Monday, July 27, 2015

The effects of inflation

Following up on Saturday's efforts, here is Noah's opening:
The U.S. federal deficit, which had been decreasing since the end of WW2, began to trend upward beginning around 1980:

It irks me that an economist (Noah Smith) would look at a graph of debt relative to GDP, and call it "deficits". It is exasperating to see him ignore the effect of inflation and watch him misinterpret the graph because of it. And it is difficult to get people to see what I want to show them.

My Saturday post is just a little bit complicated. Just a little, tiny bit more complicated than Noah's. He talks deficits and shows us debt: He shows the accumulation of those deficits that are his topic. Then he takes that accumulation, divides it by GDP, and starts making claims about deficits.

I complicate Noah's efforts by pointing out that he fails to consider the effects of inflation:

1. Inflation pushes GDP higher, but does nothing to existing debt, so it reduces the ratio of debt-to-GDP.
2. Inflation pushes new borrowing up, but does nothing to existing debt, so it creates the illusion that deficits are exploding.

Noah ignores both these effects, and so misinterprets his graph.

No comments: