If wages go up 20%, and prices go up 15%, everyone is better off and got a 5% raise, right?
Go poll people that experienced that and they won't tell you they're celebrating being 5% richer, they'll tell you they're outraged about the 15% inflation.
Psychologically they'll believe they earned that 20% raise through hard work. Putting in extra hours to get that promotion. But then the inflation robbed them of their 20% raise, and turned it into a measly 5% raise. They'll be outraged.
Politicians get this. No one will credit politicians for raising average wages, people will believe they earned their raise themselves. But there's lots of votes available for lowering prices.
I think this is part of the article's point. Raising incomes to combat affordability problems is far better for everyone involved than lowering prices artificially.
But like you said politicians get less credit for the the former than they do the latter, and thus we have the current situation of continued bad policy decisions.
The article isn't denying that lowering prices is politically effective--I think that's undeniable at this point--just that doing so is probably the wrong call.
Fair, it does touch on that issue towards the end. But I think it deserves more than a couple sentences acknowledging (but proposing no solutions to) the issue in the last paragraph, given IMO it's basically the entire issue with their proposal.
The point of doing high inflation is that it changes the balance of rewards between labor and wealth (owning debt), and that is where the resistance here comes from too. This will raise your wages, and destroy the values of your stocks.
You see, wealth IS debt. You should think of rich people's assets as fundamentally being some percentage of public+private debt.
But labor and wages aren't. Labor fundamentally represents some percentage of GDP.
So the effect of high inflation is that it lowers debt, dramatically and quickly. Stupid but somewhat accurage rule of thumb: 5 years at 10% inflation will lower debts by about half. While it leaves the dollar number that rich people own rising, it kills it in terms of percentage of GDP. The rewards for labor, meanwhile, don't change in terms of GDP, so they go up much more. The way government stimulates inflation is by paying its own employees much more, and raising pensions, unemployment, ... not financed by debt, financed by printing money, so employers are forced to pay more for labor to avoid people telling them to fuck off.
And, yes, this is (capitalist) economic orthodoxy, the part of capitalism that rich people hate, because it kills their ownership values. And, yes, things are more complicated than this simple picture, but in general this is true. However the economist is the economist. They preach (capitalist) economic orthodoxy the way the Pope defends Christianity. And that is just fine.
Well it's been "tried" essentially everywhere. Making sure wages rise on pace has been a policy position of essentially every liberal country on Earth for over a century.
To say it doesn't work using Latin American countries as an example, is like saying Russia already "tried" capitalism in the 90s. This kind of policy is so broad, widespread, and so often poorly implemented that it's impossible to use a single example as proof of ineffectiveness.
If you're looking for a positive example though, most people agree that the Scandinavian nations have done pretty well keeping wages on pace.
Asset prices (rich people's wealth) are fundamentally a percentage of outstanding debt.
Wages (the reward for labor) is fundamentally a percentage of GDP.
By having high inflation you change the balance between asset prices and wages, making labor worth a lot more than assets for a while. Kills your savings, especially the ones in government bonds and things like savings accounts, but it lowers your debt even more, as well as government debt.
Exactly what people have been clamoring for. It will change the "rich get richer" dynamic, at least for the large majority of wealthy people.
Having lived through hyper-inflation the only thing that got that under control was price controls. Wages going up can't stop inflation - they fuel inflation. Inflation psychology is that your money is going to become worthless so you don't save it, you spend it, which keeps prices going up. It wrecks havoc on loans and debt as well. If you lent money with a fixed rate hyperinflation erases your returns. If you borrowed with a fixed rate your debt is effectively erased.
Not to mention that governments in general don't control incomes. They can lower taxes (which is good IMO). They can pay government employees higher wages (which is hard to do when you lower taxes).
At the end of the day governments make things better by making smart investments (or policies that enable smart investments) and make things worse by making bad investments (or policies that lead to bad investments). Everything else is second order effect.
i don't think this is really true. people don't complain about an abstract concept of inflation, they complain that they can no longer afford things they once could. if wages really did practically increase by 5%, they could afford more things and have more money left over at the end of the month, and that is what they would notice.
politicians can't really affect wages the same way they can temporarily and artificially lower prices. but they also understand they need inflation to get elected, since you generally win elections by what you promise, not what you don't promise.
What they would notice is their entire net worth decreased significantly and their marginal income increased slightly. This is not a good deal for anyone with any savings.
Inflation especially impacts people older in life, who tend to be people who are more likely to vote and contribute to campaigns.
Lowering prices is of course more noticeable because you receive a raise once every long period, but pay higher prices (or lower) constantly and it’s very visible.
What I and many others to whom it matters a lot more than me are noticing is that the majority of things in the supermarket are twice the pre COVID price and pay has not gone up.
inflation is great if you own assets, which skews older. and they're more likely to vote, yes. which is why we get policies that are determined to keep housing values sky high.
When wages go up 20%, they go up 50% for the top quintile and 5% average for everyone else (or whatever the math is, preserving the general proportion). When prices go up 15%, they go up 50% on mandatory expenses and 20% on discretionary spending, and the basket of goods used to index inflation for both is massaged until it looks like a 15% increase overall.
That said, your assessment of the psychology of inflation is correct. It's just inapplicable here. The issue isn't people not understanding how much richer they are, because they're not. It's the intelligentsia and "elite" refusing to acknowledge the reality, because they'd then have to actually make material changes, which would reverse the siphoning of wealth from the middle class that they've been engaging in for at least the last 30 years.
It's partly because a 20% raise isn't a 20% raise. Even at the most modest tax bracket (above poverty) that will be reduced down to 17%. So outpacing groceries by 2% doesn't really feel good at all.
Percentages also don't matter as much when you break down raw numbers. A 20% (ignoring taxes) raise when your take home pay is $3000 disappears very quickly into your $6000 credit card debt, or maybe your $700/month car loan, or your $400/month student loans. People making that extra $600 more don't get a breath of relief, they get closer to the surface to breathe at all.
>No one will credit politicians for raising average wages, people will believe they earned their raise themselves.
And this is why we're doomed to fail at this rate. We're in 4 entirely different crises that are entirely above any individual worker's head, but somehow our solution is to just grind our way out. Maybe do some gambling (or sorry, "prediction markets")to get ahead. We're trying to dig out of a hole we didn't make and we just keep shuffling sand around instead of actually progressing.
> It's partly because a 20% raise isn't a 20% raise. Even at the most modest tax bracket (above poverty) that will be reduced down to 17%.
That's just not true.
To come up with an example of 17%, I have to plug in numbers that put you above the tax limit for social security, assume that tax brackets weren't modified by inflation (they are supposed to be), and put you right at the cusp before the next large jump tax bracket. So from 197,300 to that plus 20%. And even then, it's more than a 17% raise unless you are in California, where it's a 16% raise.
But that's again a very contrived example. In most cases, it's a full 20% raise.
> A 20% (ignoring taxes) raise when your take home pay is $3000 disappears very quickly into your $6000 credit card debt, or maybe your $700/month car loan, or your $400/month student loans
Except inflation makes loans cheaper. You get a raise. The principle stays the same. If inflation and your salary both go up by 20%, that's mathematically equivalent to a 16% reduction in your debt. So your credit card debt becomes the equivalent of $5,000, etc.
Debt is where inflation is awesome though, if you have 10% inflation and your wages raise 10%, your car loan and student loans become irrelevant quickly.
I'm confused about your first point. Income tax brackets are adjusted annually for inflation, at least in the USA. Receiving a 20% raise in a year with 17% inflation comes with each tax bracket cutoff also going up about 17%, so the post-inflation and post-tax income should match receiving a 3% raise in a year with zero inflation.
Don't forget about taxes. Things cost 15% more, wages go up 20%, but the government takes a chunk of that 20%. Do you net even 15%? Depends on your tax bracket.
If wages go up 20%, your post tax income should also go up by approximately 20%.
The exceptions are if you enter a new tax bracket, but that only affects your marginal dollars, sns even then, the increase in tax brackets is just a few percent.
In the U.S., you could also cross the SS/Medicare threshold and then suddenly your post tax earnings will go up more than your wage increase.
Post-tax wage changes shouldn’t differ too much from the pre-tax wage increase.
> Psychologically they'll believe they earned that 20% raise through hard work.
Well, it's not just that. They've been telling us for decades that wages are alternatively a direct reflection of the value of our labor to the company, or, a price set by the market, depending on which is cheaper for the corporations.
Kind of like when people say that UBI would simply instantly raise the price of all rent to match. Oh, really? The supply of rentable units will suddenly have decreased? The demand will suddenly have gone up? No? Odd that the "market set price" responded then.
The only reason it would go up by the same amount is greed of "the market" profits are unevenly distributed so it would make sense to even things out a bit (at least undo the gains made over COVID and the last few years by those profiting the most from inequality).
There is no 'wages go up 20%'. That's not how the economy works. Wages are renegotiated on an annual basis and most people have to job hop to get anything close to a 20% raise.
Inflation affects everyone rapidly. But to get the claimed wage increase people have to do work to find new jobs.
> There is no 'wages go up 20%'. That's not how the economy works. Wages are renegotiated on an annual basis and most people have to job hop to get anything close to a 20% raise.
The example was not meant to be a single year. Over the 2020-2024 timeframe we did see movements around that size (though the gap between average wages and inflation was smaller than my example, where I rounded the numbers).
yeah but it's not a great example, because actually wages aren't going up. maybe people would be able to psychologically handle inflation if it wasn't out-pacing wages. actually, now i think about it, that's not psychological at all, so the whole premise is kind of out the window, isn't it?
Though I disagree with your conclusions, that part is irrelevant to whether the example works.
An example is not bad simply because it's unrealistic. I'm sure you've heard plenty of examples which allow you to understand the main point without being perfectly representative.
The point of this example in particular was to illustrate how wages work alongside inflation. As long as you understand the point--that inflation is relative--the specific numbers don't matter.
the point of the example was to illustrate how people fixate on the increased cost of living fron inflation and ignore their increased earnings, even if the increased earnings out-pace the inflation in their cost of living. my point is that's a bad example because we couldn't say that that's true given that the cost od living has been out-pacing wage inflation for a long time.
so yeah, the example illustrates the idea, but it also underlines how the idea contradicts reality.
No, the point of the example was not to make any specific claim about wages or inflation. The point of the example was to illustrate that wages and inflation are relative. That's it.
If instead OP had said "if wages go up 500%, and prices go up 1,000%, everyone is worse off and got a 500% pay cut", then the main point being made would remain exactly the same. Again, this is because the exact numbers were never relevant, and the example was for explanation purposes.
Now apart from the fact that we are now 6 comments deep in the most pedantic thread I have ever had the displeasure of participating in (this is my fault too, to be fair), you also might be interested to know that cost of living/inflation has not outpaced wages for a "long time" as you so claim.
Here's a graph from the last 30 years, for example, showing earnings keeping up with inflation.
Or if your a low wage earner, those wages have especially kept up, outpacing inflation and even high wage earners by significant margin in recent years.
This is not to say that there is no affordability problem, but no matter what way you put it, your specific claim, that wages have not been outpaced by inflation "for a long time", is demonstrably false.
I don't work in tech, and hopping jobs will get you 5% at most, usually. Maybe it's because I'm in the public sector and wages are public information? Either way, it always comes across as VERY out of touch when people here talk about massive increases just by changing jobs.
Not to mention how casually they talk about changing jobs. As though there weren’t pressures (and desires) keeping people at one workplace, and that those people form a large enough percentage of the population that their resentment of inflation has political force.
That falsely turns your experience into an imagined generality.
There was one year I received 3 raises at Travelocity and nearly doubled my compensation. I was hired as a web designer and after 3 months was involuntarily reassigned to a developer role and told to “figure it out”. I got a negative annual review that year and then ended up in Afghanistan on a military deployment. When I came back to Travelocity I was still classified as a developer but was reassigned from marketing to product development where to wages are higher, but I was earning as a junior designer. After eagerly looking for other internal jobs they gave me a raise to catch me up. Several months later I was promoted to a senior developer position and became the company A/B test engineer, which also came with a raise. A little after that another company gave me a better offer and Travelocity countered. This was like a million years ago.
Because most of my career is in writing JavaScript if I want to continue to increase my wages I would have to do the most beginner level shit work because that is common expectation for JavaScript developers.
> That falsely turns your experience into an imagined generality.
> There was one year I received 3 promotions at Travelocity and nearly doubled my compensation. I was hired as a web designer and after 3 months was involuntarily reassigned to a developer role and told to “figure it out”.
This is obviously an aberration where you are doing exactly what you claimed the gp did.
Moving jobs is the single best way to get a raise and has been for decades. Leveraging the experience at a company (which is relatively static) for a higher wage at another where that new and different experience has more value.
Notably, how company leadership changes are less likely to be from internal candidates than a transplant from another company.
This might be true for software but it isn’t true into management, it isn’t true for any other industry, and it isn’t true for other forms of compensation.
This misses the primary cause. There's an affordability crisis because most of the capital continues to concentrate in the hands of a small set of people who maximally extract rents. As one small example, private equity buys up businesses of all kinds and extracts a rent; both the consumer and the worker suffer.
If you said during the feudal era "there is an affordability crisis: the peasants don't have money to buy castles," perhaps you were right. But the solution was to revolt against the king.
> But the solution was to revolt against the king.
most revolts were triggered by someone else (a rich lord) wanting to be king. The peasants participating in the revolt are simply either lied to, or were promised they would reap the benefits and rise above their station.
The real solution was the black plague, which created labour shortages, and gave the remaining peasants bargaining power.
And, to distract everyone from the destruction of the lower and middle-classes, here’s an <insert ethnic or somewhat alien> group you’re supposed to hate.
