Which Comes First: Inflation or Political Instability?

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Inflation is often viewed as an economic phenomenon, with mostly economic effects. Policy makers today worry about what inflation will do to the housing market; they express concern about government borrowing costs. They might note changes in individual economic behavior: a shopper pinching pennies at the grocery store. Politicians will worry about being voted out of office if they are blamed for its economic impact.

But inflation is associated with more than just economics and electability. It is also linked to political instability. The historical record contains many cases where inflation went hand in hand with major political realignments, coups and even bloody revolutions. This history is worth keeping in mind as countries throughout the world grapple with spiraling prices.

That inflation could fuel political instability — or vice versa — may seem self-evident, but teasing out a causal relationship is easier said than done. It’s a classic chicken-and-the-egg problem. Which came first: inflation or instability?

Consider, for example, economic historian Peter Temin’s study of the economy of ancient Rome. This magisterial work includes a nuanced look at the inflationary pressures that consumed the late Roman Empire. Temin asked whether inflation caused political instability — or the reverse.

To answer this question, Temin created different indexes of political instability — the turnover in emperors, for example — to determine if he could establish a causal relationship. But this proved elusive, given that equally plausible scenarios could be spun out that explained the downfall of Rome.

Temin noted that political chaos could create the need to pay off soldiers, spurring money creation and ultimately inflation. Alternately, inflation might understandably lead to discontent, which leads soldiers to revolt against their masters. But figuring out which came first was difficult to determine.

Finally concluded that an external variable may have kicked off a mutually reinforcing dynamic of instability and inflation that would topple Rome. This was the Antonine plague that ripped through the Roman Empire from 165 to 180 AD (For the record, Temin posited this theory before the arrival of our own, contemporary pandemic. But the parallel is unnerving.)

The skeptic might reasonably question the utility of drawing inferences from something that happened nearly 2,000 years ago. After all, many conventions of the modern monetary order—central banks, most obviously—didn’t exist in ancient Rome. Thankfully, there are studies that address our own era.

One typical study of 160 countries between 1960 and 1999 found that political instability — defined by turnover in cabinet and ministerial positions — contributed to inflation volatility, particularly in countries with central banks with limited independence from the larger political system.

Conversely, countries with strong institutions (independent central banks, basically) tended to fare relatively well, even if they faced high rates of political turnover. Think of Italy, for example, where governments change at an alarming rate, but its policy makers have managed to keep inflation reasonably tame.

Yet it’s equally easy to find evidence that a causal relationship moves in the opposite direction. Two political scientists put this possibility to the test in an article that examined how electorates responded to inflation between 1970 and 1994 in 19 industrialized nations. Significantly, the researchers made a distinction between generic inflation rates and what they called “unexpected” inflation: cases where price levels took off in defiance of what everyone, economists included, anticipated.

The results suggest that politicians and political parties pay a serious price when inflation takes people by surprise. This finding held up under different statistical assessments of the relationship. All of which bodes ill for any party currently in power in places like, well, the US Democrats, take note.

Still, sending incumbents into early retirement because inflation unexpectedly spiked on their watch is hardly a tragedy, even if it may feel that way to some politicians. It’s the same punishment inflicted on leaders when they have the misfortune to preside over a recession. Either way, protest is safely contained within existing political institutions. The government doesn’t fall; leaders escape with their lives.

But the historical record is read with cases where inflation, whether cause or effect, contributed to the breakdown of the existing social and political order.

The political demographer and historian Jack Goldstone made a persuasive case along these lines in his landmark study of the early modern world, noting how the interplay of population growth, fiscal mismanagement and inflation helped fuel what he called “state breakdowns” of Stuart England, the Ottoman state and China’s Ming Dynasty, among others.

More modern episodes of inflation, particularly hyperinflation, underscores this dynamic. The poster child is the Weimar-era inflation that ravaged Germany after World War I. As early as 1937, the British economist Lionel Robbins recognized that this trauma might have paved the way for the end of democracy in Germany.

Robbins memorably wrote that the great inflation “destroyed the wealth of the more solid elements in German society; and it left behind a moral and economic disequilibrium, apt breeding ground for the disasters which have followed. Hitler is the foster-child of the inflation.”

Historians have quibbled with this thesis. Anti-Semitism certainly had something to do with Hitler’s ascent. But others have endorsed the larger point, finding similar disruptions in countries like Austria, which also sustained a bout of hyperinflation in the early 1920s.

A far more sweeping, if provisional paper recently examined the relationship between inflation and political instability between 1492 and 1900, as well as a more focused comparison that examined the period after World War II.

The authors — sociologists Joseph Cohen and April Linton — relied on two indexes of instability. The first, which they compiled in a separate publication, measured so-called “revolutionary situations,” where groups attempted to overthrow the state, successfully or not. A second collection of incidents supplied a metric for the modern era.

Their conclusions echoed much of what the other forays into this subject have found. In the pre-modern era, high rates of inflation often augured instability, but the precise sequence of cause and effect remains difficult to establish with certainty.

In the post-World War II period, by contrast, inflation’s effects varied greatly, depending on the quality of a country’s institutions. Not surprisingly, high-functioning democracies, particularly those with higher levels of prosperity, weathered inflationary storms far better than poorer, authoritarian countries.

This holds lessons for today. As price levels rise across the world, we’re seeing the first signs that inflation and instability are once again ascendant. In Peru, protests over rising prices have rocked the government in recent weeks. The International Monetary Fund has expressed concern that soaring food costs will spark unrest elsewhere. In time, these problems may spread to the developed world.

If they do, we will relearn a painful lesson: Inflation and instability are really two sides of the same debased coin.

More From Stephen Mihm at Bloomberg Opinion:

Don’t Count on Higher Rates to Stall the Housing Market: Stephen Mihm

Why Ukraine’s Wheat Fields Sow Dictators’ Megalomania: Stephen Mihm

1970s-Era Inflation Advice Was Hollow and Still Is: Stephen Mihm

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Stephen Mihm, a professor of history at the University of Georgia, is a contributor to Bloomberg Opinion.

More stories like this are available on bloomberg.com/opinion

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