If you reallocate money without creating new currency, what you get isn't really inflation. Prices may adjust because the demand for things lower income people buy increases and the demand for things higher income people buy decreases, and prices follow demand. But supply and demand isn't inflation.
And that effect is present for any method of reducing wealth inequality. If we had less inequality, people who are currently poor would then have more money and use it to buy things. If those things are scarce then their prices will increase.
It's like saying we shouldn't decrease homelessness because it may increase energy prices when the new homeowners have to heat their new homes. Even if it's nominally true, the implication that the cost outweighs the benefit is ridiculous.
And if you're really worried about high prices, the way to combat them isn't to denigrate efforts to increase middle class wages, it's to address artificial scarcity in markets like housing.
You’re forgetting about velocity. A dollar in a middle class earner’s hands gets spent faster than a dollar in a billionaire’s. That faster spending stokes both growth and inflation.
Billionaire's don't hoard cash. Money they don't spent is all invested. Billionaires know how to manage money, and don't pile it up in Scrooge McDuck cash vaults.
Velocity’s relationship with income is well documented. (Note, too, that velocity most properly measures the purchase of goods and services. Transaction velocity also includes investment. Even that goes down as income goes up.)
Even so, I seriously doubt wealthy people have non-trivial amounts of money in checking accounts, because the interest paid on them is nearly non-existent. Wealthy people know how to manage their money, and investing it in 0% checking accounts, stuffing it in mattresses, or burying it in tin cans are all terrible investments.
Drug dealers wind up with large blocks of cash because they have difficulties laundering it so they can invest it. The idea that anyone else has pallets of cash in their basements is sheer nonsense.
https://www.investopedia.com/articles/investing/022416/why-b...
Banks keep as little cash as possible, because (again) cash does not earn money. They try to lend out as much as possible. The people who borrow money don't sit on it, either, who wants to pay interest on money sitting in a pile?
The whole cash hoarding theory is nonsense.
https://www.frbsf.org/economic-research/publications/economi...
But the rich aren't hoarding cash. They're investing it. The money is put to use. The rich do not have pallets of cash in the basement.
You'd think that professional bankers would understand this.
Here's the salient quote from the paper:
"Surveys show low-income households tend to spend a larger share of their income than high-income households. Because of this, temporarily redistributing income from the rich to the poor could stimulate consumption and, through that, the economy as a whole."
Yup, that's the "rich people hoard cash" theory.
As a general statement, that's just as much an assumption as the GP's claim. Where are the studies to back it?
I could certainly imagine situations where someone owns a lot of wealth but never developed the skill to manage it - classical example being inheritance.
Also (unrelated to the argument), "investing" != "put to good use". If an investor chooses the strategy that gives themselves the best ROI that doesn't mean the investment is necessarily beneficial for anyone else. (Except in an abstract "stimulating the economy" sense. But if that is all you want, you could just spend all your money continuously digging holes and filling them again.)
There's no rational reason to borrow money and make a pile out of it.
Even people who operate cash businesses (like casinos) rush to deposit the cash in a bank ASAP.
> If an investor chooses the strategy that gives themselves the best ROI that doesn't mean the investment is necessarily beneficial for anyone else.
Actually, it does mean just that. An investment is giving someone else money to do something productive with that money. That person will take their cut, and so benefit.
Look at the Dairy industry in the United States. Wal-Mart has vertically integrated the dairy industry into itself, as a result, many smaller regional farmers no longer have a market at all since there is no way to compete with someone who is so well integrated that they can SELL AT A LOSS in dairy, yet compensate by making up for it with social engineering via loss-leading.
https://www.nbcnews.com/news/us-news/best-advice-u-s-dairy-f...
You CANNOT sit idly by and say that investment is ALWAYS a positive societal good when by definition, the "rational invester" (read: paperclip maximizer for ROI) will naturally tend to converge on creating monolithic structures, which, by their nature as "rational corporate actors" act as, again, paperclip maximizers for profits.
Balance sheets do NOT accurately convey the full story of economic processes at work creating tangible effects in the real world, any more than meteorological climate models do.
If you take into account side effects caused by collectively funded (via rational investment methodologies) creating monolithic industry-consuming behemoths, then the idea the rich are "hoarding money" makes perfect sense.
Wal-Mart in this case is doubling down on automation, and keeping what payroll it pays low, so it's not actually acting to distribute wealth back to those who are so strapped they can't even think of investing, because they need to put the next meal on the table.
EVEN if they could statistically speaking, the most wealthy are the most likely to be able to pick up what stock they'd have to sell, because stock doesn"t put food on the table.
This creates a situation where regardless of who's hand the money is actually in, the outcome is the same. Monolithic businesses will be invested in, they'll integrate until they start creating value deserts in their space, and in order to contribute to continuing growth figures, will optimize away liabilities by minimizing workforce or salary. The only one's benefiting being those already on board.
Does it "GENERALLY" work well though? Yes and no. Yes, given the absence of any actors large enough to create value deserts through excessive vertical integration? Yes! It does!
No. I'm the sense that that isn't what the market seems to produce though. Companies will diversify, merge, or employ externalization of negative outcomes EXACTLY to accomplish making themselves the best looking target for investors.
At some point, enough has to be enough. The economy is one of the few process spaces where eternal growth is EXPECTED. No living system constrained by finite resource and time CAN grow indefinitely without causing major systemic upsets.
An equivalent solution to what Wal-Mart is doing could be achieved with networks of smaller less "fiscally efficient" distribution centers doing business with fewer monolithic industrial behemoths. This keeps the barrier to entry lower, leads to more opportunities for job creation, and increases financial mobility overall. This is something that CAN't exist with uncontrolled maximization of ROI by investors, and profits by corporation. At some point enough HAS to be enough.
Maybe I'm not an economist, but I've seen enough complex systems to recognize when blind spots exist in current modeling. This is something I see never get addressed.
I didn't say it was. I was responding to "beneficial for anyone else".
> value deserts
I'm sorry, but this is nonsense.
There are some sound reasons for redistributing money from the wealthy to the poor. Benefiting the economy because the rich are hoarding money or are incompetent investors is not one of them.
Again, look at Wal-Mart and dairy. Alphabet\Google does the same with digital advertising.
I'm not saying people are crap investors either. I'm saying the definition of a "good investor" (maximize fimancial ROI) and a "good company" (maximize financial profit) leads inevitably to market behemoths forming which WILL degenerate the health of the economy as a whole, and drastically increase barriers to entry for smaller players. A company as a collective stands as much as a danger when it becomes too large as it does a benefit.
A "good company" should not grow infinitely. It should grow as much as is needed to do what it needs to. That is providing it's service to it's community. No living system constrained by finite time and resources can support unceasing growth. The economy is just such a system.
-1st degree:Real wage growth doesn't happen, because investor behavior wants the most money back to them from a company.
-2nd degree: A company will try to trim "waste" by cutting immediate liabilities to the lowest they can to maintain requisite Talent.
-3rd Degree: Talent is going to go where the biggest bucks can be made, and that will be the biggest market behemoth which exists currently. The infusion of investor capital exaggerates buying power to acquire and retain Talent which would be necessary for smaller competitors to get a leg up against the behemoth"s entrenched position. This leads to value deserts, which adversely effects industry as a whole.
-4th degree: Smaller competitors die in value deserts. supply goes down, demand stays the same or goes up. Prices go up, profit goes up, return to 1st degree.
Wal-Mart captured a great deal of investor capital. In order to keep itself looking tempting to investor's it has to grow (diversify), cut liabilities (minimize wage growth, decrease employment/payroll via automation, and minimize benefits expenditures through scheduling shenanigans), or do BOTH at the same time by vertically integrating their supply chain and using loss leading's attendant benefits to undercut small producers; this pushes them out of the market, jacks up prices on the commodity when supply goes down, thereby increasing profits, thereby drawing more investment capital. Start the cycle again with the next industry.
It's called a positive feedback loop, and in nature, if they aren't compensated for, bad things happen. It just so happens that this one has a multi-generational period, so no-one has lived long enough or paid enough attention to get upset about it. If they did, I just haven't found their paper, bit I have the feeling people are starting to notice, even if they can't articulate it.
