Governments are mishandling the affordability crisis(economist.com) |
Governments are mishandling the affordability crisis(economist.com) |
I think this misses the psychology of inflation.
If wages go up 20%, and prices go up 15%, everyone is better off and got a 5% raise, right?
Go poll people that experienced that and they won't tell you they're celebrating being 5% richer, they'll tell you they're outraged about the 15% inflation.
Psychologically they'll believe they earned that 20% raise through hard work. Putting in extra hours to get that promotion. But then the inflation robbed them of their 20% raise, and turned it into a measly 5% raise. They'll be outraged.
Politicians get this. No one will credit politicians for raising average wages, people will believe they earned their raise themselves. But there's lots of votes available for lowering prices.
But like you said politicians get less credit for the the former than they do the latter, and thus we have the current situation of continued bad policy decisions.
The article isn't denying that lowering prices is politically effective--I think that's undeniable at this point--just that doing so is probably the wrong call.
This has been tried in many latam countries in the past 15-20years with Inflation expectations getting out of control as result
This strikes me as a symptom of an unsustainable system.
Percentages also don't matter as much when you break down raw numbers. A 20% (ignoring taxes) raise when your take home pay is $3000 disappears very quickly into your $6000 credit card debt, or maybe your $700/month car loan, or your $400/month student loans. People making that extra $600 more don't get a breath of relief, they get closer to the surface to breathe at all.
>No one will credit politicians for raising average wages, people will believe they earned their raise themselves.
And this is why we're doomed to fail at this rate. We're in 4 entirely different crises that are entirely above any individual worker's head, but somehow our solution is to just grind our way out. Maybe do some gambling (or sorry, "prediction markets")to get ahead. We're trying to dig out of a hole we didn't make and we just keep shuffling sand around instead of actually progressing.
Having lived through hyper-inflation the only thing that got that under control was price controls. Wages going up can't stop inflation - they fuel inflation. Inflation psychology is that your money is going to become worthless so you don't save it, you spend it, which keeps prices going up. It wrecks havoc on loans and debt as well. If you lent money with a fixed rate hyperinflation erases your returns. If you borrowed with a fixed rate your debt is effectively erased.
Not to mention that governments in general don't control incomes. They can lower taxes (which is good IMO). They can pay government employees higher wages (which is hard to do when you lower taxes).
At the end of the day governments make things better by making smart investments (or policies that enable smart investments) and make things worse by making bad investments (or policies that lead to bad investments). Everything else is second order effect.
politicians can't really affect wages the same way they can temporarily and artificially lower prices. but they also understand they need inflation to get elected, since you generally win elections by what you promise, not what you don't promise.
That said, your assessment of the psychology of inflation is correct. It's just inapplicable here. The issue isn't people not understanding how much richer they are, because they're not. It's the intelligentsia and "elite" refusing to acknowledge the reality, because they'd then have to actually make material changes, which would reverse the siphoning of wealth from the middle class that they've been engaging in for at least the last 30 years.
Well, it's not just that. They've been telling us for decades that wages are alternatively a direct reflection of the value of our labor to the company, or, a price set by the market, depending on which is cheaper for the corporations.
Kind of like when people say that UBI would simply instantly raise the price of all rent to match. Oh, really? The supply of rentable units will suddenly have decreased? The demand will suddenly have gone up? No? Odd that the "market set price" responded then.
The exceptions are if you enter a new tax bracket, but that only affects your marginal dollars, sns even then, the increase in tax brackets is just a few percent.
In the U.S., you could also cross the SS/Medicare threshold and then suddenly your post tax earnings will go up more than your wage increase.
Post-tax wage changes shouldn’t differ too much from the pre-tax wage increase.
Inflation affects everyone rapidly. But to get the claimed wage increase people have to do work to find new jobs.
The example was not meant to be a single year. Over the 2020-2024 timeframe we did see movements around that size (though the gap between average wages and inflation was smaller than my example, where I rounded the numbers).
I think you're being overly critical here.
There was one year I received 3 raises at Travelocity and nearly doubled my compensation. I was hired as a web designer and after 3 months was involuntarily reassigned to a developer role and told to “figure it out”. I got a negative annual review that year and then ended up in Afghanistan on a military deployment. When I came back to Travelocity I was still classified as a developer but was reassigned from marketing to product development where to wages are higher, but I was earning as a junior designer. After eagerly looking for other internal jobs they gave me a raise to catch me up. Several months later I was promoted to a senior developer position and became the company A/B test engineer, which also came with a raise. A little after that another company gave me a better offer and Travelocity countered. This was like a million years ago.
Because most of my career is in writing JavaScript if I want to continue to increase my wages I would have to do the most beginner level shit work because that is common expectation for JavaScript developers.
Most of the people responsible for Government decisions are fairly well insulated from most crises, hence the crises will continue and grow.
As it is we have to live with it. Enduring the barbarians.
Governments, however, are responsible for responding to crises occurring in the areas they are elected and paid to govern. But increasingly they behave like lords over subjects rather than representatives of the group.
There'd be short term economic repercussions when America throws a tantrum, but whose fault is it that this could significantly harm the Dutch economy? Better to rip off the band-aid.
A lot of the time it is actually even worse than this in that they are often in a position to benefit from the crises.
