Deflated by inflation
October 26, 2009 2:05 PM Subscribe
[Economics101Filter] How is it that the cost of living can go up, but salaries stay the same? Economics n00b questions inside.
I've been away from the States for about 10 years. I come back, and am naturally shocked by how much more expensive everything has become. (FWIW, I live in NYC.) For instance, a diner meal for me was always under $10; now, breakfast is easily $15.
I was lucky enough to be able to land a job right away in my old sector. I was shocked a second time when I saw that salaries, as well as vendor costs, have stayed _exactly_ the same. (E.g., the average project/account manager's salary is around 50K - precisely the level I was at as a 3-year "veteran" when I left 10 yrs ago.)
Question: how does this work, exactly? Are people just living shittier lives? Eating out less (but this is New York!) Is this true across different sectors? Or is it just endemic to my sector? Will it eventually balance out? Is it just a sign of the times? Please enlighten this economics n00b!
(Anonymous because I feel too stupid asking these questions, and also because I don't want to announce my salary level to the entire world.)
I've been away from the States for about 10 years. I come back, and am naturally shocked by how much more expensive everything has become. (FWIW, I live in NYC.) For instance, a diner meal for me was always under $10; now, breakfast is easily $15.
I was lucky enough to be able to land a job right away in my old sector. I was shocked a second time when I saw that salaries, as well as vendor costs, have stayed _exactly_ the same. (E.g., the average project/account manager's salary is around 50K - precisely the level I was at as a 3-year "veteran" when I left 10 yrs ago.)
Question: how does this work, exactly? Are people just living shittier lives? Eating out less (but this is New York!) Is this true across different sectors? Or is it just endemic to my sector? Will it eventually balance out? Is it just a sign of the times? Please enlighten this economics n00b!
(Anonymous because I feel too stupid asking these questions, and also because I don't want to announce my salary level to the entire world.)
One theory is that the flat wages over the past decade were supplemented by income from asset bubbles (.com bubble, housing bubble) to keep up with cost of living hikes.
Now that those sources of incomes are no longer present, some expect that costs of goods and services in the economy will now fall to match the "real" incomes.
posted by de void at 2:12 PM on October 26, 2009
Now that those sources of incomes are no longer present, some expect that costs of goods and services in the economy will now fall to match the "real" incomes.
posted by de void at 2:12 PM on October 26, 2009
The most obvious answer would be the housing bubble. Easy financing drives up prices, which drives up rent, which drives up cost of living. So people turn to financing to buy their own home, based on crazy market assumptions.
Why would salaries remain the same? Firstly wages are sticky. Or perhaps people in your field are seeking jobs in NYC to the exclusion of other markets, driving wages down. Plus, if the DOW is the same as it was 10 years ago, why not salaries?
posted by pwnguin at 2:18 PM on October 26, 2009
Why would salaries remain the same? Firstly wages are sticky. Or perhaps people in your field are seeking jobs in NYC to the exclusion of other markets, driving wages down. Plus, if the DOW is the same as it was 10 years ago, why not salaries?
posted by pwnguin at 2:18 PM on October 26, 2009
The use of credit was ever upward until the crisis. People may have been keeping up with the price increases by going further into debt.
posted by spaltavian at 2:21 PM on October 26, 2009 [2 favorites]
posted by spaltavian at 2:21 PM on October 26, 2009 [2 favorites]
There are two major contributing factors.
One factor is that banks were extremely willing to lend. Credit cards, home loans and home equity loans were easy to obtain even with bad credit. Individuals were able to afford inflated prices through taking on additional debt, maintaining (or raising) the standard of living at the same time that businesses didn't feel pressure to raise salaries.
This chart shows the very substantial increase in the amount of household debt over previous 10 years. Household debt rose from approximately $6T to approximately $14T. (You can see it taper at the top as banks became less willing to lend as the housing crisis and foreclosures began.) At the same time, the personal savings rate decreased to almost nothing.
