Previously I mentioned how it is scary that some governments are offering 25% “low-risk” return on certain investment vehicles going into 2017. Well, that return has now been explained, at least in part, by policy. As the FT reports:
“Many economists have also changed their views. Economics textbooks used to state that if you raise pay above the value it creates for employers, you reduce demand for labour. In other words, minimum wages cost jobs.
But economists’ opinions are now more nuanced, in large part because of the experience of countries such as the UK, which have so far sustained steady increases in the minimum wage without doing any notable damage to employment.”
The living wage is an attempt to hike the minimum wage on society’s lowest skilled workers, and may coincide with an increase of the monetary base- allowing workers to feel wealthier in nominal price terms while doing little in real price terms.
Why is this justified?
Quite simply, during times where debt accumulation (typically, but not always borne by government) is so high that interest rates extract more from the economy than the economic growth, the only solution is to reduce the debt burden in real terms.
It seems that the UK will be attempting to, at least in part, inflate their debt burden away. Other solutions lie in stretching debt repayments over a longer time horizon, or forcing haircuts on creditors.
Between Q2 2017 and Q2 2018 (and perhaps moving forward) we might see significant inflation in the United Kingdom which would fit the historical record. As Ben Bernanke might say, it’s time to start the helicopter engines and get ready for the cash drops.
Of course, there is still the alternative- no stealth jubilee by government and the controlled descent into the abyss of wealth destruction. This would benefit the wealthiest individuals and institutions in society, though neither option is particularly pleasant to consider.
Could this policy be wrong?
Yes, in fact. Historically wealth accumulates in the hands of the few under capitalism. Over time this inherited wealth (or dynasty wealth as I prefer to refer to it) is hoarded and isn’t reinvested (see: Monarchy/Oligarchy etc.) In the event that most of this wealth is actually being mobilized in useful ways, ie: there is no slack for investment in the productive economy, central bank and government interference will only destroy wealth.
Historically, this has not been the case- there has always been slack, but there are some reasons to think that one day soon, that slack will diminish, making the policy of punishing savers a failed one. Is it soon? Perhaps. History will tell, but the stakes are high. We cannot afford to misread the situation.