>It's not like the restaurant owner has the option of just deciding to pay twice or three times the labor costs, and trust that their customers will be happy to cover the difference, if their competitors don't have to do the same.
This feels a bit backwards. We don’t know that their competitors aren’t already paying more, we only know that some people can’t seem to get labor at the price they were paying before. I think the numbers here are currently inconclusive, but I conjecture that what we’re seeing is small business owners losing labor monopsonies that they had come to rely on, and consequently a more competitive labor market. Of course competition causes upward pressure on prices, that’s the whole point.
This is tangential but I think America has been too scared of inflation for too long. There’s nothing wrong with a bit of inflation, especially if it means we can get closer to full employment. We haven’t even been meeting the fed’s (very low) target for quite a while.
Remarkably, since the tail end of the Bush administration, it's the opposite: the Fed has desperately tried to get inflation up to its 2% target level, and mostly missing.
The reasons are debatable, but I'd argue that it's mostly because the mechanisms they're using end up inflating the stock market instead of consumer goods.
There are economists terrified of any inflation, but it's an attitude that's more popular with some ideologues than with mainstream economists. You hear a lot about them on TV and the Internet, but not nearly as much in real economics talks. Those ideologues punch above their weight in Congress, but not at the Fed.
The Fed governors aim for a small, controlled level of inflation. Mostly that's to prevent people from just sitting on their money: money stuffed into a mattress doesn't grow the economy. Money in bank accounts isn't much better, since they can be withdrawn at any time. So a little inflation nudges people to either spend their money or invest it. Such is the theory.
The reason is quite clear - the Fed cannot transfer money effectively to the poor/middle class; it's fiscal policy that can do that (and labor unions to some degree, which were gutted in the 80s).
Inflation doesn't happen when you give more to the people that don't consume (and sustained inflation only happens when there is an actual shortage of some good, and arguably we have overcapacity for everything today so inflation will only happen under either a commodity price shock or complete breakdown of supply lines (transitory inflation can happen like it is now - from the COVID shock))
That's absolutely correct, but it has been remarkable the way there's been no money flowing to the poor and middle class.
Supply-side economics clearly doesn't work, but it wasn't totally insane. If money was pumped into corporations you'd expect at least some of it to turn into more conventional demand. Buy a private jet or a yacht (built by workers and maintained by more workers), or start a company that pays wages, or something.
Instead, all of the money just gets shuffled among each other. It's not just that trickle-down doesn't work; it's that it doesn't seem to trickle at all. Even to non-Chicago economists that's a little surprising. Chicago School turns out to be more than just incorrect, but utterly at odds with reality. Rich people simply don't behave the way they imagine they do.
About the closest it comes is messing with the real estate market -- mostly in the form of pricing lower-class renters out. That benefitted the existing homeowners, and maybe that's helped stem middle class decline a tiny bit, but there are too many other forces working against them. Instead, it just trickles more money back up.
It'll be interesting to see what happens as COVID eases off. That's a very unusual kind of shock, and I'm surprised it hasn't been even more economically disastrous than it is. Part of it is that the government has done a weak form of the right thing, pumping money directly to consumers. If not for that we'd have seen a deflationary spiral of truly catastrophic proportions.
Supply side economics works if you have a nation that is doing so many productive investments that it has trouble getting enough financing for everything. By cutting taxes and lowering interest rates you are making it easier for businesses to acquire enough capital to do even more investments.
The US economy is the exact opposite. It's difficult for the investment rate to catch up with the savings rate. Things like home construction are being delayed. Public infrastructure suffers from cost overruns, etc.
>It's not just that trickle-down doesn't work; it's that it doesn't seem to trickle at all.
For obvious reasons. Money doesn't trickle because consumer/worker behavior tends to lag behind business behavior. When a company has a good year, it can wait until the labor market tightens before it has to increase wages. If companies invent automation then they have a first mover advantage where they save a lot of money in the first 5 years and then once competitors join the market the margins are driven down. That delay is costing consumers money and it's costing workers money because the company doesn't employ anyone with it. Business oriented politics also tends to encourage inefficient (from a macroscopic perspective) corporations who lobby for bills that benefit them at the expense of everyone else.
>Part of it is that the government has done a weak form of the right thing, pumping money directly to consumers.
"Despite the cacophony of complaints about "ruinous" budget deficits and "excessive" monetary growth, the headline-grabbing double-digit inflations of 1974 and 1979-80 were mainly of the special-factor variety. Only a minor fraction of each inflationary acceleration can be attributed
to changes in the baseline rate; the rest came from supply shocks from the food and energy sectors, from mortgage interest rates, and from the end of price controls—a whole host of special one-shot factors. It is precisely
this aspect of the recent inflation that this paper seeks to document. Since the paper focuses on the special factors to the exclusion of the baseline rate, it is worth pointing out at the outset that the two inflations are not really independent. Inflation from special factors can "get into"
the baseline rate if it causes an acceleration of wage growth. At this point policymakers face an agonizing choice—the so-called accommodation issue. To the extent that aggregate nominal demand is not expanded to
accommodate the higher wages and prices, unemployment and slack capacity will result. There will be a recession. On the other hand, to the extent that aggregate demand is expanded (say, by raising the growth rate
of money above previous targets), inflation from the special factor will get built into the baseline rate."
This is the difference between the responses to 2008 and 2020. The first was exactly the first example from the paper, and the second is the latter (expansion of demand capacity).
I've concluded that over steer (over correction) is the norm.
My hunch is one big cause is the mismatch of time scales between tenure (employment) and policy outcomes. Meaning that most policy and decision makers have moved on to new roles and jobs before the consequences of their decisions become clear. So very little learning can happen.
Feds tried to induce inflation for the last 20 years, it’s good for them since they can just print more money. They largely failed to do so since dollar is so well propped by international demand.
>it’s good for them since they can just print more money.
That's not good because it means they failed to keep up their mandate.
>They largely failed to do so since dollar is so well propped by international demand.
Actually, the international demand is forcing deficit spending. If money leaves the US and then comes back in the form of treasury bonds then pretty much the only way to tap into the money is to let the government get into debt. If driving yields to near zero was good enough to cause inflation we wouldn't be in this mess.
This feels a bit backwards. We don’t know that their competitors aren’t already paying more, we only know that some people can’t seem to get labor at the price they were paying before. I think the numbers here are currently inconclusive, but I conjecture that what we’re seeing is small business owners losing labor monopsonies that they had come to rely on, and consequently a more competitive labor market. Of course competition causes upward pressure on prices, that’s the whole point.
This is tangential but I think America has been too scared of inflation for too long. There’s nothing wrong with a bit of inflation, especially if it means we can get closer to full employment. We haven’t even been meeting the fed’s (very low) target for quite a while.