Esta entrada también está disponible en: Español
Paul Krugman once again became a source of controversy among economists and politicians, in a dispute with Michael R. Strain, an economist at the American Enterprise Institute, who in an article in The New York Times, stated that inflation “mainly hurts the poorest.”
Krugman, on Twitter asked, “‘Aside from priorities, is this even true?” referring to Stain’s assertion, “Is there any good reason to believe that inflation hits low-income households especially hard?” the Nobel laureate in economics added.
In his next tweet, Krugman said that “Inflation redistributes from creditors to debtors — not exactly a burden on the bottom half of the income distribution,” and he gets even more biased when he points out that during the great disinflation of the 1980s, inequality increased, although he cautions that the event is not a causality of inflation reduction, but “hardly supportive of the claim” of Stein.
In the end, he concludes with the statement that “‘Inflation especially hurts the poor’ has truthiness — it sounds like it should be true. But I don’t see either evidence or a mechanism.”
It was a matter of minutes before the tweet scandalized economists and political analysts. How is it possible that a Nobel Prize winner in Economics is unaware of the effects of inflation? How can an economist be unaware of the cases of Argentina, Venezuela, Turkey, Zimbabwe, the Balkans in the 90s and Germany in the 20s? How can anyone claim that it is not entirely true that inflation affects the poorest?
Something so obvious to any Venezuelan, today a Nobel Prize winner in Economics does not know it. However, for the sake of discussion, I will assume that Krugman consciously avoided the word hyperinflation — which definitely affects the poor more than the rich, since the former have the possibility of moving their savings to another country or another currency — and I assume that the economist was not taking into account, for some reason, priorities; referring to basic consumer goods, such as food, services, education, among others.
To understand the logic of Krugman’s reasoning a little more, I will refer to his column in The New York Times of December 16, where the economist points out that although inflation during the 70s was high, nominal wages also grew with it, so according to him, it is not necessarily clear that it affects the poor more.
The second part of Krugman’s argument rests on the assumption that there is a disincentive to hold longer-term financial assets “especially if inflation rises above the interest rate.”
The problem with Krugman’s logic
Unfortunately, for Krugman his first assumption is only true if nominal wages were to grow in line with inflation, and this did not happen either in the 1970s or today, where wage growth corresponds to 4.8%, and inflation has soared by 6.8%.
In fact, from 1978 to 1983, the United States experienced a rise in the number of people below the poverty line, coinciding with the rise in inflation. To paraphrase Krugman himself, although inflation is not necessarily the cause of the increase in poverty in the late 1970s, this increase “hardly supports the claim” of the Nobel laureate.
Research by investment bank JPMorgan Chase & Co. shows that while lower-income households saw a relative increase in their cash flow from stimulus checks, these households were also the first to spend the extra money fully.
It is worth mentioning that JP Morgan’s research is referenced in the article that interviews Stein and Krugman shares on his Twitter to “refute” the claim that inflation affects the poorest; so I can only assume that the Nobel Prize winner in economics either did not read the article he cited, or decided to omit this information.
The second part of Krugman’s statement is also wrong, as it assumes that most credit is not indexed to inflation, which can be disproved by simply applying for a housing loan. While some other credit may become cheaper, this is not the norm in the U.S. economy and lending rates will tend to adjust to rising inflation.
It is even hasty to assume that the recipients of this cheap credit are the poorest households. A recent study by the New York Fed shows that the size of loans to higher-income households is double the amount disbursed to lower-income households for almost all items: current credit, mortgages, education, etc.
Another way to understand why credit may be reaching higher-income Americans faster is to look at the inflation that the stock market experienced over the past two years, where billions of dollars were pumped into the major stock indexes.
While some wealthy individuals may be losing money by holding factories or savings funds over the long term, others are profiting at the expense of inflated returns on the stock price of FAANGs or cryptocurrencies.
In other words, Krugman’s hypothesis explains why Nancy Pelosi’s husband‘s investment has higher returns than Warren Buffett’s over the past two years but fails to disprove the fact that inflation does indeed affect poorer people more.
Finally, we do not quite understand why Krugman chooses to omit a household’s priorities from his hypothesis, as if it were a trivial matter.
If one chooses to omit the weight of basic needs in a household’s budget, then naturally the cheapening of credit would be seen as a transfer of wealth. But the reality is not so, and an increase in the cost of living objectively affects the welfare of a poor household more than the welfare of a wealthy household by not having the expected returns on its portfolio.
Yes Paul, inflation is more detrimental to the poorest, and there is plenty of evidence to indicate this.
Economist, writer and liberal. With a focus on finance, the war on drugs, history, and geopolitics // Economista, escritor y liberal. Con enfoque en finanzas, guerra contra las drogas, historia y geopolítica