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Inflation doesn't exist as a policy to stiff wage earners. Inflation exists as a reality of a growing economy (more goods and services needs more money to cover
by uses 5y ago
Inflation doesn't exist as a policy to stiff wage earners. Inflation exists as a reality of a growing economy (more goods and services needs more money to cover them). The alternative is deflation, which would be extremely bad. So what we aim for, is low inflation. Which we've had for ~40 years. Low, controlled inflation is the vastly preferable alternative to any amount of deflation, so it's the side of the scale we target, giving a ~2% margin of error (~2% is the inflation level usually targeted by modern central banks).
What Krugman is talking about is that cutting wages is extremely hard for employers to do. Nobody wants to take a paycut. So what employers do instead, being put in the situation of needing to cut payroll, is eliminate entire positions. Which on the whole is worse than a paycut because of the destabilizing effect to the individual and society. So a positive side effect of inflation (not the main effect, a side effect), is that in the absence of pay raises, low inflation creates a constant mild paycut unless there is specifically a pay raise. It makes the economy more resilient.
- friedturkey 5y agoYeah, deflation is awful. Imagine our continuously increased production and efficiency resulting in goods becoming cheaper and the value of the working person’s dollar going farther. Horrifying.
- imtringued 5y agoImagine money capitalists abandoning physical capital and laying off workers because their grocery bill turns the yield on employment negative while the yield on money itself is positive. You'd be foolish to sell products for lower prices, you don't get a discount on debt for example (negative interest rates).
- jokethrowaway 5y agoWith deflation there would be no reason to invest your money, paralysing the economy. Some inflation is needed; what we don't need is https://brrr.money/ https://brrr.money/
- dnautics 5y ago"no reason to invest your money" You mean with deflation people will suddenly no longer want for more money? Sign us up!
- ska 5y ago> You mean with deflation people will suddenly no longer want for more money? Sign us up! No, they mean that people will want jobs and not find them. [addition: this is at least the orthodox view behind small inflation targets as policy, that on the whole it's the best trade off]
- friedturkey 5y agoJapan is said to be deflationary (until covid at least) and lacks an unemployment problem.
- ska 5y agoIs japan deflationary in real terms? Even if so I suspect the economists would argue endlessly about "other factors". Either way, I'm not saying I believe the analysis, but when economists talk about the problems of deflation they aren't afraid that people will have "enough" money.
- imtringued 5y agoIf there is no reason to invest they will want more money. Once the interest rate drops below liquidity preference the desire to hold money approaches infinity. This is known as the keynesian liquidity trap. The only solution is to implement negative interest rates on cash to neutralize the liquidity preference. Even if you have negative interest rates on money, people will flock to the next basic human need that has its own liquidity preference. Once the yield on land or property falls below liquidity preference people will hold onto empty property. The solution to the problem is to neutralize ground rent via land value taxation. Thus you have both a money cycle and a real estate cycle.
- 5y ago
- BitwiseFool 5y agoThere's this really weird dichotomy where whats "good for the economy" is often bad for you as an individual, and vice versa.
- dnautics 5y agoSure because the people who decide what is "good for the economy" have different interests than pretty much every other individual in it.
- pashamur 5y agoIt’s a real thing: https://en.m.wikipedia.org/wiki/Paradox_of_thrift https://en.m.wikipedia.org/wiki/Paradox_of_thrift You get ahead by saving, but everyone can’t do that all together or the economy collapses.
- dnautics 5y agoIt's a model that makes behavioral assumptions that are provably wrong. The fact that people buy computers despite prices going down contradicts the underlying assumption. There is nothing particularly special about computers among all goods.
- fuzzfactor 5y agoOnly collapse of the consumer economy, which in the first place should never be allowed to rise to enough significance to be much of a show-stopping collapse when it happens.
- colinmhayes 5y agoThere will not be many working people if the economy is deflationary. Please read a macro book so you at least understand what you're arguing against before spouting nonsense.
- megablast 5y agoTell so Some to read a book because you can’t articulate the issue.
- friedturkey 5y agoJapan says its economy has been in deflation since the 90s.[1] Everybody is working. Sure, the numbers aren't going up and there aren't constant booms of new companies being valued at 100 billion and exploding (which draws ire from economists and billionaire investors), but quality of life has been consistently high for normal people. Homelessness is barely present and people who want a job can find one quickly. If the books say it's wrong, maybe it's time they get updated. [1] https://www5.cao.go.jp/zenbun/wp-e/wp-je03/03-00102.html https://www5.cao.go.jp/zenbun/wp-e/wp-je03/03-00102.html
- colinmhayes 5y agoJapan isn't a very good example because their economy has absolutely tanked because of their horrible monetary policy. Japan was in a liquidity trap caused by their low inflation for literally decades which caused their economy to grow barely 1% annually. The reason their unemployment rate is low is because they've been stuck in this rut for literally 30 years, so people have adjusted. That doesn't mean it isn't causing immense harm though. Real wages are literally lower than they were in the early 90s. https://www.economist.com/finance-and-economics/2013/03/09/waging-a-new-war https://www.economist.com/finance-and-economics/2013/03/09/w...
- djohnston 5y agoReal wages for Americans also haven't grown in decades: https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/ https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us... What's the harm?
- batshit_beaver 5y agoDeflation is horrific for any economy because it makes debt more expensive to service. Like it or not, modern economies are largely able to function thanks to prolific use of credit. If you think about it, it makes a ton of sense - if a rich person or company is sitting on a bunch of money, in an inflationary environment they are encouraged to invest this money in r&d, businesses (esp risky ones, like innovative startups), better employees or benefits for existing ones, etc. In a deflationary economy the best use of money is NO use of money. It's a death trap.
- prichino 5y agoThis deflation is bad meme comes straight from the big international bankers of the early 20th century (JPM et al.). They cared mostly about liquidity and stable exchange rates. Unless you are one of them, please stop parroting "would be extremely bad". Would it be different from now? Probably. Extremely bad? For whom?
- prewett 5y agoPeople who have debt is the canonical set for whom deflation would be bad Including everyone who has a mortgage: your payments stay the same, but you earn less, so they take up a larger portion of your income. Naturally this can lead people who have debts that they could have serviced without deflation now cannot service them, so they go bankrupt. This also happens with any company that has debt (which is pretty much all of them). The Great Depression is frequently seen as having been an ordinary depression made worse by a deflationary spiral. So for whom would it be bad for? Everyone.
- dnautics 5y ago"People who have debt" is dominated by financialized instruments: shorts, options, forex, margin trading, etc. all exist due to easy access to debt at low interest rates.
- notahacker 5y ago"People who have debt" is dominated, surprisingly enough, by people with debt. There are a lot more people with mortgages than people making leveraged trades. For the rich loss of an opportunity to cheaply leverage their wealth is the gain of opportunities to lend their wealth at usurious rates instead, or to profit at the expense of the productive from simply selling off their assets and doing nothing with their cash but wait for the price to fall so they can buy stuff back for less. For ordinary people whose net worth is mostly tied up in a property that's falling in value but not in mortgage repayments and whose wages are about to be reduced, the opportunities are less exciting. (Sucks for the rich trying to run companies rather than just letting their investment manager allocate their wealth to whatever grows it best in the current climate too)
- int_19h 5y agoDo we actually have a growing economy in practice at this point? Or do we pretend that it's growing by inventing value out of thin air (as is the case with e.g. stocks)?