David Glasner comments on Jon Hilsenrath’s piece in the Wall Street Journal (“Slowing Inflation Cheers Fed“). I do not intend to comment on Glasner’s entire post; I recognize Hilsenrath’s contradiction (praising lower inflation, but then suggesting this gives the Federal Reserve wiggling room for future monetary stimulus). There are several things I disagree with, but are not really worth arguing with in a short commentary: primarily, I do not think that inflation can lead to growth in real wages, and I believe that there should be deflation (whether because of higher productivity or a monetary contraction caused by a period of malinvestment). These things can be discussed elsewhere. Rather, what I want to bring attention to is the notion “that rising prices necessarily put more dollars in people’s pockets.”

The complete statement reads,

The real problem with that sentence is the unstated assumption that the number of dollars people have in their pockets has nothing to do with how much inflation there is. I do not expect Mr. Hilsenrath to accept my theoretical position that, under current conditions, inflation would contribute to a speedup in the rate of growth in real income, but it is inexcusable to ignore the truism that rising prices necessarily put more dollars in people’s pockets and simultaneously assert, as if it were a truism, that rising prices reduce real income.

If we are measuring the general prices of consumers’ goods, Glasner is, of course, broadly correct that in order for there to be an increase in prices there must be an increase in the quantity of money being bid towards these goods — stated in a less roundabout way, people are enjoying higher nominal wages (i.e. there is more money in their pockets).

What Glasner seems to be arguing, though, is that because inflation amongst consumers’ goods necessarily requires rising nominal expenditure (by consumers) real wages remain the same. That is, prices rise proportionally to the increase in consumer spending. In order for Glasner’s proposition to be true all consumers’ nominal wages would have to increase proportionally, and the change in prices of individual goods would have to occur in such a way that the value of money in relation to all consumer goods remains the same. We can deduce right away that such a set of prerequisites is impossible to fulfill.

Right away, we know that not all consumers’ have had their nominal incomes grow proportionally. A little over eight percent of the United States’ labor force is unemployed; to that, we can add a large quantity of discouraged workers. These are consumers who are not earning an income, besides any unemployment or welfare benefits they are receiving (benefits that follow inflation trends, if even that). The employed labor force are all working for wages set by their employers (based on the demand for specific/unspecific labor and supply of adequate laborers) — I do not think that anybody is assuming that all wages are rising proportionally and simultaneously.

Now, Glaser’s main proposition: inflation in consumers’ goods is a function of an increase in nominal aggregate demand for consumers’ goods. But, if wages are not rising simultaneously and proportionally for all consumers, then some must suffer from a reduction of the real purchasing power of the dollar. Abstracting sufficiently, we can pool individuals into those who receive newly created dollars and those who do not. Those who receive money first will be able to bid new currency towards consumers’ goods at their prices of the immediate past, causing prices to increase. Those who do not receive this money will have to suffer from an increase in the prices of consumers’ goods.

Glasner’s mistake — unless I terribly misinterpreted his point — is an over-reliance on the mechanical quantity theory of money and prices. Yes, inflation is a monetary phenomenon. That does not mean that inflation actually takes place simultaneously and proportionally amongst the prices of all economic goods and wages. Instead, prices change relative to each other; some lose and some win. It was this lack of focus on relative prices that Friedrich Hayek warned about in Prices and Production (although, he was referring to relative prices amongst goods of different stages in the structure of production and this would lead him to his elucidation of intertemporal discoordination).