Political Compass #9: Inflation vs. unemployment.

Great Debates
1

Many political debates here have included references to The Political Compass, which uses a set of 61 questions to assess one’s political orientation in terms of economic left/right and social libertarianism/authoritarianism (rather like the “Libertarian diamond” popular in the US).

And so, every so often I will begin a thread in which the premise for debate is one of the 61 questions. I will give which answer I chose and provide my justification and reasoning. Others are, of course, invited to do the same including those who wish to “question the question”, as it were. I will also suggest what I think is the “weighting” given to the various answers in terms of calculating the final orientation.

It might also be useful when posting in these threads to give your own “compass reading” in your first post, by convention giving the Economic value first. My own is
SentientMeat: Economic: -5.12, Social: -7.28, and so by the above convention my co-ordinates are (-5.12, -7.28). Please also indicate which option you ticked.

Now, I appreciate that there is often dissent regarding whether the assessment the test provides is valid, notably by US conservative posters, either because it is “left-biased” (??) or because some propositions are clearly slanted, ambiguous or self-contradictory. The site itself provides answers to these and other Frequently Asked Questions, and there is also a separate thread: Does The Political Compass give an accurate reading? Read these first and then, if you have an objection to the test in general, please post it there. If your objection is solely to the proposition in hand, post here. If your objection is to other propositions, please wait until I open a thread on them.

The above will be pasted in every new thread in order to introduce it properly, and I’ll try to let each one exhaust itself of useful input before starting the next. Without wanting to “hog the idea”, I would be grateful if others could refrain from starting similar threads. To date, the threads are:
Does The Political Compass give an accurate reading?
Political Compass #1: Globalisation, Humanity and OmniCorp.
#2: My country, right or wrong
#3: Pride in one’s country is foolish.
#4: Superior racial qualities.
#5: My enemy’s enemy is my friend.
#6: Justifying illegal military action.
#7: “Info-tainment” is a worrying trend.

#8: Class division vs. international division. (+ SentientMeat’s economic worldview)

*Proposition #9: * Controlling inflation is more important than controlling unemployment.

SentientMeat (-5.12, -7.28) ticks Disagree.
A very telling proposition indeed, I feel. Put simply (perhaps oversimply), the theory goes like this: Unemployment can never actually reach zero, because of people either between jobs, unable/unwilling to work, retraining due to obsolete skills, and other sources of such “residual unemployment”. However, the lower unemployment goes, the less competition there is for jobs, putting workers in the driving seat as regards their relationship with their employer. Hence, workers can demand wage-rises which employers are obliged to accede to given the workers’ increased indispensibility, pushing up inflation. Inflation, the theory goes, devalues those same workers’ pensions and savings (not to mention the assets of the rich) and so the workers are served better, say some, by making them compete for jobs like dogs in a pit. And so, interest rate rises (which are known to throw people out of work) are used in order to control inflation. As a ballpark figure, an unemployment rate of around 4% of the viable workforce is usually considered “too low”, leading the government to increase interest rates.

But hold on a moment. Does that mean that we are deliberately loading all of the suffering onto a few poor bastards who have to endure the hell of losing the income they depend on, all for the sake of the value of pensions, savings and assets? Are we melodramatically warning of the danger inflation poses to workers’ pensions and savings, when many of them are in such crushing debt that a good bout of inflation would probably do them good?

Of course, too little attention to the simmering pot of the economy can lead to hyper-inflation and an Argentinian mess all over the kitchen, and that very definitely is bad for everybody. But a climate of medium inflation is simply not the nightmare one might have been led to believe given the lifestyle benefits of increased job security. Indeed, if you were to ask me whether I would prefer:
a) an increased risk of losing my job, or
b) a decrease in the value of my assets,
then all things being reasonably equal I would plump for (b), as I think would many low or middle income earners.

High earners on the other hand (and indeed any corporate entity with significant assets) understandably recoil from (b) like an albino in sunlight, and they have the ear of the government to a far greater extent than the poor schmucks who might lose their job. And so, government policy is provisionally to keep unemployment above a roughly 4% threshold for “the common good”.

Now, I happen to disagree with this policy but, so long as there is adequate provision for these people who are effectively deliberately denied work, I might appreciate its reasoning. But to then hear people criticise these unfortunates for “slacking”, and see proposals for evermore drastic slashes at the social safety net so that “sloth is not rewarded” - Christ on a parliamentary subcommittee! The sheer gall of such hypocrisy astounds me.

This proposition represents another balancing act. Again, I feel that the very definite and immediate suffering caused to its victims outweighs the nebulous “suffering” caused by the decrease in value from inflation. Thus, at the very least, I would ascribe equal priority to the control of inflation and unemployment.

2

Inflation also devalues the current wages of workers. It operates somewhat like a pay cut, with the distinction that inflation recognizes no minimum wage laws.

It can even be argued that the rich have a greater share of their wealth invested in ways that are relatively shielded from inflation (home ownership, money market accounts), as well as operating at a relatively larger margin of safety. Inflation thus operates like non-progressive taxation. A rich man who suffers a 10% loss of purchasing power is not going to be impacted as greatly as a poor one living at the margins. When you allow inflation to cut purchasing power, you are essentially reducing the minimum wage by whatever the inflation rate is. Maybe you can maintain higher levels of employment (although see the history of the 1970s in the US for examples of “stagflation”, where relatively high levels of inflation operated at the same time as high levels of unemployment. But if inflation is tending to reduce real purchasing power of a given job below a “living wage”, you have not really done any good to the people for whom you have employed.

Another factor to consider is that people react to higher labor costs just as they do to any other economic factor. Thus they tend to replace low-skill jobs with automation, since machines do not demand wage increases, or outsource jobs to countries with lower labor costs.

Maintaining a stable currency is one of the primary duties of a responsible government.

And it may be clearer if you can exclude your rant about how the unemployed are condemned for being lazy. If you don’t mind my saying so, if that is your reason for disagreeing with the proposal, you are mistaking rhetoric for economics.

Regards,
Shodan

3

This is one of the false dichotomies in this test: ie, that one cannot have a low value for one without a higher value for the other.

I agree with Shodan on this. The government can control inflation since it is the sole enterprise in the business of printing money. While not an exact science, the Fed has been able to demonstrate a reasonable policy for keeping inflation low. Unemployment, however, is another matter entirely. It is unlcear what the government can do **directly ** to reduce that figure. The best the government can do is stay out of the marketplace as much as possible, keep tax rates stable (and preferrable low), and operate a balanced budget. In other words, create a stable enviroment and let the market do its job.

4

No, as I explained clearly, my reason for disagreeing with such a policy was because I feel that the definite, immediate suffering caused by unemployment outweighs the nebulous “suffering” caused by inflation. As I said, I happen to disagree with this policy but, so long as there is adequate provision for these people who are effectively deliberately denied work, I might appreciate its reasoning.

Am I to take it that those who believe that inflation is the only one which is really controllable tick Agree?

5

I would tick strongly agree, but again I think it’s a false dichotomy. Governments **can ** control inflation but they can’t control unemployment.

6

(5, -5) Strongly Agree

Again I am with Shodan and John Mace on this issue. Politicians would love us to believe that the government can put people to work. It simply isn’t that easy to control. Inflation can be managed by maintaining a stable currency. It would be lovely to do both, but if I had to steer the best efforts of the government towards one goal or the other, I would control inflation. The market will take care of the rest.

7

Well, I suppose the government can contol unemployment if it gets too far out of hand… by putting the unemployed to work for the govenment FDR style.

This, of course, stands at odds with the goals of a market economy.

8

I’d pick agree and pinch my nose while doing it. My reasons are the same as what Shodan and John Mace have stated.

9

Debaser: Why would you have to hold your nose. As the sole regulatory agency of the currency supply, it is the government that **determines ** the rate of inflation. The private sector cannot affect inflation.

10

The Fed is at best a quasi government agency. Historically the Fed has enjoyed and practiced great autonomy. With few exceptions (Arthur Burns in the Nixon Admin) the Fed chairmen have had fully developed backbones and have made both presidents and politicians alike angry. (a sure sign of credibility!)

The Fed’s primary constituents are the banks, specifically it’s member banks that are generally national, regional or super-regional banks. Ultimately it is the “net creditors” in society that the Fed seeks to protect through monetary policy.

It is true that the private sector cannot directly control inflation. But they do have a powerful voice at the table in the form of the Fed.

11

Change “quasi government” to “quasi political”, and I’d agree with you. The Fed is fully appointed, funded, and answerable by and to the government. The fact that the administration allows a degree of independence is a decision made by the administration, not the Fed. Sure, the president would dump the Fed the public was up in arms about his (the Fed Chairman’s) actions, but that’s true of any presidential appointee.

12

I choose Strongly Disagree.