It goes back to wage growth because of the link between 1 and 2. 3 and 4 are what cause the actual societal\market damage. You can't "solve" the problem without fundamental rethink on the axiom that kicks off all of this, which is "the best investment is to dump as much money as possible into the fastest growing company", which has a sub axiom of "growth without bounds is acceptable and to be encouraged".
It ain't straightforward, but nothing about economics seems to be. If there is a glaring flaw, please enlighten me. I REALLY want to improve my understanding.
Never in my life have I ever heard of anybody (other than criminals and a few mentally ill people) with a cash hoard. Nor have I ever known anyone to do this. I've never seen any newspaper article about anyone with a hoard. Never a magazine article profiling millionaires with cash hoards. No books about it.
And yet, it is apparently conventional wisdom that wealthy people hoard cash as a general rule.
Name one wealthy American with a cash hoard.
I don’t think anyone assumes anyone is hoarding cash. It’s just a time to deployment question.
A dollar flowing into a wealthy person’s account may take a week or two to get loaned out or fielded into an investment, and another week or two to pay the investment manager or begin facilitating the purchase of goods and services. A dollar dropped into an empty checking account may buy food that day from an establishment which will sweep it out to a supplier the next day.
Our financial system is efficient, but the last time I saw a statistic for the figure, it takes about two weeks for the average checking account deposit to get turned into a mortgage.
Same thing.
It's like saying that a formula 1 race isn't faster then a car parked on the start line because it ends up at the same place. It ignores the times the car goes around the track.
It also presumes that a choice of an investment is as good as the free market in distributing capital effectively.
Imagine a world where everyone put 99% of his income into investments. There would be nothing to invest in, because nobody was consuming.
And by this definition the poor are definitely putting the money to better use because they cause the economy to grow by spending it all.
The rich are currently facing an asset price inflation because there is too much money wanting to be invested and not enough consumption for all those assets to be put to good use.
At a fixed money supply, growth causes deflation. People want to engage in more transactions and they need money to do it, which increases demand for currency.
You often see inflation during periods of growth because when there are high returns to be had, people take out loans to expand and banks making loans creates new money. The new money causes inflation. But if you really didn't want that to happen, it's simple to prevent it by requiring banks to hold more reserves (so they won't make as many loans).
But it's not clear why preventing moderate inflation should even be desirable. If you get a 10% raise at the same time as prices increase by 4%, who's complaining? You're up 6% annually and your mortgage, credit card debt and share of the national debt are down 4%.
True. This is the problem with fixed money supplies.
We moved past fixed money supplies several decades ago. My statement stands true in any modern context. Rich households spend slower than poor households.
Raises aren't automatic, they often have to be fought for. Especially in the public sector. What tends to happen in tones of inflation is labour unrest; people find their food prices have gone up by 10% so they need a >10% raise urgently, taking to the streets if necessary.
For the present problems of overly high inequality and falling productivity, indeed, the correct solutions probably run opposite to the "solutions" to the '70s stagflation crisis (wage repression and deflationary monetary policy).
Is it telling me that when unemployment is low, central bank policy is to raise interest rates? If so, why not say that? What I meant is that generally I don't see how the sentences in this article add up to .. an article. It's a bunch of metrics, chosen by convention, expressed in cliche. It kind of sounds like it's telling us a theory or opinion about something, but it isn't really.
Raising rates aren’t the only way to solve the problem of (a) people who could be in the labour market but aren’t and (b) insufficient labour in the places it needs to be.
Whatever it’s trying to do, it got me thinking about barriers to hiring in New York City. Are there steps we could eliminate or consolidate? Last week’s primary just saw my former bartender and taco server effectively become a Congresswoman for Queens. An article about the central bank and unemployment would not have prompted me to consider discussing this with her.
Why not discuss it with her?
I would have never tried the pastrami taco if it hadn’t been for her!
> Why not discuss it with her?
She’s campaigning. Not sure distractions would help. In any case, these sorts of proposals benefit from specificity. Next steps are doing homework and proposing specific rule changes.
Let’s not take pastrami tacos for granted.
They’re actually a brilliant fusion of American Hispanic and American Jewish traditions. As it happens, her district has prominent populations of each.
https://www.washingtonpost.com/politics/2018/live-updates/mi...
The part where someone has to compete for ultra-scarce housing in and around NYC.
Source? (Genuinely curious.)
Based on the wealth and income demographics of her community, democratic socialist policies would be net benefit.
You may dimly recall from your undergraduate Macro courses a relationship between unemployment and inflation called the Phillips Curve [0], which is used to evaluate one of the "dual mandates" the Fed tries to fulfill with its interest rate setting policy.
The problem, of course, is that there is evidence from the Fed's own research that suggests that the Phillips Curve is balderdash [1]. That doesn't stop central banks (including the Fed) from pretending it's still true, though.
[0] https://en.wikipedia.org/wiki/Phillips_curve
[1] https://www.philadelphiafed.org/-/media/research-and-data/pu...
I can’t recall a major central bank basing a policy decision on the Philip’s Curve since the 1970s.
12:29 pm
The Philips Curve is alive, [Federal Reserve Chair Janet] Yellen says.
So the Philips Curve posits that there is a relationship between the degree of slack in the labor market and inflation, and it is an empirical relationship that, while not absolutely tight, has been a consistent relationship over time, and I believe that relationship still holds.
https://www.c-span.org/video/?406675-1/federal-reserve-chair...
> there's considerable support for the idea that an inverse relationship between unemployment and inflation exists at least in the short run
Would you care to cite some? I'm certainly familiar with the post-70's forms of Phillips Curve theory (it's discussed in the very Wikipedia article I linked). But I also cited a 2017 paper from the Philadelphia Fed that looked very hard for such a relationship and couldn't find one, and which itself cites prior research going back to 2001 that agrees.
Real unemployment and under-employment are high because of the way unemployment is now measured. The definition of being unemployed has changed since the GFC to manipulate the statistics.
Some tricks to manipulate the numbers are:
- If you have been unemployed for more than 6 months you are no longer classified as unemployed.
- Work for one hour a month, say mow your neighbor's lawn or give someone a paid ride in your car and you are no longer unemployed.
- Give up an stop looking for work, and you're no longer unemployed.
Looking at different indices at different times is obviously going to skew the results, but that's the fault of the person doing the looking, not the BLS, Obama, or the Deep State.
I think you might be confusing cyclical and structural unemployment with your first point. I think it is valid to talk about the two numbers separately as they deal with pretty different problems (labour market liquidity/efficiency versus skills shortages).
The employment rate is at an all time high in many countries.
As for point 2: employment in the black economy is usually not included in official employment figures; people who want to work more hours are classed as underemployed although data on this is not as comprehensive as for the other measures.
I do not think the definition of employment has changed much in the last decade. Do you have a source?
Nah, this would be the labor force participation rate - and that one took a plunge since 2008 and never recovered since.
The OECD chart linked (if you play with the sliders) shows that both are increasing globally. I know that in the UK the employment rate is at an all-time high [3].
Your link seems like it might be using a strange measure of employment [4] which excludes agricultural workers and the military in the numerator and includes all people who are aged 16+ in the denominator, so as your population ages, the indicator would worsen.
[1] https://data.oecd.org/emp/employment-rate.htm
[2] https://data.oecd.org/emp/labour-force-participation-rate.ht...
[3] https://www.ons.gov.uk/employmentandlabourmarket/peopleinwor...
[4] https://www.investopedia.com/terms/c/civilian-labor-force.as...
Yes. Unemployment is very low. That means if you need ten people, you may have to pay more or wait longer than you expected. That is what “labour market running hot” refers to. “Eliminating slack” means encouraging employers to raise wages (which can cause inflation) to fill productive jobs.
“Central bank tightening” refers to the Federal Reserve reducing its balance sheet and raising rates. There is a Fed meeting later this year when target rates are expected to be raised, partly in reaction to said labour market.
I agree that the financial press could afford to be less jargon heavy.