Section I
Recently, the markets have been all aflutter about the potential for inflation. While we all know the definition of inflation, what does it mean? For me, my baseline is the double-digits of the Carter Administration years. However, I will be 50 in a few months, and am older than the vast majority of the folks physically sitting at trading desks/stations around the world who move the real money on the matter. To them, inflation might be 4-5%. Heck, it might even be 3-4% after all these years of China’s overcapacity-led, global disinflation.
I suppose you could say we will know inflation when we see it, or something along those lines. Or will we?
Okay, if the opening of this section feels like déjà vu all over again, it is. I freely admit I cut & pasted those opening sentences from Section II of the 2/09 edition of this newsletter. However, it bears repeating over and over again, and the question remains: what causes inflation?
Intellectual minds have wasted countless hours pondering and pontificating on this seemingly simple question. To be sure, the printing press has been the primary culprit in every hyperinflationary economy with which I am familiar. But relatively modest hourly wage gains? A weaker dollar? Perhaps on both, but, to what degree? More importantly, is that degree a potential problem?
After all, a 1.0% annual increase in the Consumer Price Index (CPI) is technically inflation, but who would consider it a problem in the absolute sense? At least as far as rising prices are considered?
This week, Treasury Secretary Steven Mnuchin has taken a little flack in the press for daring to utter the following: “You can have wage inflation and not necessarily have inflation concerns in general.” Intuitively, this doesn’t make sense, does it? Higher wages would almost certainly lead to higher prices, at least in the real world and not Mnuchin’s fantasyland. Perhaps.
While what follows next might seem like an equivocation, it isn’t: higher wages will only lead to higher prices, in general, if they cause demand to grow at a faster pace than supply. What if American workers socked away or invested this much ballyhooed increase in wages (which a lot of folks might not actually be seeing in their pay packets)? What if they paid down credit card debt or their mortgage? What if they fund 529 plans for their children and grandchildren, or something along those lines? Increased their pledge to their place of worship? To overseas missionary projects? What if a sudden increase in worker productivity drove down unit costs, helping to put a lid on inflation?
You see, while there might be a strong positive correlation between wages and prices, it is still just that: a correlation and not necessarily causation. There is a difference. However, more than that, just how robust have these wage gains really, really been?
There is a report the Bureau of Labor Statistics (BLS) puts out every quarter entitled: “USUAL WEEKLY EARNINGS OF WAGE AND SALARY WORKERS.” It is as the names implies. Hourly wage rates are one thing, and what people are actually bringing home is quite another.
The most recent iteration of this report was for the 4Q 2017 timeframe. No duh, huh? The numbers here are the story. At the proverbial end of the day, the ‘usual weekly earnings of wage and salary workers’ in the United States was $854 during 4Q 2017. It had been $846 during 4Q 2016. This represents a 0.9% increase over those 4 quarters.
To be sure, the data had been close to 3.8% for the 4 quarters ending with 3Q 2017, but it is what it is. For 2017, the average American worker saw their usual weekly earnings increase by about 1.0%. Obviously, this number is subject to revision, and all that.
Then there is the curious case of ‘Table B-3. Average hourly and weekly earnings of all employees on private nonfarm payrolls by industry sector, seasonally adjusted’ in last month’s Employment Situation report. It seems weekly earnings actually fell for the average US worker in January, and were up a less than eye-popping 2.6% over LAST January.
So, which is it? 1.0% or 2.6%? Ohhhhhhh….the fun we have with government data sets! Why does anyone wonder why “economists” are noted for saying things like “on the one hand, but, then again, on the other”?
I will go out on a limb here and write/state/say I just don’t think either of those numbers are all that concerning. They certainly wouldn’t be the impetus to print a new $100 trillion bill like our friends in Zimbabwe did a few years ago, let alone the 1 sextillion Pengo note Hungary printed in 1946. 2.5% wage inflation? Okay, but is that reason enough for the Federal Reserve to go crazy with the overnight lending target this year? I don’t think so.
As almost an aside, I really believe a lot of working class Americans would be kind of surprised to hear/read what the talking heads have been saying about wage inflation. Kind of surprised? Naw, let’s use the word shocked instead.
At the end of the day, relatively slight wage gains alone will not be enough to engender significant consumer inflation. Period, and end of discussion. Could they be part of the larger recipe? I don’t anyone would argue otherwise. In the meantime, if there really is wage inflation across the spectrum, let’s celebrate the good it could potentially do as opposed to worrying about the bad.
Section II
As it always does, the conversation turned to current events at a recent family gathering. One of the topics was something called a ‘basic income.’ In case you aren’t familiar with the concept, the website basicincome.org defines it as: “…a periodic cash payment unconditionally delivered to all on an individual basis, without means-test or work requirement.” In other words, an untethered cash payment from the government for simply existing. Ideally, this would be at or above the accepted poverty threshold.
Who wouldn’t like that, huh? The government can simply eliminate poverty by giving people money for doing nothing! Sheer genius! Why haven’t we been doing that all along? In truth, there are a lot of intellectual people who advocate a basic income, and some of their arguments would seem to make sense, particularly if you use your heart as opposed to your ears.
Still, the problem with a basic income is in its name, income. According to Merriam-Webster, income is: “a gain or recurrent benefit usually measured in money that derives from capital or labor.” As such, income derived from neither capital nor labor, by definition or lack thereof, is not income. Our friends in Louisiana might call it a lagniappe, or a little something for nothing.
Perhaps we should call basic income something other than income because it isn’t, not really at least.
Then there is old basic truth: how much do you truly value something for which you don’t have to work, particularly compared to that which you do? If you find it hard to truthfully answer that, let me give you a scenario which might make things a little clearer: you have to bet $1,000 Sydney Lanier HS will beat the Auburn Tigers in football by 3 touchdowns. Would you rather bet my money or your own? I think the answer is obvious.
So, if someone or something is willing to pay you to consume without producing, why would you produce or produce at your potential? For instance, if I have to produce $100 worth of goods and services in order to meet my personal needs and the government decides to give me $20, how much will I then produce? It would seem $80, right? So, society misses out on that marginal productive capacity of mine. But, hey, no one will miss it will they?
To answer this, I am going to quote a line from one of my favorite movies, “Doctor Zhivago.” It comes from the scene where Zhivago’s brother sees him tearing down a wooden fence. It goes like this: “I told myself it was beneath my dignity to arrest a man for pilfering firewood. But nothing ordered by the party is beneath the dignity of any man, and the party was right: One man desperate for a bit of fuel is pathetic. Five million people desperate for fuel will destroy a city.”
While this is only a line from a movie, it makes intuitive sense. Why would it not make the same sense in an economy? If you pay me to do nothing, that is exactly what I will give you up to the point where my needs are no longer being met. Multiply that by some 300 million, and we could have a bit of a problem on our hands.
Well, at least that was my reasoning this past weekend. The college kids in our family didn’t like it much, and plenty of you won’t either.
Take care, and have a great weekend.
John Norris