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Thus the governments spokesmodels (like Paul Krugman) are always pushing the idea that inflation is good and deflation is dangerous. I generally agree with you

Thus the governments spokesmodels (like Paul Krugman) are always pushing the idea that inflation is good and deflation is dangerous. I generally agree with you, and yes, Krugman-the-columnist is an ass (as opposed to Krugman-the-economist of days gone by). However, there is something (small) to be said for inflation. Behavior econometrics shows us that in some areas, our economic behavior is not what rationality would suggest. One of these areas is around wages: we expect upward movement of wages, and won't tolerate nominal decreases, even when buying power is increasing so that real wages are increasing. Maintaining a constant low level of inflation allows us to create an illusion that counters the irrational behavior, so that employers are still able to exercise a small degree of control over wages, at least over longer periods.

dnautics 16y ago
(flameshield) So giving employers control over wages is a liberal position? Just as I thought. (/flameshield) I guess, as a libertarian, my position is that irrational behavior is just that. It's going to happen, there's no reason to believe that government is going to be any less irrational than individuals, and on the balance, giving people freedom (to screw up, too) is more important, more sustainable, than imposing order and control over the populace. One thing that opened my eyes was this notion that a lot of what we do is totally a misjudgement of probabilities. If you have a game that 99.9999% of the time makes you a 100% return and .0001% of the time puts gives you a negative 10^1000 fold loss, you can wind up severe sample biasing that leads you to think that you're churning out awesome returns, when the equilibrium position is way bad. Of course, the solution that we as a society seem to have been headed toward is centralization of responsibility and insurance - which, IMO, has the potential to put everyone in the hole - when, instead we should possibly be embracing solutions of insulating risk and decentralizing, personalizing responsibility, combined with, you know, forgiveness. Seems to me like a more sustainable, humanizing way to handle things.
- CWuestefeld 16y ago
  No flames necessary. I'm also a libertarian, so philosophically I agree with you. I'm also a bit of an armchair economist, and here I was just noting what economic theory tells us. To be sure, Milton Friedman would tell us that not only isn't inflation not fooling anyone, but it also represents a real transfer of funds into the hands of those who manage to first get their hands onto "new" dollars.
- yequalsx 16y ago
  Giving people the freedom to screwup is what got us in this mess. If my neighbor makes a bad decision and buys a house he really can't afford and the bank makes the bad decision to give him the loan then it can't affect me, right? Well, it can if it's repeated millions of times. On the whole, we are irrational creatures most of the time. Humans are easily manipulated and duped. None of us is an expert in everything and so proper regulation of markets is necessary.
  - CWuestefeld 16y ago
    Implicit in your reply is the idea that government can help shield us from harm by preventing such bad decisions. Do you have any basis for a belief that the government will make better decisions than the people? Part of any answer to this must be an explanation about how those regular people, subject to being "easily manipulated and duped", will wise up and do the right thing once put in power. Second, it should be obvious to members of a community such as HN, that progress demands the freedom for people to try out new solutions, risking failure. Protecting us from this will, at best, impede progress.
    - yequalsx 16y ago
      Right now government prevents parents from trying to toughen up their 13 year old child by making him work in a coal mine. Parents who want to do such a thing are being prevented from making this bad decision by government. It would be a bad decision on my part if I knowingly made unsafe products and sold them to people. Government does its best to prevent me from making this bad decision.
      - CWuestefeld 16y ago
        You have addressed neither of my concerns: 1. How does a government official become wiser and less susceptible to manipulation or being duped? How is it that's he's got an edge over my decision-making skills? 2. If government is acting as a nanny, how can we prevent that from becoming an obstacle toward innovation (which is just another word for "risky behavior")? Trite and silly replies don't make these concerns go away.
lzw 16y ago
"Behavior econometrics shows us that in some areas, our economic behavior is not what rationality would suggest. ... we expect upward movement of wages, and won't tolerate nominal decreases, even when buying power is increasing so that real wages are increasing." I won't dispute that some effect along these lines might have been measured. But please realize this is a reaction (irrational or not) to the state of affairs at the time the reaction had. In a deflationary environment, the reaction may well be quite different. And in fact, I expect it would. What you've identified is a reaction to inflation-- that is, people knowing they need to keep getting more money to keep even-- that isn't irrational at all. But it doesn't justify inflation, or show that inflation is good. In a deflationary environment, I'm pretty sure this effect would not be there.

dnautics 16y ago

(flameshield) So giving employers control over wages is a liberal position? Just as I thought. (/flameshield) I guess, as a libertarian, my position is that irrational behavior is just that. It's going to happen, there's no reason to believe that government is going to be any less irrational than individuals, and on the balance, giving people freedom (to screw up, too) is more important, more sustainable, than imposing order and control over the populace. One thing that opened my eyes was this notion that a lot of what we do is totally a misjudgement of probabilities. If you have a game that 99.9999% of the time makes you a 100% return and .0001% of the time puts gives you a negative 10^1000 fold loss, you can wind up severe sample biasing that leads you to think that you're churning out awesome returns, when the equilibrium position is way bad. Of course, the solution that we as a society seem to have been headed toward is centralization of responsibility and insurance - which, IMO, has the potential to put everyone in the hole - when, instead we should possibly be embracing solutions of insulating risk and decentralizing, personalizing responsibility, combined with, you know, forgiveness. Seems to me like a more sustainable, humanizing way to handle things.

CWuestefeld 16y ago
No flames necessary. I'm also a libertarian, so philosophically I agree with you. I'm also a bit of an armchair economist, and here I was just noting what economic theory tells us. To be sure, Milton Friedman would tell us that not only isn't inflation not fooling anyone, but it also represents a real transfer of funds into the hands of those who manage to first get their hands onto "new" dollars.
yequalsx 16y ago
Giving people the freedom to screwup is what got us in this mess. If my neighbor makes a bad decision and buys a house he really can't afford and the bank makes the bad decision to give him the loan then it can't affect me, right? Well, it can if it's repeated millions of times. On the whole, we are irrational creatures most of the time. Humans are easily manipulated and duped. None of us is an expert in everything and so proper regulation of markets is necessary.
- CWuestefeld 16y ago
  Implicit in your reply is the idea that government can help shield us from harm by preventing such bad decisions. Do you have any basis for a belief that the government will make better decisions than the people? Part of any answer to this must be an explanation about how those regular people, subject to being "easily manipulated and duped", will wise up and do the right thing once put in power. Second, it should be obvious to members of a community such as HN, that progress demands the freedom for people to try out new solutions, risking failure. Protecting us from this will, at best, impede progress.
  - yequalsx 16y ago
    Right now government prevents parents from trying to toughen up their 13 year old child by making him work in a coal mine. Parents who want to do such a thing are being prevented from making this bad decision by government. It would be a bad decision on my part if I knowingly made unsafe products and sold them to people. Government does its best to prevent me from making this bad decision.
    - CWuestefeld 16y ago
      You have addressed neither of my concerns: 1. How does a government official become wiser and less susceptible to manipulation or being duped? How is it that's he's got an edge over my decision-making skills? 2. If government is acting as a nanny, how can we prevent that from becoming an obstacle toward innovation (which is just another word for "risky behavior")? Trite and silly replies don't make these concerns go away.

lzw 16y ago

"Behavior econometrics shows us that in some areas, our economic behavior is not what rationality would suggest. ... we expect upward movement of wages, and won't tolerate nominal decreases, even when buying power is increasing so that real wages are increasing." I won't dispute that some effect along these lines might have been measured. But please realize this is a reaction (irrational or not) to the state of affairs at the time the reaction had. In a deflationary environment, the reaction may well be quite different. And in fact, I expect it would. What you've identified is a reaction to inflation-- that is, people knowing they need to keep getting more money to keep even-- that isn't irrational at all. But it doesn't justify inflation, or show that inflation is good. In a deflationary environment, I'm pretty sure this effect would not be there.