Is the world economy entering a wage-price spiral? | Hacker News Reader

Is the world economy entering a wage-price spiral?

economist.com

156 pointspaulpauper338 comments

I’m glad to see people mentioning this passage:

“In the popular imagination workers’ share of the economic pie has room to grow at the expense of profits. But recent research suggests that labour’s share of the value created by firms has in fact been fairly stable in most rich countries during recent decades“

That entire piece needs some citation. What do they define as labor here? Are they analyzing all job categories? Are they lumping in highly paid software engineers from FAANG with people working at a retail outlet?

Regardless of source material, that part also misses the point entirely of the workforce category that’s demanding wage increases.

Workers in this category are saying “stop hoarding y’all profits and pay us more so we run with less profits and bonuses for the high levels”.

The article is suggesting that if wages are increased, prices will need to increase which will in turn devalue the wage increase. But it fails to discuss if the chunky profit margin can be sacrificed without raising prices too.

Honestly, I like a lot of the economist but this particular article in this weeks edition had me shaking my head hard.

Labor share of income in the developed countries is at the lowest it's been in decades (1). In the US, if all workers received a 13% pay hike, this would just bring the labor share to where it was in 1990. Profit margins are at record highs (2). It took me two minutes of googling, yet somehow people writing for one of the most prestigious econ-related magazine in the world are incapable or unwilling (more likely) to mention it.

In addition, this figure also includes the "labor share" of top-level management. People focus too much on CEO pay, and neglect the fact it's also C-suites, vice-presidents, board members, and most of the direct and indirect perks they receive. I wouldn't be surprised if the labor share of income to this new nobility increased from low single-digit to double-digit percentage

(1) - https://www.oecd.org/g20/topics/employment-and-social-policy...

(2) - https://www.axios.com/profit-margins-record-high-rising-infl...

And worse, the marriage of capital and politics is wrecking havoc. People are represented less and less vs special interest who never had it this good. Making a u-turn becomes harder and harder as time goes by.

To be fair here, capital and politics have always been married and wrecked havoc, for the last few thousand years, which is why the history of humanity is full with slavery, serfdom and bloody wars. There's no way around that, power and money corrupts and concentrates in the hands of a few who fight tooth and nail to further entrench their power and wealth at the expense of everyone else.

Our major break came from having two devastating world wars that affected the ruling class as well, and broke the traditional wealthy feudal powers, right before an industrial boom that gave the working class a leg up never before seen in our society, to which everyone looks back fondly as that situation will never happen again (at leat not until the next violent global war/revolution).

But now, during a prolonged period of relative peace and stability, our situation is reverting back to the feudalism of lords and serfs, haves and have-nots, exactly how our civilization has always been like.

The difference is that now, instead of being the serf of a lord for food and shelter, you're the serf of a giant megacorp for employment(food) and to a giant real-estate conglomerate or a giant bank for shelter, and with a much longer life expectancy and higher standard of living.

So yes, there is always going to be a fight for power in society, and people are going to find ways to buy power with money to the extent they are allowed. However there are ways to structure governance to limit the extent to which wealth can buy influence. For instance, I grew up in the states, and currently live in Germany, and while no government is immune to the influence of capital, having a multi-party system certainly does seem to lead to outcomes where the best interest of the people have a much better chance of winning out than you see in the states.

I also disagree with your reading of history that we're regressing to the natural feudal state of humanity, which was disrupted only by the world wars. I would argue what we have seen is more like a pendular oscillation between consolidated and distributed power structures, at least over the past several hundred years.

For instance, in France and Russia, ages of elite opulence, and disregard for the well-being of the general population gave way to violent revolutions which resulted in the redistribution of power, at least nominally, toward the population. Similarly, the gilded age in the US represented a massive consolidation of wealth in a few hands, and it eventually gave way to a labor movement which put more wealth in the hands of workers.

Since the late 70's at least, the neoliberal movement has been on the march to separate labor from their power and return it to the hands of the elite. We'll see if society manages to find some kind of equilibrium, but if history is any indication it seems more likely that some breaking point will be reached, and existing power structures will be torn down in favor of new ones.

Most of history across the world has seen conflict between the wealthy merchant/scribe/craftsman class which would become the capitalists, and a landowner/priest/warrior aristocracy which typically held power. While it's not the first time it's ever happened, the modern industrial world is by far the longest lived and most extensive alignment of capital and power.

> But it fails to discuss if the chunky profit margin can be sacrificed without raising prices too

In recent years the mere suggestion of lowering profits is utterly taboo in American society, and is usually received about as well as if you were talking about selling beer to kids, or weddings for children.

I honestly believe a ton of people have been brainwashed (or maybe just tricked) into believing that McDonald's actually needs to make $10B [1] in profit per year, and that literally everything would fall apart if it didn't.

Nobody wants to admit that McD's could increase wages for tens of thousands of front line workers who need it most, keep prices identical and still make, oh I don't know, a hefty $2B profit each and every year. Instead they just recommend employees get a second job to make ends meet [2]

I can only assume the topic being so utterly taboo is because that would mean the wealth of the rich would increase slower than it is today (but of course, it would still increase)

(I'm using McD's as the example here, though I think it applies equally to every large and wildly profitable company)

[1] https://www.macrotrends.net/stocks/charts/MCD/mcdonalds/gros...

[2] https://www.motherjones.com/food/2013/07/mcdonalds-budget-mc...

McDonald’s Corporation doesn’t hire the workers in the stores, those are franchises.

Last I checked, approximately half of McDonald's stores were franchises and half were corporate-owned.

Nope.

https://corporate.mcdonalds.com/corpmcd/franchising-overview...

Approximately 93% Of McDonald’s restaurants worldwide are owned and operated by independent local business owners.

The thing is, it seems like there are multiple factors at play here.

What you're talking about is the distribution of funds within an organization. I.e. if company X has a certain total revenue, can they afford to re-distribute a greater percentage of that number & towards employee compensation vs. stock buybacks. From that standpoint, for many successful firms the answer is probably yes.

But another factor at play here is market forces, and scarcity in particular. So for instance, amidst the chip shortage, the price of new and used cars increases because it's not possible to produce enough cars to meet demand. So firms that can afford to pay more do so to afford top talent, because working at company X will mean you can afford to have the lifestyle you want. This incentivizes company Y, which can not simply redistribute profits toward wages, to increase prices so they can afford to compete in the labour market, which farther contributes to the increase in demand for higher-wage jobs, contributing to the cycle of inflation.

So I don't think it's as simple as having super profitable companies take a haircut to increase wages. In an environment of greater-than-average scarcity, the market should perform its role in price discovery of scarce goods. But in an environment where capital itself is not scarce, you risk that price discovery mechanism being broken, and prices just increasing indefinitely.

Disclaimer: I'm not an economist, I'm just someone who's been thinking about inflation a lot lately, so I am happy to be corrected.

All costs boil down to: Natural Resources, Labour, and Capital.

If Capital is not scarce, Labour is scarce, and there isn't a change in natural resources (there may be in some cases, but I don't think that changed a lot), then capital should become cheaper and labour should become more expensive. That's how a well functioning market economy should work.

Inflation is largely irrelevant in the discussion, since the real output of the economy doesn't change with inflation (of course, hyperinflation and deflation can destabilize an economy, but we're definitely not there).

I don't really understand this: why should capital availability increase in the face of a labor shortage? Making capital doesn't actually create more labor, so wouldn't this just re-allocate labour towards those with more access to cheap capital?

I'm not suggesting capital availability increased because of labor shortage. I'm saying capital availability has been high for a while (one of the reasons for the low interest costs).

EDIT: just noticed I missed an "and" in the original comment. It should be "If Capital is not scarce, and Labour is scarce"

> greater-than-average scarcity

Isn't scarcity infinite?

Every argument against increasing labor share of income boils down to "oooooooioooh, inflaaaaaaaaation, spoooooooky!"

> Every argument against increasing labor share of income boils down to "oooooooioooh, inflaaaaaaaaation, spoooooooky!"

This doesn't seem to make any sense, considering increasing labor share is not creation of money (inflation) but merely a different method of allocating the existing money. But maybe that's your point or maybe inflation is defined differently than what I learned in high school.

I believe that most Americans believe that it's an economic law that if wages increase it _will_ result in wage price inflation.

Inflation just means you get less stuff per dollar in the store

Wage price inflation means the excess labor cost(wages) is added to the price of goods, resulting in increased wages, resulting in increased prices over and over until bread costs 1 billion dollars.

This is an absurd proposition when you could just reduce profit margins. The problem is that capitalists don't want to. Why should they!

What should happen is that we should allow wage price inflation forcing companies to lower profit margins after a very short recession, then quality of life would increase for the working majority.

See this would hold if the money supply is held relatively constant. We are not in that environment.

I am in favor of increasing labor's share of income. My point is, in order to increase labour's share of income, the money supply has to be held relatively constant in order to avoid inflation.

In an environment like we have, where capital is basically free, when labor becomes scarce, firms with access to the infinite money supply can just raise wages ad infinitum and this is what creates the problem. The capital supply is not properly controlled by market forces currently. If it were, increasing labor's share of profits would be resolved without inflation.

So my overall point is that we are seeing issues with inflation because of the intersection of Quantitative Easing and real-world scarcity. QE hasn't led to inflation before, because most of the new capital created just ended up in paper assets like securities. So if the fed prints 10 trillion dollars, and most of it just ends up on the balance sheet of some investment banks, it's not going to affect the price of a loaf of bread. But if the money supply is increased indiscriminately and it also gets into the hands of people who are competing for the same used car, this is what causes issues with the value of the currency.

> QE hasn't led to inflation before, because most of the new capital created just ended up in paper assets like securities.

Ah, well summarized.

> competing for the same used car

What happens when labor no longer has the money for non-essentials?

Thoughts on how real estate will come into play?

Economists gets it wrong all the time so no need for disclaimers.

Attitudes to wages vary so much. A German ex-colleague of mine here in London is convinced we (SWE's) are all underpaid. An Estonian ex-colleague on the other hand offhandedly described our profession as overpaid. I mention nationalities because I think it is a factor in their attitudes.

Interestingly the latter ex-colleague was on 20% less TC than me despite doing the exact same job, and having 5 years seniority.

More formal seniority levels and wage transparency would help workers a great deal in my view.

SWE salaries in London seem to be booming

I think that nationality angle is interesting but I believe it's only incidental. For example I tend to sympathise with this idea that in some cases IT workers are overpaid compared to other professions, but I'm from a relatively wealthy country (Scotland). When you have lived somewhere that has lower wages overall, but you have worked in a highly paid profession in a wealthy country then you're going to be quite keenly aware of the gap in compensation. So if you've seen the wages a janitor, shopkeeper, cleaner or even schoolteacher in Estonia makes and reflect on the fact that Facebook, Google devs in London will likely be on over $100k/year then yeah it's not unreasonable to conclude that we are overpaid.

London and Estonia are much different places with different salary expectations and living costs so you can't really expect them to be identical (not least across different jobs) but I think it's unavoidable that anyone with experience of both will make the comparison.

Sorry for picking on London and Estonia here, it wasn't personal :) I the same would apply to San Francisco vs Budapest or Frankfurt vs Manila or Oslo vs Rosario etc etc

> Attitudes to wages vary so much.

They're probably relative to the costs of living.

There's a job offer I looked at a while ago (just moments before the pandemic started), for a company in London. The pay was typical for non-FAANG companies. I did some math on it, and quickly discovered that:

- If I can do the job remotely from Poland, I'm instantly becoming a high-earner. There are jobs locally that pay comparably, but they're the ones other people point at when they say SWEs are overpaid.

- If I have to move to London, the pay is shit. I'd be moving with my family (wife and then a 1yo daughter). I'd have to rent out a smallish 2-room apartment on the other side of London, with 40-60 minutes commute one way (bus -> metro -> bus), and the pay would barely cover rent + daycare for the kid, meaning if we wanted to eat something more ambitious than ramen, my wife would have to either stay at home (forging daycare), or find a decent job herself. Forget saving any money.

Now, it's not currency power difference - it's cost of living difference. The little bits of money we'd be able to save if we reduced our standards of living hard wouldn't translate to much spending power back in Poland either way.

After doing the math, I've decided the value add of being in London vs. being in Kraków (a major city in Poland, with an active tech community) is not worth the reduction of quality of life, and near-complete drain of disposable income. I double-downed on remote work, enjoying costs-of-living arbitrage for as long as I can.