The real major economic problem of our day is the extent to which labor's share of productivity gains have plummeted and continue to plummet.
If your wealth comes from capital everything is going gangbusters and nothing needs to be fixed. Just listen to Trump talk about the economy and how blind he is to how normal people experience it.
And AI is just going to supercharge this problem.
On a relate-able scale, look at the 'alignment' difference between a worker and their manager; between an SWE and someone in mangement a couple of levels above. They're a different species, in terms of 'alignment', generally. They don't even speak the same language.
(I'm being hyperbolic, but hopefully the core of what I mean comes across).
One possibility is "adjust the minimum wage for inflation," but they seem to be against this: https://www.google.com/search?client=firefox-b-1-d&q=the+eco...
But since government is a euphemism for the more verbose "humans whose biology drives them to select self" they will continue to mishandle the "affordability crisis" by propping up its roots, doing nothing to stave off future gilded ages
High house prices are simply stealing from the next generation and increasing house prices raise the prices of everything because housing is an input to the cost of everything.
In many Western countries, housing is the best performing asset class so it's reached the point of stealing investment dollars that might otherwise go to productive output. Housing is the black hole at the heart of the economy.
The only country that has attempted to correct this thus far has been China. Xi Jinping quietly popped the real estate bubble a decade ago and the real estate sector has been in recession ever since as prices correct. As Xi says, houses are for living in, not for speculation [1].
The only countries that have even partly avoided this are because they implemented systems long ago that have prevented land hoarding, such as Red Vienna [2]. Interestingly, the post-WW2 UK almost ended landlords but then along came Thatcher [3].
[1]: https://en.wikipedia.org/wiki/Houses_are_for_living,_not_for...
[2]: https://www.youtube.com/watch?v=jO52FWzJoyQ
[3]: https://www.theguardian.com/lifeandstyle/2024/mar/19/end-of-...
and so really the solution is to reduce spending. which, to some extent, is so obvious it kind of hurts.
Redistribution is a left-wing policy. A lot of elected governments went right-wing recently. It's as simple as that.
The issue is not "governments". This is what the voting public wants.
See, for example, what happened after Weimar Germany's inflation.
Let them eat cake.
It is not "mishandling" the affordability crisis - it created it and actively maintains it. Most recently and least subtly by bombing and blockading all the places that we get oil from, in an economy that was deliberately designed so it can't do anything without oil.
No car = no on-going petrol / diesel costs.
Fewer cars = cleaner / healthier air. Quieter, more serene ... everything.
Cleaner / Healthier air = Fewer health issues.
Fewer cars = more bikes
More bikes = physically healthier people.
Good planning is worth its weight in gold. I fear I'm stumbling into utopia theory, which is fraught with forgetting a whole lot of other realities.
New York City is one of the most expensive places in the world. Housing is more expensive than SF.
No cars needed in NYC, yet expensive as hell.
Inflation is useful (within limits). So is deficit spending in a growing economy.
> Inflation is really just a hidden tax
No it isn't. The idea that the government should fix the value of money -- and that if it does otherwise it is stealing out of your pockets -- is goldbug crank territory.
If inflation was a tax, then deflation would make people richer. It doesn't. Why? Because in a deflating economy, your creditors can't pay you back.
Deflation is very damaging, and avoiding it is more or less the number one goal of macroeconomic policy.
It is a similar issue with taxing nominal wealth. 2/3 of nominal wealth in the US is completely non-liquid. Taxing the liquid fraction is essentially leveraged as a result, causing a catastrophic collapse in the value of similar investments by ordinary people as a side effect. Impoverishing a large portion of the middle class to own the rich isn’t a recipe for political success.
After that, the money is gone.
The underlying problem of high, persistent government spending remains. This isn’t primarily a “tax the rich” problem.
At some point they'll need to do austerity.
Yes, the amount of government spending currently is likely too much, but by not spending the opportunity cost is sometimes greater. As the article contends, the solution to the affordability problem is to raise wages. If you can use the levers of government to induce growth that naturally raises wages, more deficit spending might be worth it.
To say it doesn't work using Latin American countries as an example, is like saying Russia already "tried" capitalism in the 90s. This kind of policy is so broad, widespread, and so often poorly implemented that it's impossible to use a single example as proof of ineffectiveness.
If you're looking for a positive example though, most people agree that the Scandinavian nations have done pretty well keeping wages on pace.
> There was one year I received 3 promotions at Travelocity and nearly doubled my compensation. I was hired as a web designer and after 3 months was involuntarily reassigned to a developer role and told to “figure it out”.
This is obviously an aberration where you are doing exactly what you claimed the gp did.
Moving jobs is the single best way to get a raise and has been for decades. Leveraging the experience at a company (which is relatively static) for a higher wage at another where that new and different experience has more value.
Notably, how company leadership changes are less likely to be from internal candidates than a transplant from another company.
An example is not bad simply because it's unrealistic. I'm sure you've heard plenty of examples which allow you to understand the main point without being perfectly representative.
The point of this example in particular was to illustrate how wages work alongside inflation. As long as you understand the point--that inflation is relative--the specific numbers don't matter.
so yeah, the example illustrates the idea, but it also underlines how the idea contradicts reality.