The other factor is that households increasingly became multiple-income households. In order to maintain a statistically average lifestyle, multiple family members were required to work, and single-income families became a minority. See this thread for details.
posted by eschatfische at 2:22 PM on October 26, 2009
One factor is that banks were extremely willing to lend. Credit cards, home loans and home equity loans were easy to obtain even with bad credit. Individuals were able to afford inflated prices through taking on additional debt, maintaining (or raising) the standard of living at the same time that businesses didn't feel pressure to raise salaries.
This chart shows the very substantial increase in the amount of household debt over previous 10 years. Household debt rose from approximately $6T to approximately $14T. (You can see it taper at the top as banks became less willing to lend as the housing crisis and foreclosures began.) At the same time, the personal savings rate decreased to almost nothing.
The other factor is that households increasingly became multiple-income households. In order to maintain a statistically average lifestyle, multiple family members were required to work, and single-income families became a minority. See this thread for details.
posted by eschatfische at 2:22 PM on October 26, 2009
A few possibilities:
1) NYC is an awful example for a lot of things; especially on prices of things, it's often a pretty extreme outlier.
2) Your industry could be an outlier; I'm definitely earning more than I would have ten years ago in the same job - but I also still have a job, and the recession is hitting different industries with different levels of force; health care's doing okay, while construction is a massacre.
3) Salaries haven't stayed the same - they've just returned to the same levels they were at 10 years ago, due to the economy. For example, a lot of people I know recently received pay cuts recently that took them back a few years.
4) A lot of people are just living shittier lives. Welcome to a crappy economy!
posted by Tomorrowful at 2:22 PM on October 26, 2009
1) NYC is an awful example for a lot of things; especially on prices of things, it's often a pretty extreme outlier.
2) Your industry could be an outlier; I'm definitely earning more than I would have ten years ago in the same job - but I also still have a job, and the recession is hitting different industries with different levels of force; health care's doing okay, while construction is a massacre.
3) Salaries haven't stayed the same - they've just returned to the same levels they were at 10 years ago, due to the economy. For example, a lot of people I know recently received pay cuts recently that took them back a few years.
4) A lot of people are just living shittier lives. Welcome to a crappy economy!
posted by Tomorrowful at 2:22 PM on October 26, 2009
Imagine you are an employer. Costs of doing business are going up (for the same reasons costs of living are going up for employees = everything is just more expensive). That being the case, are you likely to increase salary?.... Probably not. As an employer, you are already in a situation where costs of doing business are going up, but due to the economy, customers are buying less of what you make. Raising your prices is not an option.. and neither is giving employees raises.
"Are people just living shittier lives?"
For me?... the answer is: Yes.
posted by jmnugent at 2:23 PM on October 26, 2009
"Are people just living shittier lives?"
For me?... the answer is: Yes.
posted by jmnugent at 2:23 PM on October 26, 2009
Part of the hubbub about the current (bad) U.S. economic situation involves data that incomes haven't risen enough to match cost of living, so if you wanted to know a lot more, Planet Money would have plenty to say about these ideas.
Personal split-second theory that just occurred to me:
"Supply and demand curves" go like this: as price increases, the number of people willing to buy an item goes down, but the number of people interested in selling the item goes up. Econ 101 says the market automatically finds the price with an equal number of buyers and sellers.
Recent data about the USA: personal savings rates plummeted over the last 15 years, and (societal) willingness to buy things on credit went way up, meaning that there would be less of an "I just can't afford that" barrier to having prices go up, i.e. buyers would be willing to pay more if they don't feel they have to use real money to do it with. Prices rise.
posted by aimedwander at 2:24 PM on October 26, 2009
Personal split-second theory that just occurred to me:
"Supply and demand curves" go like this: as price increases, the number of people willing to buy an item goes down, but the number of people interested in selling the item goes up. Econ 101 says the market automatically finds the price with an equal number of buyers and sellers.
