Acton Institute Powerblog

Inflation and the Minimum Wage

Share this article:
Join the Discussion:

Broken bank 02In yesterday’s edition of The Transom, which I highly recommend, Ben Domenech included a discussion that places the debates over raising the minimum wage within the broader context of the effects of inflation more generally.

Here’s a section:

There shouldn’t be any debate about the reality of the problem that the costs of basic staples, health care, and higher education are chewing up ever-increasing portions of the median family budget which is, in inflation-adjusted terms, smaller than it’s been since 1995. According to the Bureau of Labor Statistics, over the past five years, the average prices for all goods are 7.7% higher; the average price of bread is 10.4% higher; and the average price of meat/poultry/fish/eggs is 16.2% higher. In the past decade, the average worker has paid 89 percent more toward their health care benefits, while their wages grew 31 percent. The rising costs of the government-fueled higher education bubble makes American parents concerned they can no longer afford to send their kids to college. On top of it all, Americans no longer feel confident about their ability to find a new job which can pay them enough to make up for the costs of these goods and services.

The problem is not that the cost of unskilled labor is too low. The problem is the costs of what workers can buy with the fruits of that labor are too high. And the reason for that is largely due to government and systems which socialize risk and insulate producers from reality, not the realities of a competitive marketplace.×9 Those who favor a free market response to these inequality-related concerns ought to view the minimum wage push as an opportunity to put forward an agenda that speaks to these real concerns with a gas & groceries agenda. This is not going to be solved by more government requirements which raise the cost of labor and will absolutely lead to more low-skilled unemployment: it is with an agenda that would smash the insulated systems which have led to these higher costs.

Ben goes on to outline in some detail what an agenda might look like, which includes “ending the government’s management Soviet-style programs of dairy and raisins.” Horror of horrors, the Daily Beast and dairy producers would have us believe that the result would be $8/gallon milk. I can’t be the only one who wonders what the market price of commodities from milk to oil and sugar might be without various protectionist measures and subsidy schemes.

Ben ends the section with a key question: “Some Republicans have taken up more populist anti-corporatist and anti-cronyist arguments in recent months, because they can read the same polls we do. But will they stand up to cronyism, or are they just interested in demagoguery on the issue until they hold the reins of power again?”

So middle and working-class wages have not been able to compete with the inflated prices of various commodities, in large part fueled by various government policies. A classic exploration of the link between the welfare state and a condition of permanent or chronic inflation is Wilhelm Röpke’s A Humane Economy. Röpke’s comparison of the consequences of inflation vs. deflation is helpful, especially since it resonates with what most people experience (which is out of step with most mainstream [Keynesian] economists). Indeed, argues Röpke, “The blame for inflation must be laid at the door of the whole trend of postwar economic policy in most countries, that mixture of planning, welfare state, cheap-money policy, fiscal socialism, and full-employment policy.”

By embracing a Keynesian economic platform, “The danger of inflation was reduced to a vague and remote possibility; the thing to be feared constantly was what was usually somewhat imprecisely described as deflation. Budgetary deficits, leveling taxes which diminish both. the ability and the willingness to save, artificially low interest rates, a combination of growing popular consumption and investment stimulation, expenditure and credits on all sides, mercantilist foreign-trade policies with the twin purposes of mitigating the effects of those other policies on the balance of trade and of creating export surpluses as a further stimulant for the domestic money flow-all of these practices now received the blessing of economic science.”

But of the two, inflation is the greater enemy than deflation in Röpke’s estimation, in large part because the negative long-term consequences of inflation are disguised by short-term benefits, which is not true of deflation:

We should never have forgotten that over the course of centuries. Inflation is always a lurking temptation and at all times the way of least political and social resistance. Both inflation and deflation are monetary diseases, but, unlike deflation, inflation has an initial pleasant stage for wide circles of the population, and above all for the politically most influential, because it begins with the euphoria of increased economic activity and other boom symptoms. There has always been more danger of inflation than of deflation. By and large, things happen just as they are described in the second part of Faust in the famous paper-money scene : “You can’t imagine how it pleased the people.” But that is precisely the dangerous seduction of inflation: it begins with the sweet drops and ends with the bitter, whereas deflation is most disagreeable from the very outset and is marked by the unpleasant symptoms of depression, unemployment, a wave of bankruptcies, the closing down of factories, losses all along the line, and contraction of economic activity. It follows that of the two diseases, inflation is the rule and deflation the exception.

It is short-sighted to argue in favor of increasing the minimum wage on the basis of arguments about the standard of living without going deeper and examining the issues that reduce the value of wages over time and reduce the purchasing power of the working classes. When we connect declining value of wages with the inflation-driven increase in the costs of various commodities, we have a much more accurate picture of the vicious circle connecting inflationary policy and the ever-constant need to inflate wages by means of government fiat. Röpke identified this in part as “a wage-price spiral in which rising wages and prices keep pushing each other up, especially and most effectively in the presence of the fatal system of a sliding scale of wages determined by the cost-of-living index.”

Röpke goes on to examine four basic causes of chronic inflation, and his diagnosis of each of these in his own time shows us just how much worse things have become in the meantime and how much more precarious our situation is today than it was fifty years ago. Two of the main checks on inflationary tendency that Röpke identified, the gold standard and a de-politicized central bank, are now either completely absent in the case of the former or substantially absent in the latter case. As Röpke puts it, “we cannot have all three: stable money, full employment, and further wage increases. We have to sacrifice one in order to preserve any combination of the other two.” In the intervening fifty years, it is clear which of the three has been sacrificed, and it is also becoming increasingly clear that the instability of money is a key factor in the social distress of our times and is also what Röpke rightly described as “a phenomenon of intellectual and moral decadence.”

A Treatise on the Alteration of Money

A Treatise on the Alteration of Money

 Mariana explains how government, if given control of other forms of private property, would also debase the values of those forms and use them according to its own interests.

Jordan J. Ballor Jordan J. Ballor (Dr. theol., University of Zurich; Ph.D., Calvin Theological Seminary) is a senior research fellow and director of publishing at the Acton Institute for the Study of Religion & Liberty. He is also a postdoctoral researcher in theology and economics at the VU University Amsterdam as part of the "What Good Markets Are Good For" project. He is author of Get Your Hands Dirty: Essays on Christian Social Thought (and Action) (Wipf & Stock, 2013), Covenant, Causality, and Law: A Study in the Theology of Wolfgang Musculus (Vandenhoeck & Ruprecht, 2012) and Ecumenical Babel: Confusing Economic Ideology and the Church's Social Witness (Christian's Library Press, 2010), as well as editor of numerous works, including Abraham Kuyper Collected Works in Public Theology. Jordan is also associate director of the Junius Institute for Digital Reformation Research at Calvin Theological Seminary.