Wednesday, February 12, 2014

Is Moore's Law the Ultimate Inflation Killer?

Lately I have thinking about how technological progress makes inflation less and less likely over time. For those that aren't familiar, Moore's Law is s the observation that the number of transistors on computer circuits doubles approximately every two years. The law is named after Intel co-founder Gordon Moore who described the trend way back in 1965. His prediction has proven to be accurate over the years, and tech growth has roughly followed this law for almost half a century now, and our quality of life has drastically increased as a result.

This exponential growth of computing power has led to unbelievable increases in productivity and transmission of information. This means that production can respond to increased demand at ever increasing levels, making inflation less and less likely over time, at least in sectors which are computing heavy. We can now produce more and more stuff, with less and less inputs, especially human labor. The easiest example is lawyers/researchers- where it used to take hours to pour through documents to find information, it now takes only seconds thanks to CTRL-F.

Certain basic commodities may be not be affected by these improvements, especially energy- its proven much harder to manipulate energy than transistors. But for all else, the more that computers can do, the less that humans must do, and computers can produce 24/7 without asking for a raise or cost of living adjustment. General supply becomes more elastic over time, and the United States is more efficient than ever. The problem is that aggregate demand is based on the intelligence of our federal policy makers and legislators, which is desperately lacking. 

Why is is so hard for modern humans to realize that our recurring problem is a lack of demand, which can easily be solved by our agile, fiat currency issuing federal government? Whenever we MMTers bring up the need for more government spending/lending, we get faced with the tired "hyperinflation" schtick, as if war-ravaged 1920's Germany bears any resemblance to the modern United States (pro-tip: It doesn't!)

So as it turns out, its really not that easy to create inflation in modern competitive economies. The Fed has blown all its wads, and still can't hit its target. As I see it, concerns about inflation are about as relevant as concerns about a Soviet invasion....both haven't existed since the 1980's. The baby boomers really need to update their macro, or get the hell out of the way.

Our lack of cultural evolution leaves us stuck in the mindset that was appropriate for most of human history- that resources were very limited and production could not easily adjust to increases in spending power. But in the 21st century, we are facing the opposite problem- too little spending power to spur demand for everything we are capable of producing. 

As with everything else it boils down to politics- the 1% stupidly think that giving "those people" too much spending power might drive up prices. Yeah, as if any public school teacher is going to show up to an auction in Greenwich and outbid a hedge fund manager for a Picasso or Renoir....

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