Does inflation increase wealth? That is the contention of some economists and business journalists who should know better. Inflation has a silver lining for economic welfare, they claim, or price increases are good for the economy as a whole.
The argument in a nutshell is that inflation induces newly impoverished retirees back into the labor force. Their work increases gross domestic product, and we will all benefit from the increased goods and services it creates. So too for those who put off retirement, unable to afford it because of inflation.
It is true that inflation makes people on fixed incomes poorer, and that some people respond by going back to work. But does that really help the economy?
No. It boosts the GDP and its growth prospects, but it hardly amounts to an overall economic benefit. Economics 101 teaches that there is such a thing as a labor-leisure dichotomy. Why don’t people seek to work all the time? Because they value the leisure they would thereby forgo more highly than the additional money they could earn. Most people are reasonably happy with 40-hour weeks and a vacation of one month a year or so. But GDP would be higher if they labored 80 hours a week and took no holiday at all. The prospects for economic growth would also increase.
Would the average person be happier, and would it help the economy, if people were compelled to work that much more merely to boost GDP? Of course not. Most people would be miserable with 80-hour workweeks, and economic conditions would be worse, not better.
The same considerations apply to the decision to retire. Many people look forward to retirement and regard the leisure they obtain as a greater value than the extra wages they could earn by remaining on the job. But then inflation hits. They feel—and actually are—poorer than they were before. So they return to the labor force.
The returning workers may have more money, but, based on their own revealed preference, the leisure they had to forgo was of even more value. That decision is good for the economy, only if we define “the economy” merely as maximizing GDP.
Mr. Block is a professor of economics at Loyola University New Orleans.
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Appeared in the April 21, 2022, print edition as ‘There’s More to Wealth Than Work.’