Recent data about the USA: personal savings rates plummeted over the last 15 years, and (societal) willingness to buy things on credit went way up, meaning that there would be less of an "I just can't afford that" barrier to having prices go up, i.e. buyers would be willing to pay more if they don't feel they have to use real money to do it with. Prices rise.
posted by aimedwander at 2:24 PM on October 26, 2009
Answer: You were overpaid previously, and are now underpaid.
posted by blue_beetle at 2:30 PM on October 26, 2009 [2 favorites]
posted by blue_beetle at 2:30 PM on October 26, 2009 [2 favorites]
I don't think it is just you, I remember twenty years ago when I was in school a good entry-level unskilled wage was $15, $20/hour was uncommon but available with a few years experience. Someone with a general BA would expect to earn around $25-30/hour for white collar work with a few years experience. Uh, that is still what you get today even though the house that sold for less than $200k in the late 1980's is now going for closer to $400 and gas has quadrupled in price.
I work in public and academic libraries and the average wage has gone up less than $5 an hour in the past decade. People are struggling more, I know people of my generation (mid-thirties) are not living anywhere near the level older relatives were when they were in their mid-thirties twenty years ago. Mom's bank is what is keeping a lot of my friends afloat even though they have "good" jobs.
posted by saucysault at 2:32 PM on October 26, 2009
I work in public and academic libraries and the average wage has gone up less than $5 an hour in the past decade. People are struggling more, I know people of my generation (mid-thirties) are not living anywhere near the level older relatives were when they were in their mid-thirties twenty years ago. Mom's bank is what is keeping a lot of my friends afloat even though they have "good" jobs.
posted by saucysault at 2:32 PM on October 26, 2009
The answer to this type of question will take more space than Metafilter allows, but some quick points to consider are:
1) There is not a 1-to-1 relationship between salaries and inflation. That is, salaries don't grow at the rate of inflation. Some salaries grow much more quickly and some less quickly. This is probably industry- and geography-dependent.
2) Many people finance consumption from things other than salary: credit cards, inheritances, capital gains (stock market, commodities, real estate, etc.), inheritances, various legal settlements, forms of debt other than credit card (equity in one's house*, etc.), distributions from partnerships, and, I'm sure, many other forms of non-salary financed consumption.
*Note that if you take cash out of the equity that you have in your house you are essentially financing that cash by taking on more debt. As you reduce equity, you increase debt, all other things constant.
posted by dfriedman at 2:34 PM on October 26, 2009
1) There is not a 1-to-1 relationship between salaries and inflation. That is, salaries don't grow at the rate of inflation. Some salaries grow much more quickly and some less quickly. This is probably industry- and geography-dependent.
2) Many people finance consumption from things other than salary: credit cards, inheritances, capital gains (stock market, commodities, real estate, etc.), inheritances, various legal settlements, forms of debt other than credit card (equity in one's house*, etc.), distributions from partnerships, and, I'm sure, many other forms of non-salary financed consumption.
*Note that if you take cash out of the equity that you have in your house you are essentially financing that cash by taking on more debt. As you reduce equity, you increase debt, all other things constant.
posted by dfriedman at 2:34 PM on October 26, 2009
Are people just living shittier lives?
"Shittier" is a relative term. Prices for many consumer goods, such as electronics, have fallen, while quality has gone up. Ten years ago, a flat screen TV was a luxury. Today, you can't buy anything but flat screens. Ten years ago, cell phones were optional. Today, the 12-year-old girl that lives next door has one.
And she texts on it. Endlessly.
posted by Cool Papa Bell at 3:04 PM on October 26, 2009 [7 favorites]
"Shittier" is a relative term. Prices for many consumer goods, such as electronics, have fallen, while quality has gone up. Ten years ago, a flat screen TV was a luxury. Today, you can't buy anything but flat screens. Ten years ago, cell phones were optional. Today, the 12-year-old girl that lives next door has one.
