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Inflation is excess demand for goods and services. We raise interest rates in an inflationary environment because we want people to accumulate wealth in the for

Inflation is excess demand for goods and services. We raise interest rates in an inflationary environment because we want people to accumulate wealth in the form of financial assets instead of spending on real things. Raising taxes on high-income people could help if it goes far enough that we actually reduce our consumption. High income people have low marginal propensity to consume - that’s why it’s better to give regular people money when you want stimulus. Tax hikes targeted at the very high income would have to be very steep, or they’d just be absorbed by lower savings rates. As long as we’re entertaining weird taxes, progressive consumption tax is probably what you want here. Special sales taxes on big ticket luxury items (cars, boats, watches, etc) could also do the same thing a little less elegantly but in a more familiar way.

bugglebeetle 3y ago
Much of inflation is being driven-by corporate concentration, so the answer is to not tax wealthy individuals but corporate profits at much higher rates: https://scholarworks.umass.edu/econ_workingpaper/343/ https://scholarworks.umass.edu/econ_workingpaper/343/
- Scoundreller 3y ago
  > not tax wealthy individuals but corporate profits at much higher rates Most wealthy individuals would take a haircut if corporate holdings were worth less. It mostly has the same effect. It's not like Bill Gates has all of his wealth in cash.
  - bugglebeetle 3y ago
    Sure, but the parent was talking about how taxing wealthy individuals would not tame inflation because of their (relatively) small impact on demand. The same is not true about how corporate profits filter back into the economy.
VagueMag 3y ago
> We raise interest rates in an inflationary environment because we want people to accumulate wealth in the form of financial assets instead of spending on real things. Yes and no. The Fed has a not-so-subtle goal of taming inflation in part by capping asset prices with its interest rate hikes.
jarym 3y ago
> Inflation is excess demand for goods and services Correction, inflation is either from excess demand or constrained supply - the reasons for inflation matter when trying to address the problem.
- trashtester 3y ago
  > inflation is either from excess demand or constrained supply Inflation is always about the balance between supply and demand > the reasons for inflation matter when trying to address the problem Less than one might think based on the either or thinking. Even when a change in supply causes inflation, reducing the demand side will bring it back down. The exception being for specific items where demand is not very elastic in the short term, such as fuel or basic food items. But even increasing interest rates (a demand side intervention) may not affect those prices by much, it will affect other prices enough that aggregate demand can stay low.
- somewhereoutth 3y ago
  My understanding is that, at the whole economy level, it is in fact neither of these things, but instead too much money in circulation. If the government prints more money, then the amount of goods/services each unit will buy will fall. Through ultra low interest rates and QE, governments have been doing a lot of money printing.
  - kasey_junk 3y ago
    That is an economic theory expressed by a particular economic school but it is not universally believed by economists. And like most economic theories it’s very hard to (in)validate in the real world.
    - influx 3y ago
      What are the arguments here? If it didn’t cause inflation, the USA should abolish taxes and just print trillions of dollars and buy everything in the world, and give each resident a million dollars a month as basic income.
somewhereoutth 3y ago
Strictly, inflation is too much money chasing too few goods/services. Hence money printing (with low interest rates facilitating credit expansion, and QE activities) causes inflation, and the reverse will reduce it. True that the rich will tend to save money thrown at them, but they also tend to sink it into assets (like property) hence the 'everything bubble'. As you point out, wealth taxes won't move the needle on the price of bread, but may help reduce the costs of housing.
- stephen_g 3y ago
  That’a not ‘strictly’ what inflation is, it’s how the Austrian school defines it. But it’s much complex than that (monetary velocity etc.), so trying to model the economy using the quantity theory of money tends to not yield useful results.
  - somewhereoutth 3y ago
    Agreed that velocity is an important component, but I hope we can also agree that dumping large amounts of money into the economy (ultra low rates and QE) will result in price rises. At the whole economy level, I'd suggest that supply and demand don't really cause inflation - at least, not the kind of disfunctional inflation that we should guard agains. For example, if the supply of bread is reduced, then necessarily people will eat less bread (and price signalling will ensure that it is the poor that eat less bread). So long as this does not trigger e.g. a wage price spiral or other pathological effect, then this is 'fine'.
- closeparen 3y ago
  Assets being overvalued is a different thing from inflation. It's true that the cost of housing is up, but that's also borne out in rents. It's true that most people are homeowners, but the quantity actually included in inflation statistics is "owner's equivalent rent." House prices acquiring a premium over and above rent on comparable properties is not inflation.

