Why a small amount of inflation can be helpful.

[Daniel Unplugged]

I'm no Keynesian, but there is a reason why 2-3% Inflation is good for the economy. I'm not saying that this reason outweighs all the reasons why inflation is bad either.

 

For the purpose of this post, inflation=price inflation=an increase in overall prices in the economy.

Real wage=nominal wage/inflation rate=purchasing power of wages.

 

 

In the absence of inflation, it is damn near impossible for real wages to fall in line with market forces. For starters, It's pretty much illegal to cut someones nominal wage. It is also very very bad for employee morale. Bad employee morale is bad for business, so businesses are often willing to pay slightly higher than market wages, in order to avoid the employee backlash of a nominal wage cut. If the market demands a real wage cut, and employers are unable/unwilling to provide it, it results in an oversupply of labor (unemployment), and incidently, a profit margin that is somewhat smaller than it should be. A small 2-3% inflation negates this problem, since it allows employers to cut their employees real wages by 2-3%, by having a nominal wage freeze. This way, real wages can fall (if the market demands it), the employees don't revolt, supply and demand are kept in balance, and resources are allocated efficiently.

 

It all comes down to the psychology (and lack of economic literacy) of employees. (Of course not always) employees prefer a nominal wage rise of 1% with 3% inflation over a 1% nominal pay decrease with no inflation, even though they are actually worse off.

[Kevin Beal]

The problem is not inflation per se. The problem is a violent monopoly on currency. And a monopoly on an inflationary currency is the worst of all worlds, for all the reasons I'm sure you're already aware of.

 

One solution to the problem you presented is not to have an hourly wage and instead have other methods of compensation (like as a percentage of a budget or a per project basis).

 

Also, you could develop your own internal crypto-share currency that you get paid in that is redeemable for whatever currency people are using at the latest exchange rate.

 

And there is a flipside to the problem you presented, as well: you don't have to give people raises since their compensation is worth more.

 

Also, maybe I've just missed something, but inflation hits business owners just as much (if not more) than their employees, doesn't it? So, while they may be paying less in employee compensation, they have less money to go toward that compensation.

 

You could be pro-inflation and pro-bitcoin. Strictly speaking, bitcoin won't be deflationary until 2140. That's assuming some better currency technology doesn't take it's place by that time. The vast majority of all technological innovation in the known universe will happen in that time. And that's insane.

[PatrickC]

It all comes down to the psychology (and lack of economic literacy) of employees. (Of course not always) employees prefer a nominal wage rise of 1% with 3% inflation over a 1% nominal pay decrease with no inflation, even though they are actually worse off.

 

Why would an employer want to cut wages when there had been no inflation?

[MrCapitalism]

Fire your higher paid employees, and then hire then back at the lower wage rate.

 

They're happy to have a job, you're happy to pay them less. Morale problem solved!

 

What about the effect the rate of inflation will have on decisions concerning saving, borrowing, or investing?

[dsayers]

there is a reason why 2-3% Inflation is good for the economy

 

Could you define inflation please? Under a State monopoly, you're talking about an artificial increase in the money supply, which is theft of value. This is bad for 99% of folks and could not be described as good for the economy.

 

Also, could you define "real wage" and compare/contrast it to wage? I view use of this phrase as a red flag.

[Daniel Unplugged]

Why would an employer want to cut wages when there had been no inflation?

To increase profits of course. Everybody wants lower prices for what they purchase. Employers are no different to consumers in that regard. Notwithstanding what I said in the OP, employers will always demand, and receive, a reduction in wages, if, and only if, the market allows it. Granted, only rarely does the market demand lower real wages, a big exeption being the US in the last 30 years. Don't forget that the US is far from a free market.

[MrCapitalism]

Wouldn't the employees just quit and go work somewhere else? If all the employers tried to cut wages to increase profits, wouldn't the employees just start their own businesses and out compete their old shops by bidding away the workers?

[PatrickC]

To increase profits of course. Everybody wants lower prices for what they purchase. Employers are no different to consumers in that regard. Notwithstanding what I said in the OP, employers will always demand, and receive, a reduction in wages, if, and only if, the market allows it. Granted, only rarely does the market demand lower real wages, a big exeption being the US in the last 30 years. Don't forget that the US is far from a free market.

 

Still not making any sense. Why would a lack of inflation cause wages to decrease?

[Daniel Unplugged]

Could you define inflation please? Under a State monopoly, you're talking about an artificial increase in the money supply, which is theft of value. This is bad for 99% of folks and could not be described as good for the economy.Also, could you define "real wage" and compare/contrast it to wage? I view use of this phrase as a red flag.

I just modified the OP to include definitions, sorry and thanks.Yes I know inflation in a state monopoly is theft, and immoral. I was not, nor would I, advocate it for that reason (it's immoral). Note that the theft aspect of state monopoly inflation barely affects half of people, since half of people hold bugger all dollars (I dont know the exact figures, buy I think about half of Americans have less than $1000 in the bank). If inflation is 3% then the inflation 'tax' is only $30 per year. It is of course, still theft, and still immoral. Anybody who owes more dollars than they have, actually benefits from inflation, due to the reduction in the real value of their debt, and that is most certainly more than 1% of the population.

Also, maybe I've just missed something, but inflation hits business owners just as much (if not more) than their employees, doesn't it? So, while they may be paying less in employee compensation, they have less money to go toward that compensation.

The theft aspect of inflation affects people in proportion to the number of dollars they hold, so if a business keeps a lot of dollars, they lose a lot of purchasing power. Inflation affects all prices equally (including wages), so there is (almost) no net benefit or loss to a person who keeps few dollars in the bank (their wage goes up by 3% and the price of the goods they goes up by 3%. It cancels out exactly).

Still not making any sense. Why would a lack of inflation cause wages to decrease?

It wouldn't. What did I say that caused you to infer that that was I meant? Maybe I was being unclear.

Wouldn't the employees just quit and go work somewhere else? If all the employers tried to cut wages to increase profits, wouldn't the employees just start their own businesses and out compete their old shops by bidding away the workers?

I specifically said 'if the market allows/demands it'.What you are referring to is a situation where the market would not allow it.

Fire your higher paid employees, and then hire then back at the lower wage rate. They're happy to have a job, you're happy to pay them less. Morale problem solved! What about the effect the rate of inflation will have on decisions concerning saving, borrowing, or investing?

Where I am in Australia, that is super dooper illegal. I'm not certain about the US, but I suspect the law is similar. It is not, however, immoral. I disagree that that solves the morale problem. Sure, the employees may accept the lower wage, and continue to work, but it would surely adversely affect morale in the workplace if workers were routinely getting fired, and then rehired at a lower price.There is a million arguments why inflation is harmful, and I mentioned that too. The point of this thread is not to discuss those arguments, but to discuss the argument I presented on the OP.

[Magnus]

The root of problem you've presented sounds more like one of employers wanting to hire lots of employees whose productivity never increase over time.

 

Or, more accurately, the problem is a mass-employment-based business model in which workers are hired to be machine-like functionaries that never vary.

 

That model is facilitated by constant, moderate inflation. Which is another way of saying that in the absence of constant, moderate inflation, that model is less viable.

 

In a non-inflationary environment, raises would generally only occur when they reflected an increase in real value -- work-experience that translates into an improvement in skill or speed or lack of errors or some other aspect of productivity. A raise is given to keep from having to replace the experienced employee with a noob.

 

Inflation allows (i.e., encourages) workers to stagnate, without even knowing it.

 

But that mass-employment based business model is not the only way to have a thriving and healthy economy. Why should the State promote that model above all others (which it does through inflation that facilitates nominal wage increases despite unimproved productivity)?

 

No one knows what a freer economy would look like, but I've always presumed that it would undermine or destroy the drone-like factory worker-employee system that prompted the rise of Communism. The "Satanic mills." It would put constant pressure on the drive to innovate, to work for yourself, and against the mass-employer. I expect a freer society would be more of a society of entrepreneurs and freelancers,

 

The great mass of people would finally own the means of production!

[dsayers]

If inflation is 3% then the inflation 'tax' is only $30 per year. It is of course, still theft, and still immoral. Anybody who owes more dollars than they have, actually benefits from inflation, due to the reduction in the real value of their debt, and that is most certainly more than 1% of the population.

 

I don't follow. Are you saying that theft is good because it reduces people's debt? Inflation would still be theft and in the transaction you're talking about, the debtor is getting stolen from. Please reconcile the square circle of theft is good (for the economy).

[Daniel Unplugged]

I don't follow. Are you saying that theft is good because it reduces people's debt? Inflation would still be theft and in the transaction you're talking about, the debtor is getting stolen from. Please reconcile the square circle of theft is good (for the economy).

Please read my posts again. It's all there.

[dsayers]

I did read your posts. And then I posed that question. So to me, it's not all there. And I offered a counterpoint that should lead to either a revision of your position or a clarification of it. Are you saying you're unwilling to clarify your own communication?

