Why you should always adjust for inflation

This chart shows why no economic statistic is valid unless an adjustment is made to allow for the effects of inflation.

If you just look at income in terms of dollars, the American middle class has not done all that badly in the 21st century.

If you look at what those dollars will buy (setting aside the question of whether the CPI underestimates the true cost of living), the figures tell a different story.

For the context of the chart, click on Rising Inequality: Recovery Driven Almost Entirely by the Rich by “Gaius Publius” for the Center for Media and Democracy

Are we Americans just a bunch of malcontents?

My friend Anne e-mailed me an article entitled Everything Is Amazing and Nobody Is Happy by Morgan Housel for The Motley Fool.  He says the American standard of living is just great, and American pessimism about the economy is not based on any fact.

Click on the link and see if you agree.  I don’t see it.  Housel’s basic argument is that we Americans live longer and enjoy longer retirements than in the past.  That is, in fact, true for me. But unless something changes, I don’t think it is going to be true for my niece and nephew, who are in their 20s, and their young children.

What I see, as I look around, is (1) the evaporation of good jobs in manufacturing, (2) expansion of low-wage jobs in fast-food restaurants and chain stores, (3) evaporation of pensions and other benefits, (4) workers laid off in middle age who are surviving on a combination of part-time and temporary jobs, (5) young workers doing the same.   There are Americans in high tech and high finance who are doing well, but they are a minority.

A book (which I haven’t read) entitled Average Is Over by an economist named Tyler Cowen says the future economy offers little to most Americans.  He argues that high technology and automation will provide great opportunities for the most intelligent and enterprising 15 percent of the population, but the rest of us will have few opportunities except in service jobs providing for the affluent.  I don’t think his prediction is inevitable, but I certainly think it is possible.

Of course average Americans are much better off than their ancestors a century ago, and infinitely better off than child laborers in the sweatshops of Bangladesh or forced laborers in the cotton fields of Uzbekistan.  But our country is moving backward, not forward.  There’s no law of nature that says that, just because we’re Americans, we are guaranteed the “American standard of living”.

A strong economic recovery for 1% of us

With each economic recovery, the top 1 percent of American income earners take a larger share of the national income.  It’s true that they lose more, percentage-wise, in recessions [1], but they make up for it on the upswing.

Unless you have a good argument that the top 1 percent are contributing more to the U.S. economy than ever before, I think you have to admit the system is out of balance.

Some economists say that increased economic inequality is a result of automation and computerization.   To me, that’s a different way of saying that the income gains are going to people who own machines and computers (who are not the same individuals as the inventors of the new automation and computer technology).

What’s wrong with the U.S. economy

Hat tip to Making Light.