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In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is ext

In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around. On the other hand, lower interest rates allow banks to synthetically create more money at a lower cost (e.g. corporations borrowing say, a million dollars at 1% interest is very attractive) and that will drive inflation more broadly, because its new money created. Raising rates makes creating money more expensive (setting a higher "floor" on the price of new money relative to what the banks get it at) This is why interest rates rising in theory, will depress housing prices because it costs more in monthly payments to cover the interest on the mortgage to buy the house, which means fewer people can buy more expensive homes and it takes more money out of the economy as a result, because borrowing is more expensive. This is why you can get 5% yield CDs at banks quite suddenly, because giving you favorable terms on savings is cheaper than borrowing the money from the central bank. Its false equivalency to think cash assistance and many other forms of social welfare drives inflation more broadly, in the general case. I will caveat there are specific cases where inflation can be driven by government spending directly, but its not generally the case with things like cash assistance, in due part because its not creating new money. [0]: I'd like to just point out, I'm explaining a very complex system of inputs and outputs in very simplistic terms. While its not incorrect per se, it certainly is more complex than I'm laying out in reality. Conceptually however, I think this explanation is rather sufficient in getting the point across that I'm asserting [1]: if I'm wrong, I'd love for someone to point out what I'm wrong about. I'm assuming most of us aren't economics majors here, therefore, as noted, I omitted alot of nuance, while acknowledging that there are cases where the government can cause inflation via spending.

gustavus 3y ago
> In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around. Although this would be true to a certain extent wouldn't this drive inflation as it would cause an increase in demand without a corresponding increase in supply? Since suddenly a lot more people can purchase things that they couldn't before. E.g. Cars at the beginning of COVID, consumer electronics, etc.
- mitthrowaway2 3y ago
  If it's coming from tax dollars, it's increasing the amount some people can spend on consumer electronics and used cars while also decreasing the amount that other people can spend on houses, vacations, and new cars. So the net impact should be roughly zero, assuming that the taxes don't meaningfully affect supply. However, with pandemic rate cuts, much of it came from newly-created loan money (either borrowed by the government, or by businesses and individuals), meaning cheap loans for cars and houses drove those prices up at the same time that consumer goods were also in high demand.
- no_wizard 3y ago
  To pose a question to think about: what inflation are we talking about exactly? Short term inflation (usually horizon of less than 18 months) can significantly increase due to demand outstripping supply, absolutely. Market efficiency though, should cause rapid normalization and eventually prices will fall due to competition, at least in a healthy functioning market economy (that's another debate). That said, I'm considering what drives long term inflation, which extends beyond an 18 month horizon. We're approaching year 3 of dramatically increasing inflation across the board, and one of the only mechanisms we have at that point is driving up the cost of new money and allowing that to ripple across the economy. So much of our economic system is centrally based around borrowing, whether its cars, homes, business expansion etc. These decisions are in part, driven by cost. When the cost of borrowing is lower, its easier to spend higher sums and drive long term inflation. It also lends people to seek greater and greater returns with "cheap money", driving these boom bust cycles. My general argument is long term inflation is driven by cheap money, and short term inflation that may be caused by government assistance is just that - short term, and measurable, and should, in a functioning market, normalize itself away. tl;dr, demand side inflation naturally curbs since high demand outstripping supply will natural raise prices to an equilibrium, and bring them back down as it cools off, supply side inflation is more opaque in reality, esp. when it comes to controlling borrowing costs (IE, creating new money)
hguant 3y ago
It's not that you omitted nuance, it's that your basic premise - "cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around" - is fundamentally incorrect, and goes against both economic theory, and lived experience over the last few years post COVID. > Its false equivalency to think cash assistance and many other forms of social welfare drives inflation more broadly, in the general case. This is also probably why you're getting down voted - it's just wrong 1. taxation, either explicit or implicit through interest rate manipulation, doesn't impact monetary supply at the scale we're talking about here. It impacts the cost of, and therefore the availability of capital. 2. cash assistance to the poor isn't a simple "take $100 from Peter and give it to Paul" transaction. It transforms capital (what taxes impact) into money. This is a weird distinction, but capital isn't money. Think of it as two separate streams - there's a fictionalized capital stream of stock markets etc, and a "real world" money stream that interacts with good and services. 3. Cash assistance to the poor directly drives inflation because the demand for goods is decoupled from reality. By giving cash to the poor, you generate increased demand for the same amount of goods and services. This is econ 101 - demand goes up, prices go up. Because the monetary supply has been manipulated by injections from capital, this demand is decoupled from the cycles that would tamp it down. Let me repeat that: a sudden increase in demand, coupled with more money in the system, decouples prices from the systems that keep them in place and drives inflation. If you'd like an object lesson in this, I'd refer you to the past 3 years of experimentation with wealth transfers in the US, and the current inflation as a result of that. Edit to add - I make no moral statements here. I think that cash assistance to the poor _is_ generally the least bad option of government assistance; however, we should be clear eyed about the costs of these actions, and not hand wave them away, only to be shocked, shocked, shocked, when those costs come due.
- no_wizard 3y ago
  The past 3 years of experimentation of wealth transfer has wholly benefited the wealthy and corporations by a large margin. Direct cash assistance[0] in total cost is less than what just the PPP loans ended up costing the government, for example. This actually would be a great example of government spending that does cause inflation[1][2] and largely did not benefit the middle class (let alone the poor). Cash assistance to the poor / middle class is more murky. While yes, short term inflation in part was driven by the broad relief payments[3], it is sustained by cheap money[4]. My argument is centrally that cash assistance to the poor and middle class, broadly, won't sustain inflation as prices rise and demand normalizes, as an efficient market should do. The distortion on that market happens with a combination of low interests, which drives cheap capital creation, which distorts natural price normalization, and fuels riskier investments, which are all observable economic cycles. My conclusion, based on what I understand and evidence there in, is that cash assistance, especially in limited one shot capacity, is not going to sustain inflation at the pace we've been seeing it most broadly. One particular note is PPP loans (which were largely forgiven) + "cheap money" is a big driver in being able to sustain higher prices via "buffing" the balance sheets of businesses. If I can sustain demand loss at a higher price because my operating costs dropped significantly due to cheap (or in some cases "free") money, you've just distorted the market. In a healthy environment, high prices should naturally have lead to lower demand, which would kick off the deflation cycle, which in a certain band, is healthy for the economy as a whole. This is why there's arguments over whether interests rising more dramatically is the "right tool for the job". To be honest, I'm not sure our understanding differs that much on this aspect, only in as so far as I am less critical of direct cash assistance to the poor / middle class than the assistance given to wealthy / corporations (in, for instance, form of PPP loans). I also don't think that cash assistance is the real long term driver of inflation at this stage. I'd also like to note, I wasn't talking about pandemic relief per se, I was more talking about general cash assistance that you would typically see in welfare programs, which is provided via taxation, usually. [0]: https://home.treasury.gov/policy-issues/coronavirus/assistance-for-state-local-and-tribal-governments/coronavirus-relief-fund https://home.treasury.gov/policy-issues/coronavirus/assistan... [1]: https://www.cnbc.com/2023/06/26/ppp-loan-fraud-drove-home-price-inflation-in-certain-markets.html https://www.cnbc.com/2023/06/26/ppp-loan-fraud-drove-home-pr... [2]: https://www.stlouisfed.org/en/publications/regional-economist/2022/jul/was-paycheck-protection-program-effective https://www.stlouisfed.org/en/publications/regional-economis... [3]: https://www.federalreserve.gov/econres/notes/feds-notes/fiscal-policy-and-excess-inflation-during-covid-19-a-cross-country-view-20220715.html https://www.federalreserve.gov/econres/notes/feds-notes/fisc... [4]: https://www.imf.org/en/News/Articles/2022/07/11/CF-US-Economy-Inflation-Challenge https://www.imf.org/en/News/Articles/2022/07/11/CF-US-Econom...

