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There's a fair amount of confusion between map and territory in this article. It seems to take macroeconomic indicators like CPI, nominal wages, and real wages

There's a fair amount of confusion between map and territory in this article. It seems to take macroeconomic indicators like CPI, nominal wages, and real wages as fundamentals and then infer that the economy must behave a certain way because of historical relationships between them, when the reality is that the economy behaves as the economy behaves and the macroeconomic indicators only measure what's going on. A good example is "By definition, inflation-indexed wages cannot result in a higher inflation rate. Wages indexed only to inflation will actually reduce the inflation rate, if productivity is positive, which it typically is." No - if you have an inflation-indexed wage, it will go up when inflation does, regardless of what productivity does. You can't just infer that productivity has risen because the inflation-indexed wage went up - in this specific instance, it's clear that it hasn't, because nothing has changed except the inflation index. Inflation is best thought of as a feedback loop. Every expense is somebody else's income, so if expenses are going up across the economy, somebody is getting more money. That gives their suppliers leverage to raise prices and their customers a need to raise prices or go out of business. The rate is going to be uneven across different sectors, which is where the CPI vs. nominal vs. real wages behavior comes in. Real wage increases are nominal wages * CPI, by definition, so if most of the increase in prices is accruing to labor, real wages will be positive, while if most accrues to capital, real wages will be negative.

mhuffman 3y ago
>so if most of the increase in prices is accruing to labor, real wages will be positive, while if most accrues to capital, real wages will be negative. I am not asking this to be snarky, but do you recall any time in our lives where increase in prices mostly accrued to labor?
- nostrademons 3y ago
  It's happening right now - that's what the 1.8% increase in real wages over 2023 is.
  - NominalNews 3y ago
    Hi! Author here! You are correct - that we have real wage growth. However, it is worth nothing that productivity has gone up 3-4% over the last several quarters (see FRED data). Wages should grow by this amount in real terms at least. That's where the standard assumption of 3.5% nominal wage growth comes from (2% inflation + 1.5% productivity growth). So the 1.8% real wage growth is, in my opinion, very low given the economy.
    - nostrademons 3y ago
      Labor productivity data can be hard to interpret over the short term because of its definition as real output / hours worked. If, for example, the government sends all non-essential workers home while continuing to pay them through PPP, productivity will rise because hours worked has gone down (as it did in 2020), even though no layperson would say that people were more productive during COVID. Similarly, if companies are laying off people without significant declines in output (as in the 2023 tech industry), this also shows up as increased productivity. If CPI is dropping but nominal output and hours worked remain constant, this also shows up as increased productivity (real output goes up, because of lower inflation), though this scenario should be pretty rare since actual prices are a major component of nominal output. I'm reminded of a coworker who produced absolutely nothing of value for 18 months (his project was canceled at the end without ever launching), collected ~$1.5M in total comp, and worked 3-4 hour days. His productivity was sky-high: $1.5M in economic transactions for ~1000 hours worked. It's just that the economic transactions were basically lighting money on fire. For that matter, his department of ~3000 burned around $6B over ~5 years and is currently in the business of bricking otherwise-useful devices. It just had massive layoffs, but he transferred to another department, made his bosses look very good there, and survived the layoffs. You really need a long enough time period to know whether the shitty quality products you put out will result in fewer transactions before you can interpret productivity data. Long-term (multi-year) productivity growth usually presages real wage gains. But short-term (couple quarters) productivity growth could just be an indicator of layoffs coming, which usually means real wage cuts.
  - mhuffman 3y ago
    ... and what is the increase in real profit growth to capital? The point of my post wasn't that wages never go up, but I do not remember when price increase MOSTLY went to labor.
NominalNews 3y ago
Hi! Author here! - I think I agree with the general point you're making. To elaborate: I've actually written about the underlying inflation mechanism (May 10, 2023 - (Un)intuitive Inflation). The main model used by central banks for modelling inflation is the New-Keynesian Model. This model explains that the rate of inflation is related to the level (sic) of real marginal costs, desired (Note: not realized) mark-up (profit margin) and inflation expectations. The main element through which wages feed through to inflation is the real marginal cost. However, if current wages are below pre-pandemic real wages (which for many still are), then real marginal cost is lower, thus pushing the inflation rate down below the 2% inflation target. During the 2021-23 inflation surge, the supply shock and bottlenecks created significantly pushed up the real marginal cost of production (things like over-time, things like it taking to produce longer than before due to supply delays etc). This has reverted bringing back down the level of real marginal cost. Which is why we are close to the 2% inflation target. The mechanism regarding price setting - between firms and workers - is actually really nicely put by a recent Werning and Lorenzoni paper - Inflation is Conflict. Interestingly, they are capable to generate a theoretical result where we have inflation with no money! Meaning there is no monetary policy.

