Inflation, real wages, and the election results

Almost everybody these days accepts at face value that the result of the election was heavily determined by negative perceptions about Bidenomics, and that, in turn, resulted from inflation. Inflation was high (it wasn't, at least not that much), and people were pissed off. This is not just Larry Summers, who had argued (incorrectly in my view) that inflation was caused the large fiscal packages of an excessive generous government.

In the heterodox camp, many have suggested that more should have been done to control greedy corporations, that caused inflation by hiking their mark ups. In this view, price controls might have been helpful (often some examples of other countries, like Spain are used). While some of these would have been good, they depend on the previous existence of national mechanisms to, for example, control the price of energy (even easier if one has a national oil company),  of a national Value Added Tax on food that could be reduced to alleviate cost pressures. As I noted in the INET video, the best policy would have been to try to increase wages above inflation, and perhaps the best national tool was the minimum wage, but Biden and the Dems in Congress failed to pass an increase (Trump and the GOP are against the existence of a minimum wage, let alone a higher one).

At any rate, as I noted before, real wages at the bottom of the income distribution did go up, going back at least to the Clinton era, as it can be seen below.

However, that about the relative position of the workers at the bottom, nor about the fact that during the Pandemic period (and at the beginning Trump was still the president) real wages for the non managerial workers basically stagnated (even fell a little bit from the peak).

And, as noted before, this does overlook the fact that real wages for an extended period, going back to the 1970s, has more or less stagnated (individuals, obviously, might be doing better, as they get promotions and so on; but people know that their parents could have a better life with a working class salary back in the 1970s).

The key is not inflation, but that real wages have not been growing enough to provide a sense that people's lives are improving. If the left clings to the demonization of inflation, the ultimate lesson would be that fiscal policy was the problem (not the greedy corporations, but the inefficient government; both stories are incorrect, see why on my Catalyst piece). And we will make it so much more difficult for the next Democratic administration and the progressives within that coalition. Many on the left took the wrong lesson from the 1970s, that inflation was a problem, and that balanced budgets were necessary to win elections. That certainly was reinforced by the Clinton administration. To conclude that inflation and excessive spending was the problem with Bidenomics will make things worse.

In terms of feasible strategies that would have positive economic effects, and generate immediate electoral advantages, Dems should concentrate on higher minimum wages as a catalyst for better labor market conditions (the effects spread to other wages, and it is a simple slogan that people readily understand, and Trump would have been forced to remain silent or come out against it).

Very brief note on the Brazilian real and the fiscal package

 

The Brazilian real depreciated last week (full meltdown might be a bit of a hyperbole), and in many quarters there has been a suggestion that it is now undervalued, and that would somehow be connected to the dangers associated with the fiscal position, and the willingness of the Lula government to push the spending cuts, and the tax changes, with cuts for those at the bottom of the income distribution and hikes at the other end (more on the fiscal story in a bit).

The obvious reason for this is that the Brazilian basic interest rate was coming down from its post-pandemic high, and probably, and in spite of all the pressure from progressives and heterodox economists, it was a bit too low. As it can be seen, as the SELIC rate came down, the exchange rate started, eventually, to depreciate. This will have some impact on inflation, but it is nothing that should be of any significant concern. A higher SELIC, and a few interventions by the Brazilian Central Bank (BCB) should be more than enough to stabilize the exchange rate.

The fiscal situation does not require any adjustment, and certainly not one for next year, and not at the expense of reducing government outlays on education and health. Brazil managed to grow more than predicted by markets since Lula's election, because the fiscal rules were taken with pragmatism and the adjustment has been delayed. If the government goes through with the spending cuts, expect growth to decelerate, and the fiscal accounts to worsen.

This is exactly what Dilma tried in her first government, then backtracked, and then adopted in the aftermath of her victory in 2015, leading to the worsening of the fiscal results, and the impeachment (not that this is on the table; but the political future certainly is if Lula cannot deliver growth and better income distribution). Btw, the changes in the taxes are a good thing.