2/Most people don't remember the 70s now, but back then, inflation was the number 1 economic problem on people's minds -- by far! 
3/And some folks are starting to look back at that period and ask: Why were people so upset about inflation?
https://twitter.com/BCAppelbaum/status/1397204262057283605
4/This might seem to some like a silly question. Inflation means the cost of living goes up, right? Who likes that??
But the way economists classically thought of inflation, it meant that WAGES also went up!
noahpinion.substack.com/p/your-local-p…
But the way economists classically thought of inflation, it meant that WAGES also went up!
noahpinion.substack.com/p/your-local-p…
5/If wages and prices both go up, who cares? Just swap out the numbers, and everything else is the same.
Economists thus struggled to think of fancy reasons why people don't like inflation. Maybe it creates uncertainty? Maybe going to the ATM is just a hassle??
Economists thus struggled to think of fancy reasons why people don't like inflation. Maybe it creates uncertainty? Maybe going to the ATM is just a hassle??
6/And in fact, in the late 60s, even as inflation rose, wages DID keep pace! American workers kept getting richer even as stuff kept looking for expensive on paper.
7/BUT, in the 70s, this changed. Wages stopped keeping up with inflation, so workers got poorer.
8/What changed?
One possibility is that the inflation of the late 60s was driven by high aggregate demand, while the inflation of the 70s was driven by oil shocks (and by changes in expectations of Fed hawkishness).
One possibility is that the inflation of the late 60s was driven by high aggregate demand, while the inflation of the 70s was driven by oil shocks (and by changes in expectations of Fed hawkishness).
9/Maybe when demand is high, wages and prices both rise, but when supply tightens, there's something that keeps nominal wages from rising to keep pace with inflation.
This is called "upward nominal wage rigidity".
ftp.iza.org/dp10510.pdf
This is called "upward nominal wage rigidity".
ftp.iza.org/dp10510.pdf
10/In fact, when the great @RobertJShiller did a survey on why people dislike inflation, this is exactly what they told him.
nber.org/system/files/c…
nber.org/system/files/c…
11/Why might workers have a tough time negotiating for cost-of-living increases?
Some conjecture that long-term contracts -- which were even more popular in the union-heavy 70s -- have the adverse effect of making year-to-year raises harder...
Some conjecture that long-term contracts -- which were even more popular in the union-heavy 70s -- have the adverse effect of making year-to-year raises harder...
12/But manufacturing -- where unions were strong -- actually kept pace with inflation, wage-wise.
So maybe the problem is a *lack* of worker bargaining power instead?
So maybe the problem is a *lack* of worker bargaining power instead?
https://twitter.com/JHWeissmann/status/1397581773761138691
13/Or maybe it's something else -- @IvanWerning suggested it could be a paradoxical result of *downward* nominal wage stickiness.
In any case, seems like an important thread for economists to pursue!
In any case, seems like an important thread for economists to pursue!
14/Now, keep in mind, this doesn't matter unless we really do get persistent, significant inflation.
Which I don't think we're near yet.
noahpinion.substack.com/p/when-to-worr…
Which I don't think we're near yet.
noahpinion.substack.com/p/when-to-worr…
15/But the point here is, what people really don't like about inflation is that they think it makes their wages go down.
And sometimes, like in the 70s, it really does. Even if we don't quite know why it does, yet.
(end)
noahpinion.substack.com/p/why-do-peopl…
And sometimes, like in the 70s, it really does. Even if we don't quite know why it does, yet.
(end)
noahpinion.substack.com/p/why-do-peopl…
Anyway, if you like this sort of post, remember to sign up for my Substack's free email list! :-)
noahpinion.substack.com
noahpinion.substack.com
• • •
Missing some Tweet in this thread? You can try to
force a refresh