Perhaps capitalism was less to blame… A critical fifth estate and honest political ruling would’ve kept us on the path of the post-war “contract with the people” bit, that was working fairly well.
And high inflation would stop/reduce that by lowering debt.
Fundamentally, you should think of rich people's wealth as a percentage of outstanding debt (except of course things like Royal families' wealth). If public + private debt drops as a percentage of GDP, rich people will own more in nominal terms, less in terms of GDP (ie. less compared to labour). So the net effect of high inflation will do is make their ownings worth less in terms of assets.
A group of people unaffected by a problem will rarely correctly handle the problem. And the further they are away from it, the further from 'correctly handle' will be their handling.
Most of the people responsible for Government decisions are fairly well insulated from most crises, hence the crises will continue and grow.
They are isolated until the pitchforks come out. That's the big risk with letting a crisis fester, even if you yourself are not affected. thousands or millions of frustrated citizens, and it only takes one at the end of their rope.
The difference being that the Dutch Government isn't meant to be responsible for the civilised behaviour of other countries.
Governments, however, are responsible for responding to crises occurring in the areas they are elected and paid to govern. But increasingly they behave like lords over subjects rather than representatives of the group.
The Dutch government could protect its sovereign interests apart from the USA - for example by legalizing decompilation and antagonistic interrop with American software, or reverse engineering of American hardware, or suspension of copyright and trademark protections for American businesses. Dutch Mickey mouse cartoons for everyone!
There'd be short term economic repercussions when America throws a tantrum, but whose fault is it that this could significantly harm the Dutch economy? Better to rip off the band-aid.
> Most of the people responsible for Government decisions are fairly well separated from most crises
A lot of the time it is actually even worse than this in that they are often in a position to benefit from the crises.
The real major economic problem of our day is the extent to which labor's share of productivity gains have plummeted and continue to plummet.
If your wealth comes from capital everything is going gangbusters and nothing needs to be fixed. Just listen to Trump talk about the economy and how blind he is to how normal people experience it.
Going way off topic here but, how can we expect AI 'alignment' when even country leadership doesn't align with the people any more?
On a relate-able scale, look at the 'alignment' difference between a worker and their manager; between an SWE and someone in mangement a couple of levels above. They're a different species, in terms of 'alignment', generally. They don't even speak the same language.
(I'm being hyperbolic, but hopefully the core of what I mean comes across).
We're completely misaligned. That's why it's going to supercharge the problem. Pour trillions not into heathcare nor other public goods, but towards private companies who want to ransack civilization and dismantle the idea of a labor economy. The workers hate data centers but cities and states keep signing on.
Just more examples of political greed being funded by a plutocracy.
Just got me thinking about how much an area would attract residents if it could advertise the savings they'd make from living there as compared to anywhere 'normal'.
No car = no on-going petrol / diesel costs.
Fewer cars = cleaner / healthier air. Quieter, more serene ... everything.
Cleaner / Healthier air = Fewer health issues.
Fewer cars = more bikes
More bikes = physically healthier people.
Good planning is worth its weight in gold. I fear I'm stumbling into utopia theory, which is fraught with forgetting a whole lot of other realities.
American cities are not nice places to live due to crime..the built environment is often better than equivalent cities elsewhere. People who care about cities need to care about law and order.
Not really. Third world countries have more orderly cities than America with people in much more destitution. I've lived in many and my parents grew up in one. The idea that it's just that is just silly imo.
NYC, and a handful of neighborhoods from the other top 5 cities, are the only places in the entire country that have semi-functioning urban design. The entire population of America who wants human centered urban design only have a few square miles to pick from. So of course the cost of living will be high.
oatmeal1 is right. The largest components of most people's budgets are housing and transportation. Restricting new construction constricts new supply which results in rent/mortgage payments being higher than they need to be. Zoning which makes driving easy and anything else very hard makes buying and maintaining an automobile a de facto necessity. It also exposes you to oil shocks.
The Economist, as a London-based magazine, has front-row seats to a great example of an affordability crisis in a city with good infrastructure and little car dependency. (In the UK they generally call it the "cost-of-living crisis", if you're looking for more information.)
I don't see how simply raising the income would change anything long term.
The main issue is that the affordability crisis is also a result of the market. And without changing the preconditions or mechanics we'd get the same outcome just with different numbers.
So:
- Build housing
- Make housing more affordable by allowing homeowners (= not renting out) to write off and/or write off-faster
- Give newly built housing better write-off conditions
- Prevent cartels that operate via "pricing as a service"
Build housing is the biggest contributor (the remaining are simply levers to generate more build housing).
The lack of building comes from the bad zoning laws preventing builds. The rules at the local level are mostly favourable to existing owners, who by a large margin, want their existing property and environment to remain as static as possible to what they purchased (ala, the character of their neighbourhood).
And not to mention that even if they, in principle, agree with denser housing, they would face problems with crowded infrastructure that has to be paid for (and mostly hasnt been upgraded or improved, like public transport, road conditions, grid connections etc).
Therefore, the best current option is to push the affordable (read: high density) housing away from where you are, even if you, in principle, don't disagree with the ideals of it.
It's really annoying that minimum wage and the like aren't pegged to a general 'cost of living'-number that scales with inflation and whatnot. Peg the wages of the politicians to the same number. If they then want to increase their own wages, they have to also increase the minimum wage, or go out of their way to only increase their own wage, which will hopefully cause some people to call them out on their shenanigans.
Are there really a lot of countries where politicians are constantly increasing their wages while minimum wage stays the same? In the UK, both numbers are set by independent commissions which primarily adjust for cost of living; MP wages also have a modest benchmarking adjustment to ensure they stay in line with what civil servants responsible for similarly complex work would make. The US has "solved" the problem by increasing neither politician salaries nor minimum wage since 2009.
I do love the idea of tying the wages of public servants roughly to their constituents. But we already know the loophole of "use insider trading and bribes" to get around such restrictions on salary. Above all else, we need proper accountability before we dream of any real change like this.
Many of the issues that are currency related. The same labor being priced in different currency having different value is the most major issue. When a currency dives, then labor gets discounted due to inflation.
Reaffirming my view that The Economist is a neoliberal dishrag, the word "housing" appears zero times. Because housing is the number one problem and it'll never get fixed because ever-increasing house prices have become an explicit policy goal and, more importantly, homeowners will never vote for decreasing house prices.
High house prices are simply stealing from the next generation and increasing house prices raise the prices of everything because housing is an input to the cost of everything.
In many Western countries, housing is the best performing asset class so it's reached the point of stealing investment dollars that might otherwise go to productive output. Housing is the black hole at the heart of the economy.
The only country that has attempted to correct this thus far has been China. Xi Jinping quietly popped the real estate bubble a decade ago and the real estate sector has been in recession ever since as prices correct. As Xi says, houses are for living in, not for speculation [1].
