## Thursday, April 17, 2014

### Does inflation make you poorer?

A lot of people think that inflation makes them poorer. I hear this all the time. It makes sense, right?

You might think: "Hmm, if my income stays the same, and prices go up (inflation), then I can't buy as much, so my real purchasing power has gone down. I'm poorer!"

And then you might think: "Actually, no matter what happens to my salary, I can buy more if prices are lower. So inflation always makes me poorer, no matter what."

Are you one of the people who thinks this? Then let's take this idea, and run with it, and see where it gets us. First, go to the BLS' inflation calculator, and enter a starting year of 1980 and an amount of \$100, then hit "calculate". I did that, and I got a number of \$286.76. That means that it would take \$286.76 in 2014 to buy what you could buy with only \$100 in 1980. In other words, the total inflation from 1980 to 2014 was 186.76%!

So imagine if there had been zero inflation from 1980 to now. Does that mean that you'd be 186.76% richer now than you are? That would be a pretty good deal, eh? You'd probably have a bigger house, at least one more car, and plenty of money in the bank!

In fact, it wouldn't just be you, right? All of America would be richer! The logic that "inflation decreases purchasing power" applies equally to each and every person, right? So if there had been 0% inflation since 1980, everyone in America would have a bigger house, another car, and would be taking nicer vacations.

OK, and it gets better. If inflation decreases your purchasing power, then deflation increases it. It makes sense, right? Deflation means prices go down. Lower prices mean you can buy more stuff. Duh. What could be simpler?

So if we only had deflation, we'd be getting much richer every year. The more prices went down, the more stuff we could buy. With 20% deflation, in a few years we'd all be living like kings, and with 90% deflation, our money would dectuple in purchasing power every year! In no time, we'd all have yachts, private jets, and yearly vacations to Europe and Japan. Right?

No?

Wait, something's wrong here. This doesn't seem possible. But how can you escape this conclusion? If inflation decreases your purchasing power, then deflation increases it. That's definitely true, since deflation is just negative inflation. If prices go down, you can buy more stuff. But how on Earth could deflation create all those yachts and private jets out of thin air? It couldn't, could it?

So maybe there's a flaw in your thinking. Maybe inflation doesn't really make you poorer. How could that make sense? How could rising prices not reduce the amount of stuff you can buy?

Well, there is an answer, but I want you to think of it yourself. I'll just give you a hint: Whenever you buy something, the money you spend is someone else's income...

1. Impeccable Austro-libertarian logic 'til the last 3 paragraphs...

1. ArgosyJones6:48 PM

Eh, I'd give it a B- for neglecting to mention muh gold.

2. Not really Austrian logic from an academic perspective (internet Austrian warriors, definitely). Also not a (completely) libertarian position (source: I am a libertarian).

The logic Noah applies is a bit off. A) 0% inflation from 1980 till now doesn't necessarily imply you'd have more stuff (the bigger house stuff Noah is talking about). Look at the quantity theory: MV=PY. Assume V is stable. Log both sides. 0% inflation could imply M growing (shrinking) as Y does. Or M and Y staying the same. Noah making the generalized argument "0% inflation" could be any of these three. But we've had real GDP growth since 1980 so it's M growing with Y to get 0% inflation. So yeah, we have more stuff because Y is growing.

B) On deflation: M falls as P falls as Y stays the same. M stays the same as Y increases and P decreases. Again, this all depends on what's happened since 1980. As we've had real GDP increases since 1980, that means that we've had M stay the same as Y increases. So we have more stuff.

The Austrian ideal of deflation is a money supply not moving and real gdp increasing. That's the deflation Noah should be talking about if he wants to emulate the Austrian position. A contraction of the money supply isn't a good idea, and there are a few Austirans who agree (Leland Yeager comes to mind). I can't speak for other Austrians because I don't know their ideas on simply contracting the money supply to create prosperity - I'd think that if they applied their ideas on putting money into the money supply not bring about prosperity, then taking money out won't bring prosperity as well.

I know that Noah knows that inflation/deflation is much more nuanced than what he wrote here. Friedman argued that the optimal money supply growth be zero - which implies a deflation rate equal to real gdp growth. Steve Williamson points out that many macro models agree with that. So talking about deflation in a vaccuum is not really a good idea, because at face value deflation *is* a good thing to have *because* it implies an increase in real GDP and *yes* more stuff (though bigger houses, I can't say for certain).

We want deflation as it pertains to increases in real GDP. But we want 0% or a bit more inflation because of the problems with having real debt burdens increasing, solidifying expectations and avoiding contraction of the money supply.

3. Forgot a disclaimer: not an Austrian (though my usage of the quantity theory would imply that)

4. "The Austrian ideal of deflation is a money supply not moving and real gdp increasing."

In his later writings Hayek came out against even this form of deflation.

Instead he essentially advocated a stable 'price level' equivalent to a general rate of 0% inflation /deflation.

See 'The Denationalisation of Money' in particular on this subject.

5. Anonymous11:55 AM

One correction...

The supply of money should stay in perfect proportion the size of the economy, not zero, which would necessitate no change in the economy.

Hence the reason why having gold as money is such a bad idea. Sure you can't print gold (although the investment banks have managed that very thing.) its quantity has no relation to the size of the economy...

Anyway to answer Noah's exercise.
A poor man's labour is an asset too, and perfectly hedged against inflation. So surely inflation is good for those who work. Or rather who's future work outstrips their current monetary assets.

The poor should love inflation. If only they had economics degrees to know it.

2. Brilliant, brilliant piece. It really distills a key concept of basic economics in an easy-to-understand, digestible form. This is what academic blogging should be like!

Sadly, libertarians will totally misunderstand it, out of stubbornness or stupidity.

3. Anonymous6:29 PM

This is such a devastating point. In other words, this fallacy leads to the ridiculous conclusion that any arbitrary level of prosperity is achievable through deflationary reductions in the money supply. So printing money doesn't make us magically richer, but burning money does...? Oops.

4. reeeeal waaaage groooowth. it's turned.

5. Anonymous6:46 PM

People are silly. Inflation is like pretty much everything else. It has winners and losers.

The winners either pretend there are no losers or mock the losers they acknowledge.

The losers whine and bellyache and are generally insufferable with their self-righteous, narcissistic outrage. Pretty much sums up politics right there.

1. As a middle aged investor who is holding some of my savings in short term debt instruments I am one of those losers who in our self righteous narcissistic outrage feel that deliberate inflation only works as an economic policy if it succeeds in stealing from people like me. Silly me, not wanting to be the sacrifice to your political goals.

2. Yes. Other people should sacrifice so your short term debt instruments perform better.

3. Yes. Other people should sacrifice so your short term debt instruments perform better.

No. People should not try to steal from me if they expect me to play nice.

How does inflation help anyone:
1) it takes from people who have made long term investments in bonds and reduces willingness of people to make new investments in long bonds
2) it gives to everyone who borrowed money at fixed rates
3) it reduces the real wages in some industries
4) it frightens the middle class into over investing in housing and real estate which can produce short term booms
5) because corporate interest payments are deductible and interest earned by pension funds is not taxable it can create a defacto tax cut for business

The alleged "benefits" of inflation flow from those effects. I don't think there are any other mechanisms for inflation to stimulate the economy in a real way. Are those really the mechanisms you want at work to stimulate the economy?

4. But with inflation, the winners and losers rarely know which they are.

5. This comment has been removed by the author.

6. I agree. A monetary policy that doesn't help Absalon's investments is nothing short of theft, but a monetary policy that helps people who have borrowed money at fixed rates is just a giveaway to entitled, whiny narcissists.

