Peter Dorman had a post on this topic here a while back. The inflation fallacy says that inflation doesn't affect real income, since aggregate nominal income increases at the same rate as prices. But today you can't shake a stick without hitting someone, economist or lay-person alike, talking about the harm that the current inflation is doing to real income.So: what is going on? If the inflation fallacy is correct then a fall in real wages would imply an increase in real non-labor income. Is that happening?But the larger point of the fallacy is that changes in real income have real, not monetary, causes. If, for example, an increase in labor supply reduces the equilibrium real wage, this may well manifest itself in an inflation rate in excess of wage growth, and the blame for lower
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Peter Dorman had a post on this topic here a while back. The inflation fallacy says that inflation doesn't affect real income, since aggregate nominal income increases at the same rate as prices.
But today you can't shake a stick without hitting someone, economist or lay-person alike, talking about the harm that the current inflation is doing to real income.
So: what is going on? If the inflation fallacy is correct then a fall in real wages would imply an increase in real non-labor income. Is that happening?
But the larger point of the fallacy is that changes in real income have real, not monetary, causes. If, for example, an increase in labor supply reduces the equilibrium real wage, this may well manifest itself in an inflation rate in excess of wage growth, and the blame for lower real wages might be placed, fallaciously, on high inflation.
So why are real wages falling? One explanation, given by Jason Furman, is that the demand-induced expansion of employment is the cause--real wages behaving, as is typical, counter-cyclically.
But something about that doesn't sit right with me. Lately, I have been thinking back, way back, to Bob Rowthorn's "conflict theory of inflation." One implication is that the stagnation of real income, or a reduction in its growth rate -- and hasn't the pandemic been responsible for such a stagnation? -- can lead to inflation as everyone, capitalist and worker alike, tries to maintain their real incomes. This is consistent with the inflation fallacy: we want to treat the consequence, higher inflation, as the cause, pandemic-induced lower real income.
I'm really asking for help here, and would love to hear what Peter, Barkley and Tom think.
(BTW, I have the same puzzlement when I read descriptions of the great inflation related to the influx of New World gold as a cause of lower real wages and capital accumulation.)