One of Warren Buffett's annual reports (I forget which year, but I think it was the late 1990s) had an interesting observation: inflation doesn't affect all firms equally. Instead, it pools where there is a competition bottleneck. If you are the monopoly provider in a market, you have complete and total ability to raise prices in response to your customers having more money available to pay. If you are in a very competitive market, then every time you try to raise prices, some other entrant undercuts you and your customers and suppliers capture the surplus instead.
The Fed, however, measures inflation based on a basket of goods bought by the "average" consumer. Most of these goods are in competitive markets: groceries and gas and consumer electronics. And so the measured inflation rate that the Fed uses to control the money supply significantly undercounts the true inflation rate, with much of the money injected into the economy pooling in differentiated industries like high finance, elite universities, health care, Google & Facebook, etc. From there, it doesn't circulate the way it should, because people in those industries need few goods that the average American produces. Instead, it goes into asset prices, as they try to buy up more future earning potential.
I've suspected that maybe a simple way to fix this would be with "helicopter" Bernanke's crazy idea: drop money out of helicopters. Maybe not literally (imagine the fights on the ground!), but perhaps the Fed could inject money into the economy at the bottom, through direct deposit into consumer's bank accounts or tax refunds, and then collect it from the top, through fees on banks. That way, the money is immediately spent, and so the true effect of the money injected is more easily measurable in the CPI.
> I've suspected that maybe a simple way to fix this would be (snip) to drop money out of helicopters.
Wouldn't a simple way to fix this, be to change the relative importance of the "basket of goods" so that it reflects what real people actually spend money on?
Because housing, healthcare, and daycare/education when totaled should probably be 60-75+% of that basket, since that's where most people's money actually goes. Based on this - https://www.bls.gov/news.release/pdf/cpi.pdf - the percentages the Fed currently uses seems far, far too low.
The cost of gasoline going up 50%, or the cost of laptops going up 50% is far less hurtful than say, the cost of rent going up 50%, or the cost of healthcare going up 50%. I suspect if we used realistic numbers for inflation cost calculations, we'd see the real rate is far higher than is currently claimed, which would help economists better understand why so many people are suffering so much under a "good" economy.
The Fed already tries to adjust the basket of goods to reflect what real people spend their money on. The problem is that the average dollar is not reflective of the average person. Dollars are concentrated among the rich; that's what inequality means. The rich spend their money on asset purchases like buying stocks, real estate, and businesses. To my knowledge, asset prices are not included in the CPI at all. If all the money that the Fed pumps into the economy ends up being concentrated in Facebook and then is used to buy Whatsapp for $19B, that doesn't count as inflation at all. So they keep pumping money into the economy, it keeps going to the 1%, asset prices keep rising, and the rich get richer while the poor get nothing.
If anything should be progressively taxed its individualized capital gains. It is simultaneously very healthy to incentivize everyone to invest a bit in capital, and extraordinarily detrimental to the health of civilization to let capital concentrate without any impediment.
When do you assess the tax? If it's at any predictable interval of time, it opens the market up to massive manipulation schemes where people crash their own stocks to avoid paying taxes and bid up their rivals so they'll be forced to owe a massive tax bill.
You could I guess take an average over time to avoid the manipulation efforts, but then you still run into the issue many dot-com paper millionaires faced, where they were assessed a tax bill based on the paper value of their options but when it came time to pay it, the stock wasn't worth enough money to cover the taxes.
That's why we have the current system, where capital gains are taxed as income (though at a lower rate), but only when you sell them. That's the only time when you can put a fair value on the asset being sold, when it's convertible into the currency you actually plan to pay the taxes with.
IE, buy all the stock you want. It doesn't matter. The dividends you get, and any payout you get from selling those stocks (even for immediate reinvestment) count as income.
People aren't awarded money arbitrarily... Nobody will pay you more than you're worth. If a good hedge fund manager is able to make 1000x as much as a good doctor, he is worth 1000x as much as a good doctor, by definition, no matter how distasteful that might seem.
I believe @utexaspunk is saying that salary should be tied to the amount of social good you do.
You are saying that the market sets salaries based on how much value you create, as measured in dollars.
And he wouldn't be in my bracket so he doesn't have to deal with struggles either.
That would be great but think of the difficulties. Firstly, which politicians would support it? Most politicians spend their time fundraising ( begging the wealthy for money ).
https://www.theatlantic.com/politics/archive/2013/06/the-hum...
Can you imagine the future of such politicians?
Especially now that corporations can donate as much as they want?
https://en.wikipedia.org/wiki/Citizens_United_v._FEC
Secondly, the ultra-rich will simply move money/assets offshores in hidden accounts. A lot of them already do that to avoid paying taxes. If it were to increase, a lot more money will go underground.
Thirdly, citizenship is something that can be bought and sold in modern society. The ultra-rich will buy citizenship in countries with lower taxes and simply move their companies/assets there. Look at what the pharmaceutical industry has been doing the past 10 years.
https://en.wikipedia.org/wiki/Tax_inversion
The problem is that the international world order is corrupt and the wealthy write the rules/laws. Even if there was a raise in taxes, they would add a loophole for the wealthy to bypass it.
The Australian Government did just this during the Global Financial Crisis, https://en.wikipedia.org/wiki/Rudd_Government_(2007%E2%80%93...
It included a lot of measures, such as an increase in infrastructure spending and tax cuts, but one of the most interesting was the $950 AUD outright cash payment to individuals earning less than $80,000 AUD a year.
Australia did not feel the Global Financial Crisis nearly as much as other countries, and it is argued that the stimulus package was a big part of that.
There are concerns that the stagnation of wage growth we are seeing now is our economy paying for the stimulus package but I am waiting for a thorough retrospective report to make comment.
It seems like you have a lot of different prices in the economy, and if all prices stay the same, except milk goes up 20% and yachts fall 20%. How much has inflation changed? You have to pick some way to weigh the prices. And it seems to me that the best way to do this is weigh them by how much the average consumer is spending on them.
Imagine where we would be if instead of baling out the banks after 2008, letting those banks fail and forgiving the loans they held. Millions of Americans owning their houses free and clear as well a having an extra few thousand dollars a month to spend or save.
https://www.nakedcapitalism.com/2015/01/the-failure-of-a-pas...
It was intended as an emergency measure to help the poor when grain prices had risen sharply due to meager harvests.
Today we can produce so much food we have to come up with creative ways to keep it valuable - subsidies, dumping it, etc. We've "lost" a ton of agriculture jobs since that experiment was tried, because we can do it with less people. Seems reasonable to transfer those gains back to the people instead of all of them going to the guy that owns the harvester.
I find/believe shadowstats.com to be more accurate than the gov't stats on inflation and unemployment.
Interestingly, they never seem to adjust inflation upward because of product debasements (other than price per unit in a bundle), so that seems to bias the numbers.
[1] http://www.reuters.com/article/us-usa-fed-dudley-ipad-idUSTR...
> Dudley tried to explain how the Fed sees things: Yes, food prices may be rising, but at the same time, other prices are declining. The Fed looks at core inflation, which strips out volatile food and energy costs, to get a better sense of where inflation may actually be heading.
Guess exactly when food and energy costs were declared volatile. If you thought "when they went up" you'd be right.
If you disregard those actual inflation is 5%.
Inflation the hidden Tax
" Although inflation causes generally rising prices, it should not be understood as detrimental to all parties involved. It is highly lucrative for the government and the banking industry. When new money is printed (today, created electronically), it greatly benefits the first recipient because assimilating the new money into the economic organism takes time. Those first recipients (government and banks) can purchase goods and services at the old prices. As the money slowly works its way through the economy prices are bid up. Eventually when it reaches the salaried workers, prices have mostly adjusted. This process is a hidden tax on salaried workers, or anyone who receives the money late in the cycle. It is especially detrimental to those on fixed incomes, such as pensioners. Not only does the government understate the effects of inflation in its official numbers, any price decrease that would have occurred as a result of productivity gains are denied to the consumer as well. Inflation is nothing but wealth transfer. The government prints money and buys stuff with it. Prices rise and the salaried worker can buy less stuff. All the stuff the salaried worker could have otherwise bought has accrued to the government. Simple. Politically, it is far more palatable than raising taxes because the process is badly understood and well obfuscated. "
http://austrianeco.blogspot.pt/2008/02/inflation-part-22.htm...
https://inflationdata.com/Inflation/Inflation/DecadeInflatio...
