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

“I’m working harder and falling behind”

For the past decade, the incomes of average Americans have been flat while the productivity of the American economy continued to increase, and the United States continued to produce more goods and services per person.

Millions of Americans, including anybody who follows this web log, know this all too well.  But according to Time magazine, the news is starting to reach inside the Washington beltway.  Republican Majority Leader Eric Cantor gave a major speech on this subject to the American Enterprise Institute.  His answers—school choice, federal help to parents in paying for school, family-friendly work policies, tax simplification and so on—touched only on the fringes of the problem.

The challenge to the Obama administration is whether they can come up with something better.

Michael Scherer of Time magazine, like so many in Washington, thinks impersonal economic trends are the problem.

Part of the shift can be attributed to increased income inequality owing to globalization and new technology — the wealthy becoming much wealthier, while the rest stayed the same. Part of it can be attributed to increased corporate profits, as new markets opened overseas and new technology lowered costs. Some of it has to do with how the figures are calculated. But the most important political takeaway of the chart is that at the turn of a new century, much of the U.S. stopped feeling the benefits of a growing national economy.

If the problem is the inexorable force of globalization and automation, which make the work of ordinary Americans objectively worth less and the worth of the elite objectively worth more, there is not much to be done.  But the question is: worth less to whom?   I acknowledge that the world’s richest 0.01 percent do not think they have any need for people like me.  Then again, I don’t see that people on my level need them.

But maybe the problem is that the corporate and governmental system is rigged to benefit people at the top at the expense of people at the bottom.   To the extent that this is the true explanation, the way forward is clear.   It is to un-rig the system.

Click on The Most Important Chart in American Politics for Scherer’s article in Time on the political implications of stagnant family incomes in the midst of rising productivity and output (GDP) per person.

Click on A Lost Decade in American Politics for background on productivity, GDP and family incomes by Jake Berliner of NDN, an economic research organization..

Click on Eric Cantor’s ‘Make Life Work’ Speech for the full text of his speech Tuesday.