EU survey shows how much people dislike inflation

by on May 19, 2013 at 7:47 pm in Uncategorized | Permalink

As reported by the excellent Carola Binder:

Personally, what are the two most important issues you are facing at the moment? 

This question was only asked in May 2012. For the EU as a whole, by far the most common response was rising prices/inflation. In fact, 45% of people in 2012 said that inflation was one of the top two most important issues they were facing. The pie graph below shows, for the EU as a whole, the responses people chose. Only 15% of people chose the financial situation of their household as a top issue. Health and social security also had a mere 15%. I was stunned that three times as many people consider inflation a top issue as consider health and social security a top issue.

Of course the survey respondents are wrong (see the link for more details, including on national distribution of answers).  I believe that a) they are confusing a tight standard of living with “inflation,” and that b) they missed the post on Scott Sumner’s blog where he mentioned nominal gdp as a way of thinking about monetary policy, gobbling up only the items on Swedish liberalism, Chinese economic growth, and Asian cinema.  The best case you can make for their response is that they understand they have privileged/protected service sector jobs, they know they will not see many more nominal wage hikes, they feel more or less protected against nominal wage cuts, they do not like the idea of renegotiating their labor contracts, and so they understand that a higher “p dot” does indeed lower their real wage more or less forever.

In any case, people really do not like “inflation,” as they understand the concept.  They are not keen to hear that “inflation” should be higher, simply on the basis of a theory held by some economist.

By the way, according to one measure cited in the comments on Binder’s post, measured EU inflation is running at about 1.2%.

asdf May 19, 2013 at 8:13 pm

“The best case you can make for their response is that they understand they have privileged/protected service sector jobs, they know they will not see many more nominal wage hikes, they feel more or less protected against nominal wage cuts, they do not like the idea of renegotiating their labor contracts, and so they understand that a higher “p dot” does indeed lower their real wage more or less forever.”

=They know that wage increases won’t keep up with inflation for most of the population.

And thus they are against inflation.

Makes sense.

Doug May 19, 2013 at 11:27 pm

Technocratic bureaucrats and academics trying to centrally manage the economy. What could go wrong with that?

“No, no, no. This time is *different*. You see we have completely boiled the entire economy down to a simple science of controlling this arbitrary number called NGDP.”

mw May 19, 2013 at 8:38 pm

Wait is this a post about Europe, or Wall Street bankers?

prior_approval May 20, 2013 at 3:28 am

This post is about how Americans, or at least a certain segment of them, still don’t grasp that American opinions are meaningless to those who aren’t American.

Especially when framed like this – ‘Of course the survey respondents are wrong’

Which is doubly amusing when one might just make the connection between the ECB and its sole defined mission, and why eurogeddon hasn’t quite happened yet.

Here is what is really amusing –

‘The best case you can make for their response is that they understand they have privileged/protected service sector jobs, they know they will not see many more nominal wage hikes, they feel more or less protected against nominal wage cuts, they do not like the idea of renegotiating their labor contracts, and so they understand that a higher “p dot” does indeed lower their real wage more or less forever.’

So, what was the big news in German economic reporting last week? Well, that after a series of warn strikes, the union IG Metall and the industrial concern representation Gesamtmetall, in the distinctly non-service industry sectors concerning metal / electrical fabrication/manufacturing, have agreed to a wage increase of 5.6% over 20 months, covering 3.7 million workers, which is expected to be adopted. ( for a more pro-business, but German language source – http://www.welt.de/wirtschaft/article116193580/IG-Metall-und-Arbeitgeber-einigen-sich-auf-Lohnplus.html )

Unions in Germany are quite enthusiastic about ensuring that workers receive their fair share of corporate profits, since it was the workers that actually created them. Which might just explain why striking is such a normal part of German industrial relations (well, doctors and dentists also ‘strike,’ but that would be too complicated to explain in a short comment), and any party proposing to weaken that right would be laughed out of power.

But hey, those Germans who care about inflation are still wrong, apparently. Which is odd, considering that their worries have absolutely nothing to do with the reasons listed by an American why they are wrongly worried.

Contours, it is all about the contours. Especially presenting a list of reasons which fit into a certain set of intentionally created American preconceptions, having no basis in at least a segment of EU reality as represented by Germany, and 3.7 million workers. And no interest in reporting about it, of course.

Oh, did anyone here mention that German Amazon distribution centers are also suffering strikes, and there is an investigation into Amazon’s practices in terms of subcontracted labor?

Or how the Greens in Baden-Württemberg have pretty effectively frozen public sector wages, something that neither the CDU or SPD have been capable of when in power? While also climbing in popularity, with a higher approval rating than the Greens actually were first elected?