(Note that the graph on the parent article is inflation adjusted. "Note: Inflation-adjusted annual average growth using income after taxes, transfers and non-cash benefits.")
The idea of a 17% mortgage is frightening.
Inflation from 1946-1980 (34 year period): 322.6% Inflation from 1983-2017 (34 year period): 145.9%
Actually, this disparity growth has been driven by the extremist anti-inflationary policies of the Federal Reserve Bank under Alan Greenspan and his successors. Reduced of inflation allows accumulated wealth to mean more over time, whereas higher inflation puts pressure on workers to demand (and obtain) wage increases and keeps the inequality in check.
You have this backwards. Inflation allows those with debt (leverage) to disproportionately capture a larger percentage of wealth.
Those with more debt make out better... who do you think has more debt? Inflation is wealth transfer from the lower and middle class to the upper class.
The minimum wage stagnated starting in the 1970s and fell to a lower level (adjusted for inflation) from the '80s onward. The federal minimum wage adjusted for inflation around 1970 would be around $9-10/hr now. As a share of per capita GDP, which the minimum wage used to roughly track, the minimum wage has fallen much more. If we were at the equivalent levels to the 1960s it would be near $20/hr right now. That combined with a shift in the balance of power from labor (unions, etc.) to employers has translated into depressed wages for the working and middle classes for the last 40 years or so. And from that everything else follows.
And if you think some central mechanism has gone horribly awry, what central mechanisms changed around 1980?
Disclaimer: I don't know enough about this stuff to make a definitive argument.
https://en.wikipedia.org/wiki/Reaganomics
?
The Copyright Act of 1976, perhaps? If we look at the list of wealthiest Americans, most of them are there because they provide something to the world that nobody else is able to directly copy. Without competition, there is no mechanism to spread the money around.
To my original point, though, making money off of a copyrighted work represents income from an asset, the value of which compounds over time, due to inflation.
I'm not sure it is that broad to begin with. The 99.999 percentile of adults with these near-infinite income gains represents only ~2,000 people. While wealth and income aren't the same thing, I expect there is a lot of overlap with this list[1] that outlines 400 of the potential names.
If you look at how they made their fortunes, many are directly attributable to copyright. Bill Gates certainly wouldn't have topped the list if anyone was free to copy/resell Windows.
> To my original point, though, making money off of a copyrighted work represents income from an asset, the value of which compounds over time, due to inflation.
Increased value of an asset does not necessarily translate to increased income. A primary residence, for instance, is a good example. The value of your home may be increasing, but nobody is paying you to live there. Many people are quite happy to pay top dollar for an asset that generates no revenue on the hope that capital gains alone make the purchase provide returns.
But you do rightfully point out that those who have entire control over a certain asset have complete control over the streams of money directed at that asset. That is not exclusively limited to copyright, but changes to copyright opened up a whole new set of wide-ranging assets to hold that were previously not there. Anyone holding hard assets was presumably already milking it for everything it was worth, thus, while incredibly profitable, not increasingly profitable.
[1] https://www.forbes.com/sites/chasewithorn/2016/10/04/forbes-...
An exponential growth curve is an exponential growth curve, irrespective of what it measures. Thanks anyway for the pedantry.
> And if you think some central mechanism has gone horribly awry, what central mechanisms changed around 1980?
In 1974, the US dollar switched from being a store of value to a store of debt: https://www.amazon.com/Creature-Jekyll-Island-Federal-Reserv...
And sometimes it's hard to have a discussion with someone when they don't understand the fundamentals of a field.
