Thursday, May 24, 2012

Why Everyone Hates Inflation...

...despite what Matt Yglesias says:

Now a fancy-pants economics blogger can tell you that the most important price in the economy is the price of labor and the price of labor is equal to workers' incomes, so a general increase in the nominal price level is necessarily a general increase in nominal incomes. But nobody seems to believe that. Instead people are convinced that gasoline and milk are the main prices in the economy, and that a general increase in the nominal price level is necessarily a general decline in real incomes.

What the "fancy-pants economics blogger" doesn't understand is that the workers are behaving in a rational income.  They intuitively recognize that (a) wages are sticky, both up and down, and (b) they have no bargaining power with enormous numbers of unemployed.  If nominal prices rise due to nominal, inflationary increases, the will suffer a real, immediate loss of purchasing power, and their wages will only rise on a lag, if they rise at all.  The benefits however, are uncertain--being contingent on an economic recovery--and will accrue mainly to the newly employed.  Thus people hate inflation, even though it is theoretically better for everyone, because they bear immediate costs and take on risk, only to share the benefits.


10 Comments:

Blogger Yoel Natan said...

Some inflation is good because it forces those with investments to get their money out of bonds and "safe" investments, thereby driving the economy forward. Progressive taxation does the same thing. The super-rich can afford to sit on their money indefinitely even if they are losing it hand over fist, since the know they will only live so long, and taxation is based only on their income, not on their net worth. The moderately rich must keep all their money working for them, by contrast, since they have less of a cushion.

Republican taxation policy means that the rich can keep more of their income, and keep it in safe investments and even overseas, since there's little law enforcement going after tax evaders. Meanwhile, because that money is not working, or is working for other countries' economies, the US economy doesn't keep up with the population growth, and the labor participation rate of men keeps going lower, from 87% or higher in the 1950s to 67% now. Of course, since only people actively looking for work through govt employment offices in the last six months are counted in unemployment figures, the unemployment rate remains low. The Republicans worked that bit of magic by eliminating the incentive for people to sign up at the unemployment office--one gets no food stamps or any sort of welfare or even job training unless one is quite active in looking for a job and taking whatever is offered. That's how they managed to manufactured a low unemployment rate, and then they campaigned on a record of creating jobs. Ha! All a bunch of baloney:

http://www.angrybearblog.com/2012/02/labor-force-participation-rate.html

2:47 AM  
Blogger Octavo Dia said...

With inflation-indexed bonds, you can keep it in safe investments forever. Inflation will have zero effect on that score.

6:22 AM  
Blogger Octavo Dia said...

Also, the point still stands, whether forcing rich people to move their investments to more productive assets improves the economy or not--there are immediate costs in exchange for risk and widely-distributed benefits.

7:45 AM  
Blogger Yoel Natan said...

Oh yeah, there's a whole $1.5 trillion in inflation indexed bonds issued by govts in the entire world. Why even mention it? Point doesn't stand:

http://en.wikipedia.org/wiki/Inflation-indexed_bond

As of 2008, government-issued inflation-linked bonds comprise over $1.5 trillion of the international debt market

6:07 PM  
Blogger Octavo Dia said...

Read it again. It would still be the case even if there were no inflation-linked bonds.

9:05 PM  
Blogger Yoel Natan said...

The post hinges on the economic behavior of workers in reaction to inflation, but I don't think that's a big factor in economics in the long run. Maybe month to month. It's how the "haves" and the corporations react to inflation. In CA and other places a lot of "haves" found themselves in a higher tax bracket not because they were richer, but due to inflation. They got sticker shock. The best thing for them to do would have been to adjust the "progressive tax scheme to account for inflation, but instead the corporations and "haves" wanted lower taxation and a flattening of progressive taxation, and no inflation. This has stifled the economy relative to population growth, and many men especially have become unemployed simply because with low taxation, to get rich, one only needs to become an importer or service provider. With higher taxation, one needs to build factories and invest a lot of capital, and take some risk.

3:52 AM  
Blogger Octavo Dia said...

Note the terms "immediate" and "lag."

9:16 PM  
Blogger Yoel Natan said...

Yes, but you and the author you quote seem to be just theorizing (and theorizing wrongly), while I'm looking at actual history. Farmers and laborers in the past whenever inflation cropped up (1800s through 1980) never had a problem with it since they typically had debts to pay, which looked increasingly small with inflation. It is only the "haves" that have a problem with inflation. For example, back in the 1970s credit card companies could only charge little interest, so people were filling up the car on credit and paying off the bill way later since inflation was higher than the interest rate! That's why the Supreme Court ruled that credit card companies could charge whatever interest they wanted--in order to combat that problem. That also marked the rise of the financial credit industry seeing they could now get away with usury. BTW, you and your brother were/are employed making plastic cards (mainly) due to that 1970s SCOTUS decision on interest rates. Reagan only won by a little each time, showing that the Average Joe was not bothers too much even by years of inflation.

4:32 AM  
Blogger Yoel Natan said...

Here's what I mean by the super-rich not putting their investments in anything that isn't safe, thereby not growing the economy enough to keep enough men employed (only 67%). A couple in Beloit, WI, is worth $2.6 billion, and from 2005 through 2012 they only payed $10 million in state sales tax. I think that works out to a 0.3% tax rate. The only way they could have had that little to tax is if they had everything socked away in long term bonds, I'd guess:

Wisconsin's richest woman owed no 2010 state taxes

http://www.pasadenastarnews.com/nation-world/ci_20750321/wisconsins-richest-woman-owed-no-2010-state-taxes?source=rss

4:36 AM  
Blogger Octavo Dia said...

I'd reckon that they had all their money invested in same-state municipal bonds and leased their residence (so the real estate taxes were born by the landlord). They'd owe no Federal tax, no state tax, and no local tax.

You can eliminate any period prior to 1934 from consideration, as the U.S. was on the gold standard and the U.S. was suffering from chronic deflation. It is not applicable to circumstances today. Also, see: stagflation for the most recent major instance.

9:44 PM  

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