Well, no problem – this is not a place where one needs to worry about learning such things.

Josh May 20, 2013 at 7:40 am

So, why are Europeans so concerned about inflation? They must have been EXTREMELY unhappy with inflation before the crisis when it was faster than it is now. And they could have done something about it then without causing such massive and prolonged unemployment.

Bob May 22, 2013 at 1:20 pm

It’s pretty simple: When people think of inflation, they think about how it affects the prices they pay for things, but they do not think it has any effect on how much they are getting paid.

Inflation can only be helpful when you owe a lot of money at a fixed rate, or you think about macro. Most mortgages in Europe are not at fixed rates, so nobody sees inflation as something good.

Brian Donohue May 20, 2013 at 2:10 pm

Good to see you coming out in favor of frozen public sector wages, even suggesting it’s a political winner. Good for you.

Claudia May 19, 2013 at 8:43 pm

In addition to John Aziz’s comment, referenced above. There are a few more takes on the data: http://www.blogger.com/comment.g?blogID=5624436327404149621&postID=105068699289589682

I’d love to do an experiment to see if survey respondents dislike “inflation” more or less after reading a few Scott Sumner posts. Why make this so complicated? Economics often faces quandaries when benefits and costs of a policy are distributed unevenly, just because we have trouble modeling (and addressing) that heterogeneity doesn’t mean it doesn’t matter. These responses are not weighted by wealth or consumption (or median voter) shares … just simple averages of what worries people.

Even with behavioral biases and math deficiences, I would always choose a room of 500 random people over any number of economists to tell me what’s up in the economy and their expectations…economists can do the interpretation. And maybe their definition of inflation is the one that actually matters.

Rahul May 20, 2013 at 12:21 am

Tyler’s whole post really smacks of ivory tower arrogance.

First, the “we economists know what inflation is; what can the clueless masses know?” If our calculations / estimates mismatch with your perceptions it is you who must be wrong because, of course, everyone knows that our inflation estimates are infallible and accurate.

Secondly, let’s go and survey people and if we don’t like their answers we’ll pretend they are clueless or confused or biased in some other way. Ironically, all this is about “inflation” a concept where ultimately perceptions are everything! If people sense inflation (however wrong you may technically prove them to be), they will act in ways they usually do to inflation.

Hoover May 20, 2013 at 2:31 am

Tyler’s whole post smacks of a mischievous sense of humour, The bit about ordinary Europeans only reading Scott Sumner’s posts about Asian cinema should have been enough of a clue.

Luis Pedro Coelho May 20, 2013 at 3:07 am

I don’t think it was ironic in that sense. When dining EU elites, you can easily start a discussion on Asian cinema, but the elites are completely clueless on monetary policy. Very few of them would even know that “P dot” refers to “derivative of P wrt time”, but Asian cinema is an easy topic of conversation.

Claudia May 20, 2013 at 7:21 am

yes, Hoover but this “humor” or “satire” or “Straussian freestyle” is hard to unpack. I have heard economists say zany things about inflation and I have heard survey respondents say zany things too, so I honestly have no clue what or who is being poked at here. 360 degree trolling is annoying…especially when launching point is a serious post. But I will give TC credit for wearing his “knave” badge from Krugman with pride.

Bernard Guerrero May 20, 2013 at 1:24 pm

Side note: “360 degree trolling is annoying” Wouldn’t that be the whole point?

Josh May 20, 2013 at 7:38 am

That’s simply not true that “‘inflation’ [is] a concept where ultimately perceptions are everything.” Perceptions of inflation matter because they can affect inflation. But, suppose people think there is massive inflation when there just isn’t. The answer isn’t: Ivory tower economists just don’t get what people care about. The answer might be: People are misperceiving inflation anyway, so more inflation won’t necessarily hurt them. Economists want to know which parts of preferences for inflation are about real effects, such as higher inflation leading to more volatile inflation, and which parts are about perceived bad effects that aren’t actually there, such as workers not realizing that inflation makes wages go up. Maybe my wage rises 5% per year, but I also see prices rising 5% per year. Without economics knowledge, I may believe that, without inflation, my real wage would be rising, not realizing that contractionary monetary policy would probably slow my wage increases as much as price increases, and would probably hurt my real wage by creating unemployment.

Silas Barta May 20, 2013 at 11:30 am

So people are just imagining the shortfalls in their family budgets?

Rahul May 20, 2013 at 12:52 pm

Either that or they should be changing their buying habits to match what Economists put in their standard basket.

