Employment is one spot where the rubber meets the road, and compensation is the other. Just for the sake of argument, if employment levels rose while the wage pool remained constant, everybody slicing up the same wage pool into thinner and thinner shares, a macro view would have to conclude that economic growth would rest at zero. Fortunately, though, wages have a minimum floor and tend to be somewhat sticky (pdf). At first glance, the wage pool seems to be growing pretty well:
And even when you take the total wage pool and divvy it up among all workers you get a pretty good upward slope:
Right here, I’d like to say that what actually happened in the US economy, both by policymakers, business and innovators has, on the whole, worked out pretty well, or at least, the individual harm caused, and there was plenty of that, was from a macro point of view, nil. Somebody else’s gain made up for it. Nonetheless, what actually transpired was pretty amazing, for by and large, business and policymakers managed to create work for everyone who wanted a job, as participation rates show:
That’s actually an enormous accomplishment and it didn’t have to happen that way. Already, we have the stop-light windshield cleaners and panhandlers at busy traffic intersections, but in Honduras, people are reduced to lining the roads and filling in potholes the government refuses to take care of, hoping motorists will throw them a few coins for their work. We’re not quite there yet and were it not for businesses’ desire to mine the remains of America’s post-war prosperity, we’d likely be where Honduras is today. At any rate, the US working population expanded from about 34 million to almost twice that, about 71 million Americans at work, all of whom had their shot at prosperity (as long as they were white college grads). However, what nobody can claim is that, on the whole, we are better off. This is illustrated by the comparison nominal to real mean wages:
Even in 1970, the $1000 raise everybody got doesn’t amount to much. It only took us 42 years to get it and in fact, American workers were in negative territory from the recession of 1973 right up until the dot-com frenzy released the pent up demand for a path towards financial security in 1999:
So the trade-off was this: Americans would, on the whole, be able to find work, but getting ahead would be available to only half. As we’ve already seen, the lucky ones would overwhelmingly white and possess a college degree.
You’re On Your Own, Guys
The staffers whose jobs have been cut will be allowed to freelance for the magazine, Smith said.
“In my grandest thoughts I hope they will continue to contribute to the magazine,” Smith said in the News Photographer report. “I can’t imagine a world where they don’t. We just have to figure out what this new structure is.”
Time Warner, which owns HBO, CNN and Warner Bros. Pictures, spun off its magazine division, Time Inc., in June last year to shield its TV and film business units from the fallout in print advertising.
Source: ‘Sports Illustrated’ lays off staff photographers, retrieved 23 January 2015.
Revenue actually grew slightly to $821 million from $818 million a year earlier. Digital advertising revenue was up 5 percent to $65 million — but overall advertising was flat at $428 million.
Source: Time Inc.’s stocks fall after third-quarter earnings release, retrieved, 23 January 2015, bold mine.
A Short Rant
Capital markets may say they hate uncertainty, but the fact is, when they feel there is money to be made in volatile markets, they’re perfectly happy to operate in the Wild West. With the election of Ronald Reagan, that’s what they got. What we also got was a massive dose of “patriotic economics.” I can’t say that Ronald Reagan was the type exemplar of this subspecies of economic pundits, because they’re legion: Milton Friedman, Friedrich Hayek, Ludwig von Mises and a host of others that, if you’re lucky, you never heard of,. There’s always a pattern with this type. “We’ve seen the horrors (which are usually process, not economic) of planned economic societies (except for China’s and Japan’s, of course) and that’s exactly why we fought a revolution to escape!” Often, they’ll tell a story of meeting somebody from Cuba. I don’t know why Cuba, but the apocryphal Cuban-refugee-who-shall-remain-nameless crops up fairly regularly. Ayn Rand made a career out of this sort of thing, before suing to qualify for Social Security and lesser mouths insist that they need to take our country back! From other Americans-who-shall-remain-nameless, apparently. Just for the record, that isn’t economic thinking by any stretch of the imagination. Jingo nationalism, tribalism, rent-seeking . . . it is certainly a dogwhistle for those, but what it is not, is economics.
Democrats hop on that bandwagon as well:
POTUS: "The genius of America is the free enterprise system and freedom, and the fact that people can go out there and start a business."
— Barack Obama (@BarackObama) October 4, 2012
Because nobody ever opened a tavern or an inn or started a business or conducted overseas trade in feudal Europe . . . ohwait:
1 Wepyng and waylyng, care and oother sorwe,
2 I knowe ynogh, on even and a morwe,
3 Quod the Marchant, and so doon othere mo . . . .
Merchants in Chaucer’s day? Oddly enough, that quote was taken from the Prologue of the Merchant’s Tale, though Obama must doubt that anyone in 1475 knew what Chaucer was on about. “Marchant? What’s that?” The amount of rhetorical bilge on this vein is staggering and I’ll repeat here what I said when I heard Obama spout that nonsense: America’s genius was in the downward and horizontal redistribution of political power. Full stop. Some kind of free enterprise system has always been a universal norm since the dawn of civilization and in America, our success was merely an accidental by-product of physical and political geography, natural advantages that have diminished. The situation we find ourselves in today, the New Normal, is characterized partly by gross inequality, partly by a legacy of accumulating vast amounts of capital and partly by an oversupply of labor. About 17% of American men in their prime working years cannot find work―right now, and I see nothing to indicate that this will change anytime in the foreseeable future.
Thus endeth this rant.
Ready Or Not . . .
Nixon had opened the floodgates in August of 1971, but for the time being, there was no flood. Indeed, the velocity of inflation steadily slowed until August 1972. One would have expected a feeding frenzy if the [efficient?] markets were so dead certain there was an overabundance of dollars in circulation but I rather expect that central banks intervened or at least signaled their intent to intervene to prevent a sharp downward turn sparked by dollar shorts. This was dangerous territory for all.
Not that they didn’t try. In spite of the danger, currency vigilantes kept on taking runs at the dollar which led to several adjustments of official exchange rates. With the December 1971 Smithsonian Agreement the G-10 decided to drop the Bretton Woods system and a world not really prepared to, adopted floating currencies. The dollar wasn’t quite out of the woods yet, however. A further, unilateral, dollar devaluation of 10% was announced on Valentine’s Day in 1973. This, of course, allowed inflation to spike. Monthly, prices rose at a rate changing from 0.243% to 0.485%, and don’t let the fractions of a percentage point confuse. This was huge. This measure is like compound interest, accelerating from a starting point which, in this case, was already elevated. This becomes clearer in year-over-year terms: inflation soared from 3.865% in February 1973 to a whopping 12.200% in November 1974.
Let me put it this way: in the twelve-month period from November 1973 to November 1974, it’s as if everybody took an involuntary wage cut of 12.2%.
Things had been unraveling since the spring of 1972. In May, presidential candidate George Wallace was shot by a 22 year old looking to demonstrate his manhood. Bagdhad nationalized the Iraq Petroleum Company in June. Also in June, the Watergate break-in. On 1 August, Democratic presidential candidate George McGovern announced that his running mate, Thomas Eagleton, had withdrawn (at McGovern’s request) from the ticket, and Democrats were in disarray. Carl Bernstein and Bob Woodward smelled blood and were just building up a head of steam in their Watergate investigations. The Eagleton withdrawl from the race overshadowed their 1 August Washington Post story linking a $25,000 campaign donation to Watergate burglar Bernard L. Barker, but if the triumphant administration thought things would settle down after the election of 1972, they were sadly mistaken. Markets assumed (correctly) that Washington was more afraid of unemployment than inflation and the political will to deal with the latter was lacking while the administration was playing defense. So financial markets kept pushing, and Main Street passed along the costs―and then some.
Mark the dynamic implied in the scenario as I described it. It’s neither entirely a cost-push nor a demand-pull situation here. Undoubtedly, there were cost-push drivers at work in the broader economy, but those are overly mechanistic. Rather, I feel certain, it is one of expectations and permissions in which the sell side hiked prices because they expected others would, and judged they could get away with it2..
It resembled a panic, like a run on consumers had broken out. Most corporations went into full price-gouging mode and overall after-tax profits rose steadily until Q3-1974, well into the recession:
Corporate After-Tax Profits w/out IVA & CCAdj
Worse was just over the horizon, but few suspected that yet. At this point, one reason the sell-side could get away with artificially boosting their profits are the housewives who entered the work force at this time. These women stepped up to save their homes, and in so doing, saved American business:
Corporate After-Tax Profits (blue)
Participation Rate of Women (red)
Note how abruptly the trend changes in Q1 of 1973. Women were forced to become breadwinners when they had to, It’s as if the Christmas season spending revealed to many just how closer to the edge they were getting. Increasingly, women now had permission to take a job if they wanted and the social stigma put on a male breadwinner unable to support his family was fast wearing thin. One of those women who stepped up was my mother, beginning as a part time worker in a local department store.
Then the other shoe dropped.
They Drive By Night
I don’t know how it is now, but in December, 1973, I learned that the long haul truckers in the West and Mid-West were the most courteous drivers on the road, bar none. I began by taking a perch on University Ave in Berkeley, California holding a sign that read BOSTON for maybe fifteen, twenty minutes or so before catching a lift and sixty-two hours later, I was home. Thank you, Dwight D. Eisenhower, and Bill, a migrant carpet-layer who gave me the lift. An ice storm had passed through the Mid-West a few days earlier, but I missed that. I knew beforehand that December is definitely not the time of year you want to hitchhike across the United States (if you can call catching one ride from the Bay Area all the way home in the Boston suburbs “hitchhiking”―to this day, my brother-in-law vehemently denies that it qualifies) but that was the kind of luck I had then. More apropos to this story, the National Maximum Speed Law had been enacted just a few weeks earlier, but as far as I could tell, I was just about the only one driving at 55 MPH. After all, out-of-state plates on a car carrying a pair of bearded longhairs was then a magnet for State Police. Probably still is.
Central bankers might have been able to maintain the dollar’s strength enough to allow a gradual devaluation, but we’ll never know. In the midafternoon of 6 October 1973, Arab armies, led by Egypt’s Anwar Sadat and Syria’s Hafez al-Assad invaded Israel. The Israeli Air Force, four armored divisions (twice the force Moshe Dayan had asked for) and all of Israel’s reserves were waiting for them. Turns out that one of Sadat’s family members was working for Israeli intelligence. Arab OPEC states had already decided to raise oil prices and cut production in conjunction with the invasion, but after Washington approved an emergency aid package to Israel on 16 October, they imposed a general oil embargo on the United States. What ensued was another panic and run―this time on gas stations. The US went into recession almost immediately and the speed limit was reduced to 55 MPH in a matter of weeks.
One thing to note here is how this recession broke all the rules of supply and demand. Prices kept on rising right along with unemployment:
Unemployment and Inflation (percent change)
Well, so much for the Phillips Curve. You never want to get too far from the idea of permissions and expectations when it comes to prices and wages. Businesses couldn’t be blamed for rising energy costs and expected everyone else would hike their prices anyways. I can’t say that at this point, they had a lot of choice in the matter, Americans being so dependent on oil imports, so Washington doubled-down like they had on foreign exchange and once again abandoned Americans to the tender mercies of the free-market jihadis. Look hard and see if you can spot when crude oil price controls were abandoned:
WTI Spot Market Prices
Of course, gasoline price controls soon followed:
CPI – Gasoline, All Types
And finally, electricity:
CPI – Electricity
If your business was an airline, a trucking company, used either service, or a restaurant or you were somehow exposed to oil markets by not walking to work or taking your food raw or bathing in cold water or you weren’t willing to chance surviving the winter without heat, well, there you go. You were screwed.
