[graeme]

You haven't understood the issue. If a firm needs to lower costs, the alternatives to mild inflation are:

* Negotiating actual salary cuts, or * Job losses

Ideally in a market, prices adjust up and down freely. Obviously this is not a sensible approach to salaries. Given the bias towards loss aversion, having mild inflation make mild losses is preferable to having, say: 5% deflation, 7% salary cut.

This concept is from Econ 101. And it doesn't mean everyone's wage drops. It means struggling firms can adjust wages less painfully.

Your alternatives to 2% are:

* active deflation, with actual wage cuts

* higher inflation, where you have active salary negotiations each year to predict inflation and negotiate higher or lower than inflation, like in the 70s

[ponow]

Why should firms get a free 2% cut in salaries paid? Generally, firms are in a stronger negotiating position about salary, especially for the lowest skill labor and poorest people.

If there's a downturn, then everyone will have to tighten belts, and firms can make that case to employees.

Making a real 2% salary cut the universal default is cruel, and if your typical hourly wage-earner understood clearly the choice being made on their behalf, they'd be pissed.

Deals shouldn't be altered without agreement, but that's what 2% inflation targets do. If you agree to a salary, then nobody should be specifically putting their thumb on the scale one way or the the other.

Professionals and job-hoppers have less problem negotiating to keep up with inflation. It's the poor people who get screwed.

Also, inflation is less steady the farther away from zero it is, I'd wager. So we have inflation spikes sometimes, like we've seen. There's always a time lag between spikes in price increases on goods, and wage increases (which require negotiation). During that lag period before a compensating wage increase, savings get used and real loss is suffered. I highly doubt that the loss in savings is generally recovered, and the Fed never even aims to recover that loss. The most vulnerable people lose the most, and are impeded from building wealth as a result, and probably come to depend on government more.

[Rexxar]

It's not a "free 2% cut in salaries", it apply to everything else. If there is 2% inflation the company will have to pay everything more and will have probably have to negotiate to get higher price from its client too or it will not get its 2% more revenue to compensate the increase of everything.

Additionally, usually workers have too take debts too buy their house. If there is a little inflation and the salaries are following inflation the debts becomes comparatively lower every year.

It's not just against workers. There are upsides and downsides for everybody.

[graeme]

You’re imagining every firm gets 2% savings every year. That isn’t how it works.

Most firms have rising real wages: real wages rose during the 2% inflation period.

But sometimes a firm needs to lower costs. Having a small bit of inflation lets a firm do so without either firing people or actually cutting nominal wages.

[derangedHorse]

> real wages rose during the 2% inflation period

There is no consistent "2%" inflation period. If a year were to have 6.5% inflation (like with year 2022-2023), most firms will not raise real wages to match it. Over the last decade we've had a 2.82% average inflation rate with 4.41% variance showing how much we overshot both metrics.

source: https://www.usinflationcalculator.com/inflation/consumer-pri...

[dxbydt]

Econ 101: index to 2% inflation, tolerate mild losses.

Elon 101: hire aggressively until product finds PMF, then fire aggressively.

[killjoywashere]

It’s the old county fair analogy: the rich kids get shots on goal until they hit. Middle class kids get one shot. The poor get no shots, they’re working the fair. There are progressively fewer middle class kids getting their one shot. And some of them used to get two.

[throwawaymaths]

So you're saying that it's government's responsibility to let firms be shitty to their employees with stealth pay cuts?

I would MUCH rather a firm have to face the music and reputational damage of cutting employee pay or firing employees. It's far more honest and the actual other option is gasp don't cut your employees wage and instead take a hit to your margins.

[BehindBlueEyes]

Layoffs still happen, sometimes from healthy companies too, I doubt they’d think twice about any reputational damage over margin cuts.

[chii]

if you were the one whose jobs' being cut, would you make that very same argument?

[ponow]

Firms can do uniform pay cuts (say 2%) instead of targeted layoffs. That way all employees are in it together, and yet there's still market discipline in whether to cut.

[throwawaymaths]

I've been let go. It was fine.

The premise of your quip is nonsensical, since people are let go anyways. You wouldn't know that you were the marginal human that was cut because we are in inflation or not.

[oatmeal1]

You haven't understood the issue. The issue is involuntary dilution created by fractional reserve banking. When a new loan is created, the bank and (especially) the borrower benefit from the increased money supply. That increased money supply dilutes everyone else. The rich get loans to pay for college, buy houses, expensive cars, and own stock in companies that use leverage to grow faster, whereas the poor get loans to buy mobile homes and cheap cars. Overall, the poor wage earners experience a net dilution compared to the rich.

[ponow]

But isn't that money multiplier due to fractional-reserve banking essentially a one-shot deal, and doesn't continue to expand over long time periods?

So if banks keep 10% in reserves, then a cash deposit gets multiplied by 1/.1 = 10 times, and that factor does not grow with time. Even if there were no law against continually lowering reserve ratios (and therefore increasing this multiplier), the market would tend to create a bound, for otherwise the bank would have greater risk of collapse from runs and unexpected loan defaults.

By contrast, if the central bank (Fed) keeps increasing its balance sheet (by buying assets using money it created from thin air), we have continual growth in the money supply (since the folks who sold the assets have new money in their accounts, granted magically by the central bank).

In fact, if we had a law that banned fractional-reserve banking for all commercial banks, so that all commercial banks had to have 100% / full reserves, eliminating your dilution, the central bank could still perform open market operations and buy assets with printed money, and thereby continue to increase the money supply. Full reserve for private/commercial banks is still compatible with money printing by a central bank.

So I know fractional-reserve gets a lot of heat by sound money folks, but the continual inflation observed since the 70s is not primarily a fractional-reserve problem, but a central bank money printing problem.