(no subject)

[eirias]

After a heated discussion last night about tipping points and the choice/need of women to work for pay, I decided to look at data on inflation. One person had asked whether there was an uptick in inflation during the years that women began to enter the workforce en masse (I'm talking middle-class women here; I know that poor women in cities have never actually had much choice).

Anyway. That's just backstory; the point is, I found a site that lets you graph a bunch of different US economic indices back to the earliest days of the republic. I figured the consumer price index would show me what I wanted to see, so I generated this graph (1800-2007).

The graph shows a few things I expected -- war related upticks, relatively higher growth in the fifties and sixties compared to what preceded it; and then it also shows this inflection point circa 1970, where you start seeing massive inflation that is never reversed. (You can see it in charts of yearly inflation, too; before 1970 there were years with positive and negative inflation; afterward, it's always been positive.) Yes, yes, the stagflation of the seventies is legendary, but why has the CPI continued to increase substantially every single year since then, when it didn't before? Did the rules of the economy change in some fundamental way? What's going on and what am I missing?

Comments

[tiurin.livejournal.com]

I think that the need of women to work for pay isn't as tied to inflation as it is to something else- school quality. Here's the book that made me think this was the case. (http://www.amazon.com/Two-Income-Trap-Middle-Class-Mothers/dp/0465090826) Once some women decided to work so that they could afford a house in a better school district, other women did too...and the massive prisoner's dilemma was on. So we're now stuck.

The rules of the economy did change in some fundamental way around 1970. Before 1971, the Bretton Woods system was in effect and the US Dollar was convertible to gold(and most major currencies had a fixed exchange rate relative to the dollar). Nixon, for a number of reasons including inflation and an ever-growing trade deficit, punted Bretton Woods and suspended gold convertibility when it became obvious that the US would quickly be left with no gold reserves. Once Bretton Woods went out the window, all currencies were left to float against each other, which meant that there was far less restraint as far as fiscal discipline went. The US in particular saw this as license to run the printing presses, since the American dollar was still viewed as the world's reserve currency. The current weakness of the dollar is the end result of 40 years of screwy fiscal policy. We might've been able to avoid it had not Bush II done an epic fail.

The scary thing is, I believe that the basic basket of goods for the CPI has been revised a few times to hide the true inflation rate- i.e. substituting hamburger for steak in the new revision, etc.

[eirias.livejournal.com]

That is all terribly interesting and helpful. (And does back up the substance of my argument, which was that, for good or ill, women's choice to work effectively raised the cost associated with choosing *not* to work.)

I'm going to check out that book. It sounds like it touches on a *lot* of things that interest me right now, as a late-twenties married person contemplating choices about career, kids, and housing. Perhaps after phase II of the move, though... might not be smart to buy stuff before moving 1,000 miles ;).

I'm glad I know you! You know useful stuff.

[nonnihil.livejournal.com]

I'll state it more strongly -- the "Two-Income Trap" has less than zero to do with overall inflation. More people working means more goods in the economy, but doesn't reduce expected future returns on capital, so increases in the labor force are generally deflationary.

It's only in fields that suffer astonishingly horrible cost-disease and status competition effects (like, eg, education and, uh, education) where a two-income-trap situation can take hold, and inflation would be limited to those fields if not for some external fiddling in the money-supply.

[eirias.livejournal.com]

Okay, I'm confused. More people working for pay means that families have more money to spend; how does this not lead to price increases for the things that families buy? Isn't the price of consumer goods tied to purchasing power? I mean I suppose if that excess is all going to real estate, that'd explain it, but I'm stuck somewhere in your explanation.

I'd not heard the term cost-disease before; it's interesting, and relates to something I've been noticing over the last year, which is that jobs that primarily involve working with other people have lower status and pay, and this can even be seen within some professions (within academia, the people who only teach are paid less and respected less; within medicine, the people who only see patients are also respected less, as far as I can tell, but I'm not sure about the pay). I'd wondered why this should be the case and this seems to me like one explanation.

[jpfed.livejournal.com]

how does this not lead to price increases for the things that families buy? Isn't the price of consumer goods tied to purchasing power?

Those prices are also tied to production. More people working increases the supply of things that people buy, which is a force driving towards lower prices. I don't know which of the forces (purchasing power vs. increased supply) ends up being more powerful.

