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Inflation mystery. An Aha! moment for me. - kandrathe - 06-28-2011
I've been digging into research on the global economy for the past few weeks, and I stumbled across an article on inflation that finally clarified for me the greater inflation puzzle, and based on this revelation, I'm venturing an economic prediction. Now, this is also beyond what monetarists are doing within the global banking system (i.e. printing lots of money), which does not help the inflation case either.
Way back in the Greenspan days, there was a long period of "low" inflation, at least as far as the Fed calculated the CPI. I thought this was mostly because the CPI is a broad index, or conglomeration of a basket of goods and services. So, you get pluses and minuses, but they all tend to average out over time. Now, I don't think so.
Behind our false sense of security in our CPI (and government run economy), I believe there is a hidden danger that has been building for 50 years or more. After WWII, the US was pretty much the only player left standing with their industry and production intact. In fact, we emerged from the war with an abundance of trained labor, and more production capacity than ever before. It was pretty quickly transformed from producing war materials into consumer goods, and then people were encouraged to buy land, build a house, and have kids. With all these new cars on the roads, and industrial growth, sometimes the rivers caught on fire, pollution reared it's ugly head everywhere, and so we rightly passed a bunch of laws to restrict pollution, but also it added costs to our industry. When we were fully mobilized for WWII, no one bothered to worry about something as pedantic as pollution. I'm not complaining mind you. I enjoy not being exploited the companies I work at, and I've never been a union member* but, I would expect they enjoy their collective bargaining, and contract negotiation perks too. I like to breathe clean air, have pure food to eat.. you know... the consumer protections, and clean water to drink. They come at a price (along with all the taxes) that are built into the price of the goods and services we consume.
With the largest highly trained work force and industrial might, we also felt great about giving more benefits to the workers (many of whom were returning veterans too). We added full dental, full health care insurance, etc, etc. Pretty soon, as Americans, we had it all. Pretty much full employment, a higher trained workforce, getting high benefits, and also some of the toughest employment, safety, and pollution control laws. We were in hog heaven, with pretty high taxes, high employment, consumer and worker protections, and a growing export based economy. It anyone in the world wanted a product, and could afford it, we'd ship it on over.
But, while we resisted Communism, and felt smug about our "way of life", the rest of the world was rebuilding, and the US was in fact helping to transform wherever we could (in the name of freedom, capitalism, and democracy) nations to help them lift all the boats in a rising tide. Essentially, I still think this seems to be a good plan had we also planned for that day when we were no longer the only big dog. But, I still think their is a hidden danger for us. Kind of like when you get that puzzled feeling when you are training your replacement, hoping the boss is also thinking promotion.
I'm not sure when it began, but at least by the 1970's, we suddenly woke up one day and the fear was high in the US that Japan and less so Germany were going to clean our clock, and so we started to get smarter about our manufacturing. We entered into the age of global capital mobility. You know, if we didn't do it, they would. You can see it in the history of the US trade deficit. Somebody figured out that it was cheaper to move "production" to under developed nations without the expensive burden of laws, and there was a huge labor savings to boot. Beyond our increasing consumption of energy to power our big autos and gizmos, we consumers were selling out the American goods, and companies (including our local stores) for cheaper foreign made goods. Of course, now, it is a novelty to find US products that are actually made in the US. Around this time(early 80's I'd guess), we should have started tracking inflation along at least two different tracks. One type of inflation is related to the cost of consumer goods, which is incredibly influenced by the global cost of labor, and the burden of law. The other type of inflation is more local, and involves the things that cannot be outsourced, and are hard to just import like doctors, nurses, and college faculty. So, local inflation might be national, regional, and/or metropolitan. I suspect the key culprits to be housing, health care, education, and to a lesser degree food. The 80's were the beginning of the rise of Walmart, Target, Home Depot, etc. I mean it is pretty ridiculous that I can spend more to fill up my gas tank, than it costs to buy a small refrigerator, or air conditioner.
If we run low on housing, market pressure initiates a building boom, as "investors" speculate that they can build more units to get a profit. Until, we have too many houses and we suffer a lull (or bust cycle) until the growth rate again fills them. Except, starting around 10 years ago, we began to see a shuffle as the boomers kids moved out of the house, and empty-nesters started to downsize. Additionally, in 2010, the first boomers will reach 65 and in droves ( an extra 500K in my state) will be migrating toward senior housing, and probably moving to warmer climates if they can afford it. Enter the shortage of senior housing, and the excess of single family homes perfect for raising children. Try to convince your local city planners that it's time to tear down the excess capacity of tax payer homes, to build nearly zero tax base senior housing. It's better to pressure the banks (or use Freddie or Fannie) to offer the homes to sub-prime borrowers, because at least they will pay their property taxes (in escrow). At least, until they default on their loans when the economy faces a hiccup and they lose their jobs. I believe much of this gap can be filled with immigration, although it's not a very popular idea.
Traditional education (bricks and mortar) is not easy to flex with a variable stream of children. The peak of the boomers children needing k-12 education passed in the late 70's through the 80's. Now, public k-12 school systems are contracting, class sizes are shrinking, but the costs of each local system tend to keep growing, and tax payer funding keeps allowing pretty much unchecked growth for many public systems. Teaching has become specialized, like medicine.
Back in the 60's, when I was young, I saw one teacher all day. When I misbehaved, I saw the principal, and when I was sick I saw the nurse.
My sons both have a main room teacher, then a teacher for spelling, a teacher for math, a teacher for health, a teacher for phy. ed. and 3 or 4 para-professionals that roam to help kids who need extra help. There are a number of special attendants to supervise the playground. There is a district wide rotation for 2 band directors, and each school has 2 music teachers as well. Now, both my sons have IEP's for there diagnosed atypical learning styles (one is definitely ADHD, and the other has a neural developmental delay), so they also see a battery of special education professionals, the district child psychologist and periodically a speech pathologist. If I sound like I'm complaining, I'm not. When we decided to have children, we intentionally moved into one of the best school districts in the State, and this is one of the best education states in the US. I'm glad for the help, but egads I can see why the costs have skyrocketed. If price was no object, this is the type of education system every child should have. I'm blessed to be able to have my sons in this system, and unfortunately it is probably entirely unsustainable with a dwindling, retiring tax base.
Then, there is college with a pretty consistent 6-10% inflation rate with spikes during peak demand. Some of this has to do with rules on student loans, and the infusion of money into college educations, and I suspect some of it has to do with demand expansion. I tend to think about demand as air pressure inside a closed box. At some point, the box responds and adds a new major, or program. This creates a temporary shortage of dorm beds, classroom space, and faculty, and then the pressure equalizes for awhile. It hardly ever contracts, and almost never at public institutions.
Then, I suspect with easy access to health care insurance, the same demand explosion has occurred in health care. I won't go into excruciating details, because I think we've hyper analyzed the US medical versus other systems here before. We probably have the best, and most expensive health care that money can buy, and again, it is probably completely unsustainable to give it away the way we do.
Back to my main point. Because of the pretty much negative growth of some things in our basket of goods (e.g. look at appliances), we've masked the hyper inflation that has occurred in some of the most important aspects of our lives. Now that the boomers are beginning to retire (and begin consuming more health care), the workforce will contract (10-15% by 2030) putting even more pressure on the service sector in all areas. In almost every sector of our economy for the foreseeable future, replacement workers (filling in for the retiring boomers) will outpace new workers (HS and college graduates) by a 2 to 1 margin.
So, I believe we are facing two inflation time bombs over the next decade. One will occur as population pressures in China cause their incomes to rise resulting in an increase in the price of consumer goods, unless capital again seeks new fertile grounds for low cost employment in other underdeveloped nations (perhaps Africa, or greater India). The second will come as a result of a global, and local worker shortage in most sectors and concentrated on health care, education, and other services that need to be supplied locally. Some of this could be offset by an immigration program aimed at our replacement worker needs (educated, and experienced), and some pressure would be alleviated by raising the retirement age to 72 (as people remain healthier and useful longer). Third, it might be possible to absorb some of the worker shortage with additional productivity (e.g. tele-medicine, online education, etc).
I am extremely disappointed in the Obama administrations lack of energy planning in transition off a fossil fuel dependent economy, as it was one of the positives in a long list of negatives (namely more unsustainable spending). A cornerstone of our economic growth is cheap, and therefore abundant energy and so without a sustainable energy plan we face a dark future.
Pun intended. * Well, briefly when I worked for the government for a few years I might have been in a union, but I was really a white collar desk jockey paying union dues.
RE: Inflation mystery. An Aha! moment for me. - Jester - 06-28-2011
So, this is going to be real hyperinflation (aka overwhelming poverty) rather than nominal? That's a scary thought. While things will no doubt get more expensive, I don't think I believe that. I'm pretty sure Americans will be at least roughly as productive tomorrow as today, at bare-bones minimum.
What was the "aha" realization?
-Jester
Afterthought: I do love this - "I tend to think about demand as air pressure inside a closed box. At some point, the box responds and adds a new major, or program." I'd say air-filled boxes don't usually determine policy at universities, but given some of the decisions I've seen, maybe you're on to something.
RE: Inflation mystery. An Aha! moment for me. - kandrathe - 06-28-2011
(06-28-2011, 09:14 AM)Jester Wrote: So, this is going to be real hyperinflation (aka overwhelming poverty) rather than nominal? That's a scary thought. While things will no doubt get more expensive, I don't think I believe that. I'm pretty sure Americans will be at least roughly as productive tomorrow as today, at bare-bones minimum.Yes, and no. The ones remaining in the work force may be as productive, however the individuals skills gap in credentials needed versus those available is increasing. In other words, we need more highly skilled workers, and we're producing fewer of them. Also, those retiring take their experience with them, and so we experience a natural brain drain in one sense, but perhaps it is offset by youthful exuberance in another. Still, I'd rather have 3 experts with experience than 10 rookies who need additional hand holding, and training.
Quote:What was the "aha" realization?Just the idea of separating local inflation (expressed in runaway health care, education, and other services costs) from global inflation which dominates the CPI at ~3%.
Quote:Afterthought: I do love this - "I tend to think about demand as air pressure inside a closed box. At some point, the box responds and adds a new major, or program." I'd say air-filled boxes don't usually determine policy at universities, but given some of the decisions I've seen, maybe you're on to something.Well, yes, it was an intuitive leap. But, at universities, the buildings tend to be big boxes filled with process, and product. The bigger you get, the more boxes you need.
RE: Inflation mystery. An Aha! moment for me. - --Pete - 06-28-2011
Hi,
(06-28-2011, 10:12 AM)kandrathe Wrote: ... the individuals skills gap in credentials needed versus those available is increasing. In other words, we need more highly skilled workers, and we're producing fewer of them.
At one end of the spectrum are the jobs that require so little knowledge and skill that anyone can do them. These tend to be minimum wage jobs. Typically, it is not worth the cost and effort to automate them.
At the opposite end of the spectrum are the jobs that require great amounts of ingenuity and creativity. Watsons aside, we are nowhere near replacing people with machines for these jobs.
The rest of the spectrum has either been automated out of existence or moved to where labor costs are so low that automation isn't worth it. As the labor costs internationally grow, automation becomes a more viable option.
For most animals, including humans until comparatively recently, survival is a full time occupation. The development of agriculture, the resulting permanent settlements, and thus civilization created free time and excess energy for humans. This excess time and energy was used to build monuments, fight wars, explore, write novels and poems, compose music and drama, etc. One might say that the increased productivity caused by the cooperation of civilization made us more civilized.
However, only a small minority of the population could take advantage of the full benefits of the increased productivity. There just wasn't enough goodies to go around. That has largely changed over the past few centuries. No longer is the royal court the only group with a varied diet (and that only because they moved from place to place like a swarm of locust, eating each place bare), but the variety of food available in the stores of the industrial nations puts the banquets of the Roman emperors to shame.
The point is that, so far, the full output of the human race has been needed, first to survive, then to meet the demands of the priest and royal castes, then to generate the luxuries everybody wanted. As more of the productive work is done by machines, only the extremes are left for people. It might be true that the number of jobs lost on the assembly lines are balanced by the number created in robotics and software engineering, but I wonder if the people displaced from the line by robots have the mental ability to design robots.
So far, every economic theory I've seen ignores the changes all around us and bases itself on a rapidly outmoded model of production. What happens to "an honest day's work for an honest day's pay" when there is no demand for the work? Who owns the profits of production when the producers are robots?
--Pete
RE: Inflation mystery. An Aha! moment for me. - vor_lord - 06-28-2011
(06-28-2011, 05:01 PM)--Pete Wrote: What happens to "an honest day's work for an honest day's pay" when there is no demand for the work? Who owns the profits of production when the producers are robots?
I realize this is a serious discussion... but someone has to mention Steel Beach by John Varley in this context. The novel explores the concept of when there is little demand for work at all (the only work left is in entertainment). Even more than simply no demand for work, this is a society where the classic economic problem of scarcity is no longer a problem.
RE: Inflation mystery. An Aha! moment for me. - kandrathe - 06-28-2011
(06-28-2011, 05:16 PM)vor_lord Wrote:Unfortunately in the current system (and in the socialist, and communist systems) and in the social mindset, if you don't work then you have no value. I didn't read Steel beach, but I caught up on the plot summary. It seems to me that inn the Steel Beach world, Hildy's suicides are an escape from the same life of insignificance. In our times, the owners rule, the white collar worker is 1st class and blue collar, is 2nd class. And the non-workers are tolerated as a burden upon the state (system).(06-28-2011, 05:01 PM)--Pete Wrote: What happens to "an honest day's work for an honest day's pay" when there is no demand for the work? Who owns the profits of production when the producers are robots?I realize this is a serious discussion... but someone has to mention Steel Beach by John Varley in this context. The novel explores the concept of when there is little demand for work at all (the only work left is in entertainment). Even more than simply no demand for work, this is a society where the classic economic problem of scarcity is no longer a problem.
And... I think you are getting at something in our culture, when in order to survive, an individual after 50 years of production, spends their retirement years earning a subsistence wage standing at the entrance of Walmart greeting shoppers. I wince, when I see gray haired fry cooks at McDonalds trying to learn Spanish. After the dissolution of the extended family, and the family itself, we've found that the paternalistic "state" and "corporation" are rather heartless.
We live in the land of freedom, but for myself, the social contract has been pretty one sided in favor of the employer (paying me a fraction of my value), and then the government (taking 1/3 to 1/2 of the employer's, and employee's production). Imagine if it was normal that workers might secure even a small fixed portion of their production (physical and intellectual).
RE: Inflation mystery. An Aha! moment for me. - Jester - 06-28-2011
(06-28-2011, 10:12 AM)kandrathe Wrote: The ones remaining in the work force may be as productive, however the individuals skills gap in credentials needed versus those available is increasing. In other words, we need more highly skilled workers, and we're producing fewer of them. Also, those retiring take their experience with them, and so we experience a natural brain drain in one sense, but perhaps it is offset by youthful exuberance in another. Still, I'd rather have 3 experts with experience than 10 rookies who need additional hand holding, and training.
In the future, there will be a surplus of experienced workers, not a surplus of rookies. There is no glut of young people. The population is, overall, aging.
The retirement of the boomers will be painful, but the baby boom is not *that* large. It changes the composition of the work force somewhat, but the big burden is retired workers living until 80, not an absence of experienced workers.
Quote:Just the idea of separating local inflation (expressed in runaway health care, education, and other services costs) from global inflation which dominates the CPI at ~3%.
You can calculate inflation however you like - higher by some measures than others. (Heaven help you if you're from the school that insists gold is the only stable measure of value!) I would tell you that runaway costs for health care have to do with a cripplingly inefficient system, and that increasing college tuition is about the withdrawal of subsidies for higher education, forcing up "retail" prices for college without dramatically changing the underlying costs. It's just a question of who pays the bills and how.
Other services are divided into sophisticated services, like law and banking, that track the skill premium on educated workers, and low-end services, which pretty much just track wages, and therefore will only increase along with an increase in the standard of living.
-Jester
(06-28-2011, 05:01 PM)--Pete Wrote: So far, every economic theory I've seen ignores the changes all around us and bases itself on a rapidly outmoded model of production. What happens to "an honest day's work for an honest day's pay" when there is no demand for the work? Who owns the profits of production when the producers are robots?
Whomever owns the robots, presumably. The incredibly large product of a fully automated, impossibly advanced economy will simply drive prices down to the level of affordability... or, if the goods are not affordable by any consumers, they will not be produced in the first place. (Unless robotics tycoons like to hoard each others' toasters and vacuum cleaners.)
It might matter how expensive the robots are to make - if self-replication becomes widespread, or simply very cheap assembly and boilerplate AI, then these phenomenal powers might be available to almost everyone, making labour pointless, and everyone a capitalist.
The real question is, what happens when the robots become owners?
-Jester
(06-28-2011, 06:18 PM)kandrathe Wrote: We live in the land of freedom, but for myself, the social contract has been pretty one sided in favor of the employer (paying me a fraction of my value), and then the government (taking 1/3 to 1/2 of the employer's, and employee's production). Imagine if it was normal that workers might secure even a small fixed portion of their production (physical and intellectual).
Wages should be equal to the marginal product of labour, right? Otherwise, someone is leaving money on the table by either hiring too many workers, or not enough of them...
-Jester
RE: Inflation mystery. An Aha! moment for me. - --Pete - 06-28-2011
Hi,
(06-28-2011, 06:18 PM)kandrathe Wrote: ... in favor of the employer (paying me a fraction of my value), ...
How do you assess your value? Seriously.
It isn't what you think you're worth, it's what you're willing to settle for. If you don't think you're getting enough, ask for more. If they won't give you more, go elsewhere. If no one meets your price, go self employed. If you can make more self employed than you can working for someone else, then you are right, they weren't paying you full value. If you can't, then you are overestimating your value. Your work is like anything else. The value of it is based on supply and demand.
--Pete
RE: Inflation mystery. An Aha! moment for me. - --Pete - 06-28-2011
Hi,
(06-28-2011, 07:56 PM)Jester Wrote: The incredibly large product of a fully automated, impossibly advanced economy will simply drive prices down to the level of affordability... or, if the goods are not affordable by any consumers, they will not be produced in the first place.
If not enough people can afford the products, then less products will be made. The cost of making fewer products will increase the cost of the products (the opposite of economy of scale), leaving yet fewer people able to afford the products. That spirals down into stasis.
How will the vast majority of people, incapable of getting the top end jobs because of their mental limitations and not lucky enough to get a bottom end job, get any income to buy any products at all?
(06-28-2011, 07:56 PM)Jester Wrote: It might matter how expensive the robots are to make - if self-replication becomes widespread, or simply very cheap assembly and boilerplate AI, then these phenomenal powers might be available to almost everyone, making labour pointless, and everyone a capitalist.
Not quite. There is still the question of raw materials. I once told a friend I was going to build a telescope from scratch. He smiled and pointed out it would take a while. A few billion years after the big bang I would have to cause before enough stars had gone supernova to give me workable amounts of silicon, oxygen, iron, copper, etc. for my truly raw materials.
(06-28-2011, 07:56 PM)Jester Wrote: The real question is, what happens when the robots become owners?
No one, except present CEOs and members of the board, will notice any difference.
--Pete
RE: Inflation mystery. An Aha! moment for me. - Jester - 06-28-2011
(06-28-2011, 08:21 PM)--Pete Wrote: If not enough people can afford the products, then less products will be made. The cost of making fewer products will increase the cost of the products (the opposite of economy of scale), leaving yet fewer people able to afford the products. That spirals down into stasis.
You can't decrease prices so much that prices increase. All prices are relative. Whatever is left for humans to do, will be incredibly valuable (measured in robot-produced goods) because it's all we have to do. There is no external measure of value, no economic deity tallying up use values.*
Think of things we get for free, or nearly free - Sunlight is one of the most valuable things we have. If we stopped having sunlight, we would all be impoverished (or dead) and have to devote enormous effort to produce warmth and light. But nobody sits around mourning the fact that we have driven the artificial sunlight workers out of their jobs. If a resource is cheap and plentiful, that's good, not bad. We simply work at producing something else, and the exchange value of those things is so much the higher.
Quote:How will the vast majority of people, incapable of getting the top end jobs because of their mental limitations and not lucky enough to get a bottom end job, get any income to buy any products at all?
If they have absolutely nothing better to do, then they can make old products the old way, by hand, and sell them for pennies. And since the new economy is so ludicrously productive, those pennies will buy them their goods. It is no different from very poor countries today - there is technology, but they do not have it, and so they make what they can with what they have.
Quote:Not quite. There is still the question of raw materials. I once told a friend I was going to build a telescope from scratch. He smiled and pointed out it would take a while. A few billion years after the big bang I would have to cause before enough stars had gone supernova to give me workable amounts of silicon, oxygen, iron, copper, etc. for my truly raw materials.
Agreed, although space is *big*. I once got into an argument with a fellow economic historian over that. Some people seem to have difficulty understanding that what we think of as "raw materials" are the products of stellar processes, not some inherent "stuff" arbitrarily lying around. We are just another process for using loose energy to convert one form of starstuff into another.
Quote:No one, except present CEOs and members of the board, will notice any difference.
Meet the roboboss, same as the old boss.
-Jester
*Unless, of course, we create something that has its *own* values. In which case we could be well and truly fracked (to put it precisely.)
RE: Inflation mystery. An Aha! moment for me. - --Pete - 06-28-2011
Hi,
(06-28-2011, 08:52 PM)Jester Wrote: You can't decrease prices so much that prices increase.
I don't understand where this is coming from. The spiral I was speaking of is:
- Not enough demand for a product at a given price. Cannot drop price because it is already at break even -- product sells for the cost of the materials and energy needed to make it.
- Production is cut back to reduce existing surpluses. However, there are fixed costs (taxes and insurance on the manufacturing facilities, etc.) that now have to be spread over a smaller number of items. Since the item was at break even, either the price goes up or the loss kills the company.
- Increased price puts the product out of reach of even more people, thus further lowering the demand, thus starting another cycle.
(06-28-2011, 08:52 PM)Jester Wrote: Whatever is left for humans to do, will be incredibly valuable (measured in robot-produced goods) because it's all we have to do.
And what would that be? Punctuation poems? Covers of 4'33"?
(06-28-2011, 08:52 PM)Jester Wrote: We simply work at producing something else, ...
"We'll just take shelter under this tree until it is soaked, then we'll just move to another."
Really?
(06-28-2011, 08:52 PM)Jester Wrote: ... It is no different from very poor countries today ...
It is very different. Right now we have a heterogeneous system. It's like a box of gas that is warm in some spots and cold in others. There is heat flow, but the heat flow is a transient phenomenon. Eventually, it will be homogeneous, and the heat flow will end.
(06-28-2011, 08:52 PM)Jester Wrote: Agreed, although space is *big*.
Yeah. The landfills of today will become the oil fields of tomorrow -- if by tomorrow you mean a few hundred million years from now. The thing is, solutions requiring eons and galaxies are not too practical for the problems of an entity that lives decades and occupies about 25% of one planet.
--Pete
RE: Inflation mystery. An Aha! moment for me. - kandrathe - 06-28-2011
(06-28-2011, 07:56 PM)Jester Wrote: In the future, there will be a surplus of experienced workers, not a surplus of rookies. There is no glut of young people. The population is, overall, aging.
[attachment=54]
Our local population is still growing slightly until 2020.
(06-28-2011, 07:56 PM)Jester Wrote: The retirement of the boomers will be painful, but the baby boom is not *that* large. It changes the composition of the work force somewhat, but the big burden is retired workers living until 80, not an absence of experienced workers.
[attachment=55]
Here is what our boom looks like here.
(06-28-2011, 07:56 PM)Jester Wrote: You can calculate inflation however you like - higher by some measures than others. (Heaven help you if you're from the school that insists gold is the only stable measure of value!)I would reference a basket of stable commodities, not just gold (which can be influenced by fad). Were I to invest in commodities to offset inflation, it would not be in gold.
(06-28-2011, 07:56 PM)Jester Wrote: I would tell you that runaway costs for health care have to do with a cripplingly inefficient system,It is. The question I have is whether the increasing amounts of government control (nearing 50% of all health care spending) have streamlined it, or have complicated it. Also, I fear their "one size fits all" approach fails in an economy as diverse as the USA. See also the article below on price in-elasticity. If a heart transplant costs $100 or $1M I would still attempt to save my own life. There is no objective place where some one determines they will not pay for health.
(06-28-2011, 07:56 PM)Jester Wrote: ... and that increasing college tuition is about the withdrawal of subsidies for higher education, forcing up "retail" prices for college without dramatically changing the underlying costs. It's just a question of who pays the bills and how.
Perhaps it is the chicken and the egg, but I see it as the opposite. Prices are chasing subsidies.
![[Image: Student-Subsidies-vs-Tuition1.png]](http://blogs-images.forbes.com/ccap/files/2011/04/Student-Subsidies-vs-Tuition1.png)
Subsidy-Absorbing Institutions of Higher Education
"The government often decides that it would like to subsidize a particular good or service in an attempt to make it more affordable for consumers. It generally does so with good intentions. However, such subsidies are frequently captured by the providers and fail to result in lower prices for the consumer. In such instances, the providers simply increase their prices by the amount, or some portion of, the subsidy. They maintain their margins and increase their revenues, all thanks to the generosity of the public purse (or perhaps politician’s failure to understand basic economics). This problem is especially prevalent for subsidized goods and services that economists consider to be relatively inelastic. The term inelastic simply refers to a good whose demand is relatively unresponsive to a change in price. Health care, food and education are often thought to fit the bill of an inelastic good – consumer’s generally continue to pay for them even when prices rise."
(06-28-2011, 07:56 PM)Jester Wrote: Other services are divided into sophisticated services, like law and banking, that track the skill premium on educated workers, and low-end services, which pretty much just track wages, and therefore will only increase along with an increase in the standard of living.However the method used, it is clear that the BLS use of the CPI-U is couched in inaccuracy, and describes hardly anyone's experience with inflation.
(06-28-2011, 07:56 PM)Jester Wrote: Wages should be equal to the marginal product of labour, right? Otherwise, someone is leaving money on the table by either hiring too many workers, or not enough of them...Generally, yes. Collective bargaining strengthens labors position. My slim point here is that law supports the corporate ownership of the intellectual work done by their employees. It is the inventions, designs, plans, and etc. that enable corporations to be unique and competitive. In a nutshell, we treat too much of our work like its a widget on an assembly line, and remunerate employees with an hourly wage.
RE: Inflation mystery. An Aha! moment for me. - Jester - 06-29-2011
Quote:Perhaps it is the chicken and the egg, but I see it as the opposite. Prices are chasing subsidies.
Subsidy-Absorbing Institutions of Higher Education
Loans are not subsidies that can be expected to reduce "retail" prices. They are money given in order to afford high prices, not a bargain made to keep prices down. Perhaps it amounts to the same thing in the end, except that, if your measurement of education costs is not total spending, but tuition, then you end up with a higher result.
-Jester
RE: Inflation mystery. An Aha! moment for me. - Jester - 06-29-2011
(06-28-2011, 10:19 PM)--Pete Wrote: I don't understand where this is coming from. The spiral I was speaking of is:
- Not enough demand for a product at a given price. Cannot drop price because it is already at break even -- product sells for the cost of the materials and energy needed to make it.
- Production is cut back to reduce existing surpluses. However, there are fixed costs (taxes and insurance on the manufacturing facilities, etc.) that now have to be spread over a smaller number of items. Since the item was at break even, either the price goes up or the loss kills the company.
