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Why You’re Never Entitled To A Wage Rise OR Economics For Dummies

Economics is quite simple really, if you think about it like a game of basketball. Your aim is to get as many baskets through the ring as possible while trying to ensure that your opponent doesn’t get more through.

Of course, like all analogies related to economic matters, this one breaks down if somebody points out that basketball games are played under a set of rules which means that it only lasts for a limited time and that the aim of economics is surely to work with people to score as many baskets as possible so surely we’re all on the same team and it’s silly if people are trying to restrict their opponent scoring when if we all shot for the same basket we’d be socialist and that would never do because how would we know who’s winning if everyone is driving a Tesla?

So, I’ve decided that I need to avoid analogies entirely and describe what’s happening in such simple terms that even Tim Smith can understand it…assuming that he has the patience to read past the first paragraph.

For a number of years, the prevailing economic theories were based on the ideas of people like Milton Friedman and the idea was that if governments just balanced their budgets and kept out of everyone’s way then market forces would create prosperity and the rising tide would lift all boats and for a number of years this worked really well for everyone except those who weren’t fortunate enough to own a yacht or even a lifeboat. Economists were fond of using data which backed up their ideas apart from the odd year or ten when it contracted their theories.

Then came the Global Financial Crisis which – if I were still using analogies – was the equivalent of the iceberg hitting “The Titanic” and lots of boat owners looked to the government because as someone said, “We’re all Keynesians now!”

Keynes was popular before Friedman and he argued that governments should stimulate the economy when it was weak and pull back spending when things were booming. In other words, build more infrastructure when there was less private demand and only do what’s necessary when private demand took off.

Rich people generally didn’t like this idea because it sometimes meant that governments had deficits and this meant that taxes would need to go up to balance the budget which Keynes argued didn’t always need to happen, but once people got their way and stopped listening to Keynes then governments didn’t run deficits even in times of recession… Or at least didn’t deliberately run deficits.

Of course, the GFC changed things because lots of companies were at risk of going broke so the idea that governments couldn’t intervene to save them was so last century and surely everyone could see that if all the big companies failed then there’d be nobody to hire workers and we’d all go to hell so the best thing to do would be to take public money and give it to private people in return for them saying, “Great, now we can go back to the business of making money and scoring baskets and stopping anyone else from getting too many because when we score baskets everyone wins.”

Things were pretty much back to normal and we were just about to say how good it is when governments don’t do terrible things like force firms to take their money in return for them complaining about government debt, when along came Covid. This prompted one of the great rethinks. Once again, the government would need to give everyone lots of money to keep the economy going.

This brings us to our current place. Before we go any further we need to remember what money is. It’s basically an IOU from the government and if you think about it, IOUs are potentially only worth the paper that they’re written on. However, if you had an IOU from John Lennon or Elvis, then it would be worth considerably more than the paper it was written on, even though there’s no chance that they’ll make good. In the case of the IOU from Elvis, it’s worth money because it’s rare. If Elvis had written several million IOUs then it wouldn’t be worth as much.

And that’s pretty much what happens when the government pours money into the economy. I’m not going to try to explain quantitative easing or money printing at this point beyond saying that the government has pretty much made the value of money worth a little bit less by its actions during the Covid crisis. (Yes, I know Covid is still around, but the crisis part of it is over, as far as the government is concerned.)

When you couple this with all the things that are pushing prices up, such as gas and oil shortages, which in turn pushes up transport costs, food shortages from the Ukraine and the floods and lots and lots of other things, you have a sudden breakout of inflation which is better than deflation but it does have the effect of pushing interest rates up.

Now, I probably should point out that interest rates are so low that they need to go up and it’s actually a sign that the economy is recovering but, at the moment, it only has the effect of making the stock market go, “Oh no, things are improving this will push up interest rates so we better get out of the market before it crashes…”

I know what you’re thinking. “Things are improving. Surely that’s good for companies and they should be making more money, so why is there so much panic?” Well, that’s a very good question. The fear is that attempts to control inflation will lead to a recession. It’s rather like when the car in front of you stops suddenly and you hit the brakes. You may have avoided the first accident but when the car behind you keeps going, you end up at the panel beaters anyway. Sorry, that was another analogy.

Today, when some of the data suggested that things weren’t all going swimmingly in the USA, the market rallied a bit because the fact that things are that good means that interest rates are less likely to go up, so the fact that things aren’t going quite as well means that the market is happy…

If it sounds crazy, that’s because it partly is. Some very astute investors make money by doing the exact opposite of what everyone else is doing. That’s because everyone else is working on the theory that they need to do what everyone else is about to do, but by the time they do it, so has everyone else.

So basically, if you get a pay rise now, it’ll add to inflation. But you haven’t been able to get one for the past few years because your employer couldn’t afford it because…

Actually, I don’t know why your employer couldn’t afford it. You’ll have to ask someone else to explain that one.

 

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6 comments

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  1. Steve Davis

    As the Australian economist Barry Hughes put it in EXIT FULL EMPLOYMENT – “Only when the pursuit of self-interest remains the preserve of the few does the system remain workable.”

  2. wam

    Good laugh at your first paragraph, rossleigh! BBall is a shit american game and baskets are scores, A better sport is netball they have a basket but score on goals which was one point but you could get a point by a penalty basket.
    So the economy was great till the election now it is in trouble and it is albo’s fault.
    ps I couldn’t afford a payrise because it would interfere with my grants from the gov and would put the workers away from a health card.

  3. Pete Petrass

    Employers could not afford to give us pay rises because……………….they were too busy making record profits.

  4. Terence Mills

    In 2019 then finance minister Mathias Cormann said low wage growth was “a deliberate design feature of our economic architecture”.

    This was such a profound statement that nobody knew what he meant so they thought he must be really smart and made him Secretary General of the OECD.

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