The massive corruption in Nixon’s administration finally caught up to him in August of 1974. He resigned, and Congress’ choice of Gerald Ford to the vice presidency, vacated by Spiro Agnew, ascended to the Oval Office. Our one and only president who nwas never elected. Less than 4 weeks after taking office, Ford signed one key piece of legislation: the Employee Retirement Income Security Act (ERISA). An alternative (or augment) to Social Security, it’s another example of dishonest Washington spin. Anyone who knows anything at all about Social Security knows that it’s structured to be as safe and secure as possible. In the 1930’s this was a highly desirable trait. Social Security was funded through a dedicated tax, The money was not allowed to be stashed in a banks, because in the 1930’s, who could trust a bank? Social Security revenues were to be parked in and administered by Treasury, and the Social Security administrators held special treasury bonds which are not allowed to be traded, thus removing them from the vagaries of the bond market. ERISA turned all that around. Gerald Ford signed into law a tax break designed to encourage people to hand their money to Wall Street―the last place in the world anyone would think of as secure. I’ve seen various figures for the total amounts parked in 401k’s since their inception, but it seems Americans have contributed somewhere around 5 to 6 trillion dollars since this policy’s inception. A taxpayer-backed windfall for Wall Street bankers. Ford, however, was such a nonentity and carried so much corrupt GOP baggage that the Democratic Party felt comfortable enough to nominate a Washington outsider, distinguished mostly by his genteel humanity, Jimmy Carter. Carter’s key economic appointment was Paul Volcker, who was tapped he replace William Miller as chairman of the Fed. The economy Jimmy Carter had inherited was mixed. The good news was that the economy had stabilized. The bad news was that even the lowest rate of inflation in the late 70’s still ran at an annual rate of 5%:
Velocity of Inflation, 1975 through 1982
In 1979, another energy crisis was sparked by the Iranian Revolution and the seizure of US embassy resulting from Carter’s ultimately humane act of keeping faith with an ally and allowing the deposed Shah to come to the United States for cancer treatment. Oil markets reacted badly and prices were driven up sharply to yet another plateau:
WTI Spot Market Price
Velocity of Inflation, 1975 through 1982
Volcker became Fed chair in August 1979. By October, after the ceremonies and handshaking was completed, he began to act. Monetary policy was something the Fed had hitherto managed with a light touch, gradually raising the federal Funds rate and mandating marginally higher bank reserves, an approach Volcker had agreed with, but he came to recognize that this approach wasn’t working, so the FOMC under Volcker got the hammer out, and the effective Federal Funds rate peaked just north of 19%:
Effective Federal Funds Rate Under Paul Volcker
Why didn’t businesses simply raise prices to cover their increase cost of borrowing the way they did when energy prices spiked? Permissions. Essentially, Paul Volcker took away businesses’ permission to infinitely pass along costs to consumers, demonstrating his resolve by his willingness to drive the entire economy into recession.
In the 1970’s, the American civilian labor force had grown 29%. The Participation Rate for women had risen by 8%, from 43.4% to 51.5%. Nominal wage and salary compensation had grown 249%, but inflation ate away half of that, for a net gain of only 17% over the entire decade.
Nominal vs Real Wage and Salary Compensation, 1970’s
Averaging out to 1.7% per year, demand was stagnant, except for one thing. Consumer credit, both non- and revolving kinds, grew by 269%:
Total Consumer Credit, 1970’s3
From this point on, consumer credit becomes the vital driver of the economy, and this bears repeating: By the end of the decade, half of the value of every dollar earned in wages vanished into corporate coffers and the bank accounts of oil sheiks.
1Bordo, Michael D., Owen F. Humpage, and Anna J. Schwartz. Working Papers of the Federal Reserve Bank of Cleveland: Federal Reserve Bank of Cleveland, Dec. 2010. Web. 31 Oct. 2014.
2Sometimes, it’s permission-be-damned, and businesses were resorting to all sorts of underhanded ways to squeeze more.
3“FRB: Z.1 Release–Financial Accounts of the United States, Historical–September 18, 2014.” FRB: Z.1 Release–Financial Accounts of the United States, Historical–September 18, 2014. Federal Reserve Board of Governors, n.d. Web. 13 Nov. 2014. Table G.19.
“I think we overdid finance versus the real economy and got it a little lopsided as a result.”
