When and how did it happen? How did the definition of inflation become so deformed over the decades? It used to be easily and properly understood as a decline in the unit of account; in our case the dollar.
In the 1970s policy favored devaluation. Love or hate gold, President Nixon’s decision to sever the dollar’s link to the yellow metal was an explicit devaluation. And prices across the board rose. It’s popular among the confused to say that rising oil prices in the 1970s caused inflation. Such a viewpoint gets inflation exactly backwards. The shrinking dollar was the inflation, only for prices of not just oil, but wheat, meat, soybeans, and every other commodity under the sun to soar as a reflection of a shrinking dollar measure.
This is a useful jumping-off point towards addressing a recent A1 Wall Street Journal article by reporter Tom Fairless. Titled “Top Economist Warns Inflation Here to Stay.” The "top economist "is “former UK central banker Charles Goodhart.” Goodhart’s views on inflation give life to the old quip about economists existing to make weather forecasters look good.
But first, it make sense to return to the 1970s. It’s sensible because in his piece on Goodhart, the reporter in Fairless observed that “inflation looked like it was heading to zero” when “the global economy tanked in 2020.” There are two errors here. First, the global economy didn’t “tank” in 2020 as much as command-and-control was imposed out of nowhere. While a recession is paradoxically a sign of an economy on the mend as bad hires, bad acquisitions, bad loans, investments, and decisions are corrected, what happened in 2020 was that economic activity was quite literally arrested.
Second, Fairless’s analysis presumes that economic contraction is the path to lower prices. Except that the 1970s show why such a Phillips Curve view of the world is so backwards. With the dollar (and for that matter the pound in England) in severe decline in the ‘70s, prices rose. Crucial here is that the economies of the U.S. and U.K. were notoriously weak, and malaise-ridden. Political outsiders like Reagan and Thatcher didn’t just coincidentally emerge as much as both were a logical electoral reaction to broad unhappiness about the economy. Inflation by its very name drives unhappiness, and not just because money quite literally doesn’t stretch as far as it formerly did.
Much more important about debased money’s economic impact is that contra the view of economists, consumption doesn’t drive growth; rather consumption is a consequence of growth. Investment is the obvious instigator of economic advance, and this explains why inflation is always and everywhere a signal of malaise ahead. When investors put capital to work, they’re buying future returns in “money” like dollars and pounds. But with both currencies in decline, so was the investment that powers the productivity advances that nearly always result in lower prices, and that are tautologically economic growth. In other words, the surest sign of stagnant economic activity is a lack of falling prices.
Which brings us back to Goodhart. His stance as expressed to Fairless is that a “long glut of inexpensive labor that had kept prices and wages down for decades” is “giving way to an era of worker shortages, and hence higher prices.” This is the basis of Goodhart’s belief that inflation is “here to stay.” The only problem is that it’s rooted in complete nonsense.
The nonsense starts with the presumed “glut of inexpensive labor.” Such a view implies that wages are about supply versus demand in the marketplace. No, they’re determined by investment. This truth further explains why true inflation (as in devaluation) always and everywhere correlates with such economic misery. Since the devaluation is a tax on investment, that means it’s logically a tax levied on job creation. All jobs spring from investment, which is a blinding glimpse of the obvious.
Furthermore, Goodhart’s analysis presumes that the investment behind all job creation migrates to low-wage locales. Actually, quite the opposite. In the U.S., for instance, the vast majority of investment flows to San Francisco, Boston, New York, and other locales known to attract the kinds of individuals who demand high pay. In other words, technologically focused jobs are high paying jobs, and the corporations that require these kinds of high-end workers tend to be in the cities mentioned.
Better yet, just what are the corporations doing in those cities densely packed with well-paid workers? They’re generally devising all manner of ways to render more and more market goods cheaper and cheaper. If you doubt this, pick up the supercomputer that sits in your pocket, and that enables communication and information access that not too long ago would have cost a fortune. In short, the high-wage workers that Goodhart deems inflationary are the very individuals whose genius is bringing down the price of everything. There’s quite simply no evidence supporting the claim made by Goodhart that rising wages correlate with what he mis-diagnoses as inflation.
As for the mere notion bruited by Goodhart that we’re headed for “an era of worker shortages, and hence higher prices,” even if true it would be of little consequence. Assuming worker supply limits that result in higher wages, the rising wages themselves would and will exist as an impetus to automate more and more of the work formerly done by humans. It’s called progress.
Better yet, by all accounts the automation mentioned above is on the way. If so, the impact will be profoundly brilliant. Basically, billions and perhaps trillions of “hands” will enter the workforce. “Worker shortage” fixed. Will this result in lower wages for humans? Quite the opposite, and for obvious reasons. Wages are once again determined by investment, and investment pursues productivity. Wages will naturally soar amid automation simply because the human workers of tomorrow will get to specialize on a level that will stagger us. Translated for those who need it, a rising supply of artificial “hands” will logically be a driver of much higher pay despite Goodhart’s musings.
What Goodhart defines as inflation isn’t even inflation, and worse for him, if it were, his conclusions are backwards. Weathermen can rest easy.