(And it's a matter of time before this ends. While the pandemic dramatically increased the choice in remote work jobs, it also put the topic of CoL arbitrage in the spotlight, so now businesses have it easier to coordinate and capture the surplus for themselves instead, under the guise of employee fairness.)

EDIT: also your German colleague might be a special case, because AFAIK in Germany, software jobs are underpaid compared to the rest of the world, even accounting for currency power and costs of living. A German colleague of mine, working for a German software company servicing industry clients, once complained to me that he's sad that on - in his opinion decent, for Germany - software salary he can barely afford to keep the family afloat, and that's with his wife also working, whereas a "bad, no-good" relative of his earns way more than that doing occasional construction work...

I think it’s because of the government moves that have effectively shut down a huge swath of prior contracting gigs (where SWEs got paid decently, albeit as freelancers). These experienced engineers are not going to work for 70k/year like suckers, er perms, were doing 5 years ago. Combined with rising TCs at FAANG, and a shortage of experienced engineers, overall wages have gone up significantly in the last 2-3 years.

Can you kindly explain what SWE and TC mean?

SWE = Software Engineer

TC = Total Compensation

Software engineer and total compensation, respectively.

> suggesting that if wages are increased, prices will need to increase (...) fails to discuss if the chunky profit margin can be sacrificed without raising prices too

Even if companies were to choose to sacrifice the "chunky profit margin", wouldn't an increase in salaries (and therefore demand for consumption) lead to an increase in prices anyway?

In a lot of cases no: if the wage increases are eaten up by the energy price increases. If the wage increases go to the upper middle and upper class, which don’t know what their money on. If the demand goes into mass producible goods, where higher demand leads to lower prices.

Higher demand only leads to cost reduction if goods are produced more cheaply with increased scale, which is not given. There is a point where diminishing returns bring saving at scale to 0

Only if supply is highly inelastic. Otherwise, increased demand can just mean increased supply at the same price point.

Also, a lot of goods have their current price points because of price gouging and monopolistic practices. These can also be attacked, though that's a different matter.

It does seem the cost of living around tech hubs is higher

"In the popular imagination workers’ share of the economic pie has room to grow at the expense of profits. But recent research suggests that labour’s share of the value created by firms has in fact been fairly stable in most rich countries during recent decades. We estimate that it has already risen by one percentage point on average in big rich countries during the pandemic. There may not be very much scope for further increases."

Wow, that's a truly obnoxious misdirect. Just use the word "stability" and hope nobody notices that stability is not the subject.

Profits in retail went up 40% during COVID -- and wages are up 1%. The scope for further wage increases therefore approaches 39%.

Obviously companies are going to continue to try to hold on to as much of that increase as possible for themselves, but here the Economist is pointing at the fact that wages have been artificially depressed, and pretending that that constitutes evidence that there's no room to raise them!

https://www.brookings.edu/essay/windfall-profits-and-deadly-...

That doesn't follow, at all. You're measuring the 40% increase in profits relative to the amount of profits but the 1% increase in wages relative to the amount spent on wages, and those pots are generally very different in size - in fact, the smaller the amount of money that goes to profits compared to workers, the more biased against workers and towards profits measuring this way makes it look. Generally in retail, wages are one of the main costs and are a lot bigger than profit margin outside of small specialized companies.

Also, that article reads like propaganda. They carefully avoid quoting any figures that are meaningfully comparable. For example, the industry-wide figures they quote compare the average increase in profit for selected entire large companies for a year not to the increase in their annual staffing bill, but the increase in one hour's pay for one worker. The only comparison between total staffing bills and anything else is for one cherry-picked company that increased its pay to staff whilst making a loss on its US operations over the time period they're looking at and having a 68% drop in overall profits, if I'm reading the linked report correctly. But they carefully don't compare to that company's profits at all.

It’s a good point, especially considering retail profits in sectors like food can be as low as 2-3% of revenue, so a 40% increase might be an extra 1% of revenue, while labour costs might make up 30-40% of costs, so if those went up by the same absolute percentage then the chain would be losing money (which would presumably then allow them to cut everyone’s wages by the same proportion by the same logic?)

If the profit margin is 2% but it increases to 3%, that’s a 50% increase in profit.

Yep. And if wages cost 33% of the income, to increase the worker pay by three percent will take 100% of the additional profit. That is why a 50% increase in profit tells you nothing about how much wages can increase.

Yes, the same trick can be used when writing a scientific paper: "we improve process X's accuracy by 150%!" (when the base is 1% accurate, it is now 2.5% accurate).

This trick is used all the time. In my previous SaaS company we used to write case studies to show the impact caused by our product on the business' bottomline. A typical impact used to be like conversion increased from 10% to 12%. However, this impact used to seem very tiny and absolutely not case study worthy.

Hence, we would deliberately calculate impact by taking not the previous sales but the previous conversion rate as the denominator. Thus, would 10 to 12% growth would go like "we increased Y's conversion rate by 20%."

Can't be mathematically disputed and totally clickbaity at the same time.

In that case, it’s not particularly misleading. All else equal, I’d expect an increase of 20% of sales, not an increase of 2%. Sure, a clarifying footnote/endnote would be nice.

>> companies are going to continue to try to hold on to as much of that increase as possible for themselves

Shareholders are going to continue to try to hold on to as much of that increase as possible for themselves. It is too easy to place blame on heartless corporations. Place the blame squarely on the flesh-and-blood people running and benefiting from corporations. Those profits aren't sitting in a big vault at Amazon. They are sitting in the bank accounts of every Amazon shareholder.

This is wrong. If Amazon earns $1bn extra profit the market cap of the companies shares could/should increase at least $1bn (depending on how it was made, and any future prospects for repeating the win).

However, no money is transferred to shareholders unless Amazon do a buy back or issue a dividend, it's just a revaluation. If those shareholders starting selling, only market forces (belief in Amazon) keep the price up. Shareholders can't demand their share of that $1bn in most cases, short of suing the company.

Stocks can and do trade below book value. Companies with net $1bn in the bank can have a market cap below $1bn in inefficient markets.

It's not market inefficiency causing that, but rather expected value. If a company has $1bn in the bank and you expect them to squander it, then you'd be foolish to value them based off of it.

This same logic explains the value of Amazon; they plow profits back into the business, making the future business bigger and more valuable. Their shareholders clearly agree with that type of longer-term thinking and have rewarded Amazon's growth with giant valuations repeatedly over the years.

With a high enough net worth you don't need liquid assets, large banks provide <1% interest rate loans that get paid off by your estate. Saves on taxes as well

>Shareholders are going to continue to try to hold on to as much of that increase as possible for themselves.

I mean the small shareholders generally don't make much comment about anything, and certainly not about wage control at a company they invest in.

>Those profits aren't sitting in a big vault at Amazon. They are sitting in the bank accounts of every Amazon shareholder.

sure, if the company pays dividends quarterly or if the board doesn't make some other decision on what to do with the money, and of course until the dividends are paid it does sit in Amazon's accounts.

on edit: I see nly made the same point with more technical observations https://news.ycombinator.com/item?id=28927742

So you mean you, me, your grandmother, and everyone else with a 401k or pension?

Stock ownership, along with other forms of wealth, is very unevenly distributed. Far more so than even income.

"Wealthiest 10% in U.S. Own 89% of Stocks and Mutual Funds"

The wealthiest 10% in the U.S. hold 45% of real estate, 54% of pension entitlements, 85% of private businesses and 34% of consumer durable goods.

https://www.thestreet.com/investing/wealthiest-10-pct-in-us-...

You might also care to revisit HN's guidelines:

https://news.ycombinator.com/newsguidelines.html

Particularly:

Be kind. Don't be snarky. Have curious conversation; don't cross-examine. Please don't fulminate. Please don't sneer, including at the rest of the community.

Comments should get more thoughtful and substantive, not less, as a topic gets more divisive.

Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize. Assume good faith.

Eschew flamebait. Avoid unrelated controversies and generic tangents.

Throwaway accounts are ok for sensitive information, but please don't create accounts routinely. HN is a community—users should have an identity that others can relate to.

A 401k with a vesting schedule geared at minimizing the already empheral retirement contribution businesses don't want to provide hoping on turnover with vesting to reduce payout and for those remaining with enough disposable income to contribute hefty amounts to their 401k? Sure.

Even 401ks are evaporating in significance so that is becoming a less valid point. Given the typical audience here, you and me sure, but the vast majority aren't reaping rewards or able to tie money up in unrealized gains they cant magically realize like many with piles of investments (often tax free).

Why are 401k's evaporating in significance?

Curious Brit here.

Not sure what OP is referring to because 401(k) balances are at all time highs [0].

[0]: https://www.cnbc.com/2021/08/19/401k-balances-hit-a-new-all-...

My guess is, part of the problem is how much of the economy is in the different sectors. Certain sectors (finance, software) have rather few employees relative to revenue, and they are (by definition) not the ones where most people are working. So, perhaps agricultural and industrial employers don't have much room to raise wages, AND too big a slice of the pie is going to employers, because it's not the same companies. The employers with lots of employees perhaps cannot raise wages much, while the employers with the room to pay more aren't employing many people.

So, the solution? Uh, hmmmm...lemme get back to you on that.

>In the popular imagination workers’ share of the economic pie has room to grow at the expense of profits. But recent research suggests that labour’s share of the value created by firms has in fact been fairly stable in most rich countries during recent decades.

It's unfortunate they didn't include any references for this claim, which seems pretty bold in the face of voluminous evidence that income inequality has increased dramatically in those same "recent decades". (See e.g., https://www.pewresearch.org/social-trends/2020/01/09/trends-..., https://ourworldindata.org/income-inequality, https://www.cbpp.org/research/poverty-and-inequality/a-guide..., etc.)

The only way I can see to conclude that labor's share of value created has remained anywhere near stable is to either lump executives in with labor, or exclude passive income from the definition of value created.

If your income is from working a job, then it can only go up via a raise, a different job, or an additional job. But you can only reasonably work 2-3 jobs. The gains are linear and do not compound.

If the income comes from investments,we'll, there are no limits. Each increase compounds.

So yeah, the rich get richer. The system is broken, but it is working as designed.

Labor's share has been stable because it's been kept artificially low while capital profits soared. "Stable" is a misdirect here.

You’re comparing apples to oranges. Inequality is not the same as labor vs. capital. There are many rich laborers (surgeons, investment bankers, software engineers) and there are many poor capital holders (pensioners, widows, orphans).

Inequality has primarily increased because the wages of high earners has pulled away from median wages. Returns to capital have if anything declined, in contrast. And no, these high earners are not all or even majority executives. CEOs of public companies only make a very small fraction of wage earners in the top one percent. Far more common are physicians, attorneys, tech workers, financial managers, and other professionals.

Nor is it an issue that these are high earning workers are “not paying their fair share”. Almost all of their income is taxed as ordinary income at high marginal rates. Many live in high tax states like California or New Jersey and are paying well over 50% marginal rates.

Once you account for post tax-and-transfer income, inequality in the United States has not increased at all in the past 50 years.

It's a fair point that income inequality has been driven to great extent by the professional class. But the message behind the article is that everything's fine because labor's share of income has remained stable. The problem is the growing inequality, not the identity of the people taking a disproportionate share of the income pie.

Tax-and-transfer is a response to inequality, and so necessarily lags the problem it tries to address. If current policies were truly maintaining the status quo from 50 years ago, then it follows that wealth inequality would be increasing linearly, and not accelerating as it is.

Gonna be controversial but one idea is the universal basic income, financed in part by capturing the value from the means of production (capital owners, technology creators) as they replace labour with machines.

"Capturing the value from the means of production" unfortunately but unsurprisingly leads to chronic under-investment in the means of production, as those who would otherwise invest in capital are uninterested in seeing its value captured.

This road leads to poverty, not prosperity (and more inflation as more money chases fewer goods produced in fewer factories by fewer workers).

I don't buy this. Trickle down economics is bullshit.

Investment happens anywhere there is a chance of positive return.

Investing in new technology either as an inventor/entrepreneur or dumb money still offers returns exponentially higher than anything else, should it work out.

There is a point where excessive taxation/regulation hurts innovation, but I don't think we're anywhere near that.

"Trickle down economics is bullshit."

It's been happening since the dawn of the industrial revolution.

The harnessing of fossil fuels and machinery should have put everyone out of work forever.

We used to be 85% living and working on farms, and now we're 5%.

In short, we found ways to make people way, way more productive, and the standard of living for the average person is astronomically higher today than it was 200 years ago.

I think special attention needs to be paid to accumulation of assets, and that this can definitely get out of hand (even as wages and standard of living rise, it can still be a problem), but overall, it's worked out.

Paradoxically, I still trust markets and regulation more than I do centralized control and distribution. The current US governments multi trillion dollar budgets come with all sorts of special requirements, usually of the social kind that can be liberally interpreted by institutions receiving the money (i.e. schools have to comply with our social view in order to receive the money, instead of just making sure that it's fairly spent).

For example, I think min. wage increases tend to be a better social measure because it's attached to actual production, and, it's generally not encumbered by some kind of employment and hiring ideology.

I honestly believe the tools are available to us, and we can make a ton of progress by just doing basic adjustments, closing loopholes, ensuring standards.

As an example, Healthcare reform of one way or another, even something that disentangled employment from Health Insurance, and somehow got 'pretty much everyone' covered one way or another, might yield gigantic side benefits with reduction of poverty and individual calamity. 50% of individual bankruptcies are Healthcare related. Imagine how much strife comes from that, and it's most unnecessary using a policy framework that we could apply today.

Especially things like offshore tax havens, tax loopholes, bogus charities etc. etc..

So much low hanging fruit, or at least, low-hanging from an ideological perspective.

> markets *and regulation*

The key many Americans seem to forget.

> Investment happens anywhere there is a chance of positive return.

I have a home solar-panel system to sell you. It will pay for itself in a mere 25 years. Now, normally, it'd pay for itself in 8 years, but taxes have raised the price. You will surely invest in this system anyway.

If the alternative energy sources are even more expensive, then yes, it makes complete economic sense for me to invest in this because it yields a positive return.

All you've done with this example is try to say that X is better than (X + tax), failing to identify the actual benefits and tradeoffs derived from the tax. Please at least try to be somewhat intellectually honest.

Right, but Homo Economicus doesn't really exist, and just because an action is "rational" from a purely economic standpoint, it doesn't mean that action will be taken by an actual living person. Disincentives sometimes have demotivating factors beyond their purely economic impacts.

I'd honestly be shocked if people with the means and interest to put in a solar panel system would care whether they made their money back in 8 or 25 years.

> Investment happens anywhere there is a chance of positive return.

Thats not how it works. Taking a higher percentage of returns, can leave the returns positive, but the expected value of risks negative.

EX: To make a simplified example, imagine that you can invest 10$, in an investment that has 50% chance of giving you an additional 11$.

That has a positive expected value. But if you put a 20% tax on the winning, now that investment no longer has a positive expected value, even though the returns in the wining case are positive.

Which is why in the USA you write off your losses. If you make 11 on 20 and lose 10 on 20, you pay taxes on 1 dollar.

>This road leads to poverty, not prosperity (and more inflation as more money chases fewer goods produced in fewer factories by fewer workers).

You mean these people are so disgusted by the idea of taxation that they would abandon the business opportunity that has presented itself in front of them?

Cry me a river for the people who will be making only 300 million dollars a year in net profit, rather than 500 million.

This is the kind of thinking that has gotten us into this hole: "We have to do everything we can to appease the wealthiest, or they'll stop gracing us with jobs!"

Ah yes, this would be the “supply side doesn’t even exist” economics of 21st century meme politics.

Meme politics is pretending that only a binary exists between laissez-faire and communism.

The sad part is most of the presidential candidates seem be trying their hardest to turn that pretend into reality.

> as those who would otherwise invest in capital are uninterested in seeing its value captured.

There are only so many places you can park your money

Surely there’s a middle ground…

Do you have any peer reviewed sources proving that? So far I only found ideological ones preaching the trickle-down economics demagogy.

Neoliberalism is a failed experiment, we now live in the results of this failure, 40 years after it started. We either address this failure or we let it roll until it sparks a revolution, either way it needs fixing.

> Neoliberalism is a failed experiment

how has neoliberalism failed?

It hasn’t. Global extreme poverty fell from 36% in 1990 to 10% in 2015. It’s really frustrating to engage with people who categorically refuse to acknowledge positive developments.

Global poverty has improved mostly due to China, which is total opposite of neoliberal policy (privatisation, deregulation, austerity [allowing rich to pay less taxes while taking the necessary tax money via cuts to social programs] etc).

And if there is any improvement in neoliberal poor countries it is because of the definition of "extreme poverty" used is based on nominal dollar value disconnected from material reality.

This stat is, I assume, coming from Pinker, which is disputed and highly misleading. And somehow you are frustrated with engaging people.

Global extreme poverty falling isn't due to neoliberalism, or at least show me a source saying so.

I left another comment on the thread with this study [1] which I recommend to anyone wanting to dispute that neoliberalism has failed.

About the US from this study:

> Third, where we have seen a reduction in poverty, it has come from government action, not from education. The earned income tax credit (EITC) and minimum wage, for example, are the systematic levers that raised wages for lower-wage workers—not skills. In 1967, the poverty rate was 27 percent without tax credits and benefits. That number is 29 percent now, but it is 16 percent when tax credits and benefits are applied. The EITC has pulled many people out of poverty.

[1] https://rooseveltinstitute.org/wp-content/uploads/2020/07/RI...

Here is a much better study and summary of the main failures than what I could ever write on this comment section [1].

[1] https://rooseveltinstitute.org/wp-content/uploads/2020/07/RI...

> unfortunately but unsurprisingly leads to chronic under-investment in the means of production, as those who would otherwise invest in capital are uninterested in seeing its value captured.

Unfortunately and unsurprisingly you got the math backwards on this one.

A claim discounting his so strongly would seem to require at least a modicum of explanation.

Well, I'm not sure UBI really solves the issue. Also, replacing labour with machines is not really the problem here; agriculture and industry still require lots of people, it's just that those sectors aren't the ones making the profits. The profits are going to software and finance, but we still need the agriculture and industry to run, and they still need lots of people.

> it's just that those sectors aren't the ones making the profits.

Coincidentally - they're also the most competitive / not monopolies.

Drones, automated harvesting, self driving trucks, software etc. will make their way into those industries eventually.

If wage growth isn't coming organically for whatever reason, then some form of wage subsidy will need to occur. Or, you just have large swaths of lower middle class people in a growing state of contempt for the city dwelling elites.

All of those technologies had extremely low investment due to the competition with an oft-abused migrant worker class sacrificing for their families. This was short term thinking because the human race would have been better off with more investment here.

> Well, I'm not sure UBI really solves the issue.

You can't just say that and then not say why you think that.

Agree. We already essentially do this with social security.

Seems like we're reverting to an old class divide. Aristocrats who get paid for having money, and peasants working the fields and told there's no money with which to pay them.

People might end up finding a solution by looking at history. France in the late 1700s and Russia in the early 1900s might end up being a reference point for some country in the mid 2000s.

>So, the solution? Uh, hmmmm...lemme get back to you on that.

There are three.

Either you do the usual: income sharing (welfare and progressive taxation).

You do the next best thing: Let people spend all their money and if they don't do it themselves, let the government borrow money to do it.

Or you do the best thing that is impossible to implement: Work sharing. Make people work exactly as much as they demand work for themselves. You're a billionaire and have too much money? Easy, let someone else who wants to become a billionaire do the job and become a billionaire too.

If there is not enough profit within a sector to pay for necessary wage increases, the money can come from increased prices. This allows money to be redistributed from rich sectors to poorer sectors.

> So, the solution? Uh, hmmmm...lemme get back to you on that.

Tax the excess from the wealthy industries and redistribute via whatever reasonably fair set of programs you happen to like. I know, I know, communism, yada yada. But that's the solution, and it's trivially proven to work. Basically every economy (including the USA) does this in a zillion ways already. It's just that "finance and software" haven't been among the victims so far so it seems like a disruption.

The point here isn't to provoke an argument about SoCIaLisM or whatever, just to point out that your feigned ignorance of working solutions isn't correct. We know how to fix this.

> I know, I know, communism, yada yada. But that's the solution, and it's trivially proven to work

work is doing a lot of, erm, work in that sentence. If it means "impoverish and oppress" then you're right. Otherwise, I can't for the life of me think of a single example where it has "worked".

> Otherwise, I can't for the life of me think of a single example where it has "worked".

Because you didn't live during those times. They are what resolved the great depression. They have been abolished since the 70s which means they haven't been done for the last 50 years. Why else do you think has the economy been stagnant for 20 years?

> Because you didn't live during those times.

History is recorded in increasing detail over time. By the 1930s there was a lot of recording being done and a lot of it is still extant.

Communism did not resolve the Great Depression anywhere, let alone the United States, and if you're wondering why communism has had such a bad rap since the 70s, I can give numerous examples for that. I have to wonder why you don't know, for example, about the killing fields of Cambodia.

> So, the solution? Uh, hmmmm...lemme get back to you on that.

Third decree: no more... rich people... and poor people

From now on, we will all be the same... ummm, I dunno

I gotta think about that...

— Tenacious D, "City Hall"

The world added about a billion people to the 'middle class' with associated increases in consumption. At the same time, especially in the US, there were not the investments in infrastructure & domestic production needed to add productive capacity to meet the overall increase in demand. Instead, the US economy (in particular) has become 'financialized' with investment flowing to speculation, high interest lending & financial product creation - leading to a massive increase in 'accounting dollars' that has to be met (at some point) with an offsetting amount of 'real dollars' on the Fed or Treasury balance sheet. Put another way, there are effectively 3 US Federal Reserves: The real one, the one represented by offshore US dollar denominated financial products (eg. Eurodollars, US denominated foreign debt), and domestic financial products (eg derivatives, Corporate bonds).

Put simply, a Cambrian-like explosion of investment is where we find ourselves. The write downs needed to revert to a stable mean would similarly be fiscal mass extinction events for many enterprises & households.

Over my lifetime I've been increasingly feeling more against the finance industry as it is. After working in fintech I got staunchly against it.

I don't think that finance as an industry shouldn't exist. It does provide a lot of benefits for cashflow, investments, etc., I do understand its role and benefits. My gripe is exactly with the over-financialisation of everything, the increased risks that over-leveraging in multiple sectors create, finance introduced itself as the weakest chain in the link, we got to the point where banks are definitely more powerful than the most poweful economy in the world, simply because a failure in the system can become systemic with a few levers being pulled.

We created a system which every other system in the world is a dependent of, we have a single point of failure on something that by itself generates no value in real terms. It does generate value by increasing our leverage, that is it. We've became hostages of the financing industry and of the risks they take, not us.

You say no value, but what about credit/borrowing?

If I want to take out a mortgage, I have to get a loan. Somebody has to put up money to back the loan. Then maybe I sell this loan to somebody else to reduce my risk exposure, and so that they can get retirement income. That's finance.

If you couldn't take out a loan, houses would certainly be cheaper. But it would likely not be cost effective to build them if you can't amortize the expense over 30 years.

If you had to pay 100% cash for housing, the poor would never be able to afford them, I assure you

Are you saying this isn't useful? Same question re: credit cards.

I do agree that government policy has led to excessive risk taking and wealth inequality, especially the federal reserve. But I wouldn't pin that on the finance industry. Moreso populist tendencies seeping into what should be a hard numbers and risk focused profession.

Everybody likes easy money

> single point of failure on something that by itself generates no value in real terms. It does generate value by increasing our leverage, that is it.

This was my point of "no real value". The only value is to advance the future into the present, at the cost of interest. This value is also the critical part making the system brittle, we advance the future far enough until the pressure on the system is too large and then a single spark lights the whole pile on fire. We have a "market correction", meaning: human suffering in humongous scale because some people were too greedy and wanted the future now instead of being able to wait a few years.

And worse, the existence of this system forces everyone who is not wholly accepting it into a disadvantaged position because your competitor is going to take advantage of cheap credit if you try to be cautious, so there is no incentive to not play the game, at all.

Alternatives to mortgages already exist in the form of Sharia compliant shared-ownership products. Effectively what you do is pay rent on the fraction of the house you don't own, while purchasing the rest at a regularly re-evaluated rate.

In this model there's no debt and therefore no leverage. Properties have to be bought by either very wealthy investors or the funding has to be crowd sourced.

Hmm the mechanism isn't clear to me. What do you mean by "pay rent on the fraction you don't own".

You buy a piece of the house all cash, and rent the other parts? Doesn't this imply it must be a multi-family unit?

And yeah, with no debt, only the wealthy will be able to afford properties. But maybe I don't understand the mechanism.

Now, I am a dumb rube with vague, unhappy feelings about the financial industry - but it’s not as if Jamie Diamond is running for President on a “clean up finance” platform. Who’s the person who actually understands the game that will carve away all the crap?

There are many who understand it well enough to reform it. The issue is not complexity -- finance isn't even that complicated -- it's a lot less complicated than tech or physics or construction, or logistics or medicine -- it only takes political will to switch to an economy that allows only utility banking and simple vanilla financial contracts. But this would require shutting a lot of things down, and there are a lot of wealthy interests standing in the way.

In this sense, it's just like medicine or higher education. Look at the people benefiting from the current system -- these are the ones who oppose changing it.

There is utility in things like futures contracts, a guaranteed price for grain is very important if a farmer needs to reliably pay a mortgage.

There's significant diminishing utility in allowing that futures contract to be traded millions of times by algos or allowing huge profits by firms that can front-run because they have fiber lines and the best perf coders that see the farmer trying to make the trade before it hits other exchanges.

Simple solution seems to be a financial transaction tax. No need for complex regulations, just decrease the incentives for working in the financial industry. Change will follow.

> simple vanilla financial contracts

the thing is, that used to be the case a long time ago. But it's insufficient, as increasing complexity of the modern world demands more complex financial products. I don't see them as wrong at all - after all, no one is forced to enter into these contracts, and those who do obviously see a benefit. That's why they proliferated after all.

These financial products are like Chesterton's Fence :

https://wiki.lesswrong.com/wiki/Chesterton%27s_Fence

To me the problem is clearly in the rate of growth between the higher ups and the actual labor force. Of course a CEO with huge responsibilities has to earn way more than a task based worker. Over the last 40 years basic salaries grew at a rate x, while average c-level salaries grew at a rate nx. That n multiplier is where the problem lies. Has C-level importance in the business grown with a factor n? Why have we accepted in the first place that this discrepancy should be the norm?

I went all analytical and stuff, but what I’m probably really saying is eat the damn rich and abolish billionaires.

I suppose this comment won’t be very popular in a forum of wannabe tech billionaires who idolize tech billionaires.

With the internet and the massive amount more things that can be done by less people then there has been a trend towards stratification of salaries generally. Even companies like Amazon that still have high demand for physical labour in warehouses have an efficiency far higher per worker than would be possible before (think of the overheads there would've been to managing a company of the scale of amazon in the 70s). The gains from this mostly gone to central offices and people who can build and manage these systems (software people among them) so I think that trend goes someway to explaining increasing stratification.

OTOH while companies as a whole have become more productive per person I'm very dubious that CEOs of companies have grown thousands of times more productive than everyone else without some pretty sketchy credit stealing of vast improvements in enterprise productivity.

RE: Abolish billionaires that would be more to do with government policy. As much as corporate lobbyists talk about Tax discouraging enterprise etc there's very little evidence of reduced productivity in high tax economies like found in western europe. If we went back to 90% tax rates and wealth taxes etc you'd still have billionaires short of actual hard stops of 100% tax or whatever. It would just be harder to get there.

We printed 40% of all dollars ever printed last year. (!!!) I’m sure the EU copied that motion as did others.

Why is anyone surprised that everything costs more when everyone has more money? I’ve seen my investment increase massively the last year and I don’t assume it’s because I’m a genius. The rich just got a lot richer.

> We printed 40% of all dollars ever printed last year. (!!!)

Stop repeating this bullshit.

It's is a reporting artifact that doesn't mean what you think it means. $11.2T that wasn't previously reported in M1 was added to the definition in May 2020 due to regulatory changes prior to 2020. That money didn't poof out of thin air; it already existed prior to May 2020. The step change that happened in May 2020 has absolutely nothing to do with anything real... that massive discontinuity (which happened before the major stimulus spending, btw) is almost entirely attributable the definition of M1 changing. See https://news.ycombinator.com/item?id=28818494 for more discussion.

Meanwhile, M2 has increased nearly 30% since April 2020 (perhaps this is what OP meant to say) with no definition changes. Were you unaware of this, and thinking people were misunderstanding the M1 definition change for the last year?

I think the notion that we printed 40% of all money in existance last year holds.

The FED balance sheet is also up by about 40% last year:

https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

And AFAIK the FED prints the money they buy their assets with.

Why mention stimulus when fiscal policy has nothing to do with money supply?

The money supply changes when the Fed decides to print money to acquire assets, which has nothing to do with congressional legislation.

> Why mention stimulus when fiscal policy has nothing to do with money supply?

Why, indeed. (More explicitly: I'm pretty clearly critiquing to an implicit conflation of the two, not positing one.)

> The money supply changes when the Fed decides to print money to acquire assets, which has nothing to do with congressional legislation.

Just to be pedantic since this whole thing 40% defies any presumption of reasonable numeracy... this is entirely irrelevant to the bat-shit insanity 40% claim.

If the Fed changed the statutory definition of M1 to now include $11 trillion that definition 100% existed previously but wasn't part of the formal statutory definition of M1. So M1 "increased" in one immediate massive instantaneous step change by exactly $11 trillion. Shocker! Again, not because anything real changed in the actual money supply. But because a bunch of money that definitely did already exist previously but wasn't part of a definition denoted by "M1" was added to the definition of "M1".

M2 is the more commonly referenced money supply figure. Have you looked at the M2 money supply lately?

https://fred.stlouisfed.org/series/M2SL

Very obviously massive amount of money printing. Order of magnitude more than was ever done during the GFC.

Roughly 30% of the money supply printed in the span of 18 months. And they keep going, every day printing billions.

This was meant to be an emergency procedure to save the economy, and it made sense at the very initial stages. Now it just acts as a hyper accelerant towards wealth inequality.

Yet we have many cheering it on, talking about nominal wage gains, as people become poorer in real terms. Or because their stock portfolio/house is appreciating.

Unfortunately the Fed has fallen to both populism and political pressure. It's been obvious for months that the best risk adjusted policy was to begin tightening long ago.

I say risk adjusted, because if they're wrong about transitory inflation, they will have to hike suddenly and induce a recession. So we risk a recession and we gained what?

The economy is overheating right now, as is very obvious by retail sales being elevated 20% above baseline (resulting in shortages) and the widest gap between job openings and job seekers in history. The Fed is meant to smooth peaks and troughs in the business cycle, not pour gasoline on them.

Why care about money supply if it is just sitting on a banks' balance sheet without ever entering the real economy?

Because the Fed is suppressing bond yields with their asset purchases. This artificially distorts many things in the market, generally towards a risk on fashion.

It's a big reason that housing is having an epic, historic rally, through suppressed 10y yields which tend to lead to lower mortgage rates. If you look at the summary of Fed purchases, published monthly, they are buying bonds across all maturities, not just short term bonds as they've done in the past.

It makes closing the bottle again more difficult. The Fed is effectively monetizing the US Government deficit by buying ~60% of all new treasuries issued (bank buys bonds and sells to the Fed).

And a lot of it relates to psychology of the markets. They continue to pour gasoline and encourage risk taking at exactly the wrong time.

It's likely this money will eventually make its way into circulation... it depends on consumer credit patterns. But the money won't leave the supply until the purchased bonds fully mature, which can be up to 30 years.

So yes, QE needs to end, regardless of whether the money ends up locked away in a bank's balance sheet. I believe the Federal Reserve should enact the best risk adjusted policy, not the best policy for the immediate term, which is their new mantra.

The medium-long term risks to their current policy far outweigh the benefit at this point. Easy money policies always look more appealing from a short term perspective... always.

That's why when populism takes over the monetary system, you see these policies proliferate, often with disastrous consequences. Look at the currencies of many South American countries for evidence of this.

No we did not print 40% of all money last year, QE is not printing money, its an asset swap. This money did not go into anyone's pockets. The Rich did not get a a lot richer compared to everyone else the bottom quartile of earners actually see their wages increasing the fastest of anyone right now. Saving are up, demand is high, Things are good! https://twitter.com/rortybomb/status/1448767207899545609?s=2...

Yes, of course.

An asset swap of newly printed cash for bonds.

No offense, but sounds like you don't really understand how the Federal reserve operates.

And re: your link. Talking about wage growth in nominal terms is meaningless. Wage growth has lagged inflation all this year, aside from last month. But rents are up ~15% nationally YoY, while wages only up a few percent. This rent growth has not materialized in the CPI yet, that's coming down the pipeline.

So feel free to celebrate a nominally higher number while the poor get poorer.

Personally, I'd rather advocate against inflationary policies that harm the poor the most.

Unfortunately people who are ignorant of finance cheer on policies due to nominal increases, while the wealth gap grows ever wider.

Cash is a bond.

From my perspective outside the USA, a dollar note is just a perpetual bond with 0% interest rate.

Never a good idea to accuse others of not understanding something.

Whether cash is a bond or asset is totally irrelevant.

The subject at hand is, is the Federal reserve printing money and increasing the money supply?

The answer is yes. Calling cash an asset and thus defining printing money as an asset swap is an irrelevant distinction to make.

OP Implies the Fed is not increasing money supply, which is wrong.

Everybody increases the money supply everyday. It’s normal - because money is an elastic concept.

Trade credit increases the money supply.

There is no distinction between any of it. It’s all credit in a unit of account

Yes, credit is another mechanism to alter money supply.

But you know the Fed has many levers to control this, such as fed funds rate, bank reserve ratios? It's part of their job to optimize these levers. Yet they choose to create moral hazard and unaffordable housing through excessively easy policy (supply chain disruptions anyone?)

Demand has been artificially distorted far beyond baseline, is the core of the supply chain issues. If you looked at the actual economic data and retail sales, personal income numbers.

Expansion of the money supply is not some magical thing that just happens in a totally free market fashion. If it were free market, the cost to borrow would be much higher, thus lower effective money supply, I assure you.

The distortion of long term treasury rates is much worse than their distortions of short term rates.

That's why they're so afraid to end QE. They know, if subjected to free market forces, long term treasury yields will spike and cause valuations to tank. Personally I think the Fed should stop focusing on the market. That's not their job

"An asset swap of newly printed cash for bonds."

What the hell is printed cash? QE just means banks get bank reserves which a have become a claim against the treasury bonds. Whether you own the bonds directly or indirectly via central bank reserves doesn't matter at all. Imagine the fed issues a new currency called the treasury dollars. All you can do with treasury dollars is buy treasury bonds from the fed. That's what QE does except with bank reserves which can also be used to lend out money to businesses and consumers.

Really, QE is a nothing burger. It doesn't make consumers, businesses or governments more likely to borrow. It should be stopped because it is completely ineffective. All it really does is tighten the treasury bond market which means technical buyers (money market, insurance and pension funds) who really need the bonds will bid for increasingly lower yields on the bonds. You know that is a huge surprise, the idea behind QE was that people start selling their government bonds and buy higher yielding bonds from corporations. That didn't happen as much as the Fed wanted.

Lower risk-free rates lower mortgage rates which would increase mortgage affordability and amounts borrowed.

That makes me, an existing home “owner” more likely to refinance, possibly with cash-out and makes many new borrowers willing/able to borrow more money than if the risk-free rate was 5% higher.

I think QE does increase borrowing; it’s not clear to me that it does it for a net good.

Read my reply to the other poster, as it basically addresses this directly.

But the TLDR is that it distorts the activity in the treasury markets, reducing treasury yields, and encourages risk taking/juices asset valuations. And they buy 30y treasuries, so you really think in the span of 30 years this money won't get lent out?

The Fed played no small part in housing rallying 30-40% nationally in the span of 18 months. Does this seem normal or natural to you? What about the youth that want to own some day? We are multiple standard deviations above the 100yr inflation adjusted mean for housing, well above the 2008 bubble peak now.

This is called pulling forward 10 years worth of gains/value to the present, IE a generational transfer of wealth from the young (non-asset owners) to the old (asset owners). For this reason alone, the policy is a total disaster. People claim to care about wealth inequality, but cheer excessively easy money policies on at every turn.

The obvious other reason it's a disaster is because of moral hazard and risk taking that can lead to more epic declines than a smoothed business cycle. The Fed played a big part in the psychology around the dotcom and 2008 bubble, for example. Read up on the Greenspan Put. Earlier action from them could have prevented these.

The Fed buys 60% of all newly issued treasuries. This is almost banana republic levels of monetization of the debt.

Yes, the government pays interest on this debt just the same, but they have a buyer willing to pay any price without concern to fair value.

This is straight from Investopedia:

> To execute quantitative easing, central banks increase the supply of money by buying government bonds and other securities. Increasing the supply of money lowers interest rates. When interest rates are lower, banks can lend with easier terms. Quantitive easing is typically implemented when interest rates are already near zero, because, at this point, central banks have fewer tools to influence economic growth.

Ok, the Fed doesn't "print" money, the mechanism is more convoluted than that. But it absolutely does inject money into the system, which is ultimately backed by "reserves" which are created out of nothing.

> But it absolutely does inject money into the system, which is ultimately backed by "reserves" which are created out of nothing.

Well, here is the kicker. The system is not the real economy, just a mechanism that lets banks borrow from each other to maintain sufficient reserves. If you want to inject money into the real economy you need to actually borrow money and do fiscal stimulus. If the government does the obvious and borrows for investments like education or infrastructure then the government not only has a liability (the debt) but also an asset (the infrastructure). If the government cuts taxes instead then it not only fails to create an asset equal to the debt it also diminishes the value of their most important asset. The ability to charge taxes.

Practically speaking there are two problems here. First, the economy has to have room for government spending and second the money actually has to be spent in a way that benefits the economy. If neither are true you get inflation.

I'd say the stimulus checks didn't really benefit the economy. The spending spree that so many people expected didn't happen. The unemployment benefits had the advantage that they are primarily given to people who have no income. I'm sure they contributed to inflation but the supply chains don't look great either. The explosion in energy prices cannot be explained by fiscal stimulus alone.

Well, strictly speaking, the money is backed by the promise to repay the bond with interest. At that point in the future, the money will disappear from existence.

The bonds in question are Treasuries, so when the money is repaid it is repaid by the Treasury.

Every one of these bonds represents future borrowing (if rolling over the debt) or future tax revenue.

It's the secondary effects of buying these bonds that is stimulative. Lower treasury yields means investors seek higher yields elsewhere (e.g. in stocks, corporate bonds etc etc.). They buy those, driving up prices, which in turn drives down yields there too.

In any case, bond yields have been falling for decades, so if anything the GFC and COVID have just nudged things along. People are now questioning whether it's even worth owning investment grade bonds. People who want a hedge against the stock market are beginning to look at other asset classes. The wealthy are moving in to increasingly exotic and diversified asset classes. Things like forestry, commodities, private equity etc are now becoming accessible to the moderately well off and not just the super wealthy. Money managers are pushing ever more speculative investments to retail (crypto, ARK funds etc)

Ever dollar in existence represents future tax revenue. It quite literally wouldn't be there otherwise.

And spending that dollar causes the tax revenue to arise, which means all dollars and all bonds are the source of their own funding.

It's basic monetary maths. https://new-wayland.com/blog/why-tax-matches-spending/

The majority are Treasury securities but the Fed has also purchased other assets under quantitative easing, like mortgage-backed securities.

The paper from Bank of England is the best explanation I have read about how money is created.

https://www.bankofengland.co.uk/quarterly- bulletin/2014/q1/money-creation-in-the-modern-economy

As someone else said earlier in the thread most of the money created is by commercial banks when someone take out a loan.

Can I get a few million to be repaid in the next 200 years? Could really use that loan.

Well... Austria issued 100 year bonds. I'm sure you could get investors on board by issuing bonds. I don't think a bank is going to accept that offer.

It's never repaid, only refinanced.

To repay the loan at country level, those holding the equal and opposite savings have to spend the money to create the tax flow that pays off the loan.

Since people tend to want to save over time, that doesn't happen.

Only 200 years? Think bigger. In 2014, the UK paid back a debt that was originally issued in 1720, and that's not even the oldest government debt out there.

https://historyofyesterday.com/the-oldest-debts-in-history-2...

I think there's a part of this that most people don't consider which is the eurodollar system. A lot of money is created by the private sector via banks and in a typical time the majority of money creation is actually done by the private sector. In the case of the US dollar being the gloabl reserve currency and used for global trade much of the money creation is done via offshore banks. So if this eurodollar system stops creating new money at the same rates as before then it's entirely possible for hard currency creation to go up without it being as inflationary as it would otherwise appear.

Has the value of your investments really increased that much, or are rising stock prices just reflective of the lowered value of the dollar?

The S&P 500 is up 31% compared to a year ago, and the US Consumer Price Index has only increased 5.4% over the same time period.

Most of the new riches go to people who already have more than they need so they save it. Therefore you get asset inflation and to a lesser degree price increases in consumer goods.

US Consumer Price Index is also showing less inflation than most people would experience themselves. http://www.shadowstats.com/alternate_data/inflation-charts show the both the new and the old CPI inflation numbers.

If price of beef increase a lot and people instead eat chicken the beef counts for less in the CPI. There is also a modifier if the the product have improved, ie the TV is a lot better than the earlier one.

The CPI just lags behind. The signs point towards further price increases in the future. In some segments, we've already seen similar increases recently, or even greater ones, e.g. with GPUs or construction material.

I know it’s almost becoming a cliche to post the “chart of the century”, but CPI is not effectively capturing inflation. The money has to go somewhere.

https://www.aei.org/carpe-diem/chart-of-the-day-or-century-3...

Rents up 15% YTD nationally, while CPI shows something like 3%.

There are a long list of reasons why, but the rent factor in CPI is likely to produce a few percent gain on it's own, given it's weighting in the measure.

(CPI lags market)

Is there a version of that chart that includes 2021?

YoY will reflect the massive crash we had last year. Compare it with 2019 levels.

No, as of 1 year ago the stock market had already recovered and exceeded its pre-pandemic levels. But sure, let's look at a few other intervals:

Compared to 2 years ago, the S&P 500 is up 51%, and the CPI is up 6.8%.

Compared to 3 years ago, the S&P 500 is up 63%, and the CPI is up 8.7%.

etc. Even if you think the CPI is somewhat underestimating inflation, it's clear that stock prices have been rising much faster than the value of the dollar is falling.

Other countries are doing much worse. They are buying USD and it has strengthened (=appreciated against other currencies) as a result of that.

https://www.tradingview.com/symbols/TVC-DXY/

That's just part of the money supply. M2 increased as well, but perceptually much less.

There is no evidence of hyperinflation as of now, but we certainly have an inflation hype.

The items I buy in the supermarket are same price as before. My rent is the same as before. Gasoline is up, but I barely use any of it now when I work from home.

> The items I buy in the supermarket are same price as before. My rent is the same as before. Gasoline is up, but I barely use any of it now when I work from home.

And, more importantly, it's merely... up. Still well below 2014 highs. There's a real concern that the wildcat producers won't come online this time. But on the other hand a huge shift to electrification hitting demand at exactly the point where you would've been counting on even sleepy wildcat for supply to come back online (sustained $100/barrel or so).

> We printed 40% of all dollars ever printed last year. (!!!)

Do you have a citation for that claim? I can't find anything like what you're stating. If you're talking about the huge increase in the M1 money supply, that "increase" comes from a regulatory change that took place in April of 2020 that now includes savings accounts in the M1 measurement (thus bringing it closer in line with M2).

See: https://fredblog.stlouisfed.org/2021/05/savings-are-now-more...

If you're talking about actual printed Federal Reserve notes, that's also not the case. See:

https://www.federalreserve.gov/paymentsystems/coin_currency_...

and

https://www.federalreserve.gov/paymentsystems/coin_data.htm#...

As for:

* > Why is anyone surprised that everything costs more when everyone has more money?*

Everything doesn't cost more because "everyone has more money". If anything, recent wage increases have finally allowed some Americans to catch up to the massive increases in housing, education, etc.

As for prices going up, that's due to massive, ongoing supply chain constraints. No monetary policy is going to change that. You can read all about it in various articles linked to here on HN. If you need more evidence, look at the price of gold over the past year:

https://www.kitco.com/scripts/hist_charts/yearly_graphs.plx?...

Gold, a common inflation hedge, is down over six and a half percent since this time last year. In fact, it peaked around August 5th/6th, 2020 at $2,067.15 and has been trending downward since. Other commodity prices, which were depressed in 2020 due to COVID-19 suppressing demand, have now swung the other way and are definitely higher than they were a few years ago. However, most of them are still below their ~2014 peaks.

That said, it looks like there may be some relief on the supply chain front. There was a meeting at the White House a few days back between the President and "shipping companies, mega-retailers and unions" to deal with ongoing supply issues. It now looks like some backed-up West Coast ports will now operate 24/7. We still have a dearth of truckers due to the 2019 US transportation and manufacturing recession (see: https://www.businessinsider.com/why-trucking-industry-slowdo... ) and subsequent overall slowdown during 2020 due to COVID-19, but things are slowly improving.

We might see the supply chain issues easing soon. Container shipping rates may have already peaked (see: https://www.bloomberg.com/news/newsletters/2021-10-11/supply... ) and with increased port operating times, we'll hopefully see a reduction in transportation costs which, as of right now, are a major part of price increases.

Then there's the whole semiconductor manufacturing pipeline bottleneck but, as more chipfabs are being constructed worldwide, that should provide relief for those of us hankering after GPUs, CPUs, and whatnot, and should help automakers move inventory.

I think a large part of the reason why wages have lagged productivity gains for the last 40 years is that as soon as the Fed saw wage growth, they'd raise interest rates out of fear of inflation. So you basically had the most powerful actor in the economy consistently squashing any rising wages.

This may be true if interest rates haven't spent two decades at historical lows

Did the low interest rate benefit the workers much? Maybe the home owners, corporations and investors more?

Home buyers and other debt owners sure. But otherwise they weren't intended to help workers as that isn't part of the Fed's mandate. It helps indirectly in that it helps pave the way for the federal government to enact fiscal stimulus via debt.

it helps workers as the low interest rate boosts employment due to lowering the risk of investments (which creates jobs at some point in the financial chain).

I don’t think so. In fact it’s driven the housing market (the one asset class where it could have helped) into financial speculation yet again

Or a knock-on effect of lower wages is lower demand, which reduces the flat-level Fed rate necessary to maintain low inflation.

The fed raised interest rates in 2018 and it is considered a policy mistake nowadays.

Productivity gains are all in tech - mostly software at that. Seriously, I’d guess 95% of all gains in that time period. The people implementing that tech have captured a slice of the value. Senior engineers with no degree can and do pull in $500k. And how could they not? It may not be easy to do a start up, but it’s trivial. At the same time, companies are competing for employees in their rapidly expanding markets - fighting for billions of future dollars. The people being replaced or made to be more productive have not captured any of that value nor do I see any market based reason why they would. Do their jobs require specialized skills now? No, nothing more than a bit of training… in fact demand is down for them.

Productivity gains and wages are strongly coupled but productivity gains are not uniformly distributed.

Yeah, maybe it would be nice if govt run some infra jobs and research from taxing th ese gains? Just a question. Don't know answer. Maybe it's better if VCs reinvest these gains (but probably it too short-term)

I think that OSS software for govt use would make a big difference to capture these recent gains for society

The Fed is actually here as a brake to prevent the economy from overheating. However, I'm no longer convinced that 2% is the ideal rate. In my opinion inflation allows the economy to adjust and higher inflation lets the economy adapt faster. I'd say anything below 5% is fair and anything above 10% is harmful.

That's because interest rates are the Wizard of Oz routine

The operation behind the curtain is making people unemployed. That's how inflation is actually curbed - eliminating wages from certain people and providing no alternative job. Since they have less money, they naturally demand less. That elimination of demand then impacts prices - eventually.

Rates have been in steady decline though for the last 40 years.

Yeah if anything it's the opposite. As soon as there was wage growth, the fed would drop interest rates to keep people from saving that sweet money they got and push them into investing it in rich people.

We're going to be hearing this a lot, for political reasons.

What seems to be driving inflation right now is supply chain trouble from the pandemic. Shortages drive up prices in the near term, since there's a clear supply/demand imbalance. Wages only directly affect items with a large labor component. Restaurants, yes; steel, no.

But steel is way up https://tradingeconomics.com/commodity/steel

As is oil, and most other commodities. Shortages are also caused by less people working because lots of money has been printed and handed out. So prices for these good rise. This is not surprising.

But there have been no changes to the fundamentals of steel or oil supply, we're still digging both out of the ground and refining them.

