which are themselves perceived as caused by certain people or institutions acting badly. This standard of living effect is not the only perceived cost of in- flation among non-economists: other perceived costs are tied up with issues of exploitation, political instability, loss of morale, and damage to national prestige. The most striking differences between groups studied were between economists and non-economists. There were also important international and intergenerational differences. The US–Germany differences (on questions not just about information) were usually less strong than the intergenerational differences. *This research was supported by the U.S. National Science Foundation and the National Bureau of Economic Research. This paper was presented at the National Bureau of Economic Research Conference on Monetary Policy and Low Inflation, Cheeca Lodge, Islamorada, Florida, January 13, 1996. The author wishes to thank the numerous people who filled out the questionnaire. Questionnaire design and translation and survey management were under- taken with the help of Michael Krause in Germany and Jose Carlos Carvalho in Brazil. The cooperation of the Institute of World Economics in Kiel, Germany, and of Harmen Lehment there is much appreciated. The author also thanks Moshe Buchinsky, Giancarlo Corsetti, Robert Faulstich, Benjamin Friedman, Ilan Goldfajn, Anil Kashyap, Miles Kimball, Alvin Klevorick, Gregory Mankiw, William Nordhaus, Christina Romer, David Romer, Matthew Shapiro, Virginia Shiller, and participants in the Conference on Monetary Policy and Low Inflation for helpful suggestions. Aslak Aunstrup, Mylene Chan, Paulo Freitas, John Lippman, Chris Malloy, and Daniel Piazolo provided excellent research assistance. 3 Table 1 Number of Stories that Use Various Economic Terms on Nexis General News Search Facility, Level 1 (1) (2) (1) (2) ALLNWS CURNWS ALLNWS CURNWS (last 2 years) (last 2 years) Inflation 872,004 255,987 Public Goods 12,998 4,586 Unemployment 602,885 161,939 Economic 11,741 2,962 Productivity 376,775 103,507 Efficiency Infrastructure 331,888 148,354 Deflation 11,584 3,141 Economic Growth 322,888 106,354 Indexation 10,550 2,564 Poverty 316,995 114,190 Productive Capacity 9,263 1,988 Monopoly 231,370 72,103 Income Distribution 7,884 2,171 Price Index 179,911 50,278 Human Capital 7,102 2,604 Communism 150,000 35,139 Price Gouging 6,427 1,850 Price Increase 147,877 35,115 False Advertising 6,219 1,851 Money Supply 104,498 24,005 Cost of Living 4,595 762 Diversification 89,034 21,300 Allowance Consumer Price 74,054 21,096 Market Incentives 4,037 1,270 Index Index Bonds 3,398 869 Trade Barriers 59,101 18,053 Externality 2,985 1,169 Risk Management 46,979 19,646 Potential Output 1,353 449 Price Level 38,086 8,130 American Economic 1,289 324 National Debt 37,771 11,818 Association Job Opportunities 36,816 12,129 Game Theory 1,292 551 Industrial Policy 24,316 5,433 Economics 1,136 271 Technological 15,971 4,638 Profession Innovation National Economic 810 99 Public Investment 15,946 5,137 Strategy Real Interest Rate 15,447 3,710 Real Business 127 55 International 15,170 3,949 Cycle(s) Competitiveness Indexed Annuity 59 23 At this time of relatively low inflation among most of the major countries of the world, “inflation” still appears to be the most commonly used economic term. The Nexis system, using its current news section CURNWS that covers the last two years only, still produced more stories using the word “inflation” than using any other economic term, see Table 1 column 2. Because the word “inflation” is so much a part of everyday lives, it has many associations and connotations to ordinary people. Moreover, because shopping, and thereby noticing prices, is an everyday activity for ordinary people, thinking about prices is also a major part of people’s thinking, and the subject “inflation” is one of great personal interest for most people. Inflation, when it is substantial or shows the risk of becoming substantial, is clearly perceived as a national problem of enormous proportions. This fact is also evident in the constant attention that inflation is given in the media and in the The Gallup Poll has asked in the US since 1935 “What do you think is the most2 important problem facing this country [or this section of the country] today?” Those citing inflation or the high cost of living as the most important problem have generally represented a significant percentage of respondents. The percentage was generally over 50% from 1973 to 1981, when inflation was higher than it is today. 4 fundamental role it plays in many political elections. News about inflation seems to have serious consequences for approval ratings of Presidents and for outcomes of elections (see Cartwright and DeLorme, 1985; Parker, 1986; Golden and Poterba, 1980; Cuzan and Bundrick, 1992; and Fair, 1978, 1994). Public opinion polls have shown that inflation (or something like inflation) has often been viewed as the most important national problem.2 The great public concern with inflation has certainly had an impact on the economics profession. We must ask whether the extent of public concern with in- flation really makes sense, or whether the economics profession has been influenced from without into devoting too much attention to inflation. Studying so complex a public concept as inflation will not be easy. To attempt to learn about it at some depth, I have followed here a sequential procedure, in- volving first informal conversations with people, allowing me and my students to use our judgment as much as possible, and then a questionnaire survey. II. First Steps of this Study I asked student research assistants to interview random people in the US and Germany informally, with a list of suggested interview questions, and to give me their impressions; I interviewed some people as well. I then discussed with these students what people seemed to be saying. When asked why they dislike inflation, people often protest that they are not experts, and they need to be prodded to respond. When they do respond, it is often with what seem to be incompletely thought out ideas, and vague associations about inflation, yet a conviction that inflation is important. Most people seemed to be vulnerable to fundamental confusions about inflation, and in spite of their convictions as to the importance of inflation, seemed not to have given really serious thought to it. Several students came back to me independently of each other and told me, as a result of their interviews, that it was very easy to see why people dislike inflation: people think inflation erodes their standard of living. For example, my student, Michael Krause, who interviewed in Germany wrote: If you ask people in conversation why they think that people dislike inflation, everybody says it is because of the increase in the cost of living, the fall in real income. This is particularly relevant for those who live from pensions or social security transfers, where 5 inflation corrections lag behind (at least when the inflation rate has unexpectedly increased). Several times I indicated that nominal incomes would be adjusted to inflation. It was said that it was uncertain that an adjustment would take place, or when it will take place, at least there is uncertainty about whether this adjustment would be sufficient. Conducting these interviews inclined us to a hypothesis that the main issue for the public with regard to inflation is just that people do not see the connection be- tween inflation and increases in income that might be associated with it. We must try to understand why people would think that there might be little connection between the inflation rate and the changes in their own income. Simple reflection on the mechanism of inflation suggests that there are likely to be many people who benefit from it, rather than be harmed by it, but no one reported hearing an interviewee volunteer that he or she benefited from inflation. There is something of a puzzle here why the answers should so uniformly assume that inflation is harmful to the respondent. Many other issues were also raised regarding inflation, issues that seemed to suggest concerns along very different lines. Some of these appear potentially very important too, even if people do not bring them up first in our conversations. These other concerns will be described below in various questions. They may even turn out to be the more important issues for policy makers, in trying to decide whether or how much to fight inflation. III. Questionnaire Design To give quantitative force to our impressions about what people thought, various of their ideas were put down on questionnaires, to be distributed to large samples of people, who could indicate the extent of their agreement with these ideas. I decided to use three questionnaires (Questionnaires A, B, and C) because there were too many questions to expect any one respondent to answer them all with patience and thoughtfulness. Separating the questions into three questionnaires also gave us some opportunity to avoid suggesting ideas that might bias answers elsewhere in the same questionnaire. Questionnaire A was very short and emphasized open-ended questions where respondents were given space to write a paragraph to answer. The questionnaire, distributed to a random sample of people in the US, was so short that it occupied only both sides of a single sheet of paper; the text of this questionnaire is reproduced