7. Karl - small point to keep in mind: my capital is a lot more mobile in today's world than your job skills. Now you can be hostile to me and people like me or you can try to find something that works for all of us.

8. My capital is mobile, too. What's your point?
Your confusing hostility to you to hostility to your argument. Suppose someone argued for higher inflation as follows:
"As a young man with a mortgage who is just trying to keep a roof over the head of me and my family, I am one of those losers who in our self righteous narcissistic outrage feel that deliberately low inflation only works as an economic policy if it succeeds in stealing from people like me. Silly me, not wanting to be the sacrifice to your political goals."
You would not find this a good justification for higher inflation (nor should you). Absalon's debt instruments are no better an argument for low inflation than Young Man's mortgage is for higher inflation.

9. Karl - inflation only works to reduce the burden of debt if it comes after the debt has been contracted. If everyone knows that a certain amount of inflation is coming then the lenders can build that into the interest they charge. The young man will then pay higher nominal interest and the inflation component of his mortgage will require larger payments than he would have to make in a low inflation / low interest rate environment. I see people arguing for a burst of inflation - that stimulates the economy by (1) reducing the real wages of employees with low bargaining power and there appear to be a lot of people on the left who seem to think that would a good idea and (2) catching long term bond investors offside. I went into my money holdings knowing that the Fed would target 2% inflation and I have no ground for complaint with that. My complaint is with the people who think 4 or 5% or higher inflation would be a good thing.

10. Anonymous3:17 AM

Do not worry. You should be okay if you hold short term debt instruments.

I'm not seeing many compelling reasons that short debt should do well though.

6. Nice, Anonymous @ 6:45. Old people on living on fixed income and savings are not in the same position vis a vis inflation as young people who are in debt. While there may be misconceptions about inflation, it doens't mean there is nothing to disagree about, as some glib commenters (not Noah) have seem not to understand.

1. Anonymous5:55 AM

"Old people on living on fixed income and savings" are very rare. Most live primarily on Social Security, which adjusts for inflation. Those who don't tend to have large portfolios (else SS would me a bigger percent of income), and standard advice is to diversify. Their stocks usually adjust for inflation.

7. Anonymous7:25 PM

The answer is "depends"...

As in I just crapped myself trying to come up with something clever to outsmart Noah.

1. Awwwww, shucks.

8. Inflation is non-neutral, so no, not "everyone get poorer". Namely, the people who get the money first are richer, as prices haven't adjusted yet to new money. Astute readers will notice I'm defining inflation as the increase in the supply of money, not increase in prices. This is important in solving your dilemma.

Deflation, when it involves the shrinking of the money supply, means money is more scarce. So less money is needed to buy the same goods as before. However, the effects are backwards: the people who are the first to suffer from tighter money supply conditions are poorer, as they now have less money to purchase goods than before.

Falling prices only make people wealthier when they are the result of productivity gains. If technological improvements mean you can now produce the same goods at, say, 80% the cost, then you can offer lower prices while still making a profit. Confer the history of the computer industry to see how this is both possible and sustainable.

In conclusion, inflation makes some people poorer and some richer. Same with deflation--so long as they are the result of changes in the money supply. But productivity changes that result in lower prices--with a constant money supply--can result in "everyone" getting richer.

1. Anonymous7:40 PM

exactly right.

2. "...I'm defining inflation as the increase in the supply of money, not increase in prices."

Neat. Now can you perform the same trick using the definition of inflation, rather than what you imagine the definition to be?

"Area man passionate opponent of what he imagines inflation to be..."

3. Anonymous3:57 PM

@Jonas
Exactly right (I mean correct).

9. I feel as if there is a false correlation here. If you have 0% inflation that would mean you are 0% richer now, not 186%.

If you meant to compare the real-life inflation we see today, to this hypothetical 0% inflation, then you would have 186% more purchasing power from hypothetical-now to real-now, but you would still have 0% more purchasing power total (read: 0% "richer") from 1980 to now. It doesn't make you "richer" it kept you exactly the same...

"...inflation is a sustained increase in the general price level of goods and services in an economy over a period of time." http://en.wikipedia.org/wiki/Inflation Since there was hypothetically 0% inflation of the currency from 1980 to today, you would only be able to purchase the exact same house, car, etc since no other prices in the market had been affected by inflation compared as to your dollar (they both were adjusted by 0%).

The reason inflation "makes you poorer" is that when your income remains a constant, and it not adjusted to meet inflation over time, all those goods you used to purchase at that \$1 level now cost \$1.86 because they were adjusted over time. You are numerically no "poorer" as in the number of dollars you have, but your purchasing power for those dollars you have is certainly decreased.

Just because that inflated money passed from you to another person, does NOT mean there is a direct correlation to YOU getting more money for those free-market-goods flowing around and adjusting to inflation. Maybe you work as a bagger at a grocery store – your salary has no direct tie to inflation, even though all those goods being sold at that store do. This is a large reason why people demand minimum-wage reform. Maybe we should make wage/salaries adjust for inflation just as the goods those free-market-employers are selling are?

1. So check out my deflation example. Since deflation boost your purchasing power, it makes you richer, right? If there were 50% deflation a year, our purchasing power would double every year, right? Right??

2. Noah, congratulations on your discovery of the Ewbabmiz complementary antiparticle to the hyperbolic Zimbabwe argument!

10. Anonymous7:36 PM

Yes! And look at all the wonderful prosperity that currency inflation has brought the people of Argentina and Zimbabwe in the last decade. If only we could juice the printing presses even faster here in the west, we might achieve similar economic success.

1. Anonymous10:56 PM

Sorry, house rules. In an argument about inflation, first one to cry "Zimbabwe!" loses.

2. Sorry, house rules.

That's a stupid rule. Would you prefer references to Weimar or Kipper und Wipper?

3. Anonymous5:35 AM

You do not understand the causes of inflation in Argentina and Zimbabwe. The problems here relate to the nature of the structure of their economies, and in the latter case, the political situation. Both countries have been characterised by a very inequitable distribution of wealth which has distorted resource allocation that has its origins in their colonised periods.

Many countries have debased their currencies or printed money but have maintained political and economic stability. Forget what economic theory taught you. This is the zone of history and political science. It is to do with the integrity of governments. Without that a currency does not have currency, that is the fundamental meaning of the word. If a country does not have political stability or the government does not have authority, almost certainly it will experience inflation - most likely the system will break down into barter. Likewise a country with a fundamental structure of production problem, a permanent terms of trade problem at the same time being a small open capital import dependent economy with an oligarchic ownership of capital structure, will likely get into trouble.

4. Anonymous at 5:35 - I don't think you have a clue what you are talking about. Argentina and Zimbabwe had inflation because of bad economic decisions by elected governments. Argentina's colonial experience is so long in the past as to be irrelevant to its current circumstances. In the early 20th Century Argentina had a relatively high standard of living. In Zimbabwe, many of its recent problems have been the result, not of an unequal distribution of wealth, but because the popularly elected government decided to appropriate the wealth of white farmers and destroyed their own economy. Zimbabwe has been independent for so long that they should be responsible for their own success or failure.

5. Anonymous7:31 AM

Absalon. You need to think about a fundamental question. Why did the North Far East, Europe and North America, Australia etc succeed, but Africa and South America did not.

The answer is not in economic theory.

It is to do with their terms of trade structures, political, social situations. Sure, in Argentina they had a brief period preWWI where commodities gave a balance of payments surplus. (So by the way did places like Nauru and Bahrain, and Saudi Arabia and the UAE now.) THe problem is that the ownership structure of capital was distorted. This surplus capital was not translated into good investment that would have empowered its surplus labour. Actually it led to further dependence on foreign capital. Import substitution attempts also failed simply because the necessary socio/political/economic structures for development were not in place. This is linked to the political situation and associated resource ownership structure that was carried over from the colonial period. Countries in such situations can stay in a permanent poverty trap. Efforts at income distribution have generally failed because fundamentally they have not tackled either entrenched interests or simply replaced one power base with another.

