The U.S. Misery Index: Ignorant Data



A friend sent me an article discussing the latest U.S. Misery Index, posted at Yahoo Finance.

As the Yahoo article says,

The misery index — which is simply the sum of the country’s inflation and unemployment rates — rose to 13.0, pushed up by higher price data the government reported on Wednesday.

There are a few things to consider here when it comes to this so-called Misery index: (1) why is inflation high, and (2) why is unemployment high?

In both situations, we can lay the blame soundly on government intervention.  Inflation, as defined by the Austrian School of Economics, is NOT a rise in prices.  Inflation is, simply, a rise in available cash in the economy.  Cash rises for only two reasons: either (a) government prints more of it and puts it into the economy, or (b) banks lend new money that they’ve created solely through the power granted to them by the Federal Reserve.

Inflation means a rise in money supply, plain and simple.  What happens when you increase the money supply?  People spend it faster — and it’s the faster spending that causes prices to rise.

Of course, there can be industry specific rises in prices that occur separate from an actual rise in the money supply.  This happens generally with higher demand for a product.  If all of a sudden, everyone wanted strawberries, and there’s a limited number of strawberries available, the prices of strawberries will go up.  That’s typically a short term demand, though — most price increases happen when government or banks create new money literally out of thin air.

For a great example of how government and banks both create higher prices through money creation, consider the housing market: government wanted more people to own homes, so they lowered the standards for mortgages — they used Fannie Mae and Freddie Mac as guarantors for loans issued by private banks.  The banks created new money (not money from deposits in the bank) to loan out to more people to buy homes.  That means more money was active in the housing market.  As I mentioned above, if you put more money towards strawberries, the prices go up.  Put more money towards the housing market, prices go up.  That’s how bubbles form — and it’s exactly the reason the housing market bubbled as fast as it did.  Government started the mess, and the banks helped it along, knowing they were protected by Fannie Mae or Freddie Mac in case of default.

In terms of employment, most of these mainstream media articles ignore a very important facet of that number: something I call disemployment.  Disemployment, as I define it, would be when a business or entire industry of businesses want to hire people, but are unable to.

Consider this: if an industry has plenty of unemployed people who want to work, and are willing to work at a lower price than the currently employed, it is in a company’s best interest to lower wages and offer the other competitive laborers the job, if they can do it at the same level of quality.  Of course, there is a cost to train new employees, so it’s a more complicated scenario than just hiring the cheapest laborer available.  Still, the supply of available workers should, in a market free from government regulations, allow for more people to be hired.

So what is it that prevents employers from hiring workers at a more competitive rate?  Simply put, union contracts.  Look at the industries with the highest unemployment figures today: factory and installation, construction, education.  All 3 of these industries are heavily unionized, which means that employers are bound by long term contracts to never pay below a certain figure.

If a company is mandated to pay a salary of $50,000 a year for the next 4 years, they absolutely can not hire people at $40,000 who are willing to do the same work at a lower price.  If the company can bring in new hires and save 20%, they can also hire 20% more people.  With an unemployment rate of 11%, wages would merely need to fall 11% or so, and the entire group of employable and capable unemployed would be working.  But the union contracts prevent this.

The pro-union folk will argue that it would be a race to the bottom, meaning wages would keep falling until they were below the poverty line.  This is bullshit, plain and simple.  Wages will fall in any industry until new graduates would realize that the industry would not be a good place to work, and they would start training for a different industry with a higher demand for labor (higher wages).  This is how the economy balances itself: people study for a trade where they can maximize their income; businesses set wages based on the supply of available laborers.  As too many people study for a specific trade, wages fall, and new students choose a different industry, so wages stabilize.

The funny thing is, if the education industry was allowed to lower wages to hire more workers, it wouldn’t take long before the newly employed (who were previously unemployed) would start clamoring for higher wages.  They’d go to the union, and make demands, even though it was the union that kept them unemployed for so long.

Who forces the union issue on employers?  The goverment, of course — through a myriad of pro-union and anti-employment laws at the Federal level.  You want more employment, allow the market to function by allowing wages to fluctuate as the supply of laborers and demand for laborers adjusts.  This can happen continuously: more houses are built in summer than winter, so wages to build homes would be higher in summer.  More people need snow plowed in winter than summer, so the wages for snow plowing labor would be higher in winter.  It’s a natural state of the economy, one that government tries to “fix” by providing labor contracts with too much power.  So we end up with higher unemployment.

So, to recap this Misery Index: it’s based on two figures: consumer price increases and unemployment.  Who is to blame for consumer price increases?  Government, and the power that government gives the banks to create new money in an overall economy or specific industry.  Who creates unemployment?  Again, government grants power to private groups to stifle the ebb and flow, peaks and valleys of wages that allow businesses to set wages based on how much they have a demand for labor, and how big the supply of laborers is.

There is no Misery Index, there is just a number that is based solely on government’s failed reputation of trying to control inflation and employment.  As you can see, they do neither: they just make things worse

Update

A few things to add: if the supply of unemployed laborers is high in an industry, it is best for both the unemployed AND the employed for wages to fall to integrate more workers.  That means LESS overworking for the employees, it means BETTER service for the customers, and it means MORE variety in abilities — projects can be completed quicker.  It’s also better for the macro-economy overall: more people spending money on different things important to them mean more industries will get the benefit of the added hires.  Are classrooms too big, with too many students?  Add more teachers by lowering wages slightly.  Problem solved.

Related posts to peruse:

  1. Two parents in the workplace: a net loss?
  2. Thank you, Sean Maher, for being gay
  3. A funny thing happened on the way to the grocer’s
  4. Occupy Wall Street, Occupy Your Street
  5. Bitcoin will be stronger if it can’t be traded for fiat currency
About A.B. Dada

A.B. Dada resides in Chicago, Illinois and manages a multitude of businesses involved across a wide range of industries.

Comments

  1. (r)Evoluzione says:

    Re: inflation & deflation — I have this conversation on a semi-regular basis with my less economically savvy friends. Inflation is simply an expansion in the money supply, which is concurrent with an increase in the velocity of money. Deflation–the opposite.

    Price makes no bearing on inflation/deflation, because using a price-based definition, we see inflation and deflation simultaneously–in commodities, and real estate, as respective examples.

    Your note on who/what creates inflation is mostly correct in implicating government. However supply and demand are not insignificant players, especially in the dynamic, unstable markets we see today. Oil is the best example, because it is the ur-commodity, the basic substance that powers the world economy. With or without government intervention, it is geological fact that global supply delivery ability is contracting, and its contraction will only accelerate in coming years. That will put the brakes on the money supply, and bigtime, because it will cause a collapse in debt. Debt, being a claim on future productivity, is dependent upon continual economic growth, and it pains me to say that it seems we’re past the days of cheap, easy growth fueled by seemingly limitless inexpensive energy supplies.

    A note on unions: today, their collective bargaining for better wages, more jobs, etc, amounts to a form of mass extortion, in certain industries anyway. But in my grandfather’s and great grandfathers’ generation, unionization was the only way to rise up against, and do something about, the inhumane conditions in the newly industrializing world. My family was a lineage of miners, largely, and mines, especially the coal mines were dangerous, ruthless places where death waited around every corner, and men worked themselves to death, received career and even life-ending injuries with no compensation. Thus unionization was necessary, and I’m proud to say that my great grandfather fought–literally, with rifle in hand, for the ability to unionize. If you aren’t familiar with it, the Ludlow massacre is an interesting event to look into. It was an armed clash between members of the colorado national guard along with mercenaries/mine guards, versus the miners who were attempting to unionize. It was an epic struggle with numerous dead on both sides, which took place in 1913, the same year the federal reserve was created. Coincidence? I don’t believe in those.

    I digress. Unions: now that occupational safety has largely been established via regulation, collective bargaining may have outlived its usefulness due to its ability to disrupt natural supply and demand.

Speak Your Mind

*

Login with Facebook: