Philippine economy

[OPINION] Why I’m not as afraid of inflation as my economist

Lisandro Claudio
[OPINION] Why I’m not as afraid of inflation as my economist
'As a non-economist, I have learned much from conversing and arguing with the experts. You should try it sometime.'

In my previous piece, I discussed why we should argue with our economists. In sum, I explained why we should not treat our economists like unassailable experts, but as key contributors to a national conversation that we should all be engaged in. In this follow-up, we turn to how to argue with your economist. Here are three steps.  

1. Aspire to economic literacy

When we argue with economists, we need to know what we’re talking about. And the low level of economic literacy in country is testament to how reliant we have been on experts to make up our minds for us. For instance, I am often shocked at how few people understand the basics of central banking. 

Central banks like our BSP have dual mandates: to maximize employment and ensure price stability. These two goals are often in tension with each other and need to be balanced. When there is a lot of economic activity (often referred to as economic “heating”), people consume a lot, companies make more money, and they tend to hire more people. But because people are spending more and companies are hiring more, firms tend to charge more, causing inflation. When there is not enough economic activity (economic “cooling”), prices go down, because low spending make firms bid down their prices, causing deflation. But as firm profits go down and as they cut back on production, they tend to hire less.   

Central banks balance the economic temperature by setting interest rates. When things get too hot, they raise interest rates so that it becomes more expensive to borrow money, thereby dampening economic activity. When things are too cool, they lower interest rates to encourage borrowing, economic activity, and growth. Growth, however, is their ultimate concern, which is why central banks usually accept some level of inflation. 

As this quick and dirty explanation of central banking shows, it’s not difficult to grasp basic economic concepts. All it takes is a little effort and perhaps books that are less boring than our college textbooks.  One example is Cambridge economist Ha Joon Chang’s Economics: The User’s Guide

Another way to gain economic literacy is to jump into economic and financial news. Read the finance section of news websites and newspapers. And if you watch TV, don’t turn it off once the financial news is on. As you consume economic and financial news, you will encounter terms you are unfamiliar with. Look them up every time on websites like Investopedia. Soon enough you’ll feel like you’ve learned a new language. More importantly, you’ll be able to weigh in on more national conversations of immense importance. 

2. Know your values

In the previous piece, we examined why economics is a value-laden method of inquiry, a moral science. And although economic policy is not always a zero-sum game, it often involves trade-offs. In the example of central banking above, we saw how fighting inflation usually comes at the expense of boosting job growth.  

We often can’t have everything all at once, so we should make decisions about what to prioritize. And your values inform what you prioritize. I am a liberal social democrat, so I believe in an active state that invests in its people to reduce inequality. I am also an admirer of the East Asia developmental model where the state cooperates with businesses to boost exports. My priority economic indicators are, therefore, growth (GDP), the unemployment rate, wage rates, exports, the poverty rate, and the level of equality (the Gini coefficient). 

Under more normal circumstances (unlike 2022), I like my economy like my cuisine: to have some heat, so I have a higher tolerance for inflation than most Pinoys. Painful as it can sometimes be, successful developing nations tolerate inflation for the sake of growth. As Professor Chang explains, Korea accepted a 19.8 % inflation rate in the 1970s to create its economic miracle. Chang is, therefore, not an inflation hawk. Elsewhere, he has argued that: 

Our obsession with inflation should end. Inflation has become the bogeyman that has been used to justify policies that have mainly benefited the holders of financial assets, at the cost of long-term stability, economic growth, and human happiness. 

This is not an elitist position, as most will have you believe. Many people argue that inflation hurts the poorest the most. But if cutting inflation means risking job growth, the effects will redound on the truly poorest: those who don’t have jobs. Meanwhile, inflation disproportionately affects the rich, who are invested in financial assets that lose value (the poor are more likely to be in debt, and the burden of debt gets reduced in an inflationary environment). It is not surprising that political economist Mark Blyth has shown that fighting inflation is often a form of class warfare, a point of view shared by the Marxist economist Clara Mattei. Of course, none of these commentators are defending all inflations, nor unnecessarily high and rapid price increases (2022’s inflation scares even me). What they do is warn us against inflation-driven hysteria. My own research highlights episodes in Philippine history where inflation-phobia derailed our growth. 

