Inflation and distribution

Yes, it is true, Binyamin Appelbaum’s original article on inflation is a bit of a mess—combining quotations from clown Alan Greenspan and golfer Kenneth Rogoff with an attempt to assess the distributional consequences of increasing prices. (The follow-up column starts out a bit better, since he makes it clear that wage incomes may not keep pace with higher prices, but then he ends with a statement that—somehow—”a little more inflation” will solve the “profound and enduring unemployment, slow growth, rising income inequality.”)

It’s even worse, though, to attempt to correct Appelbaum by arguing that the only distributional effect of inflation “has been and always will be between net lenders and net creditors.” Yes, wages are prices and nominal incomes, by definition, rise with prices. But that doesn’t mean all incomes—especially wage incomes—move hand in hand with prices.

The chart above is a perfect illustration. Hourly wages (the blue line) and consumer prices (the red line) are not particularly correlated, especially since the crash of 2007-08. And given the continued existence of a large Reserve Army of the Unemployed and Underemployed, it’s quite likely that higher inflation will be accompanied by falling real wages. That’s one reason why corporations would be quite happy with a more accomodationist monetary policy, which would push inflation above the current 1.5-percent rate and 2-percent target. Their profit margins would rise (as output prices increase) while real unit labor costs would fall (as real wages decline).

Workers have already paid the bulk of the costs of the crisis (as a result of massive unemployment, slow growth, and rising income inequality). And now they’re being asked to pay the costs for the recovery (by decreasing, in real terms, what little they receive in nominal wages).

The corporations they work for would like to lower their nominal wages (and there’s an army of neoclassical economists who are willing to make that case for them, in the name of labor-market “flexibility”). The next-best alternative is to lower their real wages (and there’s an army of other economists standing by to make that case, too).