Josh May 20, 2013 at 1:45 pm

A shortfall in the family budget is caused by a fall in the real wage. More inflation does not mean a larger drop in the real wage. This comment is a perfect example of why a survey of whether people are upset about inflation is not a good guide for policy. If the central bank cuts back on inflation to try to keep prices down, nominal wages will fall too. People won’t be any less upset about the shortfalls in their family budgets.

Silas Barta May 20, 2013 at 3:42 pm

@Josh: So the trick is to redefine “inflation” so as to be irrelevant to the “family budget shortfall problem”, even though the latter is heavily influenced by rising prices, thereby labeling anyone who complains about inflation (despite this being the common term for that phenomenon) as misguided, and their substantive problem non-existent.

Nice work! The average person can’t disentangle that trick well enough to understand the definitional game.

But it still doesn’t magic up any food on the table…

Steve C. May 19, 2013 at 9:04 pm

Prices are information. The information most people see every day is the price of things they buy every day. Those prices are not going down. Why would anyone be surprised that people are worried. Personally, having lived through the 1970s, hearing tenured academics and federal functionaries advocating for “a little more inflation” scares me. If they are wrong, we don’t get a chance to re-run the experiment. Humility should be the first order of the day.

Josh May 19, 2013 at 9:42 pm

So, inflation is low, but we must have humility when advocating for more inflation. Yet, unemployment is high and we need not have humility when advocating for inadequate monetary stimulus?

derek May 20, 2013 at 9:49 am

Why do you connect the two? Will creating inflation lower unemployment? The harsh measures of the early 80′s got rid of inflation in the system and dropped unemployment.

When the economy is doing very well there is often inflation, prices rising as well as wages due to demand. Fine. Monetary authorities then try to push on the string, imagining that it works the other way around.

I also disagree with this notion. The monetary authorities, as well as fiscal, can do good when their actions don’t do harm. Their actions over a medium term tend to do harm most of the time. This economic crisis, in North American and Europe, is entirely the creation of the fiscal and monetary authorities. Sumner says that if only they had been able to see what was happening in real time and interpret it the same way that we can retrospectively. Sure. I wish omniscience on the Federal Reserve and the ECB.

Anyone who sums up the vast number of individual transactions that make up the economy into a ‘dot p’ notion is a blithering idiot.

Rob May 19, 2013 at 10:02 pm

Do you really think even the out of control inflation of the 70s lead to an economic decline comparable to what we have today? Do you really think central banks would allow run away inflation to happen? Economists are not asking for more inflation than usual, instead now we just need to work harder to get what we have so easily achieved in the past, this exertion is what has alerted the public, not the inflation itself. It is a fallacy to always err on the side of caution, especially in this case, the side of caution for who? Certainly not the side of caution for recent graduates and the unemployed.

MikeDC May 19, 2013 at 11:18 pm

I don’t think central banks would allow runaway inflation any more than they’d allow a massive aggregate demand shock to occur. Oh wait…

… wait, wait… I got it. I don’t think central banks would allow runaway inflation any more than they allowed it to occur in the 70s. Oh? Wait…

… now I got it. I don’t think central banks would allow runaway inflation any more than they would allow us to have zero interest rates for the last four years. Oh…

RJ May 20, 2013 at 12:24 am

“Do you really think even the out of control inflation of the 70s lead to an economic decline comparable to what we have today?”

It did for my widowed mother trying to live off my father’s pension benefits which were stated in nominal (not real) dollars.

mpowell May 20, 2013 at 12:42 pm

Is this a better the young starve than the old principle? Youth unemployment in Spain is over 50%.

Alan H May 20, 2013 at 4:04 pm

Having lived through Spanish politics for more than thirty years (part-time…) my view on the youth unemployment is this: The young radicals, the base of the PSOE party, pushed for and received legislation that provided an overly-protective set of work conditions. Now these young 20 and 30-somethings are 50 and 60-somethings, and “they ain’t given an inch to the man.” Today’s young? “Too bad!” The first action guaranteed the second result. “Germany will fix it!” Sure.

Brian Donohue May 20, 2013 at 4:23 pm

@Alan H. They need a slogan. How about: don’t trust anyone under 50.

Steven Kopits May 19, 2013 at 9:12 pm

I think you’re confusing inflation with price increases. Inflation affects prices and wages equally, in principle. What people don’t like is cost increases in excess of wage increases. That’s what people are experiencing, and not just in the EU. When we talk of declining median income in real terms, that’s what I think the average person thinks of as “inflation”.