And she texts on it. Endlessly.
posted by Cool Papa Bell at 3:04 PM on October 26, 2009 [7 favorites]
I'm shocked that $50-60k is being used as a yardstick for PM/AM positions. In my personal experience, this is not in line with current pay rates in any way, shape or form for these types of positions.
posted by cior at 3:14 PM on October 26, 2009 [1 favorite]
posted by cior at 3:14 PM on October 26, 2009 [1 favorite]
Taxes are lower now than 10 years ago so you have to throw that (lower taxes = higher cost of living) into the mix.
It's also important to note that interest rates 10 years ago were pushing 8% and now they're hovering under 6%. That may not seem like much but that delta alone turns what was a $400K house in the late 90s into a $500K+ house now, all other things being equal.
NYC is also a bad example since it is the world capital of capital. Plenty of people have passive incomes coming from outside the area and can afford to pay more.
posted by mokuba at 3:16 PM on October 26, 2009
It's also important to note that interest rates 10 years ago were pushing 8% and now they're hovering under 6%. That may not seem like much but that delta alone turns what was a $400K house in the late 90s into a $500K+ house now, all other things being equal.
NYC is also a bad example since it is the world capital of capital. Plenty of people have passive incomes coming from outside the area and can afford to pay more.
posted by mokuba at 3:16 PM on October 26, 2009
Here is a more simple explanation:
Workers at almost every level in almost every industry are a dime a dozen. There are just too many qualified and willing workers and not enough jobs. For this reason, employers have been able to hold wages down (i.e., no wage inflation) for a very long time.
And yes, people are living crappier lives -- especially now that they can no longer borrow money to maintain the standard of living they believe to be their due but can not and could not technically afford.
posted by SuzB at 3:32 PM on October 26, 2009
Workers at almost every level in almost every industry are a dime a dozen. There are just too many qualified and willing workers and not enough jobs. For this reason, employers have been able to hold wages down (i.e., no wage inflation) for a very long time.
And yes, people are living crappier lives -- especially now that they can no longer borrow money to maintain the standard of living they believe to be their due but can not and could not technically afford.
posted by SuzB at 3:32 PM on October 26, 2009
I'm not sure that the theory about consumption not financed by salaries explains things. After all, if you give this (borrowed) money to someone in exchange for goods and services, *they* get richer, right? The money you pay in exchange for a sandwich doesn't disappear, it goes to the restaurant owner. Sure, this can cause inflation and plenty of other bad things, but this is a different question, namely, "why is there inflation in my costs but not in my wages?"
Here's my try at an answer: worker productivity in many fields has gone up. People can now do more stuff, on average, than they used to be able to do.
Without any evidence, I would surmise that retail and restaurants (particularly small-scale independent retail and restaurants, such as those in NYC) were passed over by many of these productivity gains. After all, it still takes just as long to fry an egg as it did in 1999; if you have one person minding the whole store, you can't go down to 0.75 people minding the store even if that 1 person now has less to do (thanks to computerized bookkeeping, fancier credit card machines, or whatever).
As a result, the relative cost of these goods has gone up. For restaurants, in fact, you might make a pretty good argument that this is an example of Baumol's cost disease, which explains that some things (canonically, education and live performances) are inherently unable to improve in efficiency.
So, why are you screwed? Answer: because your productivity hasn't gone up, either. And I guess your boss is more cost-sensitive than the diner's customers.
posted by goingonit at 3:36 PM on October 26, 2009 [1 favorite]
Here's my try at an answer: worker productivity in many fields has gone up. People can now do more stuff, on average, than they used to be able to do.
Without any evidence, I would surmise that retail and restaurants (particularly small-scale independent retail and restaurants, such as those in NYC) were passed over by many of these productivity gains. After all, it still takes just as long to fry an egg as it did in 1999; if you have one person minding the whole store, you can't go down to 0.75 people minding the store even if that 1 person now has less to do (thanks to computerized bookkeeping, fancier credit card machines, or whatever).
