US economist Adam Posen has an article I recommend reading in the FT this morning (and you can read 30 articles a month, free). The headlines say enough to summarise the argument:
First, there is an army of hidden jobless people, many of them supposedly self employed.
Second, this is massively damaging in multitudinous ways, from mental well being, to sustainability, to old fashioned growth if that's what you want.
Third, inflation is much less worrying - unless you're very wealthy.
And that's what economic debate on rate rises is about now. It's pretty much down to class struggle - wealth versus the rest. Maybe it was ever thus.
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Richard-it’s a quid for 30 days -no longer free!
All the damaging effects of unemployment are seen as ‘externalities’ which is an Alice in Wonderland form of thinking which dominates economics today.
These ‘externalities’ are really ‘internalities’ and should be seen as such.
The costs to society of all this nonsense is far greater than the fictional cost of so-called national debt to future generations.
Thanks for retweeting and reposting the link: my phone dropped the link on the way in to work.
Your third point, that inflation is much less worrying unless you’re very wealthy, is am interesting one: wealth deployed in productive enterprises is somewhat shielded from inflation – cost increases can be passed on, and wage *growth* (not wage inflation) evens out as increased demand; but wealth deployed in the purchase of rents is much more vulnerable.
There is, of course, the question of inflating rents, especially in housing; but a Monetarist’s view would be that rising rents in London are not a decline in the purchasing power of money – they are a loss of purchasing power by a specific population segment and a corresponding gain for others, with a neutral or deflationary effect on the economy as a whole.
Which is to say: always ask ‘ Inflation for whom? ‘
* Not that I defend Monetarists: they are supposed to know about this, but their public pronouncements always seem to be an ideological prop for policies protecting rents.
Ti the vast majority with wealth inflation is of great interest
They own debt
Debt is educed in value by inflation
That is why inflation is deemed a ‘bad thing’
Of course there are exceptions – but this is the rule
Inflation hurts the very wealthy, who mostly invest in “real” assets, far less than those around the median who have modest cash savings which are eroded by inflation, while the monetary value of equities and property is inflated by artificially low interest rates. The wealthy have £trillions invested in property and equities whereas the vast majority of UK government debt (£1.4tn is horrendous but less than half the value of equities quoted on the LSE and AIM) is owned by insurance companies who are obliged by regulators to hold it.
So your assumption that the very wealthy are hurt by inflation paints a very partial and incomplete picture.
Those who are worst hit by inflation are those on fixed incomes (e.g. most working-class private sector pensioners).
Partial maybe
But so too is your view, I think
Quite. Debt is a rent on a nominal asset: it’s pure money, the ‘asset’ and the cashflows are reduced in real value by inflation.
Equity investments are an odd case: they represent a share of real assets and a share in payments relating to trades occurring in real terms. In theory, these real values are unaffected by a reduction in the purchasing power of a nominal sum of money.
In practice, equities (and all real-world business processes) are asigned a value based on the net present value of their future cashflows.
That net present value is calculated on *nominal* assets (discount curves for bonds). So equities and business transactions for tangible assets are less valuable in nominal terms when inflation rises, as if they were nominal assets declining in their purchasing power for real goods and services.
it’s an interesting anomaly and I’d love to know a way of arbitraging it.
I think your view of equity valuation is far too theoretical
There is no claim on assets at all
And NPV calculations are made up (literally) in every case I have ever seen – none of us are clairvoyant. Equity valuations are gambling hunches backed by big stakes
I thought inflation was bad if you were poor because prices go up and your wages don’t?
The rail price increase is scandalous in my opinion
That’s an issue too – but not why inflation is seen as a bad thing
Richard
i’m not convinced there is this link between unemployment & inflation. The BoE has kept rates at record lows for 5 years now &, in truth, it has done little to reduce unemployment. The Govt have reduced “unemployment” on the surface by aggressively forcing JSA claimants onto self-employed status although there is often, in truth, no work for them out there.
If we were to do as you suggested, & require Pension Funds to invest in British industry, if we were to actively require the ban k s that, supposedly, we all own to invest in small businesses & were we to scrap Osbourne’s despicable “right to sell at a inflated price” scheme & use the money to build social housing, I’m not sure it would lead to inflation & I don’t think it would be derailed by the BoE putting up interest rates near to their historic norm.
And I agree with you
Inflation is a means of eroding the value of wages, yes – if _real_ wages fall then, ceteris paribus, the number of unemployed also falls, in neo-classical economic theory, which is why neo-classical economists view trade unions as a bad thing, because they cause wages to be ‘downwardly inelastic’ (and for inventing jargon like that, neo-classical economists should be taken out and shot!).
Insofar as there has been a decline in unemployment not accounted for by factors such as the rise in McJobs, zero hours contracts and self-employment recently, then a fall in what these economists are pleased to call ‘voluntary unemployment’ (http://www.bized.co.uk/reference/glossary/Voluntary-unemployment) is responsible. (Voluntary only in the sense that the wages being offered are inadequate to even feed and clothe people’s children!) Iain Duncan Smith wants to reduce it even more by cutting the level of benefits, arguing, with the Cato Institute in the US, that ‘welfare’ constitutes a ‘disincentive to work’. (In that case, why not abolish the ‘welfare system’ altogether, and his job with it?) No attempt has been made, of course, to stimulate demand in an effort to combat cyclical unemployment, which is the real cause of the unemployment we have currently, thanks to the 2007-8 Credit Crunch and its aftermath.
Inflation is obviously bad news for holders of capital assets, because if you have, say, £500,000 of shares in company X, and there is 5% p.a. inflation, at the end of a year the real value of your shares will have shrunk to £475,000.
Yet a rise in prices is not the same thing as inflation: it is only if _all_, or most, prices are rising, consistently, over a sustained period, that one has inflation. Otherwise one has to talk in specific terms: house-price inflation, wage inflation, and so on. The NHS has its own rate of inflation, somewhat higher than either CPI or RPI inflation, which is why the Government’s talk of the NHS getting a ‘real terms’ increase in spending is absolutely meaningless. The NHS needs a ‘volume terms’ increase in spending just to stand still!
Agreed – bar shooting economists, of course