Bad News About Inflation
paulromer.net
paulromer.net
Sentences like that seem crazy to me - where is the hot labor market money going outside of faang? In my circle nobody is getting raises that overcome inflation unless they switch jobs, which is only viable every couple years at a max and has diminishing returns over time.
Separately, is inflation temporary? I had thought price increases don’t return to their prior levels with the exception of gas, and seemingly a dozen eggs.
Except if there's some thriving export industry with domestic factories on the rise!
who are spending money at unprecedented rates.
The spending has consistently remained high throughout the elevated inflation period, but is projected to go down a little bit.
https://www.bankofthewest.com/Wealth-Management/insights/art...
blue collar workers fix many of those things that can’t stay broken.
appliances, utilities, transportation, etc.
white collar usually also means enough of a credit limit.
“necessary” is relative.
Yes, and broken things can delay being replaced because of caution with spending
Many realized how shitty the service jobs are in comparison so now employers have to pay them a lot more or hope they get fired from the white collar job to fill the service positions.
Why's deflation different from e.g. sitting on treasury bonds? The money was originally printed by the government, the bonds are issued by the government, so sitting on bonds does nothing except pays you for taking money out of the economy temporarily, same as deflation.
If e.g. nobody would ever buy a computer because it'd be 2% cheaper if you wait a year, you could just as well argue that if bonds yield 2% above inflation you could park your money in them and wait a year and have 2% more money so nobody would ever buy anything.
And similarly, somebody stuffing money under their mattress would be removing 20x the amount from circulation as they gain, with 5% deflation. So while one can easily imagine the 5% is financially equivalent to interest, the effect on the circulation isn't.
"Remove money from circulation" seems different than simple funding of services, though. It's not even obvious there should be any difference there, if the money were infinitely subdivisible. I don't think using personal finance equivalents like funding goods and services is sufficient to explain the effect.
An economist has probably written something in excruciating detail, making sure there's no shell games being played with the terms. So it's probably on me for not reading that instead of commenting here.
I think it's bad for greedy corporations who would see their their profit margin shrink, but periods of temporary deflation every once and a while feels like it could be healthy for society.
I hear this all the time, and I see little evidence that it's as strong an effect as everyone says.
Cars, computers, and phones are all deflationary (at last in normal times). And people seem to buy them just fine.
A $25,000 car becomes a $20,000 car the moment you drive it off the lot due to depreciation.
But the purchasing power of $25,000 cash becomes $26,500 after a year of 5% deflation, which means you _gained_ purchasing power by doing nothing (aka not spending money) as the result of deflation.
But no, I don't mean depreciation.
A 2019 vehicle that sits on a dealer lot slowly loses value over time. That has nothing to do with depreciation and everything to do with newer, better vehicles coming out over time. The same thing applies to computers and phones.
> Deflation is terrible for debtors. Prices and wages fall, but the value of your debt does not. So you’re forced to cut spending. This applies to consumers and to governments, and it is one of the biggest issues in Europe right now. As Yale University economist Irving Fisher wrote decades ago, debtors are likely to cut spending more than creditors increase it, and this can turn into a really bad downward spiral. (The experience of Japan, though, proves that an economy can have a prolonged period of moderate deflation without falling into that downward spiral.)
* https://www.brookings.edu/opinions/5-reasons-to-worry-about-...
The Great Depression is an extreme example of high deflation:
> Interest rates dropped to low levels by mid-1930, but expected deflation and the continuing reluctance of people to borrow meant that consumer spending and investment remained low.[13] By May 1930, automobile sales declined to below the levels of 1928. Prices, in general, began to decline, although wages held steady in 1930. Then a deflationary spiral started in 1931. Farmers faced a worse outlook; declining crop prices and a Great Plains drought crippled their economic outlook. At its peak, the Great Depression saw nearly 10% of all Great Plains farms change hands despite federal assistance.[14]
* https://en.wikipedia.org/wiki/Great_Depression
* https://en.wikipedia.org/wiki/Great_Depression#Debt_deflatio...
There are some arguments for good versus bad deflation:
* https://www.nber.org/digest/apr04/good-versus-bad-deflation-...
2. Most/all of the benefit of inflation to consumers is captured by lenders in the form of higher interest rates - there's a reason why so many rates are quoted as "prime + x".
3. Addressing your japan/great depression examples:
I get that the transition from an inflationary economy to a deflationary one can be horrendous for consumers. Sure. But that doesn't say anything about how consumers would fare under a steady state deflationary economy.
People consume cars, computers, and phones; the primary intent is to use the product. You might sell it used at some point, but that's not the primary intent, and you're almost certainly going to take a loss on resale.
People invest in companies, governments, and individuals; the primary intent is to provide a loan that will be repaid with interest.
A physical object could be considered an investment, but only if that object is rare or somehow naturally limited (e.g. real estate).
So with inflation, you're rewarded for making investments, because otherwise your money will lose value sitting in fat stacks under your mattress. With deflation, you're rewarded for keeping those stacks hidden away, because it's a risk-free way for it to gain value.
US economy experienced massive growth through periods of deflation 1815 and 1860, and 1865 to 1900, as a result of industrialization and increased international trade.
I think people greatly overestimate the impact of monetary policy. Consumer demand and technological improvement drive growth more than anything. Climate change and rising oil prices drive investment in renewables for example. Consumer demand for computing drove technological improvements, which drove investment and falling prices. In my view, this would happen regardless of monetary policy.
You forget that in a deflationary economy prices would go down. Most of Wall Street, of course, is not their own money. It's borrowed money. Borrowed from pensioners, from central banks, from every bank in existence.
Deflation would not only make it in the banks interest never to loan a cent again, it would suck something like 95% of the money out of the stock market (so no, it definitely wouldn't be in your interest to still own profitable firms).
Wall Street is mostly smoke and mirrors, to convince people to work to pay pensioners and banks, and siphon off a healthy percentage for themselves. It just wouldn't work in a deflationary economy and it's the source of most of the money in the US economy. Without it we'd have to do something crazy like have the government run ~50 moonlanding-sized projects at the same time to make up for it.
This is the conventional wisdom, but it's rooted in propaganda put out by the government. Deflation isn't any worse (or better) for the economy than inflation. It's the yin vs the yang, so to speak.
According to the government, inflation comes from profiteers, speculators, greedy capitalists, Putin, and any number of boogeymen. In reality, it comes from the government printing and spending excess cash. The government then tries to sell the idea that 2% inflation is good for you.
Now, government does need to raise money to fund its operations in one way or another. Inflation is arguably a reasonable (and fair) way to do it. But let's be honest about it.
That can cause the prices of some assets to go up, but others will correspondingly go down, making it a net zero effect.
And inflation is equally bad if you have cash or any assets denoted in cash. It's also bad because taxes don't necessarily index with inflation. For example, much of capital gains are illusory because of inflation, yet you get taxed on that inflated value, not the real value.
Same as when wages rise once
Edit: Perhaps the ~$13k standard deduction is a better example line than the tax bracket. Just stating the wage growth isn't outpacing inflation as much as it might appear at first glance.
Here's a chart from the NY Times showing what it looks like in practice: https://static01.nyt.com/images/2021/11/10/opinion/10coy-new...
-- https://www.nytimes.com/2021/11/10/opinion/benefits-cliff-we...
For low wage people with children, they really are often better off in a low wage job than a middle wage job. In the example given, going from 25K a year to 50K would mean a lower standard of living.
The war on poverty has been a miserable failure.
One year ago they offered $19/hr starting pay.
Today the poster says $22/hr.
Something is up.
https://fred.stlouisfed.org/series/CIVPART
https://fred.stlouisfed.org/series/UNRATE
https://www.axios.com/2022/12/16/the-missing-workers-who-are...
https://seekingalpha.com/article/4531829-older-workers-propp...
Some advice I saw on a video a couple of months ago, targetting employers:
"Take a look on Zillow (or wherever) and get a good feel for the median rental cost of a 1 bedroom apartment where you are based. If you can't afford to pay your employers at least 3x that, maybe you either shouldn't be in business at all, or should plan on doing it all yourself"
Excellent advice, that perhaps In-and-Out Burger has taken.
There's a reason it's generally well liked.
That is how raises happen. The economy doesn't grow uniformly - new industries take off and cannibalize old industries, and the people in the old industries eventually lose their jobs while all of the gains in growth go to people in the new industries.
Folks who expect better-than-inflation raises without switching into a hotter industry or moving into a new role remind me of the Parable of the Drowning Man [1]. You have to help yourself and go move into the areas that are making money. Assume that about 20% of your actual job should consist of hunting for a better job (and that > 50% should be setting you up for a better job - ideally you are learning new skills in your current job that will be useful in higher-paying positions).
[1] https://en.wikipedia.org/wiki/Parable_of_the_drowning_man
As long as the employee is producing X amount of value for the company and the value is greater than the total cost of that employee the math is simple, reasonable, and healthy.
This tendency is more pronounced in bigger companies (where performance is more illegible), but the problem with small companies is that there are wide variations in their profitability and hence their ability to offer high salaries (and this is usually less than what big companies offer, hence their ability to get big). Job-switching here is the economy doing its job and funneling resources to the activities that generate the most consumer value.
I've been hearing this for 20 years so far.
Still no problems.
> I had thought price increases don’t return to their prior levels
They don't under a fiat money system. They do under a system where the money is exchangeable at a fixed rate with something not under the control of the government.