Both Australia and the US at their points of independence were fundamentally different to Argentina or Zimbabwe.

North Far Eastern income redistribution, such as in Japan and China was also far more successful.

6. Anonymous7:37 AM

I should also say Absalon, the key to successful land redistribution in China and Japan has a lot to do with the nature of land tenancy when these economies were under closed systems. This made transition easier.

For info on this I would strongly recommend the Sinology and Japanology literature, not the economics one. It is literally more informed by facts on the ground.

11. Anonymous7:42 PM

Your logic is incorrect, since inflation transfer the purchase power of the people to the government who inflates the currency. Try to play monopoly with a player who is free to print his own bills and you will see how it really works.

12. Interesting post! I would say that if there's zero inflation, but your earnings/net worth increase, then your buying power has increased. We cover some of this in terms of real wages and wage trends at PayScale: http://www.payscale.com/payscale-index/real-wage-index

13. Noah, I think you have missed the point of why there are such differing opinions on inflation. The controversy arises because of the distributional impacts of inflation.

Inflation, properly defined, is an increase in all prices, or a decrease in the value of money in general. If ALL prices did in fact change at the same rate of inflation, including wages, housing, welfare, etc, then nobody would give two hoots and you wouldn't be writing this post.

It is the fact that, as other commenters have said, there are winners and losers. Just look at the real wages of the lowest 20% of wage earners over the past 30 years - inflation for them has been uneven with respect to prices and their wages, with wages only just keeping pace.

At the other end, the capital owners, are seeing the value of their asset increase at a faster rate than inflation, meaning that they are getting gift of increased purchasing power.

1. But does this have anything to do with inflation? Inflation has redistributional effects from creditors to debtors, but an impact on real variables over 30 years?

You're reasoning from a "ceteris paribus" assumption. Decrease in the real wages and increase in the capital share is due to supply factors (technology, globalization, less power of unions etc.). Let be no inflation, nominal wages (and thus real wages as well, keeping the price level constant) would have go down.

But it is probably true that the wealthiest can find better ways to protect themselves against seignorage than poor people.

14. Anonymous8:35 PM

and if you unemployed and have no assets or on fixed income or a government worker who haven't seen his salary keep up with inflation? There is an answer, and I'll let you think about it.......

1. And what if you get hit by a truck, then hauled off to a North Korean concentration camp? Oh yeah? What then??? SEE, INFLATION IS BAD

2. Anonymous2:10 AM

I brought it up because federal government, walmart and target, just happen to be number 1,2 and 3 biggest employers in US, and with 37% unemployment we pretty much get a majority of population. But with your response I understood the way you think.

15. Anonymous9:37 PM

Hooray for straw men!

Inflation, a rise in the price level, is effectively a tax on cash savings. Whatever amount of cash you have at t0, before inflation, buys less at t1, after inflation. Therefore you are poorer at t1 than you were at t0. This is all that anyone who understands the point means when they claim that inflation makes you poorer.

Try explaining that one away. I'll just give you a hint: you can't.

1. Are you keeping your savings under your mattress???

2. Inflation is a tax on tax evasion.

3. And taxes are rape. By definition. "We will take your money or we will put you in prison."

Again, Noah has zero training in ethics. Tax evasion is means you swung your purse at the bad guy who was trying to steal it. But hey, that guy really needs the money for his lifestyle. And he's taking everyone else's purses. Why are you letting him take yours?

Although the mugger is a little better because he usually doesn't commit genocide. Or lock people in prison for smoking a plant. Prisons man. Gotta keep them booked. Wouldn't want a jail cell to go to waste.

And the roads. We need highways. How could Walmart have gotten a monopolistic position if they didn't have tax payers paying to build the highways? I mean gosh, all those mom and pop shops would still be paying higher wages and we'd still be eating local foods.

4. Anonymous3:33 AM

Hey Noah, all cash in existence has to be held by someone all the time, so yes, cash is kept by someone under his mattress and it looses value.

5. A financial advisor can explain how certain types of investments hedge against inflation. Managed correctly, investments are not eroded by inflation. Turn off the charlatans on the boobtube; get out more and talk to a respectable financial advisor.

6. I agree with Jacob Williams. All taxes are bad. Redistribution is a crime. Mr. Government wants all the money for himself because Mr. Government needs a Cadillac. Roads and companies are bad. I should be able to own a road and let nobody else drive on it. If only Mr. Government would let me do it, I would get rich enough to rule the world. I would be born poor in house owned by someone else, being purchased by some rich and clever family, but I would kill them and steal their money and purchase my own army to defend myself against other armies. And nobody will take anything away from me, even if nobody allows me to use their roads, their guns (I would build them myself! With my own hands, made from stone that I carve into guns.) or anything else. That would be most ethical.

7. Anonymous8:53 PM

He is probably not keeping his savings under the mattress, but with banks paying far less than the rate of inflation on savings, he might as well be.

8. Anonymous3:23 AM

@Jacob

It is not your money in the first place, so government is just taking it back.

9. That concept would only serve to prove that government is not for the people, by the people, and of the people. It suggests government is our parents. Only my parents didn't kill children with nuclear weapons.

I think you're being sarcastic though. But you did bring up a good topic of discussion. :D

16. But Noah what about those Halcyon eras of deflationary periods the US has enjoyed in the past. It seems like the great depression was good times for everyone... Are there really legitimate models or theories that support the idea of deflation as a mechanism for economic health?

1. Deflation as a result of increased supply is good as it actually raises real incomes.
http://macromarketmusings.blogspot.com/2010/07/daniel-gross-on-types-of-deflation.html

2. This comment has been removed by the author.

17. Anonymous10:32 PM

Careful, Noah, you are inching close to nominal GDP notions! Yes, Japan would have been much, much, better off if it had run higher NGDP earlier. The Fed ought to also run higher NGDP as well.

Say, why doesn't the Fed run a higher inflation target until NGDP gets back on its LR trend, anyway? Robots?!

18. This is a perfect example of Scott Sumners rule to "never reason from a price change."

19. It's a shame Noah that you don't study philosophy and ethics. Inflation is when Government prints money and uses it to build atomic bombs and drop them on Japanese children and invade third world Countries.

You also fail to mention that having a monopoly on printing money is a form of theft regardless of how it's used. Or have you tried printing your own dollar bills? Why can't you do it? Why can't poor people?

Good, answer to your masters. But stop complaining about police brutality and the NSA. They're the benefactors of the money that's printed.

And your math is wrong. But I find ethics more important than numbers. Perhaps you think of people as numbers? It sure seems that way.

And yes, I will debate you over video Noah. So come along to my channel. http://youtube.com/jakedaywilliams

1. Anonymous3:36 AM

And what is you knew that not government but free market is responsible for increasing money supply? Market creates assets out of thin air by making loans etc.

2. Why did you capitalize "countries"?

3. Noah, this article was not written well. This is evident within. The entire time you're asking theoretical, "you might be saying to yourself" questions. You didn't even make any claims or show any data. It's like I was peeling through the layers of an onion and just finding more onion. All I can do is cry. I don't have anything to critique. You put our own words in our mouths then fail to put any of your own in.

You're closing statement is: "Well, there is an answer, but I want you to think of it yourself. I'll just give you a hint: Whenever you buy something, the money you spend is someone else's income..."

There's an answer but you're not willing to say it? Good job avoiding criticism. Here's how this plays out:

Me: So you're say that "X = Y"
You: I never said that!

