On the importance of inflation [UK edition]

[J]

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

I wanted a unicorn and all I got was a pony...

[Dr. Trainwreck]

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.

*sigh* I addressed that. If companies are so worried over training their employees, then eliminating copyright laws and letting software and hardware spread across all companies would be a more sensible choice than recalibrating the entire education system just to suit them. And keep in mind that some things just have to be taught from employer to employer, no matter how uniform the software and processes.

[Dr. Trainwreck]

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

Would that be some kind of guarantee, or assurance from the central bank?

[J]

Would that be some kind of guarantee, or assurance from the central bank?

"Let me assure you; the central bank shall use all tools at its disposal to keep the economy on track"

[Surlethe]

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

Would that be some kind of guarantee, or assurance from the central bank?

Right: the CB declares its target and then does everything in its power to hit the target. If the Fed said, right now, "Beginning in at midnight on August 1, we are going to make $10 billion in asset purchases every hour until the unemployment rate falls to 5%." they wouldn't actually have to make the asset purchases, because the economy would recover on the expectation of the asset purchases. In fact, if the Fed did this, they'd have to sell assets and raise IOR to stop excess reserves from causing an inflationary spiral (and then some people would think that the CB had failed, just like they think QE3 hasn't worked).

Edit: In response to J's post - no central bank is currently using all the tools at its disposal. The Fed even explicitly says as much, e.g., http://www.motherjones.com/kevin-drum/2 ... t-ammo-yet, http://business.time.com/2013/02/27/wha ... mmunition/, so much more on Google. A central bank is out of ammo when it owns every single asset in the economy. Conclusions: The demand sides of current economic problems are because the world's central banks have chosen recession. (This is even more explicit in Europe, where the ECB is still using the interest rate vector!)

[J]

A central bank is out of ammo when it owns every single asset in the economy. Conclusions: The demand sides of current economic problems are because the world's central banks have chosen recession. (This is even more explicit in Europe, where the ECB is still using the interest rate vector!)

Clearly, the solution is to go full Communist...

[madd0ct0r]

A little bit behind the discussion, but the thought occurs:

is the grinding down of wages by inflation better than people's wagesbeing directly cut by the same amount? It's a slow process so people have time to adapt, and are less likely to overreact to a reduced paycheck by massively decreasing consumption.

[Starglider]

If the Fed said, right now, "Beginning in at midnight on August 1, we are going to make $10 billion in asset purchases every hour until the unemployment rate falls to 5%." they wouldn't actually have to make the asset purchases, because the economy would recover on the expectation of the asset purchases.

No, because the credibility of both central banks and Keynesian economics in general (i.e. the transmission mechanism in this case) has been steadily pissed away over the last several years. Sure you will get a short term rally in some asset classes but the attitude of most decision makers affecting the real economy will be 'wait and see'.

[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.

*sigh* I addressed that. If companies are so worried over training their employees, then eliminating copyright laws and letting software and hardware spread across all companies would be a more sensible choice than recalibrating the entire education system just to suit them. And keep in mind that some things just have to be taught from employer to employer, no matter how uniform the software and processes.

1. Making education transferrable makes companies less willing to pay for it, since it's easier for employees to take their skills elsewhere. I still don't think it's a massive problem, first because of non-compete contracts, and second because they can just pay their new employees the market rate.

2. I dont think the law is the main issue here. Even if there were no copyright or patent laws companies would still develop their own tools (outsiders won't develop them for sale if they can't internalise the profit, so doing this essentially everything moves in-house) and protect them as commercial secrets, just like the company telephone directory and the minutes of strategy meetings. In fact one of the first things I did in my current job was rederive all the equations underlying a particular model that had already been implemented elsewhere because we aren't going to trust that someone else has done things right and given us the full story. Both our model and theirs are in principle open source - but good luck finding either of them for download, let alone using them or understanding the tens of thousands of lines of code without the help of someone whose job was already to work with them.

