Cool, more theory. Explain this then. Deflation in EU, China and Japan at the same time we see economic growth.
Overall, gains in productivity don't lower inflation, they raise consumption
Productivity has outpaced wages for like 6 decades now. They only raise consumption amongst the wealthiest. Most consumption growth in lower and middle income households has been fuelled by easier access to debt and financing options
This reduces your budget constraint and reduces the money stock
You are treating deflation and recessions as the same thing. Productivity can 100% lead to deflation (e.g. EU, Japan, China). It's a policy choice as to whether to allow that or not. The US specifically prefers to keep inflation. EU as well, but they're not as good as getting their ultra wealthy to consume more.
I understand the theory. Cheaper prices in X, leads to more consumption in Y. That works for goods people were going to buy anyways, i.e. inelastic demand goods. Solar panels do not fall in that category. If solar panels are expensive, we simply just don't purchase them.
But you reveal something interesting. Which products are increasing/decreasing in price matters.
Look at the basket of goods that make up CPI. Are those goods elastic or inelastic. Housing costs is up. Energy costs are up. Food costs are up. Electronic prices are down. Transport cost are up. Healthcare is up. Childcare is up. Entertainment is down.
Everything we need is up. Everything that is optional is down. AI tokens are subsidised while electricity costs go up. This is the nature of inflation in the US
Deflation in EU, China and Japan at the same time we see economic growth.
China inflation rate over the last 20 years has been ~2%. EU and Japan similar.
Japan is actually the textbook example of what to do when facing persistent deflationary pressures. The BoJ had interest rates at 0% by 1999, started QE in 01, had negative rates in 2016 along with yield curve control for like 7 years. IE -- they dramatically expanded the monetary base.
Productivity has outpaced wages for like 6 decades now. They only raise consumption amongst the wealthiest. Most consumption growth in lower and middle income households has been fuelled by easier access to debt and financing options
That is not true. Median personal and household real wage growth has been positive this entire time, with some of the strongest most recent gains in the lowest wage brackets. Part of the story of the "shrinking" middle class has been people moving up into upper middle class.
Those EPI grapths that compare productivity to wages are just being lazy about their selection of incomes and deflators. its been beat to death
Part of how you can see this is in home prices --> the dramatic rise in home prices is driven by wage gains that are captured land rents. Its literally a right shift in demand caused by additional buying power, and its one reason why inelastic housing supply is so damaging economically.
Productivity can 100% lead to deflation
No, because to get additional productivity you need expansion of money supply to finance investment. Investment is literally the source of the additional $ that creates inflation.
Lets imagine you wanted to create deflation now. Would you raise or lower interest rates?
Cheaper prices in X, leads to more consumption in Y. That works for goods people were going to buy anyways, i.e. inelastic demand goods. Solar panels do not fall in that category. If solar panels are expensive, we simply just don't purchase them.
Inelastic demand means you buy the same quantity at any price. If good X is inelastically demanded, and its price falls, then you necessarily consume more good Y - like solar panels. Unless you take your savings and just bury them in the ground never to be seen again. Nobody does that -- even left in the bank, they fuel the money multiplier.
This is why falls in prices don't result in low inflation -- > you spend your budget. You don't maintain a consistent standard of living fixed to a cetain year, such as 1961, and then just not spend the excess gains. No, you just spend that difference and up your standard of living. To give an example of this -- when my grandparents died, they had something like 10k in the bank to leave to me and my brother: or, in other words, out of the entire lifetime of earnings, they spent all of it except 10k. That is over 99.9%. You and I will be the same, as are the vast vast majority of people.
--- yes, absolutely we need to liberalize more housing development broadly. Immigration can help with that production. Immigration can help with the cost of child care. Immigration is also important to agriculture ( -- the bracero immigration experiment directly tested whether immigration restrictions raised wages here...they didn't), etc.
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u/OpenRole 4h ago
Cool, more theory. Explain this then. Deflation in EU, China and Japan at the same time we see economic growth.
Productivity has outpaced wages for like 6 decades now. They only raise consumption amongst the wealthiest. Most consumption growth in lower and middle income households has been fuelled by easier access to debt and financing options
You are treating deflation and recessions as the same thing. Productivity can 100% lead to deflation (e.g. EU, Japan, China). It's a policy choice as to whether to allow that or not. The US specifically prefers to keep inflation. EU as well, but they're not as good as getting their ultra wealthy to consume more.
I understand the theory. Cheaper prices in X, leads to more consumption in Y. That works for goods people were going to buy anyways, i.e. inelastic demand goods. Solar panels do not fall in that category. If solar panels are expensive, we simply just don't purchase them.
But you reveal something interesting. Which products are increasing/decreasing in price matters.
Look at the basket of goods that make up CPI. Are those goods elastic or inelastic. Housing costs is up. Energy costs are up. Food costs are up. Electronic prices are down. Transport cost are up. Healthcare is up. Childcare is up. Entertainment is down.
Everything we need is up. Everything that is optional is down. AI tokens are subsidised while electricity costs go up. This is the nature of inflation in the US