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Paying market-based prices



When the price of fuel increased recently largely due to global geopolitical forces over which we have little to no control, the immediate response of our domestic transport sector was to demand fare increases.

Pretty much the same cacophony of discordant voices rang out when the purchasing power of the peso slid together with its relative value to the benchmark dollar in the international foreign exchange market. Flailing in the shallows relative to a resurgent dollar as the U.S. Federal Reserve continuously raised interest rate when their jobs data improved, the peso slid accordingly.

Against the resultant decline in the purchasing power of the peso, labor groups ranted and raved for a hefty increase in minimum wages.

As in the case of the temporary uptick in domestic fuel prices, the slide in the peso’s value was a result of a few domestic factors on one hand, while the devaluation’s causes were based on a whole slew of global catalysts we had little control over.

Between global fuel prices and the falling value of the peso, a good number had simply written in bold banner-like letters the dreaded word “Inflation.” For those who quickly educated themselves, the easiest explanation was the kindergarten graphic of a cart of bills running after a few products. Never mind the toxic interplay between cost-push and demand-pull inflation.

Media hacks as well as critics of the administration were so blinded by the word that they had too readily attached it to the administration’s economic game plans. In fact, the political opposition would recklessly employ it to justify mounting a coup. Coinciding with the filing for certificates of candidacy for the 2019 midterm derby, some even tried to justified their resurrection.

Behind such justification is the political propensity to shovel wholesale every increase in prices under the catch-all term “inflation” and then deliberately allude to it a partisan political dimension hoping to hitch a ride on populist bandwagons.

There is something profoundly wrong in each of these. It has to do with perspectives and attitudes taken. To understand, we need to take the perspective of an economist, because in recent weeks the challenges initially posed are gradually being alleviated by economic cycles and the inherent market-based economy rather than direct and active political intervention.

Simply chew on the following.

The impetus for the temporary increase in fuel is the global economy. If we were to view mass transportation operators as suppliers of services for which we pay the price or a fare, then their rationale for a fare increase is not based on any of the services they provide but on their cost input — a result of global economics. While cost inputs are valid reasons for fare increases, such argument brings fuel costs into the realm of cyclical cost-push inflation. It isn’t simply a matter of a cartful of money.

Cost-push inflation is a temporary cyclical condition; fare increases are not. The permanence of a solution on a temporary situation causes severe price increases that could very well be permanent.

The same aberration applies to the demand for higher wages to alleviate the temporary decline in purchasing powers.

Following an economist’s perspective, labor is a cost input just as fuels are inputs. Thus, labor pricing should also be market-based. The idea of “living wages” is a populist yarn. Refer to Adam Smith’s “Invisible Hand.” Business exists for profit, not to provide for costs of living.
Moreover, more than fare increases, a wage increase is even more permanent, and given its relative impact on labor-based industries, it catalyzes inflation even more than the peso-dollar exchange fluctuations.

The propensity to politicize inflation and sell the idea that politicos will provide solutions is the most ludicrous of the foregoing. From fuel to wages, we need to allow the market to determine values. As we’ve seen in recent weeks, markets have provided the inflation-alleviating solutions. Not the smart-ass, silver tongued politician.