Inflation hurts everybody, unemployment affects only those in society with the skills least in demand at the moment. The choice seems to me to be between letting everybody take a little pain, or inflict a lot of pain on one segment of the population.

I disagree with the notion that the government can’t do anything about unemployment. Suppose instead of giving tax breaks to the wealthy, Bush had taken the same money and invested it in fixing the nation’s highways, bridges, airports, utilities, etc. That government money would put a lot of construction workers on the job. Those workers, in turn, would spend money on cars, homes, etc. and put others to work. All of these people now working would pay taxes, so you’d get at least some of that money back. Downside- with this increased demand comes higher prices and inflation. So the government CAN do things that affect both sides of the scale, the trick is in knowing which side needs attention and not overdoing it.

13

As opposed to what those rich people would do if allowed to keep their money, which is - what, bury it in the backyard? Don’t you think they might want to spend it/invest it/whatever, and create jobs as well?

The difference would be that the jobs created by people freely choosing on what they want to spend their money is that the jobs don’t go away once the government program ends. Additionally, government make-work programs have less motivation to actually achieve a job of work at a reasonable cost, and with as high a return on the investment as possible.

If the purpose is just to provide work, it doesn’t matter if there are cost overruns, or if the local politicians gave the contract to their political supporters rather than to the lowest bidder. Thus private sector spending tends to be more efficient than government spending, and it tends to concentrate on things that people really want, not what government decides they want. You also avoid the disincentives to production that are involved with taxing success and subsidizing failure, which is a tendency in government-run spending.

Public works like roads and so forth are a great idea, if they can be justified on a straight cost-benefit analysis. In the case where they can be justified, it is easier to justify tax increases to do the projects. Considering them just as make-work to raise the employment rate, you are artificially holding wages at above-market levels, thus excluding marginal workers from entering the work force, or remaining there if their labor is not worth the artificially high cost. If prevailing wage rates in your area are $10 an hour (partially because of the new government-subsidized widget factory or road crew that just opened up), but you can only produce work that is worth $8 per hour, it is inefficient to hire you.

The government cannot realistically plan or manage an economy. That can only be done by allowing the self-correcting nature of the market place to adjust itself so that the prevailing wage rate accurately reflects the local availability of job skills and demand for work.

Government does best, in my view, by maintaining a stable currency, and thus enabling people to manage their own economic affairs without having to worry about losing value on their investments because of currency inflation. The more government tries to centralize the decision-making process of an economy, instead of leaving it to the millions and millions of individual economic decisions made by consumers and producers every day, the less efficient and self-correcting the economy becomes.

Governments can usually only make things worse, not better. Sometimes - usually - the best, or only, thing to do is to ensure as much as possible a fair marketplace, and then get out of the way.

Regards,
Shodan

14

With all due respect, I don’t think you can support that. Since the Fed’s inception (1913?) it has enjoyed a fairly large amount of autonomy. A primary concern of those who conceived and set up the Fed was the politicization of the money supply. I do not believe that the administration has any oversight of the Fed as you infer, and I don’t believe that the administration, by law, can emcumber the Fed’s independence.

I’m not so sure that is fully “appointed” either. The chairman is, but I’m not so sure that the board of governors (who head the regional banks of the Fed) are appointed by the president. Further, the Fed is self funding and does not take taxpayer dollars to operate. I believe all of the regional banks have their own P&Ls and operate at a profit. I think that they also collect fees from their member banks. The Fed chairman does not answer as a practical matter to the government, a fact that has caused no shortgage of heartburn from politicians over the decades who have sought to reign in the Fed’s independence.

Over the years, both the public and the politicians have been up in arms over the Fed’s actions. Paul Volcker may have more to do with Jimmy Carter being defeated than any man in America. The Fed chairman may be able to be fired (although I don’t know about that) but I don’t believe a single fed chairman has been in the 90+ years since it’s inception.

Anyone who would suggest that the Fed is somehow a pawn of the administration or the government doesn’t know how the Fed truly operates.

15

I’d hold my nose because it’s a poorly worded question. I’m quite certain that the test would interpret my disagree response not to mean that I feel the government’s responsibility, authority and ability is in controlling inflation not employment. The test, not understanding this would simply mark me as caring more about rich people (inflation) than I do about poor people (unemployment).