― Former Treasury Secretary Jon Snow in testimony to the Financial Crisis Inquiry Commission.1
I grew up in a cash economy. Not that people didn’t use credit, but my parents, along with everyone else’s, weren’t at all casual about taking on financial burdens. Like most Great Depression survivors many never outgrew a certain amount of anxiety over borrowing decisions. The norm was to take another job, wait, scrimp and save before pulling the trigger on a big purchasing decision. A washing machine with an electric motor so Mom wouldn’t need to hand-crank the wringer was a big deal. She came from a big, Irish-Acadian-Métis family who earlier migrated to Massachusetts and managed to buy a two acre plot in a small farming community north of Boston, so she was used to the idea of ownership. Not so my father. Of Anglo-Irish-stock, his family were small-hold farmers, laborers and tradesmen from central Maine. His father migrated to Massachusetts to become an urban, working-class renter and only with the arrival of the post war boom could anyone on his side take out a mortgage. Prior to that period, suburbs were crowded urban extensions―neighborhoods of mixed single and multiple-family homes on plots little larger than the buildings on them. The post-war economy and the availability of affordable transportation changed all that and the outer edge of Boston’s inner ring (Route 128), where considerable amounts of farming had once been done, gave way to the arbored, grassy, bedroom communities of almost exclusively single family homes that we envision on hearing the term “suburb” today.
Even among this new landowning class, credit cards remained a rarity and the plastic had this aura about it because you had to be well-off to be allowed one in the first place. To this day, the American Express and Diner’s Club brands retain some of this prestige, and “Carte Blanche” is proverbial for the sort of don’t-bother-me-with-consequences
freedom carelessness available only to the Fortunate Few. For everybody else, home ownership wasn’t just a mortgage. A suburban home is also a lights bill, a water bill, sewerage rates, property taxes, insurance, a phone bill, yard tools and lots more. If a family hadn’t living members who went through the experience of home ownership, people you could also count on to borrow a lawnmower from or help out with all sorts of DIY expertise, the additional costs could come as a nasty shock. Many Great Depression survivors went all-in to own their own homes and had little choice but to be very careful with spending. Of course, the prudence wouldn’t last. Hearing the stories and being potty-trained to earn and save, it turns out, is no substitute for the heuristic conditioning of actually growing up with hunger and poverty; of being uprooted to go where some work might be; as well as the humiliations of needing to send your children out to work, depending on charity or admitting defeat and moving back in with family. All of which pales in comparison to this effect of poverty:
Another, hardly mentioned, part of the legacies on both sides of my family.
Lacking the totemic gestalt bequeathed on our parents’ generation by the Great Depression and Second World War, we children of the survivors began, in the Sixties, entering the full-time workforce with higher expectations and we were more willing to take on burdens and risk our parents had balked at. Taking on debt just because it makes the purchasing act more convenient is a late baby boomer phenomenon.
Total Consumer Credit Outstanding
What a ride:
Vietnam, Woodstock, the first computer mouse patent, the Nixon Shock, The Whole Earth Catalog, Augusto Pinochet seizes power in Chile, the Bangladesh genocide, Nixon’s visit to China, the second Arab Oil Boycott (the first was in 1967) results in lines of cars waiting to gas up, deregulation, the first cell phones, the Watergate Hearings, Nixon’s resignation, the Church Committee report, the first upright bipedal hominid skeleton is discovered in Ethiopia and is named “Lucy”, the rollout of the Apple II, the Chrysler bailout, the Sony Walkman introduced, the Marquette Decision, the Iranian Revolution and seizure of the US embassy, the US energy crisis which followed, Margaret Thatcher leads British conservatives to victory, the Soviet invasion of Afghanistan, the election of 1980 and the Reagan Revolution, the air traffic controllers’ strike, more deregulation, the introduction of the Apple Macintosh, followed shortly by the IBM PC, Mount St. Helens erupts, Paul Volcker “tames” inflation1, deregulation (have I mentioned deregulation yet?), compact discs are introduced, the attack on the US Marine barracks in Beirut, and in a drastic example of news cycle management the US invades Grenada 2 days later, the worst industrial accident in history is caused by Union Carbide in Bhopal India, the Savings and Loan Crisis, the WELL is founded (a legend, the WELL was one of the earliest prototypes for social media), followed closely by the launch of AOL, the first Burning Man, the Berlin wall is demolished, Paul Mozer attempts to corner the treasuries market with fraudulent bids, the