missouri passes state law forcing cities to lower their minimum wage

[ksen]

Please provide evidence that deflation has ever been good for the economy.

 

[Crazy Eddie]

To answer Horatio's question, wouldn't deflation be a wage increase even though the numbers on the paycheck are the same? If you can buy more with the same amount of money, that is basically a pay increase.

See, that would have been MY thought. Across-the-board deflation would automatically raise the standard of living for workers and it would reduce some of the operating costs of businesses and manufacturers. Workers would be more prone to save money over the mid and long term because they can predict that the money will be worth a lot more in the future.

And even investment might still make sense from a venture capital standpoint: of a business can show that its operating costs will be reduced in the future in such a way that they will be able to produce a product at high volume and turn a profit, an investor can still expect a decent return.

 

[Crazy Eddie]

Please provide evidence that deflation has ever been good for the economy.

Please provide evidence that deflation has ever been bad for the economy.

No, that is not a rhetorical question. I am genuinely curious why that would be.

 

[Horatio Parker]

To answer Horatio's question, wouldn't deflation be a wage increase even though the numbers on the paycheck are the same? If you can buy more with the same amount of money, that is basically a pay increase.

You're making the assumption that, in an environment of falling prices, sales and profits, wages would not also decrease. Debts, however, would not decrease, but instead become harder to pay.

Capitalism relies on sales. It's harder to sell things in a deflation and harder to repay debts.

 

[Crazy Eddie]

To answer Horatio's question, wouldn't deflation be a wage increase even though the numbers on the paycheck are the same? If you can buy more with the same amount of money, that is basically a pay increase.

You're making the assumption that, in an environment of falling prices, sales and profits, wages would not also decrease.

Wages have not been known to increase at a rate consistent with inflation (which is a major problem and the whole reason this thread exists). Why, therefore, should we assume wages will decrease with deflation? In fact, given the cultural and historical aversion by companies to reduce their workers' pay (for fear of having their best people quit or go to work for their competitors) wouldn't you expect wages to stay relatively stable in a deflationary period? That would make debts EASIER to pay since the cost of all other goods -- homes, cars, food, shelter, clothing, etc -- would be reduced.

 

[Horatio Parker]

You're making the assumption that, in an environment of falling prices, sales and profits, wages would not also decrease.

Wages have not been known to increase at a rate consistent with inflation (which is a major problem and the whole reason this thread exists). Why, therefore, should we assume wages will decrease with deflation? In fact, given the cultural and historical aversion by companies to reduce their workers' pay (for fear of having their best people quit or go to work for their competitors) wouldn't you expect wages to stay relatively stable in a deflationary period? That would make debts EASIER to pay since the cost of all other goods -- homes, cars, food, shelter, clothing, etc -- would be reduced.

Please, examples of companies' cultural and historical aversion to reducing worker pay.

Wages haven't been rising due to economic policy. The pool of unemployed workers has to be large enough to keep wages down. Known as the NAIRU. Many, if not most, argue that we currently are at full employment, considered a signal for raising rates and slowing down the economy. This has been policy since the '70's.

 

[ksen]

Please provide evidence that deflation has ever been good for the economy.

Please provide evidence that deflation has ever been bad for the economy.

No, that is not a rhetorical question. I am genuinely curious why that would be.

https://www.google.com/search?q=def...ms-tmobile-us&sourceid=chrome-mobile&ie=UTF-8

Economists have a term for when all those things you mentioned go down: recession or alternatively: depression.

 

[Loren Pechtel]

I wanted to round out the picture, but over all I do think we are overall worse off. It is a question with many variables, and some things have improved so I'm not seeking a return to 1964.

I don't seek a change to the rate of minimum wage, I seek a causal cure, which is to stop the inflation that necessitates eventual minimum wage increases as the wave spreads to that sector of the economy.

A lot of long-term investment and financial calculus depends on a predictable (if not consistent) rate of inflation, and that investment primes a lot of economic activity which is why we need inflation for the health of the economy or something. "Buy low, sell high" is the driving principal here, and if prices are falling then investment activity stops.

