Tuesday, August 8, 2017

Thoughts on Wage Stagnation and Resistance to Inflation

Just as many pundits and policy makers became intolerant of any inflation, so too, have plenty of citizens. Even though the Fed acknowledges these concerns (via gradual monetary tightening as far as the eye can see), far too many observers still describe monetary policy as inflationary. What some individuals recognize as necessary monetary accommodation for mutual obligations in the marketplace, others conflate with Fed recklessness and asset bubbles.

Why have populations become so intolerant of even small amounts of inflation? One reason is the lack of wage growth in recent decades, which in turn makes the prices for some of life's most basic necessities, more difficult for lower income levels. Unfortunately, much of this lack of wage growth, results from lower aggregate output levels, due to the required inputs for the non tradable sector activity which is responsible for much of today's marketplace bottlenecks.

It is not emphasized enough, how the rising output of tradable sector activity in particular, contributed to rising wages for centuries. The fact we cannot rely on this dynamic in the present, means that many related relationships for monetary flows have also changed. Even though non tradable sector activity cannot be expected to achieve output on the exponential terms of tradable sectors, substantial output gains are still possible for non tradable sector activity, which could bring these sectors back into a better balance for output and long term growth.

Much of today's non tradable sector activity could be organized so that it does not generate a constant level of internal inflation. If populations were actually able to benefit from good deflation in housing, healthcare and education, no one would even have cause to worry about inflation. In the meantime, non tradable sector prices are exacerbated by Fed tightening, since today's organizational structure only leads to further scarcities in basic consumption necessities such as housing and time centered services.

Due to the structural nature of the present day economy - in which non tradable sector activity remains dependent on tradable sector activity - there are real problems, when overall growth stalls and inflation is discouraged at the same time. In particular, government debt - which has become responsible for much of today's high skill knowledge use - remains dependent on a level of growth which is no longer occurring, and citizens are understandably resistant to any further taxation, since their wages remain stagnant.

Fortunately, there are proactive ways to respond to today's economic impasse. However, doing so, means addressing wage stagnation in ways that increase the consumption potential of real wages, instead of succumbing to money illusion. If non tradable sector activity can be generated which borrows from the long term good deflation patterns of tradable sector activity, much of the social and political pressure of the present, would be alleviated. Since wage stagnation is not going away any time soon, the best anti-inflation approach we have, is one that is capable of producing real gains in wages, through the innovation of our non tradable sectors.

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