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Why the 2% inflation target? (2023)

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Re: Why the 2% inflation target? (2023)

#341

Post by dgoldstein0 »

Yiin wrote: post #292
itsoktocry wrote: post #280

Earlier quoted context omitted.

> The economy is rigged such that in the absence of any positive action, workers' purchasing power goes down over time by default. This obviously isn't a problem for the rich, whose money is stored almost entirely in assets which by definition rise in value with inflation. Look, I'm sensitive to the struggles of the less well off, and that we are in a particularly rough part of a cycle. I don't believe the economy is…

Your comment ignores that "richer" in this context mean basically breadcrumbs in comparison to all the other assets poor people can't realistically invest in. If economy in general goes up 20x and your own wealth increases 1.5x, yeah you got wealthier compared to before, but poorer compared to everything else.

This sounds fine to me if "your own wealth increases 1.5x" means an increase in purchasing power as opposed to the 1.5x being wiped by inflation. E.g. if housing costs quadruple you can't use that extra cash to buy a nicer house/rent a nicer apartment than before, and probably you want to save the extra money as a result of the higher housing costs rather than buying better food (assuming it didn't also rise significantly in price)

We like to hand wave and approximate costs via a single "inflation" number but smart phones are infinitely more cheap than 20 years ago - they didn't exist back then - whereas they don't solve basic needs like food & shelter. So we need better metrics.

So I have to hand wave a bit but if the economy grows such that everyone has better purchasing power, but the top 5% or 1% benefit 100x more than everyone else, I think that's a win; it'd of course be better if the new wealth was spread closer to equally, but the main thing is to make sure as much as practical that everyone is better off.

I'm not actually sure we know what the right economic policies to promote this sort of goal are.

Re: Why the 2% inflation target? (2023)

#342

Post by maxerickson »

WalterBright wrote: post #286
maxerickson wrote: post #180

Earlier quoted context omitted.

But sometimes it takes much more than 13 months for the money to be destroyed. How does the inflation know the difference in those cases?

It all averages out among all the banks issuing loans and resolving them.

Household debt has gone up by trillions of dollars.

https://www.newyorkfed.org/microeconomics/hhdc

Re: Why the 2% inflation target? (2023)

#343

Post by WalterBright »

triceratops wrote: post #299
WalterBright wrote: post #288

Earlier quoted context omitted.

Except if you look at history, inflation reliably corresponds with the increase in the national debt. The US had zero net inflation from 1800 to 1914, and endemic inflation afterwards. What happened in 1914? The Federal Reserve Act, which specifically empowered the Fed to issue money without restriction. Those other alleged causes all existed prior to 1914. Did you know that the US experienced inflation when on the g…

The US national debt more than doubled between 2008 and 2018, but inflation was low. It's only up 50% in the 6 years since, but we've had crazy inflation. The only new factors have been the things you listed - supply shocks, war. A lot of things other things happened in 1914. For instance, World War 1. Why not blame that for inflation? I said inflation was due to all of the factors you listed. Debt and deficits was o…

> The only new factors have been the things you listed - supply shocks, war

You overlooked the incredible increase in government spending.

> I just don't think it's the only factor, like you do.

For the other factors, you'll need to account for where all the extra money comes from.

Re: Why the 2% inflation target? (2023)

#344

Post by Retric »

milesskorpen wrote: post #318
oblio wrote: post #305

Earlier quoted context omitted.

Are you talking about a timescale of 100 years or 30? People are poorer than they were in 1990, especially the mid to lower classes.

This is not true: https://fred.stlouisfed.org/series/A939RX0Q048SBEA This is real GDP per capita

GDP says almost nothing about what individuals lives are like, just look at the various petroleum states. As to poor people’s lives in the US, it’s basically flat with wage growth or loss depending on how you calculate inflation over the last 40 years.

The median income earners in Q1 1990 made 408$/week, one inflation source puts that at 951.17$/week in Q1 2023, vs 1095$ so is what the actual dividing line was. https://fred.stlouisfed.org/series/LES1252881500Q https://www.usinflationcalculator.com/ So 0.3% annual growth over that timeframe with many ups and downs so numbers also look different depending on what exact dates are chosen.

