Krugman, debt, and growth

[fskimospy]

Debt is also much more necessary just for the average joe to continue the standard of living that they are used to since his wages are not rising to keep up with that inflation. Ir also seriously discourages "capital formation" and forces average people into riskier investments. So while the debt may be easier to pay you end up with a shitload more of it and you don't really gain anything for the increased debt.

I wouldn't call that a good thing.

Just about every economist I am aware of outside of the fake Austrian school believes that steady, modest inflation is a positive thing for the economy.

 

[fskimospy]

Link to source? Where are you getting that real purchasing power increased?
The printing to infinity solution you propose is not novel, Germany and Zimbabwe already tried it and it failed spectacularly. What you're effectively doing is rewarding debt binging, while discouraging savings and capital formation. Such a policy forces one to hand over his money to fund Wall St gambling, or risk living in poverty after retirement. It's policies like this that have dug us into a debt hole so far down that the only option now is to keep digging and printing, because any deflation would inevitably detonate the system.

Yes this is average income, not median, and so the median income numbers would be a bit lower. The point of the chart is the same though. Although the dollar has lost 95% or whatever of its value, the real purchasing power of the average American has tripled.

 

[IHateMyJob2004]

The proven method.

Reduce debt in good times. Spend in bad times. It's simple. The current national debt is not Obama's fault ... it is his stupid predecessor.

 

[Munky]

Yes this is average income, not median, and so the median income numbers would be a bit lower. The point of the chart is the same though. Although the dollar has lost 95% or whatever of its value, the real purchasing power of the average American has tripled.

From what I can tell, that chart simply shows average income in USD. Without also accounting for the price of goods and services, you are simply stating the income, and not the purchasing power of said income.

 

[Darwin333]

Darwin, you still have the assertion in your OP that 'Krugman hasn't been right on one thing without 30 years', you have not provided support, or even responded. Not good.

I made no such assertion and what you are accusing me of doesn't even make sense.

If you would like to debate what the author has asserted we can do that. I thought you were smart enough to know the difference between the two. Not good.

 

[fskimospy]

From what I can tell, that chart simply shows average income in USD. Without also accounting for the price of goods and services, you are simply stating the income, and not the purchasing power of said income.

This is incorrect, it is in constant 2006 dollars as stated on the vertical axis of the graph.

 

[Darwin333]

Just about every economist I am aware of outside of the fake Austrian school believes that steady, modest inflation is a positive thing for the economy.

You didn't answer my question, what is wrong with the Fed actually following its mandate of "stable" which would be no inflation or deflation (obviously you will have small variances over short periods but $100 today buys $100 worth of stuff in 10 years) OTHER than the Federal Governments debt issue?

 

[fskimospy]

You didn't answer my question, what is wrong with the Fed actually following its mandate of "stable" which would be no inflation or deflation (obviously you will have small variances over short periods but $100 today buys $100 worth of stuff in 10 years) OTHER than the Federal Governments debt issue?

Because deflation is widely viewed as catastrophic by the vast majority of economists? (I also have no idea why deflation would be any more 'stable' than inflation)

One of the reasons why economists advocate for modest inflation is so that we are always erring on the side of not slipping into deflation due to how terrible it is. Modest, continuous inflation is the most stable situation you can get.

 

[Darwin333]

You sided with a statement that 'Krugman hasn't been right one time in 30 years', based on nothing. You haven't researched it, found evidence for it.

You haven't defended the assertion when asked to.

You haven't even responded to the request.

You are usually better than this Craig. I know Krugman is one of your favoritist people in whole wide world but you seem to have your panties in a wad to the point that you are making up things.

The statement was "FACT: Over the last 30 years Krugman's prescription has never worked."

The word prescription would imply that the statement did not mean that Krugman has never been right in 30 years but instead that we have 30 years of data to show that what was specifically quoted of him will not work over the long run.

I was hoping you would realize your error which is why I didn't respond...

 

[Darwin333]

Because deflation is widely viewed as catastrophic by the vast majority of economists? (I also have no idea why deflation would be any more 'stable' than inflation)

One of the reasons why economists advocate for modest inflation is so that we are always erring on the side of not slipping into deflation due to how terrible it is. Modest, continuous inflation is the most stable situation you can get.

No, not deflation. Not inflation. Neither. A zero gain or drop in the value of our currency.

