I’m not sure on that one. Inflation disincentivises sitting on cash (including non-inflation protected bonds), so it might well increase dividends and buybacks – get that cash off the books and return it to investors and make it their responsibility to figure out what to do with it. Inflation will also require them to spend more on wages, but I would guess it will actually increase stock buybacks. I, however, don’t think that is (automatically) bad. The only real problem with stock buybacks is that it is a tax avoidance scheme. If we reformed capital gains tax then buy back away.
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Stocks are not perfectly inflation adjusted, but they do better in an inflationary environment then what the poor have, which is typically nothing. Worst case scenario, the rich can simply buy inflation adjusted bonds and be covered.
Im not sure i get your point about job security, could you elaborate? The point i was trying to make is that if you cant get a raise in response to inflation, you are the one paying for it. If you have low job security, it stands to reason that you also have a low ability to renegotiate your wages, and therefore cannot ask for a raise in response to higher inflation.
I agree, but i hasten to add that the problem Doctorow mentions about governments not liking to tax also really applies to this. The ROI calculations and what is viewed as valuable vs obsolete are going to be products of the political system, meaning subject to lobbying, graft, influence peddling and the like.
This is not to say that it shouldnt be done, but only that the result will have little to do with economics.
I appreciate this discussion! It’s really making me think through my positions.
My response is: once there is wage pressure, firms that engage in the actual creation of economic activity will become the ones that appreciate and that investors favor.
Great. They won’t make nearly as much. The stock market, as it is now, allows anyone with wealth to become a rentier. (There are of course other aspects to this problem that also need to be addressed.)
I was saying that US workers currently feel they have better job security than pre-recession. It takes a while for perceptions of job security to shift, but the economy has in fact recovered. Workers will ask for better wages, or go elsewhere.
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Some workers will ask for higher wages. Its important to contemplate who will be able to do this and who wont because it wont happen evenly.
My thesis is this: If you are wealthy or higher up the income scale, you will be more able to increase your wage in response to inflation than if you are not. Therefore, the higher up the income scale you are, the less inflation affects you, and vice versa.
My point about the rich buying inflation adjusted bonds was not that they are perfect, but that inflation wont do much to reduce the rich’s share vs the poor.
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Your thoughts make sense in a world where everyone is on wage income, and the super-wealthy are the very high wage earners (top professions, high-level bureaucrats, celebrities, etc.). In reality, the top of the income scale is dominated by returns to capital. Those returns derive, in large part, from the sorts of activity that don’t contribute to overall economic growth. That’s the core concept you have to get, and then I think the rest pretty much follows.
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What if:
- the government was able, to within $10,000,000 determine how much outstanding debt it was going to have at the end of 2019 and
- was able to print and store all of that money until the end of 2019 and
- arranged to buy back 100% of its outstanding debt with the aforementioned money at the end of 2019 and
- they were able to do it between friday Dec 27 at 5pm and Monday Dec 30 at 8am.
Would it work?
Would this be a good thing or a bad thing?
Depends on whether you can get a world government going in 9 months.
Im not sure i agree with that, but lets set this aside for a second. Instead of thinking of how the top income earners react to inflation, lets contemplate how the lowest income earners are affected. People on minimum wage take a pay cut (assuming minimum wage is not increased), full stop. If they had any power to negotiate wage increases they wouldnt be on minimum wage. People above them have some capacity to renegotiate wages, but not much, and thats even assuming they realize that they need to be doing so constantly just to stay ahead of inflation.
To me, it seems unjust to say that those who are least able to afford a pay cut (the working poor)and are least able to negotiate a pay increase are the ones who have to pay for inflation. And dont even get me started on people who are are fixed benefits like retirees and those on welfare.
Maybe the rich also take a pay cut under inflation, maybe the investor class makes a bit less, but i strongly doubt it.
