It's been fascinating to watch the debate between Michael Kinsley and Paul Krugman over inflation. Kinsley, like a lot of people, worries that all this government expansion will result in inflation somewhere down the line. Krugman dismissed Kinsley with his typical combination of arrogance and ill will, saying that "textbook economics" separates inflation (not always bad) from hyperinflation (always bad). Kinsley responded by pointing out that Greg Mankiw's textbook makes no such distinction:

I have been waiting for Paul Krugman to tell me how we are going to handle the debt, once we get this recession out of the way. No, really. There’s no economist whose judgment I trust more. (About economics, that is.) I’ve been all for the stimulus and the jobs bill and even, I guess, the sundry bailouts. But don’t we at some point have to start paying the money back? And how are we going to do that? Krugman’s failure (unless I’ve missed it) to give us an answer to that question is one of the things that makes me worry.

Krugman's rebuttal? Kinsley checked the wrong textbook. In his text, Krugman points out, there is a difference "between Zimbabwe-type hyperinflation and the more moderate type of inflation that afflicted the US and others in the 70s."

Something tells me the American consumers, investors, and savers of the 1970s wouldn't say the inflation they suffered during that decade was "moderate." Inflation may help governments deal with the debt burden by reducing that burden in nominal terms. But it also reduces the real value of wealth and punishes individuals who save for the future. The author of the non-Krugman textbook weighs in here:

My own guess is that the United States will likely raise taxes substantially, and taxes as a percent of GDP will reach levels never seen in U.S. history (although common in Europe). The politics of that will be fascinating to watch. If the political process is stymied as our leaders debate the relative merits of tax hikes versus spending cuts, bond investors may get nervous, and we could witness either the Krugman inflation scenario or the much less likely default scenario.

Are any of these scenarios -- punishing tax rates, inflation, default -- what we really want to see in our future?

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