Why can’t prices just stay the same?
I was watching this video produced by Vox the other day that asked the question: “Why can’t prices just stay the same?” It leads you to watch a 7-min video. I highly suggest watching if you have a few minutes.
It’s a great question, isn’t it? Why can’t prices just stay as they are? It doesn’t say it in the title but it’s clearly a topic entirely devoted to discussing inflation.
Ultimately as is the case with so many factors, governments intervene to follow policy designed around implementing plans for the greater good. The video explains why most governments on Earth want to see slow, gradual growth in prices. I hope you’ll watch the video and take away what was offered.
In this article, I want to talk about what was not offered and what was not discussed.
I believe that politicians are fundamentally rooted in control and taxation. They want to do what is on their agenda and they want money to pay for it. That said, I just wanted to bring up 2 possible reasons why monetary policy almost universally calls for annual inflation.
First is the price of human capital, or labour, and the second is in taxation opportunities.
Inflation is the loss of purchasing power. It is the loss in the value of your money as time passes. It’s commonly described as the increase in the price of things going forward, but I only see it as a loss in what I already have and built in the past.
Labour:
Governments are a large employer everywhere. All of the people that are employed by government expect excellent working conditions. As tempted as I may be, I will not get into a discussion about the treatment, protections or benefits that seem only to apply to government employees in this article. Overall, people feel better when they receive wage increases. Massive employers like governments need to keep employees happy by offering these increases, while being mindful of the cost of those increases.
If inflation is increasing the prices of everything, the burden of wage increases isn’t as damaging to the employer. The employer is benefiting from receiving higher revenues (in number) while employee costs increase. Inflation allows governments to give raises without actually giving raises. The employee sees more, but cannot actually use more. Still, it’s a raise. “You will take it and you will be happy.”
To compound this, most Canadian civil servants are also unionized. These employee wage increases come at a further cost of unionization and arbitration. There is plenty of bloat in the system. When the battle is between a government and the government employees, the costs for both sides ultimately come from taxation on the citizens. This is a great segue into my second point…
Taxation:
Have you ever heard of the profit fallacy? The joke is on you if you think you’ve made as much money as you did. Back of the napkin, quick math on an example to illustrate this.
You bought something for $1,000. Call it gold. You bought $1,000 worth of gold. Inflation will increase the price of that gold over time. That gold moves to $1,500 at some point because of inflation. The gold did not increase. Nothing was created. There is no real change in value, only in price. What used to cost $1,000 now costs $1,500.
As far as your government is concerned, you made $500. That is all taxable income. You will have to pay tax on that “gain”. Never mind the fact that materially nothing was produced or created. Inflation changed the price of the asset. If prices did not increase, there is no gain. One might say inflation is a great way to create a future income taxes. Forever. Might they?
In summary, this is what stood out to me after watching that Vox video. As I give it thought, I don’t think I’ve ever seen any video or article discussing these two aspects concerning inflation. Maybe my thoughts are flawed. At the very least, I am proud to have given this some thought. Most of us don’t give it much attention, though we should.