Josh May 19, 2013 at 9:36 pm

I think you are exactly right. This survey is interesting but not necessarily relevant to monetary policy or measures of ‘inflation’. The issue is that real wages must fall, so many people are seeing prices rise while their wages remain stagnant. The actual level of inflation isn’t relevant. A worker cares about the difference between her nominal wage change and consumption basket price change. It is not clear what the effect of more monetary stimulus and ‘inflation’ would have on this measure in the medium-run.

Claudia May 19, 2013 at 9:51 pm

“A worker cares about the difference between her nominal wage change and consumption basket price change” … Really, do you know that? Money illusion, the concept not the blog, http://en.wikipedia.org/wiki/Money_illusion suggests otherwise. It may be even more painful to households to have inflation plus stagnant wages than more inflation and some wage growth (same decline in real wages), or not. It’s an empirical question not something we can just deduce. Also aggregate price and wage inflation are in practice not just buttons we hit…even if we knew the correct combo to kick the economy out of its funk. (That’s Steve C’s humility point. Not the same as inaction, but can explain more incremental approaches. Just imagine if they’d really done austerity, yikes.)

Brian Donohue May 20, 2013 at 8:41 am

” It may be even more painful to households to have inflation plus stagnant wages than more inflation and some wage growth (same decline in real wages), or not. It’s an empirical question not something we can just deduce.”

What are you saying? That 2% inflation and flat wages is worse than 4% inflation and 3% wage growth? No argument there.

That 2% inflation and flat wages is worse than 4% inflation and 2% wage growth? Because people ‘feel’ differently in the two situations although they maintain the same purchasing power? If money illusion makes them spend more in the second case, do you think that’s a good thing in and of itself?

That 2% inflation and flat wages is worse than 4% inflation and 1% wage growth? There may be some macro trickery here, the “correct combo to kick the economy out of its funk” as you so top-downishly put it, but, as this affects the individual, I don’t care if ‘empirically’ people might feel better off in this situation- they aren’t.

Brian Donohue May 20, 2013 at 8:48 am

t’s tough to see incomes struggling to keep up with inflation, but inflation is more insidious as it applies to wealth. In my examples above, ‘wage increases’ get replaced by ‘investment return’ as the mechanism for ‘keeping up’ with inflation. Considering where interest rates are, and where they’re likely to be for a while, maybe a lot of people are feeling, accurately, like sitting ducks for inflation eroding their wealth.

Brian Donohue May 20, 2013 at 8:51 am

Oops…I meant to add in the demographic angle. Older societies depend more on income from wealth than from work earnings. Are we moving to an increasingly Ricardian world?

mishka May 20, 2013 at 12:37 am

> Inflation affects prices and wages equally, in principle.

Theory and practice always agree. In theory.

BC May 20, 2013 at 1:50 am

Actually, inflation affects prices and wages equally not in principle, but by definition. The difference between wage changes and price changes is defined to be due to a change in real wages, not inflation.

Claudia is correct, though. If people only cared about real wage changes, then nominal wages wouldn’t be sticky. But, they are sticky. So, people prefer stagnant nominal wages and 2% inflation over a 2% cut in nominal wages and 0% inflation. But, the survey says that they most dislike inflation, which may indicate that surveys don’t necessarily reveal people’s true preferences. (To be fair, I admit that the survey did not appear to ask about nominal wage cuts.)

I would not put too much weight into surveys, which can be very sensitive to wording and framing. People’s true preferences tend to be revealed through actual actions and decisions. Admittedly, I don’t know which market prices, if any, would tell us people’s implied inflation preferences. Maybe, in cases of high geographical mobility, say between states in the US, looking at whether people tend to migrate from low unemployment, high inflation states to high unemployment, low inflation states or vice versa would tell us whether people truly prefer low inflation to low unemployment or vice versa, for example?

Anon. May 19, 2013 at 9:27 pm

In Greece, “inflation” is on the news ALL the time. Every TV channel will frequently have reports on prices. They basically send a crew out to an open market, find the item with the highest price increase since a month ago, and VOILA people think there’s 15% inflation. The worst kind of pandering to uneducated people who don’t know math and have the memory of a mosquito, basically.

ChrisA May 19, 2013 at 9:37 pm

Well inflation does introduce uncertainty into peoples lives as they cannot be sure that their employer will fully compensate them, in fact people may in fact be fully aware of the reasons that Keynesians like to have inflation, which is to lower real wages. In other words dislike of inflation is no more or less rational than the well known dislike of nominal wage reductions.

I think Sumner has it right when he says that his NGDP targeting approach should be introduced as the Government looking to raise peoples wages by 5% rather than prices.