This is a High School debate club technique. My god, I'm surprised your website's background isn't Drunk Tank Pink with the amount of psychological manipulation happening.

Are you willing to debate this over Skype or not? If I'm going to be peeling onions I would like to be producing some content.

4. Why did you capitalize "high school"?

5. We can discuss the grammar in your article and my comments if you like.

First let's discuss the lack of creativity in starting so many sentences with the words, "So" and "But". I understand a little filler words when speaking, but to force them into text is redundant, overbearing, superfluous, inessential, and damn near loquacious. Then we can move onto why having fifteen questions and zero answers in any piece is a stab in the heart to anyone interested in prose.

I feel like a malnourished African boy pumping and pumping a broken water pump in the Serengeti with these one-liner responses of yours. I'm burning five hundred calories for an ounce of water.

6. I think starting sentences with "so" and "but" often makes pieces flow better. And why are interrogative sentences bad? ;-)

7. Starting sentences with "so" and "but" are penalized when vying for the "In-depth articles" position at the bottom of the first page search results. It is known Khaleesi.

Interrogative sentences aren't bad. I protest them in surplus. Oranges are delicious. Let's not aim for a kidney stone though.

8. Really?? I didn't know that!! Are you an SEO guy?

Sorry, 2/3 of the above were interrogative sentences, but this one lowers the ratio to 0.5.

9. Jacob,

you sound like someone who has been brainwashed by the simple-minded and dishonest propaganda pumped out by the Ludwig von Mises Institute in Auburn, Alabama.

If this is the case, I suggest you start reading things not published by them.

You may learn something.

10. Perchance you're a living simile of what it is to ask too many questions?
At the risk of abusing the word interrogative, I'm now inventing a new word at which to describe you. Inquirious.

"The baby armadillo was inquirious, as though he were a Noah."

11. It's harder to be brainwashed these days. I have the Internet and all it's diversities. I read Marx, Adam Smith, Sowell. Listen to Planet Money, Uncommon Knowledge, Freakonomics, Dave Ramsey, Econ Talk, The Critical Path, Radiolab, Skeptics Guide to the Universe, Tech News Today, Science Friday, Car Talk, Today's Lean Manufacturing, This Week in Startups, Ruby Rogues, Ruby Five, StarTalk w/ Niel DeGrasse Tyson, Astronomy Cast, Hardcore History with Dan Carlin, Penns Sunday School, Story Worthy, The Moth, This American Life, and Freedomain Radio.

I named my son Sagan after the late Carl Sagan. Promoter of science and reason. I work especially hard to expose myself to, and question everything. I have no sacred cows. It's the reason I have no problem debating Noah over video. If my views are shooken it'd be wonderful.

Sorry the long list. I have linked my profile where you can find out more about who I am and my beliefs. I offer it because I came across as sounding brainwashed to you. Look into me. I did my due diligence with Noah by reading his about, other articles, and browsing his social networks. Do I think Noah is brainwashed? No. Brainwashing requires isolation.

12. Anonymous4:48 AM

holy bitcoinz!

Still, Noah, you must have secretly hoped for more than 90 or so comments when you wrote this post.

13. A person who can write a sentence like, "taxes are rape by definition," sounds woefully undereducated to me.

Where do you think taxation came from? The distant planet Rape?

14. This comment has been removed by the author.

15. @mattski I think taxes akin to rape. Both are extractions by force. We are born in debt to foreign Governments for loans our grandparents took out. Mattski should not have to pay for the extravagant and irresponsible behavior of his parents. You wouldn't go buy a yacht knowing that your children would have to pay for it. Neither should groups of parents as a whole. Believe it or not, voting as a group to make bad choices does not eliminate evil. If all the men in a tribe agree to pillage and rape the woman of another, it is still wrong. This happened in history all the time. We aren't immune to the future being despised by our decisions.

I could be wrong, but I get the vibe that you assume government expenditures are a necessity. People make bad decisions with their own money all the time. They make even worse choices with other's money.

There's a lot off, "He's not thinking deep enough." being directed toward me. I'm not sure this is a complicated topic. We are forced with the threat of jail to pay wars that we ourselves wouldn't go fight in. Look at the budget the White House releases each year, there's a huge military allotment. It's half the spending. Half. Compare it to NASA and NIH budgets. Look at in in contrast to all the social programs. There's this weird delusion that taxes somehow go to science and community building projects. They don't. They're used for killing and policing the citizens of the world. That includes ourselves.

This isn't part of my position, but if any of you want to have a discussion please write longer responses. There's been a lot of eye rolling and asserting my disinterest in economics. Three-lined chuckled retorts aren't great examples of being academically engaged in anything. I've given you examples and explained why I believe these things. Please show yourself and me some respect be raising the standards to what we both know they should be. If you're too busy or feel I'm not worth your time then I understand. No hard feelings. Bookmark the page and get back to me if you have time in the future. Thanks for what you've contributed so far. To be fair, Noah's contribution was the article to begin with.

16. My formal education in philosophy and ethics was a bit cursory, but my impression is that most ethicists do not think that taxation is theft. In fact, most philosophers aren't libertarians at all. As it happens, they tend to be far more politically left-leaning than the general public.

That doesn't automatically mean you're wrong, and many political philosophers would acknowledge that libertarians have some interesting points, but when you're going to act all high and mighty about how educated you are, you should keep some perspective.

17. Jacob,

I appreciate your response, and you're justified to ask for more detailed contributions from your skeptics. OK, my time is limited but I'll try.

First of all, there are big areas of agreement between you and me. Yes, I agree that the US gov't spends FAR TOO MUCH on military related projects. That is a problem that started in the 50's, which Dwight Eisenhower warned us about, and it is a serious defect in our society.

However, what about roads and bridges? What about public education? What about police & fire departments? What about judges and prosecutors? What about investment in science and medical research? What about health insurance?!

Civilization has a cost, we pay that cost in taxes. Would you prefer to live in a jungle? May I recommend to you a truly great book about the birth of democracy? Pick up a copy of I. F. Stone's, The Trial of Socrates. Read it. You will never regret it.

From my perspective you are taking civilization for granted. There is no good reason to do that.

Bless you, and have a great day.

18. Thank you mattski and UserGoogol for your responses. (mattski, you can skip to the next comment if you like.) I don't have a counter-argument for you UserGoogol.What you state as far as statistical lenience towards the left within philosophical academia is likely true. I don't buy however, that having a formal anything directly correlates with expertise. As an anecdote (fully accept it's an anecdote, but a good personal example none-the-less.), I started a landscape and interior design firm two years ago without any formal education or expenditures. Today I'm wrapping up my 26th major project. When I look at the projects those at the University of Utah are doing, and compare them to my firms work, I can tell the students are being stifled. It could do a lot with incentive. I'm being paid to produce, they're paying to. Plus the added General Education classes they are required to take likely robs them of time they could be focusing on improving their expertise. I will link to my site so you can see some of our work. I'll also link to the University of Utah's Architecture and Planning Site the shows student work. Keep in mind two things; the students have been in school 4+ years. vs my two years, and look at the type of projects their producing. 99% of the projects are these weird safe and abstract structures of projects that would never be sensibly built in the real world. Just a bunch of rectangles thrown onto a white background. It's like a bunch of turtle-necking hipsters headed to urban planning straight out've an abstract painting class. There's this disconnect because painting an abstract painting takes less work than realism, but it cost the same amount in canvas in paint. They haven't been taught that engineering and building these things would cost 20X to build in reality. Do I think the students are talented? Absolutely. Do I think they're held down by tradition and their teachers? Yes. I tangent. Sorry.

