The nature of government monopolies and price inflation through monetary expansion means that on a year over year basis the cost of goods and services goes up. This is a fairly baseline understanding, regardless of what government Consumer Price Inflation metrics may say about there being “no inflation”.
And yet, it seems that the subtleties of expansionary monetary policy and its negative effects on laborers are lost on the masses. We’ve discussed previously, how in an inflationary monetary environment wages must at least keep pace with inflation, lest the laborer see a net loss of his wage power. And way back at the start of this newsletter I shared an example of the damage done by minimum wage regulations in an interesting case study.
Regularly adjusted minimum wage laws are, of course, very politically popular when the purchasing power of the underlying compensatory medium is continually debased. When a laborer can purchase 5-10% fewer goods and services on the same salary a year after taking a job, understandably, this creates friction in an economy and acquiesces to populist political narratives.
These problems compound when workers are unable to preserve their value into the future by saving their wealth with the currency in which they are paid. Laborers, often operating with minimal information, are forced to become investors and speculators, or to allocate the responsibility of their speculation to a 3rd party (financial managers) simply to preserve their purchasing power across time.
However, this is another, less discussed, side to this coin of compensation through labor which we believe is equally important to that of the loss of purchasing power in a base salary or hourly pay rate. For example, take a look at the footnotes of the very first chart displayed on our website.
“Compensation includes wages and benefits for production…”
Now we know that over time healthcare has become increasingly expensive and in many cases entirely out of reach in the West (a deep dive on this topic is required in and of itself).
And yet, although we spend more and more each year on healthcare than ever before our populations grow increasingly unhealthy (again a deep dive for another day). The truth of the matter is that each year the costs of healthcare go up (which only marginally improves for every additional dollar spent) consumers are spending more money for the same service.
Here in lies the problem with calculating compensation for a worker in terms of wages and benefits. A worker who is paid a base salary (which again depreciates thanks to inflationary monetary policy) and given medical care benefits may see the dollar value of his yearly compensation increase. However, when the cost of his medical benefits are rolled into the dollar value of his compensation, he sees no quality of life increase or purchasing power increase despite the nominal dollar value increase of his compensation.
He can purchase perhaps even fewer goods and services than he once could the year before, and is receiving the same healthcare, but at a higher cost. In this way, while it might appear to the casual observer that he is better off than he was a year ago, the purchasing power of his nominal pay has decreased and on paper he should be better off than the year before.
Additionally, a large portion of annual public sector compensation adjustments is calculated according to Consumer Price Inflation metrics and as we know, these metrics are inaccurate in terms of calculating actual monetary inflation or the effects on the purchasing power of unique individuals with their own preferences. This subtle manipulation of the formulas designed to par compensation with inflation gives the state the double sided advantage of both seniorage on their new money creation and a slow burn decrease in real compensation paid to employees.
Can anybody still wonder, in good faith, why angry youth riot and destroy property in the streets. They cannot understand the source of their ills because they have not been given the right tools to decipher the complicated arcanery of taxation without legislation.
Book of the Month:The Road to Serfdom by F A Hayek
-“Everything which might cause doubt about the wisdom of the government or create discontent will be kept from the people. The basis of unfavorable comparisons with elsewhere, the knowledge of possible alternatives to the course actually taken, information which might suggest failure on the part of the government to live up to its promises or to take advantage of opportunities to improve conditions–all will be suppressed. There is consequently no field where the systematic control of information will not be practiced and uniformity of views not enforced.”
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