mhuffman 3y ago

>so if most of the increase in prices is accruing to labor, real wages will be positive, while if most accrues to capital, real wages will be negative. I am not asking this to be snarky, but do you recall any time in our lives where increase in prices mostly accrued to labor?

nostrademons 3y ago
It's happening right now - that's what the 1.8% increase in real wages over 2023 is.
- NominalNews 3y ago
  Hi! Author here! You are correct - that we have real wage growth. However, it is worth nothing that productivity has gone up 3-4% over the last several quarters (see FRED data). Wages should grow by this amount in real terms at least. That's where the standard assumption of 3.5% nominal wage growth comes from (2% inflation + 1.5% productivity growth). So the 1.8% real wage growth is, in my opinion, very low given the economy.
  - nostrademons 3y ago
    Labor productivity data can be hard to interpret over the short term because of its definition as real output / hours worked. If, for example, the government sends all non-essential workers home while continuing to pay them through PPP, productivity will rise because hours worked has gone down (as it did in 2020), even though no layperson would say that people were more productive during COVID. Similarly, if companies are laying off people without significant declines in output (as in the 2023 tech industry), this also shows up as increased productivity. If CPI is dropping but nominal output and hours worked remain constant, this also shows up as increased productivity (real output goes up, because of lower inflation), though this scenario should be pretty rare since actual prices are a major component of nominal output. I'm reminded of a coworker who produced absolutely nothing of value for 18 months (his project was canceled at the end without ever launching), collected ~$1.5M in total comp, and worked 3-4 hour days. His productivity was sky-high: $1.5M in economic transactions for ~1000 hours worked. It's just that the economic transactions were basically lighting money on fire. For that matter, his department of ~3000 burned around $6B over ~5 years and is currently in the business of bricking otherwise-useful devices. It just had massive layoffs, but he transferred to another department, made his bosses look very good there, and survived the layoffs. You really need a long enough time period to know whether the shitty quality products you put out will result in fewer transactions before you can interpret productivity data. Long-term (multi-year) productivity growth usually presages real wage gains. But short-term (couple quarters) productivity growth could just be an indicator of layoffs coming, which usually means real wage cuts.
- mhuffman 3y ago
  ... and what is the increase in real profit growth to capital? The point of my post wasn't that wages never go up, but I do not remember when price increase MOSTLY went to labor.

NominalNews 3y ago

Hi! Author here! - I think I agree with the general point you're making. To elaborate: I've actually written about the underlying inflation mechanism (May 10, 2023 - (Un)intuitive Inflation). The main model used by central banks for modelling inflation is the New-Keynesian Model. This model explains that the rate of inflation is related to the level (sic) of real marginal costs, desired (Note: not realized) mark-up (profit margin) and inflation expectations. The main element through which wages feed through to inflation is the real marginal cost. However, if current wages are below pre-pandemic real wages (which for many still are), then real marginal cost is lower, thus pushing the inflation rate down below the 2% inflation target. During the 2021-23 inflation surge, the supply shock and bottlenecks created significantly pushed up the real marginal cost of production (things like over-time, things like it taking to produce longer than before due to supply delays etc). This has reverted bringing back down the level of real marginal cost. Which is why we are close to the 2% inflation target. The mechanism regarding price setting - between firms and workers - is actually really nicely put by a recent Werning and Lorenzoni paper - Inflation is Conflict. Interestingly, they are capable to generate a theoretical result where we have inflation with no money! Meaning there is no monetary policy.