On the importance of inflation [UK edition]

[Surlethe]

We've been over inflation before. The basic point I'm making is: UK wages are falling because of structural reasons whether you want them to or not. Labor is less valuable than it used to be; its price must fall relative to other goods and services. Society gets to choose whether that happens by throwing some unlucky, low-product people out of work, or by more equitably distributing the wage cuts through slightly higher inflation.

Or we can be honest about it and just say that everyone can either take a 10% paycut or lose their jobs and keep the inflation rate at 0%. But no, we do it the sneaky way through jacking up inflation because people won't "get it" and will remain nicely pacified until they're well & truly fucked.

Sure. One way or another, the labor market comes into balance. If everyone's well & truly fucked, well, they'll be fucked whether or not inflation happens.

BTW, I hear that money printing to target inflation is working great in Japan, they've had 2 big crashes in their markets, yo-yo'd the Yen, and gone on their longest streak to date of trade deficits since they started their unlimited monetization.

Remember that market reactions are not to outcomes themselves, but rather to the discrepancy between the *expected* outcome and the *actual* outcome. Another point to consider is that both the Nikkei and bond yields have been rising. A central bank is the only thing that can make the price of something fall by buying more of it: more evidence of recovery. Finally, of course Japan's been running a trade deficit. Look at this. Decade of stagnation, trade surplus. Finally some stimulus; trade deficit.

Devalue the currency and run a trade deficit; buy bonds and drive down their price; don't accelerate the stimulus and cause a market crash. Money is so deliciously counterintuitive.

[Surlethe]

Mechanization displaces jobs. New jobs are created... where? In new sectors, where people do something a machine cannot do, or cannot do well.

If you were pushed out of the labor force by mechanization in 1800 or 1900 or even 1980, the odds were that you could find another job which required no unusual credentials or education to do, right away. A farmhand displaced by mechanical harvesters could get a job digging ditches; his son displaced from the ditch digging job by steam shovels could get a job throwing switches on a railroad; his son displaced by electrical signaling and control could get a job on an assembly line; his son displaced by better factory automation could get a job as a store clerk.

But now that guy's son, displaced by an automated online filing system, needs a substantial education in some specialized field to be a competitive player in the workforce.

This creates a new obstacle to workers seeking to re-enter the labor market and sell their labor: sure, jobs exist in theory, that hasn't changed. But the barrier to entry is higher. And it's damn hard for an unemployable random person to find "venture capital" to improve their standing as a seller of labor, except on predatory terms.

Don't forget that prices mediate between supply and demand. The number of jobs isn't zero-sum; if people are thrown out of work because of technological advancement, they wages they command will fall and they'll be re-employed elsewhere in the economy. The signature of technological advancement displacing workers isn't unemployment, it's falling share of labor income and rising share of capital income. Unemployment is not caused by technology, it's caused by disequilibrium in the labor market.

Another way to put this is that people who are displaced by technology see their skills on one margin fall in relative value, i.e., their comparative advantage shifts, so they enter a different sector of the economy with a different marginal product (hence different wage). Alternately, they take wage cuts to underbid the capital with which they're competing. Either way, this doesn't cause unemployment; it causes a movement along the economy's (expanding) production frontier as people and capital are employed to maximize their relative productivity.

[Jub]

Don't forget that prices mediate between supply and demand. The number of jobs isn't zero-sum; if people are thrown out of work because of technological advancement, they wages they command will fall and they'll be re-employed elsewhere in the economy. The signature of technological advancement displacing workers isn't unemployment, it's falling share of labor income and rising share of capital income. Unemployment is not caused by technology, it's caused by disequilibrium in the labor market.

Another way to put this is that people who are displaced by technology see their skills on one margin fall in relative value, i.e., their comparative advantage shifts, so they enter a different sector of the economy with a different marginal product (hence different wage). Alternately, they take wage cuts to underbid the capital with which they're competing. Either way, this doesn't cause unemployment; it causes a movement along the economy's (expanding) production frontier as people and capital are employed to maximize their relative productivity.

