Governments are mishandling the affordability crisis
economist.com
economist.com
I think this misses the psychology of inflation.
If wages go up 20%, and prices go up 15%, everyone is better off and got a 5% raise, right?
Go poll people that experienced that and they won't tell you they're celebrating being 5% richer, they'll tell you they're outraged about the 15% inflation.
Psychologically they'll believe they earned that 20% raise through hard work. Putting in extra hours to get that promotion. But then the inflation robbed them of their 20% raise, and turned it into a measly 5% raise. They'll be outraged.
Politicians get this. No one will credit politicians for raising average wages, people will believe they earned their raise themselves. But there's lots of votes available for lowering prices.
But like you said politicians get less credit for the the former than they do the latter, and thus we have the current situation of continued bad policy decisions.
The article isn't denying that lowering prices is politically effective--I think that's undeniable at this point--just that doing so is probably the wrong call.
You see, wealth IS debt. You should think of rich people's assets as fundamentally being some percentage of public+private debt.
But labor and wages aren't. Labor fundamentally represents some percentage of GDP.
So the effect of high inflation is that it lowers debt, dramatically and quickly. Stupid but somewhat accurage rule of thumb: 5 years at 10% inflation will lower debts by about half. While it leaves the dollar number that rich people own rising, it kills it in terms of percentage of GDP. The rewards for labor, meanwhile, don't change in terms of GDP, so they go up much more. The way government stimulates inflation is by paying its own employees much more, and raising pensions, unemployment, ... not financed by debt, financed by printing money, so employers are forced to pay more for labor to avoid people telling them to fuck off.
And, yes, this is (capitalist) economic orthodoxy, the part of capitalism that rich people hate, because it kills their ownership values. And, yes, things are more complicated than this simple picture, but in general this is true. However the economist is the economist. They preach (capitalist) economic orthodoxy the way the Pope defends Christianity. And that is just fine.
No it most certainly is not, despite what MMT subscribers claim.
This has been tried in many latam countries in the past 15-20years with Inflation expectations getting out of control as result
To say it doesn't work using Latin American countries as an example, is like saying Russia already "tried" capitalism in the 90s. This kind of policy is so broad, widespread, and so often poorly implemented that it's impossible to use a single example as proof of ineffectiveness.
If you're looking for a positive example though, most people agree that the Scandinavian nations have done pretty well keeping wages on pace.
Asset prices (rich people's wealth) are fundamentally a percentage of outstanding debt.
Wages (the reward for labor) is fundamentally a percentage of GDP.
By having high inflation you change the balance between asset prices and wages, making labor worth a lot more than assets for a while. Kills your savings, especially the ones in government bonds and things like savings accounts, but it lowers your debt even more, as well as government debt.
Exactly what people have been clamoring for. It will change the "rich get richer" dynamic, at least for the large majority of wealthy people.
I'd love for the government to print a bunch of money eroding the value of my mortgage debt. I feel sorry for everyone who don't already own houses, because it'll push them even further out of their reach.
That's the recipe: directly print money, transfer it far and wide into society.
Or we could do QE again, and the rich will get 60-80% of the QE, and we'll be in even bigger trouble when governments are forced to pay it back a few years down the line.
> Asset prices (rich people's wealth) are fundamentally a percentage of outstanding debt.
I'm not being intentionally dense, I promise, but I genuinely can't understand how on Earth you came to this conclusion.
So when people say they own a million dollars, that would mean they own a million dollars on one side of this ledger. It means someone owes them a million dollars. It's a loan, in other words, just "the other side" of the loan.
What "value" does it represent? Well, the (equal) amounts on both sides of the central bank ledger represent the value of everything that can be owned. In a way, it's the number that defines what everything, in total, is worth.
So what happens when the government prints 10% of the total money outstanding (by creating a new central bank liability), gives it to itself, and passes that money to labor, one way or another (from increasing pensions to paying kindergarten teachers more, to building bridges, ...), what effectively happened?
1) "everything" just became worth 10% more, BUT prices can't immediately change because nobody would pay these prices on day 0.
2) importantly, no dollar amount on any loan changes. You still have a 500k mortgage, but your house now represents 550k in value (you can't sell it for any more than yesterday though at this point), if you work for the government you just got a raise that enables you to pay for a 550k mortgage, and if you work in the private sector the whole company will be screaming at the boss for a raise all at the same time. And unless they want all their people working for the government, they'll be giving this raise, too. Then they'll raise prices, of course, but that'll take more time.
3) that money ends up with people, assuming the government chooses it ends up with people, who slowly start using it, slowly bidding up the price of, say your house, over some period. This has generally been observed to in practice be about 1.6 years. But also slowly the price of everything will go up until supply and demand are back in balance. But then you do this every year for a while, at which point the period will reduce and it'll rebalance faster (because that's what everyone will be trying to cause)
In other words, the government suddenly owns effectively 10% of all assets, and gets to use that money on whoever it chooses, and after 1.6 years the money is back in the ownership economy. But during that 1.6 years whoever received this money has a 10% advantage over the asset owners.
What is the net result? A 10% wealth transfer from the "ownership economy" to the "productive economy" (assuming the government chooses reasonably), the reverse of what happens with low inflation. The more money you have, the worse the effect will be on you, and the closer you are part of the people who receive the printed money on day 0, the better it is for you. Properly executed, it's a redistribution from the rich to people.
(Note: 10% is extreme, though after QE it may turn out to be a necessity)
This strikes me as a symptom of an unsustainable system.
Inflation affects everyone rapidly. But to get the claimed wage increase people have to do work to find new jobs.
I think you're being overly critical here.
An example is not bad simply because it's unrealistic. I'm sure you've heard plenty of examples which allow you to understand the main point without being perfectly representative.
The point of this example in particular was to illustrate how wages work alongside inflation. As long as you understand the point--that inflation is relative--the specific numbers don't matter.
so yeah, the example illustrates the idea, but it also underlines how the idea contradicts reality.
If instead OP had said "if wages go up 500%, and prices go up 1,000%, everyone is worse off and got a 500% pay cut", then the main point being made would remain exactly the same. Again, this is because the exact numbers were never relevant, and the example was for explanation purposes.
Now apart from the fact that we are now 6 comments deep in the most pedantic thread I have ever had the displeasure of participating in (this is my fault too, to be fair), you also might be interested to know that cost of living/inflation has not outpaced wages for a "long time" as you so claim.
Here's a graph from the last 30 years, for example, showing earnings keeping up with inflation.
https://fred.stlouisfed.org/graph/?g=iuyN
Or maybe you'd just like to look at more recently, in which case, looking at just the past year, wages have still kept up.
https://usafacts.org/answers/are-wages-keeping-up-with-infla...
Or if your a low wage earner, those wages have especially kept up, outpacing inflation and even high wage earners by significant margin in recent years.
https://www.epi.org/publication/strong-wage-growth-for-low-w...
This is not to say that there is no affordability problem, but no matter what way you put it, your specific claim, that wages have not been outpaced by inflation "for a long time", is demonstrably false.
i'm sorry but that's just bird-brained
>> They should lift incomes, not suppress prices
> I think this misses the psychology of inflation.
> If wages go up 20%, and prices go up 15%, everyone is better off and got a 5% raise, right?
> Go poll people that experienced that and they won't tell you they're celebrating being 5% richer, they'll tell you they're outraged about the 15% inflation.
> Psychologically they'll believe they earned that 20% raise through hard work. Putting in extra hours to get that promotion. But then the inflation robbed them of their 20% raise, and turned it into a measly 5% raise. They'll be outraged.
how you get from what they said to what you said they said, i have no idea.
as for how real wages have changed overtime, you should be aware that it isn't a straight-forward measurment, and that it is an area of active political contestation.
you can see here: https://www.epi.org/blog/growth-or-not-in-real-wages/
there are ways you can slice it to make things look one way or another. for example, 1979-2017 had almost universal real wage loss for the "some college" demographic.
My issue with your criticism specifically was that you called out the example. It's like if someone had issue with Hitler, but their criticisms only focused on Hitler's choice of clothing.
"Boo Hitler! Not because of his ideology though, but because the collars he wore were too tight!" This is ridiculous because even if your criticism is valid, you are just criticizing the wrong thing.
