Inflation vs resources

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Inflation vs resources

Post by Pointedstick » Wed Aug 21, 2019 3:46 pm

Everyone knows that on a micro level, a price is caused by the equilibrium of supply and demand. On a macro level, the inputs are total purchasing power and total purchaseable goods, and they similarly arrive at an equiligrium that determined the rate of inflation or deflation.

Naively, if total purchasing power increases, but the total amount of purchaseable goods remains the same, then prices will rise to soak up the extra money resulting in inflation, and everyone loses. The same thing happens when purchasing power remains constant and the amount of total purchaseable goods falls due to some economic, political, military, or environmental disaster: prices inflate due to the same amount of money chasing fewer goods. If the amount of goods rises relative to purchasing power, then prices fall and deflation happens; if total purchasing power rises equally with total purchaseable goods, then prices don't budge. I believe all of this should be un-controversial and obvious, right?

However, what if the two are or can be related? For example, suppose the government creates 2 trillion dollars out of thin air via some mechanism (printing it, borrowing it into existence, etc), and it spends this money on vast infrastructure projects deemed to be of pressing national importance (such as for example 100% clean renewable energy, high speed rail connecting every major American city). Let's say that the construction industry is not currently large enough to accommodate the new projects, and must expand and hire more workers.

If labor force participation is near 100% and immigration and automation technology are not able to provide the additional labor power, then this amounts to more money chasing the same amount of goods and services (in this case labor) and the price of labor (i.e. wages) will rise as workers find their bargaining position improved. I believe this should also be uncontroversial.

But if on the other hand there are many able-bodied people not in the labor force, or underemployed, or there are immigrants willing to do the work, or there are idle or easily-built machines that can do the work... then these people or machines will be "purchased" with the new money, preventing wages from rising, while simultaneously creating useful infrastructure which, if it is well-conceived, amounts to a rise in real goods and services as people are able to more easily and cheaply travel, move goods, communicate, etc--while also unlocking new economic opportunities due to the diminished friction between distant locations.

So in this case, new money has appeared out of nowhere, stimulated the economy by incentivizing the use of previously idle resources (in this case people), and not produced any meaningful inflation because the rise in purchasing power injected into the economy has been matched (ideally) by a rise in purchaseable goods and services and enabled new economic opportunities.

I feel like I've just arrived at classical Keynesian economics. Is anything in the above obviously wrong?
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Re: Inflation vs resources

Post by stuper1 » Wed Aug 21, 2019 3:58 pm

What if the project(s) create 1 trillion dollars of value but cost 2 trillion dollars due to wasteful losses? Such losses are the norm in public works projects due to corruption, other waste, etc.
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Re: Inflation vs resources

Post by Xan » Wed Aug 21, 2019 4:12 pm

The (let's say) immigrants building your infrastructure have been paid with newly-created dollars, so they haven't affected other people's wages. But they are now spending those dollars on housing, food, you name it, competing with everyone else. So it only works if the project you're having built does in fact boost the real economy. If I'm understanding everything, which is always a big "if"!
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Re: Inflation vs resources

Post by Pointedstick » Wed Aug 21, 2019 4:30 pm

I guess that's the real trick, then: choosing projects and spending priorities that will result in a net increase in prosperity and grow amount of available resources, rather than projects whose costs will partially or mostly be diverted to corruption at the expense of the public.

I have a new job that sees me travel to Europe multiple times a year now and it's kind of amazing to see how things work in countries that have a functional body politic. Their governments debate about how best to maximize prosperity and long-term value for their citizens, rather than who they should hurt today. Yes, they have problems, but it seems like they have generally arrived at an overall consensus that their governments' purposes are to improve the general social welfare and infrastructure, as opposed to other concerns such as protecting citizens from outside threats, maximizing the wealth available to the highest achievers, stopping cultural change, or favoring the interests of one internal group over another. So they seem much more effective than the American government is at choosing projects that actually work and produce a positive societal return on investment.

Relatedly, infrastructure projects cost much more per mile for equivalent results in the USA than they do in Europe: https://www.nytimes.com/2017/12/28/nyre ... costs.html. It's a pretty good read. But overall you see that basically everyone involved has an attitude of "I need get as much as I can for myself." There appears to be no sense of honor, selflessness, or public service to limit people's greedy and selfish tendencies. So little wonder that things are too expensive and nobody trusts anyone else.

I just love riding on Germany's high-speed rail. The network is vast and universal, the trains are modern and incredibly fast (150+ mph), and the prices are quite cheap. It's just a lovely experience compared to driving or flying. Even in poorer countries like Spain, their cities have high speed rail and subway systems with trains that can take you straight to the airport. In my home city, there's no subway and the one passenger train that goes to a major tourist destination is like two miles to the west of the airport, rather than right inside it. How stupid is that!? Talk about millions and millions of dollars in lost tourism because it's harder to get from the airport to the destination. So it's just depressing when I return to the USA where we don't have any of this kind of sensible infrastructure. Instead people are arguing over whether or not it would work or be possible or be cost-effective or whether the geography would prevent it and blah blah blah blah and meanwhile in Germany they just already have it. China too, from what I hear. And they built theirs entirely in the last decade or two, across an area as vast and geographically rugged as the USA.

The rest of the world is leaving us behind while we argue over whether it's possible or if our government is competent enough to achieve it.
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Re: Inflation vs resources

Post by stuper1 » Wed Aug 21, 2019 4:58 pm

Agreed that American infrastructure seems dilapidated compared to other countries'. My first scapegoat would be the military-industrial complex. America is a military behemoth and the world's cop. Most of our money goes to defense spending. Compare our defense spending to Germany, France, Spain, etc.

Times were a lot simpler before nuclear weapons were discovered. Somebody now has to keep the genie in the bottle, and America's MIC is happy to perform the role, and finance politicians who will keep enabling them.
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Re: Inflation vs resources

Post by Pointedstick » Wed Aug 21, 2019 6:11 pm

stuper1 wrote:
Wed Aug 21, 2019 4:58 pm
Agreed that American infrastructure seems dilapidated compared to other countries'. My first scapegoat would be the military-industrial complex. America is a military behemoth and the world's cop. Most of our money goes to defense spending. Compare our defense spending to Germany, France, Spain, etc.
I had an interesting conversation with a slightly drunk Finn two years ago.

"I pay 30% in taxes, and what do I get?" He was grousing. "All I get is free healthcare for myself and my family, free education for my children through college, free childcare for my wife, and a pension for retirement."

"That's funny," I said. "Because I also pay about 30% in taxes, but I don't get free healthcare, I don't get free college, and I don't get free childcare. Instead I get $12 billion Gerald Ford-class aircraft carriers and $120 million F-35 fighters."

stuper1 wrote:
Wed Aug 21, 2019 4:58 pm
Times were a lot simpler before nuclear weapons were discovered. Somebody now has to keep the genie in the bottle, and America's MIC is happy to perform the role, and finance politicians who will keep enabling them.
The nuclear weapons part of our defense spending is actually not huge. Almost 3/4 is R&D, testing, procurement, and later maintenance of new vehicles and weapons, many of which turn out not to work properly but enrich big defense companies anyway. This is the depressing "Military-Industrial-Complex" stuff. I wrote about some examples a few years ago here: viewtopic.php?f=9&t=9045
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Re: Inflation vs resources

Post by Pointedstick » Wed Aug 21, 2019 6:15 pm

MangoMan wrote:
Wed Aug 21, 2019 5:12 pm
Let's not forget environmental impact studies, etc, and mountains of legal challenges that will be borne by virtually every project. Because in the USA, some group is opposed to every project.
Right. More examples of the "everything is about me and my desires, so screw society or the common good" attitude quite common in the USA.
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Re: Inflation vs resources

Post by stuper1 » Wed Aug 21, 2019 6:18 pm

I'm not saying that we are spending a huge amount of money on nuclear weapons themselves at this point. What we are spending money on is keeping us and the rest of the world safe from nuclear holocaust now that the technology is reasonably available. If we don't step up and fill the alpha-dog role, the fear is that either a worse actor will fill that role, or the role will go unfilled and a power vacuum will ensue. Either way it's a big risk to take. It wouldn't be such a big risk without the presence of nuclear weapons, especially with oceans protecting us on either side.
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Re: Inflation vs resources

Post by Pointedstick » Wed Aug 21, 2019 6:30 pm

Sometimes I wonder how much those fears are justified.

North Korea has the bomb and it's ruled by a psychotic inbred dynasty of iron-fisted dictators. Yet they haven't nuked anyone because they understand that it would be the dumbest thing they could possibly do. They'd might hit Seoul or Tokyo or even Seattle, and that would kill a few million people, but it would be the end of the Kim regime. A military coalition of the entire world--probably including China and Russia--would remove the Kims from power and set up a harmless puppet government. And they know this. So they can't use their nukes, because they want to stay in power. And that actually makes them no real threat.

It's the same for Pakistan and India who hate one another. It'll be the same for Iran once they get the bomb thanks to our president's diplomatic bungling. Even if Iran tries to be sneaky and gives nuclear weapons to one of their terrorist group allies with the intention of setting it off in Tel Aviv, the same thing will happen, because everyone with half a brain will know who gave a nuke to terrorists if something like that happens after Iran becomes a nuclear-armed state.

And it's not as if U.S. military spending or action has prevented any new nuclear-armed states from emerging. Come to think of it, the five trillion or so dollars we've spent killing hundreds of thousands of people in the Middle East for almost 2/3 of my life hasn't seemed to improve anything (shockingly! ::) ). I wonder what kind of high-speed rail network it might have bought, though...
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Re: Inflation vs resources

Post by stuper1 » Wed Aug 21, 2019 6:36 pm

The fission bomb killed say 100,000 people in Hiroshima.

A fusion bomb hitting say Los Angeles could kill 10,000,000 people. One bomb.

We lost 3,000 people on 9/11 and the whole country was in mourning for years. What would it be like if we lost 10 million, or some multiple of that if somehow we got hit in multiple cities by more than one bomb.

I don't like the wars in the Middle East, North Africa, and everywhere else either. I don't like the MIC. I don't like the American empire in general. But I do understand the fears related to nuclear holocaust.
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Re: Inflation vs resources

Post by Pointedstick » Wed Aug 21, 2019 7:06 pm

Yeah, so do it. And I think everyone else does too. That's why no one wants to start the nuclear holocaust. There would be no winners in that game.

Just about the only country it's safe to nuke with a first strike is one much weaker than your own, with no capability to counterattack, and only if the rest of the world approves or couldn't defeat you if they disapproved. 1945 USA vs Japan fits that definition, but over time it gets smaller and smaller. The world is full of nukes and nobody can use any of them aggressively. They're all defensive weapons these days, so the principal risk is probably an accident or miscommunication.

To prevent the nuclear holocaust, our critical goal should be to work towards the simultaneous worldwide elimination of all nukes (to prevent anyone from temporarily gaining the upper hand), coupled with an international anti-nuclear inspection organization with military authority to end violations. Considering that our efforts have so far failed to prevent tinpot dictators from getting them, and American diplomacy is currently in shambles, I'm not optimistic.
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Re: Inflation vs resources

Post by stuper1 » Wed Aug 21, 2019 11:27 pm

Worldwide elimination is a great goal, but I'd say the chances of reaching it are zero. There's no way any country would give up its last nuke because they would fear that another country has one or a few squirreled away somewhere.

I'm not saying I like it, but for anyone who is in a military command position, there is no way that they are going to risk losing 10 million people in one shot. I think that is one reason that the MIC is so powerful. Probably a bigger reason is just plain greed. What do CEOs of MIC companies care if we have crumbling freeways and no high speed rail? They can just use their helicopters to go wherever they want.
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Re: Inflation vs resources

Post by Pointedstick » Thu Aug 22, 2019 8:56 am

There is already a worldwide risk of losing 10 million people in one shot. It is an unavoidable risk. That ship has sailed.