As a result, the relative cost of these goods has gone up. For restaurants, in fact, you might make a pretty good argument that this is an example of Baumol's cost disease, which explains that some things (canonically, education and live performances) are inherently unable to improve in efficiency.
So, why are you screwed? Answer: because your productivity hasn't gone up, either. And I guess your boss is more cost-sensitive than the diner's customers.
posted by goingonit at 3:36 PM on October 26, 2009 [1 favorite]
According to the recent This American Life special on health care ("More is less"), says that the cost of employing a worker rose 25% over the course of the Bush administration, and that ALL of that increase went to pay for increased health insurance premiums, none into wages.
posted by jon1270 at 3:41 PM on October 26, 2009 [1 favorite]
posted by jon1270 at 3:41 PM on October 26, 2009 [1 favorite]
The short answer to your question is that yes, inflation continues on in the US, and yes, American wages are flat or even down.
Inflation continues: See InflationData.com, and this calculator. It indicates that inflation has totaled about 500% between 1964 and 2004 (see below for why I picked these years), meaning things are about 6 times as expensive now as they were then.
Stagnant wages: See, e.g., this table, assembled from BLS statistics by some outfit called the "Labor Research Association" (if you doubt their neutrality, collecting the BLS stats is left as an exercise for the reader). As you can see, weekly wages were off almost 10%, inflation adjusted, from 1964 through 2004. I don't know exactly what's happened since 2004 but I imagine wages went up modestly through 2007 and down sharply since, so we would be back at 2004 numbers now - or even lower. Please note you shouldn't double-count: this latter figure includes the inflation info set forth above, I just thought you might like to see the inflation stuff broken out. You could probably also find nominal, un-adjusted wage data out there if you really want.
Put these together and yes, the average wager earner / consumer in the US is getting squeezed like nobody's business. For more background, see the Two Income Trap; for updates on these sorts of issues, see the Naked Capitalism, Calculated Risk, and Credit Slips blogs.
Regarding Cool Papa Bell's point that a particular "basket" of similar (or even improved) consumer goods is actually cheaper now than it was then - note that the two examples he picks, HD TVs and mobile phones, also require expensive service plans (HD cable, cell phone service) which were also not required back before these products were widely available. Generally it is true that small consumer products, such as clothing and electronics, have gotten much cheaper after adjusting for inflation, but this is more than outstripped by increased housing, transportation, education, and health care costs over any given period in recent history.
posted by rkent at 3:54 PM on October 26, 2009 [1 favorite]
Inflation continues: See InflationData.com, and this calculator. It indicates that inflation has totaled about 500% between 1964 and 2004 (see below for why I picked these years), meaning things are about 6 times as expensive now as they were then.
Stagnant wages: See, e.g., this table, assembled from BLS statistics by some outfit called the "Labor Research Association" (if you doubt their neutrality, collecting the BLS stats is left as an exercise for the reader). As you can see, weekly wages were off almost 10%, inflation adjusted, from 1964 through 2004. I don't know exactly what's happened since 2004 but I imagine wages went up modestly through 2007 and down sharply since, so we would be back at 2004 numbers now - or even lower. Please note you shouldn't double-count: this latter figure includes the inflation info set forth above, I just thought you might like to see the inflation stuff broken out. You could probably also find nominal, un-adjusted wage data out there if you really want.
Put these together and yes, the average wager earner / consumer in the US is getting squeezed like nobody's business. For more background, see the Two Income Trap; for updates on these sorts of issues, see the Naked Capitalism, Calculated Risk, and Credit Slips blogs.
Regarding Cool Papa Bell's point that a particular "basket" of similar (or even improved) consumer goods is actually cheaper now than it was then - note that the two examples he picks, HD TVs and mobile phones, also require expensive service plans (HD cable, cell phone service) which were also not required back before these products were widely available. Generally it is true that small consumer products, such as clothing and electronics, have gotten much cheaper after adjusting for inflation, but this is more than outstripped by increased housing, transportation, education, and health care costs over any given period in recent history.
posted by rkent at 3:54 PM on October 26, 2009 [1 favorite]
Most people are living crappier lives.