$100 buys the exact same thing today and in 20 years.

The Fed has tons of tools to stave off deflation should it be a threat and if that was the real reason they would be targeting much lower inflation rates than they currently are. As it stands today our middle class is getting poorer, even if they make the exact same amount of money as they did a decade ago, due solely to our fiscal policy.


Quick question. Lets say you cash your very first paycheck as an adult (Age 18) and you stick the $500 under your mattress. What will it be worth (in spending power) on the day you retire?

 

[bfdd]

lol @ people worried about government workers losing their jobs. THEY ARE LEECH JOBS, they cannot exist without tax dollars which private citizens pay in. Government employees are paid with tax dollars, taxing them to pay themselves is absolutely retarded and makes no sense. Who cares if someone loses their government job? I mean honestly, who fucking cares? Wealth leeches, that's who.

 

[fskimospy]

No, not deflation. Not inflation. Neither. A zero gain or drop in the value of our currency.

$100 buys the exact same thing today and in 20 years.

The Fed has tons of tools to stave off deflation should it be a threat and if that was the real reason they would be targeting much lower inflation rates than they currently are. As it stands today our middle class is getting poorer, even if they make the exact same amount of money as they did a decade ago, due solely to our fiscal policy.


Quick question. Lets say you cash your very first paycheck as an adult (Age 18) and you stick the $500 under your mattress. What will it be worth (in spending power) on the day you retire?

Your question is irrelevant.

Also, it is not possible to hold prices exactly steady. Not going to happen. I also did not say that it was the only reason, as inflation has a number of other important benefits, but to avoid deflation at all costs you will always see banks hedge on the side of more inflation.

 

[fskimospy]

lol @ people worried about government workers losing their jobs. THEY ARE LEECH JOBS, they cannot exist without tax dollars which private citizens pay in. Government employees are paid with tax dollars, taxing them to pay themselves is absolutely retarded and makes no sense. Who cares if someone loses their government job? I mean honestly, who fucking cares? Wealth leeches, that's who.

You should let the people at the police department, the fire department, the people who build your roads, the water infrastructure, etc that they are all leeches.

 

[Munky]

This is incorrect, it is in constant 2006 dollars as stated on the vertical axis of the graph.

That does not address the price of goods and services. If you're trying to say that it does, I'd like to see how they arrive at that conclusion, not just copy-and-pasting a single graph.

 

[fskimospy]

That does not address the price of goods and services. If you're trying to say that it does, I'd like to see how they arrive at that conclusion, not just copy-and-pasting a single graph.

It definitely addresses the price of goods and services, that's what inflation and inflation adjustment is.

By comparing prices on the CPI between years we can see what a dollar buys in 1990 vs say... 2006. Or in this case a hundred years ago and today. By any reasonable measure the purchasing power of the average American is vastly higher today than it was in the past despite the dollar being worth much less per unit.

That is in fact the primary way in which people declare that the dollar has lost X percent of its value, btw.

 

[xBiffx]

It definitely addresses the price of goods and services, that's what inflation and inflation adjustment is.

By comparing prices on the CPI between years we can see what a dollar buys in 1990 vs say... 2006. Or in this case a hundred years ago and today. By any reasonable measure the purchasing power of the average American is vastly higher today than it was in the past despite the dollar being worth much less per unit.

That is in fact the primary way in which people declare that the dollar has lost X percent of its value, btw.

I am unsure. Inflation tells you the purchasing power of the dollar, in this case, but not the price of goods and services. What I mean is that if a toaster costs X in 1920, you can't figure out what it costs in 2006 based on that graph. The graph just tells you that for example, if you bought a $20,000 home in 1920, you could have bought a $50,000 dollar home in 2006. It doesn't tell you what the $20,000 home actually costs in 2006. The house might be a bad example since it is a subjectively priced good but I think you get what I am saying. I think this is what Munky is referring to.

Again, I am not sure. Please correct me if I interpreted the graph wrong.

Edit: So I guess if the toaster was $2 in 1920 but now that same $2 can buy a $5 toaster it doesn't matter because the same toaster today costs $20. So the purchasing power of the dollar as it relates to goods and services actually went down even though the dollar's value is higher. Again, maybe I'm looking at it wrong.

 

[First]

Link to source? Where are you getting that real purchasing power increased?