However it would be nice if you went into detail as opposed to just linking to that book. It's not part of the standard economic body of knowledge so I don't think it would be appropriate to expect your would be arguers to read it, especially when the author's wikipedia page is
G. Edward Griffin (born November 7, 1931) is an American far-right conspiracy theorist, author, lecturer, and filmmaker. He is the author of The Creature from Jekyll Island (1994), which promotes theories about the motives behind the creation of the Federal Reserve System.[1][2] Griffin's writings include a number of views regarding various political, defense and health care interests. In his book World Without Cancer, he argues that cancer is a nutritional deficiency that can be cured by consuming amygdalin, a view regarded as quackery by the medical community.[1][3][4] He is an HIV/AIDS denialist, supports the 9/11 Truth movement, and supports a specific John F. Kennedy assassination conspiracy theory.[1] Also, he believes the actual geographical location of the biblical Noah's Ark is located at the Durupınar site in Turkey.[5]
Other people have cited links elsewhere in the thread [0], and I don't feel especially compelled to be redundant. Not sure what to suggest other than googling some Austrian economists and their views on inflation.
Aren't there multiple schools of thought about economics? How do I know which one is the Right One to believe? Do they differ fundamentally on some levels?
I feel like googling for some school's teachings runs the risk of drinking one side's kool-aid, without even realizing what the counter-viewpoint is. Is there a good way to get a neutral overview of the different economic schools of thought, other than taking courses at a local university?
Mainstream economics has a much larger reliance on empiricism(especially recently after the Great Recession invalidated a lot of Chicago school models).
They differ fundamentally but like any field you should start with the mainstream. Start with the consensus of how the recognized leaders of a field agree on how the world works. Then start branching off into sub-fields(some of which will be labeled quackery like the Austrians). This doesn't mean they're wrong. Many times a sub-field is labeled as quacks before the mainstream finally accepts them. But more often than not the mainstream is right.
Some recognized leaders would be Greg Mankiw(representing conservative mainstream economic thought) and Paul Krugman/Brad Delong(representing liberal mainstream economic thought).
Also I think the best way to start an education in a particular field is with a textbook. They are great overviews of a field.
> I think the best way to start an education in a particular field is with a textbook.
Excellent suggestion.
Many of their followers forget the fact that they are thinking in simplified models. If reality seems to contradict the model, it is because the reality is somehow deficient from the ideal of the model and if we could only just shape reality to be closer to the model...or so most economic arguments seem to go especially when it comes to public policy.
Wikipedia is actually pretty good at being a neutral source in this area.
https://en.wikipedia.org/wiki/Schools_of_economic_thought
Understand the implications of the inevitable simplifications and you'll avoid drinking anyone's Kool-Aid.
I'm also not aware of James Watson's wacky ideas about biology. I know he has some controversial and maybe racist ideas about intelligence, but I don't think any of his ideas about biology are described as quackery.
And its about Bayesian inference, sometimes the mainstream is wrong. Not as often as it's right, but sometimes it's wrong. Sometimes people without credentials make large contributions to a field, not nearly as often as the credentialed make contributions but sometimes. Rarely a conspiracy theorist is right. But I think people who maybe don't know that much about economics should at least be aware of his position in the field before investing considerable amount of time reading his book.
Maybe vaccines cause autism, but it's a weird place to start a biology education.
On the second, thanks for the reference, haven't read that. Would be interested to hear how you think that change would lead to these effects.
Okay, slice the upper quartile and graph it over time. Now it's a proper growth curve, but it communicates the exact same idea.
> On the second, thanks for the reference, haven't read that. Would be interested to hear how you think that change would lead to these effects.
Quick thought experiment that expands on my explanation in the original comment: Suppose you have (a) a wage-earner who spends 90% of their income on goods & saves/invests the other 10%, and (b) an investor who earns an income from assets, spends 10% on goods and reinvests the other 90%.
Now (for the sake of simplicity) suppose inflation is 10% per year. What happens after year 1? What about year 2?
It seems plausible that over a long term, the top marginal tax rate can have a non-linear affect on growth. If safe returns on investments outpace inflaction+taxes, then you have exponential runaway of inequality.
Between 1980 and 1982 the top marginal tax rate dropped from 70% to 50%. This is a large change in a short period of time, and the tax rate drops continued until 1989 when 28% was the top rate.
[edit]
There is a similar, but less drastic pattern for capital gains: https://www.fool.com/retirement/2017/02/11/a-95-year-history...
Inflation doesn't affect your day to day purchases much. Prices go up, but wages go up too (wages are just prices on labor) so it cancels out. What it affects is savings and investments.
Your typical middle class person has some savings and a big mortgage. Their net worth is positive but their net cash is negative. Inflation effectively shrinks their debt over time, making them better off.
Poorer people living paycheck-to-paycheck without significant assets or debts aren't much affected either way.
Wealthy people probably hold equities and bonds rather than cash, so they're not much affected either.
The people who are hurt are people with large cash hoards, in excess of any debt they may hold. Which I think is not a particularly significant proportion of the population.
[1]: https://www.amazon.com/Capital-Twenty-First-Century-Thomas-P...
I wonder about the long period of low inflation we have being the problem. The Fed puts the brakes on the economy all the time, to prevent inflation.
Inflation would imply that everything is increasing in cost at about the same rate. Instead we have ballooning costs for a few critical expenses(housing, eductation, healthcare).
As inflation is also a form of government intervention (insert hand-waving gestures re: the Fed not really being a government agency), I think the principle still holds, but generalizes to something I can't articulate succinctly off the top of my head.
Its kind of difficult to find the similar strand in all of them to be honest. That's the reason the article ends on such a sour note: he never really figures out what's causing this.
The possible solutions are innumerable.
Pretty straightforward.
#1 Labor glut.
#2 "Surplus" (profits) of increased productivity not shared with stackholders.
#3 Transfer of tax burden from corporations onto the people.
--
Prof Sonia Marciano has an interesting theory for the why and how and when #2 happened.
"Bigger Isn't Always Better" Jul 26, 2017
https://www.youtube.com/watch?v=7Q5u4yNs_w8
"In recent years, there has been a palpable shift in the nature of the US economy. Corporations are getting bigger at an unprecedented rate. The share of US corporate income earned by the 100 largest firms is at a staggering 85 percent. Facebook has 77 percent of mobile social traffic, Amazon controls 45 percent of US e-commerce, and Google has an 88 percent market share in search advertising. We can connect the shift in the business landscape to the observation that Americans today are highly divided economically, socially, and philosophically.
The L2 Digital Leadership Academy, led by faculty from NYU Stern, Kellogg School of Management, Harvard Business School, and L2 researchers, is a two-day conference rooted in business fundamentals coupled with tactical sessions on digital topics.
Sonia Marciano has been a Clinical Professor at the Stern School of Management since July, 2007. She is currently the Stern academic director for TRIUM – a joint executive MBA program that includes Stern, LSE and HEC. Prior to Stern, she was at the Columbia Business School and prior to Columbia, she spent 2.5 years at Harvard’s Institute for Strategy and Competitiveness (ISC), where she developed content for the Institute’s Microeconomics of Competitiveness course which she co-taught with Professor Michael E. Porter.
Before HBS, Professor Marciano spent eight years as a Clinical Professor of Management and Strategy at the Kellogg School of Management, while also lecturing at the University of Chicago. She has also taught in both executive and full time programs for the Wharton School and Yale SOM. Currently, Sonia teaches core strategy as well as electives in advanced strategy and global competition. In addition, she teaches strategy and economics for corporate executive education programs in the U.S., Canada and Europe.
Sonia has won several teaching awards for distinction in teaching, most recently for best professor Yale’s, Kellogg’s as well as in Stern’s Executive MBA programs in 2010, 2011 and 2012. She was among the highest rated management professors at Stern, Columbia, Harvard, Kellogg and the University of Chicago.
She received her BA with honors from the University of Chicago. She worked in consulting, banking and the insurance industries before returning to the University of Chicago to receive her MBA in 1994, and her PhD in Business Economics and Industrial Organization in 2000."
It floors me how anyone, especially anyone with even a basic STEM background, could look at a growth curve that approaches infinity that rapidly, then turn around and say 'gee, I wonder if tinkering around the periphery of the system would solve the problem'.
No! Clearly some central mechanism has gone horribly awry.
The only explanation I've ever seen that adequately accounts for those curves is inflation. Inflation drives up prices, both of goods and of assets. A higher cost of goods narrows the margins for wage-earners (i.e. the poor and middle class), and higher asset prices inflate the net worth of people who earn income from assets (i.e. rich people) — this effect compounds over time.
If I'm wrong, please, convince me. Article & book recommendations gladly accepted.