The money illusion

When I was in high school (around 1950), an income of $5,000 a year was considered barely enough to get by on, $10,000 a Cyear was good money and $50,000 a year was great wealth.

So when college graduates who get $50,000-a-year jobs and still complain, their elders tend to be unsympathetic.  This is what the great economist John Maynard Keynes called “money illusion.”

As Kevin Drum of Mother Jones pointed out, $50,000 a year today is equivalent to $18,000 a year in 1980 and $6,000 a year in 1960 in terms of what the money can buy.

When inflation is low, as it is now, it is natural to think of it as nonexistent, but this is a mistake.  Even an inflation rate of 2 to 3 percent a year can erode income (and savings) more than you might think because of compounding.  You don’t subtract $2 to $3 from $100 every year, you subtract 2 to 3 percentage points of each year’s lower sum.  Inflation is like compound interest, except in reverse.

LINKS

Compound inflation is probably higher than you think by Kevin Drum for Mother Jones.

The wage is too damn low by Duncan Black, aka Atrios, on his Eschaton web log.