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Here’s how relative value stories ultimately change to inflation stories:

U.K. Government Worker Union ‘Prepares for Battle’ on Wages

By Mark Deen

(Bloomberg) Britain’s largest union for government employees urged members to “prepare for battle” and be ready to strike, stepping up pressure on Prime Minister Gordon Brown to hand out pay awards that meet the rising cost of living.

“Working people, our people, are taking a hit,” said David Prentis, general secretary of Unison, which represents 1.3 million public sector workers. “Our union will organize the most powerful campaign ever seen in support of public services.”

The comments, made in a speech and accompanied by advertisements in U.K. newspapers today, rebuff Chancellor of the Exchequer Alistair Darling’s call for wage restraint as he seeks to combat rising food and energy prices and a slowing economy.


2 Responses

  1. Not sure if you’re saying ‘only’ government increases in wages lead to inflation?

    If I remember correctly your framework says…

    Constantly increasing government deficit spending on any sector, like health care or war, will eventually lead to inflation in all sectors.

    If the government paid for the increased wages through tax hikes on nongovernment workers there would be inflation in government workers salaries offset by deflation in nongovernment workers salaries.

    ‘Real’ inflation comes from increases in deficit spending beyond GDP growth rates less changes in ‘savings’ desires.

    All said, if the government increases wages in order to compensate for demand shocks, it will likely continue to do so.

    Pressure is increasing on the government’s ability to govern. Interesting pressure is still able to come from unions rather than the ballot box.

  2. the way i say it is:

    the price level is a function of prices paid by govt when it spends (and/or collateral demanded when it lends).

    The currency is a simple public monopoly, and any monopolist is necessarily ‘price setter’ whether it likes it or not, and whether it acts like it or not.

    The driving dynamic is that we need the govt’s spending or lending to meet tax liabilities, and not vice versa.

    ‘Inflation’ is the govt paying more for the ‘same thing.’ So when the govt pays more for the same labor force that produces the same output, whatever that might mean, it has redefined its currency downward.

    This is all a simple point of logic, not theory.

    What complicates it all is the govt. doesn’t understand it’s position of monopolist (the Fed does, and therefore sets interest rates as it knows it *must*- no such thing as the market being able to set the overnight rate on its own as was the case with the gold standard and other fixed fx policies)

    Instead, the govt thinks it needs to tax or borrow in order to spend, and spends at ‘market prices’ with direct purchases and various forms of competitive bidding. Every now and then it does recognize that it has what’s called monopsony buying power, such as with health care, and recognizes that it has to set (and then adjust as desired) price rather than pay ‘market prices’ where there isn’t a ready competitive market.

    The largest part of govt spending is for labor, and as above, paying more for the same thing redefines the currency downward.

    That is not to say it doesn’t serve ‘public purpose’ to give govt workers cost of living raises and inflate. It’s a political decision.

    See ‘soft currency economics’ and the other ‘mandatory readings’ on this blog for more detail.

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