internet morphs into the World Wide Web, Tiananmen Square, MORE DEREGULATION, the dissolution of the Soviet Union, The beginning of a decade of war in the Balkans, the first Iraq War, Netscape is released, the Rwanda genocide, employees of Bankers Trust are caught on tape bragging how they were swindling their client Proctor and Gamble, the dot-bomb, Travelers Insurance acquires Salomon Brothers, the Fed “reinterprets” Glass-Steagall, then nearly in violation of Glass-Steagall Citibank acquires Traveler’s Insurance, after which Congress and Bill Clinton retroactively bless Citi’s action by enacting Gramm-Leach-Bliley, Y2K, 9/11, our retaliation in Afghanistan, Continental Illinois fails to do proper due diligence on a big deal and goes under, star traders and “Nobel” prize winning economists get caught looking the wrong way and Long Term Capital Management goes under, the second Iraq War, the housing bubble, the acquisition of Bear Stearns by JPMorgan, the Lehman bankruptcy, Roll Call 674 (Rick Santelli: “They didn’t pass it. The did not pass it. And I see that the Dow traders are standing there watching in amazement, and I don’t blame them!”), the passage of Emergency Economic Stabilization Act of 2008 (Santelli shelves his diapers and goes back to gargling with Blowtorch Mouthwash), the election of Barack Obama, the foreclosure crisis, the Deepwater Horizon oil spill, the Arab Spring, Citizens Uniited, Occupy Wall Street and the CBO report on inequality, the collapse of the Rana Plaza plant kills 1,129 garment workers, the West Fertilizer Plant explosion, ebola breaks out in West Africa, protesters hit the streets in Hong Kong . . . .
The first durable goods purchase I ever made, back in the early sixties, was a baseball glove. Up until about twenty years ago, that was my glove, and it served me well for countless innings, hours of catch and as my goalkeeper’s glove playing street hockey. An old friend. When I finally gave it away, the glove was so perfectly formed and the leather so soft that my hand would come off at the wrist before even a hard line drive would pop out. It still had years of life left. I saved months to buy a glove, took on extra work and even managed to convince my parents to kick in a few bucks. About half as I recall. Then, on one spring day, I walked about a mile and a half to the nearest department store (a small, local chain long since gone) and made what was then the biggest purchase of my life. Today, the nearest equivalent I could find online goes for about $90. Cheap these days, but by no means the cheapest. You can still find gloves out there in the $30 price range without too much work, but even at $90, many buying one of those today would consider that particular model a temporary purchase until they could scrape up two or three hundred dollars to trade up to something they might consider a keeper.
I paid $8.
The price difference between then and now is central to what this series is all about. I won’t offer any explanations why there’s a difference today, but we’ve heard them all by now: rising input and overhead costs: energy prices, cost of goods, wages, insurance, etc. Others might point out expanded money supply, added regulatory expenses, etc. But I don’t believe that anybody really knows. Or rather, we all know intuitively that when prices for one commodity, such as energy, rises then prices across the board must also rise to pay the premium. It just happens (or doesn’t), and all the “expert” (a word always deserving scare quotes) explanations ring hollow. Though I have my thoughts, I certainly have no demonstrable answers, except that I do believe that politics has everything to do with economic behavior. I wouldn’t go so far as to say that every transaction is a political act, I do believe that the milieu in which any transaction takes place is fundamentally informed and enabled by exogenous social and political forces. I doubt anyone could argue with that, after all, I was buying a baseball glove and not a balón de fútbol. Certainly, some aspects of the economy we’ve all lived through have been informed by politics, and that also began to change in the 1970’s, as free-market jihadis like Bernard H. Siegan, James A. Dorn and Henry G. Manne began to try to apply constitutional legal fantasizing with the intent of undermining the New Deal. Many, like those at Cato and AEI, act as if screeds like these are America’s real founding documents (and as if the Commerce and Necessary and Proper clauses don’t exist at all).
Rant Warning: It’s not as if there’s no small amount of irony in the notions of American “freedoms,” these jihadis like to go on about, which, they claim, were fundamental in the thoughts of the founders. Those guys who reached their station through the genocide of First Americans and for whom chattel slavery was an acceptable price. There’s an irreconcilable difference between between this supposedly graven-in-stone-holy-writ and the historically accurate this-is-the-best-deal-we-can-get reality1. No matter the soaring rhetoric about “freedom” we we like to tell ourselves, ultimately, we’ll be judged by our deeds.
As I say, this series will not be about economic causation, but rather, about the history, and what the data has to tell us about what we’ve lived through and where we are today. As for the causation, some of it I can’t avoid because it is built into the terminology derived from our structural perceptions, but there has been enough paper and bandwidth wasted by “experts” on causal nonsense which, in the end, means lots less than they say it does. Macro economics is a discipline still in its infancy and currently suffers from a mechanistic fetish with analytical geometry, all too often taken to absurdity. My expectation upon sitting down to any economics treatise is that it will yield us no more certitude than can be expressed with the qualifier: “I think we’ll find that . . . .”
So this story is inescapably political. For most of us, the daily operating assumptions are based on vague guesstimates of how well things are doing, informed badly by a for-profit media, cheer leading financial news outlets and what we feel our personal prospects are―though that too is a flawed measure at least, it benefits by being subject to constant revision. There are other reasons why it’s a decent measure, which I’ll get into in more detail as this story unfolds. By the mid nineties, I began to feel that what we were getting was little more than empty rhetoric and constant spin about the economy. It really didn’t take much. After repeatedly watching stocks rise on bad news, it quickly became clear that my guesstimates were suspect. By 2003, I was pretty sure that the entire edifice rested on a foundation of sand and I got every penny I owned out of the markets.
I restrict my use of data here to being a historical descriptor, but data is malleable, and I approach this project with some ground rules. “Real” measures, as in “Real GDP” are, unless otherwise noted, always taken from the beginning of the time series (for this story, this is 1970, but any year will do) and applied throughout. This means that most graphs you will see here will show trends over time that diverge from a common starting point (1970 dollars). Don’t let this throw you. The intuition is simple: A 1970 dollar was worth 100% of itself. For each succeeding year the dollar bought a little (or not so little) bit less, and the observations diverge from one another. There is no other way to measure inflation. As for the data, though there are others, my biggest source of the various data points I intend to present here is the FRED collection, a priceless resource, but the central series of data comes from the BLS Inflation Calculator, which got me started on this project. The way inflation has been calculated has changed over the years, and BLS has even made a recalculation of previous years inflation according to current methods (CPI-U-RS, where “RS” stands for “research series“). I have no idea what methodology was used in BLS’ online inflation calculator (BLS doesn’t say), but I believe it to be accurate enough for my purposes. After I stumbled across it and learned that today’s dollar would only be worth 17 cents in 1970, I decided it might be useful to recalculate some numbers we often see illustrated, like GDP:
Nominal GDP (1970-2012):
What a success story this picture paints. A $16 trillion economy! An economy that grew 15 times! I don’t think even Adam Smith ever dreamed such a thing was possible. The mythos used to explain this comes right out of Horatio Alger: that through hard work, determination and occasional bouts of brilliant insight, individuals were able to build a better world through exercising their “freedom” to profit from innovation; and through the hard work of these individuals striving to make their insights reality, others were put to [more] productive employment and reaped the rewards thereof, both as workers (both earning more as their worth grows with education and experience and as they switch to producing products that sell for more) and as consumers (with a growing array of goods and services to be dazzled by). This is, we are told time and time again, the only path to general prosperity.
Nothing could be further from the truth.
However, any honest reflection on the economic history of the United States, especially in the 20th century, would have to recognize that we were endowed with enormous resources and room for upside potential, both of which were perhaps unprecedented in human history. The flip side (and there is always a flip side) being that we benefited from being spared the geopolitical barriers and difficulties of our major political and trading competitors in Europe. Even this understates the truth: their difficulties fed our economy through immigration. Any “expert” who doesn’t begin by acknowledging this is trying to pick your pocket. Full stop. All value judgements are relative and nothing occurs in a vacuum. Were I to indulge in counterfactual speculation, I suspect that just about any highly organized system of political economy would have done just as well under these circumstances. I am sure that some arrangements might have worked even better in many respects. The idea behind that being, when there’s plenty to go around, free enterprise is the obvious (though not necessarily the smartest) path. Neglecting to optimize for equality, honesty and positive externalities makes it also the laziest choice. Laissez-faire about as difficult as falling off a log.
