When there is too much money in circulation relative to the volume of goods and services available for purchase, you have inflation. In the US, the historical annual inflation rate (measured as the rate of change in the consumer price index) has ranged from 3 to 4%. In the Philippines, it has ranged from 6 to 10%. At this rate, a basket of grocery items bought in a Filipino supermarket will double in price every 7 to 10 years.

This sounds bad enough, but imagine what will happen during hyperinflation, which has been defined as an inflation rate of more than 50% per month. It doesn't take a math genius to see that money will become worthless real fast. This has happened many times in the 20th century: Germany in the 1920s under the Weimar Republic (when prices doubled every 49 hours); Greece during the German occupation of World War 2 (prices doubled every 28 hours); Hungary at the end of World War 2 (prices doubled ever 15 hours); Yugoslavia from 1993-1994 (prices doubled every 16 hours); and the list is not exhaustive.

Hyperwage leads to hyperinflation. The Street Strategist correctly identifies hyperinflation as the greatest nemesis of hyperwage theory. When domestic helpers expect to be paid P20,000 a month, the Central Bank will be forced to print more money to meet the demand for it. The excessive growth in money supply (quantity theory of money), coupled with excessive growth in demand for goods and services (demand-pull inflation), and rapidly rising labor costs (cost-push inflation) will all combine to produce escalating prices. The immediate effect will be the suppression of business activity. What entrepreneur would want to do business in this environment where profit margins are being shaved off by the rising costs? A masochistic entrepreneur, perhaps.

Bentulan counters this argument by saying that the increased purchasing power of domestic helpers will actually stimulate business activity and increase profit margins. The producers of goods and services will supposedly make more money due to the increased demand. Well, this is only correct if the cost of production stays the same while the purchasing power of the consumers goes up. But if the cost of production rises in tandem with or faster than the increase in consumer purchasing power, then what have you really achieved except add a few more zeroes to your currency?

Bentulan also does not take into consideration the fact that there may be a long lag time before production capacity adjusts to the surge in demand. As I said before, goods and services will first have to exist before money can buy them. Just because a domestic helper's wage has been boosted to P20,000 a month does not mean that there has been a corresponding increase in the amount of goods and services she can purhcase. Capital will first have to be invested to build the factories, hire the workers, and deploy the technology needed to manufacture the cell phones and breast implants that the domestic helpers crave.

But since production costs have already escalated due to the prior legislated hyperwage boost, then capital investments have just been made unattractive. This situation will benefit producers who are well positioned to meet the demand. Who are these producers? Likely the deep-pocketed multinational corporations not affected by the hyperwage law who have the means to adjust quickly to the demand surge - since they already have existing factories and the technology in neighboring countries like China where the labor costs are low. This means Filipinos will end up importing these goods and services. Obviously, less capitalized domestic Filipino producers will bear the brunt of hyperwage. They will be decimated.

Hence, the great unintended consequence of hyperwage theory is that it may cause the Philippines' to become a net importer of merchandise. This state of affairs will reduce the country's Gross Domestic Product, given that GDP = consumption + investment + (government spending-taxes) + (exports − imports). Hyperwage may indeed result in a rise in consumption, but if it also reduces investment and causes the net export (gross export minus gross import) to become negative, then it doesn't help overall economic growth.

In summary, Thaddeus Bentulan's Hyperwage Theory was a very entertaining series of articles which forced me to brush up on my economic knowledge. It's a great read even though I have my reservations about it. The biggest objection to it is the threat of hyperinflation that hyperwage will engender, and its detrimental effects on domestic industries which will bear the brunt of high production costs. The much touted economic benefits of increased consumption may only be negated by hyperwage's suppressive effects on investments and its promotion of import dependency.

Bentulan promotes hyperwage as the cure to Philippine poverty. Alas, it is a drug that will kill the patient before its beneficial effects will have a chance to kick in.

¶ 6:43 AM