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.