Inflation, Productivity, and the Public Schools

Many, many years ago I learned that inflation was caused by too many dollars chasing too few goods and services. That simple description worked well not only in the 7^th grade, but also in subsequent years. We are very familiar with the “too many dollars” part. The terrible inflation of the Carter years was brought under control by the actions of Fed Chairman Paul Volker, who simply reduced the money supply (by increasing interest rates). This took care of the “too many dollars” part of the definition, and inflation abated.

The fed funds rate has been nearly zero now, for the last couple of years, which has increased the money supply and triggered the fear of inflation. The price of gold, which spiked at $675.30 per ounce during the Carter inflation of January of 1980, and which settled into the trading range of $271.04 to $446.46 for the next 25 years of low inflation, stands at $1309.00 at the time of this writing. Clearly, the market is anticipating serious inflation. [Note: Adjusted for inflation, a price of approximately $1600 per ounce will equal the Carter peak of January, 1980. Welcome back, Carter!]

But we often forget the second part of the description: “too few goods and services.” The Reagan tax cuts spurred productivity increases, which generated more goods and services. The balance between a reduced money supply and an increase in products to be purchased resulted in a stable economy with low inflation. These were the good times of the mid-to late 1980s, and the 1990s. The economy grew without substantial inflation.

And this explains why salary increases are not necessarily inflationary. If I receive a 3% increase in salary, but the productivity of the overall economy grows by 5%, I would expect prices to decrease, not increase. And if my personal productivity grew by 5%, I would have a reasonable argument to make with my employer that my salary increase was too low.

But what happens if salaries grow at a rate greater than productivity? That is inflationary, as it increases the money available to chase goods and services, without increasing the number of goods and services. Which brings me to the point of this article: are increases in the salaries of teachers and school administrators inflationary? The answer is: most likely, yes, and that has been the answer for quite some time now.

The salary side of the inflation question is personally unpleasant to address. My father was a vocational teacher, my sister is a music teacher, my ex-wife is a physical education teacher, one of my dearest friends is a history teacher, I have dated any number of teachers of various subjects, and I myself once taught high school mathematics, for four years. The largest employer in Morgan County (the county where I live) is the Board of Education, so many of the people I know and like are teachers.

I have nothing against teachers, and the whole issue is distasteful. So let’s delay addressing the salary side for a bit, and address the productivity side first.