gustavus 3y ago

> In simplistic terms, my understanding is that cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around. Although this would be true to a certain extent wouldn't this drive inflation as it would cause an increase in demand without a corresponding increase in supply? Since suddenly a lot more people can purchase things that they couldn't before. E.g. Cars at the beginning of COVID, consumer electronics, etc.

mitthrowaway2 3y ago
If it's coming from tax dollars, it's increasing the amount some people can spend on consumer electronics and used cars while also decreasing the amount that other people can spend on houses, vacations, and new cars. So the net impact should be roughly zero, assuming that the taxes don't meaningfully affect supply. However, with pandemic rate cuts, much of it came from newly-created loan money (either borrowed by the government, or by businesses and individuals), meaning cheap loans for cars and houses drove those prices up at the same time that consumer goods were also in high demand.
no_wizard 3y ago
To pose a question to think about: what inflation are we talking about exactly? Short term inflation (usually horizon of less than 18 months) can significantly increase due to demand outstripping supply, absolutely. Market efficiency though, should cause rapid normalization and eventually prices will fall due to competition, at least in a healthy functioning market economy (that's another debate). That said, I'm considering what drives long term inflation, which extends beyond an 18 month horizon. We're approaching year 3 of dramatically increasing inflation across the board, and one of the only mechanisms we have at that point is driving up the cost of new money and allowing that to ripple across the economy. So much of our economic system is centrally based around borrowing, whether its cars, homes, business expansion etc. These decisions are in part, driven by cost. When the cost of borrowing is lower, its easier to spend higher sums and drive long term inflation. It also lends people to seek greater and greater returns with "cheap money", driving these boom bust cycles. My general argument is long term inflation is driven by cheap money, and short term inflation that may be caused by government assistance is just that - short term, and measurable, and should, in a functioning market, normalize itself away. tl;dr, demand side inflation naturally curbs since high demand outstripping supply will natural raise prices to an equilibrium, and bring them back down as it cools off, supply side inflation is more opaque in reality, esp. when it comes to controlling borrowing costs (IE, creating new money)