in its entirety in Table 2. The questionnaire was kept very short because we felt that people could not be expected to write thoughtful answers if the questionnaire were too long. By omitting from this questionnaire many of our other questions that we could not pose without putting ideas into their heads, we get in this questionnaire some fairly pure responses. The disadvantage of this questionnaire is that by not putting ideas into respondents’ heads, we cannot well influence what people will 8 Table 2 Text of Entire Questionnaire A [With Results of 120 Questionnaires in Brackets] Questionnaire: Opinions on Inflation (A) This is a questionnaire about your views on inflation. By inflation, we mean a steady increase of the average of all prices, and thus of the price level. A1. Do you think that controlling inflation should be a high priority for the US government and its agencies? [Circle one number] 1. Yes, strongly agree [59%] [n = 118] 2. Yes, agree somewhat [33%] 3. Neutral or no opinion [1%] 4. No, disagree somewhat [4%] 5. No, strongly disagree [3%] A2. Do you find, when you hear or see news stories about inflation, that you personally find these stories interesting? [Circle one number] 1. Yes, very interesting [47%] [n = 119] 2. Yes, somewhat interesting [42%] 3. No, or no opinion [11%] A3. Some people think that news about inflation is boring technical stuff, that they can’t relate to. Can you explain to them why they should find it interesting? [space for answer] A4. Do you have worries that if inflation rises too high, then something really bad might happen? [Circle one number] 1. Yes, very much [47%] [n = 118] 2. Yes, somewhat [43%] 3. No, or no opinion [10%] A5. If you answered yes to the above, what are you worried might happen? [space for answer] A6. When inflation gets very high, what do you think is the reason? [space for answer] A7. When you go to the store and see that prices are higher, do you sometimes feel a little angry at someone? [Circle one number] 1. Yes, often [38%] [n = 20] 2. Yes, sometimes [48%] 3. Never [15%] A8. [If you said yes above] Who do you tend to feel angry at and why? [space for answer] A9. Think about how much your income (measured in dollars per month) went up (or down) in the past five years. What do you think are the most important factors that account for the change in your income? (Please try to list all the relevant factors that apply to you): 1. Income went up [53%] [n = 94] 2. Income went down [47%] A10. Try to imagine how things would be different if the United States had experienced higher inflation over the last five years, so that prices of things you buy had risen to higher levels than we actually see today. How different do you think your income (the total dollars you earn in a month) would be now, in comparison with your actual income now, if we had had the higher inflation? [Circle one number] 1. My income (in dollars per month) would be lower [28%] [n = 114] 2. My income (in dollars per month) would be about same. [35%] 3. My income (in dollars per month) would be higher. [31%] 4. No opinion. [6%] Thank you very much. Please return this questionnaire to Prof. Robert Shiller, Cowles Foundation for Research in Economics, Yale University, Box 208281, New Haven, CT 06520–8281 Reference Number________ 9 purposes (8%), (d) those who said that inflation hurts the economy in general (10%), and (e) those who only stated that inflation was important without giving reasons or who wrote something that was only tangential to the question (26%). Here are some excerpts from answers to question A3 that I categorized as asserting that inflation hurts their standard of living, category A: “It affects their life and lifestyle.” “Inflation governs the way we live. It’s simple: raise the prices, get less for your money.” “Every individual is personally affected in his lifestyle, comfort, health, etc., by whatever is happening about inflation. How can they not be interesting?” “Inflation can rob a person of income” “Their saving for retirement and college fund for their children will be evaporated when they need them the most.” “Inflation has a strong impact on an individual’s pocket book and on one’s standard of living.” “As a retired senior citizen, inflation has most definitely lowered my purchasing power.” “It affects everyone’s standard of living and their lives.” “Because it is directly related to their income.” “Because it affects the wages they receive & the price they pay for houses, cars, groceries & everything else they buy. In short, it affects their standard of living.” “Our very being depends on this.” “Right now it is killing US.” Here are some excerpts from answers to question A3 that I put in category B as asserting little more than that inflation lowers the buying power of the dollar: “Inflation reflects everyday prices of all goods, services, and products.” “I have a simple statement: inflation is directly related to your pocketbook” Although these answers are sometimes perhaps nothing more than restatements of the definition of inflation, it would seem that these statements, entered in answer to a question why inflation news is interesting, suggest that the respondent feels that inflation erodes his or her income. That this is the meaning of these statements is suggested by the answers in category A that include sentences like these as well. It is possible, on the other hand, that not all of the category B answers imply that the standard of living is generally eroded by inflation, only that one must be knowledgeable about it to live within a budget. There were a few answers that seemed to say that knowing the inflation rate is helpful in planning, category C. Some excerpts from these answers to question A3 are: 10 “Inflation rate is a gauge to measure the value of today’s dollar against its value in time to come, and also, the true return on investments. It is necessary knowledge in future planning.” “Inflation is the barometer for your pocketbook. Certainly, it is important in gauging your spending. I would explain that inflation or deflation affects your spending and savings directly. Therefore, you should know the inflation rate at all times.” “People need to learn fast due to economic world change rapidly and it is the most keen fact that influences their own life. Just makes it easier to understand. Here are some answers to question A3 that I categorized as suggesting systemic problems of inflation, more than just the direct effect of higher prices on their ability to buy, category D: “It is an indicator of future events to occur economically.” “The stability of the economy is important, as it facilitates one’s ability to buy and save. A stable economy encourages investment and growth.” There were, however, few of such answers. The impression that people are worried about the effects of inflation on their standards of living is further supported by their responses to questions A4 and A5. In answering question A4, whether they are worried that something really bad might happen if inflation rises too high, 90% said yes very much or yes somewhat. What is striking is the dramatic nature of some of the answers to the following question, question A5, about just what bad might happen. The most common answers concerned fears of depression and/or dramatic drop in overall standard of living: “That I, and millions like me, will be forced into poverty – perhaps not like the “great depression,” but close.” “If inflation rises too high, more people will be forced to seek assistance, e.g., welfare, food stamps, charity, etc. “We wouldn’t be able to afford anything. Our wages wouldn’t be high enough.” “I will not be able to live within my weekly paycheck.” “There will be more homeless and starving people.” A few reported fears of political instability: “1. Political nightmare, 2. riot, 3. big incidents” “Hyperinflation can cause governments to fall and individuals’ savings may be lost causing chaos throughout the land.” A few reported general fears of damage to the economy: When words appear in square brackets in the questions shown here, we mean that the4 word corresponding to the country of the respondent is used. The breakdown of categories by birth year was chosen so that the older group would5 be people who clearly experienced World War II and the post World War II inflation in Germany, and the younger group would be people who are clearly excluded from either group, but included in the figures from the “All” group, along with people who refused to reveal their age on the questionnaire. 13 anywhere on the questionnaire, the inconveniences created by inflation, such as making more trips to the bank. V. Public Concerns with Inflation: Results with Questionnaires B and C V.1. Confirmation of Importance of Inflation and Its Effects on Standards of Living Answers to some of the questions on Questionnaire B (distributed to randomly selected people in the US and to economists) and Questionnaire C (distributed to randomly selected people in the US and Germany, and via e-mail in Brazil) confirm the central importance in public perceptions of inflation and of the standard of living concern. These closed-end questionnaires give more precise description of our conclusions, since the wording of the answers is the same for everyone (they must choose among our answers), and allows accurate comparisons across groups. The respondents in all three countries, and among both the younger and the older in the US and Germany, were very concerned with inflation:4 C1. Do you agree with the following statement? “The control of inflation is one of the most important missions of US [German, Brazilian] economic policy.