The topic of the node is an complex one, so you'll forgive me if I refer to the write-ups of specific noders, by name, who have contributed to this node. Its generally not a good ideas to to this, as these write-ups might be deleted, but to authentically recap each write-up on which I comment would at least double the size of my own, and make it even less readable than it is.
It is also an important topic; unfortunately, because of a misunderstanding, ximenez does little to address it. Other contributors do address it, but fail to correct the key misunderstanding:
ximenez says: "If you have 2% economic growth and 2% inflation, your net gain is 0--the extra dollars in the economy are being used just to keep up with the higher prices."
Wrong. Unless otherwise specified, economic growth is real
, not nominal
. Before the growth number is reported, it is discounted by the amount of observed inflation, so that the remaining growth is real, i.e. over and above the amount the GDP "grew" due to inflation
. So if the government says 2002 economic growth (i.e. change in GDP) was 2.9% and inflation was 1.3%1
, that means that gross
, nominal growth (the increase in the nominal value of the GDP) was actually 4.2%, the sum of the two figures. The nominal GDP
is calculated by adding up the value of all goods produced in the US, figures that are reported regularly to the government by US businesses. Inflation
is calculated by comparing the price of a normative
"basket of goods
" this year as compared to previous years, under the premise that any year-to-year change in the price of an identical good
is due to inflation.2
"The people who manage our economy have said quite openly that they will make sure the standard of living for American workers never increases"
That's pretty dramatic. Odd how if it's said quite openly, the author can't reference a single quotation to that effect. In fact, what is asserted quite openly is that the standard of living
for all Americans has increased dramatically over the years.3 buzzcutbuddha
documents this point adequately, but blames the failure of working people to become rich on...consumer credit
The recent passing of stage and film director Elia Kazan4 means that classics such as "On the Waterfront" are all over cable television just now. In the film, corrupt unions extort their members to take out "voluntary" loans, at usurious interest rates, in order to be allowed by the union to work. While Kazan's film is fiction, its at least as accurate as most of the so-called "documentaries" Michael Moore spews out. The scene from On the Waterfront is what is looks like when debt actually prevents the working class from growing rich.
Today, that rarely if ever happens, and certainly doesn't in the case of consumer credit. True, you have to have a credit record in order to do many things in life, but holding a job, buying food, and renting an apartment isn't one of them (many rentals to this day are on a handshake or, legally speaking, "tenant at will" basis, although the lease with credit check, etc. is common with large, corporate housing). Personal bankruptcy laws are generous; if you screw up your credit rating, you can declare bankruptcy and emerge with an unblemished record after a mere seven years; this is a vast improvement over the debtor's prisons of centuries past. Interest rates on credit cards are at times usurious, but only if you mismanage your credit or fail to shop around for a good deal. It's equally inaccurate to say that people are "forced" to smoke cigarettes or buy lotto tickets, and just as accurate to say that smokes and scratch tickets are keeping working people from becoming rich. Unlike cigarettes and the lotto, however, the benefits of easily available consumer credit by far outweigh the problems. The ability of workers to get access to credit and other financial services with minimal fuss is what sets us apart from so many third world economies in which you have to be rich, politically connected, or both in order to access the credit and banking system.
weStLY discusses the relationship between wages and inflation reasonably well; I would just add that this phenomenon is called "cost of living" wage increases. These are inflationary because the wage increases aren't based on the real value of the workers' labor. When these wage increases are passed on to consumers as higher prices, they don't reflect a product with higher value, only a higher nominal price. Therefore, these wage increases are inflationary. That should be contrasted with a wage increase due to e.g. scarce labor. If these wage increases are passed on to the consumer, it means the real value of the product is actually higher than before the wage increase. For example, if there is a shortage of people who are willing to be janitors, the real value of janitorial services is higher, so the increase in the price of hiring a janitor is real, not inflationary.
Socialist Wolf also addresses this point, and proposes mandatory minimum and maximum wages. Presumably, government experts are endowed with a super-human power to a) magically divine what these limits should be and b) resist the incredible temptation to enrich themselves by favoring various special interests (whether business or labor benefits is irrelevant). I'll leave aside the discussion of how this has been tried and failed miserably5, and make another point: here in the US we seem to have stopped inflation without any maximum wage limit, and with a minimum wage that most Socialists consider to be too low. So it seems the Wolf's proposals seem to address a problem (inflation caused by wages that are too high) that doesn't exist.
There is an interesting discussion of the wage-inflation relationship in the public sector at Public sector pay disputes, and at Your Radical Ideas about Capitalism as a Method for Social Control Have Already Occurred to Others.
1. http://www.treas.gov/offices/economic-policy/monitoring_economies.html, Accessed Oct. 12, 2003, 11:32 am. The figures come from the PDF document, which labels them "Real GDP (percent change)" and "Price Indexes (percent change)". This URL could change over time, if it does, try http://www.treas.gov/ and look for the Office of Economic Policy.
2. The Treasury doesn't have much in the way of educational materials on how the GDP and inflation rates are calculated. Perhaps this is because this topic is covered so thoroughly elsewhere on the Internet. For example, http://www.moneychimp.com/glossary/gdp.htm or try http://www.ask.com/ and search on "Gdp Calculation".
3. For a wacky, and a little creepy, treatment of the standard of living, see the Federal Reserve Bank of San Francisco's "Great Economists Treasure Hunt" page at http://www.frbsf.org/education/activities/treasurehunt/index.html. Oh yeah, and the "openly stated" claim that the powers that be actually claim to want to increase our standard of living may be found e.g. at http://www.frbsf.org/publications/education/greateconomists/frames.html.
4. I use Kazan in this example just to brighten up a possibly dry topic. Stretching the tangent to ridiculous lengths is the forte of E2, so: Perhaps someone will reflexively point out that Kazan "named names" in the McCarthy hearings, from which we're supposed to question his entire body of work. Permit me to point out that if Roman Polanski can be forgiven for (statutorily) raping girls, then running from the law, Kazan may be forgiven for naming names, which while morally questionable, isn't even illegal. End tangent.
5. The point about minimum and maximum wages is, who decides, and on what basis. Communism is only the most dramatic example of the madness that happens when "experts" (either the Comintern or FDR's or Nixon's wage and price controls) decide to dictate wages. In my opinion, the people should decide wages by direct democracy. Now, we could subject the price of everything to a ballot vote every year or something, but such a ballot would be more ridiculous than the recent California recall ballot. Besides, why bother with ballots (at public expense!) when in a free market, producers and consumers "vote" with each and every purchase decision they make, and the price of everything is constantly updated to reflect the results! By far, the best form of direct democracy in the world, so far, is the free market.