- Increased price puts the product out of reach of even more people, thus further lowering the demand, thus starting another cycle.
This would involve a peculiar circumstance where we invested an enormous amount in very inflexible industries with huge economies of scale, where profit margins were tiny. These industries would have to be a huge slice of the economy - maybe almost all of it. All entrepreneurs across all sectors would have to be figuring "Okay, we can make money out of this, but only barely, and only if the production run is huge. We can't recoup our money, so this better work out!" I just don't see it as being very likely to happen. Maybe in a couple sectors, over-exuberance leads to malinvestment in high-capital tech, but even in a sci-fi world, surely production is more flexible than this, and can scale back without breaking the spine of the economy, leaving us spiralling down into the stone age?
Quote:And what would that be? Punctuation poems? Covers of 4'33"?
We pay people for stupider things. And, if we had overwhelming resources to waste doing so, why the heck not? What would be stopping us from our John Cage festivals, if we could produce a million flying cars with the press of a button at mind-boggling speed and efficiency?
Quote:Really?
Yes, really. We do what other people are willing to pay us to do. When people are phenomenally wealthy, they will pay to have people do all sorts of banal things.
Quote: It is very different. Right now we have a heterogeneous system. It's like a box of gas that is warm in some spots and cold in others. There is heat flow, but the heat flow is a transient phenomenon. Eventually, it will be homogeneous, and the heat flow will end.
I think this metaphor is getting a touch obscure for my understanding. Surely you are not suggesting a world in which the production of everything requires homogeneous inputs and processes, for both goods and services, to the point where there is no division of labour at all? Or where the poorest are capable of doing nothing to earn some meager pennies, even if every penny they earn can buy a fleet of flying cars, because we can make those a million at a time with the press of a button?
Quote:The thing is, solutions requiring eons and galaxies are not too practical for the problems of an entity that lives decades and occupies about 25% of one planet.
Surely your science fiction dystopian scenario is not meant to apply to the here and now, where the economy looks very little like this? Unless they extend my lifespan, surely I will not live to see robots outperform humans at all non-idiotic production and services except the super-elite creative jobs.
-Jester
RE: Inflation mystery. An Aha! moment for me. - kandrathe - 06-29-2011
(06-29-2011, 12:57 AM)Jester Wrote: Loans are not subsidies that can be expected to reduce "retail" prices. They are money given in order to afford high prices, not a bargain made to keep prices down. Perhaps it amounts to the same thing in the end, except that, if your measurement of education costs is not total spending, but tuition, then you end up with a higher result.I guess the question is whether the price(and perceived value) causes enough students to stop, or transfer. Or, are they so committed to pursuing this course that they blindly plow forward, regardless of cost, to attempt to get through it. In that case, price becomes inelastic, and to a point they will spent more, especially when the government gives them the money up front. And... Since it is a loan program, the regenerating pool (Perkins and Stafford Loans) of available money grows at the interest rate, so one might speculate then that the inflation rate on tuition also would tend to grow at the interest rate (5-6%). Also, being that they are backed by the full faith and credit of the US government, there is no risk for institutions in building them into financial aid packages.
For most students, their student loans will be their first experience in trading their future earnings to pay for today's requirements. I really don't think many of them think about it very hard. The discount rate is a built in expectation in the decision making process for competitive schools, in other words, hardly anyone pays full price. Generally, it is a no brainer decision if you opt for a more vocational degree that increases your earning value. Too bad if you really really want a liberal arts education.
RE: Inflation mystery. An Aha! moment for me. - --Pete - 06-29-2011
Hi,
(06-29-2011, 01:12 AM)Jester Wrote: Unless they extend my lifespan, surely I will not live to see robots outperform humans at all non-idiotic production and services except the super-elite creative jobs.
Get out of your moss covered ivory tower and tour a modern automotive assembly plant. The future is 1980s. Most production processes that are not automated are either being done by labor still too cheap to replace or are being done by one man suppling the guidance to a machine replacing hundreds of manual laborers. Go to a major shipping port. Look at how cargo is handled, one crane operator doing the job of dozens of stevedores.
--Pete
RE: Inflation mystery. An Aha! moment for me. - Drasca - 06-29-2011
(06-29-2011, 05:14 AM)--Pete Wrote: Go to a major shipping port. Look at how cargo is handled, one crane operator doing the job of dozens of stevedores.
--Pete
One very well paid crane operator. The barriers-to-entry for that job is very high (skills, certifications, clean records), given the value of the cargo and potential cost of failure, it bars the majority of people desiring the job from taking the job--though not necessarily mental acuity but personal responsibility (primarily clean record). I think it is not only the robots, and their owners, but those operating and maintaining the robotics involved.
