Inflation - what is it?

[Willem]

As for the real estate question, I was pointing out that it has nothing to do with either entrepreneurs nor corporations. Like most such bubbles, it is driven by medium to small firms and individual investors combined with irrationality.

Irrelevant, it's still profiteering that leads to a higher cost of living for everyone. A small entrepenuer is still an entrepeneur. And some of the companies cashing in on the last boom definitely weren't small to medium sized. We're talking about large scale projects worth millions of dollars.

 

[xchen08]

Irrelevant, it's still profiteering that leads to a higher cost of living for everyone. A small entrepenuer is still an entrepeneur. And some of the companies cashing in on the last boom definitely weren't small to medium sized. We're talking about large scale projects worth millions of dollars.

Perhaps, but it still has only negligible impact on inflation. It is a phenomenon that is both localized and temporary. Bubbles, burst, it's what they do.

 

[Willem]

Perhaps, but it still has only negligible impact on inflation.

A doubling of someone's housing costs is much more than neglible. It has a very large trickle down effect since that is probably the largest single expense a person/family has to deal with. More costly housing means an expectation of higher wages, which means an increase in the price of the employer's product in order to compensate. In order to afford a house in this area now, a family has to have a combined income of at least $100,000. That provides alot of inflationary pressures on the economy. Granted it doesn't affect people in Ottawa all that much but it still leads to inflation, even if it is just local.

It is a phenomenon that is both localized and temporary. Bubbles, burst, it's what they do.

Funny, I don't see the prices coming down all that much now that the bubble has burst. They're certainly not being slashed in half to what they were before.

 

[purplemarmot]

I apologize ahead of time for the length...

I've read 4 big economics fallacies in this thread: Minimum wage laws cause inflation; Minimum wage laws are good for poor people (yes some people have successfully argued against that one); Inflation is cause by the increase in oil prices; deflation is bad (no its not! it depends on what's causing the deflation).

If anyone here really cares about learning economics (and you probably should), then I've got some suggestions for you. It boggles my mind why so many people want nothing to do with learning economics when it affects their lives every day (I'm referring to people in general, not necessarily on this forum). The best place to start:

By reading at least one economics book: Economics in One Lesson by Henry Hazlitt. Short, easy to read. The book starts with the lesson and then uses it with over 20 case study examples, such as: the broken window fallacy (that war, earthquakes, etc. are good for the economy), government subsidies and loans, trade tariffs, trade deficits, and most importantly for this discussion, price controls (like rent, gas, and labor), minimum wage, and inflation.

The one lesson is: The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

The best part: The book is available cheaply in print, or free in both PDF and HTML on the internet. I'm not even asking you to spend money (just 5-20 hours of your time - and it will be well spent). One copy here: http://jim.com/econ/

Minimum wage: It's impact is through causing unemployment. By placing a price control/floor on wages, you are pricing out of the market anyone who's labor value is less than that minimum wage. If you make the wage for a job more than it's economic value, what do you think will happen? As a business owner, you will do something else that is more economical with your business. Lay off employees and make the remaining employees do more work, thus raising their labor worth the increase in pay. Who gets laid off? The least productive workers, generally those just starting out. Or the business could outsource work to other parts of the world where they can pay what the labor is worth to the business, or go out of business and layoff every employee.

Contrary to popular believe, employers can't just set an arbitrary wage to maximize their profits. Competition on the free market will cause businesses to end up paying exactly what the labor is worth. Laws can change that, but they will cause unemployment.

Minimum wage laws can't cause inflation: Well, at least by themselves. If there is a fixed amount of money, raising the rates of some workers in the economy by minimum wage, necessarily means that other workers wages will need to decrease. Usually this happens by causing unemployment. Since there are still the same dollars in circulation, overall prices can't increase. Sure demand for some items will cause those prices to go up, but other prices will have to drop to clear the market (sell all manufactured goods). No inflation can occur. The same logic applies to say an increase in the price of oil. If people are required to pay more for oil products, then they will have to decrease spending elsewhere. Prices will then have to fall on those products to clear the market.