16

Let me ask you this- let’s say Sammy Sosa gets a big tax cut. What’s he going to do with it? You think he’s going to say- “hey, now I can invest in that restaurant I always wanted”? Heck no, if he wanted to invest in such a thing, he would have done so even without his bonus from the government. What he’s going to do is put most of it away and then someday leave it to the Sosa heirs. Then- by the Bush logic, the guys who inherit $1,000,000 in one heartbeat won’t pay jack for taxes, while those that earn $1,000,000 over 20 years have to pay taxes on it every step of the way. The Bush White House is a government OF the wealthy, BY the wealthy, and FOR the wealthy.

17

Put it away where?

In a bank, where it will be used to finance home mortgages and thus indirectly fuel home construction? Mutual funds, which allow companies to expand and thus indirectly fuel employment? Municipal bonds, which cities and states use to finance infrastructure?

Or will he put it in a coffee can and bury it in the back yard?

You seem to be making a fundamental assumption that only government spending has any effect, and that anything the government doesn’t grab disappears from the economy. Which is pretty clearly wrong, I think.

Well, you are probably correct that economic effects affect marginal investment the most. Ten bucks means much more to me that it would to Sammy Sosa. Which is an argument against your preference for inflation over unemployment. Inflation hurts me more than it does a rich person. It hurts someone poorer than me even more.

But at the margins, it is wrong to assume that tax rates have no effect on investment decisions. I don’t know anything about Sammy Sosa, but it is not at all clear that rich people never take tax rates into consideration when deciding whether or not to spend their money.

What is the basis for your belief that government spending creates jobs, but Sammy Sosa spending does not? Why wouldn’t people work in a restaurant that he opens, but would work on road construction if the government took the money from Sosa and used it to build bridges?

Regards,
Shodan

18

I never suggested that. I said it could be political, but that it hasn’t been in recent history. Nonetheless, it is a government body.

And if you go to the Fed’s web site, you’ll see that, in fact, all the Governors are appointed by the president, confirmed by Congress, and that that Congress sets the salaries.

The Fed was clearly set up to be a non-political institution operating as independently as possible. But it is monetary policy of the US government, through the Federal Reserve System, that influences inflation.

It should aslo be noted that the OP is about government action in general, not specifically the operations of the US government. One needs only look at South America (Argentina particularly) to see how governments cause inflation and how governments can control inflation.

19

From what i can dimly remember from economics at university, there is a inverse relationship between inflation and unemployment. In fact one of the reasons we have inflation today is because economists realised this, and thus governments deliberately created inflation to lower unemployment. What they didn’t realise however is that the relationship they thought existed only held true when people expected zero inflation. After a while peoples price expectations shifted, and inflation started rising and rising. Still i think we got a decade or maybe two of artificially low unemployment from it.

So the actual tradeoff is between unemployment and changes in inflation. If the question was worded to reflect this then you would have to say controlling inflation is more important. The alternative is to have artificially low unemployment, but high and rising inflation. This would lead to hyperinflation which is good for noone.

However as the question is worded i would tick disagree.

20

Well, strictly speaking, you’re wrong here. You’re confusing the fact that the government has a very powerful single lever with which to control inflation with the idea that only the government has any lever at all. Certainly the private sector cannot it most cases coordinate to intentionally affect inflation, but that hardly means that the actions of the private sector have no effect on it.

Likewise, it’s not true that the government cannot control the unemployment rate. In fact, the Fed in the 20th century spent quite a lot of its time trying to target what it considers the current non-inflationary unemployment rate at the moment. Within a certain range, Alan Greenspan can actually pretty effectively control the unemployment rate to within a few percentage points.

The main consideration is not whether it’s just the government that can or cannot control what rate, but rather that there are all sorts of other effects of government interventions that can make them much more complicated decisions, often with unforseen side effects even when you really can achieve what you set out to do.

Indeed, even outright DESTROYING paper money cannot remove its value from the economy. Putting money in a coffee can in the backyard is simply a lesser form of removing it from the economy. But, just like printing more money can’t make the world richer (unless it has some secondary effect like curing a recession brought on by transactional inefficiency), removing it from circulation can’t make the world poorer.

If Sammy Sosa were to bury all his cash in a coffee tin, doing so would be almost exactly like making every dollar in every pocket in America worth just a teensy bit more. Sosa made that money by, presumably, creating value and getting paid for it. By not spending his money or doing anything with it, he’s thus created value but chosen not to claim any of it, leaving more for everyone else.

Now, that’s not to say that various things that are done with money don’t have very different effects on the economy. It’s true that spending is more likely the poorer you are, and spending is thought by most economists to be more likely than banking your cash to help cure a recession. But that’s a particular application in a particular situation: one shouldn’t make the mistake of generalizing it to a cure-all.