What I'm saying is that there are remarkably few military solutions that lessen this risk. "We need to maintain our giant conventional military to prevent L.A. being nuked!" makes no sense in my opinion; the two have no logical connection. We could save probably $600 billion a year to have a purely defensive domestic militia with no expeditionary forces but keep our strategic nuclear forces, and the risk of suffering a nuclear attack does not rise at all. What we would lose in that case is the ability to project power abroad and enforce the global economic order that we set up after WWII, not the safety of our major cities from nuclear armageddon.
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Re: Inflation vs resources

Post by Kriegsspiel » Fri Aug 23, 2019 9:03 am

Pointedstick wrote:
Wed Aug 21, 2019 3:46 pm
Everyone knows that on a micro level, a price is caused by the equilibrium of supply and demand. On a macro level, the inputs are total purchasing power and total purchaseable goods, and they similarly arrive at an equiligrium that determined the rate of inflation or deflation.

Naively, if total purchasing power increases, but the total amount of purchaseable goods remains the same, then prices will rise to soak up the extra money resulting in inflation, and everyone loses. The same thing happens when purchasing power remains constant and the amount of total purchaseable goods falls due to some economic, political, military, or environmental disaster: prices inflate due to the same amount of money chasing fewer goods. If the amount of goods rises relative to purchasing power, then prices fall and deflation happens; if total purchasing power rises equally with total purchaseable goods, then prices don't budge. I believe all of this should be un-controversial and obvious, right?
With you so far.
However, what if the two are or can be related? For example, suppose the government creates 2 trillion dollars out of thin air via some mechanism (printing it, borrowing it into existence, etc), and it spends this money on vast infrastructure projects deemed to be of pressing national importance (such as for example 100% clean renewable energy, high speed rail connecting every major American city). Let's say that the construction industry is not currently large enough to accommodate the new projects, and must expand and hire more workers.

If labor force participation is near 100% and immigration and automation technology are not able to provide the additional labor power, then this amounts to more money chasing the same amount of goods and services (in this case labor) and the price of labor (i.e. wages) will rise as workers find their bargaining position improved. I believe this should also be uncontroversial.
The price of the goods will rise also, since there is more demand from the government. And since it is the government, we should predict that controlling the prices of the things they buy isn't a strength. As I understand it, stuff like sand is already becoming a shortage item. If the government bids up the price of resources like that, the private sector sees the inflation.
But if on the other hand there are many able-bodied people not in the labor force, or underemployed, or there are immigrants willing to do the work, or there are idle or easily-built machines that can do the work... then these people or machines will be "purchased" with the new money, preventing wages from rising, while simultaneously creating useful infrastructure which, if it is well-conceived, amounts to a rise in real goods and services as people are able to more easily and cheaply travel, move goods, communicate, etc--while also unlocking new economic opportunities due to the diminished friction between distant locations.

So in this case, new money has appeared out of nowhere, stimulated the economy by incentivizing the use of previously idle resources (in this case people), and not produced any meaningful inflation because the rise in purchasing power injected into the economy has been matched (ideally) by a rise in purchaseable goods and services and enabled new economic opportunities.

I feel like I've just arrived at classical Keynesian economics. Is anything in the above obviously wrong?
Did you arrive at Keynes or Leibig? Leibig's Law states "that growth is dictated not by total resources available, but by the scarcest resource (limiting factor)." That obviously applies in the short term, not the long term. The limiting factor in your first scenario is obviously labor. In the second, it's... money? As in, we have all these resources (cement, lithium, sand, steel), and all these people doing nothing, we need to get them to use those resources. That doesn't seem right. Money is abstract, it is the manifestation of how scarce resources are. If it's not "worth it" to build a railroad or a solar farm, economics is saying that you're going to burn up more resources than you'll get back. So I want to come back to this:
So in this case, new money has appeared out of nowhere, stimulated the economy by incentivizing the use of previously idle resources (in this case people), and not produced any meaningful inflation because the rise in purchasing power injected into the economy has been matched (ideally) by a rise in purchaseable goods and services and enabled new economic opportunities.
If all those idle people now have money, they're going to be competing for the same goods the other people were already competing for, like food and housing. You're assuming there will be a rise in goods and services, but that won't necessarily occur. Taking food, for example, we could have a situation where we're producing the maximum amount of beef currently possible. Now all those previously unemployed and poor people, who were eating rice and beans, start buying beef. The price of beef is going to go up.