That, at least, is what all the economics majors and professors told me in college. I'm still pretty sure that answer is at least partially bullshit since investors could just as easily bet on DEFLATION by changing the way they invest. I'm guessing you would see a shift away from stocks and towards bonds.

While we need a predictable inflation rate that doesn't mean we need an inflation rate in the first place. The ideal inflation rate is 0%. In practice this isn't going to happen because we can't control inflation perfectly and a negative inflation rate is worse than a positive one, thus the target is a bit above zero.

A zero inflation rate would not cause a shift towards bonds. Stocks go up with the economy (actual growth + inflation), bonds pay about 3% + inflation + risk premium.

You would see a slight shift towards bonds because of taxes--inflation creates phantom income that you pay tax on as if it were real. For stocks this phantom income is taxed at your capital gains rate, for bonds it's taxed at your regular income rate.

- - - Updated - - -

A lot of long-term investment and financial calculus depends on a predictable (if not consistent) rate of inflation, and that investment primes a lot of economic activity which is why we need inflation for the health of the economy or something. "Buy low, sell high" is the driving principal here, and if prices are falling then investment activity stops.

That, at least, is what all the economics majors and professors told me in college. I'm still pretty sure that answer is at least partially bullshit since investors could just as easily bet on DEFLATION by changing the way they invest. I'm guessing you would see a shift away from stocks and towards bonds.

Seems to me that since economies don't grow unless someone spends more than their income, IOW growth is dependent on credit growth, inflation makes borrowing and therefore risk taking more attractive.

Economies grow as productivity increases.

- - - Updated - - -

A lot of long-term investment and financial calculus depends on a predictable (if not consistent) rate of inflation, and that investment primes a lot of economic activity which is why we need inflation for the health of the economy or something. "Buy low, sell high" is the driving principal here, and if prices are falling then investment activity stops.

That, at least, is what all the economics majors and professors told me in college. I'm still pretty sure that answer is at least partially bullshit since investors could just as easily bet on DEFLATION by changing the way they invest. I'm guessing you would see a shift away from stocks and towards bonds.

We've lived in this abnormal condition for so long that people actually consider it to be normal. It is Prison Normal to the point that people actually believe that deflation will destroy the economy. It is not necessary for an economy to have continuous inflation. To answer Horatio's question, wouldn't deflation be a wage increase even though the numbers on the paycheck are the same? If you can buy more with the same amount of money, that is basically a pay increase.

It's not that it would destroy the economy, but that it would make simply sitting on money an attractive option--and thus slow the economy. That would be a bad thing.

 

[Jason Harvestdancer]

It is not true that deflation is either synonymous or a cause of recession. That is a myth promulgated by Keynes. We have experienced deflation in the consumer electronics market in the US even though overall the US experiences inflation. Instead of crashing the consumer electronics market it has been one of the fastest growing sectors of an otherwise moribund economy.

We have experienced constant inflation for so long we have forgotten that it can be any other way. Prices are the result of four variables: demand for money, supply of money, demand for goods/services, supply of goods/services. Inflation and deflation are a result of a chance in the supply of money. Changing the supply of money has not effect on the supply or demand for goods/services.

According to the Keynesian myth, if prices go down then people immediately stop buying as they wait for prices to drop even more. This causes the prices to drop even more, causing people to buy even less, causing prices to drop more, causing people to buy less, etc. In the real world, people say "oh now I can afford X, I will purchase it". Deflation doesn't cancel the laws of supply and demand, so as prices drop demand goes up until a new equilibrium is reached.

And, finally, yes. If prices go down, a poor person can buy more goods per dollar, so at the same wage that poor person is now wealthier.

 

[Loren Pechtel]

It is not true that deflation is either synonymous or a cause of recession. That is a myth promulgated by Keynes. We have experienced deflation in the consumer electronics market in the US even though overall the US experiences inflation. Instead of crashing the consumer electronics market it has been one of the fastest growing sectors of an otherwise moribund economy.