Someone previously mentioned that minimum wage studies don't always show an increase in unemployment. That's because inflation is happening at the same time, in other words, counteracting the minimum wage increase. The more inflation, the smaller the impact of the minimum wage on unemployment (and the real purchasing power increase of the beneficiaries).

So what is inflation: It is an increase in the amount of the good that is used most commonly in the exchange of goods, namely: money. How does the amount of money increase? With our current fiat money (money because our government says it is, at the point of gun, nonetheless), it gets created by a private entity, the Federal Reserve. Other banks can do it to, but the bank would go out of business if it did, without a lender of last resort. The Federal Reserve can really just keep printing (or creating on a computer) more money. That increase in money, and that multiplied by other banks' lending, is what is inflation and causes a general rise in prices.

The federal government uses it like a tax that most citizens don't recognize as a tax. It borrows money from the Federal Reserve, to essentially create more money out of thin air. That money is then spent by the government when it still has it's initial value and by the time it trickles to us, prices have already risen. More accurately, the value of the dollar has decreased in relation to that of other goods in the economy. Anyone who saved (or loaned at too low an interest), just had their money stolen (taxed) as it can now buy fewer real goods. Anyone who borrows tends to make out good in this situation, as they pay back their balance later in money that's worth less.

The US had deflation for 30 years in the late 1800s and it was the period of largest sustained economic growth (don't buy the myth that there were depressions - they base those arguments on falling warehouse prices), but job growth was still outstanding and personal wealth for all Americans was growing - hardly bad. With a fixed amount of money (not being inflated by government or a government sanctioned monopoly - central bank), as the amount of goods produced (economic growth) occurs, prices will steadily drop over all (deflation). Those who save and are employed (there was very little involuntary unemployment, too) see their real purchasing power increase. A real raise, not a nominal one.

The deflation that economists point to that is bad is that caused by banks going out of business because they loaned more money than they had (created money out of thin air with the help of the central bank (Federal Reserve)). People with savings in those banks are hurt. If this happens to one bank it's not so bad, but a lot of banks, the money supply shrinks - good for those with savings in other banks, not so much for the economy in general and can cause a secondary depression.

BTW,

A fourth fallacy: that anyone who is knows about the power of the free market is a republican or right winger (I'm insulted!) Most republicans are not free market, but are for corporate cronyism (Plutocracy/Fascism - choose the work you like), but don't really realize they are. Most left wingers who are against the free market, aren't really against the free market, or at least they don't argue against it. They argue against our current corporate cronyism capitalism, which is far from a free market.

 

[TheLazyHase]

Contrary to popular believe, employers can't just set an arbitrary wage to maximize their profits. Competition on the free market will cause businesses to end up paying exactly what the labor is worth. Laws can change that, but they will cause unemployment.

there is aprt wich I agree (mostly the fact that republican are not an inch for free market), but this assertion istoo simplistic to work in the real world. It would work if every single people were quitting his job when he's not payed enough, and that's false, especially for poor people that can't take the risk of quitting a job. Lack of knowledge from people's part is also important, if you don't know what is the worth of your work it's easy to underpay you.

Minimum wage do help poor people. In a perfect world they shouldn't, but the world isn't perfect. For now corporation have a lot of way to pay the labor less than it's worth, one of them being countered by minimal wage.

 

[6K Man]

Take a look at how much minimum wage has increased in the last 50 years, and then compare that with how much senior management salaries have risen in the last 50 years.

 

[King Flevance]

Purple, that post was awesome. Kudos.

I also have to give a thumbs up and LOL to this quip.

With our current fiat money (money because our government says it is, at the point of gun, nonetheless),

 

[su511]

I think the inflation in this game is too primitive.

Late game it seems to be a multiplier to go to --> 100%.

Historically all fiat currencies get debased, but that may not need to be the case.

If you agree, first need to choose the correct economic framework.

I suggest austrian school of economics. Not the big government economics.

There needs to be central banking to be able to control inflation. (thru short term interst rates)

no central banking -> inflation equals zero becuz u cannot create gold ad inifinitum.

If central banking, multiple currencies and exchange rates, based on supply/demand ratio of money.