Seriously? Inflation-adjusted income (standard of living) has increased for quite some time: http://en.wikipedia.org/wiki/Household_income_in_the_United_States

The printing to infinity solution you propose is not novel, Germany and Zimbabwe already tried it and it failed spectacularly.

Yeah thankfully the U.S. isn't printing money like that so we're safe.

What you're effectively doing is rewarding debt binging, while discouraging savings and capital formation.

Too much saving reduces output/GDP, diminishes sales, and the resultant reduced demand has all sorts of negative consequences for new jobs, et al (housing starts, you name it). See Japan's multi-decade 0 growth economy despite having the highest savings rate in the world. I'm not sure on what planet debt accumulation discourages "capital formation", you'll have to explain that one buddy.

Such a policy forces one to hand over his money to fund Wall St gambling, or risk living in poverty after retirement. It's policies like this that have dug us into a debt hole so far down that the only option now is to keep digging and printing, because any deflation would inevitably detonate the system.

Deflation is always a worse alternative to inflation, something that is well borne out in U.S. history. I can link that too if you really need it.

 

[First]

That does not address the price of goods and services. If you're trying to say that it does, I'd like to see how they arrive at that conclusion, not just copy-and-pasting a single graph.

I'm not sure you understand how inflation is measured. It includes a basket of goods that is partially heuristically calculated to get the most accurate result. And as eskimospy's graph quite clearly elucidates, it includes as you put it "the price of goods and services". It in fact includes everything except food and energy (even including those things, purchasing power has exponentially increased the last 100 years as the dollar has "lost" 95% of its value).

A link for you: http://en.wikipedia.org/wiki/United_States_Consumer_Price_Index#Method_of_calculation

 

[fskimospy]

I am unsure. Inflation tells you the purchasing power of the dollar, in this case, but not the price of goods and services. What I mean is that if a toaster costs X in 1920, you can't figure out what it costs in 2006 based on that graph. The graph just tells you that for example, if you bought a $20,000 home in 1920, you could have bought a $50,000 dollar home in 2006. It doesn't tell you what the $20,000 home actually costs in 2006. The house might be a bad example since it is a subjectively priced good but I think you get what I am saying. I think this is what Munky is referring to.

Again, I am not sure. Please correct me if I interpreted the graph wrong.

Edit: So I guess if the toaster was $2 in 1920 but now that same $2 can buy a $5 toaster it doesn't matter because the same toaster today costs $20. So the purchasing power of the dollar as it relates to goods and services actually went down even though the dollar's value is higher. Again, maybe I'm looking at it wrong.

You are looking at it wrong. EDIT: And yes, inflation tells you the price of goods and services. It is usually measured in reference to the CPI, which is explicitly a measure of the cost of goods and services.

What adjusting for inflation tells you is what the median American salary would have been in say... 1920 if their dollars had been worth what dollars were worth in 2006. The actual average annual salary in 1920 was about $1,200. When you adjust that for inflation using the CPI from both times, in 2006 dollars that becomes about $12,000. This allows you to directly compare purchasing power over time.

So what that chart tells you is that in modern money the average American made somewhere around $12,000 a year (in 2006 dollars) 1 century ago. The average American in 2006 was making somewhere north of $50,000. ie: the average American has the capability to purchase about 400% more than what the average American in 1920 was able to do. We are vastly, vastly wealthier.

So to use your toaster example, say a toaster cost $2 in 1920. That means it would cost about $20 today. In 1920 your salary was $1,200, which means those $2 comprised about .16% of your salary for the year. Today your salary is around $50,000. That $20 toaster comprises about .04% of your salary. That means you could afford to buy a lot more toasters.

We have become much richer over the time the dollar has lost its value, not poorer.

 

[werepossum]

I'm not sure you understand how inflation is measured. It includes a basket of goods that is partially heuristically calculated to get the most accurate result. And as eskimospy's graph quite clearly elucidates, it includes as you put it "the price of goods and services". It in fact includes everything except food and energy (even including those things, purchasing power has exponentially increased the last 100 years as the dollar has "lost" 95% of its value).

A link for you: http://en.wikipedia.org/wiki/United_States_Consumer_Price_Index#Method_of_calculation

It's important to remember though that buying power increases in spite of inflation, not because of it. Modest inflation is not a desirable thing in an economy, merely an acceptable thing in a healthy, growing economy.

