Krugman, in an off-base slant, informs us that although the G.D.P. of the U.S. is rising, it isn't showing up in workers' wages because it's going to corporate profits, to rising health care costs and to a surge in executive compensation. Zimran enlightens in his post that although executive compensation in the US may be significantly disproportionate to the value created by executives, it's still a tiny fraction of money compared to total wage payout:
"Even if every executive in the US was paid $0, workers would not get much extra money (last time I calculated that figure it was around $30 extra per year per worker).."
Present other substantiations of the above argument, we might conclude that more plausible reasons for the lack of increase in workers' wages include macro shifts in the world economy and the U.S.'s ability (or lack of) to discern sources of competitive advantage in this shifting economy. Some economists suggest that these shifts speak for a new "Goldilocks Economy" which is not too good, not too bad. For example, India and China have emerged as significant sources of productive capital that enable good and services to be produced at lower costs. So, as a U.S. consumer, while my bonuses and wage raises have been stalled, low inflation rates are not reducing my real wages and the goods and services that I consume are getting cheaper.
While I agree in part with this argument, I still think the "not so good" part of the Goldilocks economy is that the "not so bad" is not being heard. The New York Times grudgingly pointed to the good news in its recent article "Suggestions of Strength in Economy" -
- Last year, the economy grew at an annual rate of 4.2%. Preliminary estimates for the last quarter are approximately 3.4% for the last quarter. This is the ninth straight quarter in which the economy has grown at more than 3%. The NY Times article points out that this was below expectations but heck, while we're applauding the Clinton administration, it compares with a 2.1 percent rate, and falling, in the last quarter of the Clinton administration.
- Record levels of spending by businesses and households have seen depletion of inventory levels, setting the stage for faster economic growth during the rest of the year.
- Real compensation was growing at an annual rate of 2.8 percent when Bush was settling into the White House; it grew at a significantly faster 3.9 percent rate in the first quarter of this year.
- When Bill Clinton left office almost 138 million Americans were at work; this June, that figure stood at close to 142 million.
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Article comments
1 - RJ
The main problem I see is the current high gas prices. This situation is not likely to change anytime soon.
High gas prices are inflationary. Not only does it cost Joe Blow more to fill up his tank than it used to (which simply takes more moeny out of his pocket), but the costs of EVERYTHING increase in response.
Every tangible item has to be transported from where it is produced to where it is sold. A lot of this transport is via trucks, which run on gasoline. If you increase the costs incurred by a supplier, they must increase the cost they charge to the retailer in order to remain profitable. And the retailer then must raise the prices they charge the consumer in order to continue making a profit.
And so now you have a situation where Joe Blow doesn't just have to pay more money for the same amount of gasoline, but he has to spend more of his money for all his goods.
To give one example, the place where I work recently had a rep from Coke come out to install a new soda vending machine for the employee break room )there had never been one there before). He let us know that the CURRENT price was 50 cents for a 12-ounce can, but would shortly be increasing to 55 cents per can. The reason: Higher shipping costs.
Now, an extra five cents for a can of soda doesn't sound like much, but when you consider that it isn't just czans of soda that are going to go up in price, and then you look at the aggregate impact on the macroeconomy...well...it's not such good news.
I'm not suggesting that we will have Jimmy Carter-style stagflation in a couple years...but the impact of high gas prices on the economy is most certainly negative.
2 - Dave Nalle
Your conclusions are dead on, but I differ with this one comment:
>>unemployment rate of close to 5%. Not so good.<<
On a historical basis an unemployment rate around 5% is extremely good. If you go through the BLS statistics there are very few periods where unemployment has dipped at all lower, and many believe that because of the chronic unemployed and periodic job turnover it's not even possible to get significantly lower on a national basis. So I'd move this issue into the plus column.
Dave
3 - Deepa
I agree that the unemployment rate is low by historical records but it's still above the 4.2% rate that this administration inherited. That's one reason for keeping it there. But,again, Clinton benefited from the dot-com bubble while Bush inherited the bubble burst. So, a historical comparison may be more reasonable as may be its inclusion as a positive.
4 - RJ
Yeah, 5% unemployment isn't bad at all.