The small number people at the leading edge of the enormous Ponzi scheme that the world economy seems to have devolved into - the CEOs and other executives who got paid massive, disproportionate bonuses even as the institutions they were supposed to be running crumbled - have made out like bandits.
posted by flabdablet at 7:05 PM on October 26, 2009 [2 favorites]
The small number people at the leading edge of the enormous Ponzi scheme that the world economy seems to have devolved into - the CEOs and other executives who got paid massive, disproportionate bonuses even as the institutions they were supposed to be running crumbled - have made out like bandits.
posted by flabdablet at 7:05 PM on October 26, 2009 [2 favorites]
Well, you could blame it on the fact that increasing health care costs have been eating up all potential wage growth.
But it's probably just a result of inequitable distribution of the fruits of labor. No rocket science needed to understand that.
posted by alms at 9:19 PM on October 26, 2009
But it's probably just a result of inequitable distribution of the fruits of labor. No rocket science needed to understand that.
posted by alms at 9:19 PM on October 26, 2009
Keep in mind, also, that a great deal of wealth is being transferred from the West to the East. This is a good thing, as far as I'm concerned, but it's another cause of the current situation.
posted by smorange at 9:49 PM on October 26, 2009
posted by smorange at 9:49 PM on October 26, 2009
I'm not sure that the theory about consumption not financed by salaries explains things. After all, if you give this (borrowed) money to someone in exchange for goods and services, *they* get richer, right?
This is precisely the right question to be asking (and I don't think there's a "right" answer; if you knew the answer absolutely, there's a guy by the name of Geithner who probably wants to hear from you) but the mere existence of the question doesn't, at least to me, really serve as an argument against the credit-financed-consumption theory. It just raises the question of where all the money went.
You can account for price inflation without wage inflation (or even sinking real wages), if people were financing their consumption with debt (card or HELOC) and then that money was just flowing out of the national economy. E.g., due to an increase in the price of oil or other imported commodities.
My suspicion is if you looked at a chart of household debt and the US current-account deficit, you would see them growing together. People opened lines of credit and spent money, but that money flowed out and didn't cause any wage inflation—at least not here in the US. You'd have to look in the economies of the green countries on this map, and I bet you'd see wage inflation. (Which, you do, or did, at least in some places. It's probably tougher to see in places where wealth is very highly concentrated.)
Subtract the money spent on imports from household debt, and you can probably explain the rest via things like healthcare. (Although healthcare brings up virtually the same question, as it's basically a service industry: where did the money go? I bet if you look in the right places, you'll find sectors where there was wage inflation, because they were on the receiving end of the credit firehose.)
posted by Kadin2048 at 12:59 AM on October 27, 2009
This is precisely the right question to be asking (and I don't think there's a "right" answer; if you knew the answer absolutely, there's a guy by the name of Geithner who probably wants to hear from you) but the mere existence of the question doesn't, at least to me, really serve as an argument against the credit-financed-consumption theory. It just raises the question of where all the money went.
You can account for price inflation without wage inflation (or even sinking real wages), if people were financing their consumption with debt (card or HELOC) and then that money was just flowing out of the national economy. E.g., due to an increase in the price of oil or other imported commodities.
My suspicion is if you looked at a chart of household debt and the US current-account deficit, you would see them growing together. People opened lines of credit and spent money, but that money flowed out and didn't cause any wage inflation—at least not here in the US. You'd have to look in the economies of the green countries on this map, and I bet you'd see wage inflation. (Which, you do, or did, at least in some places. It's probably tougher to see in places where wealth is very highly concentrated.)
