Money Illusion

There are a ton of studies out there--a bubble, if you will--trying to show that the assumptions of neoclassical economics, which supposedly undergrid our economic system, are crazy.  This should in any case be completely obvious, but there's nothing like a scientific study to rationalize your beliefs.

So you've got this study showing 'neurological' evidence of the money illusion; the anomaly where people respond to nominal rather than real prices (they prefer inflation--high wages, high prices--to constant prices).  Set aside for the moment the question of whether this is 'irrational'.  As the commenters above point out, for the typical consumer with debt, inflation is a great thing.  

I've never really liked this neuroeconomics literature.  Experimenters force you to do unnatural things underneath some brain scanner, and then interpret brain images--which could mean anything--to fit their political biases.  As David Brooks says, you might as well fly over LA at night and try to figure out what people are thinking.  There's no real reason to prioritize information that comes from people's 'brains' over any other kind of evidence--their actual choices, for instance.

But sure, this phenomenon may well exist in the world.  A range of studies have suggested that it might.  But it's really important if it can support a more accurate micro-theory of behavior to support alternate economics.  As the study says, "This effect is of great practical relevance as it explains, for instance, why financial policy and inflation can have a beneficial effect on employment and growth."

Trouble is, Keynsian theory was built exactly on these assumptions, and the 'Phillips Curve' policies of the 70s tried to exploit exactly this issue.  The idea was that by generating inflation, people could be tricked into taking low-wage jobs.  Instead, we had stagflation--both high inflation and high unemployment--and Kenysians were discredited for a genneration.