The line between 1st and 2nd quartile is again basically flat, though the data doesn’t go before 2000. https://fred.stlouisfed.org/series/LEU0252916100A

Though again there’s many ways of calculating inflation, and many of them show that hypothetical person worse off. And of course individuals aren’t going to stay at exactly the same income band so many many people really are significantly worse off.

Re: Why the 2% inflation target? (2023)

#345

Post by lebean »

throwaway14356 wrote: post #300
lebean wrote: post #255

Earlier quoted context omitted.

I mean, how much we talking here? We're not in Atlantis with flying cars, but there's immense efficiency gains in logistics.

That is a tricky one. I've been told early on that in most discussions one may not ask netzen to do anything for you. We could have been mowing your lawn or filling my taxes. That is how I remember it anyway. If you just help drink my beer we both get things out of it.

GOOD point!

Re: Why the 2% inflation target? (2023)

#346

Post by aorloff »

FactKnower69 wrote: post #237
sob727 wrote: post #5

Yellen supposedly told Greenspan & co in the mid 90s that 2% was a good way for companies to be able to adjust labor costs down if needed (if you don't give someone a raise when inflation is 2%, you're effectively lowering their salary). It was the only way to have some flexibility there. If you admit that this is a desirable thing, this is defeated by wage negotiations (or say, benefits) than tend to be indexed to i…

>2% was a good way for companies to be able to adjust labor costs down if needed (if you don't give someone a raise when inflation is 2%, you're effectively lowering their salary) This is EXACTLY the issue. The economy is rigged such that in the absence of any positive action, workers' purchasing power goes down over time by default. This obviously isn't a problem for the rich, whose money is stored almost entirely i…

America is rigged to benefit the business owner. This used to make more sense where in the first couple hundred years the end goal of a profession was being the head of your own shop.

But it is still true that a lot of people, including all stripes of middle class, are self employed or have income other than wages (I shared a chairlift recently with someone who spent 1/3 of the year ranching his cattle, 1/3 of the year farming a crop with his grandfather and a hired hand, and 1/3 of the year as a ski bum - 3 types of seasonal hard labor that gave him the freedom he wanted)

Re: Why the 2% inflation target? (2023)

#347

Post by GeneralMayhem »

milesskorpen wrote: post #318
oblio wrote: post #305

Earlier quoted context omitted.

Are you talking about a timescale of 100 years or 30? People are poorer than they were in 1990, especially the mid to lower classes.

This is not true: https://fred.stlouisfed.org/series/A939RX0Q048SBEA This is real GDP per capita

Mean GDP per capita, real or nominal, is a useless metric for almost all purposes. When we're talking about average people's lives, it's worse than useless.

Re: Why the 2% inflation target? (2023)

#348

Post by vkou »

TehShrike wrote: post #197
jandrewrogers wrote: post #146

Earlier quoted context omitted.

If you buy the S&P500 then someone else sold the S&P500 for the same amount of money. The cash doesn't disappear, it just moves to a different person who presumably sold the S&P500 because they need cash to spend it. That is quite different than sitting on cash.

How is it significantly different than what happens when banks invest money that is left in checking/savings accounts?

In a deflationary economy, banks offer negative interest rates.

You don't put your money in a savings account (which are lent out) in one, you put it into a vault.

Re: Why the 2% inflation target? (2023)

#349

Post by RustyRussell »

sob727 wrote: post #5

Yellen supposedly told Greenspan & co in the mid 90s that 2% was a good way for companies to be able to adjust labor costs down if needed (if you don't give someone a raise when inflation is 2%, you're effectively lowering their salary). It was the only way to have some flexibility there. If you admit that this is a desirable thing, this is defeated by wage negotiations (or say, benefits) than tend to be indexed to i…

This argument goes back to Keynes IIRC: inflation was good to keep wages reduced.

It's hard to imagine a deflationary world where bosses had to negotiate with workers to reduce their salary annually, which kind of shows how powerful this idea is...

Re: Why the 2% inflation target? (2023)

#350

Post by vkou »

mitthrowaway2 wrote: post #118
jxdxbx wrote: post #30

Earlier quoted context omitted.

Store shelves would be empty and businesses would shutter. There’d be less to buy. Banks would hold on to money instead of lending to productive businesses.

> Store shelves would be empty Doesn't that result in scarcity and thus rising prices? A bit of a contradiction.

Scarcity because nobody is working. It's not a contradiction. Inflation encourages economic activity - work. Deflation discourages it.
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