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Comment by pjc50 | Hacker News Reader

This has been orthodox economic policy for decades. There's two usual prongs:

- put up interest rates. This raises the cost of business credit, and at the margin, puts people out of work, until employment reaches the "non-accelerating rate" (NAIRU)

- break labour power by legislating against unions, breaking up state-owned businesses into the private sector, and promoting the Uber-style "independent contractor" model where people aren't employees

The public may be exposed to rising food and fuel costs, but if they can't demand higher wages that can't feed forward into higher prices and a wage-price spiral.

Yes, this involves a lot of worsening of living conditions.

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I agree with you broadly.

I think it's important to consider though that what we have right now isn't a demand crisis but a supply shortage. There are, thanks to all sorts of reasons (the fallout of COVID lockdowns from 2020-2021, supply chains, war in Ukraine between an oil exporter and a grain exporter, COVID zero in China) not enough things available for everyone to buy.

The amount of money folks have and are being paid - and are demanding at new jobs - cannot turn into the same quantity of goods now as it would have two years ago. Hence rising prices.

One of two things can happen:

- We can increase supply of goods, fix supply chains, infrastructure, bring in more labor, etc.

- We can decrease demand by reducing the amount of money in the system (increase interest rates, reduce wages).

But like, one or both of these things have to continue to happen until the demand for goods and services matches the available supply of goods and services.

Yes, this may lead to worsening conditions but that's because we don't have enough stuff for everyone to get what they want right now.

It's mostly a demand shock, not a supply shock[0]. The supply chains are busted mostly because of unprecedented demands. But considering that most normal people spend just about all of their money each month, and with personal savings rates below where they were before CO-VID and credit levels rising, either inflation ends by itself or the demand as it turns out, is coming from the wealthy looking to shelter their cash in safe commodities during the recession and away from bubbled assets.

[0]: https://www.bridgewater.com/its-mostly-a-demand-shock-not-a-...

We arguably have a demand crisis as well, because we’re at full employment. At full employment, as more people get income, they are willing to pay more for goods. We see this in the housing market and the car market right now. This is textbook economics, and sure, there are new variables taking part in the game (wall street speculators buying homes as investments), but everything else is pretty by the books (low interest rates, rising inflation).

The big question is if the fed can tighten monetary policy without crashing the economy.

People aren't getting paid more because everything else is more expensive.

People are getting paid more because there's a glut of jobs / shortage of workers.

To achieve its policy goals at containing inflation and avoiding a wage-price spiral the Fed needs to break the back of the wage market, which means it needs to destroy jobs.

The problem is that this has been policy for decades. Their job losses mostly affect the lowest earners. Giving us higher income inequality. They need to figure out policies so that they don't just negatively impact the bottom.

The bottom is where most people are. The spending of the 1% isn't really driving inflation of consumer goods and food, it's the spending of the bottom 80% who have extra cash from recently higher wages and stimulous checks. There isn't a job around here that pays less than about $15/hr now, even entry level McDonalds is paying 16 year-olds that. That's a lot more, almost double what they were paying pre-COVID.

yeah, let's take it away from the poor so the rich can buy more stuff at lower prices!

You can't run away from the real economic value of goods, services, and labor. If the working poor are now making more than they used to for doing the same work, prices will inflate until they consume about the same percentage they did before, because the economic value of their labor has not changed.

If you want to help the poor in the long run, you can't just pay them more money for the same work, you have to find ways to make their labor worth more.

that's just sounds like excuse why we should take money from the poor

"we'll have to take away your pay bump and any hopes for better pay, because the market decided you're not actually worth it"

"our billion dollar/year company can't afford to pay more without increasing prices for end-consumers"

You're begging the question with your assumption that the previous price of labor reflected its true value and the new price is excessive. What if it was previously undervalued and the new price is correct?

Then we'd have been in a recession in 2019 and wouldn't have high inflation right now.

That doesn't follow, and you're forgetting the golden rule of value:

A thing's value is the what two people agree to transact for.

A thing's value isn't dome statistical hand wave. It's a statement of fact. A dependent variable with a huge multiplicity of inputs.

If a laborer is not will ing to sell their time, which arguably, a great deal of American laborers probably shouldn't be right now given the rates many employers are offering and exploitive business models in use, Then the value is not defined.

Businesses can essentially name their price because there is a capital management complex that overall colludes to create an emergent that as a happy side effect for the actors within, leads to members being generously enriched.

The glorious absurdity to it all though, is that group is in part primarily empowered by us The enemy here, is us.

What about corporate profit margins? Why can’t they go down too? Powell and the Fed would never suggest reducing corporate margins. Much better to destroy jobs.

Low skill job wage buys you about the same amount of housing regardless of whether you're making $25/h in the Bay or $12/h in Arkansas. It buys you about the same amount of restaurant food, conditioned on buying from a local restaurant instead of a national chain. It buys you the same amount of a mechanic's work.

You can't escape basic economics. The supply of low skill labor is vastly greater than the demand, ergo real wages are low. The supply of housing is vastly smaller than demand, ergo real rents are high.