UofU cA+P: http://www.arch.utah.edu/?gallery%3E%3Ehttp://www.arch.utah.edu/gallery/2010/arch4010F10/content.html

WiLDlandscaping: http://wildlandscaping.com/landscapes

19. Response to Mattski,
Roads and bridges: Roads are bad for the environment. They are also bad if you believe small business and local communities are at the heart of living a happy and healthy life. I'm for the free market. Which means you shouldn't be surprised that I'm against the WalMarts. Walmarts have been enabled by taxpayer money being used to create highways. Highways the the Federal Government dictates. All the polluting and CO2 comes from Government holding the hands of big corporations in their quest for global expansion.

Public Education: Children should not be forced to sit down, shut up, and listen for seven hours five days a week. These teachers know damn well the internet exists. If teachers gave a damn about education at minimum 90% of them would be recording their lectures and posting them online for their students and other children to view and learn from. I worked as a K-12 teacher for two years. Teachers have had all ambition choked out of their lives by strict rules and policy. Why don't teachers want one parent from each student to come in once a month and be a teachers assistant to help with the children? My belief is that they care more about their job security and don't want to be critiqued tested. Ironic. All they do is test eleven year olds all day. Why are they so adverse to their own performance results?

Police and Fire departments: As the person who's paying for the officer to sit on the side of the road, my butt-hole shouldn't tighten every time I drive by one. Even people married to police officers are scared when they see one. I think police are corrupt. If there aren't firemen, the group that invents an inflammable home has a lot to gain.

Prosecutors and judges: 90% of prosecutions in the United States end in a plea deal. This means, 90% of suspects never go to trial. It's, "we think you did this, you confess and we'll give you one year. If you don't confess, you'll go to trial and have a 50% chance of going for twenty." To me, that's as corrupt as any system can be.

Investments in science: I sometimes wonder if the atomic bomb would've ever been built had Government not paid for it. Science is wonderful. But most science that leads to increased wealth and gain for humanity comes from the private sector. Apple is a great example. Google search. Android. All these things of value come from the private sector. The Wright brothers didn't attain flight through grants.

Health Insurance: This is an area I feel I need to do more research on.

Thanks for your responses guys. You've really put me to task. I will try to read more on health insurance. I'll put The Trial of Socrates in my cue and throw a link to it for anyone else interested. http://www.amazon.com/The-Trial-Socrates-I-F-Stone/dp/0385260326

20. Roads are bad for the environment.

So you don't use them? Tell me, Jacob, are roads bad for the free market?

They are also bad if you believe small business and local communities are at the heart of living a happy and healthy life.

I guess you will have to explain this to me because I am sure that I don't understand.

My belief is that [teachers] care more about their job security and don't want to be critiqued tested.

Isn't it dreadful that people would want to have a job, and a source of income?

As the person who's paying for the officer to sit on the side of the road, my butt-hole shouldn't tighten every time I drive by one.

Well, there is a line between rational caution and irrational fear. And it is childish to blame your excessive fears on the outside world. You need to look inside to understand why your butt-hole is so often constricted.

But as I said above, my very strong feeling is that you are taking civil society for granted. It is NOT granted. We have to keep our society civil by accepting shared responsibility for it. Shared responsibility is made real by paying taxes willingly, because the alternative is mayhem.

21. "Shared responsibility is made real by paying taxes willingly."

It's not my responsibility to help pay for the invasion of other countries.
It's not my responsibility to pay for your child's seven hour daily imprisonment.
It's not my responsibility to pay for others to force other's off their land because they didn't pay taxes. I for one don't care what the Federal Government thinks they're entitled to. Keeping desert tortoises alive is not my responsibility anymore than bringing back the dodo from extinction is.
It's not my responsibility to pay fora road to be built from my house to Manhattan.
It's not our responsibility to pay for moon landings.
All these things, paid for by threatening to take fathers away from their children and imprisoning them. "You will pay for this Lunar Lander to be built. You will pay for these missiles and jets to be manufactured and used. You will pay for a drug war that takes the fathers away from 50% of black children. If you refuse, fuck your life, fuck your dreams, fuck your kids, and fuck your wife. You will be put away."

You're a lion in a zoo that has no idea you're a hostage.

Remember one thing. If you spent 12 years and seven hours a day in public school, what's the possibility that I'm the one that's been indoctrinated?

I understand. Newness is scary. You want the status quo to continue. Look, not everyone could pack up and head to California for the gold rush. It takes a lot of character, ambition, and high goal setting.

22. Jacob, I think I understand why your butt-hole puckers every time you pass a cop on the road. Since government is the thin blue line between order and chaos, your nihilistic philosophy to remove government will cause that cop to become an armed predator whose designs on your butt may be too gross to debate in polite company. But that's the beauty of free speech (protected by government). Even nutty people can get their ideas aired in a public forum.

23. It's not my responsibility...

Yes, like Shantanu, I think I understand why you are so fearful. Because you embrace an ideology of aloneness.

24. "Look, not everyone could pack up and head to California for the gold rush. It takes a lot of character, ambition, and high goal setting."

Interesting analogy, considering heading out there for the gold rush was a fool's errand for the vast majority of people. Unless you were selling shovels...

Look we live in a society that chooses where to spend its money. As a member of that society it's as much your responsibility to pay for those expenses as it is my responsibility to help you protect your property rights, which I'm guessing you hold dearly. But those are also just civil constructs. Why should we prioritize your desires over mine?

25. This comment has been removed by the author.

26. Shantanu, mattski, Ember

Okay, to answer the assertion that I don't care about anyone but myself:
-My wife and I have 20 years combined experience in teaching in public schools.
-We have had 6 foster children in our home in the last three years. Currently two.
-My last company I fought with my partner all the time about not paying our employees enough. We had about two dozen employees. I must've spent days on the phone telling him to raise X and Ys pay. He would tell me he would, then he wouldn't. My partner was a douchebag.
-To date I have 65 free programming, technology, and design tutorials on YouTube. No ads. Last month my lessons were taken ten thousand times.

I care about people. I care about education. I care about kids having a good home and loving family.

I start to see certain similarities between people who are pro-government. Typically I find that their childhood was ripe with absent or indifferent parents. The question, "Who will take care or us?" Is usually asked by those who weren't given the care they needed to start with. If this is true with any of you, I am deeply sorry. But it is at the root of how we view the world. Of course I'm not a immune to this either. By all means try to imagine what my childhood was like given my beliefs. I'm not afraid of the discussion. Anything you ask I'm more than willing to answer honestly.

To start the honesty, I will say that my sperm donor father left my brother and I when we were two and four. Signed over the rights to my mothers new husband. Who is considered my dad today. He is quite unconcerned about his children though. I have the suspicion he has Aspergers. What do you think? Again, feel free to ask any questions.

20. XFaure4:27 AM

Inflation like deflation, all other things being equal, is just a change of variables. Thus, all other things being equal, it will not make you richer or poorer.
What makes you poorer is seignorage, a form of inflation designed to make the people poorer.

21. yeah in fact Argentina is a country full of rich people, specially today xD Gosh....

22. People think of inflation as "price" inflation and overllook that wages can also inflate. The US switched from a higher wage inflation rate to a lower wage inflation rate. In the past, students could borrow for college and pay off their nominal debt in inflated dollars and higher real wages. Now college debt is much less affordable because it is not "inflated" away and graduates must pay back nominal debt out of lower nominal wages instead of inflated wages. Interest rates on student loans should be less than 4% because wage inflation, but many loans have not reset from much higher rates. The same is true of housing.

