What Time Changes Can Tell Us About Inflation
Both are relative shifts that illustrate the challenges of coordination.
- By
- May 06, 2025
- CBR - Economics
The US Congress continues to flirt with the idea of giving up on daylight saving time, as several other countries have done in recent years. If the United States does abandon time changes, should it use standard or daylight saving time all year-round?
The answer to this question can teach us something about inflation. In fact, comparing inflation to daylight saving can help us to understand both more clearly.
Some argue permanent daylight saving time would mean kids standing out in the dark for the school bus in the winter. Others say year-round standard time would make us miss a lot of pleasant summer evenings.
The answer is that it doesn’t matter. If we move to permanent daylight saving time, and people think that’s too early to get to school or work, they will adjust business or school hours to be an hour later.
In the extreme, imagine that we eliminated time zones and the entire US switched to Greenwich Mean Time. That’s (currently) seven hours ahead of the West Coast. Heavens, do you want all the schoolchildren to have to show up at 1 a.m.? Of course not. The schools would just change their opening hour to when the clock says 3 p.m.
Prices, too, are just a set of units. Whether we measure value in dollars, euros, pounds, or yen, everything real—how much you can buy with your salary—is unchanged. When Italy joined the eurozone, all prices changed instantly and almost completely, losing two decimal points and suffering some minor controversies about whether store owners rounded up the last few cents.
So why do we have daylight saving time at all? A simplistic supply and demand economist would argue that it is pointless as well. If people want to get to work earlier in the summer, schools and businesses will move their opening hours forward in the spring and back in the fall. And maybe they’d do it in smaller steps. “Summer hours” would be a universal thing.
By and large, that doesn’t happen, even in states that don’t have daylight saving time. Why not?
The obvious answer is that it’s a “coordination failure.” The school wants to start earlier in summer, but it doesn’t want to start before businesses start. Businesses don’t want to start before schools start, so people can drop off their kids before work. Most businesses work with other businesses, so if you start before everyone else, you’re just wasting time. Nobody wants to move first, and there isn’t a central place where we can all say, “Let’s start work an hour earlier.”
Well, there is: government. Setting weights and measures, including time, is a pretty basic government function that even die-hard libertarians agree on in the presence of coordination failures. It’s a bit like whether we drive on the left- or right-hand side of the street.
The government could say, “Everyone move business hours to one hour earlier starting March 1.” But it’s easier and clearer to say, “Everyone move the clocks forward one hour.”
Evidence for coordination failure is that people don’t voluntarily move business hours one hour back every spring. If you don’t like daylight saving, avoiding it is really easy after all. There is no law stopping you from changing your hours to 8–4 rather than 9–5 when the clocks change. Except nobody does that. (People who work in finance on the West Coast get up at 4 a.m. to be at work when markets open in New York, an example of voluntary coordination.)
Also, we do see changes in places where it really matters, and where coordination is less important. Self-employed people likely start work earlier in the summer. Farmers and construction workers, whose businesses depend a lot on daylight, seem to move on their own to earlier hours in the summer.
Inflation works analogously. Prices are puzzlingly “sticky.” Forces that should raise the level of prices sometimes seem to take forever to go into effect. Exchange rates are one of the most potent examples. When the Canadian dollar depreciates 10 percent relative to the US dollar, you would expect the price of a hamburger in Windsor, Ontario, to go up 10 percent relative to the price of a hamburger across the border in Detroit, so that the real price remains the same. It doesn’t happen, at least for years.
When prices are sticky, playing with units is appealing.
The late economist Michael Mussa pointed out this puzzle a long time ago: When countries like the US and Canada changed from fixed to surprisingly volatile exchange rates, prices didn’t get any more volatile. The real price differences between goods in the US and Canada got more volatile. It’s as if Canada changed the clock, and nobody moved their opening hours.
Economists have puzzled a long time at just what the nature of this price stickiness is. A main theory posits that there are small costs of changing prices or opening hours, and not huge benefits. I find a “strategic complementarity” story—in which people’s decisions influence and reinforce each other—more plausible in both cases.
If the US moved to GMT, everyone would change their opening hours, instantly, though nobody does it for daylight saving time. This is the time equivalent of a monetary reform, changing from lira to euro. A good theory should encompass both cases rather than treat currency reforms as a special case, when costs or rules against changing prices suddenly disappear.
The strategic complementarity view suggests some interesting and unexplored possibilities. In macroeconomic thinking since John Maynard Keynes, sticky prices have been the main, and sometimes the only, “friction” making recessions costly. Well, rather than devote billions to fiscal and monetary stimulus, rather than construct elaborate Federal Reserve strategies and stabilizers, why don’t we make prices and wages less sticky?
In turn, if stickiness is a coordination failure, successfully getting everyone to change at once could work. The government could say, “On March 1 at 2 a.m., everyone reduce every price, wage, and nominal contract by 10 percent.” If that is, in fact, adjustment to a better equilibrium, only held back by nobody wanting to move first, it will stick and eliminate the recession.
Similarly, small countries in recession are often advised to devalue their currency. Their wages and prices are, they are told, uncompetitive. Lowering wages and/or prices through “internal devaluation” is thought to take too long because nobody wants to move first. Rather than devalue the currency (again), the country could just, effectively, reset the clock by a similar policy.
Of course, we have to be careful. I am not advocating wage and price controls, and the policy would look temptingly like price controls. People should be free to move prices and wages back one day later. The messaging is crucial. We’re just here to break the logjam so nobody has to move first. It’s not a panacea, because the real shocks that cause the recession will remain. But at least they will not be amplified by sticky prices.
When prices are sticky, playing with units is appealing. A government that wants people to work more might decree that clocks stop for an hour in the middle of the day, so that everyone works nine hours, counting on it taking a while for businesses to adjust with shorter posted working hours. That’s what governments are doing when they try to goose the economy with monetary policy.
I am not the first economist to compare time changes to relative economic values. In his 1953 paper “The Case for Flexible Exchange Rates,” Nobel Laureate Milton Friedman made a similar point:
The argument for flexible exchange rates is, strange to say, very nearly identical with the argument for daylight savings time. Isn’t it absurd to change the clock in summer when exactly the same result could be achieved by having each individual change his habits? All that is required is that everyone decide to come to his office an hour earlier, have lunch an hour earlier, etc. But obviously it is much simpler to change the clock that guides all than to have each individual change his pattern of reaction to the clock, even though all want to do so. The situation is exactly the same in the exchange market. It is far simpler to allow one price to change, namely, the price of foreign exchange, than to rely upon changes in the multitude of prices that together constitute the internal price structure.
Public officials often impose coordination upon their constituents. Under the right circumstances, perhaps that authority could be put to other use as well.
John H. Cochrane is a senior fellow of the Hoover Institution at Stanford University and was previously a professor of finance at Chicago Booth. This essay is adapted from a post on his Substack, The Grumpy Economist.
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