> That's not how the economy works.
> yeah but it's not a great example, because actually wages aren't going up.
> my point is that's a bad example because we couldn't say that that's true given that the cost od living has been out-pacing wage inflation for a long time.
To take this even further, and make it so even a bird-brain like myself can't possibly misunderstand, let's look at my previous example with the Nazis. Does my analogy stop working if I switch "Hiter" with "Stalin", or him with "bin Laden"?
"Boo Stalin! Not because of the Great Purge, but because of his funny mustache!"
See how the point being made remains exactly the same, regardless of whom you use to illustrate it? Please, please, please try to understand this.
And as this has now become a stress test for how thoroughly I want to humiliate myself through meaningless argument, let me also briefly address your argument on the data.
> as for how real wages have changed overtime, you should be aware that it isn't a straight-forward measurment, and that it is an area of active political contestation.
> there are ways you can slice it to make things look one way or another.
But this is not the claim you made. Your claim was much stronger, and much less defensible. You said that wages outpacing cost of living/inflation is unrealistic, and critically, that inflation had outpaced wages for "a long time."
This is just false. Inflation generally outpacing wages for "a long time" is just not a conclusion you can make based on the data. We can have more nuanced conversation about this, but here specifically I think you're trying to take your broad, conclusive, and incorrect claim, and equivocate it into a smaller, more defensible, but different claim.
There was one year I received 3 raises at Travelocity and nearly doubled my compensation. I was hired as a web designer and after 3 months was involuntarily reassigned to a developer role and told to “figure it out”. I got a negative annual review that year and then ended up in Afghanistan on a military deployment. When I came back to Travelocity I was still classified as a developer but was reassigned from marketing to product development where to wages are higher, but I was earning as a junior designer. After eagerly looking for other internal jobs they gave me a raise to catch me up. Several months later I was promoted to a senior developer position and became the company A/B test engineer, which also came with a raise. A little after that another company gave me a better offer and Travelocity countered. This was like a million years ago.
Because most of my career is in writing JavaScript if I want to continue to increase my wages I would have to do the most beginner level shit work because that is common expectation for JavaScript developers.
> There was one year I received 3 promotions at Travelocity and nearly doubled my compensation. I was hired as a web designer and after 3 months was involuntarily reassigned to a developer role and told to “figure it out”.
This is obviously an aberration where you are doing exactly what you claimed the gp did.
Moving jobs is the single best way to get a raise and has been for decades. Leveraging the experience at a company (which is relatively static) for a higher wage at another where that new and different experience has more value.
Notably, how company leadership changes are less likely to be from internal candidates than a transplant from another company.
The example was not meant to be a single year. Over the 2020-2024 timeframe we did see movements around that size (though the gap between average wages and inflation was smaller than my example, where I rounded the numbers).
politicians can't really affect wages the same way they can temporarily and artificially lower prices. but they also understand they need inflation to get elected, since you generally win elections by what you promise, not what you don't promise.
Inflation especially impacts people older in life, who tend to be people who are more likely to vote and contribute to campaigns.
Lowering prices is of course more noticeable because you receive a raise once every long period, but pay higher prices (or lower) constantly and it’s very visible.
The exceptions are if you enter a new tax bracket, but that only affects your marginal dollars, sns even then, the increase in tax brackets is just a few percent.
In the U.S., you could also cross the SS/Medicare threshold and then suddenly your post tax earnings will go up more than your wage increase.
Post-tax wage changes shouldn’t differ too much from the pre-tax wage increase.
Having lived through hyper-inflation the only thing that got that under control was price controls. Wages going up can't stop inflation - they fuel inflation. Inflation psychology is that your money is going to become worthless so you don't save it, you spend it, which keeps prices going up. It wrecks havoc on loans and debt as well. If you lent money with a fixed rate hyperinflation erases your returns. If you borrowed with a fixed rate your debt is effectively erased.
Not to mention that governments in general don't control incomes. They can lower taxes (which is good IMO). They can pay government employees higher wages (which is hard to do when you lower taxes).
At the end of the day governments make things better by making smart investments (or policies that enable smart investments) and make things worse by making bad investments (or policies that lead to bad investments). Everything else is second order effect.
That said, your assessment of the psychology of inflation is correct. It's just inapplicable here. The issue isn't people not understanding how much richer they are, because they're not. It's the intelligentsia and "elite" refusing to acknowledge the reality, because they'd then have to actually make material changes, which would reverse the siphoning of wealth from the middle class that they've been engaging in for at least the last 30 years.
Well, it's not just that. They've been telling us for decades that wages are alternatively a direct reflection of the value of our labor to the company, or, a price set by the market, depending on which is cheaper for the corporations.
Kind of like when people say that UBI would simply instantly raise the price of all rent to match. Oh, really? The supply of rentable units will suddenly have decreased? The demand will suddenly have gone up? No? Odd that the "market set price" responded then.
It doesn't seem liquid enough to justify an increase in cost of rent the instant minimum wage goes up or UBI is implemented. My point is that a lot of these "markets" are really just price controllers setting price as they please, and landlords particularly feeling like they're special and get to lay claim to some arbitrary percentage of people's income. Which, for structural reasons, they can do.
If you give everyone $2000, then landlords can successfully raise prices because now people can pay that much, and as mad as they'd be about their UBI going straight into the hands of businesses, they're unlikely to go homeless or stop buying food to protest it, so they'll pay it. That ability and willingness to pay is called demand.
So the inflationary effect will probably be limited to low-income housing, which is already heavily subsidized by taxpayer dollars in the US, arguably even more inefficiently than the situation under a hypothetical UBI. It will probably be coupled with a deflationary effect at middle-to-upper income housing, depending on the nature of the benefit and the structure of the taxes used to fund UBI. If the policy is structured competently, there’s no reason that it is necessarily inflationary as a whole.
Anyway, my point was rather to address the fact that the other commenter didn't seem to understand what "demand" means.
Percentages also don't matter as much when you break down raw numbers. A 20% (ignoring taxes) raise when your take home pay is $3000 disappears very quickly into your $6000 credit card debt, or maybe your $700/month car loan, or your $400/month student loans. People making that extra $600 more don't get a breath of relief, they get closer to the surface to breathe at all.
>No one will credit politicians for raising average wages, people will believe they earned their raise themselves.
And this is why we're doomed to fail at this rate. We're in 4 entirely different crises that are entirely above any individual worker's head, but somehow our solution is to just grind our way out. Maybe do some gambling (or sorry, "prediction markets")to get ahead. We're trying to dig out of a hole we didn't make and we just keep shuffling sand around instead of actually progressing.
In practice, most people will never escape the shackles of perpetual debt.
How can you not feel that. Nobody is forcing me to take on new debt
That's just not true.
To come up with an example of 17%, I have to plug in numbers that put you above the tax limit for social security, assume that tax brackets weren't modified by inflation (they are supposed to be), and put you right at the cusp before the next large jump tax bracket. So from 197,300 to that plus 20%. And even then, it's more than a 17% raise unless you are in California, where it's a 16% raise.
But that's again a very contrived example. In most cases, it's a full 20% raise.
> A 20% (ignoring taxes) raise when your take home pay is $3000 disappears very quickly into your $6000 credit card debt, or maybe your $700/month car loan, or your $400/month student loans
Except inflation makes loans cheaper. You get a raise. The principle stays the same. If inflation and your salary both go up by 20%, that's mathematically equivalent to a 16% reduction in your debt. So your credit card debt becomes the equivalent of $5,000, etc.
20% is 20%. Unless you're moving from one tax bracket to another on a particularly steep threshold, a 20% raise is going to actually translate to close to 20% extra take home, especially at the income levels for someone making $3k/mo take home.
Which means we need to ship homeless people next to the poor people and make them happier.
If you said during the feudal era "there is an affordability crisis: the peasants don't have money to buy castles," perhaps you were right. But the solution was to revolt against the king.
Fundamentally, you should think of rich people's wealth as a percentage of outstanding debt (except of course things like Royal families' wealth). If public + private debt drops as a percentage of GDP, rich people will own more in nominal terms, less in terms of GDP (ie. less compared to labour). So the net effect of high inflation will do is make their ownings worth less in terms of assets.