Doesn't that just exaggerate the gulf between the haves and the have nots and ensure that that have nots stay ever further behind? It's already hard enough for a lower-middle class family to get kids through college, it will only get harder if we devalue unskilled labor even more. This is especially true because inflation is adjusted for a median wage which should stay the same if not rise as time goes by. Thus you get nearly the same problems as just making all those people unemployed except you give them the added stress of working all day for the privilege of still needing social welfare.

This is less of an ideal solution than ensuring that the economy can handle these people as unemployed so that all can enjoy a higher standard of living. Or do you think that people that are uneducated deserve this treadmill they're increasing stuck on?

[Surlethe]

Doesn't that just exaggerate the gulf between the haves and the have nots and ensure that that have nots stay ever further behind? It's already hard enough for a lower-middle class family to get kids through college, it will only get harder if we devalue unskilled labor even more. This is especially true because inflation is adjusted for a median wage which should stay the same if not rise as time goes by. Thus you get nearly the same problems as just making all those people unemployed except you give them the added stress of working all day for the privilege of still needing social welfare.

This is less of an ideal solution than ensuring that the economy can handle these people as unemployed so that all can enjoy a higher standard of living. Or do you think that people that are uneducated deserve this treadmill they're increasing stuck on?

Oh, I'm not proposing any "solutions". I'm just pointing out that technological advancement doesn't intrinsically cause unemployment.

[Simon_Jester]

Those dates you cherrypicked are just the times of major US recessions...

What the hell are you talking about? Is this a response to me?

Now you segue into what is a totally unrelated claim - that if the state doesn't fun 4 year college degrees the GDP per capita will start to reduce rather than historically increase.

Actually no, this suggests that you are reading from a stance of willful ignorance and refusal to understand. To speak my true claims:

1) New jobs created by technology require more education than the jobs they replace. This has been going on ever since the start of the Industrial Revolution; compare the percentage of jobs which require literacy now, to the percentage in 1700.

2) Because of (1), if we want "technology creates new jobs" to remain true, we need to improve the education system one way or another.
2a) Honestly, I think that publicly funding more college degrees is exactly how NOT to do it.
2b) We should be doubling down on our commitment to primary and secondary education, so that a high school diploma represents a more consistent and meaningful level of knowledge and skills.

3) If we even want to tread water, we need to at least maintain the existing education system. If it declines, we will have a harder time finding educated manpower to maintain our technologized society. In which case...
3a) Our standard of living declines to an equilibrium state where a larger percentage of jobs can be done by ignorant people, or...
3b) We become dependent on other nations whose people are less ignorant than ours.
3c) (3a) and (3b) are bad.
3d) Therefore, let us avoid them, see argument (2).

That is all.

[Starglider]

1) New jobs created by technology require more education than the jobs they replace.

Not true in the general case, primarily because we try to design technology to be as easy to use as possible and it tends to get easier as it matures. Taxi driver does not require more education than carriage driver (allowing for the increased need for literacy just to be a functional citizen in modern society). Certainly design and to a lesser extent maintenance roles require increasing education, but indirectly created jobs (e.g. small crafters now prospering via selling things on Etsy/Ebay) may not. Consider the alternative explanation that by removing many unskilled jobs, we are forcing people to acquire more education in order to be able to contribute to society (whether in jobs related to the new technology or not).

[aerius]

Remember that market reactions are not to outcomes themselves, but rather to the discrepancy between the *expected* outcome and the *actual* outcome. Another point to consider is that both the Nikkei and bond yields have been rising. A central bank is the only thing that can make the price of something fall by buying more of it: more evidence of recovery. Finally, of course Japan's been running a trade deficit. Look at this. Decade of stagnation, trade surplus. Finally some stimulus; trade deficit.

Devalue the currency and run a trade deficit; buy bonds and drive down their price; don't accelerate the stimulus and cause a market crash. Money is so deliciously counterintuitive.

A trade deficit for an export economy is a good thing. Gotcha. And rising bond yields for a nation with one of the highest debt loads for a 1st world nation, which is currently running an increasing overall deficit is also a good thing. And of course the Yen carry trade being unwound is doubleplus ungood. Am I right?

[Guardsman Bass]

Not true in the general case, primarily because we try to design technology to be as easy to use as possible and it tends to get easier as it matures. Taxi driver does not require more education than carriage driver (allowing for the increased need for literacy just to be a functional citizen in modern society). Certainly design and to a lesser extent maintenance roles require increasing education, but indirectly created jobs (e.g. small crafters now prospering via selling things on Etsy/Ebay) may not. Consider the alternative explanation that by removing many unskilled jobs, we are forcing people to acquire more education in order to be able to contribute to society (whether in jobs related to the new technology or not).

What I'm hoping for is that technology ultimately makes it possible to flatten out skill requirements, so that people don't have to spend years in education for most jobs. There's precedent for that in the US's history of industrialization, a big part of which was taking low-skilled workers and adding machinery to get high productivity. Maybe once the AIs are smarter . . .

[Simon_Jester]

Not true in the general case, primarily because we try to design technology to be as easy to use as possible and it tends to get easier as it matures. Taxi driver does not require more education than carriage driver (allowing for the increased need for literacy just to be a functional citizen in modern society). Certainly design and to a lesser extent maintenance roles require increasing education, but indirectly created jobs (e.g. small crafters now prospering via selling things on Etsy/Ebay) may not.

If I were to tinker with my original claim (1), it'd go something like:

"Jobs that survive rising automation require more education than jobs that are lost to automation."

In other words, the less educated you need to be to do a job, the more vulnerable it is to automation, unless it involves social skills. Any clever fellow can figure out how to build a machine that digs ditches, or program a computer that handles credit card transactions at a gasoline pump so that you don't need an attendant to operate the pump for you. Those jobs die.

Jobs that will probably survive automation indefinitely (or until access to helpful AGI becomes cheap) are typically the ones that require sentience and informed judgment- emphasis on the "informed," which is where education comes in.

Consider the alternative explanation that by removing many unskilled jobs, we are forcing people to acquire more education in order to be able to contribute to society (whether in jobs related to the new technology or not).

I am quite content with this explanation, although I note that it still leads to conclusions (2) and (3).

What I'm hoping for is that technology ultimately makes it possible to flatten out skill requirements, so that people don't have to spend years in education for most jobs. There's precedent for that in the US's history of industrialization, a big part of which was taking low-skilled workers and adding machinery to get high productivity. Maybe once the AIs are smarter . . .

If you improve the AI just a hair beyond that point, though, you start begging the question of why you need a human being doing the job at all. This is pretty much what happened with the history of industrialization too: once assembly-line techniques reached their full staggering efficiency in the early 1900s, it only took a little extra computing power to start removing workers. Managers realized that if you must repeatedly swing a hammer, then given integrated circuits it's cheaper to build a self-swinging hammer than to have a man whose only job is to swing the hammer.

Of course, the same set of developments also call into question pretty much everything else: if AI has no need of human workers, it also has no need of human owners, and the entire economic model may go to crap in short order.

[K. A. Pital]

Don't forget that prices mediate between supply and demand. The number of jobs isn't zero-sum; if people are thrown out of work because of technological advancement, they wages they command will fall and they'll be re-employed elsewhere in the economy. The signature of technological advancement displacing workers isn't unemployment, it's falling share of labor income and rising share of capital income. Unemployment is not caused by technology, it's caused by disequilibrium in the labor market.

Another way to put this is that people who are displaced by technology see their skills on one margin fall in relative value, i.e., their comparative advantage shifts, so they enter a different sector of the economy with a different marginal product (hence different wage). Alternately, they take wage cuts to underbid the capital with which they're competing. Either way, this doesn't cause unemployment; it causes a movement along the economy's (expanding) production frontier as people and capital are employed to maximize their relative productivity.

I am deeply skeptical that (1) society is operating at PF, (2) there is such a thing as a general equilibrium, (3) wages are determined purely by the marginal product of labor (3) effects of technology displacement are fully understood and (4) number of jobs not being "zero-sum" or even sub-zero-sum, heh, in a process of economic contraction.

