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The reason is quite clear - the Fed cannot transfer money effectively to the poor/middle class; it's fiscal policy that can do that (and labor unions to some de

The reason is quite clear - the Fed cannot transfer money effectively to the poor/middle class; it's fiscal policy that can do that (and labor unions to some degree, which were gutted in the 80s). Inflation doesn't happen when you give more to the people that don't consume (and sustained inflation only happens when there is an actual shortage of some good, and arguably we have overcapacity for everything today so inflation will only happen under either a commodity price shock or complete breakdown of supply lines (transitory inflation can happen like it is now - from the COVID shock))

jfengel 5y ago
That's absolutely correct, but it has been remarkable the way there's been no money flowing to the poor and middle class. Supply-side economics clearly doesn't work, but it wasn't totally insane. If money was pumped into corporations you'd expect at least some of it to turn into more conventional demand. Buy a private jet or a yacht (built by workers and maintained by more workers), or start a company that pays wages, or something. Instead, all of the money just gets shuffled among each other. It's not just that trickle-down doesn't work; it's that it doesn't seem to trickle at all. Even to non-Chicago economists that's a little surprising. Chicago School turns out to be more than just incorrect, but utterly at odds with reality. Rich people simply don't behave the way they imagine they do. About the closest it comes is messing with the real estate market -- mostly in the form of pricing lower-class renters out. That benefitted the existing homeowners, and maybe that's helped stem middle class decline a tiny bit, but there are too many other forces working against them. Instead, it just trickles more money back up. It'll be interesting to see what happens as COVID eases off. That's a very unusual kind of shock, and I'm surprised it hasn't been even more economically disastrous than it is. Part of it is that the government has done a weak form of the right thing, pumping money directly to consumers. If not for that we'd have seen a deflationary spiral of truly catastrophic proportions.
- imtringued 5y ago
  >Supply-side economics clearly doesn't work, Supply side economics works if you have a nation that is doing so many productive investments that it has trouble getting enough financing for everything. By cutting taxes and lowering interest rates you are making it easier for businesses to acquire enough capital to do even more investments. The US economy is the exact opposite. It's difficult for the investment rate to catch up with the savings rate. Things like home construction are being delayed. Public infrastructure suffers from cost overruns, etc. >It's not just that trickle-down doesn't work; it's that it doesn't seem to trickle at all. For obvious reasons. Money doesn't trickle because consumer/worker behavior tends to lag behind business behavior. When a company has a good year, it can wait until the labor market tightens before it has to increase wages. If companies invent automation then they have a first mover advantage where they save a lot of money in the first 5 years and then once competitors join the market the margins are driven down. That delay is costing consumers money and it's costing workers money because the company doesn't employ anyone with it. Business oriented politics also tends to encourage inefficient (from a macroscopic perspective) corporations who lobby for bills that benefit them at the expense of everyone else. >Part of it is that the government has done a weak form of the right thing, pumping money directly to consumers. It's good enough. EU is still doing poorly.

jfengel 5y ago

That's absolutely correct, but it has been remarkable the way there's been no money flowing to the poor and middle class. Supply-side economics clearly doesn't work, but it wasn't totally insane. If money was pumped into corporations you'd expect at least some of it to turn into more conventional demand. Buy a private jet or a yacht (built by workers and maintained by more workers), or start a company that pays wages, or something. Instead, all of the money just gets shuffled among each other. It's not just that trickle-down doesn't work; it's that it doesn't seem to trickle at all. Even to non-Chicago economists that's a little surprising. Chicago School turns out to be more than just incorrect, but utterly at odds with reality. Rich people simply don't behave the way they imagine they do. About the closest it comes is messing with the real estate market -- mostly in the form of pricing lower-class renters out. That benefitted the existing homeowners, and maybe that's helped stem middle class decline a tiny bit, but there are too many other forces working against them. Instead, it just trickles more money back up. It'll be interesting to see what happens as COVID eases off. That's a very unusual kind of shock, and I'm surprised it hasn't been even more economically disastrous than it is. Part of it is that the government has done a weak form of the right thing, pumping money directly to consumers. If not for that we'd have seen a deflationary spiral of truly catastrophic proportions.

imtringued 5y ago
>Supply-side economics clearly doesn't work, Supply side economics works if you have a nation that is doing so many productive investments that it has trouble getting enough financing for everything. By cutting taxes and lowering interest rates you are making it easier for businesses to acquire enough capital to do even more investments. The US economy is the exact opposite. It's difficult for the investment rate to catch up with the savings rate. Things like home construction are being delayed. Public infrastructure suffers from cost overruns, etc. >It's not just that trickle-down doesn't work; it's that it doesn't seem to trickle at all. For obvious reasons. Money doesn't trickle because consumer/worker behavior tends to lag behind business behavior. When a company has a good year, it can wait until the labor market tightens before it has to increase wages. If companies invent automation then they have a first mover advantage where they save a lot of money in the first 5 years and then once competitors join the market the margins are driven down. That delay is costing consumers money and it's costing workers money because the company doesn't employ anyone with it. Business oriented politics also tends to encourage inefficient (from a macroscopic perspective) corporations who lobby for bills that benefit them at the expense of everyone else. >Part of it is that the government has done a weak form of the right thing, pumping money directly to consumers. It's good enough. EU is still doing poorly.