Follow the Leader

The subject of this post is a claim made by Joe Biden, but I'm not suggesting that he's much of a leader, nor do I recommend that anyone follow him as such. (If you do, you'll probably just wind up taking a nap - which, come to think of it, a lot of us could probably use.)

Joe's claim - made while he was in Europe, in a sad attempt to defend U.S. economic growth - was that wages are growing faster than inflation. Now, nobody bothers to look at source data or fact-check anything these days, but the Curmudgeon does, so let's start by determining whether Joe was telling the truth, or lying. (To be fair, he may not have been knowingly lying - Joe doesn't know the first bloody thing about economics, and probably has no clue how fast wages are growing, or what the rate of inflation is.)

For the record, Average Hourly Earnings year-over-year are indeed accelerating. They were up 3.7% in June, up 4.0% in July and August, and up 4.6% in September, the highest rate of wage growth since February. And February's pace was artificially inflated by the effects of California and New York re-opening their economies after their second shut-downs last winter, plus some businesses hiring more workers as vaccines became available. Moreover, historically, a 4.6% year-over-year pace is pretty doggone strong. It's higher than any growth rate seen from 2007 through early 2020, when the pandemic hit and a bunch of anomalous data began rolling in.

So what about inflation? Well, sorry Joe, but your claim is false. The Consumer Price Index year-over-year was up 5.4% in September. It was up 5.3% in June and July, and 5.2% in August, so prices have been increasing faster than wages for several months now - in fact, since April. So no wonder Americans are feeling the pinch at the gas pump and the grocery store.

I could stop there, and this post would be done. But I don't want to just prove Joe's claim wrong. I want to prove that, even if it hadn't been, he hasn't the first foggy shred of understanding of how economics work, and that anyone who takes his statement prima facie hasn't, either.

I'm going to offer an extremely simple lesson in economics here, and for the sake of simplicity, I'll take some liberties, because I don't want to write a textbook, and you don't want to read one. The focus will be on inflation, and if you've taken a fundamental econ class, the concepts will be familiar.

Basically, there are two types of inflation, defined by its causes: demand-pull, and cost-push. Demand-pull inflation is the classic case of "too much money chasing too few goods." A fine textbook example was provided by all the excessive and misdirected stimulus handed out last year. The government foolishly sent checks to a bunch of people (read: voters) who didn't lose their jobs and didn't need the money, so once the economy opened back up they bought big-screen TVs, fixed up their houses, bought cars, and eventually traveled. That, combined with supply chain disruptions also created by the government's botched response to the pandemic, resulted in higher prices, especially for anything that had a semiconductor in it.

So all of that money created demand for stuff, and the quantity demanded was greater than the quantity supplied, at least in the short run, and that resulted in higher prices. Thus demand pulled prices higher. Capisce?

The other type of inflation is cost-push inflation. In this scenario, the quantity demanded is constant, but the input costs of the goods are rising. Our semiconductor example is a good one. (I won't get into price theory too much here, but it should be intuitive that if there's a scarcity of semiconductors, the price of anything that has a chip in it, or even things that require chips to produce, will go up.)

Not all goods have semiconductors in them - shoelaces, ice cream, nail clippers - though their manufacture probably does require chips. However, there is one item that is required to produce pretty much all goods and services:

Labor.

In fact, labor is generally the largest unit cost component of any good. So, if wages are rising, what do you suppose is going to happen to prices? Companies could attempt to absorb the higher labor costs, and under certain economic conditions, they might. They could also seek to replace the labor costs through automation, AI, etc., and that's certainly happening in every industry from fast food to banking to manufacturing. Want higher wages? Be careful what you wish for, you might be replaced by a kiosk.

But what typically - almost always, in fact - happens is that the higher labor costs get passed along to consumers in the form of higher prices. Thus higher wages are a leading indicator of higher prices.

So when Joe crows about wages growing faster than inflation, it just shows that he's not smart enough to understand that above-trend wage growth is going to lead to above-trend inflation, and he'd better start thinking about how to get in front of that, if he doesn't want a return to the 1970s. Especially when inflation is already above trend.

Now, the good news is that he's wrong: wages aren't growing faster than prices. But they are growing above trend. And that is going to push inflation higher. Coming on top of demand-pull inflation that is still a factor, that's not good.

A couple of final points. First, the Curmudgeon is not opposed to wage growth. Au contraire, it is, in and of itself, a positive. However, we need to examine the causes of the current pace of wage growth. Besides the disastrous decision by the Biden administration to extend the Federal unemployment insurance subsidy through September, which was a factor, there are other government-induced causes that have nothing to do with a healthy economy:

• Fear of covid infection, which is exacerbated by the fear-mongering that is encouraged by the government's chief pandemic point-man, Anthony Fauci; the CDC; and the media. When the Delta variant was driving new infections higher in July and August, that's all we heard about. Since then, new cases have dropped like a rock. The current level of daily new cases is below where it was in late July. New cases in Florida, the fearmongers' favorite whipping-state, are non-existent. Are you hearing this on the news? No, you are not. The government, health agencies, and the media are doing their best to keep people fearful, to the extent that many people are afraid to go back to work.
• School disruptions, including closures and remote-learning arrangements, that require parents to stay at home. Absent remote work opportunities, which are declining as companies are returning to the workplace, this is keeping some people from working. This is wholly unnecessary given the risks involved.

If we would accept the fact that covid is now an endemic, that it's a virus that's always going to be with us (thank you, Dr. Fauci and your Wuhan pals), and that we have to learn to live with it like we do the flu, we could put the irrational fear aside and get back to business as usual. Until we do, these anomalies, these disruptions, are going to be with us. And they're going to continue to wreak havoc.

The second point is this: during the same speech, Joe also claimed that the U.S. economy is growing. He actually whispered it. (And what's up with that? The hair-sniffing is creepy enough, but what's with this cadaverous leaning-into-the-mic-and-whispering crap lately?) He said, "Guess what economy is growing?" Then leaned into the mic and whispered, "The U.S."

Joe, I wouldn't go to Europe and brag about the U.S. economy growing, when Q3 GDP growth year-over-year was a paltry 2.0% - the weakest non-shutdown pace since your former boss was President. Nearly all other industrialized countries' economies are experiencing output growth, so I'm not sure what your point is; most are growing faster than that pace. Maybe you whispered because a 2.0% growth rate is so downright embarrassing.

So the long and the short of it is this: yes, wages are growing at a strong clip. No, contrary to Joe's claim (and let's face it, this isn't the first time he's been wrong, or told a whopper), wages aren't growing faster than inflation. And, most importantly, that wage growth is going to drive inflation higher yet.

All the more reason to follow Kamala Harris' advice, and do your Christmas shopping now, while you can still afford the gifts.