[nonnihil.livejournal.com]

Okay, I'm confused. More people working for pay means that families have more money to spend; how does this not lead to price increases for the things that families buy? Isn't the price of consumer goods tied to purchasing power?

The money being paid out to those workers would still have existed even if it weren't being paid to them, and would presumably have been spent by other people on other stuff. Increases in total wages will be no greater than the increase in total production, or else companies would have had no reason to hire those extra workers. So adding another worker doesn't actually add to the stuff-to-money ratio and so doesn't add any inflation to the economy.

It is true that in the 70s some people thought that inflation was caused by greedy consumers ("demand-pull inflation") and greedy businesses/unions ("cost-push inflation"). As far as I know nobody outside of the popular press believes this any more.

Cost disease is a huge and weird subject in its own right, which I'm not even going to touch here.

[eirias.livejournal.com]

The idea that the only money-supply problem that matters is how much money there is, and that who has it is irrelevant to pricing -- that's pretty counterintuitive to me. Huh.

[ukelele.livejournal.com]

I am wondering (and I am so not an economist) if the dissonance might be a matter of scale? nonnihil is describing overall values of stuff and money, whereas I imagine you're thinking in terms of individual lifestyles. Maybe the way the money is distributed around the stuff is different if the way the money is distributed around the people is different?

(I also feel like putting lots of women into the economy must have ultimately increased the amount of available wealth for reasons of comparative advantage/productivity, but again, I am not an economist. Or perhaps this is one of the aforesaid things economists would massacre nonnihil for.)

[eirias.livejournal.com]

I am wondering (and I am so not an economist) if the dissonance might be a matter of scale? nonnihil is describing overall values of stuff and money, whereas I imagine you're thinking in terms of individual lifestyles. Maybe the way the money is distributed around the stuff is different if the way the money is distributed around the people is different?

Maybe that's it? I'm not sure. I just keep thinking, okay, well what if ten people had a ridiculous proportion of the money; where would the CPI be, compared to if the same total wealth were spread about among more consumers? And I can't help but think it would be much lower in the case of vast disparity, because people would still need to eat, and people would still need a market for their steak (or, pace tiurin, ground beef).

[nonnihil.livejournal.com]

One thing that happened in the '70s (and tiurin's point could be considered a more cynical interpretation of this) is that there emerged a concensus among central-bank economists that deflation was a awful terribly horrible thing (principally because it makes it impossible for central banks to manipulate the money supply in their usual ways) and that economies should aim for a constant rate of inflation. Certainly it is generally accepted these days that constant, predictable inflation is no big deal; variability is considered a much greater problem.

[eirias.livejournal.com]

Also very useful. How does one aim an economy in such a way as to control inflation? Is it accomplished primarily through the setting of interest rates?

[nonnihil.livejournal.com]

This is a complicated and disputed question to which more words have been devoted than could fit in many volumes.

Roughly, price levels change as the ratio of the change in the amount of circulating money in the economy to the change in the amount of circulating stuff to buy with that money. (Naturally, both "money" and "stuff" are tricky to measure and impossible to adequately define...). So you can inflate the economy either by having more money or by having less stuff. Central banks control the amount of money in various complex ways, and they try to keep the change in money supply just slightly higher than the amount of stuff in the economy.

Target interest rates are one way that a modern central bank adds money to or removes money from the economy. An interest rate can be thought of as a measure of how much a given chunk of change is worth as circulating money versus as something else (eg, a bond). So one way to view this would be: Raising interest rates says "your assets would be worth more as investment than as circulating money" and so induces people to circulate less money; lowering interest rates does the opposite. An interest rate is a preference for the future over the present.

So if the economy is producing less stuff then the central banks raise interest rates to pull money out of circulation and keep prices in check; if the economy is producing more stuff then the central banks lower interest rates to pull more money into circulation and keep prices from falling. (In point of fact, this is almost exactly the opposite of how real central banks do things -- they typically buy or sell bonds until market interests rates are close to their targets, rather than dictating rates directly -- but it is conceptually correct.)

The latter effect is more common -- a growing economy, without any intervention, tends to produce more stuff and so to deflate -- so most of what the central bank does is to dump money into the economy by buying up government debt in exchange for newly printed money.

Now about three million economists are going to leap on me for the enormous technical errors in what I just said...

[eirias.livejournal.com]

Thanks for your explanation; I can reassure you that three million economists almost certainly do not read my blog ;).