Sunday, 10 March 2013


Quick reply to a post from Matt Yglesias I just read on Moneybox, another of my quickly expanding list of favourite blogs (Honestly, one thing that would deserve its own blogpost is how come that you have such good political or economical opinions out there and so little is actually being implemented or even seriously discussed in the public square).

Anyhow, here, I disagree with Mr. Yglesias. In his post , he essentially argue that "To raise real wages across the economy rather than for some favored group of insiders, what you need to do is make things cheaper".

Now (and I will have one day to expand on this point by discussing inflation/deflation phenomenons as I understand them), falling prices through technological improvements/reduced barriers to entry is obviously one way to raise people's  purchasing power or well being.

But is his statement that "if everyone's boss doubled everyone's salary starting on Monday, we'd just have one-off inflation" is flat out wrong.

If everyone's salary starting on Monday was doubled, it may well result in inflation - through at least two mechanisms. One is companies adjusting their prices to reflect higher costs and the other is 'too much money chasing too few goods' i.e. supply constrains.

However, it could also result in reduced corporate profits and, assuming that there is an output gap in the economy (as there is now), there might not be any kind of inflation occurring.

At the end of the day, what Matt Yglesias describes quite evocatively is captured in macro data as "productivity gains".

Outside of population growth, productivity gains is how our societies grow. But the truth is that we can "spend" those productivity gains in a variety of ways.

We can reduce prices as Matt describes. We can increase salaries. Or corporate profits. Or taxes. Or we can reduce the amount of time we work.

So, no, a general salary hike need not result in inflation and, more generally, the whole problem in the last thirty years has been that the bottom 90 to 99% of society did not get to see much of the productivity gains we made.

I would have thought Matt Yglesias was well aware of that fact...