What is the best way to measure whether an economy is improving or deteriorating? Often times unemployment, GDP, and increasing wages(interchangeable with salaries and incomes) are the metrics used to assess the condition of the economy.
I’ve written about the inadequacy of the unemployment metric here. GDP is not a proper metric either because it wrongly counts things such as wasteful government spending, even on things such as military spending to drop bombs in the Middle East and elsewhere, as productive. Increasing wages is an okay metric at best.
I say okay because increasing wages shouldn’t be taken in isolation. What if prices of consumer goods/services rise faster than incomes? After all, what good is being a millionaire if groceries cost over $900,000?
What truly proves an improving economy is the excess of people’s incomes over the price level of consumer goods/services. Inflation, while not a direct increase in prices, is an increase in the money supply, as explained here. This increase in the money supply has the effect of increasing prices of consumer goods/services, thereby diminishing the purchasing power of people’s incomes.
As David Stockman explains in the August 21st release of his Contra Corner newsletter, which is a recommended learning source on this blog:
Since the late 1970s, prime-age white male workers with no college education have been running a losing race with inflation. During that 40-year period, nominal wages (green line) have risen by 174%, but that’s not even close to the 236% cumulative rise in the cost-of-living (black line) according to the CPI; and the far greater rise in living costs when a honest measuring stick is used to gauge the soaring costs of housing, education, medical care, insurance and other service-based necessities.
Consequently, for the 35 million alienated and aggrieved workers and their families in this category, real wages in 2019 stood nearly 20% lower than the levels attained way back in 1979.
By contrast, the wages of all college educated workers (blue line) and of black workers (red line) have managed to beat inflation by meaningful amounts. Compared to the aforementioned cumulative inflation of 236% over the four decade period, weekly wages of college-educated workers are up by 297% and by 269% for black workers.
Accordingly, the average weekly wage of the college-educated workers in real terms is higher by 20% and for black workers real wages are higher by 10% compared to 1979.
These figures are all expressed in terms of relative change against a common index of 100.0 in 1979, and they do show where the economic divide is coming from. Namely, white male high school educated workers have slipped badly, while college-educated and black workers have stayed modestly ahead of the cost of living.
To be sure, the gains of these latter two worker categories are not earth-shattering over this extended time period. In real terms, weekly wages of college-educated workers have risen by just 0.42% per annum over the last four decades while real wages for black workers have climbed by only 0.23% per annum.
This next part is important, as it shows that even for the two groups that have managed to beat inflation, and thereby experience an improvement in their economic situations, the annual wage growth rate from 1979 to today is under twice the annual growth rate in the decades preceding 1979. As Stockman continues to explain:
By contrast, between 1952 and 1972—the heyday of industrial America—real wages for all workers increased by 2.55% per annum or 5-10 times faster.
So, overall, the growth of living standards has slowed abruptly during the last four decades, but it is the large, absolute decline in the real wages of high-school educated white workers that has transformed the solid Dem blue-collar vote of the post-war heydays into the disgruntled Trumpite “deplorables” of the present moment.
Of course, the best way to help people beat inflation, and thereby enhance the economy for all people, not just the top 10%, is to reduce inflation, ideally to zero, or at the very least, border-line zero. As I’ve explained in previous posts, such as here and here, the gold standard is the monetary policy that should prevail, as inflation is essentially zero under that policy, which thereby protects the purchasing power of people’s incomes, especially the poor.
On a final note, here is some food for thought. In 1971, when Nixon “temporarily” took the U.S. off the Bretton Woods Agreement, the USD could be redeemable for $35 per ounce of gold. So, let’s say your wage was $1.60 per hour back then, the minimum wage of 1971. That means, as the poorest employed American, you had to work nearly 22 hours to be able to buy one ounce of gold(excluding taxes, deductions and those sorts of variables). In 2020, nearly 50 years later, the price of gold is now above $1,900 per ounce. With the federal minimum wage at $7.25 per hour, the poorest employees in the United States must work over 262 hours for that same ounce of gold, representing a decline in purchasing power by nearly 12-fold! How’s that for 50 years of withdrawing from the crazy, arcane, obsolete, gold standard?!