Inflation is needed to allow relative prices to reset. If inflation is too low, many prices (and wages) must reset downward to achieve balance. Almost everyone agrees that wage deflation is bad, but does not make the connection with an inflation target that is too low that creates downward pressure on wages. Inflation and deflation are a continuum, so inflation that is too low is marginally less bad than deflation.

23. Doesn't inflation basically only mean that "the numbers get bigger"? It doesn't tell if wages keep up with prices. Increasing money supply doesn't even necessarily produce inflation, only if the amount of purchaseable goods and services and the number of potential customers stay the same. There is a difference between inflation and the price level. Prices are mostly determined by supply and demand and the purchasing power of money is determined by its supply and the amount of goods available to buy. That's the reason for currency value volatility, isn't it?
Also, say, if planet Earth was the only place in the universe to contain gold, but mankind expands over thousands of planets and grows into the trillions, each corn of gold, under the gold-standard, will be able to buy you interplanetary companies, because each corn of gold backs billions and billions of dollars of goods. And if the amount of currency doesn't increase, then each cent will be desired by more and more people and prices increase. Deflation is inevitable then, only the purchasing power of those already with at least a tiny amount of money increases. Those without money - and under a fixed supply this number will increase because the dollar has a smallest unit - stay poor and will find it harder and harder to acquire currency.

24. Maybe if you assumed your usual separable utility, representative agent model, then maybe.
Also, doesn't seginorage have real short term effects in some model, even if they do reach the same steady state.
Sometimes, from the way that you write, I get the idea that you are writing from a vacuum, thumbing your nose at the "uneducated masses"...

25. If there is a general rise in the price of all goods and services (including labor services) of X%, but the price of your labor services does not rise by at least that amount, then inflation has probably made you poorer. At the same time, the net wealth of whomever it is who pays you will be increased because the real cost of your services has gone down.

There has in this case been a change in relative prices here between the price of your labor and the price of most other things. One might argue that that change in relative prices must be due to the real value of your services and would have happened anyway without the inflation, and so inflation shouldn't be blamed for it. But if wages are downward nominally rigid, then that probably isn't true. The inflation shock allows the employer to implement a real wage reduction by just foregoing nominal increases. That can be pretty easy to do in a world in which information about price levels and their logical implications is asymmetrically diffused.

If you have wealth in the form of long term nominal financial commitments by others to you, then the real value of those commitments will be lessened by inflation and that portion of your wealth may be decreased. On the other hand, for everyone who possesses long term nominal commitments to others, net wealth will be increased by a reduction in the real value of those commitments. Since most of us have both financial liabilities and assets, there is no simple conclusion to be drawn other than to say net creditors do worse and net debtors do better.

1. So does deflation make real wages go up?

26. Actually, inflation makes homeowners and other people who own leveraged real estate richer (to the extent inflation is higher than anticipated when the money was borrowed). Depending on the rate of unemployment, inflation may *simultaneously* makes the lender richer, because it reduces the probability of default.

How can it make both borrower and lender richer? In a bankruptcy/foreclosure model, with transaction costs, higher inflation allows both parties to avoid the transaction costs. You do not need a Phillips curve to make this work, higher nominal income relative to debt alone makes this work. All you really need to make this go is a positively sloped probability of default as a function of (income/debt).

Since 66% of households in the US are homeowners, the average income:debt ration is about .3, this effect is far more significant that shoe leather, menu costs, or other often cited effects of pure wage inflation in a model absent debt.

27. We have bifurcated inflation: > CPI inflation for inelastic goods like air travel, gasoline, heating energy, food, and the cable bill and < CPI inflation for stuff where there are a lot of substitutes like electronics and apparel.

28. Anonymous10:02 AM

This is like a transcribed macro 101 to non economists. You make a claim on purpose that is not true, you then start to support it and then with one line you destroy it. Thats how I tutor my poli science friends.

29. Noah, I don't think you can get there from here. Consider 3 scenarios:

(1) I buy a gallon of milk and pay \$1 (low inflation)
(2) I buy a gallon of milk and pay \$2 (high inflation)
(3) I buy a gallon of milk and pay \$2 and say thank-you and then the milkman pays me \$1 for saying thank-you.

I think that any analytic argument of the form "my spending is the milkman's income..." would imply that (3) is the best scenario, since it has the most spending. Sure, the milkman is slightly worse off than in scenario (2) since he has \$1 less, but I, the consumer have been made better off, since I have \$1 more. And gross income is \$3 !!!

Do *you* think (3) is better than (2)? How can we explain this? The end-state money holdings in are the same as (1). Is it the *process* of spending that made it better?

1. Anonymous4:16 PM

It seems to me that (2) and (3) are different. In (3), the milkman is receiving a service that wasn't provided in (2), so you can't compare them. If the milkman received the service for free in (2), then the price for milk went up faster than the price for thank yous; this suggests a supply shortage for milk, not general inflation. I think we can all agree that supply shortfalls are not good. If the milkman received the thank you for free in (1), then we're right back to the point of the article - everyone's paying more but also receiving more.

2. Hint: giving money to get money back is not income.

3. @Silvano, the cash flows sure look like income. What's the difference (in micro or macro terms)?

4. @Anonymous. OK, let's consider a modified version of (2) called (2b). In (2b), the milkman pays \$0.01 for the thank-you. In example (3), he pays \$1 for it. Now what about (2b) vs (3)? (3) seems to have the most gross spending, but the end state looks like (1). Further, is (2b) better or worse than (2)?

30. So...wages are part of inflation. Is this to say that inflation is only bad for poor folk when non-wage prices increase faster than wages increase? Or is the story more nuanced than that?

Anyways, my takeaway: whether or not inflation is bad for the poor depends on what kind of poor person you are - you may be benefiting immensely from inflation while being poor.

31. Anonymous10:51 AM

Noah please tell us how to pronounce Piketty! Please Please. We don't want to be shown up as a stupid Murican.
Buce says: Thisisy Could this be right?
Delong is down as is CR so I can't ask the assembled intelligence for the pronunciation.

1. Drugs are bad, mmmkay?

32. Anonymous10:55 AM

Well I have survived a great deal of inflation and I was always able to buy my ninja novel :) even though the price went up 10^12 times :D

33. Anonymous10:58 AM

Huh no link connection to my ninja novel price graph :(

34. Lately, though, I've been troubled by the fact that, if wages are sticky downward (as I think they are) and wages for many are above equilibrium (as I think is the case now, though less so than a few years ago), then inflation does hurt (and deflation helps) inframarginal workers (to the benefit of capital owners and marginal workers). But probably most people (certainly a large fraction of the population) are (or are financially supported by) inframarginal workers. Under these circumstances inflation arguably really does hurt the Average Joe (well, technically not: it hurts the Median Joe, not the Average Joe). Of course one has to ask why wages are sticky downward, and the answer may include irrational beliefs about nominal quantities, but nonetheless, the Median Joe could quite rationally complain about inflation under these circumstances. Interestingly, this can only be true when the inflation rate is low: once it rises sufficiently, there will be few people with above equilibrium wages at any given time. It's an ugly situation, because it means, when things get really bad, there are more people who have an interest in maintaining the policies keep things really bad.

1. Why would deflation help if wages are only sticky downward?

I think the model you're searching for is one where workers suffer from stickier information than employers, and are therefore helped more by a lack of macro surprises.

2. Deflation would (in the short run, but the short run can last quite a while) raise the real wage of inframarginal workers (while causing marginal workers to be unemployed), if the nominal wage is sticky downward. (Of course in the case of deflation it's irrelevant whether the nominal wage is also sticky upward.)

I'm not sure this can be modeled with rational behavior, but in the world we live in today, if prices go down a little, most people will keep their jobs, most will not receive nominal wage cuts, and most will thus receive real wage increases. Capital owners will be a little worse off. Terminated employees and job seekers will be much worse off.