I figure infrastructure only increases productivity up to a point, then has hugely diminishing returns. And it seems disingenuous to run calculations saying things like "this rail line will decrease commute times by 5 minutes, multiplied by 1,000,000 trips, so that's 5,000,000 minutes of productivity at $15/hour..." And if you don't do calculations like that, it seems tough to justify building out the transportation network. Same with green energy, which doesn't seem to be very economical or green.

And if transportation infrastructure is built up, it seems like it would further speed up resource usage. How much do the paradigms we use to think about things apply only to a growing world, growing population? What would it look like if the goal was to increase per capita welfare? Something to ponder.

Anyways, come at me bros.
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Re: Inflation vs resources

Post by WiseOne » Tue Aug 27, 2019 8:25 am

Pointedstick wrote:
Wed Aug 21, 2019 4:30 pm
Relatedly, infrastructure projects cost much more per mile for equivalent results in the USA than they do in Europe: https://www.nytimes.com/2017/12/28/nyre ... costs.html. It's a pretty good read.
Pointed, it's great to hear from you!!

I have friends in Europe and relatives in Canada, and we've had lots of discussions along the lines of what you get for your money. Unfortunately costs like the subway projects in the article are hard to compare. First, NYC has a long and perhaps unique list of reasons why stuff costs more: extensive political corruption and bureaucracy, unions that have way too much power, working on an island with unique challenges to things like transporting construction materials, and a dense layer of existing infrastructure to work around. Second, the construction money has to pay not only for the construction, but also for healthcare and pensions for the workers. In Europe, those costs come from a different bucket.

You're right that the US also has some expenses that other countries don't have, like the pricey job of being the world's backup military. I was actually quite happy during the 2016 campaign when this was openly questioned, but it sounds like no one is prepared to give that up just yet.
Germany, on the other hand, has a very limited military and they're not allowed any more than that for what I hope are obvious reasons. And, all these other countries have much saner immigration and citizenship eligibility policies than the US, and they didn't have an extensive slave population 150 years ago. Plus their population is much more homogenous and so their society is very cohesive; families are more close-knit and often live in close proximity. End result, they have a (proportionately) much smaller welfare- and social service-dependent class. (Not saying the multi-racial/ethnic/mobile US fabric is bad...just that it has associated costs.) That may be changing now in Germany, but the infrastructure you've seen was built before all that happened.

Interesting discussion, anyway, thanks for posting!!
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Re: Inflation vs resources

Post by Kbg » Tue Sep 03, 2019 3:55 pm

We live in a unique country for sure and it will be interesting to see how we fare in the future. I'll skip the infrastructure discussion as I've got no expertise there other than to say...we are not world class anymore for probably all the reasons mentioned.

Where I do have some experience is as a former MIC. (well still in it actually). Nukes are a very interesting weapon and most of the really deep thinking on the topic was all done in the 50s and early 60s. It was understood fairly quickly that they were something unique, which says a lot given the context of WW1 and WW2 which most of the theorists had lived through and absolutely imprinted them and their analysis. In military circles, I would say the vast majority of people think they have little to no practical use and that we can now do with precision guided munitions (PGMs) pretty much what is required militarily. This begs the question...then why keep them? And the answer in fact is as a psychological mass terror weapon. It was no accident the term mutually assured destruction got the acronym (MAD) at the same time the term came out.

Personally, I don't ever see them going away for those that have them until something renders them ineffective. Given the human species' proclivity to kill itself in mass events from time to time, you would (I think) be a moron to do so. Military violence operates on its own logic which Carl von Clausewtiz absolutely nailed theoretically. A short summation goes like this...to whatever degree a side is willing to push violence is where it will go and the other side either matches, escalates or folds if it isn't willing to go there (or can't ante up). And whether you like nukes or hate them, I think the consensus is that they have served as a significant restraint between the world's great powers including the US. The audience will note we have not actually come to any sort of large scale violence between two nuclear armed countries.

Small side note...the Nuclear Non-Proliferation Treaty has succeeded beyond anyone at the time's wildest guess. it was assumed that pretty much every nation with a decent scientific community would have them. (I think by the 70s IIRC.)
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