Ronald Brak May 19, 2013 at 9:47 pm

People tend to be proud of what they are good at. Australians are proud of their ability to play cricket, even though it’s a skill of no practical use, and North Americans are proud of their ability at that poor emmulation of cricket they call baseball. (It is an inferior copy for it fails induce a pleasently soporific level of boredom which is something that cricket excels at.) Europe is good at controlling inflation, and so Europeans tend to be proud of that fact, even though it is of no practical use and is in fact detrimental to their well being (rather like rugby). If Europe increased inflation I suspect that Europeans would become less proud of their ability to keep it low, and stop mentioning it so often as being something important, in much the same way that if New Zealand consistently thrashed Australia at cricket we would become embarrassed and possibly stop considering it to be our national sport.

Neal May 19, 2013 at 10:09 pm

… they missed the post on Scott Sumner’s blog where he mentioned nominal gdp as a way of thinking about monetary policy, gobbling up only the items on Swedish liberalism, Chinese economic growth, and Asian cinema.

I laughed.

Jonathan Finegold May 19, 2013 at 10:26 pm

In Spain, what I see is rising food and energy prices and stagnant, or even falling, incomes. If inflation were accompanied with rising incomes, I don’t think people would be so worried about it. This also suggests that people aren’t really worried about “core inflation,” but inflation measures that economists typically worry less about.

Claudia May 20, 2013 at 7:28 am

Jonathan, economists care about increases in the overall price level … including food and energy. Over time, however, inflation ex food and energy (or core) has proved a better indicator of the trend in inflation. Many of our policy actions take some time to affect the economy so we need to know where inflation is headed. Food and energy prices tend to bounce around so much due to weather and other temporary shocks that they can obscure the direction of inflation overall. Of course, it still many be the case the households put more weight on food and energy than economists (and aggregate data), since these goods are purchased so frequently. Here’s a little more detail on this: http://www.federalreserve.gov/faqs/economy_14419.htm

Alex May 19, 2013 at 10:32 pm

“In May 2012, 28% of German, 36% of French, and 40% of Austrians thought that prices had risen ‘a lot.’”

Lol, actual Austrians believe they see inflation that their peers can’t see.
:-D

EconRob May 19, 2013 at 10:32 pm

Speaking of Sumner, I can’t help but sense the irony of the nation reported to be least concerned with “p dot”.

CD May 19, 2013 at 10:45 pm

I’ve seen surveys from time to time that show the populace systematically overestimating inflation, and I think the surmise is right that people confuse it with generally straitened circumstances. I’ve heard a lot *more* worries about inflation in the last few years from noneconomists, and seen blog commenters get belligerent when confronted with data that current inflation really is low: they insist that no, it must really be high, and the data is a conspiracy.

I always wondered what this meant for rational expectations theories.

mpowell May 20, 2013 at 12:46 pm


I always wondered what this meant for rational expectations theories.

That they are based on complete bullsh*t? They may offer correct predictions in certain cases, but the model is broken…

Alan H May 19, 2013 at 11:51 pm

“those who have privileged/protected service sector jobs know…”

It is exactly the opposite. Automatic inflation protection is built into civil service salaries, and is de facto guaranteed for those professions and trades which have a legislative moat to restrict entry to a highly-needed line of work. It is everyone else that is terrified of inflation.

Brian Donohue May 20, 2013 at 12:37 am

My thought exactly.

Mike H May 20, 2013 at 12:10 am

“They are not keen to hear that “inflation” should be higher, simply on the basis of a theory held by some economist.”

Money illusion “exists” insofar as if you define “exists” to be “some suckers duped into believing that it will actually help”.

Rahul May 20, 2013 at 12:12 am

“They are not keen to hear that “inflation” should be higher, simply on the basis of a theory held by some economist.”

Thank goodness! Each economist comes up with his own theory; if we seriously listened to them all where would we end up!

Josh May 20, 2013 at 11:01 am

Each citizen comes up with his own theory. Let’s choose one of those and go with it.

The idea that we can have an economy without using economics theories doesn’t make sense. We have to have a money supply. How large should it be? I’d rather go with economists who are not perfect than a random person who doesn’t know that inflation drives wages as much as prices and may help boost real output in a depressed economy.

Why don’t you check out the frequency and depth of recessions in the beginning of the 20th century when economists weren’t so encumbered by fancy modern theories?

The Anti-Gnostic May 21, 2013 at 5:02 pm

The idea that we can have an economy without using economics theories doesn’t make sense.

You don’t need theory to have an economy. People produce, consume, buy, sell, trade, loan, borrow, etc., quite naturally. Just like people knew how to masturbate and make babies before sex education.

libert May 20, 2013 at 12:27 am

People are also generally not keen on hearing that we should “deregulate” industries, simply on the basis of a theory held by some “economist”. That doesn’t mean that they’re right.

Mike H May 20, 2013 at 1:34 am

1. Legalization of marijuana in Colorado. 2. Legal prostitution in Nevada. 3. Opposition to gun controls.

People are more than willing to support initiatives toward free market when they are personally made aware of the consequences of the opposite directions.

In the case of inflation, I’d imagine the mass majority of them don’t eve need that much economics education to understand what it would mean to their savings when the government starts printing money out of the blue.

Alexei Sadeski May 20, 2013 at 3:14 am

Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.

Bob May 22, 2013 at 1:56 pm

Sure, Spaniards know that their savings are either not there or stuck on preferential shares of local banks, and that their homes will never sell for what they think they are worth. The only way they are going to sell them back for more money than they paid is through Argentinian inflation.

mishka May 20, 2013 at 12:43 am

Very nice discussion about inflation, assuming people have zero savings.

JosieB May 22, 2013 at 11:23 pm

Good point. Most people are not economists, but they aren’t stupid either. They can anticipate a day when the government prefers inflation, which devalues the value of the currency, perhaps increasing exports and certainly lowering the level of government debt. The people who suffer most under this scenario are the suckers who actually saved for home purchases, children’s educations and retirement.

Saturos May 20, 2013 at 1:09 am

“they missed the post on Scott Sumner’s blog where he mentioned nominal gdp as a way of thinking about monetary policy…”

Oh yeah, that one.

Silas Barta May 20, 2013 at 10:54 pm

You mean “those fifty”.

Mogden May 20, 2013 at 1:16 am

Inflation is very high in low-accountability (ie, government controlled) sectors like utilities, insurance, education, health care, and government itself (taxation). Most of these are hand-waved away in the general CPI, but we still have to pay for them.

Alan H May 20, 2013 at 12:07 pm

It does seem that contemporary economists consider inflation just a nice tool to solve an equation they’ve got up on their white board. This general attitude does suit the masses of investors who bough equities counting on the inflation promise. When does the real economy of export goods manufacturers, laborers, clerks, and small business owners appear in the computation? I understand, certainly, that the taxpayer owing massive debt is being asked to foot enormous new inflating healthcare-for-others bills, and that the inflation in higher education, it is proposed, should be handled by subsidizing student loans even more heavily to keep the universities a comfortable place to draw a paycheck. But what about the businesses that actually have to compete on price globally? Most remarkable, our national policy is to punish savers when, for my lifetime (and also within German industry) we understood that saving enabled bank lending which, in turn, had the purpose of financing growing industry. Now that is solely the province of equity and the bond markets, placing even more distance between the user and provider of capital? What on earth made savers and bond holders a legitimate target for wealth confiscation? We are being sold lies as to the nature of our financial problems.

Tom May 20, 2013 at 2:07 am

The problem with a lot of economic theory is that it tends to ignore the data – and hence reality. If we take Portugal as an example nominal wages in manufacturing have fallen nearly 10% between 2009 and 2012. The logic of the market monetarist argument suggests that an expansionary monetary policy targeting nominal output would permit wage contracts to be negotiated upwards at some point in the future as nominal output (hopefully) rises. The problem is that wages are not determined endogenously. It depends on whether the Portuguese firms have been able to become more competitive internationally- hence it is a big risk for workers to take. Therefore the only way that workers in the Portuguese manufacturing sector can see an immediate rise in their standard of living is to see prices fall, hence the response to the survey. Another example is the UK – research by Tullet Prebon highlights that UK workers are seeing a fall in their standard of living as the cost of essentials has gone up by more than their nominal wages.

http://tullettprebonresearch.com/2013/03/19/prices-of-essentials-rose-3-1-in-february-2013/

Indeed, bottom quartile workers’ UK real wages are back at 1997 levels – mainly due to higher than expected inflation over the last 15 years. In recent years the Bank of England has been pursuing an expansionary monetary policy – but to little avail. The UK has more inflation and still declining nominal wages. (Sumner might argue not sufficiently expansionary?)

mpowell May 20, 2013 at 12:50 pm


mainly due to higher than expected inflation over the last 15 years

This is an inference, not a fact.

Matt2 May 20, 2013 at 4:40 am

“The problem with a lot of economic theory is that it tends to ignore the data – and hence reality.”

This was one of my basic takeaways from my first graduate Econ course at ODU last semester. Where most scientists seem to try to describe what is and why (be they mistaken or correct) Economists seem to put most of their effort into explaining why things are not they way they want them to be. Dr. Koch (no idea p_a if he’s related or not) was a good teacher, but when your whole starting point boils down to assuming away reality it is hard to take seriously as a “science.”

prior_approval May 20, 2013 at 6:29 am

‘no idea p_a if he’s related or not’

Who cares? It is about the money flows and what they buy, and not about family relationships.

