wages Archives - Zenconomics

This is Why Your Wages Aren’t Rising

by Bill Bonner – Bonner and Partners.com:

We ended last week wondering what had gone wrong: How come the 21st century has turned out to be such a dud?

Where are the jaw-dropping new inventions? Where are the rising incomes? Where is the dynamic, sizzling economy we expected?

Back in about 1963, we recall trying to picture ourselves in the 21st century. The rate of progress then was so fantastic we had to stretch to imagine it.

Every year, Chevrolet, Ford and Chrysler put out a new and better automobile. In 50 more years, surely cars would be regularly flying through the air!

In 1969, Neil Armstrong walked on the moon. It was just a matter of time before we had a colony there… from which we could explore the solar system.

Then in 1970, the pocket electronic calculator appeared. Half a century later, imagine the condensed knowledge and computing power we would be able to carry around.

Aging Economies

The only one of those things that realized its apparent potential was the increase in computing power.

That has changed life on planet Earth. Now, instead of talking to your neighbors in the elevator, you can keep your head down and focus on your smartphone.

We’ve seen couples in restaurants who never talk among themselves – each fiddled with their iPhone through the whole meal.

Is that progress or what?

Since the 21st century began, the average US household has lost income. Bummer.

Why has this happened?

One answer we proposed to readers of our new monthly publication, The Bill Bonner Letter, was that three of the leading economic zones – the US, Europe and Japan – have come to be dominated by old people.

But that explains only a part of it… and probably not the major part.

Stopping the Future from Happening

The other reason is that government is always reactionary.

It protects existing voters from those who haven’t been born yet… existing wealth businesses from entrepreneurs… and the past, generally, from the future.

Much of the blame for this flop of a century can be put on government and its cronies in the private sector.

At this suggestion, apologists for big government point out that government spending, as a percentage of GDP, is scarcely higher now than it was in the 20th century.

But today, much more of the private sector has been crony-ized.

Since 1960, the number of rules, regulations and taxes has soared.

As we showed last week, far fewer new businesses are being started now than were in the 1960s.

This is partly because a high wall of regulation, designed to keep out competitors, protects existing businesses.

Chock-a-Block with Cronies

The “security” industry is obviously a government affair – dominated by large, entrenched cronies.

But so are businesses in finance, health care, housing and education. They are not exactly married to the feds… but they are so close they spend almost every night in each other’s arms.

When you buy a house, for example, it is considered a private sector transaction.

Fannie Mae, Ginnie Mae and Freddie Mac mortgages don’t show up as government spending.

But the US government created and operates them. And these three “government-sponsored enterprises” are responsible for about 95% of mortgages issued in the last three years.

Banking, medicine and schooling – even at the university level – are so dependent on government rules and government money. And they are so chock-a-block with cronies, that they might as well be government itself.

And take a company such as GE. It is supposed to be in the business of power generators and airplane engines and other major industrial innovations.

But prior to the crisis of 2008, it worked fiddle and bow with the feds to play the government’s distorted yield curve… and then, when that gig was up…. it was saved by more direct federal bailouts.

You can read the whole sordid story at David Stockman’s excellent website, Contra Corner. (Stockman was President Reagan’s budget adviser before quitting in disgust over the administration’s profligate spending.)

In short, after 1960, the economy came to be more controlled by people who were more interested in protecting current wealth than in producing more of it.

Central planning led to a decline in growth rates throughout the rest of the 20th century. The rate of innovation slowed.

What we are seeing in the 21st century is proof of our dictum: The real role of government is to look into the future and prevent it from happening.

Article originally posted at Bonner and Partners.com

Employment Does Not Drive Economic Growth

by Frank Shostak – Mises Daily:

For the head of the Federal Reserve Board Janet Yellen — and most economists — the key to economic growth is a strengthening in the labor market. The strength of the labor market is the key behind the strength of the economy. Or so it is held. If this is the case then it is valid to conclude that changes in unemployment are an important causative factor of real economic growth.

This way of thinking is based on the view that a reduction in the number of unemployed persons means that more people can now afford to boost their expenditures. As a result, economic growth follows suit.

We Need More Wealth, Not Necessarily More Employment

The main driver of economic growth is an expanding pool of real wealth, gained through deferred consumption and increases in worker productivity. Fixing unemployment without addressing the issue of wealth is not going to lift economic growth as such.