-government debt market to finance fiscal deficits. (impacts fx rates)

-the domestic advisor needs to be upgraded to show the balance sheet, cash flow and p&l

-THE FINANCIALS show the corporation payments/income, domestically and internatinonally by civilization. & religion, trade

 

[Badtz Maru]

Minimum wage is increased to try and balance the price of living increasing pretty much every year. When minimum wage is not increased, this does not prevent the price of living increasing, it just makes it harder to live on minimum wage. For a long time in the USA there were no increases in minimum wage while the price of living continued to increase. It used to be possible for a person to easily live on minimum wage, if they were careful with their money. Fortunately, it's going up again soon (or has it gone up already?) to $7.50/hr or thereabouts, which is still below poverty level but livable, at least. The minimum wage in the USA was at it's highest in the late 1960s, when it was equivalent to over $9 an hour when you adjust for inflation. The rapid inflation in the 1970s was not matched by minimum wage increases and minimum wage for a while was nowhere near enough to live on.

 

[FriendoftheDork]

I'm reluctant to enter this argument, but I feel somehow compelled. None of the points people have made are purely incorrect, but many are incomplete.

1. A strong argument can be made that an increase in the minimum wage will increase unemployment. When the price of [unskilled] labor is set to a point higher then the market equilibrium (where the supply and demand curves meet), there will be more people who want to work at the set wage then employers who wish to pay it. This is a very solid “macroeconomics 101” understanding of the impact of a minimum wage (there is no doubt this is the “correct” basic economic analysis).

Unfortunately, real markets are much more fickle then economic models, and actual studies have had mixed results. Many studies have found no significant result, and one or two actually found an increase in employment when the minimum wage was implemented.

2. The connection between a minimum wage increase and inflation is much more tenuous. An employer will never be able to pass on all of the increased costs of production (including wages) to consumers (unless demand was perfectly inelastic, and it’s not even close in most markets that involve minimum wage work). There will also not be more total spending money, particularly if the analysis in (1) is correct (unemployment = less spending money); and the fact that some people will have more money will increase the demand for goods, and thus suppliers will respond with increased production (stimulating the economy).

Most importantly though the impact of the minimum wage on inflation is simply not significant. It’s a drop in the ocean compared to things like the price of oil.

3. Unfortunately, this has become a partisan political issue, rather then a mutual goal improve the welfare of society. Clearly many people here have been listing to the right-leaning champions of the free market, many of whom are not against the minimum wage because in increased unskilled unemployment, but because it increases the profit line of huge companies. Others have been listening to the left-leaning social welfare folks who often ignore the big picture impact.

Try to keep in mind that when a politician or someone advocating a particular political position makes a “factual” statement about economics it’s probably a half-truth; this goes for both sides.

Why has everyone ignored this post? This is probably the most accurate and unbiased argument in the whole undead thread.

I'm no expert in ecconomics but I've learned enough Macroecconomics to know that there is alot I don't know about ecconomics and that is far less simple than most politicians, Left or Right, gives the impression of.

Inflation is a fact of our lives because of our ecconomic system, which are fairly widespread over the world. Another fact is that despite market mechanics, people do stupid and illogical things all the time and thus no ecconomic theory is infallible.

And to keep this somewhat on topic: Inflation in the game is a mechanism meant to make the latter part of the game somewhat more challenging. It might be somewhat frustrating unless you ignore it and focus on the other parts of the game - improving your cities and getting more of them.

Removing inflation from the game is pretty much the same as lowering the difficulty.

 

[MaximusDarcy]

I think the inflation in this game is too primitive.

Late game it seems to be a multiplier to go to --> 100%.

Historically all fiat currencies get debased, but that may not need to be the case.

If you agree, first need to choose the correct economic framework.

I suggest austrian school of economics. Not the big government economics.

There needs to be central banking to be able to control inflation. (thru short term interst rates)

no central banking -> inflation equals zero becuz u cannot create gold ad inifinitum.

If central banking, multiple currencies and exchange rates, based on supply/demand ratio of money.

-government debt market to finance fiscal deficits. (impacts fx rates)

-the domestic advisor needs to be upgraded to show the balance sheet, cash flow and p&l

-THE FINANCIALS show the corporation payments/income, domestically and internatinonally by civilization. & religion, trade

Hurrah for SU511 for bringing the thread back on track and it's only his/her first post!. Now can't you all discuss the minimum wage and political leanings elsewhere, i.e Faecesbook.

