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Maybe this will be moved to the Econ forum, but I figured I would start it here since there will be a lot of political arguments.
I was reading a Brookings study done in 1978 when inflation was crimping the economy asking this same question. Would link but you need to register for JSTOR to view it.
They identified socioeconomic cohorts and then looked at their performance over periods of time when inflation was higher than normal. They did two analyses, looking at household finances before and after taxes and transfers. This proved important since the two analyses had different results.
In both analyses, inflation was a wash for middle income homeowners with fixed rate mortgages. They lost some ground with wages lagging prices, but made it up with home price appreciation. The cohort poorer than this also did not see a change in fortunes after accounting for taxes and transfers, because most government transfers are indexed to inflation.
The real story was with the wealthiest cohort. Inflation hurt them the most, because some are creditors and because tax rate cutoffs and deductions are generally not indexed for inflation. The more inflation, the more money you end up paying at the highest rate and the less valuable are deductions due to fixed cutoffs. Without accounting for taxes and transfers, inflation was a winner for the wealthy due to higher asset prices. But after accounting for taxes and transfers it became a loser.
This jives with the political messaging. Republicans are traditionally more worried about inflation, because it hurts their wealthy constituents especially banks. Lenders of fixed rate loans are the biggest losers of inflation. Those on fixed incomes are the second biggest losers.
Conversely borrowers of fixed rate loans are the biggest winners of inflation.
Stockholders tread water, and wage earners lose a little bit of ground to prices (at least in the 1970s, it will probably be different now with fewer unions). Those who receive transfer payments (the poor) also tread water.
This was not covered by the article, but the government is also a big winner of inflation. Not only can it inflate away its own debts, but it can capture more real dollars via taxation by the mechanism described above. Which all makes sense since inflation is almost always a problem of political economy i.e. the government chooses to stoke inflation.
Maybe this will be moved to the Econ forum, but I figured I would start it here since there will be a lot of political arguments.
I was reading a Brookings study done in 1978 when inflation was crimping the economy asking this same question. Would link but you need to register for JSTOR to view it.
They identified socioeconomic cohorts and then looked at their performance over periods of time when inflation was higher than normal. They did two analyses, looking at household finances before and after taxes and transfers. This proved important since the two analyses had different results.
In both analyses, inflation was a wash for middle income homeowners with fixed rate mortgages. They lost some ground with wages lagging prices, but made it up with home price appreciation. The cohort poorer than this also did not see a change in fortunes after accounting for taxes and transfers, because most government transfers are indexed to inflation.
The real story was with the wealthiest cohort. Inflation hurt them the most, because some are creditors and because tax rate cutoffs and deductions are generally not indexed for inflation. The more inflation, the more money you end up paying at the highest rate and the less valuable are deductions due to fixed cutoffs. Without accounting for taxes and transfers, inflation was a winner for the wealthy due to higher asset prices. But after accounting for taxes and transfers it became a loser.
This jives with the political messaging. Republicans are traditionally more worried about inflation, because it hurts their wealthy constituents especially banks. Lenders of fixed rate loans are the biggest losers of inflation. Those on fixed incomes are the second biggest losers.
Conversely borrowers of fixed rate loans are the biggest winners of inflation.
Stockholders tread water, and wage earners lose a little bit of ground to prices (at least in the 1970s, it will probably be different now with fewer unions). Those who receive transfer payments (the poor) also tread water.
This was not covered by the article, but the government is also a big winner of inflation. Not only can it inflate away its own debts, but it can capture more real dollars via taxation by the mechanism described above. Which all makes sense since inflation is almost always a problem of political economy i.e. the government chooses to stoke inflation.
Unions tend to negotiate contracts that cover a three to five year period.
If prices increase, you may get a COLA that covers some or all of it, but if wages increase due to a labor shortage like we have today, you get zip because you are locked into a contract while non-union workers can demand wage increases whenever they like.
The union shop I left during Covid is advertising wages well above what the contract called for, but it isn't enough for me to return because the non-union shop that hired me pays more (+$3.50/hr) than the new pay rate they are offering.
Moreover, if the inflation rate continues at the same pace or increases, I don't want to be locked into a contract that provides a COLA only after prices have increased and never really catches up.
As for the inflation of the 1970s, maybe this time increases in productivity will keep price increases from getting too far out of hand.
Having lived through "stagflation" once, I don't care to do so again.
Maybe that's why Democrats are OK with inflation: It hurts the wealthy most of all.
But I do disagree with you that it doesn't hurt the middle class in that they make up any loss from wages with higher house appreciation. Unless you're planning to sell, that's a paper gain - and it doesn't pay the increased grocery bills. If anything, the higher house price translates to a bigger property bill.
So I'd say that it hurts the wealthy, as you point out, but also the middle class. The group is doesn't hurt are the lower-income, whom the government will just "pay" more to offset the increased costs. (We've already seen that with the jump in food stamps.) Thus, since the Democrats are focused primarily on the lower-income, and what they can transfer to them, they don't see inflation as an issue at all.
... 1978 .. wages ... at least in the 1970s, it will probably be different now with fewer unions ...
As you mention, this is not 1978. Much has changed since then, you can deep-archive your old economics textbooks (they were never really that good back then anyway).
In the Information Age, money grows on electrons and global industrialists operate with near-slave labor across the globe.
Quote:
Originally Posted by Avondalist
This was not covered by the article, but the government is also a big winner of inflation.
What inflation? Not in globally manufactured goods, tradeable goods, and mostly low-skilled services.
Yes, there is inflation in non-tradeables, e.g. health care, housing, college education, military assets. Most of that excess goes into the pockets of private sector executives who come and go through a revolving door in the government sector.
People in government control the index for inflation-indexed transfer payments, they measure inflation mostly by prices for tradeable goods and mostly low-skilled services. Showing an increase in inflation would most likely trigger an increase in interest rates.
In the Industrial Age, average people were addicted to money illusion through wage increases, so inflation was the enemy.
In the Information Age, average people are addicted to cheap credit, so interest rates are the enemy.
Finally, please no crap about so-called political parties: those same people go through those same revolving doors.
Well, okay, since this is the political theater forum, we can obfuscate the issue by throwing mud at each other; works most of the time, just like money illusion.
Maybe you should ask the moderators to transfer this to the economics forum; it actually is an interesting issue and it may generate more economic conversation there, notwithstanding ubiquitous political theater.
while non-union workers can demand wage increases whenever they like.
As an individual today though in a "high skilled" , "in demand", tech related job function let me assure you that the negotiation power is nothing compared to collective bargaining.
We are still viewed as "disposable" thanks to modern "creative accounting" practices and sorcery involving (non-real estate) "depreciation" to justify productivity losses due to attrition and arbitrary terminations.
Maybe this will be moved to the Econ forum, but I figured I would start it here since there will be a lot of political arguments.
I was reading a Brookings study done in 1978 when inflation was crimping the economy asking this same question. Would link but you need to register for JSTOR to view it.
They identified socioeconomic cohorts and then looked at their performance over periods of time when inflation was higher than normal. They did two analyses, looking at household finances before and after taxes and transfers. This proved important since the two analyses had different results.
In both analyses, inflation was a wash for middle income homeowners with fixed rate mortgages. They lost some ground with wages lagging prices, but made it up with home price appreciation. The cohort poorer than this also did not see a change in fortunes after accounting for taxes and transfers, because most government transfers are indexed to inflation.
The real story was with the wealthiest cohort. Inflation hurt them the most, because some are creditors and because tax rate cutoffs and deductions are generally not indexed for inflation. The more inflation, the more money you end up paying at the highest rate and the less valuable are deductions due to fixed cutoffs. Without accounting for taxes and transfers, inflation was a winner for the wealthy due to higher asset prices. But after accounting for taxes and transfers it became a loser.
This jives with the political messaging. Republicans are traditionally more worried about inflation, because it hurts their wealthy constituents especially banks. Lenders of fixed rate loans are the biggest losers of inflation. Those on fixed incomes are the second biggest losers.
Conversely borrowers of fixed rate loans are the biggest winners of inflation.
Stockholders tread water, and wage earners lose a little bit of ground to prices (at least in the 1970s, it will probably be different now with fewer unions). Those who receive transfer payments (the poor) also tread water.
This was not covered by the article, but the government is also a big winner of inflation. Not only can it inflate away its own debts, but it can capture more real dollars via taxation by the mechanism described above. Which all makes sense since inflation is almost always a problem of political economy i.e. the government chooses to stoke inflation.
BS-
My parents were low income and inflation hit them hard. I remember my mother saying she could not buy certain foods anymore and she usually bought used clothing. That was late in highschool for me, during which I bought my own stuff so it did not affect me as much as my parents and my younger sibs.
Let's be clear: INFLATION BENEFITS NO ONE. Arguing over who is harmed more is absurd; it appears as though libs, realizing Biden is a complete disaster, are trying to rationalize all his blunders and make it sound like they are not "so bad"!
Do you think in post WW1 Germany, with inflation at ridiculous levels, people were more relieved that they were not ruined more than others???????? RELATIVITY DOES NOT MATTER WHEN EVERYONE IS RUINED.
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