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 56% 28% 7% 7% 2% n = 123 born < 1940 69% 13% 11% 4% 2% n = 45 born 1950– 44% 38% 2% 13% 2% n = 45 Germany All 76% 18% 5% 1% 0% n = 174 born < 1940 90% 8% 1% 1% 0% n = 77 born 1950– 51% 40% 7% 2% 0% n = 55 Brazil 56% 32% 2% 4% 7% n = 57 Concerns with inflation are high everywhere. The Germans tend to agree with this statement more often than the others, but it is striking that no group of respondents chose 1 or 2 less than 80% of the time. The older people (born before 1940) were5 14 more likely to agree fully than the younger people (born in 1950 or later). The differences between German and US respondents are much stronger for the older group than for the younger group; this is a pattern that will recur in answers to other questions below. Note that our Brazilian sample of e-mail users is approximately comparable in age to our younger group: 91% of our Brazilian respondents were born in 1950 or later. There is not a large difference between the Brazilians and the younger German or US respondents in answers to this question. Another way to gauge public concern with inflation, and to see whether there are international differences in this concern, is to ask them whether they would accept inflation if it were necessary in order to curb unemployment, that is, to ask them how they would choose between two points on a Phillips curve. This question presumes the existence of a Phillips Curve tradeoff, and so is asking directly about preferences with regard to inflation and unemployment: C8. Imagine that you faced a choice for the United States [Germany, Brazil] between the following two extreme possibilities, which would you choose? 1. The US [Germany, Brazil] would have in the next 10 years an inflation rate of only 2% a year, but an unemployment rate of 9%, thus about 12 million [3.5 million, 6 million] unemployed. 2. The US [Germany, Brazil] would have in the next ten years an inflation rate of 10% a month, but an unemployment rate of only 3%, thus about 4 million [1.2 million, 2 million] unemployed. 1 2 US All 75% 25% n = 113 born < 1940 79% 21% n = 38 born 1950– 72% 28% n = 43 Germany All 72% 28% n = 153 born < 1940 66% 34% n = 65 born 1950– 84% 16% n = 49 Brazil 54% 46% n = 50 The results show that most people in all countries would choose the low inflation even if it meant that millions more people would be unemployed. The Brazilians more often choose 2 than people in other countries, possibly since having lived through it they have learned ways of enduring it, and possibly also since Brazil does not have as developed a social safety net for the unemployed. But there is less difference across countries in answers to this question than I expected. There is little difference between the German and US respondents overall, and so the popular theory that Germans have a greater distaste for inflation is not confirmed here. The difference between the age groups within Germany is much bigger than the dif- ference overall between Germany and the US. The absence of a large difference between the German and US respondents suggests that the differences between the two countries might be more in their understandings of the unemployment conse- quences of inflation, rather than differences in pure preferences regarding inflation. 15 While the general public appears to dislike inflation everywhere, results from the B questionnaire show that economists do not generally agree: B1. Do you agree that preventing high inflation is an important national priority, as important as preventing drug abuse or preventing deterioration in the quality of our schools? 1 2 3 4 5 Fully agree Undecided Completely disagree US All 52% 32% 4% 8% 4% n = 117 Economists 18% 28% 11% 26% 18% n = 80 The fraction of our US respondents who fully agreed was nearly three times as high as the fraction of economists who fully agreed. This question also shows some indication of the magnitude of the public concern with inflation; with about half of the public choosing 1, one might say that the problem of high inflation appears to be viewed by the public (though not economists) as on par with the drug problem or the problems of our schools. In confirming that people think that inflation is a very important issue, it is helpful to see whether people see the inflation process, the surprise in inflation, as causing a problem, or the effects of the new price level itself. One way of giving information on this is to ask people if they would like to go back to earlier prices if they could: B18. Do you agree with the following statement? “If the government were to make a mistake next year, such as printing too much money, and creates prices that are 20% higher than they are today, I think that they should try to reverse their mistake, and bring prices back down where they are today.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 46% 22% 22% 4% 6% n = 113 Economists 0% 3% 5% 28% 64% n = 76 There is here a very sharp difference between the economist’s answers and the public’s: the public seems to be at odds with the fundamental economists’ notion that we should accept base drift in the price level. Why is there such a difference between the economics profession and the general public about the importance of inflation or price level changes? The general public in the US clearly thinks differently from professional economists about the costs of inflation, far more likely to think of inflation as lowering standards of living: 18 But, if we accept this interpretation of the public’s ideas about causes of infla- tion, why do people think that inflationary shocks from these causes hurt their standard of living? Perhaps their thinking arises just from an observed correlation, that inflation tends to come at times when other factors were harming their standard of living, and so people are influenced by the perceived correlation between inflation and their problems. The oil price shocks of 1973 and 1979 apparently precipitated both inflation and recession and, occurred at a time of an end to the uptrend of pro- ductivity in many countries, yet people may not remember the oil price shock as a cause, thinking instead of the inflation. The German hyperinflation of the early 1920s, an event widely alleged to have shaped German public opinion regarding inflation, occurred at a time of heavy reparation payments, as the German govern- ment resorted to inflationary finance to make the reparation payments, and Germans may have confused the lowered standard of living due to the export of real resources as reparations with a consequence of inflation itself. But, any such impressions as to correlations between inflation and other eco- nomic variables would not translate well into impressions of causality from inflation to the other variables were there not some kind of model, some kind of story, that inclines people to see inflation as causing declines in living standards. Some clues as to the nature of such popular stories, or, let us say, popular models of the economy, emerged from our discussions with people, and led us to formulate questions about them. An important factor that emerged from our conversations is that most people seem to fail to think of the models that come naturally to economists about the com- petitive pressures that shape their wages and salaries; they tend to see any feedback of inflation on wages and salaries as working through the goodwill (or lack thereof) of their employer. This was confirmed by the answers to the following question: B12. Please evaluate which of the following theories about the effects of general inflation on wages or salary relates to your own experience and your own job: [Circle one number] 1. The price increase will create extra profits for my employer who can now sell output for more; there will be no effect on my pay. My employer will see no reason to raise my pay. 2. Competition among employers will cause my pay to be bid up. I could get outside offers from other employers, and so, to keep me, my employer will have to raise my pay too. 3. A sense of fairness and proper behavior will cause my employer to raise my pay. 4. None of the above or no opinion. 1 2 3 4 US All 26% 11% 21% 43% n = 112 Economists 4% 60% 11% 25% n = 75 Only 11% of the US respondents chose 2, that, in effect, market forces will cause a raise in pay, while 60% of the economists chose this. People do not tend to see inflation as process that naturally tends to affect wages and salaries as well as goods prices. In one of our conversations; a respondent said she always had deep worries about real income after hearing some long-term 19 projection of prices. I thought that economists probably have a very different per- spective on the significance of such long-term projections, and the comparison of the public with economists on the following question bears this out: B6. Do you agree with the following statement? “When I see projections about how many times more a college education will cost, or how many times more the costs of living will be in coming decades, I feel a sense of uneasiness; these inflation projections really make me worry that my own income will not rise as much as such costs will.