Anyway, I still think we're not talking about the same thing. I'm describing what happens now, and it's the same thing that happened 100 years ago, and all likelihood will still happen in 100 years time. For the most part, the university formal education system that has become overly popular in recent years does not contribute much to it. It's a 4 year drinking holiday, except it's a lot more expensive than just sitting at home for 4 years drinking.

[energiewende]

A little bit behind the discussion, but the thought occurs:

is the grinding down of wages by inflation better than people's wagesbeing directly cut by the same amount? It's a slow process so people have time to adapt, and are less likely to overreact to a reduced paycheck by massively decreasing consumption.

No, but this misses the point. The problem is that in the market peoples' wages wouldn't be directly cut by the same amount, at least not immediately. This means that it would be too expensive to retain the current workforce, and people become unemployed. The reason Spain's unemployment is 27% and Germany's is 6% is that Euro inflation is optimal for Germany but not for Spain. So, that's the choice on offer, not cut by inflation vs cut by employers.

[Starglider]

I still don't think it's a massive problem, first because of non-compete contracts

Companies like to massively overstate the actual enforcability of non-compete in their contracts. At least in the EU, I have seen numerous contracts that stiupulate ridiculous 'shall not work in the industry for two years', 'shall not work for any company who is or was or might be a customer of ours' etc etc. Legally, this is in violation of the employee's right to earn a living in the industry of their choice. Someone can only be sued for breach of non-compete when the company can prove a financial loss due to the current activities of the former employee. This is surprisingly hard even in blatant cases like sales staff taking customer lists with them, there's little chance of it working in typical 'skilled employee went to work for a competitor' cases. Of course, doesn't stop companies trying to intimidate employees with threatening legalese letters. I don't know how closely the US matches the EU here.

[Surlethe]

A central bank is out of ammo when it owns every single asset in the economy. Conclusions: The demand sides of current economic problems are because the world's central banks have chosen recession. (This is even more explicit in Europe, where the ECB is still using the interest rate vector!)

Clearly, the solution is to go full Communist...

No, because the credibility of both central banks and Keynesian economics in general (i.e. the transmission mechanism in this case) has been steadily pissed away over the last several years. Sure you will get a short term rally in some asset classes but the attitude of most decision makers affecting the real economy will be 'wait and see'.

It's not so clear to me that CBs have lost credibility. Markets believe what they say; the CBs are just not saying things that cause fast recovery. "We'll print $X billion and see what happens" won't spur recovery; "We'll print $X billion per day until unemployment is 5%" will. (Or in the case of the ECB, they're saying things that cause continued recession: "We'll tighten until inflation is back to 2%.")

But as a general conditional on incredibility, I agree: if the CB has lost credibility, they actually have to make the purchases until either the target is hit or credibility is restored. On the plus side, if the problem is a demand deficit, the CB isn't out of ammunition until it owns everything, so lack of credibility is not an insurmountable barrier.

[energiewende]

I still don't think it's a massive problem, first because of non-compete contracts

Companies like to massively overstate the actual enforcability of non-compete in their contracts. At least in the EU, I have seen numerous contracts that stiupulate ridiculous 'shall not work in the industry for two years', 'shall not work for any company who is or was or might be a customer of ours' etc etc. Legally, this is in violation of the employee's right to earn a living in the industry of their choice. Someone can only be sued for breach of non-compete when the company can prove a financial loss due to the current activities of the former employee. This is surprisingly hard even in blatant cases like sales staff taking customer lists with them, there's little chance of it working in typical 'skilled employee went to work for a competitor' cases. Of course, doesn't stop companies trying to intimidate employees with threatening legalese letters. I don't know how closely the US matches the EU here.

This would be more like an apprenticeship, actually beneficial to the employee with just some quid-pro-quo for the employer, so ideally would be backed by the law rather than attacked as some possibly "exploitative" arrangement.

Essentially the company could just claim back most of your salary if you voluntarily leave or are fired before a certain period.

[Simon_Jester]

That would be so stupidly open to abuse; you'd end up with a lot of people stuck in de facto indentured servitude.

The obvious exploit on the company's part would be to overstate the value of their training, so they can "claim back" a disproportionate amount of money- say, treating four weeks' training seminars as though they're worth thirty thousand dollars.

Or they could recruit people with agreements like this, then start screwing around with the terms of employment: "oh, right, did I mention that our office is moving to Outer Mongolia in six months? And that we're laying off half the secretarial staff so you'll be spending an extra seven hours a week filling out more of your own paperwork?" Very convenient, as a way of forcing employee retention under conditions where they wouldn't normally get it.

Or, of course, they could hire people with the expectation that they'd probably leave of their own free will after a few years, then try to game the system by working extra-hard to find reasons to fire people in the last few months of their 'apprenticeship.'


There's been a tremendous rise over the past generation or so of corporations trying to fill entry level white-collar positions with unpaid or underpaid interns. Sometimes the interns are acquiring real experience; sometimes they're just the cheapest available source of labor. I'm not surprised that companies want to hire cheap labor when they can get it, but I see no reason to systematically reorganize labor law to provide it to them.

[K. A. Pital]

Wow, am I really hearing "the company can just take your wage"? Are you fucked in the head, energiewende? I am sorry to use such harsh terms, but the withdrawal or non-payment of wages for work is the feature of modern-day slavery arrangements and worst Third World regimes where wage payment is never guaranteed and you might have to work for months just for nothing, up to the point where your "wage" is given to you out barter-wise or not given out at all. Then the company is bankrupted and you can no longer claim anything from it; you're poor, destitute and you've been doing slave labour for six months or so.

But of course, I shouldn't have expected less from our paragons of economic reform.

Problem is of course that wage withdrawals in reality look so ugly that no sane politician would propose them to occur on a regular and legalized basis. That's the good part. The bad part is that they can still occur even outside the legal framework.

[energiewende]

I am not sure if that is a serious post, but it should be clear that being paid to receive a valuable and immediately marketable education is not any way comparable to slavery, any more than being given an antique Colt 1860 is the same as being shot in the head.

If you think it will result in imminent revolution (and remember, only the minority who get fired or tried to screw their employers have to pay anything at all), I don't think you want to look at the US student loans' system.

[Simon_Jester]

Energiewende, the problem is that this system will not work as you envision. It would work if everyone were honest. But offering such an obvious, easy way to get out of paying people for their work will make con men out of a LOT of employers, or at least tempt them.

What would you do to fix that? Tie up the courts with a mass of lawsuits on behalf of people who claim their wages were unfairly garnished?

[energiewende]

The obvious exploit on the company's part would be to overstate the value of their training, so they can "claim back" a disproportionate amount of money

Leaving aside the fact that universities have an even stronger incentive to do this... wait, why leave that fact aside?

Or they could recruit people with agreements like this, then start screwing around with the terms of employment: "oh, right, did I mention that our office is moving to Outer Mongolia in six months? And that we're laying off half the secretarial staff so you'll be spending an extra seven hours a week filling out more of your own paperwork?" Very convenient, as a way of forcing employee retention under conditions where they wouldn't normally get it.

Or, of course, they could hire people with the expectation that they'd probably leave of their own free will after a few years, then try to game the system by working extra-hard to find reasons to fire people in the last few months of their 'apprenticeship.'

Setting up a scheme to deliberately defraud people is not just civilly liable, but a criminal offence. Also, while the company is messing around trying to extract small sums of money from their employees who they then constructively dismiss and leave with no means of repayment, who is actually producing goods and services to sell to customers?

There's been a tremendous rise over the past generation or so of corporations trying to fill entry level white-collar positions with unpaid or underpaid interns.

Somewhat. What the class warriors don't tell you is that the evilest corporations pay the most money. Investment banks will pay for $10-15k for a summer of work as an "intern". The purpose of internships is to make it easy to fire obviously unsuitable people in the first few months.

the problem is that this system will not work as you envision

This is how the economy in fact did work as recently as 30 years ago, at least in my country. In fact I was even offerred money myself for university in exchange for committing to a company, but since university is paid by the government and I didn't need the extra, I turned it down.

[K. A. Pital]

I did not say it will result in revolution. People are wretched, miserable and weak. Even real wage withdrawals in teh Third World don't necessarily cause one. It's just mind-boggling though how some people argue for Third World solutions in the first world. It's like a freak show of sorts.

[Zaune]

Mind-boggling? Not really, it's just that your average plutocrat thinks the days when anyone earning less than a lower-middle class wage at least could simply be expended like so much coal or oil in the pursuit of profit suited their ancestors ather well and can they have things back the way they were before, please?

[energiewende]

I did not say it will result in revolution. People are wretched, miserable and weak. Even real wage withdrawals in teh Third World don't necessarily cause one. It's just mind-boggling though how some people argue for Third World solutions in the first world. It's like a freak show of sorts.

What's your view of the actual US university system, in which everyone accures $10s of thousands of non-dischargeable debt (even the "permanent disability" waiver is rarely upheld by courts) with no pay or job or promise of either, or even usually any relevance of their credential to a job.

I am not speaking from theory here; my aunt works with nurses who were paid a nominal sum to train and given free room and board while doing so, in exchange for commitment to work for the British National Health Service. Today to even apply for this job a British citizen would have to accrue £30,000 of debt to obtain a degree in nursing plus another £20,000 of living expense loans. During this time they would neither be paid nor guaranteed any job on graduation. What reason is there to favour the current system other than status quo bias? Or more bizarrely view it as worse for the poor?

The worst thing is that the only reason this system is possible is that the government guarantees the loans. If it didn't, hospitals would have to train their own staff like in the past and pay them because no one can afford to work for 4 years for free. We have somehow distorted the free market in such a way as to make the poor poorer and disproportionately disadvantage them in getting good jobs.

In other countries like Germany university education is still more or less free but this only creates another problem: why do we want job training done by middle men whose interest is to extort as much money as possible for as little practical knowledge as possible, rather than by the end users of job skills? University only makes sense if one believes it permanently raises IQ or learning is readily transferrable between different fields, but this isn't what the evidence suggests.

[K. A. Pital]

Germany is nice. People get training on credit from the government and repay it when and once they can.

Different skills and human development in general are important. Humans are no living machine tools; fuck those who suggest that. There's no such rule that the "end user" should decide on how humans are developed. Humans are not to be "used". They are humans.

[Dr. Trainwreck]

Making education transferrable makes companies less willing to pay for it, since it's easier for employees to take their skills elsewhere. I still don't think it's a massive problem, first because of non-compete contracts, and second because they can just pay their new employees the market rate.

I still don't see why we should go and change the education system to suit the market instead of providing a more all-around education. Essentially, you're saying it would reduce unemployment, at the cost of reduced wages and less diverse education. I don't feel that comfortable with the tradeoff.

2. I dont think the law is the main issue here. Even if there were no copyright or patent laws companies would still develop their own tools (outsiders won't develop them for sale if they can't internalise the profit, so doing this essentially everything moves in-house) and protect them as commercial secrets, just like the company telephone directory and the minutes of strategy meetings.

Of course they would, I said so in my last post. But to a lesser extent than they do now. This is just a black-and-white fallacy.

For the most part, the university formal education system that has become overly popular in recent years does not contribute much to it. It's a 4 year drinking holiday, except it's a lot more expensive than just sitting at home for 4 years drinking.

I don't remember asking you what you did at uni, nor asking for your personal opinion of it.

[K. A. Pital]

So because this guy was drinking in school, abolish the school! Nice. What next? Some folks drink at work. Abolish work!

[energiewende]

I got a technical (ie. vocational, though not called that) education in university, unlike 80% of attendees. I don't recall giving you my opinion of it.

Anyway, I am not seeing much argument at this point. University is being defended because, I guess, it's cool to say you went to university. Which is of course why people cried so loudly for the subsidies in the first place, not because they read econometric studies claiming it would boost GDP per capita.