Inflation vs resources

[Pointedstick]

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.

[Kriegsspiel]

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.

[WiseOne]

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!!

[Kbg]

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.)