We have experienced constant inflation for so long we have forgotten that it can be any other way. Prices are the result of four variables: demand for money, supply of money, demand for goods/services, supply of goods/services. Inflation and deflation are a result of a chance in the supply of money. Changing the supply of money has not effect on the supply or demand for goods/services.

According to the Keynesian myth, if prices go down then people immediately stop buying as they wait for prices to drop even more. This causes the prices to drop even more, causing people to buy even less, causing prices to drop more, causing people to buy less, etc. In the real world, people say "oh now I can afford X, I will purchase it". Deflation doesn't cancel the laws of supply and demand, so as prices drop demand goes up until a new equilibrium is reached.

And, finally, yes. If prices go down, a poor person can buy more goods per dollar, so at the same wage that poor person is now wealthier.

Falling prices in one market doesn't cause a problem. It's only when they're falling in general that you have an issue--because now putting your money under your mattress is an investment strategy. People hold off on spending money.

 

[Jason Harvestdancer]

Falling prices happen in many markets, and there is no reason to suspect that the Keynesian myth of out of control deflation will automatically result should we experience a general economy-wide deflation. The only reason to advocate for inflation and against deflation is if you believe that it is good economic policy to convince people to spend as quickly as possible, the Keynesian superstition that savings is bad for the economy.

In truth, when prices fall, the laws of supply and demand are NOT suspended. People increase demand as a result of falling price until a new equilibrium is reached, instead of holding off until the economy collapses in the deflationary spiral so feared by Keynes' myth. Yes, it does mean that putting ones money under a mattress is a profitable investment, but it does not mean that everyone will start hoarding all their money and refuse to spend any of it. Plus there is no guarantee of further price fall, which is something a rational spender (but not a Keynesian) appreciates.

I purchased my house in 2009 WHILE prices were falling. I did so because I saw that houses were finally affordable within my pay. I could have stayed in my apartment and waited for prices to fall more ... on the other hand there was no guarantee they would fall more. I knew I could now afford it and that I did not wish to live in a rented apartment anymore. According to Keynes, I don't exist.

 

[laughing dog]

Falling prices happen in many markets, and there is no reason to suspect that the Keynesian myth of out of control deflation will automatically result should we experience a general economy-wide deflation. The only reason to advocate for inflation and against deflation is if you believe that it is good economic policy to convince people to spend as quickly as possible, the Keynesian superstition that savings is bad for the economy.

In truth, when prices fall, the laws of supply and demand are NOT suspended. People increase demand as a result of falling price until a new equilibrium is reached, instead of holding off until the economy collapses in the deflationary spiral so feared by Keynes' myth. Yes, it does mean that putting ones money under a mattress is a profitable investment, but it does not mean that everyone will start hoarding all their money and refuse to spend any of it. Plus there is no guarantee of further price fall, which is something a rational spender (but not a Keynesian) appreciates.

I purchased my house in 2009 WHILE prices were falling. I did so because I saw that houses were finally affordable within my pay. I could have stayed in my apartment and waited for prices to fall more ... on the other hand there was no guarantee they would fall more. I knew I could now afford it and that I did not wish to live in a rented apartment anymore. According to Keynes, I don't exist.

So how come the Japanese economy endured economy-wide deflation for years without an improvement in living standards?

Whether or not deflation is a good or bad sign for the economy depends on the forces causing the deflation. If deflation is the result of increased production, then deflation is not a bad sign for the overall economy (but it may be for some sectors). If deflation is the result of a fall in demand, then the deflation is a symptom of a larger problem - a depression or recession. And there is ample historical evidence that economies can remain in depressions and recessions for moderate periods of time.

Your statements about Keynes and Keynesians more accurately reflect your ignorance of their views than the actual content of their views.

 

[Crazy Eddie]

Wages have not been known to increase at a rate consistent with inflation (which is a major problem and the whole reason this thread exists). Why, therefore, should we assume wages will decrease with deflation? In fact, given the cultural and historical aversion by companies to reduce their workers' pay (for fear of having their best people quit or go to work for their competitors) wouldn't you expect wages to stay relatively stable in a deflationary period? That would make debts EASIER to pay since the cost of all other goods -- homes, cars, food, shelter, clothing, etc -- would be reduced.