[Jer]

In the absence of inflation, it is damn near impossible for real wages to fall in line with market forces. For starters, It's pretty much illegal to cut someones nominal wage. It is also very very bad for employee morale.

I think you're underestimating the ability of people to learn. Currently, a reduction in hourly pay in fiat money is a reduction in purchasing power. In a true deflationary economy it would only take a few trips to the grocery store or gas station to notice that my money from the reduced wage has the same purchasing power. This is something that could be very easily negotiated in an employment contract. The wal mart manager could set pay based on the price of milk or something similar and the employee's pay could be defined as the BTC equivalent of 10 gallons of milk per hour.

[square4]

It all comes down to the psychology (and lack of economic literacy) of employees. (Of course not always) employees prefer a nominal wage rise of 1% with 3% inflation over a 1% nominal pay decrease with no inflation, even though they are actually worse off.

 

Employers should not take unfair advantage of this lack of economic literacy. They should not give the employee the false impression that the purchasing power of the wage will remain constant.

 

This is something that could be very easily negotiated in an employment contract.

 

In the current situation of inflation, it would make sense for people to include a clause in their contracts that stipulates a nominal wage increase of x% per year (maybe tied to a price index). But why is this rarely done? Some possible reasons:

- thinking unions or government will take care of it

- lack of economic literacy

- short term thinking

- weak bartering position (lack of other job options)

[Magnus]

I'd like to ask the OP if he'll address my question -- how can this situation be considered "good" when, even according to your summary of economic consequences, inflation only benefits some employers?

 

As I said in my response, constant moderate inflation is desired by a certain kind of employer -- one who wants to employ large numbers of low to moderately skilled workers who don't advance much. It's the prototypical factory model.

 

As Hazlitt explained in his famous book, the one lesson of economics is to consider effects as to all people who are involved, and over a sufficiently long time frame.

 

Here, the "good" you've identified accrues to large factory-type employers, but harms everyone else. Also, over time, the effect of constant moderate inflation is to distort the economy in favor of large factory-type employers. They effectively foist some of the cost of their operation (having to give employees more real raises, or lose more experienced employees by attrition) onto the rest of society.

 

Those kinds of crypto-subsidized industries tend to wither and rot -- a kind of Rust Belt phenomenon.

 

I think we can take it as a general principle of politics that every statist intervention in the economy occurs because some small faction wants it to happen.

[PatrickC]

Yeah it seems to me that you haven't particular researched the history of this topic well. Wages throughout the 19th century Britain didn't change enormously, but the cost of 'stuff' did decrease significantly. They seemingly only increased once the govt did deals with bankers in the early 1900's

[Daniel Unplugged]

how can this situation be considered "good" when, even according to your summary of economic consequences, inflation only benefits some employers?

I'm a free market kind of guy. I consider it good overall when prices (including the price of labor) move up or down in line with market forces. Of course it is not good for an employee to have their wage cut, but if that is what the market demands, then overall, I consider it to be a good thing. Yes, only sometimes does the effect I described above help to allow the price of labor to move in line with the market. None of the arguments that inflation causes harm are invalidated by my argument. I agree that the net effect of inflation is harmful, and oppose government induced inflation.I personally, have no problem presenting an argument that opposes my stated position, as long as it is a valid argument. A failure on my part to acknowlege a valid opposing argument, makes me biased, affects my credibility, and would indicate that I am not seeking the truth, but am only seeking reinforcment of my current position. There is enough people doing that, I will not be one of them.

Yeah it seems to me that you haven't particular researched the history of this topic well. Wages throughout the 19th century Britain didn't change enormously, but the cost of 'stuff' did decrease significantly. They seemingly only increased once the govt did deals with bankers in the early 1900's

Was that post meant for my other current thread? It seems out of context here.

[TDB]

Why would an employer want to cut wages when there had been no inflation?

Better than firing everyone?

OP assumed real wages have fallen, so your question is why would that happen without inflation? Either demand for labor has fallen, or supply increased. Or productivity could fall, though that seems unlikely. That's why econ is such a headache, everything affects everything else. I want to say real wages tend to go down in a biz crisis. My head hurts now, curse you for making me think about econ.

 

The real problem is wage-slavery. Entrepreneurs aren't happy when they take a hit to their income, but if it happens, it happens. No one wants to monkey with prices for their sake, so that they are making the same nominal income but might not notice they can't buy as much any more.

 

And in fact, no one is doing it to clear the labor market, either. This entire exercise is a search for the silver lining, when I'd rather think about how to get rid of the black cloud.