“Inflation is Coming, Inflation is Coming!”
All around the Federal Reserve building, someone for
years has been riding his horse—a la Paul Revere—crying out in
excitement over the notion that 2 percent inflation is finally coming.
This week, Janet Yellen has finally gotten to where many other Central
Bankers around the world already are—it’s not happening.
We’re
not even close. Especially since we haven’t seen any real, sustainable
increases in the Producer Price Index (PPI) or the Consumer Price Index
(CPI). Indeed, the European Central Bank leaders (along with the Fed)
have been throwing everything they possibly can at inflation, and it
doesn’t seem to move. The only thing that will move it is sustainable,
global GDP growth.
I know that no consumers or
governments want excessive inflation. But without increases to PPI and
CPI, instituting wage increases without companies taking a hit on their
bottom line is impossible; hence, it’s been nearly 16 years since we’ve
seen any real wage increases.
One would think the
labor force is about as tight as it can get at 4.4 percent unemployment,
but also remember that we have a 40-year low in labor participation. We
need some of this labor to begin to participate in a growing
economy—not to mention that we need to see sustainable increases in PPI
as a result of GDP growth and a tightening labor force before we will
ever see any real growth or wage increases.
I know it is nearly impossible for those living in
the Washington, D.C. bubble to think about unintended consequences.
Most of the brilliant economists on Capitol Hill believe the labor
participation rate as it stands today is the new normal. They must think
millions of people (even those between the ages of 16 and 55) have all
retired and are sitting on the beach or playing golf.
If
that is true, there is no way we will have a labor force that will be
able to keep pace with a growing economy. Such an economy will put
demands on this limited workforce—at least until there is balance in
employment. If President Trump’s economic team is correct, then it is
very likely we will have a labor crisis that could stifle our ability to
sustain GDP growth.
Streamlining immigration reform
must happen at the same time GDP is growing. Yes, there will need to be
some important milestones that every legal immigrant must meet before
becoming a citizen; the vetting process must be priority No. 1. But if
our leaders are right about the labor participation in this country
being the new normal, they had better get moving with immigration
reform.
However, if the so-called new normal of labor
participation is inaccurate, then we better incentivize those who are
out of the labor market to return to the workforce. The best way to do
that is to carefully examine the broken system that is supporting so
many people under the age of 55—and hope that this group desires to
become productive citizens again by offering them opportunities for
prosperity for themselves and their families.
We have been somewhat shortsighted when it
comes to pushing economic stimulus as we seek to develop ways to keep
companies here and bring new companies to America. Such a push will not
be sustainable if we can’t promise those employers a strong, ready and
willing workforce.
Our leaders in Washington seem to
have a huge problem with understanding cause-and-effect. There was a
time when the Federal Reserve and other organizations had to consider
the effect of underlying causes, not simply default to textbook
scenarios.
Certainly, there is a relationship between
PPI increases, inflation, and wage increases, but if the Federal
Reserve, along with some government agencies, believe we will see higher
wages without PPI, GDP growth and a tightened labor market—think again.
Maybe we will see consumer confidence and consumer spending increase
without wage growth, but it’s not likely.
In the big
picture, companies are not anxious to lower their profit margins by
raising wages without consumer prices increasing as well. Now, prices
remain flat globally, and we are importing deflation. Growth simply will
not be sustainable without increases in GDP. No matter what, the U.S.
and global economy will dictate interest rates and monetary policy—even
though central banks around the world believe they have all the answers.
Unfortunately, the sluggish growth of our economy
is not the fault of the Federal Reserve. It’s all about our failed
legislators doing nothing. And that is something to get very nervous
about. If your wages are not going up, don’t look to the Federal
Reserve, your human resources department, a corporate board, the
president of the company or the owner of the small business.
The next time you walk into a voting booth, take a long, hard look at the ballot.
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