LEE: Merkel on German inflation, wage hikes: Nein!

The Eurozone has apparently dumped on Chancellor Merkel the responsibility of tending to their deflation fears. Should she accept? Photo: German Chancellor Angela Merkel/ AP

WASHINGTON, November 6, 2013 — Fish gotta swim, birds gotta fly, and economists apparently gotta attack Germany these days.

That Hammerstein and Kern didn’t add that last part to the lyrics for “Can’t Help Lovin’ That Man” is understandable. Twenty-first century deflationary pressures in Europe couldn’t have been a common topic of discussion on a 19th century Mississippi show boat.


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It is among the knights of my round table, though, since I wrote my first snark about the euro and German Chancellor Angela Merkel. Subsequently, I have had the pleasure of sharing with my fellow knights the approximately four billion heartwarming emails inquiring if I manifest a particular male hormonal reaction toward her. I claim privacy about my reproductive health in declining to answer.

But whether or not I do, I believe her stance on German inflation has been prudent. A surprising number of voices, not entirely from the left, have called on Chancellor Merkel to raise wages to create inflation. There are good microeconomic arguments against doing this, but none are as succinct as the one my friend Kai Yen Chen made when we were in the fourth grade. I was trying to sell him my near mint copy of Defenders 10 in which Thor fights the Hulk in the Avengers-Defenders war. He objected to the price I demanded. Why? Follow his logic carefully: BECAUSE IT ISN’T WORTH THAT MUCH!

In essence that’s the argument against a minimum wage, which is itself a variant on the argument against price controls. You can use words like “dislocation” and “disequilibrium” all day to explain it, but you don’t need them. Very simply, if you force a price that isn’t deserved, then someone’s getting screwed. Those aren’t the exact words in the economic literature, but they emanate from the penumbra of the discipline.

If employers are legally required to raise wages above what employees are worth, they will simply reduce the number of employees who are hired. Here in the United States, our minimum wage, currently $7.25 per hour, ostensibly helps workers, but it also has an insidious reverse effect. People whose skills would only warrant $4.00 per hour are not promised jobs at $7.25 an hour. Instead, they are priced out of the market altogether as some employers make the rational decision not to hire rather than overpay.


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The troubled countries of Europe would desperately love Germany to raise its wages. That would make their own workers more valuable in comparison, but I’m not aware that Chancellor Merkel has any responsibility for workers other than German ones. And if she hadn’t been tending to their welfare, that is if German workers actually had been oppressed by low wages, they could simply have brought their skills elsewhere in the Eurozone, which if memory serves, partially exists to encourage just such labor mobility.

Up to now, Chancellor Merkel has successfully fought back attempts to institute a minimum wage in Germany. But this week’s announcement that consumer prices in the euro zone rose by only 0.7 percent over the past 12 months will surely intensify the calls on her to do just that. There may be other reasons to have a minimum wage — social ones just maybe — but to serve as a tool against deflation is surely not one of them. If it were, there would be no need to stop at higher wages. An administrative doubling of food prices would surely get consumer prices up before the dinner schnitzel cools. Does that solve anything?

I certainly hope not. If it did, consider the temptation before the world’s politicians the next time they develop deflation fears of their own. Frightening. I’d have to rush out to get a lifetime supply of schnitzel cheap before they could act.

______________________________

Michael Justin Lee from the faculty of finance and the Center for East Asian Studies at the University of Maryland, teaches, speaks and writes at the intersection of finance and politics. He is the author of “The Chinese Way to Wealth and Prosperity” (McGraw-Hill, 2012). A veteran Chartered Financial Analyst, he served as Financial Markets Expert-in-Residence in the U.S. Department of Labor. He can be followed at www.michaeljustinlee.com


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Michael Justin Lee

Michael Justin Lee from the faculty of finance and the Center for East Asian Studies at the University of Maryland, teaches, speaks and writes at the intersection of global finance and politics (with occasional tangents off on one or the other).

He is the author of “The Chinese Way to Wealth and Prosperity” (McGraw-Hill, 2012). A veteran Chartered Financial Analyst, he served as Financial Markets Expert-in-Residence in the U.S. Department of Labor. He can be followed at www.michaeljustinlee.com

 

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