It is the pool of real wealth that funds the enhancement and the expansion of the infrastructure, i.e., an expansion in capital goods per individual. An enhanced and expanded infrastructure permits an expansion in the production of the final goods and services required to maintain and promote individuals’ lives and well-being.

If unemployment were the key driving force of economic growth then it would have made a lot of sense to eradicate unemployment as soon as possible by generating all sorts of employment.

It is not important to have people employed as such, but to have them employed in wealth-generating activities. For instance, policy makers could follow the advice of Keynes and his followers and employ people in digging ditches, or various other government-sponsored activities. Note that the aim here is just to employ as many people as possible.

A simple commonsense analysis however quickly establishes that such a policy would amount to depletion in the pool of real wealth. Remember that every activity, whether productive or non-productive, must be funded. When the Fed or the federal government attempt to increase employment through various types of stimulus, this can result in the expansion of capital goods for non-wealth generating projects which leads to capital consumption instead of growth.

Hence employing individuals in various useless non-wealth generating activities simply leads to a transfer of real wealth from wealth generating activities and this undermines the real wealth-generating process.

Unemployment as such can be relatively easily fixed if the labor market were to be free of tampering by the government. In an unhampered labor market, any individual that wants to work will be able to find a job at a going wage for his particular skills.

Obviously if an individual demands a non-market related salary and is not prepared to move to other locations there is no guarantee that he will find a job.

For instance, if a market wage for John the baker is $80,000 per year, yet he insists on a salary of $500,000, obviously he is likely to be unemployed.

Over time, a free labor market makes sure that every individual earns in accordance to his contribution to the so-called overall “real pie.” Any deviation from the value of his true contribution sets in motion corrective competitive forces.

Purchasing Power Is Key

Ultimately, what matters for the well-being of individuals is not that they are employed as such, but their purchasing power in terms of the goods and services that they earn.

It is not going to be of much help to individuals if what they are earning will not allow them to support their life and well-being.

Individuals’ purchasing power is conditional upon the economic infrastructure within which they operate. The better the infrastructure the more output an individual can generate.

A higher output means that a worker can now command higher wages in terms of purchasing power.

Article originally posted at Mises.org.

Nominal Income vs. Real Income

submitted by jwithrow.

Most of us understand that inflation is a given in our world today… But not too many of us think about how inflation affects our income.

We tend to think of our income in nominal terms rather than in real terms because that’s what we can see. We can see the numbers. After all, nominal income is our income defined only by its dollar amount.

While this just seems like common sense, it’s not the real story. You can expose the flaw of nominal income when you compare it over periods of time.

Think about this. What if our income goes from $48,000 last year to $50,000 this year? That’s a 4% raise. Not too bad, right?

Well, let’s look at our income in real terms. Real income is income defined by its purchasing power. It is nominal income adjusted for inflation.

What if inflation rises to 4% this year?

Well, the means our $50,000 salary this year will have basically the same purchasing power as our $48,000 salary last year. In other words, we didn’t get ahead. Our raise wasn’t actually raise. That’s because our income did not go up in real terms… even though our paychecks were bigger.

That’s why it’s so important to see income in terms of purchasing power… Not in terms of nominal dollars.

The real story is that the American middle class has been stuck on a giant hamster wheel for decades now. Their paychecks keep getting bigger… But their purchasing power is destroyed by inflation. They are stuck.

This is why the Austrian School of Economics views inflation as an insidious tax. If nominal income kept pace with inflation then it would not be so bad. But wages have struggled to keep up with inflation since the early 70s.

Now, wages have done a decent job of keeping up with the Consumer Price Index (CPI). But this index has been adjusted several times to ignore food and fuel price increases. They fudge the numbers to make the CPI look better.

By the way, Social Security promises cost of living increases tied to the CPI… Retirees are getting a raw deal there.

This concept also exposes the retirement folly pushed by the financial services industry.

Have you seen those commercials about your “magic number”? They say you need a certain amount of dollars saved up for retirement to live securely off the income.

But if you think in terms of real income and purchasing power… It is impossible to pinpoint a magic number. Inflation will constantly eat into it. That’s why their magic number is just a carrot on a string.

So, the only way to truly take control of your own financial destiny is to think in real terms… And to recognize the nominal view of money for the illusion that it is.

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