Please, examples of companies' cultural and historical aversion to reducing worker pay.

ECONOMISTS dislike talking to people. They prefer a more “scientific” approach to research, such as number-crunching or abstract theorising. But that can be a weakness, as a new book by Truman Bewley, an economist at Yale University, makes clear. In “Why Wages Don't Fall During A Recession”, published by Harvard University Press, he tackles one of the oldest, and most controversial, puzzles in economics: why nominal wages rarely fall (and real wages do not fall enough) when unemployment is high. But he does so in a novel way, through interviews with over 300 businessmen, union leaders, job recruiters and unemployment counsellors in the north-eastern United States during the early 1990s recession.

Explanations for why wages are sticky abound, but they are often unconvincing. Neoclassical economists, who have a starry-eyed faith in the efficiency of markets, think wage rigidity is an illusion. In their view, workers quit their jobs when pay starts to fall in a downturn. This stops wages falling much and makes them appear inflexible. But their theory implies that unemployment in a recession is voluntary—a view at which reasonable people might rightly scoff.

Keynesians, who accept that markets are often imperfect, think wages are sticky, but cannot agree why. Some blame unions or established employees (“insiders”) for blocking pay cuts. Keynes himself thought that workers were so concerned about their wages relative to those at other firms that no company dared to cut pay. Others argue that firms pay high “efficiency wages” in order to make the threat of job loss more costly for workers and so spur them to work harder. (Wages might still fall in a recession, though, since workers are more afraid of not finding another job when unemployment rises.) Still others claim that firms implicitly insure workers against a fall in income in exchange for lower long-term average wages. And so on.

[...]

Why, then, are wages sticky? Mr Bewley concludes that employers resist pay cuts largely because the savings from lower wages are usually outweighed by the cost of denting workers' morale: pay cuts hit workers' standard of living and lower their self-esteem. Falling morale raises staff turnover and reduces productivity. Cheerier workers are more productive workers, not only because they work better, but also because they identify more closely with the company's interests. This last point is crucial. Mr Bewley argues that monitoring workers' performance is usually so tricky that firms rarely rely on coercion and financial carrots alone as motivators. In particular, high morale fosters teamwork and information-sharing, which are otherwise difficult to encourage.

Firms typically prefer layoffs to pay cuts because they harm morale less, says Mr Bewley. Pay cuts hurt everybody and can cause festering resentment; layoffs hit morale only for a while, since the aggrieved have, after all, left. And whereas a generalised pay cut might make the best workers leave, and a selective one damage morale because it is seen as unfair, firms can often lay off their least competent staff.

Thing is, I have never known the idea "companies are reluctant to lower wages in a recession" to be all that controversial. Economists don't know WHY that is, but it's pretty well known. More to the point: since wages do not grow to keep up with inflation, there's no reason to assume they would shrink at pace with deflation.

Wages haven't been rising due to economic policy. The pool of unemployed workers has to be large enough to keep wages down. Known as the NAIRU. Many, if not most, argue that we currently are at full employment, considered a signal for raising rates and slowing down the economy. This has been policy since the '70's.

I have the impression that this policy was based more on theory than data in the 70s. I have the impression that that has not really changed.

Please provide evidence that deflation has ever been bad for the economy.

No, that is not a rhetorical question. I am genuinely curious why that would be.

https://www.google.com/search?q=def...ms-tmobile-us&sourceid=chrome-mobile&ie=UTF-8

Economists have a term for when all those things you mentioned go down: recession or alternatively: depression.

I've heard that before, but one thing I noticed about the last recession was that it did NOT involve any noticeable drop in prices (otherwise known as "deflation"). There was a bursting of a price bubble in a specific sector of the HOUSING MARKET, but not a deflationary period.

And even the Great Depression, AFAIK, didn't involve a deflationary trend of prices. Or am I misunderstanding the history of that?

 

[Crazy Eddie]

It is not true that deflation is either synonymous or a cause of recession. That is a myth promulgated by Keynes. We have experienced deflation in the consumer electronics market in the US even though overall the US experiences inflation. Instead of crashing the consumer electronics market it has been one of the fastest growing sectors of an otherwise moribund economy.

We have experienced constant inflation for so long we have forgotten that it can be any other way. Prices are the result of four variables: demand for money, supply of money, demand for goods/services, supply of goods/services. Inflation and deflation are a result of a chance in the supply of money. Changing the supply of money has not effect on the supply or demand for goods/services.

According to the Keynesian myth, if prices go down then people immediately stop buying as they wait for prices to drop even more. This causes the prices to drop even more, causing people to buy even less, causing prices to drop more, causing people to buy less, etc. In the real world, people say "oh now I can afford X, I will purchase it". Deflation doesn't cancel the laws of supply and demand, so as prices drop demand goes up until a new equilibrium is reached.

And, finally, yes. If prices go down, a poor person can buy more goods per dollar, so at the same wage that poor person is now wealthier.

Falling prices in one market doesn't cause a problem. It's only when they're falling in general that you have an issue--because now putting your money under your mattress is an investment strategy. People hold off on spending money.

Wait... what? So what the hell happened with the recession then? Prices suddenly and rapidly dropped in exactly ONE MARKET and it wound tanking the entire economy. For the entire planet. EVERYWHERE.

What the fuck sense does THAT make?

 

[Horatio Parker]

Please, examples of companies' cultural and historical aversion to reducing worker pay.

ECONOMISTS dislike talking to people. They prefer a more “scientific” approach to research, such as number-crunching or abstract theorising. But that can be a weakness, as a new book by Truman Bewley, an economist at Yale University, makes clear. In “Why Wages Don't Fall During A Recession”, published by Harvard University Press, he tackles one of the oldest, and most controversial, puzzles in economics: why nominal wages rarely fall (and real wages do not fall enough) when unemployment is high. But he does so in a novel way, through interviews with over 300 businessmen, union leaders, job recruiters and unemployment counsellors in the north-eastern United States during the early 1990s recession.

Explanations for why wages are sticky abound, but they are often unconvincing. Neoclassical economists, who have a starry-eyed faith in the efficiency of markets, think wage rigidity is an illusion. In their view, workers quit their jobs when pay starts to fall in a downturn. This stops wages falling much and makes them appear inflexible. But their theory implies that unemployment in a recession is voluntary—a view at which reasonable people might rightly scoff.

Keynesians, who accept that markets are often imperfect, think wages are sticky, but cannot agree why. Some blame unions or established employees (“insiders”) for blocking pay cuts. Keynes himself thought that workers were so concerned about their wages relative to those at other firms that no company dared to cut pay. Others argue that firms pay high “efficiency wages” in order to make the threat of job loss more costly for workers and so spur them to work harder. (Wages might still fall in a recession, though, since workers are more afraid of not finding another job when unemployment rises.) Still others claim that firms implicitly insure workers against a fall in income in exchange for lower long-term average wages. And so on.

[...]

Why, then, are wages sticky? Mr Bewley concludes that employers resist pay cuts largely because the savings from lower wages are usually outweighed by the cost of denting workers' morale: pay cuts hit workers' standard of living and lower their self-esteem. Falling morale raises staff turnover and reduces productivity. Cheerier workers are more productive workers, not only because they work better, but also because they identify more closely with the company's interests. This last point is crucial. Mr Bewley argues that monitoring workers' performance is usually so tricky that firms rarely rely on coercion and financial carrots alone as motivators. In particular, high morale fosters teamwork and information-sharing, which are otherwise difficult to encourage.

Firms typically prefer layoffs to pay cuts because they harm morale less, says Mr Bewley. Pay cuts hurt everybody and can cause festering resentment; layoffs hit morale only for a while, since the aggrieved have, after all, left. And whereas a generalised pay cut might make the best workers leave, and a selective one damage morale because it is seen as unfair, firms can often lay off their least competent staff.

