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I'd love to see more analytical humility in this area. > "The problem – economics research has repeatedly shown that this is not the case." And economics rese

by csours 3y ago

I'd love to see more analytical humility in this area. > "The problem – economics research has repeatedly shown that this is not the case." And economics research has also repeatedly shown that this IS the case. I'm not supporting that argument, I'm just saying that you have conflicting bodies of research. Everyone here is engaging in motivated reasoning, depending on who they think the boogie-man is. Humility means being clear about how much you can possibly say from the evidence at hand. Humility means thinking more about confounding factors than about things that you believe to be true. I'd also love if we talked more about access to resources instead of money.

burkaman 3y ago
Do you know of research that disagrees with this post? The Economist article doesn't mention any, in fact there is only a single sentence supporting its headline: "Although American pay growth has subsided from more than 5.5% year on year to around 4.5%, that is probably still too high for the Federal Reserve’s 2% inflation target." It seems like an editor may have chosen a headline that doesn't match what the article says.
- 0xbadcafebee 3y ago
  You can always find research that supports a contrary finding in economics. Economics is black magic.
  - burkaman 3y ago
    I'm familiar with this stereotype, but again, do you know of any such research in this case? I'm not an economist but I can't immediately find any, even if I add stuff like "conservative think tank" to my search terms.
    - Closi 3y ago
      I mean it seems fairly econ 101 in some respects: * Companies have normal profitability in the long run in a competitive market. * If costs go up, companies must raise prices to maintain normal profitability. * If wages increase, costs go up. Here is the paper I assume is referenced in this article: https://www.google.co.uk/books/edition/Wage_Growth_and_Inflation_in_Europe_A_Pu/0skaEAAAQBAJ?hl=en&gbpv=0 https://www.google.co.uk/books/edition/Wage_Growth_and_Infla... But the blog article says: "The Economist piece appears to have repeated the old theory that wage growth causes inflation spirals. As discussed, empirical evidence shows this is not true" I don't think many economists would argue that wage inflation causes no price inflation, and that also doesn't seem to be the finding of the paper they are referring to - which finds that wages CAN create inflation. The debate is about the amount of passthrough (e.g. how much an increase in wages affects an increase in the price of goods). Then the blog article says: > there is evidence that it is elevated inflation that causes wage increases. But that can be true while the opposite is also true. Inflation can cause wage increases. Wage increases can increase costs. Increasing costs can lead to price increases. Price increases cause inflation. Inflation can cause wage increases. Each step in diminishing quantities, but still multiplying the initial effect of inflation. I think this article is very cherry-picky of the facts.
      - NominalNews 3y ago
        Hi! Author here. This was actually my second article on wages and inflation (the first one can be found on my site - Dec 4, 2022 - Wages and Inflation). The main theoretical work behind this actually work done by Oliver Blanchard (1985). From that post: "Another influential paper was Blanchard (1985). In this paper, Blanchard argued that in a setting where an increase in overall demand reduces unemployment, firms will have to compete for workers by offering higher wages, which will force them to increase their desired mark-up, pushing up prices of goods. With higher prices of goods, real wages of workers (i.e. the actual amount of goods workers can buy) fall, thus pushing them to demand higher wages. In a staggered negotiation situation, where these negotiations happen repeatedly (i.e. month-to-month) rather than in a world where wages and prices adjust immediately, inflation can persist for a long time. Due to the simplicity and logical appeal of this theory, it has been heavily tested empirically. Most empirical studies to date suggest, however, that wages do not cause1 inflation. Schwerzer and Hess (2000) from the Cleveland Federal Reserve did an overview of the economic research at the time and found very little evidence supporting the idea that wages cause inflation. Only one study showed a causal impact2, while three others, and Schwerzer’s and Hess’ own work were not able to find this causality. The reason for the ambiguity in results is because inflation and wages move so closely together that attempting to separate and isolate which one causes which is not straightforward to do. Their own work focused solely on establishing the direction of causality, using what is called in economics and statistics “Granger causality”, which is a test whether the future values of one time series3 (inflation in our case) can be predicted by past values of another time series (nominal wage growth) and vice-versa. The review and analysis conducted by Schwerzer and Hess suggests that increasing wages do not cause inflation. On the contrary, evidence likely points to inflation driving increased wages." So I would say so far the preponderance of evidence suggests there is unlikely to be causality of wage growth on inflation. Multiple methods have shown the causal link is unlikely. However, it is true that if wages didn't rise (that is workers would take real pay cuts) then inflation would fall, which is the main channel central bank interest rate hikes work to reduce inflation. What is more important in the current inflationary surge, is that the behavior of wages is entirely consistent with previous similar historic inflationary episodes. If anything, they're actually a bit lower than in the past. The focus on wage growth as a concern is not warranted at these levels.
    - NominalNews 3y ago
      Hi! Author here. Yes - this is a stereotype and it is unfortunate it exists (to some extent I think the blame should be placed on the profession that doesn't speak up). Good economics, whether theoretical or empirical models, should allow for multiple outcomes. Then when it is tested with data, conclusions can be drawn on what is likely or not. Many economics questions have these conclusions - it's just a lot of theories are mentioned over again, without actually referencing the fact that a lot of research has already been done and demonstrated a theory is no longer appropriate.
- csours 3y ago
  It all depends on where you point your microscope. This is the fundamental flaw of rationality - you can prove a very specific case, but when you try to make it apply generally, you run into problems. So in this very specific case, the inflation that we've experienced over the past few years was NOT due to wage increases. You look in the microscope and see this to be true. Wages increases were not a primary cause of inflation (in this time period) The problem is when you generalize and say 'Wage increases do not cause inflation'. The problem is that you have exited your historical context and you are moving into a new context. Wage increases certainly CAN contribute to inflation; they were not your most recent problem, but they might be your NEXT problem. The other difficulty is that the human brain wants to be satisfied, it does not want to understand all possible context. So the brain loves it when you can just say "Here is the problem, the whole problem fits in this box, and here is the one single, simple cause of the problem." (Apologies for overusing the word 'problem')
  - burkaman 3y ago
    That's reasonable, and this post is making that specific argument "that wages have not caused or continued the inflationary surge observed in 2021 to 2023." So I think you and the author agree here. I'm guessing the author would also agree that a blanket "wage growth doesn't cause inflation" statement would be too broad and not supportable.
  - NominalNews 3y ago
    Hi! Author here. This was actually my second article on wages and inflation (the first one can be found on my site - Dec 4, 2022 - Wages and Inflation). In that one I tackled the generalizability of the result, especially to the US economy. I 100% agree that for a result to hold, we need similar assumptions and conditions (basically the issue of external validity of a study). Regarding wage growth and inflation and the causality between the two, it actually has been studied quite heavily. From my previous post: "Due to the simplicity and logical appeal of this theory [wage-price spirals], it has been heavily tested empirically. Most empirical studies to date suggest, however, that wages do not cause1 inflation. Schwerzer and Hess (2000) from the Cleveland Federal Reserve did an overview of the economic research at the time and found very little evidence supporting the idea that wages cause inflation. Only one study showed a causal impact2, while three others, and Schwerzer’s and Hess’ own work were not able to find this causality. The reason for the ambiguity in results is because inflation and wages move so closely together that attempting to separate and isolate which one causes which is not straightforward to do. Their own work focused solely on establishing the direction of causality, using what is called in economics and statistics “Granger causality”, which is a test whether the future values of one time series3 (inflation in our case) can be predicted by past values of another time series (nominal wage growth) and vice-versa. The review and analysis conducted by Schwerzer and Hess suggests that increasing wages do not cause inflation. On the contrary, evidence likely points to inflation driving increased wages." So I would say so far the preponderance of evidence suggests there is unlikely to be causality of wage growth on inflation [in the US]. Multiple methods have shown the causal link is unlikely. Are there circumstances in which wage growth can be the trigger of runaway inflation - I suppose there will be such conditions (how feasible/realistic they are is also a question). Have they occurred it in the US - does not appear so. However, regarding the main issue at hand (i.e. current inflationary surge), there is even more evidence that it has not been the case, and we are nowhere near wage growth that would make us wonder about the wage-price spiral. Real wages are growing well below productivity. Summarizing - you are 100% right that it is important to keep an eye out on external validity issues. It is also important to state the underlying assumptions (whether it is regarding the conditions of the economy or the mechanisms). It is something I am trying to get across with all of my writing and maybe could have done a better job in this particular case (although I have written a more theoretical post on the same topic, so that influenced the writing here)
EchoChamberMan 3y ago
How about this one? "It’s now significantly more deadly to be homeless [in Cali]. Why are so many people dying?" https://news.ycombinator.com/item?id=39578218 https://news.ycombinator.com/item?id=39578218 The idea wage increases are inflation is a disgusting. No reason to cap wages because companies "might" pass the cost to consumers. They are already raises prices simply for more profits.
- csours 3y ago
  1. Yes companies are greedy. 2. Yes companies hide behind real effects as a justification. 3. Those effects are real anyway. Wage increases are ONE driver of inflation. The size of this effect depends on a lot of things. Price increases are ONE driver of inflation. The size of this effect depends on a lot of things. When something does not go the way you want, you can't just pick the cause. No matter what starts an avalanche, it will continue to propagate itself. It's fine with me if you are mad at greedy companies. It's fine with me if you are mad at me. My request is that we get more comfortable with the idea that multiple causes can contribute to an effect, and the size of those contributions can change over time.
  - EchoChamberMan 3y ago
    Deferring the discussion over a supposed lack of evidence is disingenuous. There is plenty of evidence in the article, though the Economist article provides very little. Given economics is not a hard science, there will never be enough evidence in the world for conclusive "laws" as in physical science, so we have to make do with what we have, and there is a lot in the article to analyze. Your point was "we need more evidence to justify these claims." I feel like the increase of people dying from homelessness is rather strong evidence real wages are not keeping up with inflation. Claiming wage growth causes inflation because companies "might" pass costs is also rather specious. Humility also includes "Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize," from the HN guidelines. You avoid discussing the topic entirely, and focus on... an ad hominem? [1] Talking about money is also good, because that's how I pay my bills. [1] https://www.wordnik.com/words/ad%20hominem https://www.wordnik.com/words/ad%20hominem

by csours 3y ago

burkaman 3y ago

Do you know of research that disagrees with this post? The Economist article doesn't mention any, in fact there is only a single sentence supporting its headline: "Although American pay growth has subsided from more than 5.5% year on year to around 4.5%, that is probably still too high for the Federal Reserve’s 2% inflation target." It seems like an editor may have chosen a headline that doesn't match what the article says.

0xbadcafebee 3y ago
You can always find research that supports a contrary finding in economics. Economics is black magic.
- burkaman 3y ago
  I'm familiar with this stereotype, but again, do you know of any such research in this case? I'm not an economist but I can't immediately find any, even if I add stuff like "conservative think tank" to my search terms.
  - Closi 3y ago
    I mean it seems fairly econ 101 in some respects: * Companies have normal profitability in the long run in a competitive market. * If costs go up, companies must raise prices to maintain normal profitability. * If wages increase, costs go up. Here is the paper I assume is referenced in this article: https://www.google.co.uk/books/edition/Wage_Growth_and_Inflation_in_Europe_A_Pu/0skaEAAAQBAJ?hl=en&gbpv=0 https://www.google.co.uk/books/edition/Wage_Growth_and_Infla... But the blog article says: "The Economist piece appears to have repeated the old theory that wage growth causes inflation spirals. As discussed, empirical evidence shows this is not true" I don't think many economists would argue that wage inflation causes no price inflation, and that also doesn't seem to be the finding of the paper they are referring to - which finds that wages CAN create inflation. The debate is about the amount of passthrough (e.g. how much an increase in wages affects an increase in the price of goods). Then the blog article says: > there is evidence that it is elevated inflation that causes wage increases. But that can be true while the opposite is also true. Inflation can cause wage increases. Wage increases can increase costs. Increasing costs can lead to price increases. Price increases cause inflation. Inflation can cause wage increases. Each step in diminishing quantities, but still multiplying the initial effect of inflation. I think this article is very cherry-picky of the facts.
    - NominalNews 3y ago
      Hi! Author here. This was actually my second article on wages and inflation (the first one can be found on my site - Dec 4, 2022 - Wages and Inflation). The main theoretical work behind this actually work done by Oliver Blanchard (1985). From that post: "Another influential paper was Blanchard (1985). In this paper, Blanchard argued that in a setting where an increase in overall demand reduces unemployment, firms will have to compete for workers by offering higher wages, which will force them to increase their desired mark-up, pushing up prices of goods. With higher prices of goods, real wages of workers (i.e. the actual amount of goods workers can buy) fall, thus pushing them to demand higher wages. In a staggered negotiation situation, where these negotiations happen repeatedly (i.e. month-to-month) rather than in a world where wages and prices adjust immediately, inflation can persist for a long time. Due to the simplicity and logical appeal of this theory, it has been heavily tested empirically. Most empirical studies to date suggest, however, that wages do not cause1 inflation. Schwerzer and Hess (2000) from the Cleveland Federal Reserve did an overview of the economic research at the time and found very little evidence supporting the idea that wages cause inflation. Only one study showed a causal impact2, while three others, and Schwerzer’s and Hess’ own work were not able to find this causality. The reason for the ambiguity in results is because inflation and wages move so closely together that attempting to separate and isolate which one causes which is not straightforward to do. Their own work focused solely on establishing the direction of causality, using what is called in economics and statistics “Granger causality”, which is a test whether the future values of one time series3 (inflation in our case) can be predicted by past values of another time series (nominal wage growth) and vice-versa. The review and analysis conducted by Schwerzer and Hess suggests that increasing wages do not cause inflation. On the contrary, evidence likely points to inflation driving increased wages." So I would say so far the preponderance of evidence suggests there is unlikely to be causality of wage growth on inflation. Multiple methods have shown the causal link is unlikely. However, it is true that if wages didn't rise (that is workers would take real pay cuts) then inflation would fall, which is the main channel central bank interest rate hikes work to reduce inflation. What is more important in the current inflationary surge, is that the behavior of wages is entirely consistent with previous similar historic inflationary episodes. If anything, they're actually a bit lower than in the past. The focus on wage growth as a concern is not warranted at these levels.
  - NominalNews 3y ago
    Hi! Author here. Yes - this is a stereotype and it is unfortunate it exists (to some extent I think the blame should be placed on the profession that doesn't speak up). Good economics, whether theoretical or empirical models, should allow for multiple outcomes. Then when it is tested with data, conclusions can be drawn on what is likely or not. Many economics questions have these conclusions - it's just a lot of theories are mentioned over again, without actually referencing the fact that a lot of research has already been done and demonstrated a theory is no longer appropriate.
csours 3y ago
It all depends on where you point your microscope. This is the fundamental flaw of rationality - you can prove a very specific case, but when you try to make it apply generally, you run into problems. So in this very specific case, the inflation that we've experienced over the past few years was NOT due to wage increases. You look in the microscope and see this to be true. Wages increases were not a primary cause of inflation (in this time period) The problem is when you generalize and say 'Wage increases do not cause inflation'. The problem is that you have exited your historical context and you are moving into a new context. Wage increases certainly CAN contribute to inflation; they were not your most recent problem, but they might be your NEXT problem. The other difficulty is that the human brain wants to be satisfied, it does not want to understand all possible context. So the brain loves it when you can just say "Here is the problem, the whole problem fits in this box, and here is the one single, simple cause of the problem." (Apologies for overusing the word 'problem')
- burkaman 3y ago
  That's reasonable, and this post is making that specific argument "that wages have not caused or continued the inflationary surge observed in 2021 to 2023." So I think you and the author agree here. I'm guessing the author would also agree that a blanket "wage growth doesn't cause inflation" statement would be too broad and not supportable.
- NominalNews 3y ago
  Hi! Author here. This was actually my second article on wages and inflation (the first one can be found on my site - Dec 4, 2022 - Wages and Inflation). In that one I tackled the generalizability of the result, especially to the US economy. I 100% agree that for a result to hold, we need similar assumptions and conditions (basically the issue of external validity of a study). Regarding wage growth and inflation and the causality between the two, it actually has been studied quite heavily. From my previous post: "Due to the simplicity and logical appeal of this theory [wage-price spirals], it has been heavily tested empirically. Most empirical studies to date suggest, however, that wages do not cause1 inflation. Schwerzer and Hess (2000) from the Cleveland Federal Reserve did an overview of the economic research at the time and found very little evidence supporting the idea that wages cause inflation. Only one study showed a causal impact2, while three others, and Schwerzer’s and Hess’ own work were not able to find this causality. The reason for the ambiguity in results is because inflation and wages move so closely together that attempting to separate and isolate which one causes which is not straightforward to do. Their own work focused solely on establishing the direction of causality, using what is called in economics and statistics “Granger causality”, which is a test whether the future values of one time series3 (inflation in our case) can be predicted by past values of another time series (nominal wage growth) and vice-versa. The review and analysis conducted by Schwerzer and Hess suggests that increasing wages do not cause inflation. On the contrary, evidence likely points to inflation driving increased wages." So I would say so far the preponderance of evidence suggests there is unlikely to be causality of wage growth on inflation [in the US]. Multiple methods have shown the causal link is unlikely. Are there circumstances in which wage growth can be the trigger of runaway inflation - I suppose there will be such conditions (how feasible/realistic they are is also a question). Have they occurred it in the US - does not appear so. However, regarding the main issue at hand (i.e. current inflationary surge), there is even more evidence that it has not been the case, and we are nowhere near wage growth that would make us wonder about the wage-price spiral. Real wages are growing well below productivity. Summarizing - you are 100% right that it is important to keep an eye out on external validity issues. It is also important to state the underlying assumptions (whether it is regarding the conditions of the economy or the mechanisms). It is something I am trying to get across with all of my writing and maybe could have done a better job in this particular case (although I have written a more theoretical post on the same topic, so that influenced the writing here)