Of course this might not be the case, but at the very least I wouldn't expect the impact of SVB's failure to show up in any of these charts just yet.
Disclaimer: Not an economist
I’m sure inflation will be at a higher than baseline level for some years but unless something like COVID happens again - what would be driving an increase in inflation? If it’s from workers getting raises then why should we - the workers - worry about that? That’s literally the best place for the money to be going in the whole system!
I don't see how raising interest rates will help when the core issue with housing is the lack of supply. If anything higher rates will make it harder to add more supply.
why did this become a issue last 2-3 years. I don't understand this at all. Re raising interest rates will crush demand via job losses, foreclosures, dissuade flippers and property speculators.
Sure if you raise rates enough to cause a recession and massive job loss that would eventually push home prices down but it seems like building more housing would be a simpler, kinder solution.
Raising interest rates doesn't automatically lead to layoffs and businesses closing. It certainly might for faltering or weak companies, but it's not like x% interest rate increase === y% unemployment increase or z% business closure.
> foreclosures
Sure, if you have an adjustable rate mortgage, are massively underwater, and can't afford the new payments. That in and of itself is not a bad thing - if you couldn't afford the house five years ago at 4.5% fixed rate, you couldn't afford it at a 3% ARM either. There's no reason to think an increase in foreclosures would be anywhere close to 2008 levels simply because rates are increased to more historically reasonable levels.
> dissuade flippers and property speculators
Good.
The Fed can't do anything about housing supply. Mostly it's zoning regulations preventing it, lower mortgages to bring out the buyers might help a little but even when the market was roaring we hardly built anything.
Didn't the BLS say 5.6%, not 5.8%? From https://www.bls.gov/cpi/
> In March, the Consumer Price Index for All Urban Consumers increased 0.1 percent, seasonally adjusted, and rose 5.0 percent over the last 12 months, not seasonally adjusted. The index for all items less food and energy increased 0.4 percent in March (SA); up 5.6 percent over the year (NSA).
What am I missing?
K-shaped recovery and inequality for the 99%.
The dumbest take though on the inflation issue was from the Washington Post, with this since-renamed headline: “Inflation is cooling, so why aren’t customers feeling it?” Well, slowing inflation isn’t exactly deflation, is it!
Spring isn’t in the air. That’s the smell of fresh cut dollars.
> Paul Romer, economist and policy entrepreneur, is a co-recipient of the 2018 Nobel Prize in Economics Sciences and University Professor in Economics at NYU. He has spent his career at the intersection of economics, innovation, technology, and urbanization, working to speed up human progress.
I personally do find it surprising how over seasonal effects are often the primary number reported, and there isn't much effort to really understand them.
This was especially problematic for reporting unemployment numbers during the pandemic. All of the published unemployment numbers during the pandemic included seasonal effects, which is absurd to anyone giving the situation even a moments thought. Clearly the impact of the pandemic disrupted whatever seasonal pattern there may have been during stable period.
For unemployment during the pandemic including these seasonal effects would often invert conclusions about the data (e.g. "unemployment is higher this month" when the non-adjusted values were lower and vice versa).
Often times when we really care about an economic indicator it's during times where something strange is happening meaning we should be cautious about unquestioningly using seasonal effects in models.
He makes reference to a prediction of a 100 bps decline, I think by the end of the year which seems kind of silly to me given the numbers appear to swing by more then 1000 bps over individual months. I’d be curious what he’s actually basing the claim on. He has some sort of model. I’d hope it’s not just based on what is shown in the article
It's officially the "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel," it dates from 1968 not 1900, it isn't part of the original prizes funded by Nobel, there's no evidence Nobel - given his distrust of the profit motive - would have approved, and it's funded with an endowment from Sweden's Central Bank.
There have been calls for it to be abolished.
To say some of the awards have been controversial among science and arts laureates would be a huge understatement.
At least the money doesn't come from selling armament...
> To say some of the awards have been controversial among science and arts laureates would be a huge understatement.
More controversial than Nobel Peace Prizes?
I think the economics prize was a group of people with ties to money and power trying to add weight and credence to theories that would support their continued access to money and power.
Neither is flawless but one is much more ... noble?... than the other.
> The prize in economic sciences is awarded by the Royal Swedish Academy of Sciences, Stockholm, Sweden, according to the same principles as for the Nobel Prizes that have been awarded since 1901. [0] https://www.nobelprize.org/prizes/economic-sciences/
There is nothing wrong with disagreeing with even the most respected of experts, history has proven they can be wrong often.
Simply ignoring someone because "I don't know who this is" is generally a bad idea, and even more ridiculous when that person does in fact have a well known reputation.
I disagree with the rigor of the analysis. I don’t have any strong opinions on the takeaways.