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The Real Relationship Between Inflation And Unemployment

John Galt

Updated: September 14, 2022

inflation and unemployment
Editor’s Note:

EDITOR'S NOTE: The article below may seem a bit technical and focus on the issue of inflation’s relation to unemployment, but it takes a turn and brings to the fore two concepts that are often confused: first, whether economic growth truly is measured in terms of spending or production; and second, whether inflation begins with prices or whether it can be detected in the initial devaluation of the currency that results from an increase in the money supply. The difference between either concept is like night and day. It’s what causes economists (such as the Fed) to make misguided forecasts (i.e. inflation is “transitory”) and grand miscalculations that can only make bad situations worse. The main point of the article is to bring mainstream economic assumptions into question. And with that being said, another assumption that’s commonly espoused by mainstream economists and market experts is that gold is a barbarous relic. With central banks around the world loading up on the yellow metal and the Eurasian BRICS alliance on the precipice of unleashing a gold-backed reserve currency set to dethrone the US dollar, such an assumption about gold would be dangerous at the least, and disastrous at the most, especially for those whose wealth is predicated on the sustained value of the US dollar.

Recently the New York Times NYT -2.9% reported on the ShotMaster Pro, a remarkable piece of machinery that can make eight different espressos at a time, or 700 per hour. The cost of this modern “robot” is $50,000, which apparently is the annual cost of employing a human barista in New York City.

Readers of reasonable intelligence can hopefully see where this is going. While economists believe consumption powers economic growth, the obvious reality is that investment does. And the impetus for investment is to produce exponentially more goods and services at costs that continue to plummet. Applied to the ShotMaster, what presently fetches $50,000 will soon enough retail for a fraction of the previous number.

This is worth keeping in mind with economists top of mind. In a recent opinion piece, Harvard professor Jason Furman wrote with evident worry that “To bring price increases down to 2%, we may need to tolerate unemployment of 6.5% for two years.” The discredited Phillips Curve lives in faculty lounges!

Back to reality, inflation has nothing to do with unemployment. Think about it. Consider Lebanon at present, Argentina for decades, and perhaps Mexico in decades past. Inflation is a decline in the unit of account. Put more plainly, inflation is a currency devaluation. More on actual inflation in a bit, but for now it’s useful to remind readers that a focus on unemployment when contemplating inflation is a sign of the mind wandering, or a thought non sequitur.

To see why, let’s imagine for a moment that chiropractic treatments are revealed to cure more than bad backs. Let’s imagine they’re discovered to cure heart disease. If so, readers can likely imagine a huge surge of chiropractic visits that would occur in concert with higher wages for the practitioners alongside higher costs for patients. Inflation? Not in the least. If we’re spending more for treatments, we logically have fewer dollars for other goods and services.

Repeat it over and over again: demand cannot cause inflation. A rising price of one market good logically implies falling prices for other goods. Inflation is yet again a currency devaluation.

Obviously Furman doesn’t see it that way. To him, rising demand is inflation for it allegedly implying a mismatch between demand and supply. Except that demand is what happens after we’ve supplied goods and services. Furman’s analysis presumes that Haitians are poor because there’s not enough “demand” in Port-Au-Prince. Actually, there’s not enough production there and a lack of demand is the logical consequence of the lack of production. Demand mirrors supply, but supply comes first.

Still, Haiti isn’t just useful as a way of showing how so-called “demand” is unrelated to inflation. Haiti is a reminder that the U.S. economy is part of a global whole. Economies are just people, and everything we Americans produce and consume is a result of global production and cooperation among producers. This simple truth is seemingly lost on Furman.

Evidence supporting the above claim is his worry about a lack of “slack” in the U.S. economy. To Furman, inflation springs from demand not just for goods and services, but also from demand for labor and production capacity. As Furman sees it, low unemployment and high capacity utilization in the U.S. are inflationary for them signaling a limited supply of workers and places for those workers to produce. Furman forgets that the economy is global.

He forgets that U.S. producers employ workers around the world, and production capacity around the world. Again, everything American companies produce is the end result of painstaking production in countries near and far from the U.S. These countries include Haiti.

At which point it’s worth revisiting the ShotMaster. It’s not unreasonable to speculate yet again that investment in this modern robot will rapidly push its price down such that ShotMasters will more and more spell human workers inside the Starbucks SBUX +4.9% stores that are ubiquitous in the U.S., and around the world. It’s another truth missed by well-credentialed individuals like Furman: the very investment that powers the economic growth they naively view as inflationary also reduces alleged labor pressures. Put another way, growing economies automate away so-called labor shortages all day, and every day. So while the Fed’s power is vastly overstated, it’s useful to expose as wanting the musings of economists who think inflation’s cure is government intervention meant to put people out of work. Really, how does Furman sleep at night believing as he does?

Which brings us back to inflation. It’s yet again a devaluation of the currency. Over the last 18 months the dollar has soared against every major foreign currency and also lightly crushed gold. Yes, the “inflation” that has Furman biting his nails would be the first one in the history of mankind that took place amid a rising currency. It should have serious readers seriously wondering if they’ve mistaken rising prices for inflation. There’s an ocean of difference between the two.

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Originally published on Forbes.

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