The latest scare-mongering among the economically ignorant comes from the Fed, as outlined in this Reuters piece. In it, we are warned of the inflation risk of Trump proposals for infrastructure spending, tax cuts, and other potential expansionary policies. Inflation is always the buzz-word to caution against aggressive government spending (which is desperately needed, and always an option for a sovereign currency issuer such as the U.S.) So it is important to really understand what this means.
Inflation is always relative – the price of one good in relation to another. A price on its own, say $3 for a loaf of bread or a $20,000 salary a year, tells us nothing without context. So the commonly quoted inflation figures are based off of a weighted basket of goods which include energy, healthcare, housing, food, income, etc.
This brings us to the classical Marxist battle between capital and labor. Over the past 30 years, we are told that we have had “steady” and “healthy” inflation. The truth is that there has been more than steady inflation for the price of capital (housing, healthcare, education, and energy in particular). Unfortunately, this has not nearly been compensated by a corresponding increase in the cost of labor, i.e. wages and income. As EPI reports to us:
“..ever since 1979, the vast majority of American workers have seen their hourly wages stagnate or decline. This is despite real GDP growth of 149 percent and net productivity growth of 64 percent over this period.”
In short, capital has made tremendous gains over nearly 40 years whereas labor has been basically flat. Technically, inflation has been steady, but only because of how insanely prices have grown for housing and other costs, despite the lack of growth in incomes. So, a Trump infrastructure plan could bring a huge benefit for Americans (i.e. increase in the cost of labor) if it employs thousands of workers and puts money into their hands. A tax cut has the same effect of putting money directly into the workers hands, raising the income side of the inflation number.
However, we do not yet know the details of these plans. Tax cuts for the rich, who have a much lower propensity to spend, will have little help for the economy. An infrastructure plan, if funded by private investors as opposed to new government money, will still not add the necessary demand to the economy. What is needed are large tax cuts for the middle class, and an infrastructure/jobs plan. This will give much needed leverage to the labor side of the inflation formula, and promote wage growth while lowering inequality.
Ball’s in your court, Trump!