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Why is this down-voted? Higher inflation has historically been considered a populist idea. The idea being that the poor had fixed-interest rate debt, and if

• nostrademons 13y ago
  It's the standard, conventional wisdom, but it also misses some subtlety that Warren Buffett's tried to bring up a few time in Berkshire Hathaway annual reports: Inflation isn't distributed equally. When the money supply rises, firms in strong bargaining positions with few substitutes are in the best place to raise prices, because their customers can't readily switch to competitors. So basically, Google will come out of it like a bandit, because they're the only game in town for search advertising, and their auction pricing means they don't have to take any active effort to raise prices. Walmart will come out of it pretty well, since in many communities they're the only game in town. Software engineers, skilled managers, and other workers with in-demand skills will do okay. The folks competing for all the unskilled labor positions? They're going to get screwed. So it's only partially true that the poor benefit from inflation. They'll benefit from cheaper debt payments and possibly higher employment. But they're unlikely to see much of the added money supply in wages, and they're going to take it in the chin on prices.
  • lsc 13y ago
    >So it's only partially true that the poor benefit from inflation. They'll benefit from cheaper debt payments and possibly higher employment. But they're unlikely to see much of the added money supply in wages, and they're going to take it in the chin on prices. The theory is that inflation will decrease wages for anyone making above market wages. That's one of the mechanisms by which economists theorize that inflation stimulates the economy. Downward nominal wage rigidity, and all that. If you are arguing that minimum wage workers are making above market wages (and that argument is supported by the evidence of the high unemployment rate) well, That's certainly a valid point. But those making $10/hr at mcdonalds? (the California minimum is $8.00 and McDonalds will pay you a little more than that after you've been there for a while.) - are those folks making market-clearing wages? I'd argue that they are. However, the other side of this is that inflation is generally thought to increase the demand for labor in general. I mean, my personal take on it is that we have vastly more unskilled labor than we have demand for. We need more demand. More demand for labor would mean that companies wouldn't be so picky. That's the thing, companies whine about not having skilled labor, but when the economy gets hot? Companies train. I think I've written before how I got a programming/sysadmin gig when I was 17... in 1997, and how that would have been nearly impossible four years later. Meanwhile, I turned those four years into enough experience to remain employed through the crash. I became a dramatically more valuable employee during those four years, and I don't think that this increase in value is because I'm some extra special super-virtuous worker. I think most people in that situation would have become dramatically more valuable. So yeah; I think we need to create demand. The private sector could do this by coming up with new industries (like the service sector in the '80s.) or the government could do this directly through WPA style projects. Inflation, I think, can be seen as part of an attempt by the government to stimulate the private sector into doing it. But either way, I think demand is key. Demand is the problem. Long-term unemployment has brutal long-term consequences that are much worse than simply not earning as much for a while, because not only are you not earning while unemployed, you aren't gaining experience. You aren't becoming more valuable for your future jobs. It's bad on an individual level, but it's also bad on a macro level; there is a real reason why experienced folks get paid more. They are more productive.
  • Mikeb85 13y ago