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 66% 20% 7% 6% 1% n = 116 Economists 5% 15% 9% 30% 41% n = 80 It is hard to imagine more striking difference between two groups of respondents than we observe here: only 5% of the economists agreed fully with this statement, while 66% of the US respondents did. The tendency of economists to see a much more tenuous connection between inflation and the development of real wages led me to suppose that economists would tend much more than the public to agree in the following question: B7. Do you agree with the following statement? “Inflation is a sort of units of measurement thing and little more: the dollar is a yardstick by which we measure value, and the length of this yardstick (value of the dollar) is changing through time. All we have to do is make sure we are taking full account of the length of the yardstick, and inflation will have little effect on us. 1 2 3 4 5 Fully agree Undecided Completely disagree US All 12% 8% 32% 20% 27% n = 114 Economists 23% 28% 6% 27% 15% n = 78 Over half the economists chose one or two here, while only 20% of the public did. A similar question was asked on the C questionnaire, to allow international comparisons of the notion that inflation is expected to be corrected: C5. Do you agree with the following statement? “It makes no sense to pay attention to the development of the inflation rate, because a pretty accurate inflation correction in my income is to be expected anyway.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 2% 1% 3% 30% 65% n = 122 born < 1940 5% 0% 5% 30% 61% n = 44 born 1950– 0% 2% 2% 20% 75% n = 44 Germany All 5% 4% 11% 11% 69% n = 169 born < 1940 7% 5% 14% 7% 68% n = 74 born 1950– 2% 0% 9% 13% 76% n = 54 Brazil 0% 0% 5% 25% 70% n = 57 20 There is a striking tendency to disagree that inflation corrections can be expected in all countries sampled. People tend to think that their income may not be corrected for inflation, at least for many years: C6. Imagine that next year the inflation rate unexpectedly doubles. How long would it probably take, in these times, before your income is increased enough so that you can afford the same things as you do today? In other words, how long will it be before a full inflation correction in your income has taken place? [Please mark only one answer.] 1. Up to a month 2. Until the next negotiation with my employer within a year 3. Several years 4. Never will be restored 5. Do not know 1 2 3 4 5 US All 0% 7% 39% 42% 11% n = 123 born < 1940 0% 2% 36% 48% 14% n = 44 born 1950– 0% 11% 44% 33% 11% n = 45 Germany All 0% 8% 40% 40% 12% n = 171 born < 1940 0% 8% 41% 35% 16% n = 74 born 1950– 0% 5% 40% 42% 13% n = 55 Brazil 2% 19% 17% 28% 34% n = 53 Over three quarters of respondents in all groups in both the US and Germany chose 3 or 4, that it will take years for real income to be restored or that it will never be restored. Even in Brazil, with its indexation, 45% chose 3 or 4. Of course, the hypothetical question asked here — concerning a sudden change in the inflation rate — raises difficult intertemporal issues that a careful answerer might find challenging. In fact, the inflation rate is changing all the time, and it would seem that there must be times when there is no inflation but wages are increasing to catch up to past inflation, so that wages may be increasing because of inflation even when there is no inflation. The public probably lacks the quantitative skills to model the response of their pay to inflation, which economists might cast in terms of distributed lags or the like. There may be little to be gained by trying different versions of this question, with different hypothetical time paths of inflation, since the public cannot easily answer any such questions, beyond just giving some vague impressions that the pay will substantially fall behind. The notion that wages lag behind prices is very old: as early as 1895 it was stated that: The prices of what wage earners have to buy respond far more promptly to changes in the quantity of money than do wages — the prices at which labor is sold. Hence, whenever money is getting better, though nominal wages may tend to decrease, wage earners are constantly getting more goods in exchange for the money they actually get for their labor; and whenever money is getting poorer, though nominal wages may tend 23 B4. (If you circled 1 or 2 in the preceding question) Would you still agree if you were told that the method of preventing economic recessions had an absolutely equal impact on economic booms (times with lots of job opportunities, and lots of sales for firms), preventing really good times just as much as it prevented really bad times? 1. Yes, I would still agree in the preceding question. 2. No, I would disagree in the preceding question. 1 2 US All 83% 17% n = 92 Economists 84% 16% n = 56 We had conjectured that most public desire for economic stabilization policy was formed from an impression that such policy can promote a higher average level of income, and we thought that most in the public would not agree on B4. However, both economists and the general public are generally supportive of stabilization policy that is just that, preventing really good times just as much as really bad times. Answers to another question reveal that a substantial minority of the public (though not economists) would like to see inflation contained even if it meant a major reduction in economic growth: B11. Do you agree with the following statement? “Keeping inflation low is so high a priority that I would not like to see a national policy that caused the inflation rate to double from where it is today even if that policy were sure to double the real (inflation-corrected) growth rate of the economy.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 21% 15% 38% 18% 10% n = 114 Economists 4% 3% 5% 17% 71% n = 79 If there are other concerns about the effects of inflation than just the effects on real incomes, what are they? The other concerns explored here were concerns about the psychological effects of inflation, the use of inflation by opportunists to take advantage of others, the moral and morale effects of inflation, the effects of inflation on political stability, and the effects of inflation and currency depreciation on national prestige. V.4. Psychological Effects of Inflation Shafir, Diamond and Tversky (1994), based on experimental evidence of various sorts, found that people seemed to base their sense of satisfaction in their earnings partly on nominal earnings, rather than just on real earnings, this is a form of “money illusion.” I tried to replicate their results in a very unsubtle way, that of merely asking people directly about the Shafir–Diamond–Tversky premise. If people answered as if they were unaware of such an effect, it would not be evidence contrary to their premise; such feelings may be subconscious or difficult to express. However, people Consistent with this interpretation of the answers to B17, it has been found that8 consumption expenditures respond positively to inflation, see Branson and Klevorick (1969). Gemeinschaft zum Schutz der deutschen Sparer, Zitate zur Stabilitätspolitik, Bonn,9 December 1990, p. 21 (our translation). Schiller was German Economics Minister 1966– and Finance Minister 1971–2, and was architect of the Stabilitätsgesetz (stabilization law) 1967. Gemeinschaft zum Schutz der deutschen Sparer, Zitate zur Stabilitätspolitik, Bonn,10 December 1990, p. 20 (our translation). Emminger is the author of many books on the D- Mark and the international monetary system. 24 (excluding economists) did not report that they were unaware of such feelings: B17. Do you agree with the following statement? “I think that if my pay went up I would feel more satisfaction in my job, more sense of fulfillment, even if prices went up just as much.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 28% 21% 11% 14% 27% n = 112 Economists 0% 8% 3% 13% 77% n = 79 The public’s answers here are spread all over the range from 1 to 5, but one might say that the fact that about half of the US–All sample picked 1 or 2 reveals some perceived benefits of inflation, rather than costs. But connected with this8 feeling there may be some perception that the apparent satisfaction is illusory or the result of tricks: “Inflation is like a narcotic. For a while it puts us in a high mood, glorifies the world, and helps us forget our problems, but an awakening follows inevitably.” (Karl Schiller, 1970).9 This leads us into a consideration of the possibility that there is some concern among the public that inflation is a sort of deception, or that it facilitates deception by some people. V.5. The Use of Inflation by Opportunists to Exploit Others Popular discussions suggest that people apparently dislike inflation because it enables people to play tricks on them: “Only a healthy money is an honest money” (Otmar Emminger, 1979).10 “In a society that wants to give a lot of room to individual freedom and responsibility, the stability of the value of the currency represents principles and values like security of one’s rights, honesty, credibility, and consistency, and so represents what is generally Loc.cit. We did not translate the word Währung here, since we think it has11 untranslatable connotations. The word “Währung” is usually translated as “currency,” and yet the word has connotations of “quality,” “value,” or “guarantee,” not shared by the English word currency. The impression that inflation is a thing to be avoided seems to have infiltrated German thinking in subtle ways. (The Sachverständigenrat is a German government- appointed standing blue-ribbon panel that provides advice about major national issues.) 