Rising Wages Can't Cause Inflation Any More Than Rising Prices Can
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To witness the search for actual inflation (a decline in the monetary unit) among economists and pundits is like watching a hunt for green M&Ms in a bowl full of yellow ones. It's futile.

Which is something to keep in mind with “inflation” well in mind. Searches for it will be fruitless, misleading, or both, so long as the problem (inflation) is improperly defined. And improperly defined it is.

Consider the focus on wages at the moment. Supposedly rising wages are evidence of inflation. Don’t you get it? If people have more money to spend, spend it they will on the way to rising prices. Except that it’s not as simple as economists and their lickspittle media enablers make it out to be.

If employees have higher wages, logic dictates that someone is paying those higher wages. It’s not as though the funds directed to workers are pulled from another planet, or picked off of a tree on which they grow. For an employee to receive more pay is only mathematically possible insofar as the employer has fewer dollars. In other words, even if you believe that rising wages cause higher prices born of “demand,” you can’t ignore that someone, somewhere has reduced “demand” born of funding those higher wages.

Prices are no different. If chicken breasts are pricey, and they seemingly are at the moment, life is about tradeoffs. If chicken breasts are enjoying increasingly sizable wallet share, logic dictates that some other market good (perhaps popsicles) is being left behind at the grocery store as a vivification of the truth about tradeoffs.

Back to wages, logic dictates that they would rise the most amid a lack of inflation. Which is kind of a statement of the obvious. Compensation doesn’t just happen any more than jobs are “created” or just “happen.” Jobs are an obvious consequence of investment in new businesses and/or new ideas altogether. And when investors invest, they’re plainly pursuing future returns in terms of a monetary unit, in our case the dollar.

From the above it’s no reach to conclude that investment would shrink amid periods of currency devaluation. Put more bluntly, inflation is anti-investment. Really, why would those with title to money put it to work in search of returns coming back in dollars that are shrinking in value? Why indeed.

Still, lost-in-the-stone-age economists and the pundits who hang on their every word believe higher wages cause inflation. They don’t. To say that higher wages or higher prices cause inflation is like saying upset stomachs cause chocolate. Causation is plainly being reversed.

Which brings us back to inflation. It’s once again a shrinkage of the unit of measure. Of utmost importance, the shrinkage is the inflation. Higher wages or higher prices are at best the consequence.

Could shrinkage of the unit of measure result in higher wages and prices? Well, of course. Inflation is once again a decline of the measure, and just as a shrinking foot would make us all taller in feet, so would a falling dollar bring about higher pay and prices in dollars. Still, there’s an obvious difference between inflation and rising wages/prices that economists plainly don’t see.

Ideally readers do see the difference as they try to understand the present. Economists claim that higher wages and transfer payments have caused higher prices that have resulted in “inflation.” Not only does the latter contradict itself (see “tradeoffs”), it improperly defines inflation altogether. In modern times there’s been no notable shrinkage of the dollar, which means there’s been no notable inflation. Economists are searching for yellow M&Ms in a sea of green.

John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, a senior fellow at the Market Institute, and a senior economic adviser to Applied Finance Advisors (www.appliedfinance.com). His latest book is The Money Confusion: How Illiteracy About Currencies and Inflation Sets the Stage For the Crypto Revolution.

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