Strikes And Inflation

With strikes coming back into style how about some economics today? For more see the compound posting "Economics", November 2019.

Workers going on strike has been in the news, particularly America's United Auto Workers. But if the reason for striking is higher wages, remember that strikes and inflation go together.

Pay raises are actually the cause of much inflation, unless there is a corresponding increase in production. The total value of goods and services that an economy produces is equal to the currency in circulation. So if we increase the amount of money to be spent, without a corresponding increase in production, then the relative value of the currency must decrease.

Inflation can be caused by other factors. The economy runs on fuel. When fuel gets expensive it makes everything else expensive. The growth of a city causes inflation because it makes land more scarce, and thus expensive, and this affects most other costs. 

The major cause of inflation today is actually the demographic imbalance. The Baby Boom generation is retiring by the millions. Never before has there been so many old people, relative to young people, and there are not enough young workers to take care of them. So the inflation is caused by a significant portion of the population being consumers of care, rather than contributing productive work.

Anyone who was around in the 1970s can tell you that worker strikes and inflation seem to go together. How much of a coincidence can it be that inflation and the number of people working in manufacturing both peaked at right around the same time? Manufacturing was heavily unionized and prone to striking for higher wages. Millions of unionized and well-paid factory workers were getting paid more than their labor was actually worth, according to the Law of Supply and Demand, and the economy adjusted by way of inflation.

During my childhood and youth seeing striking workers on the picket line was a regular occurrence. Unions used to be powerful. My first job where I got a paycheck was at a grocery store. It was unionized. If the management fired someone and the union wanted them back, they would get them back. The turning point against unions in America was Ronald Reagan's firing of striking air traffic controllers in 1981.

Does anyone remember Britain's strike-inflation spiral of the late 1970s? The winter of 1978-79 is known as the "Winter of Discontent". Workers in one industry would successfully go on strike for higher wages, and that would only encourage workers in other industries to do the same. The resulting inflation was stopped only by Margaret Thatcher in Britain, followed by Ronald Reagan in America, purposely inducing a nasty recession because that was the only way to stop the inflation.

Recessions are not always entirely a bad thing. First, recessions act as a correction to what was wrong with the economy to begin with. Second, recessions eliminate jobs that don't come back but it is jobs that are not really the needed anyway. Does anyone remember when there were people who bagged your groceries and pumped your gas for you?

Pay raises, to keep up with inflation, and cost of living adjustments form a never-ending spiral. The raises and upward adjustments are actually what causes the inflation that they are intended to compensate for.

The economy is actually working against us, forcing us to "swim against the current" to keep up. If a company is selling a product or service, and it develops so that the product or service is no longer needed, or if it develops so that your job is no longer needed, it is considered as making progress.

But yet if workers are not paid enough the consequences can be even worse. A century ago was the "Roaring Twenties", a time of great prosperity. The excess industrial capacity, left over from the First World War, was turning out a fantastic amount of consumer goods, from cars to radios. 

The good times were not to last. Industries were naturally trying to maximize profits by selling products for as much as possible while paying their workers as little as possible. The trouble is that the economy was relying on the workers to buy the goods that they were producing, and they weren't earning enough money. Goods were just piling up in warehouses. Factories began cutting back on production, meaning that workers had even less money, and it spiralled into the Crash of 1929.

The crash was devastating. It led to what is known as the Great Depression. Only a few intellectuals in the west even knew what Communism was. But this crash of Capitalism was what made Communism into a major world economic system, as an alternative to Capitalism. Germany, the Weimar Republic, was devastated by the crash. A new political party had the idea of absorbing unemployment by drastically expanding the armed forces and getting factories back to full production making military equipment for them. The party was known as the Nazis and the rest is history.

A very moderate amount of inflation is generally considered as desirable. Most governments aim for about 2% annual inflation. This is because it provides a cushion against deflation, which is even worse than inflation, because, if prices are dropping there is no incentive to make anything because by the time it is sold it may sell for less than what it cost to make it.

The reason we have such difficulty with reaching the right balance of what to pay workers is complexity. Our economy is complex, in fact it is as complex as we are. This makes it difficult for anyone to see the "big picture" of the economy. Every economic transaction involves a buyer and a seller, meaning that the buyer and seller are of equal importance. But it is much easier to see either the right, favoring the seller, or the left, favoring the buyer, than to see the big picture.

If a shoe store emphasized that the left shoe was more important than the right shoe, but another store down the street advertised that the right shoe was more important, we would consider it as nonsensical. But shoes are simple and we can see that both shoes are of equal importance. The economy is not so simple and it is much easier for each person to see either the right or left, rather than the big picture.

Plainly and simply, workers must be paid enough to be able to buy the goods and services that they are producing. If they are not paid enough it will result in recession and possibly an economic crash. Notice that America's three market crashes in the last century, in 1929, 1987 and, 2008 all came near the end of two conservative Republican presidential administrations. But if workers, as a whole, are paid too much it will just result in inflation.

We tend to zig-zag instead of having the economy proceed in a straight line. We go too far left, and then compensate by moving to the right, except that we go too far to the right, and so on. 

Religion is also part of it. Humans are designed to believe in something and if we don't believe in God we will just believe in something else. How many people have you known whose nation or political ideology is really their "religion"? This causes us to take an economic strategy, that might have been good advice at one time, and cement it into dogma.