25 expressed by the word Währung (currency)” (Sachverständigenrat, 1967). 11 That inflation gives opportunities for some to take unfair or dishonest advantage of others is clearly a concern in the US. I tried to ask about such concern in a rather more concrete way than is suggested by the above quotes, asking about specific examples of such bad behavior: B10. Do you agree with the following statement? “One of the most important things I don’t like about inflation is that the confusion caused by price changes enables people to play tricks on me, at my expense. For example, my boss can “forget” to raise my pay, and, if (s)he does, then I am taking a real pay cut. The government can ‘forget’ to change the tax brackets, and so I wind up paying higher taxes.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 51% 21% 11% 11% 6% n = 113 Economists 28% 33% 9% 16% 15% n = 80 This statement apparently struck a sympathetic chord among the public, and moreover the economists tended to agree with it, though less strongly. V.6. Moral or Morale Effects of Inflation That somehow national morale, or a sense of moral behavior in others, is compromised by inflation seemed to be a factor in our informal discussions with the public. There is also a suggestion of such a factor in the popular press. For example, in the February 1995 Reader’s Digest, the lead article by Jude Wanniski and reprinted from the Wall Street Journal, entitled “You Call This a Good Economy?” was substantially an article about inflation and its relations to morality or morale. The Reader’s Digest is the most widely read magazine in the world, with 28 million copies sold each month, and so the editors appear to have a good sense about what interests the general public; it is significant that they chose this article as the lead article in the issue, and even to offer, at the end of the article, reprints in bulk. One must try to read this sympathetically, to try to understand why this article was regarded by the editors of Reader’s Digest as so noteworthy. The tone of the article is inspirational, as if the writer was pointing out some sham or temptation, and exhorting us to keep our senses and values about us. Keynes, The Economic Consequences of the Peace (1919) [1979], pp. 147–8.13 Subsequent commentary on this passage has raised questions whether Lenin ever said this. 28 B14. Do you agree with the following statement? “The fact that prices are nearly three times as high as they were twenty years ago is due to a fundamental change in the nature of the economy, not due to the gradual accumulation over the years of the annual inflation, inflation which has generally been far below ten percent a year.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 21% 21% 23% 21% 15% n = 110 Economists 5% 1% 0% 12% 82% n = 77 A substantial minority of the public circled 1 or 2, confirming at least that the statement sounds right to a lot of people, but the economists did not, and feedback suggested that the economists were perplexed by the question. V.7. Political and Economic Chaos Caused by Inflation Reading the popular literature suggests that there is widespread concern that the effects of inflation may be so severe as to cause a breakdown in the political and economic conditions in a country. It is very easy to find quotes supporting this idea; there are very many. The following 1919 passage from Keynes is so widely cited as almost to be a cliche: Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls beyond their deserts and even beyond their expectations and desires, become ‘profiteers’, who are the object of hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless, and the process of wealth-getting degenerates into a gamble and a lottery.13 Similar themes can be found more recently: “Unstable money destroys the public-spirited and social foundation of every free state’s Gemeinschaft zum Schutz der deutschen Sparer, Zitate zur Stabilitätspolitik, Bonn,14 December 1990, p. 21 (our translation). Starting as German economics minister in 1948, Erhard became known as the “father of the German economic miracle.” He was German Chancellor 1963–6. Loc. Cit. (our translation). Blessing was president of the Deutsche Bundesbank.15 Gemeinschaft zum Schutz der deutschen Sparer, Zitate zur Stabilitätspolitik, Bonn,16 December 1990, p. 20 (our translation). Butschkau was a German bank president (Deutscher Sparkassen- und Giroverband). 29 order” (Ludwig Erhard, 1955).14 “Without good money, there is no healthy economy and no healthy social conditions” (Karl Blessing, 1957).15 “Freedom of the individual, which we all idealize, can only be assured through good money” (Fritz Butschkau, 1968).16 “The consequences of the international [inflationary] spiral go far beyond economics: they include a sharpening of social divisions and a shaking of values, as inflation rewards speculators while penalizing thrift. The ultimate threat is that inflation will eventually weaken confidence in democratic governments and institutions and prepare the way for sharp violent shifts to the radical right or left” (Reader’s Digest [condensed from Time, p. 50], July 1974, pp. 49–53). Helmut Kohl, the German chancellor, has quite recently, in the context of the debate over European Economic and Monetary Union, made the effects of inflation on democracy an important part of his message to the public (quoted in Cowell, 1995, p. A10, col. 1): From bitter historical experience, we know how quickly inflation destroys confidence in the reliability of political institutions and ends up endangering democracy. Kohl argued that we should not let the current atmosphere of cooperation in Europe encourage complacency, and argued against those who say that his concerns are exaggerated (quoted in Cowell, 1995, p. A10, col. 1): To anyone who says this is inadmissible histrionics, I ask this question: Who among us five years ago would have believed that the Balkans would have fallen so rapidly into fratricidal war, to ethnic hounding, to rape, murder and death? To try to test whether the public is indeed concerned that inflation can cause economic and political chaos, the following question was included on the C questionnaire: 30 C3. Do you agree with the following statement? “If inflation in a country rises out of control it can lead to economic and political chaos.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 74% 17% 3% 2% 3% n = 123 born < 1940 84% 11% 0% 2% 2% n = 45 born 1950– 71% 20% 2% 0% 7% n = 45 Germany All 77% 18% 3% 2% 0% n = 173 born < 1940 89% 8% 3% 0% 0% n = 76 born 1950– 69% 27% 2% 2% 0% n = 55 Brazil 41% 31% 7% 14% 7% n = 58 There is a lot of agreement with this statement, suggesting that this concern about inflation is a major one. It is perhaps surprising that there is not much difference be- tween the US and Germany on answers here. When comparing the US and Germany, the difference is more intergenerational than international. Only the Brazilians did not fully agree in the majority with this statement, presumably reflecting the fact that the Brazilians have had a lot of inflation and have not experienced economic and political chaos. Even so, a majority of Brazilians chose 1 or 2. To further consolidate our understanding of the public support of the proposition that inflation causes economic and political chaos, it is useful to confirm whether the public really thinks that the line of causality runs only from inflation to the chaos, and not also the other way around: C12. Do you agree with the following statement? “Political instability in a country will likely have a very high inflation rate as a consequence.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 26% 30% 34% 5% 5% n = 122 born < 1940 36% 27% 30% 2% 5% n = 44 born 1950– 23% 30% 34% 9% 5% n = 44 Germany All 39% 27% 26% 4% 4% n = 171 born < 1940 53% 19% 24% 1% 3% n = 75 born 1950– 20% 47% 25% 4% 4% n = 55 Brazil 21% 25% 23% 14% 18% n = 57 The impression that such reverse causality is a factor is less strong, and only about half of the older Germans are in full agreement. Still, the majority of people in the US and Germany choose either 1 or 2 here. V.8. Concerns for Prestige and the Currency National prestige is presumably an important factor in its own right, and there appears to be a concern with inflation among the general public, that we must keep 33 C14. Do you agree with the following statement? “Even if a country loses prestige because of high inflation, it doesn’t matter. There are no really serious consequences to such a loss of prestige.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 2% 6% 10% 39% 44% n = 122 born < 1940 5% 7% 9% 23% 57% n = 44 born 1950– 0% 7% 11% 45% 36% n = 44 Germany All 8% 12% 21% 21% 37% n = 74 born < 1940 11% 12% 23% 12% 42% n = 74 born 1950– 4% 7% 11% 38% 40% n = 55 Brazil 5% 9% 7% 16% 63% n = 57 Very few agreed with this statement, and moreover, no large international differences were found in opinions on the seriousness of loss of prestige: people in all countries tend to think that maintaining national prestige is important. Contrary to expectations, it was the Germans who appeared most likely to agree (choose 1 or 2). This line of questioning was then rephrased to be in terms of the value of the currency rather than the inflation rate: C17. Do you agree with the following statement? “It is too bad, when the exchange rate of the dollar [D-Mark, Real], the value of the dollar [D-Mark, Real] in comparison with currencies of other countries, falls. Therefore, an important symbol of our economic strength is weakened.