The issue is thus in the supply chain, and this is having unpredictable second-order impacts on the primary supply as well: iron ore production will dip if you can't get a replacement tire for your giant dump truck, because the tire is waiting for a container ship in Shenzhen.

>there have been no changes to the fundamentals of steel or oil supply

exactly. All while we've printed extra $10T in a span of less than 2 years. Those trillions like water are finding their way to swamp the economy.

>The issue is thus in the supply chain

While the supply chain did initially get damaged by the anti-pandemic measures, a spiraling inflation is known to cause supply chain issues too.

Inflation expectations can also cause shortages, that seems like a pretty significant problem here.

Suppliers will sell only as much steel as they absolutely need to to pay immediate expenses if they expect the price of steel will be higher next week.

I suspect that's what some of these 'shortages' actually are. Astute business people that are simply waiting longer than usual to part with their product because the price keeps going up.

Everyone did that and then the lumber price crashed.

That's a mighty risky game though. If you were getting $1 per widget last year, and can sell them for $2 now, most suppliers will be more than happy to sell at $2 instead of holding out for $3 and risking $1 or $0.50.

Why is that "the market will adjust itself" arguments do not come out as loudly when workmen wages start to rise?

Because nowadays economics has a heavy pro employer and anti employee bias.

It's a bit misleading to say that inflation is wiping out the gains from wage increases. These wage increases we're seeing are mostly a response to inflation.

Don't forget that inflation is a policy. So read it this way:. There are wage increases, then it's policy to fuck over laborers, then there are wage increases in response, and the cycle continues. Can't let the laborers get the upper hand of the polity

Exactly, a wage is the price of the labor to perform a specific job and inflation has an effect on all prices, which includes wages.

It sounds like a transfer from higher wage earners to lower wage earners. If you are trading your now slightly more expensive low wage labor for slightly more expensive low wage labor you're only losing if you get bumped into a higher tax bracket. If you are trading rising low wage labor for stagnating high wage labor you are winning.

Doesn’t this simply mean that inflation is not correctly computed by the authorities? For example in the Netherlands the price of houses is not taken into account but it’s going sky high, meaning that inflation is underreported, but wages react because people feel it.

Wage growth is mostly something we're seeing in the bottom quartile of workers so probably not enough for a real spiral. And there are real factors at play too, lots of disposable income moving from services to goods, other more direct pandemic effects, etc.

Tech wages are growing at similar rates if not more

> Wages and prices have even picked up modestly in Japan.

That's interesting since today it was just released that 2020 is the second year in Japan where salaries fell:

https://www.nippon.com/en/japan-data/h01131/

In fact doing some research for a course, I was totally surprised when I found that since last year, both Italy and Spain have higher average salary than Japan. I guess partly it's my big bias (coming from the 3rd city in Spain and now living in the biggest one in Japan, so ofc salaries are higher here) but I found it very surprising nonetheless. This is basically because Spain has been picking up the pace bit by bit, while Japan has stagnated for the last 10-20 years.

Corrective action:

Raise consumer purchasing power by fulfilling unmet demand.

Only by solving the issue of supply, such as housing near jobs / where people want to live, will prices and thus purchasing power correct.

Why is the cost of X so expensive? Rent. For workers, for employers looking for a space to operate, for everyone.

I agree. If the housing issue were solved we could probably do away with a lot of other bandaids.

“Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.” -Adam Smith, The Wealth of Nations

We (society) can sometimes get mired in the minutia and miss the big picture.

With present-day, proven technology, we can physically create ample prosperity for every human on Earth today. Energy is abundant, arable land is abundant, minerals are abundant.

It turns out that the hardest part is organizing the effort to do so, which is fundamentally a mechanism design problem.

The incentives of the influential are clearly an emergent phenomenon, so it’s silly to point the finger at a political party or individual. The fact remains that the incentives that obtain are driving an inequality situation that is trivially unsustainable.

If history is our guide: the guillotines are coming out, too late to prevent it. One hopes that we are not doomed to repeat history, having learned something, and rich people can sort of get together and do the math and realize that it’s not even in their interest to walk and talk and quack like a bunch of sociopaths.

> we can physically create ample prosperity for every human on Earth today

or you imagine it is possible, because you have it.

It is not likely that every human can live the wealthy life style of americans. Current day technology can barely withstand the lack of gas and fossil fuel for a few weeks.

Until the day star trek replicators exist, it won't be possible.

Photovoltaics alone are efficient at levels that would have sounded preposterous when I was a kid.

This is over and above the fact that we’ve known how to build safe, reliable fission reactors for decades now. I want to believe that there’s a reason we don’t better than “nuclear reactor” shares a word with “nuclear weapon”, but when the planet you live on is substantially built out of raw fuel that doesn’t poison the skies, and you keep burning the kind that does?

I don’t know what your background is, it sort of sounds like you can tell I’m a US passport holder and are coming from a different POV.

A little inside baseball: during the entire 20th century and bleeding into the 21st, Americans did in fact enjoy a quality of life that most of the world did not. In some limited ways that’s even true today.

But in the ways that matter, it’s getting really rough for the average family here these days. Something like 70% of American households could be forced into the red over a broken car needed for work, and basically everyone here is either paying (one way or another) much/most of what they earn on artificially expensive healthcare that the rest of the civilized world takes for granted. People use the term “opioid crisis” because even that is easier to say than: “people are killing themselves at a rate we refuse to even print”.

There was an implied contract: on the one hand the US citizen got to burn a bunch more carbon and have a bigger TV, on the other hand that person was paying for the invention of everything from the transistor to the Internet, paying for the R&D on most important pharmaceuticals, policing the seas via the US Navy so all those container ships make it to their destination, keeping India and Pakistan’s nuclear aspirations in their lane, containing the only super states more authoritarian than the USA (e.g. you can buy a 5nm phone from foundries that you couldn’t absent wars my family members have fought and died in).

Ceteris paribus it’s still more advantageous to be born in Santa Barbara than Kinsasha.

But this “clueless, spoiled American” trope is wearing thin. It was the British Empire that did most of the ugly colonial stuff that we somehow got blamed for, and when the median person in a country is choosing between healthcare and heating oil: words like “wealthy” might not be the best to generalize with.

>In some limited ways that’s even true today.

GDP per capita in America is about $64K, world GDP per capita is about $11K ($17K PPP). If you think Americans aren't that well off then you are mistaken.

IIUC GDP per capita is roughly the arithmetic mean?

The United States is winding down it’s run as the most productive, innovative, dynamic economic superpower in the recorded history of humanity. That was inevitably going to create the odd Ken Griffin, or Jim Simons, or Jeff Bezos or whatever.

But to the median person, it’s cold fucking comfort that Bezos is dragging the average up via his useful deployment of capital while they are literally cold.

>world GDP per capita is about $11K ($17K PPP)

That number is being dragged down by a huge number of people in global poverty. There is enough potential here to get to $30k PPP and I'd say that would be enough "wealth" for the vast majority of people.

>It is not likely that every human can live the wealthy life style of americans.

That's not the same thing as ample prosperity. It's clear that America and other rich parts of the world have been overindulging for some time.

Eh, it’s a tricky question when indulgence becomes over-indelgence.

The USA inherited a world where colonial exploitation, brutality, and genocide were the accepted norm. In fact, like all adolescents raised by abusive parents, the USA took it out on someone even less able to defend themselves.

With that said, the type checker is going to say that we’re going to compare like with like, and as utterly dominant hegemonic global superpowers go, the USA isn’t really pushing the scoreboard on innocent lives taken or ruined. The Empire or the USSR or the Mongols would be embarrassed if they had a weekend when they failed to genocide more people than the USA ever has.

It’s a sad defense to be less evil, but if there’s ever been a world-spanning empire that didn’t slaughter innocents in job lots, I’ve never heard of it.

Heavy lies the head that wears the crown, as the CCP is about to re-learn. When it’s your job to carry global stability on your back, you might unwind with an over-indulgence in some OPEC output.

For better or worse, this is pretty much the PRC’s problem now, and I for one am looking forward to a world where being American doesn’t make one a priori complicit in the fucking Raj.

I think if you read World Economic Forum's writings and know a little history (Tragedy & Hope by Quigley is a good place to start), the coming chaos which will possibly impact the mere 1%ers--with highly-paid doctors and lawyers getting possibly mistakenly mixed into the targets of rage--is all part of the plan.

WEF & Klaus Schwab's Great Reset intend to weaken the USA, because it is too independent and a bulwark against the unified world government, controlled by wealthy banking families & the true elite, they desire--they even state they desire.

If this sounds all too conspiratorial to you, please, read Quigley. He was a member of Team Elite, and while his history only goes to the ~60s, his book is credible enough to be taught in poly sci courses all across the world, and it details how a small group of international, rootless bankers have made strides over time to increase their control.

If you want to know what their agenda is, you can actually witness it being wrought in realtime. The overarching theme is that important concerns (specifically: economic issues) are to become within the control of this cretinous cabal. There is no room for national sovereignty in this. Social concerns are not just left to the individual nations, they are highlighted ad nauseum and hyped to the extreme, such that all the democratic nations in the world subsume themselves with vicious, divisive national arguments about relatively immaterial social concerns. Their medias endlessly stoke all manner of social problems--racial disparity, the rights of sexual minorities, the problems of religion--ensuring that nobody ever has a vote that can be cast for or against any particular economic choice or other, but rather, just a jumbled mass of nations all internally squabbling about relatively minor and divisive concerns.

I mean, it's a strategy as old as time. And it's playing out right here in the USA. Election 2020 was about what? Racism! (The USA meanwhile is one of the least racist places on earth.) What else was it about? LGBTQ rights! Conspiracy theories! What else was it about? COVID!

None of the debate was about the rise of China. About reshoring jobs and stifling the rise of a threatening and vile superpower. None of it was about actually cementing some kind of economic win for the 90%.

The same Team Elite is directly responsible for the rise and direction of China. Transpose the domestic squabbling to international squabbling and you will recognize the strategy that is old as as time.

Trump was anti China since the beginning, he put sanctions on China that put us into a pseudo trade war. There’s one side of the political aisle that is hyper focused on immaterial things like LGBTQ rights and racism, and I think everyone reading this knows which side that is.

It is unbelivable to me that many educated people on HN cannot put themselves in the shoes of the other person and simply sit down and imagine the narratives flip. It's like a rotating doll illusion. Sometimes it looks like its revolving left, sometimes the opposite.

It shows the grip of politicians on their followers. It is impossible to imagine someone switching sides today.

Ever want to embarrass someone? Ask them to name a couple of things their party does wrong. Or ask them if they can praise one thing about the other party.

We're in the deepest delusion in the history. It is time to put down the pitch forks and listen to reason, rationality, logic, kindness and openmindedness. Worse is that they'll attack me for raising these questions (how dare you to be centrist?). These people need help.

To both the parent and GP: I posted a comment that explicitly pointed out that blaming this or that political party is worse than useless. Of all the places on the Internet to woof for “red” or “blue” this seems like an especially weird one.

It’s a fact of life that there’s a bunch of tribal instinct wired into Homo Sapiens, anyone who’s ever been to a professional sporting event knows that.

But handling critical, complicated, delicate issues around the governance of the human race with all the subtlety and nuance of a drunk Chelsea supporter in a pub is uh, not the move.

I don’t know how many times humanity needs to go through this tiresome exercise where the prosperous just can’t keep their hand out of the cookie jar, distract the body politic with deliberately inflamed tribal identification, and push it until the plebs epater les bourgeoisie, and we get a new set of assholes owning the damned water every needs to drink before we get to some kind of semi-stable Nash equilibrium, but if I never heard a politician’s name or some appeal to identity politics ever again: it would be too soon.

Amen, you said it better.

Well, obviously no, unless you work in a coal mine you are not getting a bonus.

This inflation is the worst kind, energy prices go up = no one wins.

High energy prices drive investment in cheaper alternatives, which would be renewables. That's a good side effect because we need more of that. Though of course it sucks for people who don't have the opportunity to make the switch yet. And while it is short term nice for coal and gas suppliers to be able to sell at a higher price, the price instability is going to decimate their customers and accelerate the move to cleaner and more price stable sources of energy.

People working in coal mines need to actively worry about layoffs. Many remaining coal plants might not make it through the decade and a lot of mines have already closed.

If money aren't backed by anything (gold, goods, services etc.) and are just some bits in a computer or just some paper printed when someone deems necessary and can be invented and multiply out of thin air through the fractional reserve system whenever the banking system wants, then the current situation is absolutely normal.

Maybe it's worth remembering now that the economist was founded as a pro-slavery magazine in the 19th century.

Is this the results of QE? U.S. almost doubles the number of QE in 2020 [1].

[1] https://www.statista.com/statistics/1121416/quantitative-eas...

Simple thought experiment.

You have 1 million job seekers, and 2 million jobs. Say there are two companies each with 1 million jobs.

How much does one of these companies have to pay to fill all of its jobs?

---

Of course in the real world, Labor force participation rate can change, or immigration can fill gaps. But how many who dropped out did so permanently?

So I hate to be the "econ 101" guy here, but unfortunately this is an egregious case.

Jobs are not these floating vacancies that exist without workers or wages. Rather, a company will say, at a wage of 50 cents, want 5 million jobs. At a wage of $1, want 1 million jobs. At a wage of $2, want 500,000 jobs. At a wage of $3, want 200,000 jobs, etc. In other words, as wages go up, various activities that employ labor become unprofitable and the labor is no longer demanded at the higher wage.

In other words, there is a schedule, or function, relating how many jobs the firm wants as a function of the wage.

Similarly, there are not 1 million job seekers at any price. For a wage of 50 cents, there may only be 100,000 seekers. For a wage of $1, there may be a million, for a wage of $2 there may be 2 million, etc. Thus workers are not willing to work for any wage. As the wage goes up, more people enter the labor market. How does that happen? People delay retirement, or they postpone taking some time off for other reasons, or they switch from a part time job to a full time job or even take on extra hours. Yup, people respond to incentives.

Sometimes there is a news article pointing this out, and some commenters here react as if this is some profound revelation that poses a challenge to capitalism, etc, rather than just basic supply and demand. Want more workers? Increase the pay.

Now one of these is an increasing curve, the other is a decreasing curve, and thus there is some market clearing wage at which both the jobs demanded by firms is equal to the workers desiring to work at that wage. Therefore "in the real world", the number of jobs equalizes to the number of workers assuming workers are allowed to enter/exit the labor market and assuming that firms are allowed to adjust the offer wage.

This is the basic stuff. Once the basic stuff is understood, we can add various complications, like a search market, information asymmetry, transition costs, downward "stickiness" of wages, occupational licensing making it illegal for workers to enter, expectations, etc. One can cook up odd situations in which one of these curves is backwards bending, resulting in two equilibria, one "good", one "bad", etc. But all these complications merely add second order adjustments to the Marshallian scissors.

But if your simple thought experiment is ignoring curves and thinking there are just two numbers "workers available" and "jobs open", and one may be too big for the other, so there are "too few" jobs or "too many" jobs, then it's a bad thought experiment.

Yes, I'm aware of the finer details.

Obviously a contrived example, but has roots in reality. I'm sure you can understand working out a thought experiment with tens of variables doesn't work very well on a simple text discussion?

It's common to approach problems from an "all else equal" perspective in economics and hold other variables constant for certain thought experiments.

And there can be very real contrived cases where these constraints make sense. Say you have two widget making machines, one per company, and each requires two employees minimum to operate. And there are only two employees in the labor force? So marginal value of one employee is 0, but two is high.

The result is, all of the jobs can't be filled and wages will rise to some equilibrium point dictated by the relative value of the jobs.

Say company A is Amazon, and the job brings $20/hour of value to them. Company B is a local business and the job brings $15/hour of value to them.

In this scenario all the workers go to Amazon of course. Assuming wage is the only consideration, its more economically beneficial for Amazon to pay $16/hour to get all the workers while company B doesn't get any.

Of course the marginal value of an additional worker will change depending on the number of workers.

The fundamental point is, once the pool of labor becomes vastly smaller than the number of open positions, it becomes quite inflationary and destructive to businesses.

Some may say it's fine, and intended. But this is what tends to trigger an inflationary spiral. Companies continually compete for workers, causing wage hike spirals, which compresses margins, which leads to price increases.

And at the end of the day, your nominal wage goes up, but your real wage may only rise marginally, or even go down.

Now in the real world, I would expect labor force participation to kick in at some point and subdue the effects.

With digitalization of work there are more opportunities for worker-owned businesses with flat structures and profit-sharing.

Wages and salaries are only relevant if they are adjusted for purchase power.

We have a supply crunch. The way that works out is that those in the supply crunch can ask for more, and those outside it ask for more but end up not getting it. Plans are forced into reality by market action - which is how capitalism works.

The result will be some firms failing and some people transferred to the unemployment queue. Since we have a system where the threat of unemployment is used to tame wage claims, that is where it will end - with those thrown on the unemployment queue taking the real loss in their consumption.

There is a rebalancing going on. Certain labour is scarce. Prices of that labour will therefore rise until excess demand is eliminated. The excess demand is the wages of those currently being paid who will end up on the unemployment queue when the firm they work for doesn't get the price rises they planned to get, and can't therefore pay the current price for their supply.

"Wage growth is unusually high"

Labor prices will return to normal once people run out of savings and stimulus checks.

The stimulus checks totaled out to what $3,000? That at most covers 2 months of rent in the city. Or maybe a few months of car payments and food. If the stimulus checks were a significant portion of your income that money has been long gone.

While true, what is not being taken into account is the excess money people have from not traveling, eating out, driving to work, paying for child care, etc. How about inheritances from 700,000 dead parents who’s retirements were cut short by Covid? This has little to do with stimulus checks and more to do with financial and lifestyle changes.

Nobody pays rent…

The stimulus checks were months ago. If the status quo was so fragile that two $1000-ish checks to every working/middle class American was enough to shatter it, then it probably deserved to be broken.

First round: $1,200 per adult, $500 per child

Second round: $600 per adult, $600 per child

Third round: $1,400 per adult, $1,400 per child

(https://www.pgpf.org/blog/2021/03/what-to-know-about-all-thr...)

So, as an example, a family with two adults and three kids would have received $13,900 in total.

Morals/politics etc aside, I think supperberg's argument makes sense.

You think that a family of two adults and three kids can live for over a year on $13,900 and still have some money left over from that?

I think that a family of two adults and 3 kids will keep one of the adults home in lieu of paying for (with COVID, rather unreliable) child care if they can instead collect $14k plus unemployment.

That wasn't the "terms". It was savings + checks. Then you added "have some left".

It obviously depends a lot on the location.

They also weren’t paying any rent, so yes

(I deleted this comment because I couldn't find sources, but I found a couple of relevant ones since, so I've re-posted)

American hourly pay rose by 4.6% in the year to September while consumer-price inflation of 5.4% is more than wiping out those gains.

I've heard that the 5.4% figure is based on an out-dated methodology[0] and that inflation, as it affects the reality of a majority of people, is a fair bit higher than 5.4%[1]. This would mean the wage increases are easily outrun by inflation / CPI.

The 2014 article[0] specifically mentions that CPI doesn't take into account the devaluing of the currency - which is a much bigger factor today than it was 7 years ago when that article was written. Various statistics about X% of all US dollars were printed in the last Y years[2][3] (maybe not the most trustworthy sources).

House prices seem to be outpacing the stated inflation figure, which continues to raise the bar of income required to even consider home ownership a possibility. Whilst interest rates are very low this removes some of the regular mortgage repayment pressure, but beware the future when tapering starts and interest rates rise again, how many will go underwater, and will that be big enough to create a cascading failure of GFC proportions?

And then there's Evergrande? How will China play it to their financial advantage?

Lastly, because it's maybe more controversial and divisive, is the ol' WTF Happened in 1971?[4]. The top graph of that site showing wages growth has flatlined between 1971 and 2017.

It feels like The Economist is acting as the mouthpiece for industry pushing the status quo, wanting to continue the rhetoric that sells out the workers for the owners; rates capital and investor returns well above the provision of labor.

[0]: https://www.forbes.com/sites/perianneboring/2014/02/03/if-yo...

[1]: https://www.nytimes.com/2020/09/02/business/inflation-worse-...

[2]: https://techstartups.com/2021/05/22/40-us-dollars-existence-...

[3]: https://www.cityam.com/almost-a-fifth-of-all-us-dollars-were...

[4]: https://wtfhappenedin1971.com/

https://wtfhappenedin1971.com/

This site seems to blame everything on moving away from the gold standard but it is unconvincing.

Another answer is that the labor pool rapidly expanded in the 1970s. Prior to that, the labor force was artificially low due to two major world wars. It started expanding with the Immigration and Naturalization Act of 1965 then further expanded due to many more women entering the workforce. Mostly unheard of prior. Telecommunication in the 80s through 2000 further accelerated the work force expansion by allowing outsourcing.

Labor went from being very constrained to available worldwide.

Seems like billionares will rule till India gets rich at least. This will take some time.

Neoliberalism happened as a knee jerk reaction to high inflation.

"The rich world is used to wages and prices growing slowly. "

the minimum wage has not increased in a decade and real earnings have declined precipitously since the sixties for most americans who work longer hours for lower pay than ever. the rich world is used to profiteering, not pace.

"Wage growth is more mysterious."

Amazon and Walmart were faced with a rash of calls for unionization coupled with walkouts. wages were increased to undercut these efforts, but only as a last resort tactic of union busting. Covid ushered in a rash of unemployment which triggered personal debt in the form of delayed rent payments from eviction moratoriums that disproportionately applied to low-wage service employees. reopenings in these jobs exposed employees to the same low wages and deputized them all as mask enforcement officers to be harassed and shot at. this ensuing personal abuse that broke the camels back for the service sector resulted in many of them walking away to other opportunities when second-wave lockdowns ensued. time off means plenty of time to assess your alternatives in fields that dont scream at you for poverty wages.

"That means policymakers should focus on the labour supply"

Raise. The. Minimum. Wage. offer healthcare, parental leave, child care, and vacation for everyone. stop insisting everyone needs to go to college when theres a trucking and trade shortage, and for god sake stop referring to McDonalds as a "highschool" job to justify low wages when they open early and close late during school hours and the average employee is in their thirties.

> the minimum wage has not increased in a decade and real earnings have declined precipitously

And inflation is causing real wages to fall even now, especially at the bottom of economy! A shame. We had some decent progress over the past few years.

> Raise. The. Minimum. Wage.

And pretend this won't contribute to inflation either directly or indirectly! Then publicly shame companies for raising prices and propose price controls as a political salve, then shame those companies when the price controls lead to shortages and propose nationalization (or at least invoke the Defense Protection act!) Marvel when the problems deepen!

>And pretend this won't contribute to inflation either directly or indirectly!

Why is inflation the devil? Why should I care about inflation? When people have money and they spend it prices rise and companies will invest to produce more. If you keep inflation low by telling people that they don't matter then the economy won't matter to those people.

>Then publicly shame companies for raising prices and propose price controls as a political salve

I honestly don't care. If prices rise then there is more room for competitors and growth.

>then shame those companies when the price controls lead to shortages

Yeah sure but a basic stance against price ceilings is only logical. Minimum prices are not ideal but during a shortage they don't really ruin anything. Price ceilings are obviously bad because they do not help with inflation and just act as a general ban on trade altogether. What I personally find strange is that employer imposed price ceilings receive no scrutiny.

Surely you mean "Blame the rich some more when the problems deepen".

Wage increases and inflation are not zero-sum. For anyone who believes businesses pass total savings from low wages on to the consumer, I have a bridge to sell you.

As if the total amount of wealth in the Western world does not account for a living wage for every person healthy enough to work.

This isn't a zero sum game.

Wealth is not income. In particular, the wealth of say Jeff Bezos is mostly the amount of Amazon shares he bought multiplied by the last price Amazon shares traded it. If Amazon shares trade a few percent higher that doesn't mean there is magically several billion dollars more actual, real, inflation and purchasing power adjusted money that could be going into the pockets of workers if Bezos didn't pocket it. There's simply no mechanism by which that translates into the several billions of dollars of extra real world goods and services required to make that possible.

Now, there are actions that can be taken which are non-zero-sum. For example, if someone were to organise a way of providing people with goods and services more efficiently, that could increase the amount of them available and therefore actual real-terms income. We generally call these organisations "companies" and some of the value of that organisation existing is measured in the form of wealth. Just moving income around and expecting it to make everyone better off somehow is pretty zero sum, as is printing more money to chase the same amount of goods and services, or trying to convert wealth into actual income by confiscating businesses from the people who set them off and selling them off.

