I don’t even.
From Principles of Economics by Mankiw:
Thoughts? Comments?
Thats odd, the corporation I work for has had wage freezes for over 4 years now. Unfortunately, the prices I pay for goods did not.
Because most people…
A concession right here. He admits that some people will lose.
…inflation in income goes hand in hand with inflation with prices
Key phrase here is hand in hand. The two go don’t go hand in hand at all. See link below.
…the principle of monetary neutrality.
Which is fallacious. The Non-Neutrality of Money.
Facepalm
Do we really have a major economist promoting money neutrality? The only way that this would be true is if everyone received the money first, spent it in the same way, and at the same time. Because this will never happen money will never be neutral. I also overlooks the general effects that this will have on savers who did not anticipate the inflation.
He’s talking about the long-run, not the short run. Even in the long run, Austrians point out that there are losers depending on where the money is injected and when it’s spent.
However, I think it’s unfair to not concede that wages will increase to compensate for increases in inflation. They will not increase uniformly and completely, but they do increase in the long run.
If we assume a single ‘wave’ of inflation. Try having inflation set as a perpetual policy. Plus wage rates aren’t really effectively bargained over without a clever union and a lot of people aren’t unionized.
wage rates aren’t really effectively bargained over without a clever union
Really?
Has anyone’s boss ever said to them “Hey QE3 just came out and prices are going to rise a little bit, so here’s a $1.50/hr raise!”
Oh I get it. So kind of like a “[no one really gets hurt because] in the long run we’re all dead.” Nice.
Keynes’ statement has to be one of the dumbest of all time. If there was a list of the most useless, moronic things ever said, that would definitely be on it.
Anytime someone uses that I’ll just wait to hear something they wish to complain about and then proudly tell them how their petty concerns are irrelevant, and why.
Mankiw goes into methodological holism on the first page of the book:
Mon. 12/12/17 22:22 EST
.post #240
Then of course, there’s bracket creep:
Tax brackets are indexed to (price) inflation, according to Mankiw.
Oh I get it. So kind of like a “[no one really gets hurt because] in the long run we’re all dead.” Nice.
No, as in “the quantity theory of money works in the long term.”
I think we can agree that while employers might not want to immediately increase wages, in the medium to long run they will have to because of the real factors of production involved requiring equilibrating.
I am amazed that Neodoxy isn’t backing up Mankiw on this one. It’s not really that controversial a point.
Alternatively, take the equation of the quantity theory of money:
MV=PQ
M is the money supply
V is velocity
P is price level
Q is quantity produced
PQ may be simplified as Y, GDP.
so MV=Y (easier to look at)
This is an identity, because the velocity of money is defined as the average number of times a dollar bill is used in exchange, or V=Y/M.
If you assume that monetary policy cannot increase GDP in the long run, then if you have MV=PQ and you increase M, then assuming a constant V you will either need to increase P or Q. Since by assumption monetary policy doesn’t affect long-term production, P must increase. It’s curious why you’d think that the price level may increase without wage levels increasing as well (in the long run). It’s basic micro that wages must be bid up.
Mankiw’s saying pretty standard stuff. He’s not simply spouting off money neutrality.
Now, he may neglect the effect that monetary policy might have on the business cycle, but over the long term inflation doesn’t affect income as much as a non-economist might think.
If I could counterfeit $1Trillion a day for a year, and used them to bid for goods and services against you, then your income’s purchasing power would diminish than slowly stabilize over the next ten years, depending on how far your labor/service is removed from the goods/services I’m buying with the new money. So sure, “in the long run” your income’s purchasing power may eventually adapt to the new money supply (in ten years). That doesn’t contradict the fact that I have literally stolen huge amounts of your labor’s productivity in the meantime. Money neutrality, mu a**.
I don’t disagree with that. The point is, however, that wages will increase eventually. During the time when they did not, there was misallcoation going on. I agree.
If inflation is constant and I always receive the new money last, I never catch up.
There are always natural and artificial costs included in the prices of everything. The most obvious artificial cost is government mandates.
If the money-fairy magically doubled all cash balances overnight, there would be no economic impact. The reason that inflation in reality has an economic impact is that new money is not instantly and proportionally distributed to all holders of money. Inflation doesn’t reduce purchasing power in general, it redistributes it from those who receive the money later to those who receive the money earlier.
If the money-fairy magically doubled all cash balances overnight, there would be no economic impact.
Oh, but there would be. If she also doubled all amounts in all currently binding contracts (including debts), then we would be a bit closer to “no impact”.
Andris - I assume he meant both all money balances and all prices.