Which is why rich people oppose it so harshly.
And, to distract everyone from the destruction of the lower and middle-classes, here’s an <insert ethnic or somewhat alien> group you’re supposed to hate.
Perhaps capitalism was less to blame… A critical fifth estate and honest political ruling would’ve kept us on the path of the post-war “contract with the people” bit, that was working fairly well.
most revolts were triggered by someone else (a rich lord) wanting to be king. The peasants participating in the revolt are simply either lied to, or were promised they would reap the benefits and rise above their station.
The real solution was the black plague, which created labour shortages, and gave the remaining peasants bargaining power.
Is this true of French Revolution? (not sure?) Is it true of the American Revolution? (Probably not?) Is it true of the Civil War? (Don't think so?)
Most of the people responsible for Government decisions are fairly well insulated from most crises, hence the crises will continue and grow.
A lot of the time it is actually even worse than this in that they are often in a position to benefit from the crises.
The real major economic problem of our day is the extent to which labor's share of productivity gains have plummeted and continue to plummet.
If your wealth comes from capital everything is going gangbusters and nothing needs to be fixed. Just listen to Trump talk about the economy and how blind he is to how normal people experience it.
And AI is just going to supercharge this problem.
On a relate-able scale, look at the 'alignment' difference between a worker and their manager; between an SWE and someone in mangement a couple of levels above. They're a different species, in terms of 'alignment', generally. They don't even speak the same language.
(I'm being hyperbolic, but hopefully the core of what I mean comes across).
Just more examples of political greed being funded by a plutocracy.
As it is we have to live with it. Enduring the barbarians.
Governments, however, are responsible for responding to crises occurring in the areas they are elected and paid to govern. But increasingly they behave like lords over subjects rather than representatives of the group.
There'd be short term economic repercussions when America throws a tantrum, but whose fault is it that this could significantly harm the Dutch economy? Better to rip off the band-aid.
New York City is one of the most expensive places in the world. Housing is more expensive than SF.
No cars needed in NYC, yet expensive as hell.
No car = no on-going petrol / diesel costs.
Fewer cars = cleaner / healthier air. Quieter, more serene ... everything.
Cleaner / Healthier air = Fewer health issues.
Fewer cars = more bikes
More bikes = physically healthier people.
Good planning is worth its weight in gold. I fear I'm stumbling into utopia theory, which is fraught with forgetting a whole lot of other realities.
Man, you really sold it.
But similar to that climate change comic "what if it's a big hoax and we create a better world for nothing?"
Before COVID America was seeing a resurgence of city life.
One possibility is "adjust the minimum wage for inflation," but they seem to be against this: https://www.google.com/search?client=firefox-b-1-d&q=the+eco...
The main issue is that the affordability crisis is also a result of the market. And without changing the preconditions or mechanics we'd get the same outcome just with different numbers.
So:
- Build housing
- Make housing more affordable by allowing homeowners (= not renting out) to write off and/or write off-faster
- Give newly built housing better write-off conditions
- Prevent cartels that operate via "pricing as a service"
The lack of building comes from the bad zoning laws preventing builds. The rules at the local level are mostly favourable to existing owners, who by a large margin, want their existing property and environment to remain as static as possible to what they purchased (ala, the character of their neighbourhood).
And not to mention that even if they, in principle, agree with denser housing, they would face problems with crowded infrastructure that has to be paid for (and mostly hasnt been upgraded or improved, like public transport, road conditions, grid connections etc).
Therefore, the best current option is to push the affordable (read: high density) housing away from where you are, even if you, in principle, don't disagree with the ideals of it.
High house prices are simply stealing from the next generation and increasing house prices raise the prices of everything because housing is an input to the cost of everything.
In many Western countries, housing is the best performing asset class so it's reached the point of stealing investment dollars that might otherwise go to productive output. Housing is the black hole at the heart of the economy.
The only country that has attempted to correct this thus far has been China. Xi Jinping quietly popped the real estate bubble a decade ago and the real estate sector has been in recession ever since as prices correct. As Xi says, houses are for living in, not for speculation [1].
The only countries that have even partly avoided this are because they implemented systems long ago that have prevented land hoarding, such as Red Vienna [2]. Interestingly, the post-WW2 UK almost ended landlords but then along came Thatcher [3].
[1]: https://en.wikipedia.org/wiki/Houses_are_for_living,_not_for...
[2]: https://www.youtube.com/watch?v=jO52FWzJoyQ
[3]: https://www.theguardian.com/lifeandstyle/2024/mar/19/end-of-...
This is true, and it is a huge problem in Europe for example, where buying a property to rent is often the best investment for regular people. So instead of opening a business or taking any other risk that may or may not pay off, investment money is going to an asset class that is not productive.
Redistribution is a left-wing policy. A lot of elected governments went right-wing recently. It's as simple as that.
The issue is not "governments". This is what the voting public wants.
See, for example, what happened after Weimar Germany's inflation.
Let them eat cake.
It is not "mishandling" the affordability crisis - it created it and actively maintains it. Most recently and least subtly by bombing and blockading all the places that we get oil from, in an economy that was deliberately designed so it can't do anything without oil.
and so really the solution is to reduce spending. which, to some extent, is so obvious it kind of hurts.
Yes, the amount of government spending currently is likely too much, but by not spending the opportunity cost is sometimes greater. As the article contends, the solution to the affordability problem is to raise wages. If you can use the levers of government to induce growth that naturally raises wages, more deficit spending might be worth it.
Inflation is useful (within limits). So is deficit spending in a growing economy.
> Inflation is really just a hidden tax
No it isn't. The idea that the government should fix the value of money -- and that if it does otherwise it is stealing out of your pockets -- is goldbug crank territory.
If inflation was a tax, then deflation would make people richer. It doesn't. Why? Because in a deflating economy, your creditors can't pay you back.
Deflation is very damaging, and avoiding it is more or less the number one goal of macroeconomic policy.
After that, the money is gone.
The underlying problem of high, persistent government spending remains. This isn’t primarily a “tax the rich” problem.
It also does help to reign in some spending. Because a lot of spending is indirectly performed through subsidies. Oftentimes in the modern day for the rich who can already afford such initiatives.
> What's wrong with taxing the rich to maintain current spending?
Perhaps you have something more sensible in mind, but much of this pressure is clearly coming from the perspective that we could have incredible government spending with no tradeoffs or inflation if only we summoned the political will to fight billionaires.
At some point they'll need to do austerity.
On Baby Boomers with paid-off houses: it's admirable that you were responsible, worked hard, bought your house in the 80s or 90s, and paid it off. However, you made that deal when there were 100 million fewer people in this country. That population growth is part of what kept those house payments affordable for you over that period. We are now in a housing crisis; there are not enough rooms to go around. Many houses are underutilized, including yours. From a strictly utilitarian standpoint, the solution would be to increase taxes to reflect the real societal cost of your residence existing as it does; it would be your decision whether to pay the tax, subdivide the house to increase utilization, or sell. This is a form of austerity.
For the yuppies: 99% of the world can make due on less than half your income, in the same city you live in. Your costs are high because your tastes are expensive. A high tax would not ruin you. It would force you to make decisions, some of which might be difficult. Public school instead of private. A cheaper car, and fewer cars. Better-controlled discretionary spending on things such as entertainment, clothing, food. Full-throated support for single-payer healthcare. Your kid will still get a good education, because you are an involved parent. You will still be able to get where you need to, because you will have a working vehicle. You will be more intentional about how you enrich your lift. You will reap the benefits of dismantling America's broken healthcare system and replacing it with something at least as good as what the rest of the developed world can boast. This is also a form of austerity.
You do not solve this problem simply my making poor people's lives harder.
It is a similar issue with taxing nominal wealth. 2/3 of nominal wealth in the US is completely non-liquid. Taxing the liquid fraction is essentially leveraged as a result, causing a catastrophic collapse in the value of similar investments by ordinary people as a side effect. Impoverishing a large portion of the middle class to own the rich isn’t a recipe for political success.
But since government is a euphemism for the more verbose "humans whose biology drives them to select self" they will continue to mishandle the "affordability crisis" by propping up its roots, doing nothing to stave off future gilded ages