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 50% 23% 15% 6% 6% n = 122 born < 1940 59% 23% 14% 2% 2% n = 44 born 1950– 41% 27% 11% 11% 9% n = 44 Germany All 47% 18% 16% 13% 6% n = 173 born < 1940 52% 16% 18% 8% 6% n = 77 born 1950– 40% 22% 15% 18% 5% n = 55 Brazil 12% 25% 16% 16% 32% n = 57 About half the people in all countries but Brazil are in full agreement with this statement. Presumably Brazilians, who have seen their currency fall so much, and seeing a recent renaming of their currency, have lost such hopes for prestige of their currency. V.9. Opinions about Simple Theories of Inflation and Its Consequences Opinions about the costs of inflation may differ among groups due to differences of opinion about some very simple economic relations that usually are not discussed. I first tried to see whether the public agrees with conventional economic reasoning as regards the effects of inflation on the exchange rate and on inflation rates, and to 34 compare their answers with those of economists: B15. If the price level goes up a lot more in the United States than it does in other countries, then the dollar will tend to: [Circle one number] 1. Go up in value abroad (foreigners will have to pay more of their money if they want to exchange their money for a dollar) 2. Stay the same 3. Go down in value abroad (foreigners will have to pay less of their money if they want to exchange their money for a dollar) 4. No opinion 1 2 3 4 US All 30% 5% 55% 9% n = 110 Economists 4% 0% 92% 4% n = 78 B16. If the inflation rate goes up, then interest rates will tend to: [Circle one number] 1. Go up 2. Stay the same 3. Go down 4. No opinion 1 2 3 4 US All 72% 4% 21% 3% n = 112 Economists 97% 1% 0% 1% n = 79 It appears here that the public and economists are in general agreement on both of these basic theoretical models. The public usually answers correctly (to question B15) about the effects of inflation on the exchange rate, though their answers to this question are wrong about a third of the time. Perhaps more people would have answered correctly if the question had explained the situation a little more or if the question were put in the context of a particular situation. The public does even better on the effects of inflation on interest rates, answering correctly (to question B16) nearly three quarters of the time. This theory is very important in judging the impact of inflation on our standard of living, since it is consistent with the view that people living off their savings invested in short-term debt are not necessarily harmed by inflation. (Question C11B on page 38 below will draw out whether the public is aware of this line of this reasoning.) It is not clear from the public’s partial success in answering what are the effects of inflation on the exchange rate whether they can carry this line of reasoning much further. It is plausible that they would be influenced by a theory that price inflation in our own country harms our competitiveness abroad, and indeed we heard such theories in our conversations before writing the questionnaire. A question that tried to see how often such a theory about inflation and competitiveness is held was included on the C questionnaire: Gemeinschaft zum Schutz der deutschen Sparer, Zitate zur Stabilitätspolitik, Bonn,19 December 1990, p. 21 (our translation). 35 C16. Do you agree with the following statement? “One reason the US [Germany, Brazil] loses from inflation is that the goods that we sell abroad get ever more expensive, therefore our exports fall and jobs get lost.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 42% 30% 15% 7% 6% n = 122 born < 1940 48% 27% 16% 5% 5% n = 44 born 1950– 30% 34% 16% 9% 11% n = 44 Germany All 58% 16% 13% 5% 8% n = 169 born < 1940 68% 12% 11% 3% 7% n = 76 born 1950– 40% 25% 21% 8% 8% n = 53 Brazil 5% 15% 16% 9% 55% n = 55 Now, it is apparent the theory does indeed have some sway over people’s thinking, at least outside of Brazil. This is an important result, indicating that even though most people are aware of the effect of inflation on the exchange rates, they do not put this awareness together with a theory about international competitiveness, and are likely to want to oppose inflation for a reason that most economists would probably consider very strange. Of course, the public in Germany may be thinking about exchange rate restrictions within the European Economic and Monetary Union, and all respondents may be thinking about some very short run effects on exchange rates that might be resisted by central banks. That Brazilian respondents were relatively more successful in giving what I consider the correct answer, and this could be due either to the fact that Brazil has experienced such enormous price level movements that people must have learned that the exchange rate adjusts, or to the bias of our e- mail sample in Brazil towards more sophisticated people. Another popular theory about the behavior of inflation that could well have an important role in public thinking about, and concerns about, inflation news is a sort of foot-in-the-door theory: if inflation ever gets started, ever gets its foot in the door, then there is a risk of explosive inflation. Such a theory is described in popular accounts; for example: “With inflation, one can make no easy compromise — if one extends her a finger, she quickly grabs the whole hand (and if one flirts with her, one will end up married to her)” (Otmar Emminger, 1979).19 Belief in such a theory would create a reason for extreme vigilance regarding inflation, and so I included a question about it: 38 The following are questions for which you should indicate how often you have heard the statement approximately. This is not a question about whether the statement is true or false, but only how familiar such a statement seems to you. C11A. “An important reason for Hitler’s rise to power was the extremely high inflation in Germany in the 1920s.” I have heard this: 1. Often 2. Sometimes 3. Never US All 22% 33% 45% n = 121 born < 1940 25% 34% 41% n = 44 born 1950– 16% 28% 56% n = 43 Germany All 44% 41% 15% n = 170 born < 1940 50% 36% 14% n = 74 born 1950– 39% 44% 17% n = 54 Brazil 34% 45% 21% n = 56 C11B. “High inflation is unfair for many people since their savings lose value because the interest rates are not really high enough to compensate for the inflation.” I have heard this: 1. Often 2. Sometimes 3. Never US All 51% 36% 13% n = 122 born < 1940 57% 36% 7% n = 44 born 1950– 41% 34% 25% n = 44 Germany All 62% 28% 9% n = 169 born < 1940 66% 26% 8% n = 74 born 1950– 52% 35% 13% n = 54 Brazil 45% 39% 16% n = 56 C11C. “People who are in debt, for example when they buy a house, have an advantage when the inflation rate increases, because the real value of their debt falls.” I have heard this: 1. Often 2. Sometimes 3. Never US All 21% 43% 35% n = 122 born < 1940 23% 48% 30% n = 44 born 1950– 18% 45% 36% n = 44 Germany All 33% 40% 28% n = 169 born < 1940 38% 38% 23% n = 73 born 1950– 20% 43% 37% n = 54 Brazil 26% 37% 37% n = 54 C11D. “Working people often find it hard to make ends meet because of inflation.” I have heard this: 1. Often 2. Sometimes 3. Never US All 70% 26% 4% n = 122 born < 1940 75% 20% 5% n = 44 born 1950– 61% 32% 7% n = 44 Germany All 49% 36% 15% n = 168 born < 1940 58% 34% 8% n = 74 born 1950– 37% 39% 24% n = 54 Brazil 91% 9% 0% n = 56 39 C11E. “Retired people can’t afford to buy so much because of inflation, because their pensions do not keep up with inflation.” I have heard this: 1. Often 2. Sometimes 3. Never US All 83% 15% 2% n = 122 born < 1940 93% 5% 2% n = 44 born 1950– 66% 30% 5% n = 44 Germany All 58% 27% 15% n = 169 born < 1940 71% 19% 11% n = 75 born 1950– 39% 37% 24% n = 54 Brazil 89% 9% 2% n = 56 C11F. Remarkable stories about life in times of very high inflation are told. For example, people are said to have tried to spend their money as fast as possible, and stores are said to have raised prices extremely often. I have heard this: 1. Often 2. Sometimes 3. Never US All 22% 33% 45% n = 121 born < 1940 34% 32% 34% n = 44 born 1950– 11% 34% 55% n = 44 Germany All 44% 28% 28% n = 172 born < 1940 40% 36% 23% n = 77 born 1950– 39% 24% 37% n = 54 Brazil 75% 21% 4% n = 56 C11G. “Chile has had lower inflation in the last decade than Argentina has.” I have heard this: 1. Often 2. Sometimes 3. Never US All 0% 11% 89% n = 119 born < 1940 0% 18% 82% n = 45 born 1950– 0% 5% 95% n = 43 Germany All 2% 12% 86% n = 164 born < 1940 4% 18% 78% n = 72 born 1950– 0% 4% 96% n = 53 Brazil 22% 33% 44% n = 54 Reading these responses, one is led to suspect that people interpreted very loosely what it means to hear these statements, the frequencies reporting hearing some statements seem high for the general population. Still, comparing answers in this battery of questions across countries and age groups, we learn various things. Over- all, the statements people reported hearing most often are those about the difficulty of living with inflation, C11B, C11D and C11E. Comparing C11B with C11C, we see that people in all countries apparently hear more about effects negative effects on creditors than about positive effects on debtors, although most people in all countries claim to have heard at least sometimes that debtors can be made better off by inflation. This result confirms the impression from our personal interviews, and from the responses to open-ended questions on questionnaire A, that the awareness of potential advantages of inflation to debtors are just not so strongly recognized. Results for C11A and C11F show that there are important international differ- ences in hearing about some famous hyperinflation episodes. The statement C11G was included just to give a suggestion to what extent news about inflation is German wholesale price data, from the Statistisches Reichsamt, see Cagan (1956), p.21 102–3. 40 transmitted regionally, to what extent people hear more about countries that are near neighbors rather than distant neighbors: Chile has had dramatically less inflation in the last decade than Argentina has; it has escaped the hyperinflation experience of Argentina. If people in Latin American countries tend to hear about the inflation experience of other Latin American countries rather than that of European countries, then this would tend to create some tendency for similar opinions across Latin American countries, and hence perhaps similar inflation experience, why high inflation has been so commonplace there. This hypothesis appears to be borne out; 55% of the Brazilian respondents reported hearing this fact about Chile and Argentina at least sometimes, compared with only 11% of the US respondents and 14% of the Germans. (Unfortunately, this result might be compromised by selection bias, as e-mail respondents may be more knowledgeable.) Most people in all countries and age groups, except for the younger US respondents, say they have heard at least sometimes that high inflation was an important reason for Hitler’s rise to power. It seems a little surprising to me that so many people report hearing this. Perhaps people are thinking back on vague recollections about some chaos in the Weimar Republic leading to Hitler’s power, and thinking that it is plausible that inflation played some role in it. Economic commentators often attach credence to the notion that living through the German hyperinflation in 1923, or having closely associated with people who did, accounts for the national aversion to inflation in Germany today, and that therefore older people in Germany are more conservative regarding inflation. If this is the case, then one might expect that Germans will gradually forget their aversion to inflation, and return to more normal inflation behavior in the future. Why should living through the inflation of 1923, or remembering talking to people who did, make such an impression? Brazilians today have lived through hyperinflation, but we have seen above that they are less worried about the consequences of inflation. The answer may lie in that there are differences in the Brazilian experience, and differences in what people remember. The critical differ- ences are that in Germany in 1923 the inflation got further out of control than did the more recent Brazilian inflations, and that the loss of control in Germany then coin- cided with real political chaos, and with Hitler’s initial efforts to control Germany. A fact that is probably little known to young people today, even in Germany, is that the final collapse of the Mark in 1923, the time when the Mark’s inflation reached astronomical levels (inflation of 35,874.9% in November 1923 alone, for an annual rate that month of 4.69 × 10 %), came in the same month as did Hitler’s Beer28 Hall Putsch, his Nazi Party’s armed attempt to overthrow the German government.21 This failed putsch resulted in Hitler’s imprisonment, at which time he wrote his book Mein Kampf, setting forth an inspirational plan for Germany’s future, suggesting 43 general public seems to have the impression that the experts are confirming their impressions as to the importance of inflation. In this connection, it is very significant that the results with the B questionnaire show that much of the public thinks that the media attention given to inflation is at the urging of economists, a far higher proportion than of economists who themselves think so: B8. Which is the better explanation why inflation is reported so regularly in the news: 1. Economists tell reporters that the monthly inflation numbers are very important news, and so reporters feel that they ought to give the inflation numbers a lot of coverage. 2. The general public is regularly interested in inflation news, and reporters cover inflation to boost the number of viewers or readers. 3. Neither or no opinion. 1 2 3 US All 39% 30% 31% n = 110 Economists 18% 56% 26% n = 77 About twice as many from the public chose one; it appears that the public imagines that expert opinion shapes media attention to inflation more than the economists themselves think it does. VI.3. Perceptions of the Social Contract It appears likely that there is to some extent a public perception of a sort of social contract that governments must resist inflation, a contract that we are all born into, and that we as individuals cannot change, any more than we can change the consti- tution. To the extent that there is such a public perception, anyone who takes public office must feel that he or she is in a position of public trust, and is under pressure to live up to public expectations. Those in public offices may choose political battles, on issues that matter a lot to them, and they may try to fight popular miscon- ceptions, but are not generally likely to have the time or energy to fight the public impressions on such long-debated background issues as basic policy towards infla- tion. I sought to determine whether there is any agreement that such a social contract exists: 44 C15. Do you agree with the following statement? “Despite some opinion differences, US [German, Brazilian] politicians have always promised to keep inflation down. Especially for this reason, politicians today are morally obligated to be against inflation.” 1 2 3 4 5 Fully agree Undecided Completely disagree US All 27% 26% 17% 19% 12% n = 121 born < 1940 48% 14% 16% 11% 11% n = 44 born 1950– 14% 35% 12% 28% 12% n = 43 Germany All 65% 19% 10% 4% 2% n = 171 born < 1940 82% 9% 8% 1% 0% n = 76 born 1950– 41% 28% 15% 9% 7% n = 54 Brazil 34% 16% 23% 9% 18% n = 56 Here we see some striking differences between Germany and the other countries, that would work in the direction of preserving low inflation policy there even if there were no differences in understandings of the mechanism of inflation. It is in this question that see the biggest difference, from all our questionnaire results, between the German and US respondents overall in the proportion who fully agree. We also see here sharpest difference between younger German and the US respondents; 41% of the younger Germans fully agree, compared with only 14% of the younger US respondents. The results with this question suggest that it may be in perceptions of the social contract that there are the most important differences between Germans and people in other countries, rather than differences in tastes, opinions, or information sets. Because the differences extend to the younger generation, these are also significant in that they would appear likely to be important for a long time. More research should be done to consolidate our understanding of the international differences in social contract. VII. Summary and Interpretation of the Results To summarize the main perceived costs of inflation briefly, the concerns people mention first regarding inflation are that it hurts their standard of living, and a popular model they have that makes such an effect plausible apparently has some badly-behaving or greedy people causing prices to increase, increases that are not met with wage increases. This might be called a bad-actor-sticky-wage model. That people think wages are sticky is particularly supported by the results for questions C5 (page 20), C6 (page 20), B6 (page 19) and B12 (page 19). There also appear to be popular notions that inflation harms the standard of living by inhibiting economic growth, through some unspecified systemic factors (question C11, page 17). Other concerns are that inflation makes us feel good (question B17, page 24), but ultimately deceives us, or allows opportunistic people to deceive us (question B10, page 26), that the social atmosphere created by inflation is a selfish one and harmful to national 45 morale (question C4, page 27), that high inflation can cause political chaos or anarchy (question C3, page 30), and that inflation and decline of currency value is harmful to national prestige (questions C13, page 32, and C17, page 34). The list of concerns that non-economists aired to us, in conversation, in their answers to the open-ended questionnaire A, and in their choice of answers on the other questionnaires, sound very different from the list of real effects of inflation that Fischer and Modigliani gave in their treatise (1978) on the costs of inflation. Fischer and Modigliani divided the costs of inflation into six categories: 1) those that would persist even in a fully indexed economy, 2) those due to nominal government institutions, 3) those due to nominal private institutions and habits, 4) those due to existing nominal contracts, 5) those due to effects of uncertainty about future inflation, and 6) those due to government endeavors to suppress inflation. The effects listed under category one are the “shoe-leather” or “trips to the bank” costs produced when people try to economize on currency and the “menu costs,” the cost of changing prices, such as printing new menus. Question B9 (page 16) asked about these costs, the inconveniences of inflation, versus the effects of inflation on the standard of living, both of economists and the general public, and there was a striking difference in the answers; the public was much more fixated on the supposed direct effects of inflation on the standard of living, and relatively indifferent to the inconveniences of inflation. In non-economists answers to the open-ended ques- tionnaire, questionnaire A, there were hardly any references (only four people) to the effects of the nominal institutions, habits or contracts referred to by Fischer and Modigliani under their causes 2 through 4, nor was there any mention of the effects of uncertainty about future inflation or about effects of governments’ efforts to suppress inflation. The different sound of the complaints does not necessarily mean, however, that the concerns expressed by the general public are entirely orthogonal to those of economists. Some of the public’s concerns are surely caused by their experience with nominal contracts. Some (seven people) did mention at their own initiative on the A questionnaire that their retirement income was being eroded by inflation, and moreover, most were aware that this was an effect when asked directly about it (question C11E, page 39). The vast numbers of nominal contracts that we have today were made in a sense of trust that the government would not allow massive inflation, and these concerns are shared by economists and the public. The issues of inflation-generated opportunities for deception (question B10, page 26), and the effects of inflation on national cohesion and international prestige (questions C4, page 27 and C13, page 32) are curious for economists, and do not appear on the Fischer–Modigliani list. Perhaps it is here that we should listen carefully to what the public is telling us. A feeling that opportunities for profit through deception are being willingly created by an inflationary policy, possibly to the benefit of certain interest groups, might well promote a feeling of relative detachment from society and a tendency for less concern for others, especially since 48 complex phenomena that must have been formed by shared experiences within birth cohorts, and are not due to the aging process itself. That opinions about economic matters are mostly cohort-specific rather than age-specific is supported by the work of Inglehart (1985), who concludes that one’s basic values throughout life reflect the conditions that prevailed in one’s preadult years. Inglehart has collected data on economic opinions, including opinions on inflation, for over twenty years; see also Inglehart and Abramson (1994). If the relatively low level of concern of younger people can be expected to remain the same through time, then the public concern with inflation in both Germany and the US might be expected to decline in coming decades for demographic reasons. The people in our sample born before 1940 are now at least 56 years old; those of them in public life are probably at the peak of their influence or of declining influence. Their ability to prevent a resurgence of inflation must be waning. People who must evaluate the long-term outlook for inflation (such as those investing in long-term bonds) should bear this in mind, before concluding (as many seem to have concluded) that we are entering a new regime of steady low inflation in coming decades. 49 Appendix Sample Design For the US, we purchased three lists of 400 names and addresses from Survey Sampling, Inc., Fairfield, CT, a company that specializes in producing high quality random samples. Each of the three lists was drawn at random from the white pages of all phone books in the US. Such a sampling method oversamples males, since married couples usually list only the husband’s name. However, a letter accompanying the questionnaires invites the recipient to pass the questionnaire to someone else, and this should tend to offset the tendency to oversample males. We ask respondents to indicate their sex; see Table A1. For Germany, we purchased our list of names from the firm Schober GmbH in Stuttgart, a firm that specializes in producing random samples. We used a method of defining the sample that appeared to us as closely comparable as possible to that which we used in the US. Schober had their names categorized by sex and predicted income levels. We had them select approximately 120 females and 280 males from each of their three predicted income groups, low, middle and high, distributed according to the proportions they have in their lists in each of these three income groups, from the Land North Rhine Westphalia. Within each of these six income-sex groups, they chose a random sample from listed names in telephone directories. We chose fewer females than males because fewer female names are listed in telephone directories, and those that are listed may be unrepresentative of all females, tending to be single or elderly women. As in the US surveys, the second letter accompanying the questionnaire invites anyone in the household to fill out the questionnaire, and so we might expect to see more females answering than our sample proportions would indicate. We chose North Rhine Westphalia as representative of Germany; it is the most populous Land in Germany and includes a mixture of both major urban and rural areas. It includes the cities of Bonn, Düsseldorf, Münster, and Cologne. For Brazil, we e-mailed our questionnaire (C), translated into Portuguese to the Brazil node of Bras-net, a network for Brazilian nationals. Bras-net, a free service managed by Sao Paulo State University, has about 5000 subscribers who use the service to receive information (such as a daily survey of Brazilian newspapers), and to chat with each other about Brazilian topics. Many of the subscribers live outside Brazil. By e-mailing only to the Brazil node, we hoped to get mainly people living in Brazil, though certainly many who had their e-mail forwarded from Brazil also received our questionnaire. Certainly, those who use e-mail are not a random sample of Brazilians; this sampling technique was undertaken for reason of budget and time constraint, given that the only alternative was to omit Brazil from the study altogether. The letter accompanying the questionnaire was different from those sent in the US and Germany, based on our sense that a request for help via e-mail should In fact 382 letters were sent out in the first mailing. When an error was discovered in23 the address list they gave us, oversampling by 55 low-income females, we were given a new sample of 55 respondents, and letters were sent to these; no second mailing went to the 55 low-income females. 50 be different to succeed well. The letter was less formal, less like the dignified letter that would accompany a professional survey, evoking instead the camaraderie of network users. This letter also referred directly to the fact that international comparisons were being made, while the letter accompanying the US and German questionnaires suggested this only by mention of both Yale University and the Institut für Weltwirtschaft. It was felt that, with a questionnaire e-mailed from the US to Brazil, it would be better if we told them what we were after, to be sure that they didn’t have the misconception that we wanted them to try to give American answers. For economists, 200 copies of questionnaire (B) were distributed by stuffing faculty mailboxes in US economics departments at Boston University, Columbia University, Northwestern University, Harvard University, Princeton University, University of California at Berkeley, and Yale University. Again the accompanying letter to economists was different from the others. The letter explained this project, that questions were intended to capture the thoughts of non-economists, and apologized that some questions might appear ill-posed or unusual to professional economists. Survey Method Our method of handling the survey for random samples of the population in the US and Germany followed fairly closely that recommended by Dillman (1978). An initial mailing was made to about 400 people for each questionnaire-country. 23 Included with the questionnaire was a short letter, indicating that inflation was an important public policy issue, and telling respondents that their cooperation in the survey would help policy makers frame national policy. We might have preferred not to put the idea in their heads that inflation is an important national policy issue, but we felt it was necessary to refer to this in order to get a good response on our survey. Those who conduct surveys have found that a good response rate on a survey depends on an apparent social purpose for the questionnaire, and most people are very skeptical of questionnaires and inclined to suspect a concealed profit motive for the questionnaire. We tried to write the letter in such a way that there was no suggestion just why the inflation rate should be an important national policy issue. A week after the questionnaire and letter were mailed, a reminder postcard was sent out to all, reminding them of the importance of the study. On the back page of each questionnaire we had written a number indicating the