Wonderfulness, Part Two

Bruce commented that he could never understand why food and energy were left out of inflation reporting, and suggested that it was to make the inflation appear to be lower than it actually is. The reason given by economists is that food and energy prices are “too volatile” and that they make the inflation number jump around too much. Leaving them out results in a more stable number for consumers to look at.

If that seems silly and incoherent to you, well, you must remember that we are dealing with economists here and sounding silly and incoherent is what they do. They go to places like Princeton and the University of Chicago to learn this stuff. You and I just pay our bills and balance our checkbooks, tasks which I suspect would utterly defeat the average economist.

There are times that food and/or energy prices are rising more slowly than the rest of the market, and times that including them would actually lower inflation rather than raising it. I have no idea how often that would be the case, but it is not the case right now.

The idea that inflation makes debt easier to repay does have some validity for businesses, because their income does automatically increase along with inflation, so it requires a smaller portion of their gross income to repay the debt after inflation has run its course. That is offset, however by the fact that inflation also increases the cost of doing business, so the amount of profit (or net income) that is consumed in paying the debt may not be any less, and may even be more.

The problem is that economics and accounting are not the same thing, and economists don’t seem to realize that. Economists can look at a sweeping big picture and say that the dollar is worth less and therefore the debt is easier to repay, but that is abstract theory which doesn’t translate into what happens when actual money changes hands.

Similarly, Dean Baker says that there can be no labor shortage because all the parking lot owner has to do is keep raising the wage he offers until he is able to attract the workers he needs. That sounds fine, but Baker doesn’t realize that there is often an upper limit to what a business can charge for its product. When the parking lot owner is having to charge $75/day to park a car people start riding the train instead of driving to town and pretty soon he doesn’t need any employees.