A lot of wage growth has been in the cost of healthcare and other benefits.

As the minimum wage rises it will hurt the poorest and most vulnerable, minimum wage removes the bottom rungs of the adder.

> As the minimum wage rises it will hurt the poorest and most vulnerable

You're really going to need to cite a source for this completely counter-intuitive statement. Something academic and peer-reviewed rather than "I got a C- in Econ 102/Macro and this is my best guess" that is the standard when HN discusses economic policy.

"making an activity illegal reduces the incidence of that activity" is not a "counter-intuitive statement". The literature shows a slight skew in results that show negative effects from minimum wage (& related policies): https://slatestarcodex.com/2014/12/12/beware-the-man-of-one-...

Scott thinks that the shape of the distribution implies publication bias; as per the very first comment thread in response to that post, I disagree with that interpretation. Since 101 theory would in fact predict a negative effect you can go ahead and assert with weak confidence that a negative effect exists. (You can also trivially demonstrate that above a certain threshold, like, say, $100/hr, you would have a negative effect. Now you need to add epicycles to your theory to explain why the effect would flip from negative to positive as that number goes down, while the mechanisms by which the negative effects occur remain unchanged.)

> the cost of healthcare and other benefits.

Low wage hourly workers rarely get benefits, so does not apply in this situation.

I don't believe it. The reason why minimum wages work is that the government becomes the union of last resort. Also, if poor people receive more pay they spend more which then creates more minimum wage jobs for other people.

The minimum wage is rarely raised to some absurd level. Instead it is just gradually increased every year by a small amount.

I'm fine with a higher minimum wage, but if you have to worry about what the minimum wage is, you're already in trouble. In a healthy market for anything, that thing is not sold for the absolute minimum that can possibly cover costs. Labor should be valued at more than the government-mandated minimum wage. Not least because when there's a competition for labor, employers care more about working conditions and whether their middle managers are jerks or not.

Healthcare and child care (including education that is not done via video) do seem like things we need to be universally available. It's odd to me that we make healthcare your employer's responsibility to provide.

> real earnings have declined precipitously since the sixties

My recollection is that this is not true and that real wages have risen (although not by as much as one would hope) since the 60s. Do you have a source for this?

The minimum wage (not directly the answer but a useful reference) hit its peak inflation-adjusted value in 1968, per the EPI: https://www.epi.org/publication/congress-has-never-let-the-f...

This is a good point. The federal minimum wage not rising is a good indicator that there are likely large sections of the U.S. with precipitous drops in real wages, in particular those places with no higher minimum wage than the federal minimum. But the overall minimum wage is the highest in history (adjusted for inflation): https://www.nytimes.com/2019/04/24/upshot/why-america-may-al...

Couldn't find data for the 60s and 70s, but FRED data shows that median real wages were essentially flat from 1979 to 2015ish: https://fred.stlouisfed.org/series/LES1252881600Q

The picture gets worse if you look at men only: https://fred.stlouisfed.org/series/LES1252881900Q (The COVID spike should be ignored - low wage earners going unemployed skews the median.)

Say what you will about gender equality, but societal expectations around men providing for the family still exist.

This is also using a CPI adjustment that offsets steep increases in the price of necessities like housing, education, and healthcare with hedonic adjustments for higher quality cars, TVs, and phones. So the real picture is even worse than the data might suggest.

> FRED data shows that median real wages were essentially flat from 1979 to 2015ish

Yeah that makes sense. Precipitous drop in real wages since the 60s though is a pretty big claim that deserves quite a bit of scrutiny before just being accepted as brute fact.

> offsets steep increases in the price of necessities like housing, education, and healthcare with hedonic adjustments for higher quality cars, TVs, and phones.

Right but the offset is proportional to the monetary amount spent right (I also don't believe cars actually get a hedonic adjustment but I may be misremembering)? That is for steep increases in housing, education, and healthcare to be offset by hedonic adjustments in TVs and phones, roughly the same amount of money would be spent on housing, education, and healthcare, as on TVs and phones (or would need astronomically large hedonic adjustments). That being said housing, education, and healthcare have indeed seen steep inflation-adjusted increases in costs, but I interpret that to mean a widespread low rate of increase in costs for the rest of the basket, which includes clothing, food, and the like (which is not necessarily a good thing, it would probably be a good thing to say triple the price of electronics if that could result in healthcare costs staying stable).

>Say what you will about gender equality, but societal expectations around men providing for the family still exist.

Unpopular opinion. Demanding that women receive the same pay as men is the same as demanding that the man does not provide for the family. Demanding both is a double standard as men are forced to increasingly compete with someone they are supposed to support.

important to mention im still talking about blue-collar high school grads here, the ones driving current wage growth post-intra pandemic. these include paramedics and bartenders for perspective, who generally do not get healthcare or retirement benefits.

https://sgp.fas.org/crs/misc/R45090.pdf

Right, but your source here is from 1979 (I think there's a larger increase since the 60s) and it still displays an overall (small) rise in real wage growth for the 10th and 50th percentile. It displays a (small, which is still very bad to be clear, you would expect a large increase, but this isn't really "precipitous") drop in real wage growth for males in the 10th and 50th percentile. I don't have a source off the top of my head, but I think you'll find a rise in real wage growth for both males and females for both 10th and 50th percentile since the 60s.

On closer reading indeed the high school grads part seems to be suffering quite a bit. That decline seems to be something that would not wiped out by any increases since the 60s. But it's important to note that at this point only high school grads do not make up "most Americans." Whether that's good is another topic.

I don’t think that they have shrunk but they grew only moderately. When you account for costs like house no, health care or education then they definitely have shrunk. When I grew up there were families in my neighborhood with the dad working as a loader in a warehouse, stay at home mine, three kids and a nice house. This isn’t possible today.

Even if lower incomes have grown a little, upper incomes have grown way more making a lot of things way more expensive for people with lower income.

Real wages have risen on average. The question is for whom.

I thought the Freakonomics episode this year on raising the minimum wage was interesting.

Assuming the premise that you would like people at the bottom of the wage scale to be better off, the conclusions from the researchers they interviewed were mixed, with the one interviewee concluding that it tends to make older people better off and younger people worse off.

https://freakonomics.com/podcast/minimum-wage/

Excellent description of why people haven't gleefully returning to their pre-pandemic jobs! Additionally, people quitting their jobs to perform informal labor (eg childcare for their own kids), competitive wages paid by growing businesses sectors (eg package delivery), and of course the number of workers that just plain died.

> Raise. The. Minimum. Wage.

In the short term, obviously. But how about thinking about moving to an economic system where raising the minimum wage is not necessary?

The economic system we have now was that - it has both opportunity, available productivity, and growth and has not provided for the entire work base.

raising the minimum wage is necessary because compounding destruction of real value of nominal prices is baked into the system and without a systematic change if prices didn't rise, everything would collapse catastrophically. Perhaps we should consider a system where real value is not destroyed. Needing to raise the minimum wage is a symptom of this greater problem.

It seems we might be entering the nightmare scenario where wage growth becomes re-coupled to productivity gains instead of being siphoned away from laborers.

Does this need an /s? Don't see how this is a nightmare unless you're a billionaire.

Its clearly sarcastic, does that mean it needs an /s?

Original comment was definitely a Poe's Law contender. Hacker News, despite its "gratify curiosity" motto, has never strayed far from its Silicon Valley VC roots, and so these comment threads are brimming with corporation lovers: tech money, people adjacent to tech money, and people who simp for tech money in the hopes that they might be given a slice someday.

Or a retiree with an investment based pension.

Half of stocks are owned by pensions. The overwhelming majority of that half is owned by a small segment of privileged individuals

TIL people with a pension are privileged individuals.

Yes retirees get hurt but you have to understand that these retirees are benefiting from exploitation. Also, they are trying to pretend that there won't be a shortage of workers in 20-30 years as the population gets older.

This is an argument of the 'wtf happend in 1971' thesis. I think however, there is another way of looking at it: by treating company profits and employee compensation as obeying a sort of conservation law. So if companies are hoarding profits that would go to workers, then this would be reflected in rising shareholder equity, so if employees invest their wages in stocks, the productivity-compensation gap is lessened. Indeed, the gap between productivity and wages began widening a lot in the early 80s, when the bull market began.

What a bad idea that would be though.

Talk about putting all of your eggs in one basket. I'd have a hard time believing anyone would suggest that you do this, as the risk for things going bad if the company fails is double. You lose income as the company stagnates (or worse get laid off) AND you lose money as the company's stock drops.

This all assumes that the working class can even afford to dabble in equity markets when it's being soaked by ever rising rent/healthcare/childcare costs.

Given the latest news showing that 89% of stocks in the US are owned by the wealthiest 10% of Americans you aren't wrong, at all.

You don't have to invest it in your company. Invest it in whichever company is hoovering up all the profits.

To some extent people have been doing it, which is behind the massive stock price gains from FAANGs. Only benefits you if you did it before everybody else, though, otherwise prices get bid up so high that you don't get a decent number of shares.

Spent three years an eight months working in retail hell, and this was exactly what the company pushed employees to do - they were kind enough to sell shares to employees at a 10% discount but you had to be crazy, grossly miseducated or drank a bit too much of the kool-aid to believe that this organization was a good value store.

> So if companies are hoarding profits that would go to workers, then this would be reflected in rising shareholder equity, so if employees invest their wages in stocks, the productivity-compensation gap is lessened

Unless the company is paying dividends (and the distribution is proportional to earnings), we can't assume that a company "hoarding profits" would have a correlated stock price.

Cash holdings and investment into physical capital are assets that should reflect in share price, no?

This is of course assuming the profits aren't siphoned off into some offshore tax haven.

That’s how it looks to me. How dare the low ranks want to benefit from economic growth. How can a country exist without billionaires getting richer?

>Both wage growth and inflation are unusually high

Lots of people talking about housing bubbles and such. There's no burst coming or if there is any dip it's going to be small.

Instead we are going to have inflation take off.

USA is running about 5% inflation. https://tradingeconomics.com/united-states/inflation-cpi

The central bank 'balance' is not balanced by any intention. https://tradingeconomics.com/united-states/central-bank-bala... In fact the Fed is bankrupt, very bankrupt.

https://tradingeconomics.com/united-states/money-supply-m0

A ton of money is being printed. The USA was bankrupt in 2009, and they sure know it.

https://tradingeconomics.com/united-states/money-supply-m1

400% increase? LOL? This can be clawed back, it's not set it stone.

https://tradingeconomics.com/united-states/money-supply-m2

This is showing what is set it stone. About 24% is coming in the next year or 2 and ~40% locked in for the near future.

Worse yet, if the fed doesnt claw back the money, that 40% will go much higher. 10-15% interest rates are coming.

What's so unusual about high inflation? The US government printed nearly 400% more money to keep the bond market from collapsing just like all other countries. The consequence of this was known at the time, major inflation.

This post has a lot of misinformation.

For starters, fed is a bank and the bank cannot go "bankrupt" in the usual sense.

The United States (government) was not bankrupt in 2009. If it were, it would have defaulted on their loans.

The m0 and M1 money supplies most certainly do not have any meaning in the modern world where transactions take place digitally: There's going to be no coin shortage ruining daily commerce. Not even remotely close to what's being discussed.

> The US government printed nearly 400% more money to keep the bond market from collapsing.

The fundamental misunderstanding seems to be from what you think happens when you say "print money". What you said is the equivalent of saying "The US government borrowed more money from the federal exchange to makesure the bond market thinks the government is good for the old loans.."

Federal reserve*

It's an awesome plan. Tax the rich, then make everyone "rich" so we tax everyone at a higher rate, except that the truly rich are really good at finding loopholes. Punish the poor and the honest, while gaining virtue points for "taxing the rich".

I agree. The pundits for the past decade have been predicting a day of reckoning ,deflation , prices falling ,etc. Not going to happen. It's more of a flight to quality of the top asset classes, such as bay Area homes, biggest of tech firms (such as Amazon and Tesla), biggest and safest of currencies and investments (such as treasuries and the US dollar). Monetary policy is playing a role, but I think also this 'flight to quality' trend is as well.

> Lots of people talking about housing bubbles and such. There's no burst coming or if there is any dip it's going to be small.

[...]

> 10-15% interest rates are coming.

you have a glaring inconsistency showing

Reply on news.ycombinator.com