And, at present, the rate of inflation isn't bad either. But I suspect it will rise soon, despite whatever the Fed does vis-a-vis interest rates...
5 - Deepa
Yes, the rate of inflation is holding steady (2.68% as of last year and 2.53 as of June). An interesting response to your comment on the impact of gas prices can be found here:
http://news.orb6.com/stories/latimests/20050818/costlygasolineinflationfoe.php
Chk this one too to look at why Gasoline prices have had only a moderate impact on the Economy:
http://bigpicture.typepad.com/comments/2005/04/gasoline_prices.html
The fiscal deficit might trigger inflation but not yet...
So, as of now, it looks good. But again, nobody saw the 2001 recession coming...
6 - Dave Nalle
Somewhat higher inflation than we have now isn't necessarily a bad thing. Moderate inflation tends to be characteristic of a growing economy.
Dave
7 - Deepa
Well, it must be considered relative to the rate of growth in wages (as in, income levels must grow faster than the growth in inflation). Given that workers' wages are not increasing significantly, rapid inflation may not be good. Which is also the other side to outsourcing - a downward pressure on wages but on the flip, a downward pressure on prices and increased productivity which exerts a downward pressure on inflation.
8 - RJ
From here:
"Most economists don't think that core inflation can continue to remain at current levels because higher fuel costs eventually will push up prices of other goods and services. Indeed, core inflation at the wholesale level rose above expectations, according to Labor Department data released Wednesday. Some of that is expected to be passed to the retail level. Energy-inefficient manufacturers, for example, might be forced to cut production or shut down."
...
"Rising energy prices, they say, already are helping the Fed do its job, acting in concert with higher interest rates to slow the economy and curb inflation. As much as half of the decrease in annualized U.S. economic growth, from 4.2% last year to 3.4% in the second quarter, can be attributed to higher energy costs, Behravesh said."
...
"Except for the 1960 downturn, every postwar U.S. recession has been preceded by a jump in energy prices, Hamilton said."
...
"But consumers â€" particularly lower-income households lacking home equity â€" are becoming more hesitant to boost their spending.
Just ask Wal-Mart. The giant retailer said Tuesday that high energy costs were cutting into consumer spending, forcing it to cut profit projections for the remainder of this year.
"Unless energy prices ease, the holiday shopping season will probably be mediocre at best," Lonski said."
Like I said...
9 - RJ
To take one example, Wal-Mart has a choice. It can either keep prices stable, and deal with smaller profits. Or, it was increase prices, which would help to increase inflation.
If it chooses the latter, then my point (higher gas prices = increased inflation) is justified.
If it chooses the former, then perhaps inflation won't be such a problem. HOWEVER, by willingly limiting its own profits, the big-wigs aren't making as much as they would have otherwise, which could reduce federal tax revenue.
Also, when news of lower profits hits Wall Street, the Stock Market will go down, which hurts middle-class owners of Mutual Funds.
And that isn't good for the economy.
So, let me revise: Higher fuel costs will likely lead to increased inflation. And, if they don't, they will lead to reduced economic growth and therefore reduced tax revenues taken in by the federal government, which will lead to higher-than-expected annual budget deficits, which could lead to long-term interest rates rising, which could lead to inflation.
Like I said, it ain't good news...
10 - Deepa
Well, I guess you're painting a futuristic scenario based on the premise that gas prices will keep increasing. There's been a temporary spike in gas prices due to processing bottlenecks in refineries in the Louisiana belt (although crude prices have dropped a bit).
I agree that in the long run, rising gas prices pose a threat to the competitiveness of any economy, more so of the US, given Joe Blow's appetite for SUV's and gas. Hence, the urgent need to develop alternative energy technologies. But, guess what, higher gas prices actually give impetus to such investments in alternative technologies.
Markets rule?
11 - Deepa
"rising gas prices pose a threat to the competitiveness of any economy"
Meant growth, not competitiveness.
12 - Jon Sobel
low inflation rates are not reducing my real wages
It's not just gas prices that are high. Housing costs keep going up and up for working people. The price of a can of soda or a box of diapers may not have risen, but rent has, and so has the price of a "starter home" or condo, at least in many of the major cities, where the middle class and the poor are being squeezed harder and harder. A low employment rate doesn't mean people are living the good life.
