My letter to the NY Times re: Setting the record straight on changes to the price level

Re: Eurozone Business Growth Nears 4-year High, by David Jolly

Dear Sirs:
Once again one of your reporters repeats the mantra that there is a “…problem of declining consumer prices…in the eurozone…”. Problem for whom? Changes in the price level are the result of changes in the ratio of the aggregate demand for consumers’ goods and the aggregate supply of consumers’ goods. Think or the demand for goods as the numerator and the supply of goods as the denominator in a simple equation. Notice that an increase in the supply of consumers’ goods MUST cause the price level to FALL! A reduction in spending in favor of savings also will cause the price level to fall, which is necessary to re-establish the market clearing price for goods. Measures to prop up prices will result in unsold inventories. However, the only way the price level can rise is for the supply of consumers’ goods to fall and/or spending to rise. Spending can rise only from an artificial increase in the money supply or a reduction in savings in favor of spending. Neither of these causes of a rising price level are to be celebrated.  In conclusion, either falling prices are the result of economic progress–i.e., an increase in the supply of goods–or the market clearing antidote to a decrease in spending in favor of saving.
Patrick Barron
This entry was posted in News/ Lessons. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *