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Nobody talks about how it's an explicit fed policy to prevent wage growth, because of worries of "inflation". While other kinds of inflation are ok, such as th

Nobody talks about how it's an explicit fed policy to prevent wage growth, because of worries of "inflation". While other kinds of inflation are ok, such as the asset price inflation we are seeing today. The asset price inflation comes from the 2007 era quantative easing money given to banks instead. That is a major reason why wages are kept low. The policy started around the 1970s, and surprise surprise, real wage growth has been flat since then. The fed & US government is the biggest firm out there.

Cacti 8y ago
Conversely, it is an explicit Fed policy to always have some non-trivial amount of inflation. In fact, generally speaking, inflation is purposefully created, and has to exist, in order for the Fed to control the money supply, because the tools available to them become largely ineffective once real rates drop below 0% for any significant stretch of time ("pushing on a string"). The only significant obstacle to this was the domestic, then international pegging of the dollar to gold reserves, the last vestiges of it being removed in the early 1970s (this of course being the high point of real wage growth in the US). This is not per se a terrible thing (assuming some mythical scenario where wage growth and inflation are nearly balanced), but it certainly shifts the balance of power from inflation to the _rate_ of inflation, and therefore is easy to nickle and dime until your average worker is almost assuredly experiencing wage growth lower than inflation. Small changes here, small changes there, ones nearly impossible for your average person to have any control over or have any lever over, and largely imperceptable to most people, end up being de-facto theft through the back door.
- _red 8y ago
  The other interesting connection to wage growth and 1970's was 'women in the workforce'. The concept, apart from the genuine support that existed for it, was certainly pushed by the feds, not out of political support but because they knew what the implications were. They could drive down purchasing power and families could make up for it by having both parents work.
  - dissident1234 8y ago
    yeah check out this list of feminists by religion https://en.wikipedia.org/wiki/Category:Feminists_by_religion https://en.wikipedia.org/wiki/Category:Feminists_by_religion Notice anything interesting?
  - Cacti 8y ago
    Yes, great point. Certainly some very insidious second order effects there.
  - gumby 8y ago
    I agree that this factor has a big impact on the economy but I don't see how it drives down purchasing power in any way. By having more people available to do more things you have an opportunity for more economic activity. It's true that when an economy is in deep, possibly structural recession, you can increase wages by reducing the number of workers (this was used in Germany in the 1930s -- when they cut the number of people allowed to work in half the employment rate magically and mathematically doubled). But if you think that there is inherently a finite amount of work to be done (the so-called "lump of labor fallacy") you could also "fix" this problem by adding a day (or two!) to the week end. France tried this by lowering the number of non-overtime hours per week from 40, but it had no real effect. Instead I think there is general consensus that having more people available to do things promotes economic growth and human freedom. It has had a pernicious effect: household income has increased because the number of people working per household now averages more than 1. Relying on that measurement has masked the overall flattening of wage growth, which has been quite a bad thing. I don't know what you mean by this policy being "pushed by the feds"; could you give any examples?
    - woolvalley 8y ago
      I think they mean supported maybe? I can definitely see a typical economist giving arguments why women going into the workforce and away from the family 'workforce' is a good thing, this being encouraged by the fed which leads to policy changes by congress people. I think what people argue is multifold: - Households tend to pay for things in terms of budget percentages vs something more rational. Ex: People tend to semiconciously target 30% of their income towards housing, and will upgrade and downgrade their housing accordingly as incomes go up and down. A dual income household will therefore pay approx double the normal price if single family households are the norm. - The cost of things in some markets, especially NIMBY housing markets, are demand sensitive at the margins since the supply isn't responding properly due to rent seeking structures. So if a new more competitive creature called the dual income household lands on the scene, the price norm will adjust to assume a dual income household vs a single income household as the market price - Employers consider cost of living in pay to make a competitive offer to employees. If the typical household is dual income, the pressure to pay more to cover this norm is reduced. People quickly figure out that you need to be dual income to pay your rent and have a 'family sized' lifestyle. - Iterate this kind of model several times over a lot of stuff and you need to be a dual income household in many cases to tread water. So what you are saying and what others say can both be true at the same time. Dual income norms increase total economic output, but also make it very hard to compete as a single income household on the market, which have other knock on effects such as decreased fertility since all of the 'free' household labor has now disappeared. Go watch "F is for Family" for a 1970s time capsule of how family life was back then. You have a suburban white single family household living in a house on a single lower-middle class income, with 2 cars, the conflicts that arises as the wife starts working and her previous 'free' household labor disappears and more.
- gumby 8y ago
  There are two other reasons for having a small but nonzero level of inflation. Your example (that you need a nonzero level in order to have something to reduce -- else your only alternative is asset sales which is a much worse option for many reasons) is probably the most important. Another is that measuring the economy is quite inexact (or coarse) and has a lot of latency, so you need a little "sloop" and you want that to be positive rather than negative for the reason you gave. This is no different than any other engineering consideration: you want your characteristic error to be slightly small or slightly large depending on how the piece you're making fits with another. Third, a little inflation encourages investment; if you leave all your money in the mattress it will lose (hopefully only a little) value over time, so you are encouraged to at least put it in a bank, if not into some more productive asset. In general I think the last point is an important and good one, but a downside is that people who do not have much savings (live paycheck to paycheck) and who have no other defence against downward wage pressure do suffer what you nicely refer to as "de-facto theft through the back door" and that is an overlooked source of real misery. I'm not sure what central banks can do about it though; seems like it should be the responsibility of the actual government. By the way ultimately the Fed's reductio job description (pace the "dual mandate") is to make the money supply match the level of economic activity as closely as possible, nothing more. If you don't issue new currency but more people are born, consuming more haircuts and building more homes, then you end up with deflation, which causes the economy to grind down and makes everyone miserable. If you issue to much you get inflation which causes the economy to grind down and makes everyone miserable. They have a small number of tools to do it and pretty crude observational tools but still have ended up more consistent than when currency was linked to stuff not at all correlated with economic activity (the availability of metals). Just look at the economic crashes (sometimes more than one a decade) of the 19th century triggered by the gold strikes of California, the Yukon and Victoria, as examples.
zozbot123 8y ago
The fed cannot prevent wage growth. They can only ever put a lid on nominal GDP growth, which affects wages and profits roughly to the same extent (if anything, profits are affected a lot quicker than wages, or even employment). Wages make up a lot of the cost that businesses have to pay, so wage growth outstripping GDP or productivity was traditionally seen as a red flag and an indicator that inflation might be around the corner. But this has become less important, since we now have more direct indicators of what the market itself is forecasting about future inflation - things have improved a lot since the 1970s!
gumby 8y ago
> Nobody talks about how it's an explicit fed policy to prevent wage growth, because of worries of "inflation". While other kinds of inflation are ok, such as the asset price inflation we are seeing today..... The policy started around the 1970s, Hold on, I think you're conflating two things. The fed doesn't have the ability to affect wages directly in any way, but it is supposed to use the tools it has to "promote maximum employment, stable prices, and moderate long term interest rates" (called "dual mandate" because "maximize employment" was added in the 70s to the price & interest rate goals; most central banks don't have an explicit employment goal at all. Indeed the employment mandate was added in the 70s at a time when wage contracts (not something the fed has control over) were often indexed to inflation, which caused a feedback loop. So 1> the General Theory posits a linkage between interest rates and unemployment, so to some degree changing interest rates will impact wages, depending on what else is going on in the economy, which will affect to some degree hiring and layoff. 2> while wages are taken into account when looking into the economy, they aren't themselves a knob available to the Fed. The fed basically has only two tools: it can control, indirectly, how much interest banks charge on loans, by setting the rate at which it charges banks to borrow money from them and, more controversially, to actually buy assets. Ideally there's just the right amount of "money" (broadly defined) to match the size of the economy, and they can control the rate of which money is added as economy grows by adjusting their own interest rate to banks. In some emergency situations (e.g 2008 crisis you correctly cite) that mechanism binds up and they actually inject liquidity by buying things (govt bonds) but nobody thinks this is a preferable way to go. Asset price inflation is not considered preferable to wage inflation in any way. Source for this: years of reading actual Fed reports and minutes. This isn't secret knowledge, but it is somewhat arcane.
- woolvalley 8y ago
  It's more of a watch what they do vs what they say thing: > since 1979, the Federal Reserve has raised interest rates whenever it looked like wages were going to rise faster than inflation. The Federal Reserve, in other words, has crushed wages. https://www.ianwelsh.net/trumps-continued-collision-with-the-federal-reserve/ https://www.ianwelsh.net/trumps-continued-collision-with-the... While you don't see similar raising of interest rates when we have record multi year growth in stock prices The rates started going up as far as I can see in reaction to wage growth: https://www.bloomberg.com/opinion/articles/2018-05-17/fed-shouldn-t-raises-rates-just-to-keep-wages-in-check https://www.bloomberg.com/opinion/articles/2018-05-17/fed-sh... The inverse of the current situation happened, ie: If we have record multi year wage growth and the fed only starts ramping up interest rates in response to a recent increase in stock prices, then I would believe what is nominally said about the fed a bit more :p

Cacti 8y ago

Conversely, it is an explicit Fed policy to always have some non-trivial amount of inflation. In fact, generally speaking, inflation is purposefully created, and has to exist, in order for the Fed to control the money supply, because the tools available to them become largely ineffective once real rates drop below 0% for any significant stretch of time ("pushing on a string"). The only significant obstacle to this was the domestic, then international pegging of the dollar to gold reserves, the last vestiges of it being removed in the early 1970s (this of course being the high point of real wage growth in the US). This is not per se a terrible thing (assuming some mythical scenario where wage growth and inflation are nearly balanced), but it certainly shifts the balance of power from inflation to the _rate_ of inflation, and therefore is easy to nickle and dime until your average worker is almost assuredly experiencing wage growth lower than inflation. Small changes here, small changes there, ones nearly impossible for your average person to have any control over or have any lever over, and largely imperceptable to most people, end up being de-facto theft through the back door.

_red 8y ago
The other interesting connection to wage growth and 1970's was 'women in the workforce'. The concept, apart from the genuine support that existed for it, was certainly pushed by the feds, not out of political support but because they knew what the implications were. They could drive down purchasing power and families could make up for it by having both parents work.
- dissident1234 8y ago
  yeah check out this list of feminists by religion https://en.wikipedia.org/wiki/Category:Feminists_by_religion https://en.wikipedia.org/wiki/Category:Feminists_by_religion Notice anything interesting?
- Cacti 8y ago
  Yes, great point. Certainly some very insidious second order effects there.
- gumby 8y ago
  I agree that this factor has a big impact on the economy but I don't see how it drives down purchasing power in any way. By having more people available to do more things you have an opportunity for more economic activity. It's true that when an economy is in deep, possibly structural recession, you can increase wages by reducing the number of workers (this was used in Germany in the 1930s -- when they cut the number of people allowed to work in half the employment rate magically and mathematically doubled). But if you think that there is inherently a finite amount of work to be done (the so-called "lump of labor fallacy") you could also "fix" this problem by adding a day (or two!) to the week end. France tried this by lowering the number of non-overtime hours per week from 40, but it had no real effect. Instead I think there is general consensus that having more people available to do things promotes economic growth and human freedom. It has had a pernicious effect: household income has increased because the number of people working per household now averages more than 1. Relying on that measurement has masked the overall flattening of wage growth, which has been quite a bad thing. I don't know what you mean by this policy being "pushed by the feds"; could you give any examples?
  - woolvalley 8y ago
    I think they mean supported maybe? I can definitely see a typical economist giving arguments why women going into the workforce and away from the family 'workforce' is a good thing, this being encouraged by the fed which leads to policy changes by congress people. I think what people argue is multifold: - Households tend to pay for things in terms of budget percentages vs something more rational. Ex: People tend to semiconciously target 30% of their income towards housing, and will upgrade and downgrade their housing accordingly as incomes go up and down. A dual income household will therefore pay approx double the normal price if single family households are the norm. - The cost of things in some markets, especially NIMBY housing markets, are demand sensitive at the margins since the supply isn't responding properly due to rent seeking structures. So if a new more competitive creature called the dual income household lands on the scene, the price norm will adjust to assume a dual income household vs a single income household as the market price - Employers consider cost of living in pay to make a competitive offer to employees. If the typical household is dual income, the pressure to pay more to cover this norm is reduced. People quickly figure out that you need to be dual income to pay your rent and have a 'family sized' lifestyle. - Iterate this kind of model several times over a lot of stuff and you need to be a dual income household in many cases to tread water. So what you are saying and what others say can both be true at the same time. Dual income norms increase total economic output, but also make it very hard to compete as a single income household on the market, which have other knock on effects such as decreased fertility since all of the 'free' household labor has now disappeared. Go watch "F is for Family" for a 1970s time capsule of how family life was back then. You have a suburban white single family household living in a house on a single lower-middle class income, with 2 cars, the conflicts that arises as the wife starts working and her previous 'free' household labor disappears and more.
gumby 8y ago
There are two other reasons for having a small but nonzero level of inflation. Your example (that you need a nonzero level in order to have something to reduce -- else your only alternative is asset sales which is a much worse option for many reasons) is probably the most important. Another is that measuring the economy is quite inexact (or coarse) and has a lot of latency, so you need a little "sloop" and you want that to be positive rather than negative for the reason you gave. This is no different than any other engineering consideration: you want your characteristic error to be slightly small or slightly large depending on how the piece you're making fits with another. Third, a little inflation encourages investment; if you leave all your money in the mattress it will lose (hopefully only a little) value over time, so you are encouraged to at least put it in a bank, if not into some more productive asset. In general I think the last point is an important and good one, but a downside is that people who do not have much savings (live paycheck to paycheck) and who have no other defence against downward wage pressure do suffer what you nicely refer to as "de-facto theft through the back door" and that is an overlooked source of real misery. I'm not sure what central banks can do about it though; seems like it should be the responsibility of the actual government. By the way ultimately the Fed's reductio job description (pace the "dual mandate") is to make the money supply match the level of economic activity as closely as possible, nothing more. If you don't issue new currency but more people are born, consuming more haircuts and building more homes, then you end up with deflation, which causes the economy to grind down and makes everyone miserable. If you issue to much you get inflation which causes the economy to grind down and makes everyone miserable. They have a small number of tools to do it and pretty crude observational tools but still have ended up more consistent than when currency was linked to stuff not at all correlated with economic activity (the availability of metals). Just look at the economic crashes (sometimes more than one a decade) of the 19th century triggered by the gold strikes of California, the Yukon and Victoria, as examples.

zozbot123 8y ago

The fed cannot prevent wage growth. They can only ever put a lid on nominal GDP growth, which affects wages and profits roughly to the same extent (if anything, profits are affected a lot quicker than wages, or even employment). Wages make up a lot of the cost that businesses have to pay, so wage growth outstripping GDP or productivity was traditionally seen as a red flag and an indicator that inflation might be around the corner. But this has become less important, since we now have more direct indicators of what the market itself is forecasting about future inflation - things have improved a lot since the 1970s!

gumby 8y ago

> Nobody talks about how it's an explicit fed policy to prevent wage growth, because of worries of "inflation". While other kinds of inflation are ok, such as the asset price inflation we are seeing today..... The policy started around the 1970s, Hold on, I think you're conflating two things. The fed doesn't have the ability to affect wages directly in any way, but it is supposed to use the tools it has to "promote maximum employment, stable prices, and moderate long term interest rates" (called "dual mandate" because "maximize employment" was added in the 70s to the price & interest rate goals; most central banks don't have an explicit employment goal at all. Indeed the employment mandate was added in the 70s at a time when wage contracts (not something the fed has control over) were often indexed to inflation, which caused a feedback loop. So 1> the General Theory posits a linkage between interest rates and unemployment, so to some degree changing interest rates will impact wages, depending on what else is going on in the economy, which will affect to some degree hiring and layoff. 2> while wages are taken into account when looking into the economy, they aren't themselves a knob available to the Fed. The fed basically has only two tools: it can control, indirectly, how much interest banks charge on loans, by setting the rate at which it charges banks to borrow money from them and, more controversially, to actually buy assets. Ideally there's just the right amount of "money" (broadly defined) to match the size of the economy, and they can control the rate of which money is added as economy grows by adjusting their own interest rate to banks. In some emergency situations (e.g 2008 crisis you correctly cite) that mechanism binds up and they actually inject liquidity by buying things (govt bonds) but nobody thinks this is a preferable way to go. Asset price inflation is not considered preferable to wage inflation in any way. Source for this: years of reading actual Fed reports and minutes. This isn't secret knowledge, but it is somewhat arcane.

woolvalley 8y ago
It's more of a watch what they do vs what they say thing: > since 1979, the Federal Reserve has raised interest rates whenever it looked like wages were going to rise faster than inflation. The Federal Reserve, in other words, has crushed wages. https://www.ianwelsh.net/trumps-continued-collision-with-the-federal-reserve/ https://www.ianwelsh.net/trumps-continued-collision-with-the... While you don't see similar raising of interest rates when we have record multi year growth in stock prices The rates started going up as far as I can see in reaction to wage growth: https://www.bloomberg.com/opinion/articles/2018-05-17/fed-shouldn-t-raises-rates-just-to-keep-wages-in-check https://www.bloomberg.com/opinion/articles/2018-05-17/fed-sh... The inverse of the current situation happened, ie: If we have record multi year wage growth and the fed only starts ramping up interest rates in response to a recent increase in stock prices, then I would believe what is nominally said about the fed a bit more :p