I really appreciate the opportunity to talk about this as i think this is a subject which deserves more discussion than its typically give, but i fear that our ability to convince each other is going to be limited by the medium we are using. Because of this i want to ask a favor of you. If you want to know how inflation affects the poor, ask them. When the opportunity arises and people are talking about their pay anyway, ask them how many raises they have gotten in the last few years. Ask them about inflation and see if they even are aware that they should be getting about 2% more every year just to stay in the same place. I think you will find, like i have, that most people at the lower end of the scale, and by lower i mean less than 100k, dont get anything like a 2% increase and dont even know that they should. This is who is paying for inflation, not the Warren Buffets of the world.
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I guess the question i have is “would it work to do what?”
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I just stopped reading. The thing you want to set aside I called my “core concept.” If you want to be a reformed trolley (or at least if you want to continue, with me), you need to tell me whether or not you agree with that first.
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I know that quote gets attributed to Gandhi, but it doesn’t at all sound like something he would say (the wording, I mean).
This isn’t true. Or, at least it’s only true for a subset of what is a capital return today.
If the capital return is buying a stock well removed from an IPO and selling it a year later, then I would agree this doesn’t help economic growth. At least not very directly, possibly through some tangential limited benefits.
If the capital return is investing in creating a company, building something, funding a small business, basically all the things we think of as “capital investments” that are NOT buying and selling stock and financial instruments. These are all things that directly impact economic growth.
So, if the top income comes from funding new startups and businesses or increasing business capability, then it’s definitely contributing to economic growth.
If it’s just gambling in the stock market, several steps removed from actual business, with only tangential impacts, then I would agree that the economic impact is significantly smaller, trending to none for some types.
By set aside I meant address it separately. Here goes. I agree that the top of the income scale all comes from returns on capitol. Stocks, bonds, real estate, ect. I dont agree that those returns are from activities that dont contribute to overall economic growth. Without knowing why you think that, im not sure my response will really be on point.
I can, however, respond as to inflation’s effect on your typical investments, Stocks, bonds, real estate and so forth, if you dont think this is how the rich get and stay rich, i guess you can ignore this.
Companies, which is what you own when you own stock, will have a varied response depending on the industry and a lot of other factors. Off the top of my head, id say that companies that are in highly competitive industries will be less able to pass the cost of inflation along to its customers, whereas companies that are highly monopolistic will be more able to. Its worth noting that when a company has to internalize the cost of inflation its less likely to give its employees a raise to cover their costs of inflation.
Bonds (at least non-inflation adjusted ones) decrease in value when inflation rises, so i guess if a rich person is heavily invested in bonds then they will lose some money. On the other hand, when bond prices are depressed they are cheaper to buy so the rich can aquire them at a discount.
Real estate will vary based on the ability of the landlord to increase rents.
Generally speaking, the richer you are the more access you have to sophisticated investment strategies to protect you from inflation. You are not going to get Warren Buffet’s money through inflation, people like him have armies of people planning for that.
I dont think impoverishing the rich is a particularly useful objective. Making Bill Gates or Jeff Bezos poorer wont help the poor in any real way, in my opinion. This is especially true when the tool you are using, inflation, directly hurts the poor.
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Well mostly its coupons on bonds these days.
This is true. But money creation is surprisingly simple in many ways. After all, all dollars live in the US banking system or in notes and coins. What could be simpler?
It doesn’t seem like you’re trying very hard to understand me. Some of the rest of what you wrote is also putting me off.
Nice talking to ya though.
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The key word in @john_c’s post is “dominated.” There are some investments, as you point out, that have direct positive impact on the economy. But please remember that the financial instruments/derivatives market is massive compared to the US economy itself. The only individuals who are heavily invested in those markets are the ultra-wealthy. His assertion that the “top of the income scale is dominated by returns to capital” and that those investments “don’t contribute to overall economic growth” is dead on.
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Via overfinancialization, yes, and also rent-seeking and regulatory capture.
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Yea, sorry my responses werent totally to your liking, its too bad you couldnt even be bothered to read what i wrote until i gave you everything you wanted.
