Janet Yellen's 'Labor Market Slack' Fixation Has Nothing To Do With Inflation

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When manufacture of Boeing's 787 Dreamliner began in 2007, one not-so-notable aspect of the efficient plane's creation was that it was taking place around the world, in seven different countries. Even something as prosaic as the pencil is the result of cooperation globally, so it's no surprise that a cutting-edge airplane would require specialized ‘hands' from around the world.

Considering something that a growing number of readers have in their pockets, though Apple's iPhone is designed in Cupertino, CA at the company's headquarters, its manufacture takes place in China. As Cal-Berkeley economist Enrico Moretti noted in his essential 2012 book The New Geography of Jobs, by the time an iPhone reaches the American consumer, only one American hand has touched the final product - the UPS delivery person. Beaverton, OR shoe and sports apparel brand Nike has famously never manufactured any of its diverse array of products in the United States.

All of this rates mention in light of Fed Chairman Janet Yellen's fraudulent definition of inflation. As the Wall Street Journal's Jon Hilsenrath reported last week, Yellen "has argued consistently in recent months that labor markets are abundant with slack that will hold inflation and wages down." Translated, your prosperity is seen as a problem by Yellen who is charged with keeping inflation down, particularly if most people are working. Like her predecessor in Ben Bernanke, Yellen believes that tight labor markets are inflationary.

At first glance, and only if we ignore the certain truth that inflation is a monetary phenomenon, Yellen seemingly has a point. Tight labor markets in the U.S. could lead to rising wages and prices that some might deem ‘inflation.' But given a second pass, a more reasonable reaction is horror that Yellen occupies such a powerful seat.

Indeed, as the Boeing, Apple and Nike examples reveal, the U.S. economy is not an island. Instead, U.S. producers regularly access the world's supply of labor when they produce what we buy.

Yellen's false definition of inflation similarly presumes that labor markets are static; that we clueless individuals don't respond to wage-price signals such that we migrate to where labor markets offer the greatest remuneration. The problem is that such thinking is incorrect.

We know this most notably now thanks to the huge influx of American workers into Texas, North Dakota, and other commodity-rich (more on this in a bit) locales. When demand for labor in places like Detroit is low, workers do as they've been doing for decades, which is move to where demand for it is greater. Just the same, rising wages serve as a lure for those who've left the labor force to rejoin it.

Of course, if we ignore, as Yellen seemingly does, that the pool of labor is global, not to mention that the labor force stateside is both mobile and responsive to wage-price signals, we can't turn a blind eye to automation. Figure most of us no longer deal with a live human being when buying movie tickets, gasoline, or when we deposit checks at the bank; assuming we go to the bank at all (direct deposit has been in existence for many years) to deposit checks anymore.

Considering Walmart, the gargantuan retailer we're increasingly familiar with, one can visit a store today and conduct a major shopping spree; all free of interaction with store employees. That's the case because its stores offer self-checkout nowadays, and have offered it for many years. Markets do a great job of innovating around any presumed labor shortages.

To be fair to Yellen, she's hardly alone inside the economics profession when it comes to possessing discredited views on the causes of inflation. As Hilsenrath pointed out in the same article last week:

"Many economists believe lots of slack in the labor market - large numbers of unemployed or underutilized workers - means the Fed can keep interest rates very low to help boost economic growth without generating high inflation. Conversely, they think that if there isn't much slack, or that it decreases rapidly, the central bank should raise rates more quickly to keep price pressures under control."

As this column regularly points out, macroeconomics is a fraud on its best day, but when it comes to inflation, the profession is quite simply dangerous. How it came to a consensus that too many people working and prospering causes inflation is truly a mystery, and an impoverishing one at that.

Back to reality, inflation is always and everywhere a monetary phenomenon whereby the value of the currency declines; gold historically the objective measure of value historically accepted by the Classical, Austrian, Keynesian (don't laugh, John Maynard Keynes helped design the last gold standard at Bretton Woods in 1944), and Marxian (Marx: gold is "money par excellence") schools of economic thought. In the 1970s a dollar that bought 1/35th of an ounce of gold when the decade began bought less than 1/800th of an ounce ten years later. The ‘70s were an inflationary decade as the dollar's decline indicated.

In the ‘80s and ‘90s the dollar price of gold plummeted from a high of $875 in 1980 to roughly $300 by 2000, and the economy took off. Notably, unemployment fell to very impressive lows with no inflationary breakout to speak of. Of course there wasn't, and there wasn't because inflation, meaning a decline in the value of money, is anti-job creation. That is so because the investors who create jobs are buying future dollar income streams when they put capital to work, so when money is declining in value, investment in a relative sense goes into hard assets least vulnerable to inflation over stocks and bonds representing future wealth and job creation.

To be blunt, Yellen and her contemporaries who practice "economics" get it backwards. Far from causing inflation, low unemployment is a near certain sign that it doesn't exist. When money is not being devalued, job-creating investment is plentiful; hence the roaring ‘80s and ‘90s.

Since 2000 the dollar has plummeted against gold, and since it has, resulting high rates of unemployment shouldn't surprise us. A sinking dollar once again made hard assets representing wealth already created, and prosaic economic activity like energy (hence the rush of workers into North Dakota and Texas, among others) more attractive, much as it did in the 1970s. Forget government measures of inflation such as CPI, and forget them because the dollar's fall told the tale of actual inflation. That unemployment has been high for so many years signals that the latter is the result of inflation (meaning once again, devaluation), not a driver of it. The dollar's decline has led to reduced investment, and when investment declines, so does job creation. 

What's concerning is that Yellen is not only hopelessly wrong about the causes of inflation (presuming it to be caused by prosperity instead of dollar decline), but she sits in a powerful seat, all while being misinformed. Let's not forget this. Yellen has the potential to do serious damage for believing that which plainly isn't inflation, in fact is. Yellen's misplaced fixation is our sluggish economy.


John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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