 

[Peteusmax]

No cuz if he was a real warmonger, we'd be rampaging through China right now. Everybody knows you always bring down the strongest civ first. The weak guys in the desert aren't gonna add much to our domination score.

You need their oil to make fighters though!

Inflation is easy to stop. It will stop if we stop printing money. But this would be bad for other reasons.

Like what? The only downside I can think of to deflation is civil unrest due to ignorant people believing they are still entitled to their automatic 2-3% per year 'cost of living' wage increase.

If the cost of living were to go down, everyone's savings would be worth more. We would be able to retire sooner, etc, etc. I'm all for it!

there is aprt wich I agree (mostly the fact that republican are not an inch for free market), but this assertion istoo simplistic to work in the real world. It would work if every single people were quitting his job when he's not payed enough, and that's false, especially for poor people that can't take the risk of quitting a job. Lack of knowledge from people's part is also important, if you don't know what is the worth of your work it's easy to underpay you.

Minimum wage do help poor people. In a perfect world they shouldn't, but the world isn't perfect. For now corporation have a lot of way to pay the labor less than it's worth, one of them being countered by minimal wage.

Yes. Gradual increases in the minimum wage to reflect inflation make sense.
Of course I'd be much happier to do away with inflation and leave wages where they are... But that isn't our reality.

And to keep this somewhat on topic: Inflation in the game is a mechanism meant to make the latter part of the game somewhat more challenging. It might be somewhat frustrating unless you ignore it and focus on the other parts of the game - improving your cities and getting more of them.

Removing inflation from the game is pretty much the same as lowering the difficulty.

Also - The Federal Reserve event (iirc the name - It gives you a chance to control inflation) is probably the most powerful in the game! Wow, does that one ever make your income spike! (If only I could figure out how to encourage it)

 

[Ashurdan]

link http://www.epi.org/publications/entry/bp178/
I wanted to link this article from 2006 which seems to disprove some of the things stated in this thread and would love to hear what people's thoughts on it are. Wanring it is long, but it is very detailed. From what I understant there is a pretty direct link to economic growth after the minimum wage has been increased and stagnation when it stays steady for several years (just look at the last 10 years vs the 10 before that). Also I am not sure it has been mentioned, but I am pretty sure governments want some inflation every year to have an increase in the money supply somewhat congruent to the increase in GDP. I also agree with who ever said that the price of oil has an effect on inflation, or like inflation; it in a real way increases the price of everything; if it has to be transported the price would have to go up to compensate for the increase in the cost of transportation.

Ash

 

[chrisk]

As enjoyable as it was to read through six pages of non-game-related arguing, can anyone give me instructions on how to edit a game file to reduce my inflation by hand?

I've been playing an RFC game as china since 3000bc. My cities are coastal, rivered, well-spaced, and heavily cottaged. I have just about every wealth building built, and fewer units than would incur maintenance cost. Yet my 164% inflation is keeping my economy maxed at 60% research even with four cities building wealth, and stability/war is preventing me from expanding into australia to grow my economy. I've been more or less stagnated since astronomy killed my colossus and great lighthouse.

 

[GGracchus]

As enjoyable as it was to read through six pages of non-game-related arguing, can anyone give me instructions on how to edit a game file to reduce my inflation by hand?

I've been playing an RFC game as china since 3000bc. My cities are coastal, rivered, well-spaced, and heavily cottaged. I have just about every wealth building built, and fewer units than would incur maintenance cost. Yet my 164% inflation is keeping my economy maxed at 60% research even with four cities building wealth, and stability/war is preventing me from expanding into australia to grow my economy. I've been more or less stagnated since astronomy killed my colossus and great lighthouse.

Try posting on Creation and Customization here, you might get more responses.

 

[Skallagrimson]

(Snipped for brevity...)

The federal government uses it like a tax that most citizens don't recognize as a tax. It borrows money from the Federal Reserve, to essentially create more money out of thin air. That money is then spent by the government when it still has it's initial value and...

Outstanding analysis, and a huge +1 here. ::standing ovation::