The only countries that have even partly avoided this are because they implemented systems long ago that have prevented land hoarding, such as Red Vienna [2]. Interestingly, the post-WW2 UK almost ended landlords but then along came Thatcher [3].
> In many Western countries, housing is the best performing asset class so it's reached the point of stealing investment dollars that might otherwise go to productive output. Housing is the black hole at the heart of the economy.
This is true, and it is a huge problem in Europe for example, where buying a property to rent is often the best investment for regular people. So instead of opening a business or taking any other risk that may or may not pay off, investment money is going to an asset class that is not productive.
Unfortunately, when the populace suffers economically, it tends to become dumber. In turn, populist and demagogues rise, and these tend only to worsen matters.
See, for example, what happened after Weimar Germany's inflation.
the affordability crisis is downstream of inflation. governments should stop inflating the money supply, but of course they won't ever do this because they would then need to generate revenue another way, which would be to raise taxes. inflation is really just a hidden tax and it's easier for them to "tax" without pissing off citizens.
and so really the solution is to reduce spending. which, to some extent, is so obvious it kind of hurts.
Inflation is useful (within limits). So is deficit spending in a growing economy.
> Inflation is really just a hidden tax
No it isn't. The idea that the government should fix the value of money -- and that if it does otherwise it is stealing out of your pockets -- is goldbug crank territory.
If inflation was a tax, then deflation would make people richer. It doesn't. Why? Because in a deflating economy, your creditors can't pay you back.
Deflation is very damaging, and avoiding it is more or less the number one goal of macroeconomic policy.
Deficit spending is not universally able to create wealth. It can when invested in durable infrastructure at reasonable prices that increases productivity of the economy. But when countries borrow to pay pensions and other transfers, it destroys wealth and makes society poorer.
Taxes on the rich are already at European levels in the US. There simply aren’t enough of them to cover current spending.
It is a similar issue with taxing nominal wealth. 2/3 of nominal wealth in the US is completely non-liquid. Taxing the liquid fraction is essentially leveraged as a result, causing a catastrophic collapse in the value of similar investments by ordinary people as a side effect. Impoverishing a large portion of the middle class to own the rich isn’t a recipe for political success.
We’ve got to stop pretending loads of wealth is non-liquid and therefore off limits. The rich borrow using it as a collateral, if they can do that for their own purposes, they can do that to pay their fair share of taxes too.
That question assumes that the current level of spending is optimal. Regardless of who pays the taxes, are we getting a good value for that spending? Or could it be drastically cut?
Laffer Curve. Depends on the country but France for example already takes 44% of their GDP as tax, runs heavy deficits, and attempts to make up the difference by increasing taxes on the wealthy causes them to leave.
It's well-established that Americans are much earlier on the curve than wealthy people would like to believe. Mamdani Doctrine: ignore the part of your brain screaming rich people double consciousness and just do what's right for and fair for most people. At this point in history, that's taxing wealthy people - including paid-off-6k-sq-ft-house-with-2-people-in-it pensioners and $200k-a-year-living-paycheck-to-paycheck-in-a-coastal-metro yuppies. Yes, there'll have to be some tough decisions; austerity, indeed.
Even if this were true, such a tax program would limit the outsized corrupting influence of this class. That's arguably an even greater benefit than just helping with the deficit.
The goal of taxing the rich isn't to save the enormous defecit. It's to make sure they can't buy elections and undermine democracy.
It also does help to reign in some spending. Because a lot of spending is indirectly performed through subsidies. Oftentimes in the modern day for the rich who can already afford such initiatives.
> What's wrong with taxing the rich to maintain current spending?
Perhaps you have something more sensible in mind, but much of this pressure is clearly coming from the perspective that we could have incredible government spending with no tradeoffs or inflation if only we summoned the political will to fight billionaires.
Well, a little bit of inflation is actually good for the economy long term, and we have to balance that with the opportunity of cost of not spending.
Yes, the amount of government spending currently is likely too much, but by not spending the opportunity cost is sometimes greater. As the article contends, the solution to the affordability problem is to raise wages. If you can use the levers of government to induce growth that naturally raises wages, more deficit spending might be worth it.
This is the most impactful economic discovery of the century. You can raise taxes as much as you want if you add a layer of seperation to it and print currency.
The buck stops nowhere any more and I hear it's approaching the speed of light. The government is the ultimate legal power though, and whenever bad stuff is legal we all know who made it legal.
It is not "mishandling" the affordability crisis - it created it and actively maintains it. Most recently and least subtly by bombing and blockading all the places that we get oil from, in an economy that was deliberately designed so it can't do anything without oil.
They should outlaw financial engineering of human agency and build decision models developed and deployed within full public view that bubble up for vote national, regional, or local initiatives
But since government is a euphemism for the more verbose "humans whose biology drives them to select self" they will continue to mishandle the "affordability crisis" by propping up its roots, doing nothing to stave off future gilded ages
> They should lift incomes, not suppress prices
I think this misses the psychology of inflation.
If wages go up 20%, and prices go up 15%, everyone is better off and got a 5% raise, right?
Go poll people that experienced that and they won't tell you they're celebrating being 5% richer, they'll tell you they're outraged about the 15% inflation.
Psychologically they'll believe they earned that 20% raise through hard work. Putting in extra hours to get that promotion. But then the inflation robbed them of their 20% raise, and turned it into a measly 5% raise. They'll be outraged.
Politicians get this. No one will credit politicians for raising average wages, people will believe they earned their raise themselves. But there's lots of votes available for lowering prices.
I think this is part of the article's point. Raising incomes to combat affordability problems is far better for everyone involved than lowering prices artificially.
But like you said politicians get less credit for the the former than they do the latter, and thus we have the current situation of continued bad policy decisions.
The article isn't denying that lowering prices is politically effective--I think that's undeniable at this point--just that doing so is probably the wrong call.
Fair, it does touch on that issue towards the end. But I think it deserves more than a couple sentences acknowledging (but proposing no solutions to) the issue in the last paragraph, given IMO it's basically the entire issue with their proposal.
The point of doing high inflation is that it changes the balance of rewards between labor and wealth (owning debt), and that is where the resistance here comes from too. This will raise your wages, and destroy the values of your stocks.
You see, wealth IS debt. You should think of rich people's assets as fundamentally being some percentage of public+private debt.
But labor and wages aren't. Labor fundamentally represents some percentage of GDP.
So the effect of high inflation is that it lowers debt, dramatically and quickly. Stupid but somewhat accurage rule of thumb: 5 years at 10% inflation will lower debts by about half. While it leaves the dollar number that rich people own rising, it kills it in terms of percentage of GDP. The rewards for labor, meanwhile, don't change in terms of GDP, so they go up much more. The way government stimulates inflation is by paying its own employees much more, and raising pensions, unemployment, ... not financed by debt, financed by printing money, so employers are forced to pay more for labor to avoid people telling them to fuck off.