Yeh but the problem is collectively the low paid don’t earn enough, so they’re bot significant drivers of inflation so suppressing their wages doesn’t make a difference

Raising billions from the rich on the other hand might

"The bottom is where most people are."

I'm not sure what metric you're using, but most of them don't work that way (percentiles, etc generally have an equal number in the top and bottom. I wouldn't call the bottom 80% the bottom - and that's not where the impact is. The outsized impact I'm talking about is in the bottom 25%. Those are the people seeing the brunt of it. Me being in the 80% as a software dev isn't nearly the same.

$15/hr is a problem? Let's be honest, McDonalds isn't scheduling full time. They would make maybe $22k per year at 30 hours a week. Now subtract taxes, gas, car insurance, etc. Look back at real wages and see where that falls.

I'd argue they know pretty well who it impacts and who it does not. It's not ignorance that leads the fed to take actions which affect the lowest earners more than the higher earners.

The fed doesn’t deal with making or breaking labor power. Thats decision is left to the the people who work on capitol hill and the voters who put them there.

Then why is the employment level one of their primary determinants for interest rates? What do you think happens when the Fed raises rates? Companies lay off workers which increases unemployment. More unemployment means more workers in need of work, which viola means lower wages. See how it works?

This seems like a very one-sided description. You didn't mention the motivation for doing this? What's the benefit?

Easy: just consider the opposite:

> put up interest rates. This raises the cost of business credit, and at the margin, puts people out of work, until employment reaches the "non-accelerating rate" (NAIRU)

Instead, keep interest rates now. Then wages will go up, but prices of goods also go up, and prices are less stable. This seems strictly worse for everyone.

> break labour power by legislating against unions, breaking up state-owned businesses into the private sector, and promoting the Uber-style "independent contractor" model where people aren't employees

This is not really within the purview of Fed policy, but the various legislatures. If you had the opposite, probably real wages will go up. In the socialist ideal case, more of GDP will go to labor, and laborers will get more equal salaries, which is great.

The other side's argument is that with strong unionization you would a lot of stagnation: jobs that have low economic output but are still there because the unions keep it in place. General Motors is a classic example of a company beholden to it's labor so that capital doesn't want to invest in the company at all, and it ends up having relatively low productivity.

> Instead, keep interest rates now. Then wages will go up, but prices of goods also go up, and prices are less stable. This seems strictly worse for everyone.

FWIW I disagree with this. Prices will go up, which will incentivize adding new supply, and prices will eventually stabilize at a new (albeit higher) rate. This will eventually be compensated for through the wage-price cycle.

Rising prices are a function of supply exceeding demand right. There's simply not enough gas right now for everyone. So you can either reduce demand, or you can increase supply. Reducing demand, IMO, isn't the right way forward.

>> There's simply not enough gas right now for everyone. So you can either reduce demand, or you can increase supply.

Biden can increase fuel supply by approving pipelines or allowing more drilling on federal land. This would help the poor and laborer class. But he won't.

Pipelines don't add supply, and it is my understanding that oil companies have a lot of unused leases, but that simply drilling is easier said than done. [1]

[1] https://www.npr.org/2022/03/19/1086925726/gas-prices-oil-cru...

Pipelines get production to consumers. A well with non-existent transport is not useful to lowering fuel prices because it needs to get to consumers.

What domestic wells currently have non-existent transport? What pipelines has the Biden administration not approved other than the Keystone XL (which TC Energy abandoned plans for nearly a year ago)?

Without pipelines being planned and built, there will not be new wells. As you said, pipelines are being cancelled.

The government encouraging investment in producing new supplies (either through state-owned firms, or oil investment incentives like what the UK gov't is trying to do) probably is a good thing to do, independently of interest rates. Those targeted policies seem like the right thing to do versus super low interest rates, which sometimes fuel speculative bubbles.

Agree that prices will eventually stabilize even if the Fed doesn't tighten (as long as they don't keep expanding). The government only printed so much money, so that when nominal GDP grows it'll have to hit a ceiling.

> Prices will go up, which will incentivize adding new supply, and prices will eventually stabilize at a new (albeit higher) rate.

I think you're missing the point. Employees are desperately trying to increase supply right now. They need people to do so, but there aren't enough of them. That's why the labor market is so tight right now.

Rising prices aren't going to goad the economy into adding supply that it's already trying and failing to add. They're just going to destabilize the economy.

We can have an economy with structural issues, or we can have an economy with structural issues AND high inflation. We might ask Argentinians what they'd prefer.

i think the idea is if people can't get higher wages they won't be able to pay the high prices

thus the prices go down and inflation goes down

I don’t agree with what he said, but in his opinion surely it’s a modern unsuspected version of indentured servitude.

Slows the economy down to prevent an inflationary spiral.

Allowing inflation to go unchecked will eventually lead to a recession anyways. Raising rates to control inflation is about mitigating inevitable economic damage. In theory you should have a shorter & less severe recession by doing this.

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