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this post was submitted on 26 Feb 2024
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The last time USA had extended deflation, the Great Depression happened. When people stop consuming, retailers fire their workers. Then fewer people can consume, so more people get fired. This goes on enough, then its not just stores who fire workers, but it trickles to factories, R&D, office workers, etc. etc. The longer deflation happens, the further it spreads and the more people lose their jobs.
Ever since the Great Depression happened, US Policy has been strongly anti-deflation. Our policy is to "err" on the side of slight inflation.
So what happens when retail workers don't get paid enough to consume even with jobs?
Prices drop, causing more people to get fired. IE: The Great Depression. Or if you want a modern economy that's undergoing this shift, just look at China right now.
If people can't afford things, your only choice is to fire workers and drop prices further. That's just economics. (Why do you need workers? No one is buying anything, so fire your workers. Duh). The more people realize that this is the only strategy to survive, the lower prices get, the more people get fired, and the less that people can consume. It gets worse and worse until economists change policy and pull you out of this.
This is why we have large pseudo-government central banks keeping watch over our economy. Deflation cannot be tolerated. Yes, inflation sucks, but at least people still have jobs and livelyhoods in times of inflation or hyperinflation even. That's actually survivable. Deflation is NOT survivable, it sucks so much worse. Deflation is all-hands-on-deck we need to work together kind of situation. We never want to push the economy to that direction.
China isn't doomed btw. China's plan is to exports goods to Europe and hope that Europe buys enough Chinese crap that they can kickstart demand again. And as prices drop further and further, Chinese goods will get cheaper, and crap like Temu will pop up to sell these cheaper goods to everyone. Now there's geopolitical repercussions to this (not everyone will want to support such "dumping" of goods into our countries), so there's no guarantee that China will be successful on this front.
In that case tie minimum wage to inflation so no matter how bad inflation gets the poorest don't lose their shirts (and stop consuming)
Oh, so in times of deflation you want minimum wages to drop automatically? Deflation is "negative inflation". I'm talking about the inverse scenario compared to what you're talking about. Sorry, that sounds like a terrible idea.
And unfortunately for your argument... despite the high amount of inflation in 2022 and 2023, consuming rose dramatically. Or did you forget how ridiculously overpriced everything got, all those shoes / collectables people bought and the stock market skyrocketing as too much money was flooding the markets?
That's called an "overheated economy", too many people did too well during the times of inflation. That's... kind of the problem. Inflation happens when lots of people make more money.
IE: Emperically speaking, we can just look at the results of the last ~3 years of the USA's economy. Consuming went up with inflation, just as expected. There's no need to "encourage" consuming during inflationary bubbles.
In fact, what got inflation under control was the huge amounts of +Interest Rates encouraged by the FFR. Did you not notice the dramatically higher credit card rates that are cutting into people's budgets? That's almost by design, increasing the FFR increases all loan costs (house mortgages, credit card bills, and car loans). That's how we fix inflation, by kind of destroying money / taking money away from people.
We should have increased taxes instead IMO, so that our budget could have been managed better. But whatever, inflationary-bubbles are caused by over-consumption. The goal when inflation/hyperinflation is occurring is to cut back on consuming, and you discourage that by doing policies that are deflationary in nature.
IE: The Fed is currently slamming on the brakes (ie: doing policies that risk a deflation right now), to cut back on the chances of inflation. That's why retailers are scared, they're worried that the Fed is pumping the brakes too hard / increasing interest rates too much right now.
So should wages for poor people ever go up, in your opinion?
What's your opinion on legislation that would tie wages to their ROI for the business?
Edit: Why not force large corporations to pay their CEOs less so they can raise wages for their employees while keeping prices the same? It seems like you/economists realize corporations will let the country go to shit while stealing as much of the profit as possible and prefer that average workers deal with the detrimental impacts.
More like wages are kind of irrelevant from a macroeconomic perspective. Money doesn't matter. We can double our money supply tomorrow and it won't make anyone's lives easier.
See Argentina's minimum wage, and tell me if that solved any problem at all.
But... if increasing the minimum wage makes you feel better I'm not against it. I just don't think its the right focus to have on a policy front.
That sounds like a good way to kill innovation, as most companies that innovate lose money year-over-year for long periods of time.
The entire damn point of the stock market is to take people who like to take risks with their money (ie: investors), give them a story about how money line goes up, and "trick" investors into shoveling money into money-losing businesses until those businesses catch a good wind and make money.
In many cases (ie: MoviePass), everything collapses and everything sucks afterwards. In other cases (ie: Netflix, Amazon, Microsoft, Apple), life gets better in the long term. Its near impossible to tell the difference (do you think Uber is going to collapse? Or do you think Uber will become another major player of our economy? Do you think NVDA deserves all the extra money they got last week? Or is that a bubble?). But the important thing is that the USA has a large group of shareholders and investors who like making such risks, and who take the responsibility (ex: lose tons of money) if these bets go sour.
The goal is for us as an overall economy to make new things, and improve the lives of everyone. Money strangely enough, doesn't do that. We improve the lives of everyone by producing more, thereby giving everyone more dishwashers, homes, cars or whatever they need.
The big problem with the current "economy" isn't anything in general. USA's general economy is actually very good and people should be proud of what USA has accomplished in the past 3 years. The reasons why life sucks are outside of what economic forces can do. Ex: Housing prices skyrocket because we've been building fewer and fewer houses each year for the last 20 years.
https://fred.stlouisfed.org/series/HOUST
This is despite population growing more-and-more.
https://fred.stlouisfed.org/series/SPPOPGROWUSA
So guess what happens when housing supply drops while population increases? No one can afford a house, and there's no economic policy you can do to force people into buying houses (ex: increasing wages) because there's simply not enough houses in our country.
Until we build more houses, we ain't gonna get more affordable houses (at any wage). The focus on money is counter-productive. The focus needs to be on houses or other goods/services in the economy. (Ex: not enough nurses, not enough doctors, not enough etc. etc. etc.)
Investors/shareholders risking their own money to make new services, new goods, new technologies is fine. That's the part of our economy that works. The problem is that we've got a $HundredBillion plowing into crap companies that won't do anything ever... but somehow somewhere our economy has forgotten the basics like housing starts. Maybe its regulatory (too many NIMBY laws that outlaw cheap housing), or something. But we have the investor-money, we have the culture, we have the materials. We just need to actually build the damn houses.
One issue with raising taxes as a tactic for slowing money supply growth is that it is not very agile. Once inflation gets back under control, Congress is not automatically going to lower the tax rate. I do agree that we should raise taxes but that's more for four the budget deficit and the high wealth inequality.