Stanley Dundee

Back: The National Debt is a Problem? Negatory Top: Getting Money Right

Full Employment Drives Inflation? Uh, No

A sovereign that wishes to provide full employment need only facilitate the offer of paid work at a basic wage to any citizen who seeks employment. While the details of such a job guarantee are challenging, the principle is quite straightforward. Full employment is a policy choice. A job guarantee would set a floor on wages. Workers who lack appreciation for the glories of profit-seeking would benefit from much wider options for employment in public service, paid for by the sovereign. Everyone could have the satisfaction of participating in recognizably useful activity. Private employers might even have to compete for workers by offering training, better wages, and improved conditions compared to those of guaranteed employment. By setting the basic wage higher, wages could be boosted throughout the economy.

The spectre of inflation is frequently invoked to derail discussions of policies that tend towards full employment and hence the prospect of empowering workers to demand higher wages and better working conditions. Elders may still remember the 1970s when inflation and slow growth in the economy flummoxed economists and paved the way for the onset of neoliberalism. The European Monetary Union is perpetually haunted by the ghosts of hyperinflation in the Wiemar republic of 1930s Germany. So we need to ask what causes inflation, what are the tools for dealing with it when it arises, and who benefits and who pays.

When there is actual scarcity, due to causes external to the monetary system, e.g. natural disasters or war, with consequent loss of productive capacity, it's common for prices to rise in response to shortages. This might be the closest thing to an actual law of economics. Policy for dealing with genuine shortages should use the collective resources of society to address the specific basis for the shortages, and to ameliorate the harms caused by the shortages. Genuine scarcity makes real inflation.

In the absence of external forces acting on an economy, inflation is an indication that more money is circulating than is warranted by the current productive capacity of the economy. The proper tool for reducing excess money in circulation is taxation: raise taxes to drain demand from the economy. Taxation has the further potential of reallocating resources away from segments of the population and towards other segments. Keeping the wealthy segments of the society from concentrating enough wealth to corrupt public institutions is a pretty strong argument for confiscatory taxes on high incomes and large accumulations of wealth, such as we had during the closest thing to a golden era in recent US history: the postwar years of boomer youth. Failure to raise taxes under inflationary conditions which are not externally driven is a failure of policy. In the absence of scarcity, inflation is a policy choice to fail to adequately raise taxes.

When wages are rising relative to prices, employer's profits are threatened. They may choose to raise prices to try to pass on the wage increase to their customers, or they must reduce their profit margins. Thus rising wages under stable prices is a policy for income redistribution away from profits and towards wages. But how to prevent employers passing on wage increases in prices? Taxes on profits could be raised considerably to counteract the inflationary potential. The degree of redistribution would be configurable with adjustment of the basic wage and the tax on profits. Distribution of income in the economy between profits and wages is a policy choice. We could have a prosperous and secure middle class again in the US if we make the right policy choices.

Consider also the premise that inflation is always bad. Let's recall who are the beneficiaries of inflation, and who is harmed. When inflation comes on, debtors find their debts reduced in real terms, since the money they owe is worth less than it was when the debt issued. Creditors suffer the loss. A brief, sharp burst of inflation in a time of full employment and rising real wages would be greeted enthusiastically by debt-shackled workers. Inflation can redistribute wealth from creditor to debtor.

Let's not overlook the converse to inflation: deflation. When prices and wages are falling due to a shortage of money, that's deflation. Deflation works opposite to inflation in transferring wealth from debtor to creditor. A debtor must repay debts in money more valuable (more scarce) than that in which the debt was issued. The illusion of scarcity of fiat money thus benefits creditors at the expense of debtors. That may explain why so many pixels are lit in support of that illusion.