Thing is, I have never known the idea "companies are reluctant to lower wages in a recession" to be all that controversial. Economists don't know WHY that is, but it's pretty well known. More to the point: since wages do not grow to keep up with inflation, there's no reason to assume they would shrink at pace with deflation.

The most recent serious deflation in the US was the Great Depression - and wages certainly were lowered. The point was how advantageous deflation is to wage earners. I don't see anything in this source that addresses that. Presumably any deflation serious enough to noticeably increase real wages would have to be widespread and persistent.

Wages haven't been rising due to economic policy. The pool of unemployed workers has to be large enough to keep wages down. Known as the NAIRU. Many, if not most, argue that we currently are at full employment, considered a signal for raising rates and slowing down the economy. This has been policy since the '70's.

I have the impression that this policy was based more on theory than data in the 70s. I have the impression that that has not really changed.

What I've read is it's based on the assumption that increasing wages were a primary cause of the 70's inflation.

 

[Loren Pechtel]

Falling prices in one market doesn't cause a problem. It's only when they're falling in general that you have an issue--because now putting your money under your mattress is an investment strategy. People hold off on spending money.

Wait... what? So what the hell happened with the recession then? Prices suddenly and rapidly dropped in exactly ONE MARKET and it wound tanking the entire economy. For the entire planet. EVERYWHERE.

What the fuck sense does THAT make?

A recession isn't just one product getting cheaper.

 

[Crazy Eddie]

What I've read is it's based on the assumption that increasing wages were a primary cause of the 70's inflation.

Is that a good assumption? Because wages didn't keep pace with inflation during or after the 70s, and it's generally accepted that the combination of the oil embargo and some dramatic political shifts in American labor and immigration policies had a lot to do with that too.

 

[Horatio Parker]

What I've read is it's based on the assumption that increasing wages were a primary cause of the 70's inflation.

Is that a good assumption? Because wages didn't keep pace with inflation during or after the 70s, and it's generally accepted that the combination of the oil embargo and some dramatic political shifts in American labor and immigration policies had a lot to do with that too.

I didn't mean to imply that it's correct, only that it's CW. It justifies keeping govt spending low enough to maintain the NAIRU.

Others say the inflation was due to commodity price shocks i.e. higher oil prices. In fact, I've read that the move that ended the inflation was Jimmy Carter deregulating natural gas in 1978. That allowed natural gas prices to rise and compete with oil.

Cost-push inflation cannot be eliminated without killing the economy if one relies on increased taxes, reduced Government spending and high interest rates, which is the deficit hawk prescription. All that will and did do is to move toward macroeconomic and microeconomic austerity. The way cost-push inflation has to be fixed is through bringing alternative sources of supply, wage and price controls, and rationing online.

[...]

As for bringing new supplies online, that is the best cure for cost-push inflation, but the problem with it is that it can take a good deal of time to work. Ironically, Jimmy Carter did initiate this cure for Saudi-induced oil inflation during his Administration, when he de-regulated natural gas production. The problem was that the new supplies did not begin to have an impact for some time. Eventually they did, but only after President Carter was defeated by Ronald Reagan, and only after the availability of more natural gas created an international oil glut, the primary reason for the fall of inflation in the Reagan Administration.

The secondary reason for the fall of inflation was Volcker backing off the Federal Funds rate. The Reagan recovery couldn’t have occurred without that; but, on the other hand, Volcker’s move wouldn’t have been effective if the oil price hadn’t already fallen.

So, the bottom line here, is that the Government did mostly fiscally irresponsible things in seeking price stability during the Carter Administration, while wrapping itself in the moral sanctimony of preaching the necessity for sacrifice. The one clearly good thing it did was to de-regulate natural gas. That eventually worked, and if Congress and the President had combined that with oil rationing and strict enforcement of price controls on domestic supplies, export controls on domestic oil, application of price controls on oil imports, and perhaps limited wage controls, then the economy could have survived without Paul Volcker’s Fed drying up the credit flow and producing a prolonged recession.

http://neweconomicperspectives.org/...nsibility-3-carter-inflation-health-care.html