Subtract the money spent on imports from household debt, and you can probably explain the rest via things like healthcare. (Although healthcare brings up virtually the same question, as it's basically a service industry: where did the money go? I bet if you look in the right places, you'll find sectors where there was wage inflation, because they were on the receiving end of the credit firehose.)
posted by Kadin2048 at 12:59 AM on October 27, 2009
Another useful thing to ponder is the economics concept called velocity of money.
If everybody is readily extending credit to everybody else, then any given dollar will get spent a hell of a lot more often over the course of a year than it would if everybody is sitting on their savings and not doing much with them.
Given that extending credit is now generally perceived as riskier than it was a while ago, less of it is getting extended, and the velocity of money is reduced. The overall effect is the same as if large amounts of money had been removed from the economy entirely.
In short: one component of the answer to "where did the money go?" is "slower".
posted by flabdablet at 2:14 AM on October 27, 2009
If everybody is readily extending credit to everybody else, then any given dollar will get spent a hell of a lot more often over the course of a year than it would if everybody is sitting on their savings and not doing much with them.
Given that extending credit is now generally perceived as riskier than it was a while ago, less of it is getting extended, and the velocity of money is reduced. The overall effect is the same as if large amounts of money had been removed from the economy entirely.
In short: one component of the answer to "where did the money go?" is "slower".
posted by flabdablet at 2:14 AM on October 27, 2009
Compensation has gone up, it's just all getting eaten up by health insurance costs.
Also, inflation isn't constant across all things. I too have noticed that all manner of food costs have gone up in the last year or so. A lot. BUT, they stayed flat for a good long time.
The overall effect is the same as if large amounts of money had been removed from the economy entirely.
And don't forget the trillions that actually DID disappear...
posted by gjc at 4:35 AM on October 27, 2009 [1 favorite]
Also, inflation isn't constant across all things. I too have noticed that all manner of food costs have gone up in the last year or so. A lot. BUT, they stayed flat for a good long time.
The overall effect is the same as if large amounts of money had been removed from the economy entirely.
And don't forget the trillions that actually DID disappear...
posted by gjc at 4:35 AM on October 27, 2009 [1 favorite]
In short: one component of the answer to "where did the money go?" is "slower".
Sure, but that exerts a deflationary pressure on the economy, even in the face of huge money supply infusions by the Fed. It's worthwhile remembering, I think, that the poster isn't asking about what happened to prices and wages over the last two years, but over the last 10.
You can account for price inflation without wage inflation (or even sinking real wages), if people were financing their consumption with debt (card or HELOC) and then that money was just flowing out of the national economy. E.g., due to an increase in the price of oil or other imported commodities.
Indeed, you can. But I'm not sure that's the answer---yet---in this case. Is it import-based goods which are getting more expensive? I suppose you could make the argument that it's the price of oil driving everything, in which case the money is leaving the local economy and going to suppliers of commodities.
For my money, I like the health-care-costs explanation (which I didn't know about before) the best.
posted by goingonit at 5:10 AM on October 27, 2009
Sure, but that exerts a deflationary pressure on the economy, even in the face of huge money supply infusions by the Fed. It's worthwhile remembering, I think, that the poster isn't asking about what happened to prices and wages over the last two years, but over the last 10.
You can account for price inflation without wage inflation (or even sinking real wages), if people were financing their consumption with debt (card or HELOC) and then that money was just flowing out of the national economy. E.g., due to an increase in the price of oil or other imported commodities.
Indeed, you can. But I'm not sure that's the answer---yet---in this case. Is it import-based goods which are getting more expensive? I suppose you could make the argument that it's the price of oil driving everything, in which case the money is leaving the local economy and going to suppliers of commodities.
For my money, I like the health-care-costs explanation (which I didn't know about before) the best.
posted by goingonit at 5:10 AM on October 27, 2009
I once saw a union bumpersticker: "United we bargain, divided we beg." - There's money to go around, but the begging hasn't been exactly great.
posted by Orb2069 at 6:01 AM on October 27, 2009
posted by Orb2069 at 6:01 AM on October 27, 2009
For my money, I like the health-care-costs explanation (which I didn't know about before) the best.