EchoChamberMan 3y ago

How about this one? "It’s now significantly more deadly to be homeless [in Cali]. Why are so many people dying?" https://news.ycombinator.com/item?id=39578218 https://news.ycombinator.com/item?id=39578218 The idea wage increases are inflation is a disgusting. No reason to cap wages because companies "might" pass the cost to consumers. They are already raises prices simply for more profits.

csours 3y ago
1. Yes companies are greedy. 2. Yes companies hide behind real effects as a justification. 3. Those effects are real anyway. Wage increases are ONE driver of inflation. The size of this effect depends on a lot of things. Price increases are ONE driver of inflation. The size of this effect depends on a lot of things. When something does not go the way you want, you can't just pick the cause. No matter what starts an avalanche, it will continue to propagate itself. It's fine with me if you are mad at greedy companies. It's fine with me if you are mad at me. My request is that we get more comfortable with the idea that multiple causes can contribute to an effect, and the size of those contributions can change over time.
- EchoChamberMan 3y ago
  Deferring the discussion over a supposed lack of evidence is disingenuous. There is plenty of evidence in the article, though the Economist article provides very little. Given economics is not a hard science, there will never be enough evidence in the world for conclusive "laws" as in physical science, so we have to make do with what we have, and there is a lot in the article to analyze. Your point was "we need more evidence to justify these claims." I feel like the increase of people dying from homelessness is rather strong evidence real wages are not keeping up with inflation. Claiming wage growth causes inflation because companies "might" pass costs is also rather specious. Humility also includes "Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize," from the HN guidelines. You avoid discussing the topic entirely, and focus on... an ad hominem? [1] Talking about money is also good, because that's how I pay my bills. [1] https://www.wordnik.com/words/ad%20hominem https://www.wordnik.com/words/ad%20hominem