hguant 3y ago

It's not that you omitted nuance, it's that your basic premise - "cash assistance to the poor generally does not drive inflation in any meaningful way, because the cash used is extracted via taxation in the first place, its, quite literally, shifting money around" - is fundamentally incorrect, and goes against both economic theory, and lived experience over the last few years post COVID. > Its false equivalency to think cash assistance and many other forms of social welfare drives inflation more broadly, in the general case. This is also probably why you're getting down voted - it's just wrong 1. taxation, either explicit or implicit through interest rate manipulation, doesn't impact monetary supply at the scale we're talking about here. It impacts the cost of, and therefore the availability of capital. 2. cash assistance to the poor isn't a simple "take $100 from Peter and give it to Paul" transaction. It transforms capital (what taxes impact) into money. This is a weird distinction, but capital isn't money. Think of it as two separate streams - there's a fictionalized capital stream of stock markets etc, and a "real world" money stream that interacts with good and services. 3. Cash assistance to the poor directly drives inflation because the demand for goods is decoupled from reality. By giving cash to the poor, you generate increased demand for the same amount of goods and services. This is econ 101 - demand goes up, prices go up. Because the monetary supply has been manipulated by injections from capital, this demand is decoupled from the cycles that would tamp it down. Let me repeat that: a sudden increase in demand, coupled with more money in the system, decouples prices from the systems that keep them in place and drives inflation. If you'd like an object lesson in this, I'd refer you to the past 3 years of experimentation with wealth transfers in the US, and the current inflation as a result of that. Edit to add - I make no moral statements here. I think that cash assistance to the poor _is_ generally the least bad option of government assistance; however, we should be clear eyed about the costs of these actions, and not hand wave them away, only to be shocked, shocked, shocked, when those costs come due.

no_wizard 3y ago
The past 3 years of experimentation of wealth transfer has wholly benefited the wealthy and corporations by a large margin. Direct cash assistance[0] in total cost is less than what just the PPP loans ended up costing the government, for example. This actually would be a great example of government spending that does cause inflation[1][2] and largely did not benefit the middle class (let alone the poor). Cash assistance to the poor / middle class is more murky. While yes, short term inflation in part was driven by the broad relief payments[3], it is sustained by cheap money[4]. My argument is centrally that cash assistance to the poor and middle class, broadly, won't sustain inflation as prices rise and demand normalizes, as an efficient market should do. The distortion on that market happens with a combination of low interests, which drives cheap capital creation, which distorts natural price normalization, and fuels riskier investments, which are all observable economic cycles. My conclusion, based on what I understand and evidence there in, is that cash assistance, especially in limited one shot capacity, is not going to sustain inflation at the pace we've been seeing it most broadly. One particular note is PPP loans (which were largely forgiven) + "cheap money" is a big driver in being able to sustain higher prices via "buffing" the balance sheets of businesses. If I can sustain demand loss at a higher price because my operating costs dropped significantly due to cheap (or in some cases "free") money, you've just distorted the market. In a healthy environment, high prices should naturally have lead to lower demand, which would kick off the deflation cycle, which in a certain band, is healthy for the economy as a whole. This is why there's arguments over whether interests rising more dramatically is the "right tool for the job". To be honest, I'm not sure our understanding differs that much on this aspect, only in as so far as I am less critical of direct cash assistance to the poor / middle class than the assistance given to wealthy / corporations (in, for instance, form of PPP loans). I also don't think that cash assistance is the real long term driver of inflation at this stage. I'd also like to note, I wasn't talking about pandemic relief per se, I was more talking about general cash assistance that you would typically see in welfare programs, which is provided via taxation, usually. [0]: https://home.treasury.gov/policy-issues/coronavirus/assistance-for-state-local-and-tribal-governments/coronavirus-relief-fund https://home.treasury.gov/policy-issues/coronavirus/assistan... [1]: https://www.cnbc.com/2023/06/26/ppp-loan-fraud-drove-home-price-inflation-in-certain-markets.html https://www.cnbc.com/2023/06/26/ppp-loan-fraud-drove-home-pr... [2]: https://www.stlouisfed.org/en/publications/regional-economist/2022/jul/was-paycheck-protection-program-effective https://www.stlouisfed.org/en/publications/regional-economis... [3]: https://www.federalreserve.gov/econres/notes/feds-notes/fiscal-policy-and-excess-inflation-during-covid-19-a-cross-country-view-20220715.html https://www.federalreserve.gov/econres/notes/feds-notes/fisc... [4]: https://www.imf.org/en/News/Articles/2022/07/11/CF-US-Economy-Inflation-Challenge https://www.imf.org/en/News/Articles/2022/07/11/CF-US-Econom...