We wrote in passing last week about how, regrettably, US wages were failing to keep up with inflation and how, regardless of whether inflation moderates or stays elevated, this was a disaster for average Americans and would likely lead to serious repercussions, at the ballot box and in our society.

In some respects, this has been a long running theme of ours.

As a few of our earlier newsletters (and memes) have covered, the media and policy elite excuse making for inflation have been legion and pathetically superficial:

• First the inflation was supposedly transitory.

• And actually when you really dove into the details, ostensibly not that elevated anyway.

• And what did exist was the result of corporate greed and/or foreign wickedness ("Putin did it").

• And when it was finally acknowledged that prices were rather elevated, they were supposed to be just on the cusp of declining precipitously.

But by far the most pernicious and seductive argument might have been (past tense) that: actually inflation, in this context, could be a good thing!​

This take was as elegant and simple as it was wrong.

The rough idea behind this theory was something called the "hot economy thesis." The thinking here was that tighter labor markets would lead to rising real wages. In turn, these rising real wages would ensure that worker pay was outpacing the rate of price increases and so were "real" gains in buying power rather than just "nominal" gains that were counteracted by the hidden tax of inflation.

So, this argument claims that a very low unemployment rate and quickly growing economy could provide workers with greater leverage in wage negotiations and, as a result, inflation might be high but wages would keep up.

The evidence for this line of thinking - especially in DC - emanated from two supposed golden eras of postwar American economic history: the 1960s and late 1990s.

The only problem is that the evidence from these eras is, actually, either wages didn't keep up (the 1960s) or wages increased above the rate of inflation but were largely driven by large gains in productivity (the 1990s).

When productivity rises you are doing more per hour or unit worked so wages are rising but for a different reason: you are producing more.

(pro tip: there is no such thing as a golden era, really ever.)

All of this brings us to an excellent piece of analysis in the Washington Post that came out this past week and did a fabulous job of demonstrating the scale of the problem and how, despite rising wages, it is poorer Americans who are paying the greatest price for high inflation:

This shows the scale of the problem and the fact that right now many Americans - and many poor Americans in particular - are working hard and making more money but their wages are failing to keep up with the inflationary spiral of the last 2 years.

One thing to note is that the above data is only through the end of 2021 as well. 2022 is certainly not looking much better.....

The sad thing is that real wage losses was always likely to be true in a high inflation/low productivity era.

As far back as the 1930s, John Maynard Keynes pointed out in his General Theory of Employment, Interest and Money that wages struggle to keep up with prices in a hot economy because prices are more "dynamic" (by which he meant they can adjust more frequently) than wages.

And because of this stickiness, Keynes also explicitly made the inverse and ominous point: wages most often outpace inflation during an economic contraction rather than an economic boom for the same reason: they are harder to adjust and only do so slowly.

That fact will provide precious little comfort to America's lowest paid workers. The best hope they have of a real wage increase might be during a recession when they will also risk losing their employment. Not great....

What does this all mean practically speaking?

• It suggests the strong bias in favor of Main Street vs Wall Street will continue from policymakers, including the Fed. They will be heavily pressured to raise rates swiftly to try and curtail inflation hurting these workers further.

50 basis point interest rate hikes (i.e.: 0.50%) may become the new 0.25% for the foreseeable future and the concerns of investors will have to take a back seat.

The worry will be that these types of hikes will raise the possibility of "too tight, too quickly" in terms of financial conditions and the onset of a recession.

Regardless of which scenario occurs, however, it seems reasonable not to patronize workers who are fully well aware that their wages are failing to keep up and loftily assuring them they should be thankful for living in a high inflation era.

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