13 - Jon Sobel
A low employment rate
I meant a low unemployment rate... argh, time to turn in.
14 - Dave Nalle
Higher gas prices SHOULD cause an increase in inflation. The fact that they have not, suggests that we might actually be in a deflationary cycle in other areas.
>>Housing costs keep going up and up for working people. The price of a can of soda or a box of diapers may not have risen, but rent has,<<
Actually, rental costs are down substantially from where they were 3 years ago.
>> and so has the price of a "starter home" or condo, at least in many of the major cities<<
Actually, the price of higher end homes has increased much more on a percentage basis than the price of lower priced homes. Plus easy and aggressive financing at low rates makes it much easier to get into a starter home.
Right now in the suburbs of Austin you can easily qualify for a starter home in the $80-120K range based solely on making enough money that the mortgage won't be more than 50% of your salary - way over HUD recommendations - with no money down and a low rate- depending on your credit. But even if your credit sucks you can still get qualified at a rate which would have been good 5 years ago. This means that a small family with an average single income or two incomes right at the poverty level can afford a decent $120,000 house.
Dave
15 - Deepa
Here's a good post on gouging gas prices
16 - RJ
"Actually, rental costs are down substantially from where they were 3 years ago."
Perhaps nationally, but not where I live!
17 - thomas riccardo
The U.S. economy is based on smoke and mirrors.
We are the world's largest debtor nation and our debts are increasing at an increasing rate.
We have an 800 billion dollar current account deficit, over 600 billion dollar governemental deficit when including the raids on the trust funds, for every dollar of profit in the U.S. economy we have 5 new dollars of debt! That last statement tells the tale. Is anyone going to argue that is a huge problem, there is no economic growth only debt growth. I make 1 new dollar in profit and 5 dollars in new debts, that a disaster!
We have 45 trillion dollars in debt not counting the S.S. and Medicare payments that will be due when the Baby boomers begin to retire in 2008.
We have trade deficits in almost all fields of commerce and also in High technology goods! I'll repeat also in High Technology Goods!
Eight out of the top 10 new jobs created are low paying service jobs such as waitresses, clerks, fast food workers, janitors, etc.
We have about 14 million maunufacturing jobs left in this country and declining. Guess how many the European Union has-almost 40 million manufacturing jobs. They are also the world's largest merchandise exporters and service exports by far!
The U.S. employment rate of 18 to 65 year old workers is about 62 percent, European Union is about 63 percent so about the same amount.
The U.S. healthcare system is rated 37th in the world and the most expensive. Our Education system is subpar and our students constantly are toward the bottom on international tests comparing other modern countries.
Our Higher education system is the most expensive in the world and many citizens cannot afford to go.
Our infrusture is crumbling as according to the major Newspapers and the Wall Street journal. Our Roads, sewage systems, electrical grids,pipelines,ports,schools,water treatment plants, airports,etc are in need of trillions of dollars in upgrades which are mostly being ignored, like the levies in New Orleans.
When it comes to scientific journals, the European Union publishes more then the U.S. passing them in 1995.
The Nobil Prizes for this year-chemistry(Shared by French and American scientists), physics(shared by German and American Scientists, Peace (IAEA, a European watchdog agency for nuclear weapons control around the world.France is hosting the largest fusion research project in history, Cern is the largest physics lab in the world, Europe is the frontrunner in alternative energy research, One of the leaders in Aerospace and is at the top or near the top in all fields.
To all those American workers who wonder why it is tougher and tougher to remain in the middle class it is bascially because Europe, China,India and Russia have taken alot of our thunder over the past 20 years or so.
18 - Temple Stark
some people demonstrate a complete lack of real world knowledge on anything approaching econmic matters.
An average home price is an average home price that incluudes all strata of pricing.
The average home price in most areas is through the roof.
Man and I don't even uselessly pontificate on economic issues, gettng nowhere like a pig stuck in mud.
19 - Dave Nalle
>>The average home price in most areas is through the roof.<<
Pretty interesting when it coincides with a boom in real estate sales. People are apparently willing to pay those higher prices, which makes me wonder what's going on in the economy to make that possible - aside from cheap and easy to get loans.
Dave