Sunday, August 19, 2007
For the last week or so I’ve been looking to cut my rent in half. And at a lease renewal rate of $2,400 – and I apologize for throwing the numbers out there, but it helps to drive the point home – one would not think that to be a difficult task. But nowadays it requres me to move all the way out to Brooklyn.
I’m an economist. What does my apartment situation say about inflation in general? I think about these issues often, and in sometimes abstract ways, but this time it has hit me on a personal note. Inflation rates, for the most part, are reported as averages, and policy determined on such numbers. On average the price level has gone up by X and incomes have gone up by Y. But at a behavioral level inflation is something that has massive distributional effects, absolutely nobody is on the “average”. Inflation works its way into the economy as a boon for some and a bust for others (like me). Recent rent increases in Manhattan are a textbook case.
Wall Street, a significant part of the economy here, recently paid out bonuses for individuals in the tens of million of dollars. That’s good news for them. With the Federal government pumping money into the economy and the Federal Reserve pumping money supply into banks stock prices have gone up more than they may have otherwise, a boon to Wall Street broker-dealers who make money in such transactions. And with that came a rather precipitious increase in income to those folks. The problem in New York is that we have not increased production of housing, restaurants, etc., in as large a scale. As a result, as our Wall Street tycoons try to spend more in Manhattan on housing, goods and services. Prices rise. And one would think that someone who has $10 million to spend would hardly effects the likes of me. That is naïve.
There was no increase in the supply in the housing markets of $10 million, so they bought in lower prices levels, crowding out those who would otherwise buy in those price levels, and those in those price levels crowd out those who do not own at that level, and so-on. In that period, of course, no ones income has increased at the same rate as Wall Street’s, so they are forced to a lower standard of living; same salary but lower – what economist call – real income, the $ income requred to purchase the same stuff. That’s me, for example, having to move out to Brooklyn -- rent poor. Eventually, the cost of living rises in such a way that companies find it difficult to hire and retain people in New York. So some skills will get immediate increases in income, while others – for example those making minimum wage – will take years to adjust, if ever.
Eventually, markets clear and, on average, people are making and spending more on things. But did Wall Street’s “real income” rise at the same rate as others? Doubtfully. That’s the pernicious effects of fiscal and monetary policy, and the fallacy of only looking at averages. Distributions abound, and an example of how inflation tears at the heart of society -- on average we are kosher, but in reality inflation was really a tax on the poor people holding cash.
With the seemingly endless supply of economists and political pundits, why is there such myopia in economic policy, and why do we continue to pull these same economic levers that have such harmful effects?
It’s because we are still stuck with Depression-era policy when we are not in a Depression and fixing the other things are too hard, politically. Capital and labor are not idol. Yet the government and Federal Reserve continue to want to think that their spending and expansion of the money supply are silver bullets. It’s not.
If Washington wants to do more for the economy they should do nothing, and eliminate all their bull-shit counter-cyclical policy immidiately. It does more harm than good. Have we learned nothing from Milton Friedman?
Don't they understad that I've got to move all the way the fuck out to Brooklyn?
I’m an economist. What does my apartment situation say about inflation in general? I think about these issues often, and in sometimes abstract ways, but this time it has hit me on a personal note. Inflation rates, for the most part, are reported as averages, and policy determined on such numbers. On average the price level has gone up by X and incomes have gone up by Y. But at a behavioral level inflation is something that has massive distributional effects, absolutely nobody is on the “average”. Inflation works its way into the economy as a boon for some and a bust for others (like me). Recent rent increases in Manhattan are a textbook case.
Wall Street, a significant part of the economy here, recently paid out bonuses for individuals in the tens of million of dollars. That’s good news for them. With the Federal government pumping money into the economy and the Federal Reserve pumping money supply into banks stock prices have gone up more than they may have otherwise, a boon to Wall Street broker-dealers who make money in such transactions. And with that came a rather precipitious increase in income to those folks. The problem in New York is that we have not increased production of housing, restaurants, etc., in as large a scale. As a result, as our Wall Street tycoons try to spend more in Manhattan on housing, goods and services. Prices rise. And one would think that someone who has $10 million to spend would hardly effects the likes of me. That is naïve.
There was no increase in the supply in the housing markets of $10 million, so they bought in lower prices levels, crowding out those who would otherwise buy in those price levels, and those in those price levels crowd out those who do not own at that level, and so-on. In that period, of course, no ones income has increased at the same rate as Wall Street’s, so they are forced to a lower standard of living; same salary but lower – what economist call – real income, the $ income requred to purchase the same stuff. That’s me, for example, having to move out to Brooklyn -- rent poor. Eventually, the cost of living rises in such a way that companies find it difficult to hire and retain people in New York. So some skills will get immediate increases in income, while others – for example those making minimum wage – will take years to adjust, if ever.
Eventually, markets clear and, on average, people are making and spending more on things. But did Wall Street’s “real income” rise at the same rate as others? Doubtfully. That’s the pernicious effects of fiscal and monetary policy, and the fallacy of only looking at averages. Distributions abound, and an example of how inflation tears at the heart of society -- on average we are kosher, but in reality inflation was really a tax on the poor people holding cash.
With the seemingly endless supply of economists and political pundits, why is there such myopia in economic policy, and why do we continue to pull these same economic levers that have such harmful effects?
It’s because we are still stuck with Depression-era policy when we are not in a Depression and fixing the other things are too hard, politically. Capital and labor are not idol. Yet the government and Federal Reserve continue to want to think that their spending and expansion of the money supply are silver bullets. It’s not.
If Washington wants to do more for the economy they should do nothing, and eliminate all their bull-shit counter-cyclical policy immidiately. It does more harm than good. Have we learned nothing from Milton Friedman?
Don't they understad that I've got to move all the way the fuck out to Brooklyn?
# posted by otas : 5:03 PM
