The Guadalajara-Minnesota Connection
As new markets open up, entrepreneurs rush in to fill the demand. An alert reader sent me this picture taken Friday, March 1, of a bus parked at a south…
Many Americans have been delighted to see wages rising since the end of the pandemic. But whether they realize it yet, inflation has already eaten up all of those gains — which highlights the fact that the U.S. economy has no system for making sure that wages keep up with inflation.
…And yet, when you adjust for inflation, it turns out that real wages — representing how much stuff you can actually buy with your paycheck — have gone down since May 2020 and continue to drift lower:
This is true whether or not you use consumer price inflation or the personal consumption expenditure price index, a popular alternate measure of inflation. And it’s even true when you hold occupations constant to account for the changing composition of the workforce.
In terms of real purchasing power, American workers are still losing ground.
The reason wages can look like they’re rising when they’re actually falling is inflation, of course, which has been running unusually high this year:
The typical inflation rate is about 2%; this year, it’s been more like 5%. Workers who don’t know this, or who are slow to perceive the rise in prices they pay for goods like cars and groceries, won’t realize this, and will be happy with their unusually large raises. But companies, whose accountants and managers certainly know the true inflation rate, will also be happy, because they know they’re not actually paying more for labor.
So, as a $15 an hour wage becomes the “norm” without legislation, it isn’t making people better off in real terms.
But the $15 an hour minimum wage isn’t the only progressive shibboleth getting skewered by inflation. Modern Monetary Theory (MMT) starts from the quite correct observation that a monetary sovereign like the federal government — a body that issues the currency its liabilities are denominated in — need never go bankrupt: It can meet whatever liabilities it incurs simply by issuing a sufficient nominal amount of currency.
This might cause many of us to worry about inflation. Indeed, proponents of MMT such as economist Stephanie Kelton admit that there are limits to the monetary sovereign’s ability to finance ever-greater government spending simply by printing money. In her book The Deficit Myth, Kelton writes:
Just because there are no financial constraints on the federal budget doesn’t mean there aren’t real limits to what the government can (and should) do. Every economy has its own internal speed limit, regulated by the availability of our real productive resources— the state of technology and the quantity and quality of its land, workers, factories, machine, and other materials. If the government tries to spend too much into an economy that’s already running at full speed, inflation will accelerate. There are limits.
The question is where we find those limits and the answer is to increase the rate of inflation. To see why, look at the equation of exchange below, one of the few genuinely useful equations in economics:
This says that the money supply in an economy (M) multiplied by the number of times it is spent in a given period (velocity of circulation, V) equals the price level (P) multiplied by output (y). Again, this is a truism. It simply says that nominal spending (or aggregate demand, MV) equals nominal income (Py). As all spending is someone else’s income, this is true by definition.
So, if we hold V constant, an increase in M (the money supply) will either lead to an increase in P (prices, inflation) or an increase in y (output, stuff). What we are seeing is inflation rising faster than output which suggests that we are, in fact, much closer to the economy’s “real limits” than many MMTers would like to think.
Yesterday, a Twitter (X) account caught my eye, going by the handle of Minnesota Department of Human Services Employees, @Minnesota_DHS. It only has 34 followers, but makes the following claim…
Several news organizations have identified the man who shot and killed two police officers and a firefighter yesterday in Burnsville as 38-year-old Shannon Cortez Gooden. One of Gooden’s children called…
Yesterday, I wrote about a bill being pushed by three DFL Senators — McEwen, Seeberger, and Hoffman — which would erect a costly regulatory apparatus to govern who could buy, sell, or use…
A drilling crew boring some 2,000 feet under the surface of the northern Minnesota wilderness has found what they were looking for. Namely, confirmation of a rich pocket of helium…