And the funny thing is, it really is about the money flows and what they buy. And a personal fascination of how little the game has changed since I was paid to play it at GMU, having been an observer of the process just as it was getting started.

Now, if you had a teacher named Hazel, and they just happened to be from Fairfax, and just happened to be related to the man that was most intimately involved in how GMU became what it was, I’d be interested, albeit very mildly.

Andrew' May 20, 2013 at 7:59 am

My question is why do I know more than you do about it?

Here’s my take, George Mason, because you simply can’t compete with the elite schools chose not to. Warren Buffett would be proud. So, they pursued different avenues and it worked fantastically.

Andrew' May 20, 2013 at 8:02 am

What you see as some kind of vague innuendo that you make vague and incoherent accusations (e.g. The billionaires do and at the same time don’t care about $50k- about two grad students for 9 months work) view as one of the few inspiring examples in academia. I’m sure a few hearts were broken along the way, but that is nothing compared to the soul-crushing that standard academia cannot function without.

Andrew' May 20, 2013 at 8:03 am

As we say in the business, this is big-boy ball. There’s no crying.

prior_approval May 20, 2013 at 12:40 pm

A two for one –

‘The billionaires do and at the same time don’t care about $50k’

The people paying the bills expect results – $50k without results tends to be considered a waste, while $500k with results is considered a wise investment. Or are you unfamiliar with that sort of accounting?

‘Here’s my take, George Mason, because you simply can’t compete with the elite schools chose not to.’

Here is my take, based on things like budget figures, personal associations with a dean and a couple of dept chairs, a head of one of Mason’s ‘centers,’ and a significant amount of information which was never supposed to be discussed outside of certain office, covering the 80s and early 90s.

GMU was the cheapest school to buy, with an asset that a real estate developer understood how to sell best – location, location, location.

prior_approval May 20, 2013 at 1:32 pm

And since you personally know how this works – any comment concerning GMU and its centers which is too specific and supported with facts that at least the people involved recognize as accurate tends to be dealt with, leaving only ‘vague and incoherent accusations.’

But you may want to take a look at how GMU ‘imported’ a number of centers and scholars in a certain time frame, what those centers and scholars were concerned with, and instead of wondering why they migrated right next to the Capitol, ask yourself what sort of genius it took to recognize the possibility presented by a new school like GMU, with a desperately obvious need for money coupled with extremely weak institutional structures, compared to more established institutions.

And this isn’t even getting into Commonwealth of Virginia politics, that considered anything roughly north of Winchester or Fredericksburg as alien territory which had nothing to with Virginia, or its elected officials, at all. Providing a wonderful opportunity to do things which would never have been possible at a real school like UVA, as the oversight would have been more focused.

You might want to spend some time reading here – http://ahistoryofmason.gmu.edu/ You don’t even have to read between too many lines – the land dealing and use of extra funds is very apparent here – http://ahistoryofmason.gmu.edu/exhibits/show/prominence/contents/schooloflaw – and here – http://ahistoryofmason.gmu.edu/exhibits/show/prominence/contents/arlington

‘On November 28, 1978 the George Mason University Foundation acquired eleven acres of land and a single building: the twenty-five year-old former department store belonging to the International School of Law in the Virginia Square section of Arlington. The two institutions expected that they would merge the next year to form a new law school. Indeed, they did. The Virginia General Assembly approved George Mason’s union with the International School of Law in March of 1979 creating the George Mason University School of Law, while simultaneously recognizing the university as a doctoral institution.[2] This ended the University’s difficult struggle with state authorities and gave Mason a distinctive program to feature at Arlington, beginning July 1, 1979. The George Mason University Foundation later sold approximately half of the land on the western side of the parcel to the Federal Government for nearly five times the amount it paid for the entire property.’

See? There is a reason why many people are convinced that the federal government overpays for whatever it buys. Some of them, however, know how to use that fact to their advantage. Like the George Mason University Foundation, ‘a non-profit corporation established to supply the university with funds beyond that which it receives from the state.’

Alan H May 20, 2013 at 4:21 pm

Having known George Johnson well before he came down to GMU, and having followed John Hazel’s development interests, I would say the combination was excellent in this specific way, that it joined the forces of personality, political capability, and financial backing, to finally bring Northern Virginia a university which could serve its growing needs. As a young attorney I moved to Northern VA at approximately the same time, and to a nearby neighborhood, Oakton, and enjoyed watching the growth. Creating GMU in the face of a reluctant legislature absolutely required powerful financial backing, and that need did not evaporate after the first few years.

Andrew' May 20, 2013 at 9:02 am

Once inflation helps discharge one groups short-term debts (poor decision-making), it doesn’t go back to ‘normal’ for the people paying for it whose prices (liabilities) went up. Why are economists so sure about this trade? Has it ever actually been tried and worked?

Dalks May 20, 2013 at 10:51 am

Since Europe is mostly a state-run economy, and since state services will adjust their prices to maintien public servants revenues, every other european can expect to loose far much than inflation if inflation ever comes.

Therefore, inflation will never ever happen in Europe, since european economy will simply stop working before.

Soviet Unit May 20, 2013 at 11:29 am

When the Euro began circulating in 2002 in Italy, inflation was all over the news and the National Institute of Statistics (ISTAT) was repeatedly called into question as its inflation estimates were of a very low inflation, while people suddendly felt their purchase power had been severely reduced all of a sudden. It turned out, both were right, only they were talking about two different things using the same word. As I see it, those who are in the know are a responsibility of understanding if, when and how this happens.

Floccina May 20, 2013 at 11:47 am

To me this looks like tyranny of job holding majority over the jobless minority.

And to think somewhere along the line the majority of people thought that money was too important to be left to the private sector.

Floccina May 20, 2013 at 11:59 am

A Rick Perry could get elected over there.

Floccina May 20, 2013 at 12:02 pm

I wonder if you could sell NGDPLT as targeting total income/wage growth rate.

zbicyclist May 20, 2013 at 12:27 pm

Over 50 comments so far, but the word “stagflation” has not shown up. Do we have such short memories that we think of the 1970′s as only a time of good rock and roll? Have we forgotten wage and price controls (Nixon), Whip Inflation Now WIN buttons (Ford) and whatever Jimmy Carter was trying to do?

CD May 20, 2013 at 2:52 pm

Ah, memory lane. I do remember price controls, and the required placards on the walls of stores about their compliance. That’s what you get for electing a communist like Nixon. And WIN buttons! My little sister wrote away for one.

But Zbi, you gotta do more than evoke the past. In what key respects are current conditions like the 1970s?

zbicyclist May 20, 2013 at 4:13 pm

Some similarities:
1. Energy prices are a popular concern.

2. Part of the underlying dynamic was the wind-down of a war on the Asian mainland, and we are now winding down other wars on the Asian mainland.

3. When stagflation occurred, it seemed poorly understood. We expected inflation to occur in a time of big demand, not at a time of economic stagnation. In the expansion of the 1960′s it seemed macroeconomics was well understood, but the 1970s undercut that. Similarly, the financial collapse of 2008 occurred after a period of optimism about macroeconomics.

There are, of course, many ways in which the situations are different.

CD May 20, 2013 at 8:47 pm

1. Energy prices are *always* “a popular concern.” The 1970s history of energy prices is rather unusual, though.

2. You need to do better than “part of the underlying dynamic.” What are the causal mechanisms?

3. This “it seemed” stuff is pretty vague, no? Who is your “we”? Re the 70s, anyone who had paid attention to Latin American macro in the 50s and 60s had seen multiple stagflation episodes, with supply shocks and wage-price spirals. Re recent years, old-fashioned Keynesian macro, liquidity traps and all, has done a pretty good job. You can always find people who make the wrong call, and *any* boom, any period of prosperity lasting more than a few years, throws up technocrats who tell people what they want to hear: that this is a permanently good state of affairs.

zbicyclist May 21, 2013 at 9:55 am

Re 3: “anyone who had paid attention to Latin American macro in the 50s and 60s had seen multiple stagflation episodes, with supply shocks and wage-price spirals.”

But who was paying attention? These were third world countries whose relevance to the first world wasn’t easy to see.

Bogwood May 22, 2013 at 10:31 pm

Feature inflation or feature creep is the underlying problem at least in the US. Feature creep makes four major household expenses very poor investments for all but the highest earning quintile(Houses, Autos,Health Insurance, Higher Education). Then in the face of major negative hedonics(not the comfort sense the real value-added sense)the offending elements are called features rather than bugs. The jury is still out on electronics,a close call but also unaffordable for most as a return on investment. Lose the granite counters, drive a 100-200 pound vehicle assembled locally,use catastrophic health insurance, and start an apprenticeship around age 9. Increasingly negative hedonics combined with nominal higher prices both exponential,very powerful trend. Only massive debt makes these uneconomic purchases possible, for awhile.

Get More Information May 25, 2013 at 12:35 am

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