Laissez-Faire Capitalism In Action
Prosperity2, it turns out, is a lot harder to build than by just simply letting free markets operate without constraint. In a system as large, complex and interconnected as the US economy, even large gains are incremental―short term measures as small as a few tenths of a percent may represent significant trend changes. It is, therefore, vital we pay scrupulous attention to our unit of measure, which is, most often, the dollar.
The graph of nominal GDP above is useless. Even the most widely cited calculation, Real GDP (usually calculated from the bottom of the last economic shock), tends to mask the secular trend:
Nominal vs Real GDP (index=2009)
As you may have guessed, these nominal and real GDP graphs hide the real extent of inflation’s role, and it is sizable. In order to measure it, I retrieved the relative worth of the dollar for every year, in terms of its value at the beginning of my time series from the BLS Inflation Calculator mentioned above. Plotting the results reveals the fact that the overwhelmingly biggest reason we have a $16 trillion economy today because our unit of measurement degraded by 83% over the last 42 years. In terms of the purchasing power of 1970, the US has a $2.752 trillion economy today, and the difference between the nominal and the real is profound:
3 GDPs: Nominal (black) vs Real GDP (2009 – red) vs Real GDP (1970 – green)3
Money is worth only what it will buy, and another reason for anchoring this story in the year 1970, is that it is near the end of Bretton Woods system. On 15 August 1971, President Nixon ended the convertibility of the dollar into gold. Money itself changed on that day, and all the economic data we see bandied about now is measured in what amounts to an unstable unit of measure. When compared in apples-to-apples fashion, we often get just about what one might reasonably expect. For instance, there was real “growth” (another word deserving scare quotes) in the United States, but much less than is generally believed, and many people are, at best, are only marginally better off today than they were 42 years ago. Many, it turns out, are worse off.
The principle applies to all sorts of macro data as well―wages, earnings, savings, transfers, profits, taxation, investment, spending . . . in short, all economic activity. What we wind up with is what I feel is an ironclad grasp of economic change across the last forty years. At the very least, we can arrive a durable baseline for further discussion, but we should also get a pretty clear grasp how too many so-called “experts” perpetrate a deceit on the rest of us non-economists. I can tell you now the data reveals that unconstrained markets benefit some (very handsomely), while it drives others into poverty and puts many more on the brink.
1As Benjamin Franklin put it:
“For when you assemble a number of men to have the advantage of their joint wisdom, you inevitably assemble with those men, all their prejudices, their passions, their errors of opinion, their local interests, and their selfish views. From such an assembly can a perfect production be expected? It therefore astonishes me, Sir, to find this system approaching so near to perfection as it does; and I think it will astonish our enemies, who are waiting with confidence to hear that our councils are confounded like those of the Builders of Babel; and that our States are on the point of separation, only to meet hereafter for the purpose of cutting one another’s throats.”
Madison, James. “Avalon Project – Madison Debates – September 17.” Avalon Project – Madison Debates – September 17. Yale University, n.d. Web. 11 Nov. 2014.
2In economic terms I take “prosperity” to mean excess demand, or more accurately, excess aggregate demand that is, that most working-consumers earn more money than the necessities of life demand from them and all enjoy the opportunities to do so fairly easily (mainly, that they don’t have to take the chances that entrepreneurs do in order to get ahead). I have always found this to be a durable definition and this implies how we should measure prosperity. However the term also connotes relative standards of living and not all aspects of these are economic. Social status (always relative) is also a part of prosperity. The word, like most English terms, is imprecise, and while I use the term here in the economic sense, I am always mindful of its various quality-of-life connotations.
3The values I extracted from the BLS calculator are as follows Inflation factor (a dollar’s worth) times Nominal GDP yields Real GDP:
|Inflation x Nominal = Real|
|Year||Inflation Factor||Nominal GDP (billions)||Real GDP|
Graphed out, the Inflation Factor column illustrates the dramatic reduction in dollar value throughout the period. I was later gratified to find that my own graph of consumer purchasing power was exactly mirrored by data found on FRED, which I’ll share here: