Inflation and triple rainbows

A long time ago, I wrote a post that had a throw away line at the end criticizing Matthew Yglesias for simultaneously thinking that "the rent is too damn high" and that we need inflation. "Inflation" – as it’s defined by official statistics – includes the cost of rent. Someone arguing that the rent should go down is implicitly arguing for deflation.

Anyway, Yglesias responded in a post, in which he stated the following:

But the issue here is that inflation raises the general economy-wide nominal price level. If you took every single price in the United States and moved the decimal point one notch to the right you’d have inflation. But everything would actually be the same. Nobody would have actually gotten a 1,000 percent raise and nothing would really be 1,000 percent more expensive. It’d just be different prices.

After inflation did that, it would create unicorns who shot triple rainbows out of their horns (I know it’s old, but it’s so good).

I was reminded of this exchange by a post at The Manual To My Range Rover. At the time, I let Yglesias’ comment go without a response for a couple reasons. First, I generally try not to attract a large readership. Second, the last thing I wanted to deal with was some commenters from Yglesias’ sight commenting here. I think it’s been long enough that I can safely reply without anyone paying attention.

Inflation doesn’t work by raising all price levels equally. That sort of operation only exists in the minds of economists and the textbooks they write. Inflation is created by printing money. Once the money is printed, the consequences of printing money can’t be controlled. Some prices will certainly rise, but no one can control which prices will rise. Even if central bankers have some control over which prices rise, they certainly can’t make the prices of all goods and services rise in perfect proportion to each other, as Yglesias suggests.

Instead, all they can do is create bubbles. Sometimes, progressive economists are honest about this.

Obviously, at other times, they’re not.

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4 Responses to Inflation and triple rainbows

  1. “Nobody would have actually gotten a 1,000 percent raise and nothing would really be 1,000 percent more expensive. It’d just be different prices.”

    A respected economist who can’t do basic math? Only in America!

    • Dave says:

      Yglesias destroys his own argument for inflation while attempting to explain it. He is quite correct that if all dollar bills and dollar holdings everywhere magically had one extra zero added to them, while all prices had the same, then that would be a 1000% inflation AND would accomplish exactly nothing.

      What he fails to explain, at any point, is how he expects this magic process to do anything other than redistribute prices in an unfortunate and unexpected way, as you point out.

      • Vladimir says:

        The point is that adding a zero to a figure makes it 900% greater, not 1000% greater.

      • Dave says:

        Vladimir, I missed that subtly because both Yglesias and myself were using imprecise language.

        “Appending a zero to every price is a 900% increase in price.”

        It’s not clear to me what the exact definition of the word “inflation” is, but I suppose “percent increase in prices” is a reasonable working definition.

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