There still seems to be a large gap between menial jobs and educated / skilled / qualified workforce but what is considered skilled or qualified is a bit more varied than just sheer mental agility. Also, some of those with ability do not have the desire to do certain jobs. That very same crane operater may not desire to do the graveyard shift, and the current (shrinking) tendency for fewer women in technical/engineering than men. I have seen many women just as potentially capable, but with absolutely no desire toward technical jobs, but I have also seen growth toward parity (of which I am happy to see).
Medical services does indeed seem to be a booming industry overall. We live longer in part because it is so varied and specialized. Dying at 30 might've been the norm at some point, but now it is a tragedy to die so young.
RE: Inflation mystery. An Aha! moment for me. - Jester - 06-29-2011
(06-29-2011, 05:14 AM)--Pete Wrote: Get out of your moss covered ivory tower and tour a modern automotive assembly plant. The future is 1980s. Most production processes that are not automated are either being done by labor still too cheap to replace or are being done by one man suppling the guidance to a machine replacing hundreds of manual laborers. Go to a major shipping port. Look at how cargo is handled, one crane operator doing the job of dozens of stevedores.
Funnily enough, I actually did go to a modern automotive assembly plant this year, tagging along with our "ivory tower" business history class field trip to the Lotus factory in Norfolk. It actually surprised me how little was done by automation, and how much was still hand assembly. Now, Lotus is not Ford, and scale matters. What it taught me is that, at least for the foreseeable future, there is still a large role for human input into manufacturing, especially where flexibility and customization are important product features. (Not everyone wants their Model T in any colour they like, so long as it's black.) The workers in the factory were skilled manufacturing employees, but they were hardly some kind of creative elite.
However, you're right, we do more with fewer people as time goes on. The resources that were saved by not hiring stevedores can be put to use somewhere else, making the real costs of things drop. This means it takes fewer work hours to earn a given standard of living, so people can either take it easier, or work in more esoteric jobs. Might look a little strange to us, but there's no reason to think it will cause the economy to implode.
-Jester
RE: Inflation mystery. An Aha! moment for me. - kandrathe - 06-29-2011
(06-29-2011, 10:39 AM)Jester Wrote: However, you're right, we do more with fewer people as time goes on. The resources that were saved by not hiring stevedores can be put to use somewhere else, making the real costs of things drop. This means it takes fewer work hours to earn a given standard of living, so people can either take it easier, or work in more esoteric jobs. Might look a little strange to us, but there's no reason to think it will cause the economy to implode.
Check out Martin Ford's online (free) book, The Lights in the Tunnel: http://www.thelightsinthetunnel.com/
"THE LIGHTS IN THE TUNNEL employs a powerful thought experiment to explore the economy of the future. An imaginary "tunnel of lights" is used to visualize the economic implications of the new technologies that are likely to appear in the coming years and decades. "
I think that while, buggy whip makers retooled themselves into auto plant workers, there is at each wave of automation a reduction in the needed number of workers.
We can imagine the day when the robots are self repairing, and there are still a few jobs in designing robot improvements. We probably have past the point where an automated worker is "better" than a human worker as measured in lifetime costs and benefits.
Another way the global economy is viewed is by sector, where certain sectors, like manufacturing (production) are wealth generating, while others like government, or the service sector are wealth consuming. In the US, we've migrated the bulk of our economy to government, retail and health care, which are wealth consuming. Now, much of this is redistributive in moving wealth from the consumers, through the distributors, to the producers. In the macro, you can determine that as long as your per capita gross domestic product is increasing, then your people are better off today than they were yesterday.
![[Image: RealGDPperCapita-650x450.png]](http://visualecon.wpengine.netdna-cdn.com/wp-content/uploads/RealGDPperCapita-650x450.png)
You can see that structurally, we are experiencing an economic problem in the US, as big as the great depression, or the aftermath of WWII. A large amount of "paper wealth" disappeared in 2008, and we may not get back to even in this decade. The assumption is that this curve will continue to rise eventually. I hope we are not past the peak, and climbing down the mountain.
RE: Inflation mystery. An Aha! moment for me. - --Pete - 06-29-2011
Hi,
(06-29-2011, 10:39 AM)Jester Wrote: It actually surprised me how little was done by automation, and how much was still hand assembly.
I did say "modern". I've gone to Renaissance fairs, but I don't assume all butter is hand churned.
There are two factors slowing automation: labor unions and cost. The first is becoming less powerful as the economy becomes more globalized. The second is becoming less important as the robots themselves are being built by robots.
(06-29-2011, 10:39 AM)Jester Wrote: Might look a little strange to us, but there's no reason to think it will cause the economy to implode.
My crystal ball is broken, and I'm not a seventh son, so I guess I'll just have to wait and see.
--Pete