It may have "truthiness" going for it, but it doesn't really explain everything. Sure, on an individual level, healthcare costs increasing would make you feel poorer, but the money you're paying ends up going to doctors, insurance company employees, shareholders, etc. It's not like the insurance companies (who generally get demonized) are sitting on a giant pile of Benjamins. So it doesn't explain why there was so much price inflation without wage inflation, because you would expect to see some wage inflation in the sectors benefiting from the cost increases, and spreading out from there. Basically, the money has to go someplace; you can't just treat the healthcare sector like a black hole.
Over the last 10 years, the price of oil has gone from $16.56 (1999) to over $90 (2008), and is on target for somewhere around $43-45 this year. There are very few goods whose prices aren't affected by petroleum: food is, energy is, gasoline obviously is. That could easily explain much price inflation -- and since the money flows out, it explains the lack of wage inflation. Other raw materials (particularly metals) have increased in price as well, although I don't think any of them are as significant as oil.
I don't mean to imply that there's really one right answer; if history has shown anything it's that sussing out the root causes of macroeconomic phenomena (especially recessions, depressions, panics, etc.) is incredibly difficult even in hindsight, and that the causes are generally many things working together. It's probable that healthcare has played a role, but I don't think it's particularly convincing as a singular explanation.
Also, in the past you saw a large amount of oil revenues end up back in the US, due to lack of profitable overseas investments. (Cf. petrodollar recycling.) More recently, this hasn't happened as much; oil-exporting countries have begun to invest more of their revenue domestically, or in developing countries. So while in other periods money spent on oil might not have actually been 'lost' from the US economy, now more of it is. That would explain why you didn't see as much wage/price inflation disconnect during the past, despite a reliance on imported oil that didn't happen overnight.
posted by Kadin2048 at 2:25 PM on October 27, 2009
It may have "truthiness" going for it, but it doesn't really explain everything. Sure, on an individual level, healthcare costs increasing would make you feel poorer, but the money you're paying ends up going to doctors, insurance company employees, shareholders, etc. It's not like the insurance companies (who generally get demonized) are sitting on a giant pile of Benjamins. So it doesn't explain why there was so much price inflation without wage inflation, because you would expect to see some wage inflation in the sectors benefiting from the cost increases, and spreading out from there. Basically, the money has to go someplace; you can't just treat the healthcare sector like a black hole.
Over the last 10 years, the price of oil has gone from $16.56 (1999) to over $90 (2008), and is on target for somewhere around $43-45 this year. There are very few goods whose prices aren't affected by petroleum: food is, energy is, gasoline obviously is. That could easily explain much price inflation -- and since the money flows out, it explains the lack of wage inflation. Other raw materials (particularly metals) have increased in price as well, although I don't think any of them are as significant as oil.
I don't mean to imply that there's really one right answer; if history has shown anything it's that sussing out the root causes of macroeconomic phenomena (especially recessions, depressions, panics, etc.) is incredibly difficult even in hindsight, and that the causes are generally many things working together. It's probable that healthcare has played a role, but I don't think it's particularly convincing as a singular explanation.
Also, in the past you saw a large amount of oil revenues end up back in the US, due to lack of profitable overseas investments. (Cf. petrodollar recycling.) More recently, this hasn't happened as much; oil-exporting countries have begun to invest more of their revenue domestically, or in developing countries. So while in other periods money spent on oil might not have actually been 'lost' from the US economy, now more of it is. That would explain why you didn't see as much wage/price inflation disconnect during the past, despite a reliance on imported oil that didn't happen overnight.
posted by Kadin2048 at 2:25 PM on October 27, 2009
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The number of people qualified to work in your field grew, the amount of work available in your field shrunk, or some combination of those two could explain it.
posted by ripley_ at 2:12 PM on October 26, 2009