[energiewende]

Not true in the general case, primarily because we try to design technology to be as easy to use as possible and it tends to get easier as it matures. Taxi driver does not require more education than carriage driver (allowing for the increased need for literacy just to be a functional citizen in modern society). Certainly design and to a lesser extent maintenance roles require increasing education, but indirectly created jobs (e.g. small crafters now prospering via selling things on Etsy/Ebay) may not. Consider the alternative explanation that by removing many unskilled jobs, we are forcing people to acquire more education in order to be able to contribute to society (whether in jobs related to the new technology or not).

What I'm hoping for is that technology ultimately makes it possible to flatten out skill requirements, so that people don't have to spend years in education for most jobs. There's precedent for that in the US's history of industrialization, a big part of which was taking low-skilled workers and adding machinery to get high productivity. Maybe once the AIs are smarter . . .

Let's be honest, just eliminating subsidies for education and super-taxing the non-vocational subjects would achieve this. People are kidding themselves if they think the vast majority of retail, food service, data processing and middle management jobs done by most people couldn't be adequately performed by people who left school at 14. They can and were. The extra 7 years of education almost certainly doesn't make people better at their jobs than 7 years of work experience, during which they'd make rather than lose money.

If anything the education brainbug has become an anchor on rising economic prosperity despite higher notional total compensation. Rather than "starting out" at 21 with a few thousand in the bank and work experience, people "start out" at that age with 10s of thousands of debt, and it isn't really increasing their income, just letting them stand still relative to everyone else who has a diploma in something useless.

Engineering and medicine are exceptions, but it's not like everyone in 1900 was an engineer or doctor, or could be today. These are high IQ elite professions. But remember that even many of those don't really need any university education: accountancy, investment banking, arguably even law.

[ray245]

But why would companies want to spend time and money to train workers when it is easier to hire someone who already has those skillsets?

[energiewende]

This is something of a red herring. The current university system (and school system to a large extent) teaches things that are not useful to employers and don't increase productivity. Employers prefer young people with degrees because if you don't have one it's a mark you're a weirdo or a loser, not because you won't bring the enormous knowledge of a BA holder to the firm.

But it's a reasonable point assuming we had a practical education system - should it owned by the state or by employers? And I still go for employers for the most part. Working in one of the fields that actually requires high formal education, they do it for two reasons: first, because no one else will, iincluding the universities, and they need someone to work for them. Second, because practical skills are actually a lot less transferrable than the "Do what you love!" After School Specials would like you to think. You are good at using one sort of program (which may be company-specific and proprietary), you can fix one type of engine, you know a lot about partial differential equations... this makes you better at using some other program, fixing a different type of engine, or learning group theory to only a limited extent. Certainly it makes you much less productive than an existing employee at another company that does those things. For everything else, there are 5 year non-compete contracts.

[Dr. Trainwreck]

This is something of a red herring. The current university system (and school system to a large extent) teaches things that are not useful to employers and don't increase productivity. Employers prefer young people with degrees because if you don't have one it's a mark you're a weirdo or a loser, not because you won't bring the enormous knowledge of a BA holder to the firm.

But it's a reasonable point assuming we had a practical education system - should it owned by the state or by employers? And I still go for employers for the most part. Working in one of the fields that actually requires high formal education, they do it for two reasons: first, because no one else will, iincluding the universities, and they need someone to work for them. Second, because practical skills are actually a lot less transferrable than the "Do what you love!" After School Specials would like you to think. You are good at using one sort of program (which may be company-specific and proprietary), you can fix one type of engine, you know a lot about partial differential equations... this makes you better at using some other program, fixing a different type of engine, or learning group theory to only a limited extent. Certainly it makes you much less productive than an existing employee at another company that does those things. For everything else, there are 5 year non-compete contracts.

Well you know, the lack of technology in earlier eras meant that people had to be peasants by necessity. So we developed technology and we've found free time and we're no longer peasants and we have access to education... well, using all of these only to produce better peasants defeats the purpose. I know The Corporation would love it, but with our democracies and our freedom and our whatnot we can finally tell The Corporation to fuck off. If they are worried that practical skills won't transfer, and if they're frothing that they have to teach each new employee their unique software and stuff... they can start by repealing a few of these copyright laws, and if it doesn't work, then we can try restructuring the world's education systems to breed peons for them. Holding allegiance to your nation is already hard without having to hold parallel allegiance to Apple (figuratively speaking).

[energiewende]

I'm not sure we aren't talking across purposes. The non-transferrability of practical skills is precisely why companies do train employees. I'm yet to meet an engineer who said that he simply took his degree knowledge and jumped right in, for instance. Everyone has told me that they spent months to low single digit years learning the particular software and processes of their employer, almost certainly being a net lossmaker for the firm for at least some of that time. And engineering is one of those very few areas where the state-subsidised education has some real use.

[Simon_Jester]

Energiewende, do you think there are other reasons to educate people besides "MAXIMIZE THE PRODUCTIVE POWER OF THE WORKER-UNIT!"

[energiewende]

That's an individual choice of course, but how many people would enroll in a 4 year college for simple enjoyment, and renounce any right to a credential at the end? While most simply don't enjoy college at all, even those who do would balk at the price tag. Learning for fun is already well covered by correspondance courses and amazon.

[Simon_Jester]

Let me be more clear: do you think there are utilitarian reasons to educate people besides "MAXIMIZE... [et cetera?]

[energiewende]

That depends how narrow a view you take of "maximising productivity". As Aristotle claimed I think people seek the Good Life, and, for instance, being able to read helps people enjoy the Good Life beyond its ability to get one a better job. However this still falls in the broad scope of maximising "productivity" defined as peoples' perceptions of their personal living standard.

[Surlethe]

A trade deficit for an export economy is a good thing. Gotcha. And rising bond yields for a nation with one of the highest debt loads for a 1st world nation, which is currently running an increasing overall deficit is also a good thing. And of course the Yen carry trade being unwound is doubleplus ungood. Am I right?

What do you think has induced the trade deficit? Hint: Increased domestic demand stimulates demand for imports and increases the price of exports. This is a good thing. As to whether rising bond yields is a good thing or bad thing, either economic recovery will make Japan better able to service its debt, or Japan's already dead in the water. Why do you think markets crashed when the BoJ decided not to accelerate stimulus?

I am deeply skeptical that (1) society is operating at PF, (2) there is such a thing as a general equilibrium, (3) wages are determined purely by the marginal product of labor (3) effects of technology displacement are fully understood and (4) number of jobs not being "zero-sum" or even sub-zero-sum, heh, in a process of economic contraction.

1) It's not, 2) I'm not relying on the existence of such a thing, 3) that doesn't make marginal product a bad approximation, 3) they're almost certainly not, and 4) during an AD contraction, absolutely not, hence the importance of stabilizing AD, in particular permitting high inflation.

[J]

As to whether rising bond yields is a good thing or bad thing, either economic recovery will make Japan better able to service its debt, or Japan's already dead in the water. Why do you think markets crashed when the BoJ decided not to accelerate stimulus?

I shall ask you to follow this line of thought and think through its implications.
There's a lot more I'd love to say, though not at the expense of my job. Oh well.

[Surlethe]

I shall ask you to follow this line of thought and think through its implications.
There's a lot more I'd love to say, though not at the expense of my job. Oh well.

Model share prices as a superimposition of all the different possible present values of income streams. When the BOJ removed the futures where it continued to accelerate stimulus, expected future incomes dropped all across the Japanese economy.

[J]

Yes. But you're still not getting it. Market & economy depends on continued & accelerating stimulus. Meditate upon that.

[Starglider]

Market & economy depends on continued & accelerating stimulus. Meditate upon that.

Recently I have been seeing assorted guidance documents about 'how to deal with withdrawal of central bank stimulus' (particularly from the Fed). The general expectation is 'vol spikes across all asset classes as major market dislocations occur'. A nice thing about FX and FX options in particular is that the sell side is more willing to talk about bearish scenarios, since most kinds of vol translate quite directly into FX flow and prop profit (cash as people panic pull money arround and rearrange their carries and deriv as hedges get changed around so quickly).

[Surlethe]

Market & economy depends on continued & accelerating stimulus. Meditate upon that.

Depend on the expectation of continued and accelerating stimulus. If expectations are managed correctly, the central bank need not actually perform stimulus.