The best argument you can have with an economist is one where you debate the relative value of indicators. This has, for instance, been at the core of my many arguments with my friend and fellow Rappler Thought Leader, JC Punongbayan. JC and I agree on many important things. For example, our views on the first Marcos presidency largely align, which is why I am very excited for the upcoming release of his very readable book on the Marcos economy. But where we disagree the most is on inflation.  

If you read JC’s work and tweets (which you should!), you’ll note that he is very, very concerned with inflation. JC himself highlights inflation and prices as one of the major themes of his public writing, and has done podcasts and explainers on the topic. His concern with inflation is not limited to the Philippines, but informs even his views on the United States. Instead of examining problems like the loss of manufacturing jobs or race-based inequality, JC concludes that “the general expensiveness of things lies as [sic] the root of many problems in America.” 

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On this issue of inflation, I am, ironically, closer to the position of most economists than JC. As Nobel prize-winning economist Robert Shiller has shown, professional economists tend to worry less about inflation than average citizens. Yet we know that the average Filipino is most concerned about inflation above other issues like employment or poverty. JC’s values, therefore, reflect popular sentiment. 

Popular as it is, JC’s knee-jerk hatred of inflation has caused him to make intelligent, but ultimately unfair, claims. For example, JC drummed up significant concern in 2018 when inflation exceeded the BSP’s target. While he admitted that international factors like oil prices mattered, he tried to blame the Duterte administration’s tax reform law called TRAIN, by “assuming that all (or most) of” a certain increase in prices was “due to profiteering,” which, in turn, he believed was a result of oil companies abusing the TRAIN law. The argument hinged on multiple speculative assumptions that were difficult to verify. In asking, “Does this mean that TRAIN could be responsible for much of the excess inflation we’ve seen in recent months – even more than the surge in world oil prices and the weaker peso?” he insinuated his argument without proving it. 

At that time, Filomeno Sta. Ana III (who, like me, is not a Duterte fan) and his group Action for Economic Reforms had already been calling for a more sober assessment of the situation , noting the limited and transitory inflationary effect of TRAIN. He also showed that some of TRAIN’s inflation was good, since it increased the prices of unhealthy products like soft drinks. 

Sta. Ana and his colleagues would be proven correct. As even the inflation-phobic Economist newspaper noted, “inflationary pain” quickly eased in 2019 and the Philippines remained “one of the zappier growth prospects in Southeast Asia.” By October of 2019, it would seem like JC had gotten his wish, when inflation dropped to a staggeringly low 0.9 %. He was correct to note that such low inflation could have been an indicator of the economy slowing down. But the fact that inflation dropped so quickly, despite the continued implementation of TRAIN, should have made him reassess his views on the law. At least it should have made him concede that its inflationary effect was transitory. And as we saw above, sometimes we must pay for our development through bursts of inflation. 

For JC, however, that price is often too steep, reflecting values that are different from mine. Neither of us are 100 % right nor wrong, we just value different things. 

3. Argue open-mindedness and admit your mistakes

In my many arguments with JC, he has been nothing less than a gentleman and a good sport, and I hope I have been the same. Arguing with respect is, of course, of utmost importance. But closely tied to respect is open-mindedness.   

Recently, I was in the middle of another Facebook tirade about inflation-phobia, where I noted that we should focus not just on indicators that view Pinoys not just as consumers (inflation and the price of the peso) and more as producers and workers (wages, employment rate). Naively relying on the experience of other developing countries and some scattered data, I asserted that our wage growth often outpaces inflation. JC, however, alerted me to World Bank research, showing that real wage growth was stagnant from 2000 to 2016. Put simply, this means that the percentage of growth in salaries did not exceed the percentage growth in inflation. I was schooled, and I had to admit that I was wrong. Sometimes, my own bias for economic heat can lead me to hasty, even irresponsible conclusions. Now, I share JC’s concern over real wages. 

The nice thing about arguing with economists in a respectful and open manner is that you learn things. Experts, yes, should be challenged, but they remain experts for a reason. As a non-economist, I have learned much from conversing and arguing with the experts. You should try it sometime. –

Lisandro Claudio (Leloy) is assistant professor at the Department of South and Southeast Asian Studies, University of California, Berkeley. He is also the host of Rappler’s Basagan ng Trip. He is not an economist. 

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