20 Nov 2012

## Noah Pinion Shows Yet Again That Economists Will Be Strung Up Right After Investment Bankers

[UPDATE below.]

I knew right off the bat that Noahpinion was doing something wrong in this patronizing post on inflation, but it took me a minute to figure out where the error was creeping in. But don’t worry, I finally got it. Here’s Noah:

Inflation is one of those things that almost nobody who isn’t an economist seems to understand…

Or the other day, someone on Twitter asked me: “How is it possible for inflation to help debtors when wages are going down? If wages are going down, doesn’t inflation just make it harder for people to pay off their debts?”

The answer is no. Here’s why. Suppose you make \$50,000 a year and you have \$50,000 in debt. Your debt-to-income ratio is 1. Also, just for convenience, let’s say the general price level starts out at “1”.

Situation A: -50% real wage growth, 100% inflation.
In this case, the new price level is 2. Your new real wage is \$25,000. Your new nominal wage is \$25,000 x 2 = \$50,000. Your debt is still \$50,000. Your debt/income ratio is still 1.

Situation B: -50% real wage growth, 0% inflation.
In this case, the new price level is 1. Your new real wage is \$25,000. Your new nominal wage is \$25,000 x 1 = \$25,000. Your debt is still \$50,000. Your debt/income ratio is now 2.

Situation C: -50% real wage growth, 50% deflation.
In this case, the new price level is 1/2. Your new real wage is \$25,000. Your new nominal wage is \$25,000 x 1/2 = \$12,500. Your debt is still \$50,000. Your debt/income ratio is now 4.

So as you can see, even if your real wage is going down by 50%, it’s better to have inflation than no inflation if you are a net debtor. Inflation erodes the value of your debt no matter what is happening to your real wages.

So what’s going on here? Why do so many people misunderstand inflation? Maybe it’s a form of “Stockholm Syndrome”. Inflation-hawkish economists have been bellowing, so loudly and so vehemently, that inflation is Satan – this goes back at least a hundred years – that non-economists just can’t help believing it. People end up trying to think up reasons why inflation must be bad after all. When you offer them freedom – when you tell them that sometimes inflation can erode debt, relieve balance sheet recessions, and help stimulate the economy – they don’t want to take it. , and they come up with more brilliant ways to identify with their captors. Or something like that.

Mr. Pinion, in my humble opinion you have totally overanalyzed the Twitter question and ended up speaking nonsense. The guy wasn’t asking you about real wages, he was asking about actual nominal wages.

So his point was something like this:

“Hey Noah, I get how if all prices double, including my hourly nominal wage rate, then it becomes easier for me to pay off my fixed debt. But if I’m having trouble making ends meet and keeping up with my loan repayment plan, then my employer actually cuts my nominal paycheck, and then on top of that the price of food and health insurance goes up, how in the world does that make me better off?!”

It doesn’t. By interpreting your Twitter guy to be speaking of real wages, you completely dodged his simple question.

Why is it that so many economists can’t understand simple questions about inflation? Must be political.

UPDATE: So in the comments, it turns out that not 1, not 2, but 3 of my clever critics think I’m missing Noah’s “point.” OK watch this. I’m going to paste Noah’s 3 scenarios, and then add one more that is done in exactly the same style, but with a 200% 300% (price) inflation rate. Watch what happens:

Suppose you make \$50,000 a year and you have \$50,000 in debt. Your debt-to-income ratio is 1. Also, just for convenience, let’s say the general price level starts out at “1”.

Situation A: -50% real wage growth, 100% inflation.
In this case, the new price level is 2. Your new real wage is \$25,000. Your new nominal wage is \$25,000 x 2 = \$50,000. Your debt is still \$50,000. Your debt/income ratio is still 1.

Situation B: -50% real wage growth, 0% inflation.
In this case, the new price level is 1. Your new real wage is \$25,000. Your new nominal wage is \$25,000 x 1 = \$25,000. Your debt is still \$50,000. Your debt/income ratio is now 2.

Situation C: -50% real wage growth, 50% deflation.
In this case, the new price level is 1/2. Your new real wage is \$25,000. Your new nominal wage is \$25,000 x 1/2 = \$12,500. Your debt is still \$50,000. Your debt/income ratio is now 4.

[Added by RPM:] Situation D: -50% real wage growth, 200% 300% inflation.
In this case, the new price level is 4. Your new real wage is \$25,000. Your new nominal wage is \$25,000 x 4 = \$100,000. Your debt is still \$50,000. Your debt/income ratio is now 1/2.

Wow, I just proved Noah’s point even more so, right? Look at that, the guy’s debt/income ratio dropped from 1 down to 1/2. So clearly 200% 300% inflation is even better than 100% inflation. Noahpinion FTW!

Oh wait a minute. By using Noah’s technique, and picking an inflation rate of 200% 300% rather than Noah’s (completely arbitrary) 100%, now I’m making the guy get a pay increase from his employer. This is clearly NOT what the Twitter guy had in mind, proving that Noah is answering a different question.

This is really simple, everyone: If I am struggling to pay my bills, including fixed-rate debt payments, and then you’ll tell me prices are going to go up by 10% next year, I don’t care what happens to this particular fraction called “debt/income.” What I want to know is, will my nominal paycheck go up by 10% as well? If so, then I’m golden. If it goes up, but by less than 10%, I conceivably could still be better off–it depends how big a fraction my fixed-rate debt payments originally are of my total budget.

But under NO CIRCUMSTANCES would I want to see prices go up, if at the same time you tell my wages are going to go down too. Instead of that outcome, I would rather see prices stay the same.

Putting it another way: For a given nominal wage and nominal debt payment, I am better off if prices go down. Duh. I don’t care if that raises the “real burden of my debt.”

If you want to say this guy’s question doesn’t understand basic price theory, and that it’s kind of goofy to assume prices could rise while leaving blue collar workers in the dust, OK…but that’s the narrative progressives have been telling about Ronald Reagan-George W. Bush’s America. I actually think that’s what prompted the Twitter guy’s question. He was having cognitive dissonance on why the Keynesian heroes were simultaneously championing inflation to help debtors, but also worrying about income gains accruing largely to the fat cats.

#### 226 Responses to “Noah Pinion Shows Yet Again That Economists Will Be Strung Up Right After Investment Bankers”

1. Brent says:

Moreover, what if nominal wages increase by 10%, but price inflation is 20%? So the hell what that his debt-to-wage ratio fell to 0.95? “Everything” in his budget, aside from debt service payments, is going to be more of a burden.

I guess my point is that if economists are going to be strung up, it is going to be because they fail to recognize what the layman sees… somehow all this “inflation business” seems to make the investment bankers relatively richer… gee, could that have something to do with the reality of how monetary inflation (and, ergo, price inflation) actually happens?

• anon says:

Brent, it seems to me that for inflation to increase you have to either have a rise in wages or a rise in borrowing (or some combination) otherwise inflation would result in bankruptcies as companies have less to spend as they won’t be able to sell their products.

It seems possible in theory for real wages to fall to zero or even negative if some essential commodity exists in a cornered market, but absent a market failure (or supply shock) for some essential good or service it seems real wages have a limit to how far they could fall. (Competitive markets should have to compete on price. Monopolies, ogliopolies, monopsonies, etc. could be problematic.)

• Anonymous says:

Wages aren’t the only source of expenditures on consumer goods. And within the sphere of wages being a sugnificant source of expenditures on consumer goods, not all wages increase to the same extent, so while some wage earners earn more money, there are other wage earners who do not, or do, but their wages rise by less than the rise in prices on account of other wage earners bidding up those prices.

• Matt Tanous says:

“it seems to me that for inflation to increase you have to either have a rise in wages or a rise in borrowing”

Not everyone has to have their wages increase, though. Inflation does not instantly raise all wages and prices, nor does it affect everything by the same amount.

• Brent says:

I’m sure this has been covered by Dr. Murphy and others by now, but his argument also depends to some extent on fixed interest rates. Price inflation doesn’t help nearly as much if the interest rate on my debt adjusts upward…. and, of course, in Pinion’s world of 100% price inflation, all future debt is going to end up being adjustable rate.

• anon says:

After reading all the comments it perhaps seems more accurate to say that for inflation to you have to have incomes increase (as opposed to just wages) or borrowing because you have to figure in asset inflation or capital gains (and the possibility of selling off assets to raise income to the price level).

It seems some people want to argue for stagflation, which in the late seventies could be characterized as a real wage decrease from a supply shock in the oil market (combined with strong unions with cost of living increases driving up the general prices level.

But the argument for higher inflation today would be that there isn’t a supply shock and inflation could reduce unemployment and with lower unemployment you’re likely to see higher wages and income. It seems some people want to say some people (perhaps creditors with fixed rate loans) may have their real wage cut with inflation with lower unemployment (even if in the middle to long run this reverses) so it is better to have their nominal wage cut entirely by higher unemployment.

• anon says:

Just to clarify, in today’s world the argument from Keynesians is that without inflation (or at least increased spending) you’re likely to see higher unemployment and default.

It’s hard to see how creditors are helped by people defaulting on their debt just like it’s hard to see how people are help by being unemployed.

The people arguing that inflation is always bad seem to be also saying deflation is always good. It seems difficult to argue that falling prices are always good in an economy that’s circling the drain as opposed to falling prices from productivity improvements. (I understand you can make the argument from a long term “efficiency” perspective. Although it’s not self-evident that’s true to me. And from a “moral” perspective, but that’s a different can of worms.)

2. Major_Freedom says:

Excellent. We are on the same page because that is the same criticism I had after reading Pinion’s post.

The main problem with inflation doves is that they have a penchant for assuming that inflation raises all wages at the same rate it raises prices of that which wage earners buy. Also, for some reason they have this fantastical notion that central banks are acting all crass when they slow down the rate of mone supply growth. How dare they! And what’s this? Inflation hawk economists are buying into this nonsense? Think of the workers! Or something.

I think they get it in school. I recall being taught by all my profs that since inflation lowers the market value of a given debt claim, inflation allegedly ipso facto makes the borrower better off. So they acquire the belief that only biased agenda driven idealogues, like greedy capitalists who allegedly benefit by “hard money” at the expense of the workers, would “end up trying to think of reasons why inflation must be bad.”

Pinion probably believes in the old myth that capitalists hoard cash, which allegedly harms workers, and so it’s a miracle that the benevolent central bank is there to save the workers by inflating the money supply and hence devaluing the cash balances of those a\$\$holes. Since there are so many workers who indebted themselves to finance living beyond eir means, Noah believes that millions of poor indebted workers can be rescued by inflation. OF COURSE he would haphazardly assume, and totallly ignore the Twitter post, that inflation raises wages. I mean, inflation helps workers! What moron would assume that a worker’s nominal income does not increase 1 for 1 with inflation?

I bet Pinion also denies the Cantillon Effect.

• Matt Tanous says:

“What moron would assume that a worker’s nominal income does not increase 1 for 1 with inflation?”

The same moron that talks about inflation’s effect on the “price level” as a whole.

• Anonymous says:

Price levels cannot be measured, but it has meaning. I think most people know what “the prices of things are going up” means, and I think it is a meaningful concept, despite the inability to measure it.

• anon says:

MF, it’s unclear to me if you’re being sarcastic about nominal income rising one to one with inflation, though with your reference to Cantillon effects I’ll assume you are.

I think you guys are on to something about question the distribution of gains and losses from inflation. (And if some debt is indexed to inflation it would seem Noah needs to revise his story.) I would certainly like to see more talk along these lines.

I would just point out that it’s not just “workers” who are in debt, but also many private companies and corporations not to mention “the government” (i.e. the people).

• Major_Freedom says:

Accurate assumption.

• Silas Barta says:

Indeed. They don’t seem to understand that when the economy produces X, and some dude with a printing press produces nothing buy new bills that allow him to consume 10% of X, then that leaves the producing part of the economy with only 90% of X … in exchange for nothing. So it diverts real resources from them that they would otherwise be able to consume.

And no amount of accounting tricks will change that.

• Silas Barta says:

Argh — should be “…produces nothing *but* new bills …”

• Major_Freedom says:

I can’t wait for mind interfaced typing: thinking the words makes the words appear on screen.

Future generations will probably look back on us using our fingers to type words the same way we look at ancient people using their arms to throw projectile weapons when hunting.

• Silas Barta says:

You know, we’re not that far away. We already have brain-controlled computer interfaces: look up the “OCZ NIA” for an affordable one — though it’s really only good at measuring head tension and eye movement.

Attach that to a good text editor interface, and you’re golden. Hm … seems like something within my reach…

3. Christopher says:

Even If Pinion’s assumption were true and the guy really meant real wages, the answer still doesn’t make sense:

Situation A: -50% real wage growth, 100% inflation.
In this case, the new price level is 2. Your new real wage is \$25,000. Your new nominal wage is \$25,000 x 2 = \$50,000. Your debt is still \$50,000. Your debt/income ratio is still 1.

So the payment on the debt stays the same but everything else being more expensive will make it more difficult to pay it.

• Brent says:

Yeah, I saw the same thing, which is why I gave the obvious (best case) counter-example. Debt-to-Wage Ratio declines, but you are mostly likely still worse off unless debt service payments are most of your expenses.

• Matt Tanous says:

And God forbid that, like nearly every individual on the planet, you are both a debtor and a creditor, as an individual who has at least a modicum of money in the savings account at the bank, suffering from the artificially low interest rates knocking interest down to about a tenth of a percent. (I hear back in the 80s, it used to be around 5+%).

Also, I think CD rates are a pretty good indicator of when the boom is turning to bust. Just FYI. If you see CD rates starting to climb, you might want to start selling your stock and cashing in your investments…

• Ken B says:

He said net debtor.

• Major_Freedom says:

Does. Not. Change. Anything.

• Matt Tanous says:

Seeing as the interest rates are not the same, this is frankly irrelevant. For instance, I currently owe over \$20K in zero-interest (charitable) student loans. I also have a few thousand in the bank gaining a measly 0.5% interest on CDs. Printing money to inflate the currency would hurt me more than it would help.

• Major_Freedom says:

Silly Matt, if inflation rises, your income is guaranteed to rise with inflation 1 for 1. Inflation will make it easier for you to pay back your debt.

Why are you assuming your wages won’t rise?!? Is it because your boss has told you you’re getting a pay freeze? Don’t listen to him Matt! He’s brainwashing you! Join us in the march for more inflation!

• Bob Murphy says:

Christopher you’re right in the grand scheme, but Noah isn’t “seeing it” (and this is what I was trying to understand before posting). because he’s comparing this outcome with the scenario in which the guy has -50% real wage growth, but prices stay the same. Then Noah concludes that the guy would be even worse in that outcome, and thus the 100% inflation somehow must have helped him (for a fixed change in wages).

The problem of course is that if nominal wages change by a given amount, then our tinkering with other prices will affect real wage changes. Noah was implicitly making someone’s nominal wages move more, when he was holding real wage changes constant and then adjusting price changes.

4. Tel says:

Noah’s post is not patronizing, because that word conveys insufficient emphasis. Noah’s post is smugly condescending, at the very least.

First of all, there is the fact that most people don’t even seem to know what inflation is. Some people seem to equate the word “inflation” with “a decrease in [my] real wages” – if things seem harder to afford, then it must be “inflation”.

I dare anyone to stand next to the sign at their local railway station showing the second 10% fare increase in the last 12 months and ask passers by if they understand the idea of inflation.

Then when they answer that things are harder to afford, you reply with, “Oh yeah, you mean that things seem harder to afford because you are such a thicky thick peon that you have no idea what you can really afford and what you can’t.”

See how that little experiment in being patronizing works out.

5. Nick says:

Except, that if inflation rises and government use interest rates to control it, you still lose. If they use taxation to control it, you still lose. That is only for fixed rate debts.

However, if you have a debt linked to inflation, you are screwed.

So lets look at the big debtors, governments. What do their debts look like. In the UK, 10% is fixed rate, 90% is linked to inflation. They are screwed. As fast as inflation goes up, their debts get bigger.

• Tel says:

Yes, that happened to Australia in the 1980’s where home loan rates hit 15% and many people had no choice but to push hard for wage rises. It led to a spiral of wages and prices. It ended up getting under control when Paul Keating got together with the big business on one hand and big unions on the other hand and did a bit of corporatist price fixing. It worked because the power of the unions and corporations is huge and they basically just decided to make it work.

Mortgage rated in Australia still hovered around the 10% mark for a decade after that and even today are higher than most places.

6. Bob Roddis says:

1. Somehow it never bothers these statists that a quasi-governmental agency is changing the terms of long term and other contracts without any due process whatsoever or permission/knowledge of the parties all to solve a “problem” that does not exist.

2. People do not naturally take to the notion that inflation is not bad. They have to be intimidated by Keynesians into believing it. What are we going to do about the problem of these bullies?

http://bobroddis.blogspot.com/2012/08/as-ive-said-for-forty-years-people-do.html

7. Bob Roddis says:

I get the sense the Herr Pinion is unfamiliar with the concepts of Cantillon Effects and how the artificial expansion of money and credit distorts the price, investment and capital structure. How unusual is that?

I get the sense the Herr Pinion is unfamiliar with the concepts of Cantillon Effects

Given that you can’t even get the guy’s name right, I don’t have a lot of confidence in your “sense.”

• Matt Tanous says:

Is Pinion not his name?

The blog is Noahpinion (as in ‘No Opinion’). The blogger’s name is Noah Smith.

• Ken B says:

• Major_Freedom says:

I like Pinion better. Sounds like pinhead.

• Bob Roddis says:

REALLY???? Oh my goodness! “No opinion”? Ha. Who knew? You really got us this time!

8. Ken B says:

Ehhhhh. Isn’t Noah making a different argument here? “IF you are a net debtor THEN inflation helps you pay your previously incurred debts even if your wages are declining.” So he compares what effect inflation has on net debtors paying off prior debt in several instances with varying wages. And shows that in each case GIVEN the wage cut inflation still helps you pay off prior debt.

That doesn’t make the case ‘infaltion good’ of course. But he’s right about the question he was asked.

• Major_Freedom says:

Or the other day, someone on Twitter asked me: “How is it possible for inflation to help debtors when wages are going down? If wages are going down, doesn’t inflation just make it harder for people to pay off their debts?”

No “net”.

“IF you are a net debtor THEN inflation helps you pay your previously incurred debts even if your wages are declining.”

That’s still not correct.

And shows that in each case GIVEN the wage cut inflation still helps you pay off prior debt.

Pinion didn’t show falling nominal wages in a context of INFLATION in any of his examples. The only time he considered falling nominal wages was in a context of deflation. The Twitter post asked about falling (nominal) wages in a context of inflation.

That doesn’t make the case ‘infaltion good’ of course. But he’s right about the question he was asked.

No, he’s wrong.

• Ken B says:

MK: “No ‘net'”.

Not in the bit you quoted.

“So as you can see, even if your real wage is going down by 50%, it’s better to have inflation than no inflation if you are a net debtor. “

• Major_Freedom says:

Not in the bit you quoted.

The bit I quoted was the actual Twitter question. So you see Pinion ddidn’t answer the actual Twitter question.

At any rate, adding “net” to “debtor” doesn’t actually change the fact that in a context of inflation (actual Twitter question), falling wages does indeed make debt harder to pay back.

It’s harder to pay back \$50k in debt when you earn \$25k in wages, as compared to if you earn \$50k or \$100k or \$200k in wages. This should be easy to grasp.

• Ken B says:

To quote a wise man, are you HIGH?

• Major_Freedom says:

There there, you’re probably still mentally whooped after your imaginary, but perhaps idealistic. war against secession.

• Gene Callahan says:

Noah notes that, ceteris paribus, inflation makes a debtor better off.

Bob then notes that many other things might not be equal, and claims “gotcha!”

Oh boy.

• Major_Freedom says:

Pinion did not assume ceteris paribus. He assumed nominal wages go up.

Wowzers!

• rayray says:

Unfortunately, no one who is victimized by inflation lives in the magical Realm of Ceteris Paribus. People like Noah sell a bill of goods to the plebes who don’t get that counterfeit money early on.

Ceteris Paribus, inflation will also cause a general rise in prices. Sealing off this little bit to show the debt effectively ‘decreases’ is deception, and everyone but the apologists for devaluing currency get it.

• Tel says:

Some people certainly will be better off with inflation — people who can keep their jobs, and who have a mortgage to pay off, and who get at least some nominal pay rises to catch up with the cost of living.

Inflation is like a soft debt default.

However, inflation is also a useful tool for devaluing real wages while avoiding the difficulty of reducing nominal wages — i.e. the presumption that typical workers are just too dumb to notice their purchasing power being eroded away. Actually, people do notice, all of them notice. Reducing wages gets people angry regardless of how it is done.

• Major_Freedom says:

People may notice that their purchasing power is reduced, but they do not necessarily know it’s because of money printing. No doubt, more and more people are understanding this, but there are still a substantial number of people who blame greedy businessmen.

But in terms of what the parasite can get away with, reductions of real wages is more easily accomplished than reductions of nominal wages. People distinctly notice when they get a pay cut. People often do not notice when prices for some goods goes up a few bps, and people also often do not notice when a company sells slightly less product but for the same price. That’s a doubly difficult to see inflation.

Inflation is a parasites’ dream, which is why the struggle to maintain it is so incredibly strong among those who are in charge of maintaining it.

• Silas Barta says:

Central bank says, “If I take 10% of the economy’s real output and consume it, then other things equal (including the output available for others to consume), it’s easier for you to pay back debt.”

Oh boy.

• Gene Callahan says:

Yes, Ken, obviously he was talking in terms of your debt. But by pointing that out, your not playing the game, which is “Nitwits pile on the statist.”

• Ken B says:

Doh! I should know that by now!

• Major_Freedom says:

obviously he was talking in terms of your debt.

Doesn’t change the fact that he didn’t answer the actual Twitter question. The question was about falling wages and inflation. Wages go down while prices go up. “In terms of the debt”, it is harder to pay it back, because you have a fixed obligation in a context of falling wages AND rising prices.

Falling wages alone would be sufficient to making debt harder to pay back. But add rising prices to the mix, and you get the actual Twitter question.

Pinion just assumed that the nominal wages for those indebted will rise 1 for 1 with inflation. Not only is that assumption not correct, but it totally contradicts the assumption posed in Twitter question.

Speaking of playing games…

9. Bob Murphy says:

Gene and Ken B., I am being quite serious right here. I want you to think through what you are saying:

In 2012 a guy makes \$60,000 in salary, and has fixed mortgage payments of \$1,000 per month (and still has decades left on his fixed-rate mortgage). He pays \$3,000/month on food, utilities, health insurance, and entertainment, and saves the remaining \$1,000 per month.

Now in 2013 his boss says he is getting a pay cut down to \$50,000 per year. His mortgage payment of course will remain the same. You guys are saying that this guy would prefer to see the prices of food, electricity, health insurance, and entertainment go up?

• Major_Freedom says:

Gene and Ken B., I am being quite serious right here. I want you to think through what you are saying

Now now, you don’t want this to happen to them do you?

• Ken B says:

Oh for pete’s sake Bob. I even said it doesn’t prove inflation is good.
Gene put it well with his ceteris paribus. (And I made the same point more explicitly because I am senstive to MF’s lingusitic skills.)

There is a principle of interpretation called charity. It means that you cannot simultaneously read ambiguities in a passage in the most hostile way and then claim vindication by refuting it. That’s not honest debate; in Gene’s lapidary prose [sorry MF] it’s ‘Gotcha!’

• Bob Murphy says:

Ken B. wrote:

There is a principle of interpretation called charity.

You’re right Ken B. Just because Noah made fun of a guy for asking a completely decent question, then gave the guy the exact wrong answer to his question by confusingly changing its nature, and then giving a psychoanalysis for why the rest of the world doesn’t come up with the wrong answer the way Noah does…I should’ve just said, “Hmm my take is different on this one. We all have our different perspectives on how math works.”

• Major_Freedom says:

+1

• Ken B says:

Different meaning of charity, but I’m not defending Noah’s tone, or even his larger goals in raising this argument.

And he’s not giving the wrong answer to the actual question. The question was not about how inflation makes me better off if I get a wage cut. The question was how does inflation make it easier to pay off off a debt comapred to no inflation, even when I suffer a wage cut (real or nominal).

• Major_Freedom says:

The question was how does inflation make it easier to pay off off a debt comapred to no inflation, even when I suffer a wage cut (real or nominal).

That’s precisely why his answer is wrong. His answer assumed a rise in nominal wages when there is inflation.

You can’t see how that contradicts the actual question yet? Maybe you need a few moments to garner up to the strength to, GASP!, agree with Murphy’s assessment.

• Matt Tanous says:

Actual question: “How is it possible for inflation to help debtors when wages are going down?”

Ken B: “The question was not about how inflation makes me better off if I get a wage cut.”

Ken B. needs to learn how to read.

The only scenario posed was the only one not answered. If my nominal wage is cut in half, and the (mythical) price level doubles, how is it that the inflation helps me, even assuming the obvious fact that my debt payments remain the same?

• Ken B says:

A text out of context is a pretext.

What’s thr est of that quote again? The part that clarifies? Was it:
“If wages are going down, doesn’t inflation just make it harder for people to pay off their debts?”

I think it was!

But of course in any event Noah showed a way how inflation can help a debtor. Whether it helps the debtor on balance depends on the size of his debt, but the discussion is about whther inflation hepls with the debt, in accordance with the part of the tweet Matt omitted.

• Major_Freedom says:

Ah, so it is a valid response to Mr. Smith’s falling wages plus inflation concerns, that he’s an idiot and everyone else are idiots because Mr. Jones next door may possibly be benefited by inflation.

• Bob Murphy says:

But of course in any event Noah showed a way how inflation can help a debtor. Whether it helps the debtor on balance depends on the size of his debt, but the discussion is about whther inflation hepls with the debt, in accordance with the part of the tweet Matt omitted.

Right, and it obviously doesn’t. Again I ask Ken: Your wage goes down by a certain amount. You have fixed debt payments. Now: Would it comfort you to know that everything else in the economy goes up in price (but not your wage)? No of course not.

I’m done. MF you and I need to form our own country.

• Matt Tanous says:

“But of course in any event Noah showed a way how inflation can help a debtor. ”

No, he really didn’t, because he cannot. If the nominal wage of an individual decreases, inflation does not help them. If I make \$50K, and then next year will only make \$30K, while my debt payments remain fixed, no amount of rising prices for other things will help me.

In fact, they can only be helped if their wage is what is inflating!

“I’m done. MF you and I need to form our own country.”

If you have three, you can have a perfectly viable anarcho-capitalist society – all disputes can be brought to a relatively neutral third-party. Just throwing that out there.

• Major_Freedom says:

Ken B seems to feel obligated to keep digging his hole, hoping that he will finally hit on something right, because he probably senses that if he concedes the point you are making, it will be used as a weapon against him in the future, and that would suck harder than how inflation affects an indebted person whose income is not rising as fast as prices.

He is cornered, and like a caged animal, is trying every hand waving deflection in the book to stop the discomfort.

• Major_Freedom says:

Gene’s claim of ceteris paribus is not correct, because Pinion assumed rising nominal wages when the question asked about falling nominal wages.

Principle of charity? You should talk.

There are no ambiguities here. The question asked how can inflation make debt easier to pay off in a context of declining wages? Pinion then proceeded to assume rising wages, not falling wages, in the example with inflation.

• Ken B says:

Actually we’re saying he’d prefer that for the real cut he has already had he’d prefer that more of it was due to inflation.

You see how you ignored the fixed real debt stipulation in this early comment?

Obviously he is worse off if now there is extra inflation resulting in a further real cut.

I mention this per our side conversation.

• Major_Freedom says:

In other words, an indebted person would probably prefer a higher nominal income to a lower nominal income.

• Mike Sax says:

Bob let me first say I enjoy your blog and learn a lot. I think as far as your scenario is concerned that’s probably not very common: for what I understand nominal pay cuts are not very common.

Companies are very reluctant to them. They’d rather layoff people and stop hiring than cut the pay of people still working for them as it’s terrible for morale, etc. and these people are at the least going to be much less motivated.

More generally, it seems to me that inlfation is a mixed bad. You certainly can think of scenarios where certain people do worse.

Still there are always beneficiaries as well. For every loser from inflation there is a winner…

In the 70s many people did better than was realized at the time as the price of homes rose much faster than the general price level.

Yet, at the same time even those who were clearly doing better still thought they were doing worse. So inlfation has a very pejorative reputation as people think of it as the prices of their own every day consuption going up.

I think that was what Noah was driving at.

Bob,

At first I thought you really had Noah here. Obviously the guy asking about inflation when wages are down was talking about nominal wages not real wages, so Noah’s example didn’t make sense. But as I thought on it a bit more I came to see that Noah was right.

Suppose inflation is 10% and a guy gets a 5% pay cut. He might think “man, this inflation is going to make it even harder for me to pay my student loans after this pay cut.” And it’s true, if inflation were 0% AND the guy still only got a 5% pay cut, then he would be better off. But why assume that would be the case? The same forces that are pushing up prices should also push up wages such that, because of the inflation, the guy only gets a 5% pay cut instead of a 15% cut. So Noah was right to handle the case the way he did.

• Bob Murphy says:

But why assume that would be the case? The same forces that are pushing up prices should also push up wages such that, because of the inflation, the guy only gets a 5% pay cut instead of a 15% cut. So Noah was right to handle the case the way he did.

(A) That’s not what Noah did in the post.

(B) Even if he *did* do that, he was not answering the guy’s question. If this were really the point Noah tried to make, then Noah would gently correct the guy for not understanding price theory, and that it would be unusual to suppose a force could raise the prices of gasoline and fuel, but not real wage rates. (Of course, that’s exactly what Keynesians have been saying has happened under the “neo-liberal” reforms since 1980, that real income for real Americans has stagnated, but let’s not get sidetracked here.) No, Noah was making it sound like the guy didn’t know how to do division.

If this were really the point Noah tried to make, then Noah would gently correct the guy

Gently correct the guy? This is Noah Smith we’re talking about.

• Matt Tanous says:

True, but the fact remains that he didn’t even make that correction – that inflation would push up nominal wage rates (other things equal).

• Major_Freedom says:

It wouldn’t technically be a correction. While one can argue that inflation does tend to make the totality of nominal wages go up over time, it’s not true that every individual everywhere at all times will have their wages go up with inflation. The question was how can inflation help the indebted wage earner whose wages are going down. The answer of course is that it doesn’t. It actually hurts that individual.

• Major_Freedom says:

But those whose incomes are stagnant, or not rising as fast as inflation, or even falling, these people are to be sacrificed by inflation for the sake of increasing various aggregate statistics that helps the state collect more taxes.

If anyone asks just pretend those aggregate statistics causally determine employment and output.

11. Transformer says:

Pinion says

“So as you can see, even if your real wage is going down by 50%, it’s better to have inflation than no inflation if you are a net debtor”

His examples seem to prove this point. If you are a debtor it is better to have inflation and no wage increase than a wage decrease and no inflation. In the first case the real price of everything except debt goes up, in the second the real price of everything including debt goes up.

You may be worse off in both cases but that is not his point.

• Ken B says:

Exactly.

I can get btw how MF doesn’t understand that by smooshing the numbers you can get 50% real wage cut with either nominal pay cuts or nominal pay hikes, but I do think Murphy should get the point. Noah could have written equations with X and Y but he used illustrative numbers to make it simple.

• Major_Freedom says:

It’s not “exactly.” It’s wrong.

• Matt Tanous says:

The inflation supposedly helps the debtor because, unlike everything else, it remains in nominal terms – while the wages rise in nominal terms (even if falling in real terms). But if his wages, in nominal terms, are decreasing or remaining stagnant, it has none of this supposed benefit. This really isn’t that hard.

• Major_Freedom says:

It’s remarkable how such an EASY TO UNDERSTAND point is going over the heads of some people here. It’s of course the usual suspects, which leads me to believe something else is going on than just a failure to grasp a particular argument. I haven’t quite put my finger on it yet…

• Matt Tanous says:

I don’t think they quite realize that Smith’s argument is not merely trying to support “inflation”, but HYPER-INFLATION of 100%, either. I mean, he didn’t just argue for 5% or 10%, but a full *doubling* of prices.

• Major_Freedom says:

I don’t think that was an advocacy, Matt. Large numbers are typically used in thought experiments for the purposes of clarity and ease of understanding.

If you ask Pinion point blank if he supports 100% price inflation, he would probably say no.

• Matt Tanous says:

I should clarify – I meant that his argument was that any amount of inflation, no matter how high, would help the debtor. Which focuses only on the debt/income ratio, and ignores entirely the rest of the effect of the inflation on the debtor (even ceteris paribus).

• Major_Freedom says:

If you are a debtor it is better to have inflation and no wage increase than a wage decrease and no inflation.

Those are the same, in real terms.

In the first case the real price of everything except debt goes up, in the second the real price of everything including debt goes up.

No, in both cases the real cost of the debt increases because real income falls in both cases by the same amount.

Using numerical examples:

1. Debt = \$50k, Inflation = 10%, wages = \$100k, real wages = \$90k.

2. Debt = \$50k, Inflation = 0%, wages = \$90k, real wages = \$90k.

In both cases real wages is reduced to \$90k, with the same \$50k debt.

• Major_Freedom says:

In other words, if your wages are going to fall because your boss says you’re going to get a pay cut (Twitter question), and you have a fixed debt obligation, then what would be better for YOU:

The prices of the goods you buy goes up, or the prices of the goods you buy does not go up?

• Bob Murphy says:

Transformer wrote:

His examples seem to prove this point. If you are a debtor it is better to have inflation and no wage increase than a wage decrease and no inflation.

OK, and since the Twitter guy asked him about cases where there is a wage decrease, surely you (and Ken B. who endorsed your comment here) will agree that Noah is not answering the guy’s question.

• Ken B says:

No I do not agree. I agree his particular numerical examples, which were chosen for simplicity, are not the best for making his point in that context. But the argument he makes DOES apply, and other examples can be adduced to illustrate.

Inflation is 5000000%, nominal cut is 25%. You sell your used copy of Human Action and pay off your mortgage with the proceeds. The burden represented by your debt has been lessened and you suffered a nominal and a real cut.

Take any of Noah’s real-cut examples. You can fiddle with the inflation and cut to introduce a nominal cut as part of the real ones. His cxonclusions still apply.

• Major_Freedom says:

Your example assumes a higher income (selling used copy of Human Action). The Twitter question guy however asked about inflation in a context of his income FALLING.

Pinion didn’t answer the guy’s question, and you are not answer Bob’s question. Cognitive dissonance much?

Given my money in is going to decline, and given my debt is fixed, then am I better off if the prices of the goods I buy increases or if the prices of the goods I buy does not increase?

The more you dodge this simple question, the more you prove yourself to be evasive, if not intellectually dishonest.

• Transformer says:

I take Pinion to be looking at a situation (like we are probably in now) where real wages need to fall for employment to increase.

The question then is “is it better for real wages to fall via a a drop in nominal wages or via inflation in non-wage goods”

To me that would be a more interesting discussion to have than the side-show that is being discussed here.

• Major_Freedom says:

That interjection is a sideshow, because the original question was how can inflation help an indebted person whose income is going to fall.

• Transformer says:

The original tweet was:

“How is it possible for inflation to help debtors when wages are going down? If wages are going down, doesn’t inflation just make it harder for people to pay off their debts?”

The examples in the post show that a debtor is better off if (real) wages go down as result of inflation rather than going down to a fall in nominal wages.

What am I missing ?

• Major_Freedom says:

What am I missing ?

Falling wages.

• Transformer says:

Is he not comparing 2 ways that wages can fall and drawing the conclusion that one way (inflation) benefits debtors more than others (falling nominal wages)?

Even if one makes the (to me non-intuitive) assumption that the tweeter means falling nominal wages then the fact still remains that a debtor would be better off if some inflation prevents nominal wages falling by as much as they would with no inflation.

• Ken B says:

Yes Transformer. Noah is making a ceteris paribus *comparison*. Arguments that don’t compare the outcomes with and without inflation miss the point. I pointed this out, Blackadder, Gene, you, all make the same point: it’s a comparison. You see how much good it does.

• Transformer says:

When Bob says

“For a given nominal wage and nominal debt payment, I am better off if prices go down. Duh. I don’t care if that raises the “real burden of my debt.”

He is making a true statement but one that is irrelevant to the point being made by Pinion.

• Major_Freedom says:

Is he not comparing 2 ways that wages can fall and drawing the conclusion that one way (inflation) benefits debtors more than others (falling nominal wages)?

He assumed in the critical example that contained falling wages, falling prices as well. That contradicts the Twitter question.

• Major_Freedom says:

Ken B:

Noah is making a ceteris paribus *comparison*. Arguments that don’t compare the outcomes with and without inflation miss the point. I pointed this out, Blackadder, Gene, you, all make the same point: it’s a comparison.

Noah didn’t answer the question. In not one of his examples, did he show a scenario of:

1. Fixed debt, and

2. Falling wages, and

3. Increasing prices.

I pointed this out. Murphy, Tanous, Silas, we are all making the same point. You see how much good that does.

• Major_Freedom says:

Transformer:

He is making a true statement but one that is irrelevant to the point being made by Pinion.

Pinion is making a point that is irrelevant to the Twitter question!

• Tel says:

There’s the point though, Keynesians use inflation as a tool precisely for the purpose of reducing real wages.

12. Keshav Srinivasan says:

Bob, Noahpinion is just the name of his blog (because it sounds like no opinion). His name is Noah Smith.

• Bob Murphy says:

Keshav what is your Bayesian prior on me not knowing that?

• Ken B says:

Keshav what is your Bayesian prior on me not knowing that?

Chance that Bob Murphy knew that Noah’s last name wasn’t Pinion: 90%.

Chance that Bob Roddis knew this: 20%.

Chance that Bob Roddis will respond to this comment by saying something that sounds slightly unhinged: 75%.

• Major_Freedom says:

As unhinged as violence advocacies? You got him beat there.

• Bob Murphy says:

Blackadder you left out Cantillon effects.

• Bob Roddis says:

Blackadder really got me this time.

http://www.flickr.com/photos/bob_roddis/8205585179/in/photostream

At some point in the past when I was much more naive, I thought that if we just made our arguments short and clear, our opponents would then find it necessary to directly engage and respond to them. I was wrong.

I have prepared a brief catechism:

Q. How does inflation help debtors?

A. By reducing the real value of fixed debts.

Q. But what if wages are going down despite the inflation?

A. In that case you should consider that, in the absence of the inflation, wages would probably be going down even more.

Q. Still, wouldn’t it suck if your wages were going down and there was inflation?

A. Yes. Getting hit by a bus would also suck. But I wouldn’t blame it on inflation.

Those, at any rate, are my answers. If you think Noah Smith was making a different point, then attack away.

• Matt Tanous says:

“In that case you should consider that, in the absence of the inflation, wages would probably be going down even more. ”

This point was not made by Noah Smith. It might be true (although I would contest that it is a general principle that can help), but it was not made by Smith. It also violates the condition of ceteris paribus that, according to Callahan at least, was supposedly implied.

• Major_Freedom says:

1. Inflation does not make the fixed obligations in a debt contract decrease. If inflation is 2%, it’s not like your interest payments will be reduced by 2%.

2. It is not the case that in the absence of inflation in NY, that the wages of someone in Alabama will necessarily be even lower. Inflation takes time to spread throughout the economy, bidding up prices as incomes are increased.

3. Inflation is in fact the cause for a person’s hardships if inflation is the cause for prices to rise by MORE than his wages rises (which includes nominal pay cuts), thus reducing his standard of living. You essentially just denied that inflation is the cause for rising prices. Hello!

• Major_Freedom says:

Also, for “In that case you should consider that, in the absence of the inflation, wages would probably be going down even more.”, you have to take into account the fact that prices would be lower as well, so I hope you didn’t assume that without inflation, wages will fall, but somehow prices will be elevated as if inflation exists.

• Tel says:

Q. But what if wages are going down despite the inflation?

A. In that case you should consider that, in the absence of the inflation, wages would probably be going down even more.

That’s not the standard Keynesian viewpoint. Nominal wages are supposedly sticky, but real wages can be reduced by inflation because somehow wage earners must be too dopey to figure it out.

14. Ken B says:

. Again I ask Ken: Your wage goes down by a certain amount. You have fixed debt payments. Now: Would it comfort you to know that everything else in the economy goes up in price (but not your wage)? No of course not.

Not the point Noah is making.

But to answer: the inflation would lessen the debt burden. That can in extreme cases make me better off. I’m confident you can see how. In most cases I will be worse off. But that’s not the point Noah is making nor the question he is answering.

• Major_Freedom says:

Not the point Noah is making.

But to answer: the inflation would lessen the debt burden.

A person whose wages decline, and whose cost of living rises, does not have his debt burden lessened.

You are not addressing the Twitter question asked, which is lower wages, fixed debt, and then whether or not rising prices are good or bad for that debtor.

15. Ken B says:

FreeAdvice, home of the war on partial derivatives.

• Major_Freedom says:

Ken B: Evader of uncomfortable truths.

• Ken B says:

Major, if you learnt some math you’d be Colonel_Freedom by now.

• Major_Freedom says:

You mean the math you haven’t learned yet?

• Matt Tanous says:

Replace the 100% inflation in Situation A with, say, 50% inflation. What happens to the D/I ratio then – the very thing that supposedly proves your point?

Situation E: -50% real wage growth, 50% inflation.
In this case, the new price level is 1.5. Your new real wage is \$25,000. Your new nominal wage is \$25,000 x 1.5 = \$37,500. Your debt is still \$50,000. Your debt/income ratio is now 0.75.

What’s that? Inflation + nominal wage decrease = bad?

• Matt Tanous says:

That should be 1.5, not 0.75. Reversed my fraction in my head.

• Ken B says:

In A, with a 50% inflation to get -50% real we need -25% nominal.
With no inflation -50% real is -50% nominal

New ratio of D/I is 4/3 with inflation: 100 debt to 75 income.
It is 2/1 without inflation. 100 debt to 50 income.

Inflation has helped lessen the burden expressed by this ratio.

I’ll let you figure out E yourself.

• Bob Murphy says:

Ken B. so how exactly does this fraction help me? Are you assuming debtors can break into grocery stores, steal some food (now with a higher market value), then hand that over to their creditors as payment?

This is really hilarious.

• Major_Freedom says:

Bob, they can just sell their used copies of books and totally contradict the context of falling incomes that way!

Whatever you do, don’t assume inflation in the presence of a FALL in a person’s income, you know, as per the original Tweet and everything. That question does not deserve an answer. I mean, that question has an uncomfortable answer. I mean, everyone is stupid because they don’t understand inflation.

• Ken B says:

No Bob. I am saying that the size of the cross you must bear represented by the debt is smaller. You may well (and likely do) have other woes.
Noah addressed a question about debt burden not other burdens. As i have said repeatedly this argument does not prove inflation is good.

I take it you agree my math refutes Matt?

Some people may be better off in toto, depending on their own D/I ratio. Some asset they care little about may now exceed their debt obligation. (To head off MF’s error. *Wages* fall, I don’t lose my assets, I can still sell my books.)
Imagine that 99% of my wages were being garnisheed to pay the debt. Once I retire the debt that ends. I am made better off by inflation, enough better off to offset the wage cut.

• Major_Freedom says:

To head off MF’s error. *Wages* fall, I don’t lose my assets, I can still sell my books.

You are again contradicting the context of falling income. You cannot assume the Tweet question guy earns anything other than a wage income.

• Ken B says:

You endorse this Murphy?

• Bob Murphy says:

I don’t know Ken B. I’m not following everything. If you are arguing that what Noah “really meant” was that blue collar workers are fine because their creditors can just send the repo man and take their baby’s crib, and MF said he doesn’t think that’s at all what Noah had in mind…then yes I endorse MF.

• Major_Freedom says:

Not the crib, Prof. Murphy! Ken B needs a place to sleep.

• Matt Tanous says:

“I take it you agree my math refutes Matt?”

You are assuming that the fall in real wages is not, at least in part, due to the inflation itself. My employer is not going to come to me and tell me that he is cutting my real wage by 10%. He would cut my nominal wage down to \$37,500 – and if inflation further destroys the real value of that, this can only hurt me more.

16. Ken B says:

Situation D:
With inflation my D/I is now 1/2
Without inflation my D/I is 2/1

That’s right isn’t it? I make 50, I owe 50, no inflation and I make 25. 50/25 = 2/1

My D/I looks better with inflation doesn’t it? 1/2 is less than 2 after all.

Doesn’t this fall under the ambit of my earlier point? You can fiddle the inflation and nominal changes to get a real cut of X% with either a nominal raise or a nominal cut. And Noah’s point still holds. We’re talking a partial derivate here Bob: dR/dI where R = D/I

• Major_Freedom says:

Yay, more denying/ignoring/evading of the context of a person’s falling income in the presence of inflation, as per the original Tweet.

This is not just hilarious. This is like watching a pigeon playing chess.

17. Ken B says:

It’s nit-picky but this
“But under NO CIRCUMSTANCES would I want to see prices go up”
is clearly wrong. If I owe an unpayable amount and hyperinflation is enough then I can sell a now trival asset to retire the debt.
You mean rare circumstnaces. But overall well being isn’t the point Noah addresses anyway.

• Major_Freedom says:

It’s nit-picky but this

“But under NO CIRCUMSTANCES would I want to see prices go up”

is clearly wrong.

Sure, when you quote out of context, and ignore the part after the comma, where Murphy wrote:

“But under NO CIRCUMSTANCES would I want to see prices go up, if at the same time you tell my wages are going to go down too.

You know, that single, painful, sticking point that is acting like a splinter in your eye, throbbing, annoying.

If I owe an unpayable amount and hyperinflation is enough then I can sell a now trival asset to retire the debt.

Yay! Contradict the context of falling income, and instead assume a rising income! That ought to prove that Tweet question guy wrong!

But overall well being isn’t the point Noah addresses anyway.

The point does not answer the question of how inflation affects an indebted person when their incomes are FALLING.

I heard a fat lady singing a while ago in the distance, but now she is literally sitting on the dinner table.

• Ken B says:

Did you not notice wages fall in my counter example?

• Major_Freedom says:

Yes, when inflation fell too.

I actually laughed out loud when you tried to rescue your hole digging by saying that the Twitter guy is benefited by inflation because he can sell his books for higher prices. Seriously, I mean what kind of an inflation rate would have to exist in order for the guy’s used books to increase in price, given his wages fall? It’s probably imaginary, like 5000i% or something.

• Bob Murphy says:

OK I shouldn’t have said under no circumstances I should have said “under no circumstances in the context of the Twitter question and Noah’s answer.” If Noah had in mind that rising prices would help service a debt, because you could sell off your alarm clock to pay off the mortgage, then the relevant fraction would be “debt/prices” not “debt/income.” Or, he would have stressed that “income” includes capital gains. But that’s not what he did.

• Major_Freedom says:

If Noah had in mind that rising prices would help service a debt, because you could sell off your alarm clock to pay off the mortgage, then the relevant fraction would be “debt/prices” not “debt/income.”

Wouldn’t the prices of the sold alarm clocks become that person’s (gross) “income”?

• Ken B says:

Wages income.

• Ken B says:

Sigh. The process removed an is not equal to sign.
Wages NOTEQUAL income

• Major_Freedom says:

Wages != Income

• Major_Freedom says:

No, wages are earned on selling one’s labor, not products.

“Demand for commodities is not demand for labor.” – John Stuart Mill.

• Major_Freedom says:

aaaaand never mind.

• Major_Freedom says:

So you’re saying wages are not income?

That’s not right. Wages are income.

• Ken B says:

This is a valid point Bob: Noah’s post is not as clear and tight as it could be.

We agree don’t we that inflation reduces the real size of a nominal debt.
Now most people service their debt out of their income, paying it down over a period of time.
Let W = wages.
So for them Q = D/W is a rough measure of how much the debt pinches.
As W falls Q rises. This harms you.
All OK so far?
Then Nick claims that GIVEN a certain rate of rise in Q you are harmed less by this rise if there is inflation than if there is not.
Are we agreed on that? I don’t think we are. Like Gene, Blackadder, and several others, I think that’s Noah’s claim. You think he’s making a wider claim.
So assume that is his claim. Is that limited claim correct?

• Major_Freedom says:

This is a valid point Bob: Noah’s post is not as clear and tight as it could be.

It’s tight and clear alright, but for a different question. One that contains assumptions which contradict the assumptions of the question.

Let W = wages.

So for them Q = D/W is a rough measure of how much the debt pinches.

As W falls Q rises. This harms you.

If Pinion had said THAT, then it would have at least been an answer to the actual question, and Murphy would not have bothered with this blog post.

Then Nick claims that GIVEN a certain rate of rise in Q you are harmed less by this rise if there is inflation than if there is not.

It’s not as profound an answer as you seem to be treating it as. All that argument says is that a fixed debt obligation is easier to pay off if your income rises. Well DUH! I think even the Twitter guy would get that banal point.

It’s about time you conceded that the actual answer to the actual question is that inflation will make it more difficult for the guy to pay off debt, and that Pinion went off on a tangent and dodged the question.

Question: Why is Murphy obligated to “concede” an irrelevant point Pinion made? What does it have to do with anything? I mean, if someone asked me a question, and I answered a different question, then would it make any sense to demand, repeatedly, that everyone concede my point and then go home? That isn’t how fair and honest debating works.

18. Gamble says:

Screw inflationist and the devil horse they rode in on.

“What the individual American… has to realize is that the policy of inflation… makes it impossible for him to organize his working, earning, spending, and saving in such a way that he could provide for the future of his family. This is why inflationary policy is the most radical revolutionary institution in the world.” Ludwig von Mises

“Inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism.” Ludwig von Mises

“Inflation is the fiscal complement of statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism.” Ludwig von Mises

“The advocates of public control cannot do without inflation. They need it in order to finance their policy of reckless spending and of lavishly subsidizing and bribing the voters.” Ludwig von Mises

“Inflation and credit expansion, the preferred methods of present day government openhandedness, do not add anything to the amount of resources available. They make some people more prosperous, but only to the extent that they make others poorer.” Ludwig von Mises

“Inflation can be pursued only so long as the public still does not believe it will continue. Once the people generally realize that the inflation will be continued on and on and that the value of the monetary unit will decline more and more, then the fate of the money is sealed. Only the belief, that the inflation will come to a stop, maintains the value of the notes.” Ludwig von Mises

19. Transformer says:

Bob writes:

“For a given nominal wage and nominal debt payment, I am better off if prices go down. Duh. I don’t care if that raises the “real burden of my debt.”

This is a situations where real wages go up and nominal wages stay the same. How is that relevant to a discussion on “How is it possible for inflation to help debtors when wages are going down?”

• Major_Freedom says:

If it can be shown that one is made worse off with inflation given unchanged income, then it’s obvious that a lower income would make things even worse.

• Ken B says:

So would getting gout.

• Major_Freedom says:

Except inflation doesn’t cause gout. It causes higher prices.

• Transformer says:

No its not.

Obviously inflation is bad with unchanged income even if one is a debtor. That would scarcely be worth doing a post on.

The point of Pinion’s post is to look at what happens when wages fall.

If the original tweeter just meant “given a fixed fall in nominal income is inflation good or bad” then obviously the answer would be “it would be bad” and again scarcely worth posting on.

But irrespective of what the tweeter meant Pinion (as can be seen from his examples) addresses the issue of “given a fixed fall in real wages is a debtor better off with or without inflation” and comes to the (correct) conclusion that he would be better off with inflation.

• Major_Freedom says:

Obviously inflation is bad with unchanged income even if one is a debtor. That would scarcely be worth doing a post on.

It makes debt harder to pay back, because your income is lower and yet prices are not lower.

The point of Pinion’s post is to look at what happens when wages fall.

By assuming wages rise? I don’t think so.

If the original tweeter just meant “given a fixed fall in nominal income is inflation good or bad” then obviously the answer would be “it would be bad” and again scarcely worth posting on.

If Pinion had said “it would be bad”, instead of answering a completely different question, then yes, there really would be no need for this blog post. But that isn’t what happened.

But irrespective of what the tweeter meant Pinion (as can be seen from his examples) addresses the issue of “given a fixed fall in real wages is a debtor better off with or without inflation” and comes to the (correct) conclusion that he would be better off with inflation.

That’s an incorrect conclusion. Given a fixed fall in wages, then a debtor is WORSE off with inflation that without inflation, because not only does he owe the same debt, but the prices of the goods he buys goes up.

You’re utterly confused.

• Major_Freedom says:

All the statement “given a fixed fall in real wages is a debtor better off with or without inflation” really says is this: “debt is easier to pay back when your income increases.” Duh.

The “real wages” versus “nominal wages” is an unnecessary complication.

• Transformer says:

we are talking about falling real wages, though.

• Matt Tanous says:

Perhaps. The tweet did not specify. Given the constant inflation that the economy undergoes, I would bet that it was a fall in nominal wages that was being referred to, though.

• Major_Freedom says:

• Transformer says:

“Given a fixed fall in wages, then a debtor is WORSE off with inflation that without inflation, because not only does he owe the same debt, but the prices of the goods he buys goes up”

I specified REAL wages, which means the more inflation there is then the less the fall in nominal wages.

The more nominal wages fall then relative to your wages everything including the debt becomes more expensive.

Taking the boundary conditions

1) the fall in real wages is achieved entirely via a fall in nominal wages then the real price (measured in wage terms) of everything including debt goes up.

and

2) the fall in real wages is achieved entirely via inflation then the real price of everything except debt goes up.

In both cases you are worse off than if real wages did not fall, but in the second case (the one with inflation) you are less badly off because the price of one thing – the debt repayment – stayed the same in real terms while everything else increased.

• Major_Freedom says:

I specified REAL wages, which means the more inflation there is then the less the fall in nominal wages.

The Twitter guy did NOT specify real wages, just wages.

Taking the boundary conditions

1) the fall in real wages is achieved entirely via a fall in nominal wages then the real price (measured in wage terms) of everything including debt goes up.

and

2) the fall in real wages is achieved entirely via inflation then the real price of everything except debt goes up.

The assumption of rising wages contradicts the assumption of the original question.

In both cases you are worse off than if real wages did not fall, but in the second case (the one with inflation) you are less badly off because the price of one thing – the debt repayment – stayed the same in real terms while everything else increased.

Those two scenarios do not address the original question, which is a scenario of falling wages and inflation (which raises prices)

• Bob Murphy says:

If the original tweeter just meant “given a fixed fall in nominal income is inflation good or bad” then obviously the answer would be “it would be bad” and again scarcely worth posting on.

Uh oh, Ken B. just spent a while arguing just this point with me.

• Ken B says:

You’ve added the war on partial derivatives to your war on logic and language?

And of course that is not what we debated.

• Major_Freedom says:

Says the evader at war with logic and language.

• Bob Murphy says:

Says the evader at war with logic and language.

Ken B. brought that war upon himself when he didn’t ask Logic and Language for permission to leave their realms.

• Major_Freedom says:

Oh, then he isn’t at war with logic and language, he’s just pointing guns at them, and firing at them. I mean, anyone who says he is willing to carpet bomb them is totally straw manning him.

Logic and language must be racists.

• Jason B says:

“Logic and Language must be racists”

They’re not racists, they just don’t understand the process.

• Transformer says:

well at least you won one argument today then.

“How is it possible for inflation to help debtors when wages are going down?”

Shorter Noah Smith: Assume inflation raises wages.

• Gamble says:

Never argue with a liar, they will beat you with experience.

Fact is,

Tweeter person said his wages are going down, not up. Both his nominal and real wages are going down. His debt amount is fixed in terms of dollars owed, but he has less purchasing power for everything else.

Inflation is a scam.

• Major_Freedom says:

You think that’s bad? When Keynes attempted to discredit the “falling wage rates and prices can cure unemployment and recessions” argument of the classicals, in the course of his criticism he assumed that wages and prices rose instead of fell, and then proceeded to argue that the classicals were wrong. I am not making this up.

That bullshit has lead to, at present count, a 76 year long thread.

• Matt Tanous says:

Well, to be fair, Keynes included a lot of other bullshit, like “refuting” Say’s Law by completely misrepresenting it, and defining involuntary unemployment as the unemployment of people who would have to work if real wages were lower so they couldn’t scrape together a living at the level they want.

• Major_Freedom says:

Let’s not forget the contradiction between Keynes’ “multiplier” and his “marginal efficiency of capital” doctrines, and the contradiction of sometimes claiming savings = investment and then other times claiming savings != investment.

21. Yancey Ward says:

I don’t want to wade through all the comments, but I am sure this point has already been made- the inflation is only benefiting in terms of debt payments, but not anything else. In any case, the man can just default on his debts, he can’t stop eating, paying for shelter, and paying for heat.

• Major_Freedom says:

Inflation doesn’t change fixed debt payments. It may change the valuations of them, but valuations are contingent upon money, and for debtors, their money income can fall and yet prices can rise.

• Yancey Ward says:

Yes, but my point is that Noah is completely ignoring that debt payments are only part of a person’s expenditures. If inflation lowers the value of those debt payments, it isn’t beneficial if all that saved value and more gets chewed up higher costs for everything else that isn’t priced on a fixed contract.

It is dispiriting that an economist of any stripe could make the mistake Noah made. I am flabbergasted.

• Bob Murphy says:

It is dispiriting that an economist of any stripe could make the mistake Noah made. I am flabbergasted.

I was too, but I am even more surprised at the people here trying to defend him. It’s one thing to think Noah just made a dumb mistake and got hung up on “debt/income” and didn’t think through the full ramifications of what he was saying, but everyone here was already alerted to the danger…and yet they jumped off the cliff anyway.

Or, you and I are the idiots.

It’s interesting that Noah himself hasn’t yet said anything in response to my challenge. I’m curious to see if/how he does.

• Transformer says:

Can you point to one sentence in the original post that is logically or factually wrong ? Your whole case seems to be that he is misinterpreting the original tweet, but that can only be an opinion.

I think its just very carefully worded to highlight this one aspect of inflation that may attract people and doesn’t mention any of the bad things that inflation brings.

I suspect he may have written it just to get a reaction from the kind of people who frequent this blog

• Major_Freedom says:

Can you point to one sentence in the original post that is logically or factually wrong ? Your whole case seems to be that he is misinterpreting the original tweet, but that can only be an opinion.

Oh please. It’s not mere “opinion” that Pinion did not answer the Twitter guy’s question, and not only that, but acted condescending towards him.

I think its just very carefully worded to highlight this one aspect of inflation that may attract people and doesn’t mention any of the bad things that inflation brings.

So you’re saying Pinion is trolling? Ridiculous.

I suspect he may have written it just to get a reaction from the kind of people who frequent this blog

That’s even more ridiculous.

• Ken B says:

Bingo.
Does it really make sense to be “flabbergasted” at an egregiously dumb error and then turn around and say the error is “Oh I guessed he meant nominal cuts, and you guessed he meant real cuts”? Especially when the other guy Noah may have had further exchanges with twitter guy (whose name we know not)?

• Bob Murphy says:

Guys, with as much free time as you have, it shouldn’t be hard to track this down. You can scroll through Noah’s twitter feed from right before he posted and surely it will not take too long to find. (I’m assuming you can see other people’s incoming tweets? I don’t really know much about it.)

• Ken B says:

Moot point I think. You just conceded to Transformer the ceteris paribus point is valid.

In any event I wrote Pinion to ask him, and cced you. If you think the note embarrasses me and displays my gross misunderstanding of what he said, you have my permission to print it.

• Dyspeptic says:

Good call. I made that mistake and now I need a cart full of Dramamine just to stay upright. Plus I will never get that 30 minutes back.

Just a thought: If we ever do get a chance to kill all the economists I want first shot at Gene Callahan. .22 hollow points to the knee caps for starters.
.

• Richie says:

Gene Callahan is an economist?

• Jason B says:

Alright, alright. I know you’re just “shootin’ ” the shit, but can we stop talking about physically harming a friend of this blog, a friend of Bob’s, and someone who is intellectually stimulating, regardless of whether or not you agree with him?

22. joeftansey says:

“How is it possible for inflation to help debtors when wages are going down?”

If the twitter guy thought that nominal wages were increasing, he wouldn’t make the blanket claim that “wages are going down”. Still, even the putative understanding of “wages going down” is that your paycheck’s numerical value goes down. No one would say they got a payraise if their nominal wage stayed the same under a deflationary price level.

• Bob Murphy says:

Thanks joeftansey. I realize we disagree a lot, but it’s good to see it’s not personal… You just think I make a lot of mistakes!

• Ken B says:

That’s a reasonable guess joe. So is taking real wages a reasonable guess. Is this fuss over whether Noah guessed wrong at an ambiguous word? That feels like “gotcha” commentary to me. If it’s a substantive debate and an important point of economics Bob is making then we should be talking about Noah’s reading. His reading is real wages.
I have a fuller comment on this point below.
In any case it is quite clear that Gene and I and a few others are talking real wage cuts. That was the ceteris paribus: same real wage with different inflation.

23. Yancey Ward says:

To make it simpler for all the Noah supporters, he is calculating a single metric- debt to income, but ignoring food cost/income, shelter cost/income, gas/income etc.

• Bob Murphy says:

To make it simpler for all the Noah supporters, he is calculating a single metric- debt to income, but ignoring food cost/income, shelter cost/income, gas/income etc.

Except it’s even more insidious than that, Yancey. He’s calculating “income” in a very weird way, which is not what the Twitter guy had in mind.

24. Cody S says:

Twitter Guy: So, I’m feeling really bummed.

Noah: What’s the problem?

Twitter Guy: What else? The economy.

Noah: Perfect! I’m an economist! Lay it on me!

Twitter Guy: Well, I have all this loan and mortgage debt, 50 grand total.

Noah: Yeah?

Twitter Guy: And then, today, my boss tells me to keep my job I have to take a pay cut of 10 grand. So, now instead of 50 grand a year, I’m only pulling in 40.

Noah: I see.

Twitter Guy: And to boot, the dollar keeps depreciating! With inflation the way it is, they say it’ll be 50% on the year! That just makes it even harder to pay down my debt!

Noah: Gosh, what a maroon.

Twitter Guy: Right? I mean-wait, what?

Noah: Do you even know what inflation is?

Noah: You’re 50 grand in debt.

Noah: You made 50 grand last year, and will make 40 grand this year.

Noah: Inflation’s on track for 50% on the year this year.

Twitter Guy: I just said that-

Noah: So where are you going to put all the extra cash?

Twitter Guy: Extra…? I just said-

Noah: Do I have to spell it out?! You’re making 10 grand less than last year.

Noah: So where are you going to put the extra 10 grand?

Noah: Good grief. You’re making 40 grand this year. Inflation at 50%, right?

Noah: So, you’re making 60 grand this year.

Twitter Guy: I….I’m making 40 grand this year. 40 Grand.

Noah: Like I said. 60 grand.

Noah: What, do you need a debt/income ratio to show you how this year’s 60 grand is more than last year’s 50 grand? Get out of my face, you plebe.

…That is how I read Noah’s post.

• Major_Freedom says:

• Bob Murphy says:

Cody S. right, except Ken B. will point out that Twitter Guy can sell his kidney for \$300,000 now.

• Jason B says:

“Ken B. will point out that Twitter Guy can sell his kidney for \$300,000 now.”

He would, as soon as we get Boehner, Reid, and Obama to agree on overturning parts of the Uniform Anatomical Gift Act of 1987.

• Ken B says:

You nicely highlight one of my points! You don’t know the rest of the conversation on twitter, and neither do I. So you are guessing about whether twitter guy mean real or nominal. But with Noah, no need to guess. he meant real wages. His every example is a real wage cut.

So go ahead, mock to your heart’s content for guessing differently than you do.

• Major_Freedom says:

By him holding falling wages as separate from inflation, by him asking how inflation will affect someone whose wages are falling, it is quite clear that he can’t mean real wages. This is because inflation already means falling real wages, ceteris paribus. If Twitter guy meant falling real wages, it would imply that he is asking this: “Given inflation is reducing my real wages, how will inflation affect me?” It’s silly and stupid, and so is your attempt to cloud what is obvious with pedantic quibbling.

Pinion’s 3 examples don’t even show what he thinks they show. He is claiming that inflation is what is making the debt easier to pay off, when it is actually just the higher income that is doing it. If inflation were omitted in all three of his examples, but the debt and wage values remained the same, then guess what? The same conclusion would be made…FOR THE SAME REASON as compared to the three examples WITH inflation.

Inflation in Pinion’s analysis is nothing but an underhanded (intentional or unintentional) way to assert that inflation necessarily raises nominal wage incomes 1 for 1.

Since Twitter guy is asking about falling nominal wages, then Pinion’s analysis is not only not showing what he thinks it shows, but is not even an answer to the question. Double bad.

25. Ken B says:

Cain lives in Pinion. He earns 100 noah per year. He spends 40 on subsistence, 10 on debt service, 50 for fun.
Abel lives in Murphy. He earns 100 bob per year. He spends 40 on subsistence, 10 on debt service, 50 for fun.

Next year Cain and Abel each suffer a 50% cut in real income. Sucks to be them.

Pinion has 100% inflation, Murphy none.

In year 2, Cain earns 100 noah. He spends 80 on subsistence, 10 on debt service, 10 for fun.
In year 2, Abel earns 50 bob. He spends 40 on subsistence, 10 on debt service, nothing left for fun.

Please explain how Cain is not better off than Abel.

Go ahead, fiddle with different percentages. Just keep the real cut the same and inflation higher in Pinion. Cain is always better off unless they both fall below subsistence. Then they’re equal.

• Transformer says:

But Ken, INFLATION IS EVIL. So what you say can’t be correct.

• Bob Murphy says:

Yep that’s it Transformer. This is an ideological tamper tantrum we’re all throwing over here. When Twitter guy said my wage goes down, he was open to the idea that a doubling of prices would make his paycheck go up. I’m sure that’s what he had in mind.

• Ken B says:

My example is about Noah’s claim, not claims twitter guy may or may not have made. Can you answer my question, or find an error in my math?

• Bob Murphy says:

Ken B., I choose to respond to Noah’s post by saying 2+2=4. You agree with my math, right? Let’s not split hairs over whether my calculation is relevant to Noah’s post.

• Ken B says:

Let’s try a new tack. I just sent Noah a tweet asking the very same question but specifying REAL wage cuts. And Noah just put up the same post word for word!! He even put it in the same place to save pixels. How cool is that?

Now — what’s wrong with the new post responding to my tweet? or to my example above?

• Major_Freedom says:

Please explain how Cain is not better off than Abel.

All you’re showing is that it is easier to pay off debt when your income is higher.

Take away inflation, and the same conclusion will be made, for the same reason:

In year 2, Cain earns 100 noah. He spends 40 on subsistence, 10 on debt service.

In year 2, Abel earns 50 bob. He spends 40 on subsistence, 10 on debt service.

Cain is better off…because his income is higher.

———————————

Now compare these two scenarios:

In year 2, Cain earns 90 noah, He spends 80 on subsistence, 10 on debt service, nothing left for fun.

In year 2, Abel earns 90 bob. He spends 40 on subsistence, 10 on debt service, 40 left for fun.

Who is better off?

This is Twitter guy’s action question.

26. Ken B says:

Look folks, in all Noah’s examples he talks about REAL wage growth (negative growth). Real wages. So it’s clear he means real wages. Noah means real wages. Now did twitter guy mean real wages as opposed to nominal wages? Maybe. Maybe not. I can’t say for sure, nor can you. Not even joeftansey can be sure. Maybe Noah can, if he had more context, but we can’t. We can only GUESS based on weak inferences. So in addressing the question, “Is Noah right ?” it’s pointless to base your argument on whether twitter guy meant real or nominal. We just saw any answer is a GUESS. But the question, “assuming real wages is Noah right?” is one we can answer, and answer without guesswork.

And if you make statements like “it’s incredible any economist could make such an error” then you really shouldn’t be talking about his guess at waht twitter guy means. I bet lots of economists misguess at less than 100% clear questions. You must be accepting his premise, real wages, and identifying a clear bonehead error. Not a guess you disagree with.

• Bob Murphy says:

But Ken, why guess at what Noah was saying? You know what *I* am saying, and I am clearly right, given the way I set up the problem. If Noah meant what I say he meant, then I’m right.

Now if you want to get inside Noah’s head, and guess at the meaning of his words, fair enough. But then by the same token, I’m going to get inside Twitter guy’s head and assume that when he said how can inflation help me when my wage is falling, he was ruling out the possibility that high enough inflation would make his wage go up.

• Ken B says:

Don’t be silly Bob. You accuse Noah of making an error. Is the error misguessing what twitter guy meant? Then that’s not an error of economics.

And there is no doubt Noah means real wage cuts. There is no nominal wage cut in his example A. Noah means real wage cuts.

• Bob Murphy says:

Ken B. I was quite clear throughout what I was accusing Noah of:

“By interpreting your Twitter guy to be speaking of real wages, you completely dodged his simple question.
Why is it that so many economists can’t understand simple questions about inflation?”

• Transformer says:

I get that you think that Noah misinterpreted the tweet.

But do you, or do you not, agree with the rest of the post that shows that a net debtor is (other things being equal) better off suffering an identical cut in real wages via inflation in non-wage prices than via a cut in nominal wages.?

• Bob Murphy says:

Transformer yes I think that is right, and it is a bigger factor, the larger your debt payments are as a fraction of your initial expenses.

• Ken B says:

Bob, what you just agreed to with Transformer is what I (and Gene) have argued from the get go. And it’s exactly the situation of my example.

• Transformer says:

So you agree with the economics of Noah’s post but just think that he shouldn’t have used it in response to that tweet ?

OK.

• Bob Murphy says:

Transformer wrote:

So you agree with the economics of Noah’s post…

No, I don’t. The “economics” of the post, if anything, was that inflation helps somebody whose wages are going down. That’s what the guy asked, and Noah did some odd calculations to conclude that the guy didn’t know what he was talking about, then went on to psychoanalyze people worried about inflation being harmful.

There actually was no “economics” in Noah’s post at all. He didn’t give an economic theory behind his scenarios, of what was driving prices etc. He just imagined three hypothetical universes and asked which one the guy would want to be in.

• Major_Freedom says:

Ken B:

Bob, what you just agreed to with Transformer is what I (and Gene) have argued from the get go. And it’s exactly the situation of my example.

From the get go? You said this at the “get go”:

“IF you are a net debtor THEN inflation helps you pay your previously incurred debts even if your wages are declining.”

Since Pinion assumed higher nominal wages in the example with higher inflation, which isn’t even addressing Twitter guy’s question), your subsequent statement:

Is rather strange.

• Major_Freedom says:

How is the claim that debt is easier to pay back when your income is higher, something important enough to point out? For that’s all you’re saying here. The inflation aspect is a smokescreen.

• Ken B says:

So you say Noah meant real wages.

RPM:”If Noah meant what I say he meant, then I’m right.”

That looks like a claim Noah’s economics is wrong, taking real wage cuts.

“Twitter guy…was ruling out the possibility that high enough inflation would make his wage go up.” I expect you are right.
In my example, no-one’s nominal wage goes up.

27. Ken B says:

I think we’re resolved. Transformer’s last put it well. Noah’s analysis is right, he was assuming fixed real cuts, but the relevance of that analysis is questionable. Think of it just as an excuse Noah seized to make the economic point.

FWIW I agree with Bob about Noah’s tone, and larger agenda, which agenda explains why he seized that example to make that point.

• Major_Freedom says:

Inflation is a smokescreen in Pinion’s three examples. All he showed was that debt is easier to pay back when your income rises as opposed to when it falls.

He could have taken out inflation altogether, and kept the same debt and wage values, and the same conclusion would have been apparent for the same reason it was apparent with inflation.

• Ken B says:

If you think that you have completely missed his point, which was about one effect of inflation. The whole point was showing how cp inflation induced real loss is better for debtor than nominal cut induced real loss. The opposite will be true for a net creditor.

Inflation affects nominal debt differently than income or most prices because the face value does not change.

• Major_Freedom says:

I didn’t miss his point, I am saying his point is superfluous. All he showed was that an indebted person is worse off with lower nominal income, than with higher nominal income. The inflation isn’t even the deciding factor. It just looks like it because he put in the inflation in the form of higher income.

He just assumed that inflation increases wage income 1 for 1. The reason he used for the wage increase is inflation. But inflation doesn’t even have to be the reason. Someone’s nominal wage can rise or fall without any inflation, and that factor alone will still be the factor that determines whether debt is easier or harder to pay back, the exact same way it determines it with inflation included.

The “whole point” you speak of is actually solely a question of the size of nominal income, that’s all!

• Ken B says:

“Kids, I want to make a point about road safety. If you don’t signal you could cause an accident.”
“Ha! You can cause accidents with power tools. You’re lesson isn’t about road safety at all.”

• Bob Murphy says:

Ken B. wrote:

“Kids, I want to make a point about road safety. If you don’t signal you could cause an accident.”
“Ha! You can cause accidents with power tools. You’re lesson isn’t about road safety at all.”

I haven’t been following your argument with MF on this thread, so perhaps the above is a fair critique of his position. What I do know is that it is a fair critique of the Gene Callahan / Ken B. position on debt burdening our grandchildren.

• Ken B says:

You mean the B – Callahan – Landsburg position I expect.

We’re like cerberus on this …

• Major_Freedom says:

If the person lecturing on road safety included power tools in his explanation, and the power tools are the actual reason in his example of accidents, then yes, I would also say that the signalling is superfluous.

The signalling may or may not be there, and his inclusion of power tools would remain the decisive factor.

• anon says:

MF, I’m wondering how you think there can be economy wide higher nominal income and no inflation?

Noah’s assuming inflation first and therefore he’s not talking about one individual.

You may have a point that higher nominal incomes won’t be distributed perfectly “1 to 1”, but I’m not seeing any elucidating discussion from you on the distributional problems caused by higher inflation.

• Major_Freedom says:

anon:

MF, I’m wondering how you think there can be economy wide higher nominal income and no inflation?

I didn’t say anything that would suggest that ‘s what I think. We’re talking about wages specifically, not “income” in general.

Wage incomes can rise without inflation. Wage incomes and prices can move in opposite directions relative to their respective bases.

Noah’s assuming inflation first and therefore he’s not talking about one individual.

You may have a point that higher nominal incomes won’t be distributed perfectly “1 to 1″, but I’m not seeing any elucidating discussion from you on the distributional problems caused by higher inflation.

If you understand that “point”, then my discussion is sufficiently “elucidating”. I am not attempting to write an economics treatise here.

Wages are only a specific kind of income. The Twiter guy is essentially asking how inflation can help an indebted person if inflation is of such a distribution that prices go up, but the Twitter guy’s wages going down.

If you can understand that inflation of \$100 billion, say, does not, at the point of entry and for some time after, necessarily raise every single wage earner’s wages by an equal share of that \$100 billion such that their real wages do not fall, then you can understand my point.

• anon says:

Okay, I think you may be right that nominal incomes can fall even while prices are rising. It would seem that borrowing could increase and people could sell their assets. Such a scenario (where the private level of debt is rising from increased borrowing while prices are still rising) runs counter to Noah’s story (where inflation is reducing private debt), I think.

However it’s still unclear to me how saying that wages are not perfectly and immediately flexible upward in an inflationary environment is a very good counterargument. It perhaps raises the issue of the distributional outcomes of inflation, but other than the usual opposition to government interventions, I don’t understand the objection. (I really would like to hear more talk about exactly how inflation works it way through the economy.)

• anon says:

Sorry, I meant to say nominal wages there, rather than incomes. I keep mixing those up.

So nominal wages could fall as borrowing increased and/or people sold their assets.

• Major_Freedom says:

anon:

However it’s still unclear to me how saying that wages are not perfectly and immediately flexible upward in an inflationary environment is a very good counterargument.

It’s not a “counter-argument”, anon. It is an argument that underlies the Twitter guy’s question being a meaningful one, such that any answer that assumes rising prices ipso facto means rising wages, is not answering the guy’s question.

Noah didn’t make an argument and then I am responding with a rebuttal to it here, in which case it would be a “counter-argument.” Instead, I am elaborating on the initial question, to show that Noah’s argument is insufficient. That’s it. That’s all that is being said about it.

If you were asked by someone how inflation would benefit them, GIVEN that their wage income is going to fall, then it would be a non-answer to just insist that their wages are going to rise.

If you can understand this, then the argument is essentially over. There is no need for any “But” or “Well, Noah did make a good point in another context, which is…” thereafter. All that is needed and appropriate is “He didn’t answer the question.”

So nominal wages could fall as borrowing increased and/or people sold their assets.

What assets can a lower class indebted wage earner sell, that would “favorably” respond to inflation? His toaster? His toothbrush? I’m being serious.

I really would like to hear more talk about exactly how inflation works it way through the economy

You’ve come to the right place.

So nominal wages could fall as borrowing increased and/or people sold their assets.

Why are you assuming borrowing will increase or that assets will be sold? Suppose a poor person rents an apartment, has basic belongings like furniture, refrigerator, bed, microwave, etc. Suppose they are indebted. Suppose they are going to cut a pay cut. I think it would be rather evasive and hand wavy to deny that this person is almost certainly going to suffer with additional inflation. For they will experience inflation as rising prices…and that’s pretty much it. Of course, they may own shares in JP Morgan, which may appreciate in price with inflation, but let’s be serious here.

• anon says:

Why are you assuming borrowing will increase or that assets will be sold?

MF, I’m not an economist, obviously. But as I’ve said elsewhere I don’t see how it’s even possible for there to be inflation without rising nominal income (not just wages). I said that I don’t know how you can get rising nominal income without either wages going up, borrowing increasing, or people selling higher priced assets, but now that I’m thinking about it some more, it seems that you’d have to have either an increase in velocity or borrowing.

I can’t quite wrap my head around it, but the only way it seems possible is if prices for certain things goes up and the people raising the prices’ nominal income is going down at the same time which seems strange, but possible. (A monopolistic market could maybe get away with this without lowering their income if people will buy more lower priced goods from them.)

• Ken B says:

“Inflation is a smokescreen in Pinion’s three examples.”

• Major_Freedom says:

The intended point is about inflation, yes, but the actual substance of the examples is only about nominal incomes.

• Major_Freedom says:

Proof:

Situation A: -50% real wage growth, 100% inflation.
In this case, the new price level is 2. Your new real wage is \$25,000. Your new nominal wage is \$25,000 x 2 = \$50,000. Your debt is still \$50,000. Your debt/income ratio is still 1.

Situation B: -50% real wage growth, 0% inflation.
In this case, the new price level is 1. Your new real wage is \$25,000. Your new nominal wage is \$25,000 x 1 = \$25,000. Your debt is still \$50,000. Your debt/income ratio is now 2.

Situation C: -50% real wage growth, 50% deflation.
In this case, the new price level is 1/2. Your new real wage is \$25,000. Your new nominal wage is \$25,000 x 1/2 = \$12,500. Your debt is still \$50,000. Your debt/income ratio is now 4.

So as you can see, even if your real wage is going down by 50%, it’s better to have inflation than no inflation if you are a net debtor.

As you can see, the argument here is that it’s better to have a higher nominal income than a lower nominal income if you’re a debtor.

Monetary inflation is not the premise. Price inflation is not the premise. The premise is higher nominal income, period.

It appears that to Pinion, higher inflation is equivalent to higher nominal wage income. He thinks he’s making a point about inflation, but he’s really not.