bugglebeetle 3y ago

Much of inflation is being driven-by corporate concentration, so the answer is to not tax wealthy individuals but corporate profits at much higher rates: https://scholarworks.umass.edu/econ_workingpaper/343/ https://scholarworks.umass.edu/econ_workingpaper/343/

Scoundreller 3y ago
> not tax wealthy individuals but corporate profits at much higher rates Most wealthy individuals would take a haircut if corporate holdings were worth less. It mostly has the same effect. It's not like Bill Gates has all of his wealth in cash.
- bugglebeetle 3y ago
  Sure, but the parent was talking about how taxing wealthy individuals would not tame inflation because of their (relatively) small impact on demand. The same is not true about how corporate profits filter back into the economy.

VagueMag 3y ago

> We raise interest rates in an inflationary environment because we want people to accumulate wealth in the form of financial assets instead of spending on real things. Yes and no. The Fed has a not-so-subtle goal of taming inflation in part by capping asset prices with its interest rate hikes.

jarym 3y ago

> Inflation is excess demand for goods and services Correction, inflation is either from excess demand or constrained supply - the reasons for inflation matter when trying to address the problem.

trashtester 3y ago
> inflation is either from excess demand or constrained supply Inflation is always about the balance between supply and demand > the reasons for inflation matter when trying to address the problem Less than one might think based on the either or thinking. Even when a change in supply causes inflation, reducing the demand side will bring it back down. The exception being for specific items where demand is not very elastic in the short term, such as fuel or basic food items. But even increasing interest rates (a demand side intervention) may not affect those prices by much, it will affect other prices enough that aggregate demand can stay low.
somewhereoutth 3y ago
My understanding is that, at the whole economy level, it is in fact neither of these things, but instead too much money in circulation. If the government prints more money, then the amount of goods/services each unit will buy will fall. Through ultra low interest rates and QE, governments have been doing a lot of money printing.
- kasey_junk 3y ago
  That is an economic theory expressed by a particular economic school but it is not universally believed by economists. And like most economic theories it’s very hard to (in)validate in the real world.
  - influx 3y ago
    What are the arguments here? If it didn’t cause inflation, the USA should abolish taxes and just print trillions of dollars and buy everything in the world, and give each resident a million dollars a month as basic income.

somewhereoutth 3y ago

Strictly, inflation is too much money chasing too few goods/services. Hence money printing (with low interest rates facilitating credit expansion, and QE activities) causes inflation, and the reverse will reduce it. True that the rich will tend to save money thrown at them, but they also tend to sink it into assets (like property) hence the 'everything bubble'. As you point out, wealth taxes won't move the needle on the price of bread, but may help reduce the costs of housing.

stephen_g 3y ago
That’a not ‘strictly’ what inflation is, it’s how the Austrian school defines it. But it’s much complex than that (monetary velocity etc.), so trying to model the economy using the quantity theory of money tends to not yield useful results.
- somewhereoutth 3y ago
  Agreed that velocity is an important component, but I hope we can also agree that dumping large amounts of money into the economy (ultra low rates and QE) will result in price rises. At the whole economy level, I'd suggest that supply and demand don't really cause inflation - at least, not the kind of disfunctional inflation that we should guard agains. For example, if the supply of bread is reduced, then necessarily people will eat less bread (and price signalling will ensure that it is the poor that eat less bread). So long as this does not trigger e.g. a wage price spiral or other pathological effect, then this is 'fine'.
closeparen 3y ago
Assets being overvalued is a different thing from inflation. It's true that the cost of housing is up, but that's also borne out in rents. It's true that most people are homeowners, but the quantity actually included in inflation statistics is "owner's equivalent rent." House prices acquiring a premium over and above rent on comparable properties is not inflation.