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
||Nominal GDP (billions)
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: