Inflation and Wages - A Follow Up

Following up on yesterday's post on how inflation is eroding the buying power of the average American and European wage earner and the upcoming strikes in key sectors like rail, mail, education and health.

It has been decades since unions flexed their muscle - indeed, unions have become emasculated. In the US private sector only 6.1% of workers are unionized today, a far cry from almost 35% in 1960.  The primary reason is the de-industrialization of the US/West, particularly after China became the world's factory.  I am certain that this shift of production from West to East (it started with Japan, remember?) is one of the stupidest socioeconomic decisions made by all Western leaders, bar none. Pardon the "stupid", but as a trained engineer I understand very well how production drives R&D advances and quickly leads to technological supremacy.  Lose your technological edge and you destroy your high value-added economy and your prosperity - period.

The loss of manufacturing jobs emasculated the entire middle class, now but a shadow of its former glory.  And along with that, has come the rise of populist politics, and politicians promising to Make America Great Again.  It is happening everywhere: in the US, France, Italy, Brazil, Austria, Poland, Hungary... it is no accident that Germany, the only Western economy still boasting a large and solid manufacturing base, has not fallen victim to populism - at least not yet.

It was a matter of time, then, that something would give and social unrest would follow.  Soaring inflation and loss of real income is now threatening to throw the West into a vicious cycle of social unrest.  It is no accident that Russia/Putin is taking advantage of this situation, hitting Western economies in their soft underbelly: energy, food and transport.  And it is still early in the game.

What should the West do? Here's a list, from immediate actions to longer term:

1. Substantially raise minimum wages - at least to cover inflation.
2. Do everything necessary to kill inflation immediately: raise interest rates at least at or near inflation levels AND get rid of excess liquidity ASAP.
3. Promote saving instead of spending. Pressure banks to raise deposit interest rates.
4. Raise corporate taxes, enforce minimum tax policies and invest the proceeds in alternative energy technologies, public transport, technical education and R&D.
5. Provide serious incentives to bring factories back. Perhaps impose trade/import restrictions.
6. Promote "buy local" policies, with tax incentives.
7. Seriously evaluate the consequences of getting rid of WTO, replacing it with bilateral/multilateral trade agreements. 

If the West - and by West I mean 70% USA, 20% EU, 10% Japan - does not act immediately, it will fail spectacularly and suddenly.  There is no time left for navel gazing.