And, yes, this is (capitalist) economic orthodoxy, the part of capitalism that rich people hate, because it kills their ownership values. And, yes, things are more complicated than this simple picture, but in general this is true. However the economist is the economist. They preach (capitalist) economic orthodoxy the way the Pope defends Christianity. And that is just fine.
> Raising incomes to combat affordability problems is far better for everyone involved than lowering prices artificially.
This has been tried in many latam countries in the past 15-20years with Inflation expectations getting out of control as result
Well it's been "tried" essentially everywhere. Making sure wages rise on pace has been a policy position of essentially every liberal country on Earth for over a century.
To say it doesn't work using Latin American countries as an example, is like saying Russia already "tried" capitalism in the 90s. This kind of policy is so broad, widespread, and so often poorly implemented that it's impossible to use a single example as proof of ineffectiveness.
If you're looking for a positive example though, most people agree that the Scandinavian nations have done pretty well keeping wages on pace.
https://en.wikipedia.org/wiki/Flexicurity
Yeah, I don't understand why people don't realize this isn't new..
Exactly, this is economic orthodoxy:
Asset prices (rich people's wealth) are fundamentally a percentage of outstanding debt.
Wages (the reward for labor) is fundamentally a percentage of GDP.
By having high inflation you change the balance between asset prices and wages, making labor worth a lot more than assets for a while. Kills your savings, especially the ones in government bonds and things like savings accounts, but it lowers your debt even more, as well as government debt.
Exactly what people have been clamoring for. It will change the "rich get richer" dynamic, at least for the large majority of wealthy people.
That also ends in everyone being paid sleventy billion dollars a minute and a banana costing more dollars than the number of atoms in the universe.
This strikes me as a symptom of an unsustainable system.
You can drop zeros at some point.
Social economics suggests what people actually care about is that they're richer than their neighbors.
Which means we need to ship homeless people next to the poor people and make them happier.
The article is behind a paywall :(
Having lived through hyper-inflation the only thing that got that under control was price controls. Wages going up can't stop inflation - they fuel inflation. Inflation psychology is that your money is going to become worthless so you don't save it, you spend it, which keeps prices going up. It wrecks havoc on loans and debt as well. If you lent money with a fixed rate hyperinflation erases your returns. If you borrowed with a fixed rate your debt is effectively erased.
Not to mention that governments in general don't control incomes. They can lower taxes (which is good IMO). They can pay government employees higher wages (which is hard to do when you lower taxes).
At the end of the day governments make things better by making smart investments (or policies that enable smart investments) and make things worse by making bad investments (or policies that lead to bad investments). Everything else is second order effect.
i don't think this is really true. people don't complain about an abstract concept of inflation, they complain that they can no longer afford things they once could. if wages really did practically increase by 5%, they could afford more things and have more money left over at the end of the month, and that is what they would notice.
politicians can't really affect wages the same way they can temporarily and artificially lower prices. but they also understand they need inflation to get elected, since you generally win elections by what you promise, not what you don't promise.
What they would notice is their entire net worth decreased significantly and their marginal income increased slightly. This is not a good deal for anyone with any savings.
Inflation especially impacts people older in life, who tend to be people who are more likely to vote and contribute to campaigns.
Lowering prices is of course more noticeable because you receive a raise once every long period, but pay higher prices (or lower) constantly and it’s very visible.
What I and many others to whom it matters a lot more than me are noticing is that the majority of things in the supermarket are twice the pre COVID price and pay has not gone up.
inflation is great if you own assets, which skews older. and they're more likely to vote, yes. which is why we get policies that are determined to keep housing values sky high.
When wages go up 20%, they go up 50% for the top quintile and 5% average for everyone else (or whatever the math is, preserving the general proportion). When prices go up 15%, they go up 50% on mandatory expenses and 20% on discretionary spending, and the basket of goods used to index inflation for both is massaged until it looks like a 15% increase overall.
That said, your assessment of the psychology of inflation is correct. It's just inapplicable here. The issue isn't people not understanding how much richer they are, because they're not. It's the intelligentsia and "elite" refusing to acknowledge the reality, because they'd then have to actually make material changes, which would reverse the siphoning of wealth from the middle class that they've been engaging in for at least the last 30 years.
It's partly because a 20% raise isn't a 20% raise. Even at the most modest tax bracket (above poverty) that will be reduced down to 17%. So outpacing groceries by 2% doesn't really feel good at all.
Percentages also don't matter as much when you break down raw numbers. A 20% (ignoring taxes) raise when your take home pay is $3000 disappears very quickly into your $6000 credit card debt, or maybe your $700/month car loan, or your $400/month student loans. People making that extra $600 more don't get a breath of relief, they get closer to the surface to breathe at all.
>No one will credit politicians for raising average wages, people will believe they earned their raise themselves.
And this is why we're doomed to fail at this rate. We're in 4 entirely different crises that are entirely above any individual worker's head, but somehow our solution is to just grind our way out. Maybe do some gambling (or sorry, "prediction markets")to get ahead. We're trying to dig out of a hole we didn't make and we just keep shuffling sand around instead of actually progressing.
> It's partly because a 20% raise isn't a 20% raise. Even at the most modest tax bracket (above poverty) that will be reduced down to 17%.
That's just not true.
To come up with an example of 17%, I have to plug in numbers that put you above the tax limit for social security, assume that tax brackets weren't modified by inflation (they are supposed to be), and put you right at the cusp before the next large jump tax bracket. So from 197,300 to that plus 20%. And even then, it's more than a 17% raise unless you are in California, where it's a 16% raise.
But that's again a very contrived example. In most cases, it's a full 20% raise.
> A 20% (ignoring taxes) raise when your take home pay is $3000 disappears very quickly into your $6000 credit card debt, or maybe your $700/month car loan, or your $400/month student loans
Except inflation makes loans cheaper. You get a raise. The principle stays the same. If inflation and your salary both go up by 20%, that's mathematically equivalent to a 16% reduction in your debt. So your credit card debt becomes the equivalent of $5,000, etc.
Debt is where inflation is awesome though, if you have 10% inflation and your wages raise 10%, your car loan and student loans become irrelevant quickly.
In theory yes, if the average person understood how to leverage debt on things like buying a mortgage 20 years ago.
In practice, most people will never escape the shackles of perpetual debt.
I'm confused about your first point. Income tax brackets are adjusted annually for inflation, at least in the USA. Receiving a 20% raise in a year with 17% inflation comes with each tax bracket cutoff also going up about 17%, so the post-inflation and post-tax income should match receiving a 3% raise in a year with zero inflation.
Don't forget about taxes. Things cost 15% more, wages go up 20%, but the government takes a chunk of that 20%. Do you net even 15%? Depends on your tax bracket.
If wages go up 20%, your post tax income should also go up by approximately 20%.
The exceptions are if you enter a new tax bracket, but that only affects your marginal dollars, sns even then, the increase in tax brackets is just a few percent.
In the U.S., you could also cross the SS/Medicare threshold and then suddenly your post tax earnings will go up more than your wage increase.
Post-tax wage changes shouldn’t differ too much from the pre-tax wage increase.
> Psychologically they'll believe they earned that 20% raise through hard work.
Well, it's not just that. They've been telling us for decades that wages are alternatively a direct reflection of the value of our labor to the company, or, a price set by the market, depending on which is cheaper for the corporations.
Kind of like when people say that UBI would simply instantly raise the price of all rent to match. Oh, really? The supply of rentable units will suddenly have decreased? The demand will suddenly have gone up? No? Odd that the "market set price" responded then.
Giving people cash would raise demand for rent and everything else, yes.
The only reason it would go up by the same amount is greed of "the market" profits are unevenly distributed so it would make sense to even things out a bit (at least undo the gains made over COVID and the last few years by those profiting the most from inequality).
Why? People want to spend their money renting a second apartment? Makes no sense.
There is no 'wages go up 20%'. That's not how the economy works. Wages are renegotiated on an annual basis and most people have to job hop to get anything close to a 20% raise.
Inflation affects everyone rapidly. But to get the claimed wage increase people have to do work to find new jobs.
> There is no 'wages go up 20%'. That's not how the economy works. Wages are renegotiated on an annual basis and most people have to job hop to get anything close to a 20% raise.
The example was not meant to be a single year. Over the 2020-2024 timeframe we did see movements around that size (though the gap between average wages and inflation was smaller than my example, where I rounded the numbers).
It was only an example though, not a claim.
I think you're being overly critical here.
yeah but it's not a great example, because actually wages aren't going up. maybe people would be able to psychologically handle inflation if it wasn't out-pacing wages. actually, now i think about it, that's not psychological at all, so the whole premise is kind of out the window, isn't it?
Though I disagree with your conclusions, that part is irrelevant to whether the example works.
An example is not bad simply because it's unrealistic. I'm sure you've heard plenty of examples which allow you to understand the main point without being perfectly representative.
The point of this example in particular was to illustrate how wages work alongside inflation. As long as you understand the point--that inflation is relative--the specific numbers don't matter.
the point of the example was to illustrate how people fixate on the increased cost of living fron inflation and ignore their increased earnings, even if the increased earnings out-pace the inflation in their cost of living. my point is that's a bad example because we couldn't say that that's true given that the cost od living has been out-pacing wage inflation for a long time.
so yeah, the example illustrates the idea, but it also underlines how the idea contradicts reality.
No, the point of the example was not to make any specific claim about wages or inflation. The point of the example was to illustrate that wages and inflation are relative. That's it.
If instead OP had said "if wages go up 500%, and prices go up 1,000%, everyone is worse off and got a 500% pay cut", then the main point being made would remain exactly the same. Again, this is because the exact numbers were never relevant, and the example was for explanation purposes.
Now apart from the fact that we are now 6 comments deep in the most pedantic thread I have ever had the displeasure of participating in (this is my fault too, to be fair), you also might be interested to know that cost of living/inflation has not outpaced wages for a "long time" as you so claim.
Here's a graph from the last 30 years, for example, showing earnings keeping up with inflation.
https://fred.stlouisfed.org/graph/?g=iuyN
Or maybe you'd just like to look at more recently, in which case, looking at just the past year, wages have still kept up.
https://usafacts.org/answers/are-wages-keeping-up-with-infla...
Or if your a low wage earner, those wages have especially kept up, outpacing inflation and even high wage earners by significant margin in recent years.
https://www.epi.org/publication/strong-wage-growth-for-low-w...
This is not to say that there is no affordability problem, but no matter what way you put it, your specific claim, that wages have not been outpaced by inflation "for a long time", is demonstrably false.
Outside of tech, seeking a 20% increase would be relatively uncommon.
I don't work in tech, and hopping jobs will get you 5% at most, usually. Maybe it's because I'm in the public sector and wages are public information? Either way, it always comes across as VERY out of touch when people here talk about massive increases just by changing jobs.
Not to mention how casually they talk about changing jobs. As though there weren’t pressures (and desires) keeping people at one workplace, and that those people form a large enough percentage of the population that their resentment of inflation has political force.
That falsely turns your experience into an imagined generality.
There was one year I received 3 raises at Travelocity and nearly doubled my compensation. I was hired as a web designer and after 3 months was involuntarily reassigned to a developer role and told to “figure it out”. I got a negative annual review that year and then ended up in Afghanistan on a military deployment. When I came back to Travelocity I was still classified as a developer but was reassigned from marketing to product development where to wages are higher, but I was earning as a junior designer. After eagerly looking for other internal jobs they gave me a raise to catch me up. Several months later I was promoted to a senior developer position and became the company A/B test engineer, which also came with a raise. A little after that another company gave me a better offer and Travelocity countered. This was like a million years ago.
Because most of my career is in writing JavaScript if I want to continue to increase my wages I would have to do the most beginner level shit work because that is common expectation for JavaScript developers.
> That falsely turns your experience into an imagined generality.
> There was one year I received 3 promotions at Travelocity and nearly doubled my compensation. I was hired as a web designer and after 3 months was involuntarily reassigned to a developer role and told to “figure it out”.
This is obviously an aberration where you are doing exactly what you claimed the gp did.
Moving jobs is the single best way to get a raise and has been for decades. Leveraging the experience at a company (which is relatively static) for a higher wage at another where that new and different experience has more value.
Notably, how company leadership changes are less likely to be from internal candidates than a transplant from another company.
This might be true for software but it isn’t true into management, it isn’t true for any other industry, and it isn’t true for other forms of compensation.
This misses the primary cause. There's an affordability crisis because most of the capital continues to concentrate in the hands of a small set of people who maximally extract rents. As one small example, private equity buys up businesses of all kinds and extracts a rent; both the consumer and the worker suffer.
If you said during the feudal era "there is an affordability crisis: the peasants don't have money to buy castles," perhaps you were right. But the solution was to revolt against the king.
> But the solution was to revolt against the king.
most revolts were triggered by someone else (a rich lord) wanting to be king. The peasants participating in the revolt are simply either lied to, or were promised they would reap the benefits and rise above their station.
The real solution was the black plague, which created labour shortages, and gave the remaining peasants bargaining power.
Touché.
And, to distract everyone from the destruction of the lower and middle-classes, here’s an <insert ethnic or somewhat alien> group you’re supposed to hate.
Perhaps capitalism was less to blame… A critical fifth estate and honest political ruling would’ve kept us on the path of the post-war “contract with the people” bit, that was working fairly well.
And high inflation would stop/reduce that by lowering debt.
Fundamentally, you should think of rich people's wealth as a percentage of outstanding debt (except of course things like Royal families' wealth). If public + private debt drops as a percentage of GDP, rich people will own more in nominal terms, less in terms of GDP (ie. less compared to labour). So the net effect of high inflation will do is make their ownings worth less in terms of assets.
Which is why rich people oppose it so harshly.
A group of people unaffected by a problem will rarely correctly handle the problem. And the further they are away from it, the further from 'correctly handle' will be their handling.
Most of the people responsible for Government decisions are fairly well insulated from most crises, hence the crises will continue and grow.
They are isolated until the pitchforks come out. That's the big risk with letting a crisis fester, even if you yourself are not affected. thousands or millions of frustrated citizens, and it only takes one at the end of their rope.
The Dutch government doesn't have the power to make America, Russia, Israel behave civilised. They would if they could.
As it is we have to live with it. Enduring the barbarians.
The difference being that the Dutch Government isn't meant to be responsible for the civilised behaviour of other countries.
Governments, however, are responsible for responding to crises occurring in the areas they are elected and paid to govern. But increasingly they behave like lords over subjects rather than representatives of the group.
The Dutch government could protect its sovereign interests apart from the USA - for example by legalizing decompilation and antagonistic interrop with American software, or reverse engineering of American hardware, or suspension of copyright and trademark protections for American businesses. Dutch Mickey mouse cartoons for everyone!
There'd be short term economic repercussions when America throws a tantrum, but whose fault is it that this could significantly harm the Dutch economy? Better to rip off the band-aid.
> Most of the people responsible for Government decisions are fairly well separated from most crises
A lot of the time it is actually even worse than this in that they are often in a position to benefit from the crises.
The real major economic problem of our day is the extent to which labor's share of productivity gains have plummeted and continue to plummet.
If your wealth comes from capital everything is going gangbusters and nothing needs to be fixed. Just listen to Trump talk about the economy and how blind he is to how normal people experience it.
And AI is just going to supercharge this problem.
Going way off topic here but, how can we expect AI 'alignment' when even country leadership doesn't align with the people any more?
On a relate-able scale, look at the 'alignment' difference between a worker and their manager; between an SWE and someone in mangement a couple of levels above. They're a different species, in terms of 'alignment', generally. They don't even speak the same language.
(I'm being hyperbolic, but hopefully the core of what I mean comes across).
We're completely misaligned. That's why it's going to supercharge the problem. Pour trillions not into heathcare nor other public goods, but towards private companies who want to ransack civilization and dismantle the idea of a labor economy. The workers hate data centers but cities and states keep signing on.
Just more examples of political greed being funded by a plutocracy.
https://archive.ph/Xr9fz
I appreciate this. I regularly catch hostility from TE when I visit; today it was the unsatisfiable captcha.
The majority of the affordability crisis stems from car dependency and excessive need for infrastructure due to bad zoning policy.
Just got me thinking about how much an area would attract residents if it could advertise the savings they'd make from living there as compared to anywhere 'normal'.
No car = no on-going petrol / diesel costs.
Fewer cars = cleaner / healthier air. Quieter, more serene ... everything.
Cleaner / Healthier air = Fewer health issues.
Fewer cars = more bikes
More bikes = physically healthier people.
Good planning is worth its weight in gold. I fear I'm stumbling into utopia theory, which is fraught with forgetting a whole lot of other realities.
American cities are not nice places to live due to crime..the built environment is often better than equivalent cities elsewhere. People who care about cities need to care about law and order.
Law and order, to some extent, is about 'life satisfaction', so making life cheaper and more pleasant would chip away at some of the crime factor.
“Chip away at some”
Man, you really sold it.
I'm not MAGA enough to say: AND IT WILL SOLVE CRIME!
But similar to that climate change comic "what if it's a big hoax and we create a better world for nothing?"
Not really. Third world countries have more orderly cities than America with people in much more destitution. I've lived in many and my parents grew up in one. The idea that it's just that is just silly imo.
Crime has declined for 30 years to an amazing extent, almost uninterrupted but for Covid. Total non-problem.
And in that time, if not for COVID, people would have been choosing to live in cities for one of the first times in American history.
Before COVID America was seeing a resurgence of city life.
> The majority of the affordability crisis stems from car dependency and excessive need for infrastructure due to bad zoning policy.
New York City is one of the most expensive places in the world. Housing is more expensive than SF.
No cars needed in NYC, yet expensive as hell.
NYC, and a handful of neighborhoods from the other top 5 cities, are the only places in the entire country that have semi-functioning urban design. The entire population of America who wants human centered urban design only have a few square miles to pick from. So of course the cost of living will be high.
oatmeal1 is right. The largest components of most people's budgets are housing and transportation. Restricting new construction constricts new supply which results in rent/mortgage payments being higher than they need to be. Zoning which makes driving easy and anything else very hard makes buying and maintaining an automobile a de facto necessity. It also exposes you to oil shocks.
The Economist, as a London-based magazine, has front-row seats to a great example of an affordability crisis in a city with good infrastructure and little car dependency. (In the UK they generally call it the "cost-of-living crisis", if you're looking for more information.)
I don't see how simply raising the income would change anything long term.
The main issue is that the affordability crisis is also a result of the market. And without changing the preconditions or mechanics we'd get the same outcome just with different numbers.
So:
- Build housing
- Make housing more affordable by allowing homeowners (= not renting out) to write off and/or write off-faster
- Give newly built housing better write-off conditions
- Prevent cartels that operate via "pricing as a service"
Build housing is the biggest contributor (the remaining are simply levers to generate more build housing).
The lack of building comes from the bad zoning laws preventing builds. The rules at the local level are mostly favourable to existing owners, who by a large margin, want their existing property and environment to remain as static as possible to what they purchased (ala, the character of their neighbourhood).
And not to mention that even if they, in principle, agree with denser housing, they would face problems with crowded infrastructure that has to be paid for (and mostly hasnt been upgraded or improved, like public transport, road conditions, grid connections etc).
Therefore, the best current option is to push the affordable (read: high density) housing away from where you are, even if you, in principle, don't disagree with the ideals of it.
https://wallhop.io/https://www.economist.com/finance-and-eco...
The article is light on concrete policy suggestions.
One possibility is "adjust the minimum wage for inflation," but they seem to be against this: https://www.google.com/search?client=firefox-b-1-d&q=the+eco...
It's really annoying that minimum wage and the like aren't pegged to a general 'cost of living'-number that scales with inflation and whatnot. Peg the wages of the politicians to the same number. If they then want to increase their own wages, they have to also increase the minimum wage, or go out of their way to only increase their own wage, which will hopefully cause some people to call them out on their shenanigans.
Are there really a lot of countries where politicians are constantly increasing their wages while minimum wage stays the same? In the UK, both numbers are set by independent commissions which primarily adjust for cost of living; MP wages also have a modest benchmarking adjustment to ensure they stay in line with what civil servants responsible for similarly complex work would make. The US has "solved" the problem by increasing neither politician salaries nor minimum wage since 2009.
I do love the idea of tying the wages of public servants roughly to their constituents. But we already know the loophole of "use insider trading and bribes" to get around such restrictions on salary. Above all else, we need proper accountability before we dream of any real change like this.
Lots of vibes in the comments and not enough citations.
Many of the issues that are currency related. The same labor being priced in different currency having different value is the most major issue. When a currency dives, then labor gets discounted due to inflation.
Reaffirming my view that The Economist is a neoliberal dishrag, the word "housing" appears zero times. Because housing is the number one problem and it'll never get fixed because ever-increasing house prices have become an explicit policy goal and, more importantly, homeowners will never vote for decreasing house prices.
High house prices are simply stealing from the next generation and increasing house prices raise the prices of everything because housing is an input to the cost of everything.
In many Western countries, housing is the best performing asset class so it's reached the point of stealing investment dollars that might otherwise go to productive output. Housing is the black hole at the heart of the economy.
The only country that has attempted to correct this thus far has been China. Xi Jinping quietly popped the real estate bubble a decade ago and the real estate sector has been in recession ever since as prices correct. As Xi says, houses are for living in, not for speculation [1].
The only countries that have even partly avoided this are because they implemented systems long ago that have prevented land hoarding, such as Red Vienna [2]. Interestingly, the post-WW2 UK almost ended landlords but then along came Thatcher [3].
[1]: https://en.wikipedia.org/wiki/Houses_are_for_living,_not_for...
[2]: https://www.youtube.com/watch?v=jO52FWzJoyQ
[3]: https://www.theguardian.com/lifeandstyle/2024/mar/19/end-of-...
> In many Western countries, housing is the best performing asset class so it's reached the point of stealing investment dollars that might otherwise go to productive output. Housing is the black hole at the heart of the economy.
This is true, and it is a huge problem in Europe for example, where buying a property to rent is often the best investment for regular people. So instead of opening a business or taking any other risk that may or may not pay off, investment money is going to an asset class that is not productive.
Singapore's system of 99 year leases also comes to mind.
> They should lift incomes, not suppress prices
Redistribution is a left-wing policy. A lot of elected governments went right-wing recently. It's as simple as that.
The issue is not "governments". This is what the voting public wants.
Unfortunately, when the populace suffers economically, it tends to become dumber. In turn, populist and demagogues rise, and these tend only to worsen matters.
See, for example, what happened after Weimar Germany's inflation.
It's almost like they are run for the benefit of the ultra rich...
Let them eat cake.
the affordability crisis is downstream of inflation. governments should stop inflating the money supply, but of course they won't ever do this because they would then need to generate revenue another way, which would be to raise taxes. inflation is really just a hidden tax and it's easier for them to "tax" without pissing off citizens.
and so really the solution is to reduce spending. which, to some extent, is so obvious it kind of hurts.
The consequences of reducing spending are also obvious, I won’t call it a ‘solution’ given how bad they hurts.
Nobody wants to go back to the gold standard.
Inflation is useful (within limits). So is deficit spending in a growing economy.
> Inflation is really just a hidden tax
No it isn't. The idea that the government should fix the value of money -- and that if it does otherwise it is stealing out of your pockets -- is goldbug crank territory.
If inflation was a tax, then deflation would make people richer. It doesn't. Why? Because in a deflating economy, your creditors can't pay you back.
Deflation is very damaging, and avoiding it is more or less the number one goal of macroeconomic policy.
Deficit spending is not universally able to create wealth. It can when invested in durable infrastructure at reasonable prices that increases productivity of the economy. But when countries borrow to pay pensions and other transfers, it destroys wealth and makes society poorer.
I agree that inflation and deficit spending can be bad. But neither is always bad.
What's wrong with taxing the rich to maintain current spending?
Taxes on the rich are already at European levels in the US. There simply aren’t enough of them to cover current spending.
It is a similar issue with taxing nominal wealth. 2/3 of nominal wealth in the US is completely non-liquid. Taxing the liquid fraction is essentially leveraged as a result, causing a catastrophic collapse in the value of similar investments by ordinary people as a side effect. Impoverishing a large portion of the middle class to own the rich isn’t a recipe for political success.
We’ve got to stop pretending loads of wealth is non-liquid and therefore off limits. The rich borrow using it as a collateral, if they can do that for their own purposes, they can do that to pay their fair share of taxes too.
That the rich don't want to be taxed, obviously. and manage to convince a voting plurality that they shouldn't.
That question assumes that the current level of spending is optimal. Regardless of who pays the taxes, are we getting a good value for that spending? Or could it be drastically cut?
Laffer Curve. Depends on the country but France for example already takes 44% of their GDP as tax, runs heavy deficits, and attempts to make up the difference by increasing taxes on the wealthy causes them to leave.
At some point they'll need to do austerity.
It's well-established that Americans are much earlier on the curve than wealthy people would like to believe. Mamdani Doctrine: ignore the part of your brain screaming rich people double consciousness and just do what's right for and fair for most people. At this point in history, that's taxing wealthy people - including paid-off-6k-sq-ft-house-with-2-people-in-it pensioners and $200k-a-year-living-paycheck-to-paycheck-in-a-coastal-metro yuppies. Yes, there'll have to be some tough decisions; austerity, indeed.
Confiscating the wealth of all U.S. billionaires (~$8 trillion) would fund federal operations for roughly 9 months...1-time only.
After that, the money is gone.
The underlying problem of high, persistent government spending remains. This isn’t primarily a “tax the rich” problem.
Even if this were true, such a tax program would limit the outsized corrupting influence of this class. That's arguably an even greater benefit than just helping with the deficit.
The goal of taxing the rich isn't to save the enormous defecit. It's to make sure they can't buy elections and undermine democracy.
It also does help to reign in some spending. Because a lot of spending is indirectly performed through subsidies. Oftentimes in the modern day for the rich who can already afford such initiatives.
The question in the GP comment was:
> What's wrong with taxing the rich to maintain current spending?
Perhaps you have something more sensible in mind, but much of this pressure is clearly coming from the perspective that we could have incredible government spending with no tradeoffs or inflation if only we summoned the political will to fight billionaires.
Well, a little bit of inflation is actually good for the economy long term, and we have to balance that with the opportunity of cost of not spending.
Yes, the amount of government spending currently is likely too much, but by not spending the opportunity cost is sometimes greater. As the article contends, the solution to the affordability problem is to raise wages. If you can use the levers of government to induce growth that naturally raises wages, more deficit spending might be worth it.
This is the most impactful economic discovery of the century. You can raise taxes as much as you want if you add a layer of seperation to it and print currency.
The buck stops nowhere any more and I hear it's approaching the speed of light. The government is the ultimate legal power though, and whenever bad stuff is legal we all know who made it legal.
It is not "mishandling" the affordability crisis - it created it and actively maintains it. Most recently and least subtly by bombing and blockading all the places that we get oil from, in an economy that was deliberately designed so it can't do anything without oil.
They should outlaw financial engineering of human agency and build decision models developed and deployed within full public view that bubble up for vote national, regional, or local initiatives
But since government is a euphemism for the more verbose "humans whose biology drives them to select self" they will continue to mishandle the "affordability crisis" by propping up its roots, doing nothing to stave off future gilded ages