 

[First]

Who cares if it encourages them to demand pay increases if it is basically a sum zero game (they can still buy the same amount of "stuff" from 40 hours work as they used to).

Huh?

Whats wrong with going with the Feds actual mandate which states "stable" not moderately increasing. Then if you do get a pay raise you are actually better off.

You do realize the Fed has publicly said, as recently as last month, that 2% inflation was their annual target, right?

Read: “Over a period of time we want to move inflation always back toward 2 percent,” Bernanke said today in Washington in response to a question from Republican Representative Paul Ryan of Wisconsin, chairman of the House Budget Committee. “We’re always trying to bring inflation back to the target.”

In reality (as in, what is really happen) wage earners have not seen an increase in their wages while they have in fact seen an increase in what stuff costs. This is a bad thing, mmmmmkay?

Except, uh, this isn't true as eskimospy's graph adequately delineates. Wages haven't increased enough, ok sure I agree there. But to say we haven't seen an increase in wages while everything costs more, is factually false by any generally accepted measure.

 

[First]

It's important to remember though that buying power increases in spite of inflation, not because of it. Modest inflation is not a desirable thing in an economy, merely an acceptable thing in a healthy, growing economy.

No, inflation has a documentably positive effect:

1) Reduces burden of future debts.
2) Encourages laborers to demand wage increases as nominal prices increase.

These two factors alone are far more desirable than prices set at 0% annual growth. Economies are based on psychology as much as anything else, and things are generally far more cheery when some small form of predictable inflation occurs as compared to the alternative. This is simply well known fact among economists and most businessmen.

 

[GaiaHunter]

We have become much richer over the time the dollar has lost its value, not poorer.

Of course the technological advance was staggering during that period.

Additionally the $ became the primary export of the US.

So the next few years will answer a few questions.

Like "wouldn't the US population be even more or rich had the dollar kept is value?" or will other nations keep buying dollars, specially china, or will they focus their attention elsewhere?" or "will we be able to keep the rate of advance?".

It will be interesting.

 

[DucatiMonster696]

No, inflation has a documentably positive effect:

1) Reduces burden of future debts.

Yes it does but it comes at the cost of eating up savings and harming people on fixed incomes (aka poor and elderly).

2) Encourages laborers to demand wage increases as nominal prices increase.

How is this even considered a positive? Having to demand higher wages to keep up with inflation is in no way a positive for the average person. In fact it is nothing more then a rat race for wages to keep up with inflation.

This is further emphasized when wages cannot keep up with inflation (in addition to the devaluation of our currency) and you start to see the cost of living going up beyond the reach of the average person.

These two factors alone are far more desirable than prices set at 0% annual growth. Economies are based on psychology as much as anything else, and things are generally far more cheery when some small form of predictable inflation occurs as compared to the alternative. This is simply well known fact among economists and most businessmen.

It is funny how you would mention that "psychology" is an important part of our economic system meanwhile you have individuals here who deride the Austrian school of economics and its focus on human action which includes understanding the psychology of economics and its on the economy as a whole.

 

[xBiffx]

You are looking at it wrong. EDIT: And yes, inflation tells you the price of goods and services. It is usually measured in reference to the CPI, which is explicitly a measure of the cost of goods and services.

What adjusting for inflation tells you is what the median American salary would have been in say... 1920 if their dollars had been worth what dollars were worth in 2006. The actual average annual salary in 1920 was about $1,200. When you adjust that for inflation using the CPI from both times, in 2006 dollars that becomes about $12,000. This allows you to directly compare purchasing power over time.

So what that chart tells you is that in modern money the average American made somewhere around $12,000 a year (in 2006 dollars) 1 century ago. The average American in 2006 was making somewhere north of $50,000. ie: the average American has the capability to purchase about 400% more than what the average American in 1920 was able to do. We are vastly, vastly wealthier.

So to use your toaster example, say a toaster cost $2 in 1920. That means it would cost about $20 today. In 1920 your salary was $1,200, which means those $2 comprised about .16% of your salary for the year. Today your salary is around $50,000. That $20 toaster comprises about .04% of your salary. That means you could afford to buy a lot more toasters.

We have become much richer over the time the dollar has lost its value, not poorer.

Gotcha. I missed comparing the costs as a ratio of incomes. Makes sense. Thanks for the lesson.