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.

My reply in the comments:

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.

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