Last Thursday, UVA Darden Professor Michael Lenox sat down with University of Texas Professor Carola Binder to discuss the latter’s newest book, Shock Values: Prices and Inflation in American Democracy. This discussion was a part of the larger Touchstones of Democracy series by the Karsh Institute of Democracy, in which speakers of various disciplines examine the foundational principles of democracy. In her book, Binder ponders the ways in which American politics past and present has been influenced by the nation’s economic standing, focusing most specifically on inflation as an economic concept and its role in shaping the nation’s political structure. During the talk, Lenox guided the discussion throughout several notable periods of American history, and thus covered many significant events spanning from the nation’s conception to the present day.
To begin, Binder explained that inflation does not affect everyone in the same way. In fact, she touched on how inflation was beneficial in the agricultural industry during the nineteenth century, especially for farmers caught in spells of debt. Debtors benefit from periods of relative inflation because they can pay back debts with a devalued dollar; in essence, their debt during inflationary periods becomes smaller without paying a penny. Therefore, in inflationary times, there is inevitable political unrest that emerges in debates over economic policy, as varying experiences with inflation result in diverging policy aspirations.
The political impact of inflation is also worrisome to many due to its uncertainty. Inflation is, if anything, defined by its inconsistency. If, Binder suggested, economists could predict that prices would fluctuate by a set 10% each year, it would be easy to make political accommodations. Yet, inflation is volatile, and Binder argued that that politics detests the uncertain. If politicians can give their voters no assurance that they are certain how the market will change in the short-term, it becomes difficult for many to trust that the economy is in good hands. Binder, as well as Lenox, also emphasized that inflation reduction does not imply that prices will drop, which is a surprising fact to Americans discontented by the rising prices of everyday goods. Rather, inflation reduction merely slows the rate of inflation. Uncertainty in price fluctuation remains a presently unresolvable political dilemma—one that, like most things, does not seem to easily produce common-sense, bipartisan solutions.
More broadly, the pair discussed the ways in which economic policy has been a defining characteristic of American politics since the conception of our nation. The federal government’s role in the economy dates back to the debates between founding fathers Thomas Jefferson and Alexander Hamilton, with Jefferson seeking to minimize federal involvement and Hamilton encouraging it. Binder described Revolutionary War-era economic policy as “not worth the continent,” as the continental dollar was largely unregulated and quickly lost value over time. No government agency had been established to monitor and regulate inflation, and price controls were perceived as restrictive of freedom of contract—a classically liberal ideal in which two individuals should be able to sign any contract, whether of payment or of any other deal, free from government restriction. Binder, therefore, argued that the precedent of non-intervention was established early in American history, dissuading government involvement in the market. Notably, Binder did not discuss Hamilton’s First Bank of the United States, which was established to promote the growth of the economy through loans to the government and more efficient tax collection. It did not last more than two decades, and a national banking system did not emerge again for over a century.
In 1913, a year before the first World War broke out, Woodrow Wilson established the Federal Reserve as the central bank of the United States, but originally it had no role in stabilizing market prices. Yet, just over a decade later, the Fed’s role quickly evolved as the nation found itself in the Great Depression. President Franklin Roosevelt’s New Deal—and its subsequent popularity—marked a significant shift in American attitudes towards interventionist economic policy. The Federal Reserve expanded its control over monetary policy, which, coupled with price controls set by Congress, helped ameliorate some of the worst parts of the Great Depression. The days of a hands-off federal government were over, Binder explained.
In an interesting side point, Binder discussed “little open policy agents,” who were working women that would inform local governments if small businesses were following the price caps set during World War II. This form of surveillance served to enforce government regulations on the economy, and it was considered by many as part of their patriotic service to the nation. Evidently, public opinion on government involvement in economics had by this point shifted drastically.
With relatively low and consistent inflation rates in the 1980s and 1990s, many Americans were shocked by the Great Recession of 2008-09, and are similarly surprised by the post-pandemic inflation rates. Binder closed by addressing these modern concerns, many of which were concerned with the ways in which future policy might escape the current status quo. Binder remarked that both Former President Donald Trump and Vice President Kamala Harris have troubling policies regarding reducing inflation, yet she remains hopeful that the state of our economy will regain its strength as unemployment continues to drop and targeted inflation grows closer to being met in the future.
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