Now it only works for mild deflation. A severe deflation would move the margin enough to make the Median Joe insecure. But still, given the institutions we have, it's rational for the Median Joe to think that inflation is bad for him in the short run (which lasts at least 6 years, by the most recent count).

I'm thinking of something like insider/outsider models of the labor market. Insiders want to keep real wages above equilibrium, and they can do this by preventing inflation.

3. Andy I imagine there are two forces that counter this effect of transfer from the employer to the employee for the infra-marginal worker.

1. The infra-marginal worker probably has net nominal liabilities as large as his or her income in the form of a mortgage. So a change from 2% inflation to 2% deflation would lead to a large transfer of wealth from the worker to his mortgage holder, higher than any transfer from employer to employee.

2.If the infra-marginal worker knows he cannot find another job that would pay him as much because he is overpaid due to deflation, he will probably work longer and harder.(This is the efficiency gain data you saw during The Great Recession)

35. This argument is a slight generalization. Sure I agree with the basic premise that people fundamentally misunderstand inflation (any sane person would). On the other hand I can argue that inflation makes your previously accumulated wealth worth less and more importantly while a general rise in the price level should mean a general rise in wages that rise is in the aggregate and may not be equally distributed.

1. Does inflation reduce the value of stocks?

2. Fair point although it certainly reduces the value of whatever is sitting in my bank account. Perhaps wealth was a poor choice of words, but there are people out there who keep a large portion of their "savings" simply in the bank. And I still think the distribution point is the stronger of the two.

4. Does inflation reduce the real wealth of the nation as a whole?

5. That rather depends on how much external debt - or assets - the particular nation has and which currency the external debt/assets is denominated in.

[ Personal bugbear - why does everyone start with these closed economy assumptions and ignore currency and international trade? And why does everyone seem to assume that every country is the USA? ]

6. Does inflation tend to redistribute the real wealth of the nation as a whole progressively or regressively?

36. How hedonic.
The whole point of adjusting for the change in the relative price of money is to measure the underlying.
We are richer or poorer in aggregate not based on nominal changes in money, but in changes in underlying goods, services, pleasures etc. provided and consumed.
Theoretically, if we started in a world with no money at all, we could become richer and poorer if all trade, consumption and economic activity took place with barter, or some non-money economy - so yeah, we can become either richer or poorer in zero, positive or negative inflation.
Assuming constant population and distribution, I think you need rising productivity to have an increase in wealth.

Inflation levels and directions may very well have distributional affects.
and they may have impacts on levels of activity, and choices and decisions about investment/saving/consumption all of which would result in varying levels of wealth in the future.
However, until we live in a world without tautology, we are stuck needing more to have more.

37. This appears to imply that newly created money is distributed evenly across a portion of the economy. If that were the case, then spending translating to someone else's income would move through the economy with some semblance of uniformity. This is very very far from the case. Newly created money is put into the hands of the Primary Dealers (GS, JPM, Citi, etc) and then used to bid up prices in various asset classes well before any rise in income/wages can match it. This exact process is where the term "Wage-Price Spiral" comes from.

Furthermore - over time - this small amount of money being put into the hands of bankers contributes heavily to the ever growing gap between the rich and poor especially when productivity gains cannot offset the increase in money supply (inflation).

38. John S10:32 PM

David Beckworth supports a monetary policy which allows productivity-driven, "benign" deflation (e.g. cheaper electronics, computers) to occur regularly.

"Currently, most observers view any deflationary pressures as something to be avoided at all costs. This conventional wisdom assumes all downward price level pressures are economically harmful and, thus, fails to distinguish between between aggregate demand-induced deflationary pressures and aggregate supply-induced deflationary pressures.

As a result, central bankers are likely to add monetary stimulus during periods of rapid economic growth--for example, when a positive productivity shock increases aggregate supply--in the mistaken belief that the deflationary pressures indicate economic weakness. Such actions, in turn, can generate a boom-bust cycle in economic activity. As I have argued elsewhere (here, here, here), the Fed's easy money in 2003-2005 in one such example."

http://macromarketmusings.blogspot.kr/2008/08/benign-deflation-in-new-keynesian-model.html

Any thoughts, Noah?

Here's more: "Aggregate Supply Driven Deflation and Its Implications for Macroeconomic Stability"

http://object.cato.org/sites/cato.org/files/serials/files/cato-journal/2008/11/cj28n3-1.pdf

39. Thanks for your great article.I’m at the look for such info about monetary policy. national minimum wage http://flsa.net/ is the main aim to create awareness about the law labor act. Beside this site makes a common sense all of the employees/workers of his own regarding the rights, duties and responsibilities. So if you want more valuable informations then read the website attentively.

40. Anonymous7:04 AM

If a certain type of inflation decreases your purchasing power, deflation does not necessarilly increase it.

Seems like you made a deflation strawman for the purporse of demonstrating your love of inflation.

Also, more things matter in regards to inflation and deflation. Like why are you having inflation and deflation and what is exactly this deflation and inflation, on which sectors of the economy with what effect. There are many cases where people will have point complaining about inflation hurting their purchasing power. As there are many cases they will have a point of complaining about deflation.

41. Not exactly swinging for the fences, eh, Noah?

42. Dan Nile12:20 PM

As a rent-seeker with a dual income stream consisting of credit creation privilege and government largesse, I whole-heartedly concur with the analysis that every increase in the average worker's cost of living is "someone else's income". That is, mine!

Viva inflation, the mysterious economic function that raises everyone's nominal income equally every year by ignoring the fallacy of composition! Noah, perhaps you could apply for a grant to study this more, thereby providing income for the rest of us, through your spending of the money that is taxed from everyone else.

43. What happens to the average Joe whose costs rise faster than his income? Presumably, his consumption will fall, putting downward pressure on prices, no?

44. There is a problem in this discussion with the definition of inflation/deflation. Inflation / deflation are aggregate phenomena estimated based on baskets of goods. What prices within that basket of goods are changing and why are important. If wages are stagnant but the prices of food and manufactured goods are falling as a result of improvements in production techniques then the index could show deflation but the burden of household debt is not increasing. On the other hand if, for example, the price of oil is rising as a result of scarcity with the result that the index overall shows inflation that is not likely to help relieve the burden of debt - people are genuinely relatively poorer.

1. Nathanael8:54 PM

BINGO!!!!

Absalon is smarter than most economists. It is the movements within the basket of prices which matters.

Are wages for the 99% going up faster than goods prices? That's good.
Are goods prices going up faster than wages for the 99%? That's bad.

45. Anonymous1:54 AM

If inflation increases the price of bread from \$1 dollar to \$1.20 the government receives more in taxes. Theft. Plain and simple. Government gets more in taxes without actually "raising" taxes. That's one major factor why they always want inflation.

46. Some of this would make sense if inflation/deflation were homogeneous. But they're not.

47. I did this calculation one day because an anti-federal reserve nut was adamant that his purchasing power had gone down since the early 70s. So if you compare the prices of goods against wages since they started keeping records you find there is hardly any difference between the two. If I remember rightly there was less than one percent difference over a 70 year span!!

So to Noah's hint - goods price inflation will end up as wage inflation. This may have broken down over the last decade or so because of massive re-distribution of income to the one percent but in the aggregate it is true. Also, the total re-distribution of GDP is probably minor but not insignificant in terms of nominal wages for the middle and working classes.

1. Nathanael8:52 PM

"goods price inflation will end up as wage inflation. This may have broken down over the last decade or so because of massive re-distribution of income to the one percent"

This has broken down permanently and will continue to be broken. And yes, it's because the increased prices go directly into CEO pockets, and they do NOT increase the wages of their workers.

48. Anonymous4:24 PM

It makes assets like stocks rise in value. If a corporation has 1 million in outstanding stock and the government has a million in circulating money and they raise the amount of circulating money stock valuation will rise. That's why unless you have assets of value the rise in inflation will make you poorer. Those holding assets will benefit when they later sell their assets. The poor have no assets so they will suffer the most.

49. jesse8:49 AM

1) Hedonics are important.
2) Most of consumers have little to no savings. What is important to them is what they can buy on their income, not the depreciating value of a dollar.
3) Real wage growth is key, and should be slightly positive or households must substitute.
4) Most of the CPI is labour costs so you argument is going to get into chasing its tail.

50. Um. So what is the answer?

51. Anonymous11:33 AM

"But how on Earth could deflation create all those yachts and private jets out of thin air? It couldn't, could it?"

Well, tell me this:

But how on Earth is it possible that your iPhone has faster processor and more memory than a super-computer in 1980? But how on Earth a compact Honda now is safer than any luxury car in 1980? But how on Earth Usain Bolt is faster than the fastest 100meter time in 1980?
It's called TECHNOLOGICAL PROGRESS. We are/do things better, stronger, faster AND cheaper.

And my final and the most important question:
But how on Earth someone so dumb to claim that falling prices are universally bad (aka indoctrinated into Keynesian theory to the point of blind fanaticism) get a tenure at an accredited university int he United States???

52. Anonymous11:45 AM

Well inflation and deflation is pretty bad. It's kinda like a love here. The opposite of love is not hate but apathy. So with inflation, the opposite would not be deflation, but no deflation or inflation.

53. Falling prices only make people wealthier when they are the result of productivity gains. If technological improvements mean you can now produce the same goods at, say, 80% the cost, then you can offer lower prices while still making a profit. Confer the history of the computer industry to see how this is both possible and sustainable.Your site is very excellent.It is very useful for everyone .I like it very most.
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54. I suppose that common people think:

It seems to be more easy to have real wage reduction with high inflation rather than low inflation (indeed we have downward nominal wage rigidity).
The more is the inflation, the more is the risk of wage reduction.
So if I want to defend my real wage achievement I should reduce the risk and ask for the lowest inflation.

What's wrong here?

1. Nathanael8:51 PM

Marco: you are correct. The solution is to force WAGE inflation.

The government should start employing lots of people at good jobs with newly printed money, forcing private employers to raise wages to compete.

55. I had an interesting conversation with my wife this morning. She says: "Walmart has really increased prices on everything!" I say: "That's great - it will make central bankers very happy because they've been worried sick inflation is too low and economy is not performing well." She says: "How come, this is crazy. Most people who shop at Walmart cannot afford higher prices. Inflation clearly makes them poorer and will actually cause them to consume less. Doesn't this hurt the economy?"

Here I begin to struggle. How do you explain to a non-economist why central banks like low inflation and some explicitly target 2% inflation? "You see sometimes the economy goes into a downturn, which we call recession. Businesses close and people lose their jobs making society poorer. Central Banks will usually lower interest rates which spurs desire for borrowing and spending which gets the economy going again. It's like an engine. When it begins to sputter, central banks put more fuel. Now sometimes the downturn is so severe that interest rates reach zero and central banks can no longer jump start the economy by lowering rates. People cut spending and hoard cash for a rainy day, which leaves the economy operating below capacity with many unemployed. That's why central banks always like to pump enough fuel into the engine, so it always makes a nice humming noise (low inflation) keeping the dreaded lower zero bound a remote prospect."

My wife was quick to respond. "So do you know why the engine sputtered in the first place? Why did the economy go into a downturn?" I smile: "Well that's complicated. There are many competing theories that explain the business cycle, but we don't need to get into that. The important thing is that low levels of inflation preserve central banks' capacity to jump start the economy when it does go into a downturn."

"What you are saying is that the economy is like an engine. When it works well it makes a nice purring sound. When it stops working, rather than finding and fixing the core issue, policy makers focus on fixing the sound. Even more importantly, this artificial hum makes the engine work better for some than others?"

At this point, I had to concede defeat and agree with my wife that we need a new paradigm http://tinyurl.com/k4vjswm

1. "How come, this is crazy. Most people who shop at Walmart cannot afford higher prices. Inflation clearly makes them poorer and will actually cause them to consume less. Doesn't this hurt the economy?"

Maybe a simple answer could be: since we have higher prices than expected it means that consumer have been consuming more than expected i.e. economy is performing better than expected.

2. Sure, but the issue I'm addressing is the distributive effect meaning some people are able to consume more while others are having to consumer less - think of people on minimum wage who are subjected to an annual pay cut due to inflation. They are stuck between a rock (Fed 2% inflation target) and a hard place (Congress' refusal to increase MW). Now that inequality is front and center, economist should study the extent to which Fed 2% target has contributed to inequality over the last 30 yrs.

But there is also a second more important point, which I describe in detail in the link I posted above. Under gold standard or a fiat money regime with credible central bank (Fed post-Volker) excess money supply does not fuel inflation but rather asset bubbles. The problem is that during the decades of "Great Moderation" Fed took its cues from inflation rather than bubbly asset markets. Examination of the historical record clearly indicates that mismanagement of exogenous monetary base by Fed has been a force of instability fueling two asset boom/bust cycles. The implication for policy is that 2% inflation target is fundamentally flawed. Instead, central banks should target exogenous monetary base aggregate to match endogenous demand for asset money.

3. Nathanael8:50 PM

H. Publius: I think you're largely right; the problem is institutional.

The Fed feeds its money in through banks, as "loans". As a result it can *only* fuel asset bubbles, not general inflation.

If money was printed as US notes and spent on direct employment of the 99%, it could fuel actual inflation. Of course, that's what we need right now.

Distribution patterns are everything here.

56. I've read many thoughtful comments here. I hope for some from mine:

Suppose the economy is represented by a 7 person table playing texas hold-'em (poker). At the start of the game, everybody begins with the same amount of money-whether they deserved to start at the same point or not is moot. Whether you think poker is a game of chance or skill is moot. Why? because either way the story will end with one person having ALL of the money. Compare this to income (and worse, wealth) disparity. Sooner or later, without an injection of more money into the table, only one person will have all the money (income being the winnings of one hand, and chips being the wealth from previous winnings). The economy would stop just as the game does. To continue, one of two things (or a combination of both) must occur. Either chips are taken from the one person who has them and re distributed to everybody else (aka taxes, seizures, theft, commandeering, whatever your word is). Or, new money is handed to everybody at the table (inflation, increasing of the money supply, whatever you want to call it). Now, the economy--or game--can continue; ableit with no one starting from the same position any more as some have more chips (money) then others. Until this is realized as an economic necessity it is easy to have people say, "inflation is bad as it gives a free ride to people who don't deserve it--having fairly lost their money to others." Or, "taxing is a theft upon those who have fairly earned their just rewards and passing that wealth to the undeserving." well, which is it? Or, is it best to let the game come to a stop in the name of fairness/righteousness/whatever?

1. Why would trade stop? I can see that the exchange value of chips would go down. But the chip-owner still needs the labor of the others.

57. Nathanael8:48 PM

This is how I always try to explain this bit to people:

Did your wages go up? They didn't? Then this isn't inflation, it's just price-gouging.

"Inflation" is defined as an increase in all prices AND WAGES.

58. Anonymous6:14 AM

Your income will fall as well in case of deflation !!!!

59. The question was: does inflation make "you" poorer. Then it changed to: can, or must, inflation make "everyone in America" poorer, with the implicit assumption that everyone in America stands in the same situation.