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This chart shows the average hourly earnings adjusted for inflation. If rising wages were responsible for the stagflation of the 1970s, then the damage was clearly done before January, 1973. That was when average hourly earnings peaked.
Source Data:
St. Louis Fed: Average Hourly Earnings: Total Private Industries
St. Louis Fed: Consumer Price Index For All Urban Consumers: All Items
10 comments:
40 years pass and wages are still around 17 bucks 50: whatever happened to economic growth? If CPI underestimates inflation, then people are actually worse off. Oof!
dearieme,
Fortunately, I'm in the camp that thinks the CPI is reasonably accurate but can seem a bit confusing in the short-term.
For example, if housing prices were to rise quickly and then suddenly stop rising quickly.
Yep, sucks to be a workin' man. On the plus side, maybe Country & Western music will stop sucking. It's been a long, long time.
Incidentally, I prefer the term wage slave.
Taxes are the silent killer. As nominal wages increase people climb into higher tax brackets even though their real purchasing power has not increased.
Throw in new and increasing fees/taxes on everything from parking to cable bills and its just hard to save a plug nickle let alone the old silver dime.
Stag,
Just finished reading all (almost all) of your posts to date. Significant to say the least.
Over the past five years, I've read over a dozen books on investments, housing, debt levels, valuations, demographics, social mood, behavior of crowds, etc. I've tried to balance the bearish readings by also reading bullish stuff too. The bullish arguments come down to nothing more than hope and optimism.
I have found nothing that can adequately allay my bearish sentiments. The bearish facts are just too overwelming and stubborn. I see both deflation and inflation, but think the fed and markets will be fighting the last war so I don't necessarily see a 1970's repeat.
The dot com bubble and housing mess were easy to see. The fact that the fed missed or ignored them gives me no confidence in their abilities. Somehow, I think Buffets weapons of mass destruction prognostication will come to pass. If wall street could sqeeze that much money out of housing imagine what is possible in a lightly regulated and opaque market like derivatives. With derivatives, you can print your own cash flow streams - for a while.
Its the best of times and the worst of times. Its not if, but when. Time to follow my gut.
MAB,
Just finished reading all (almost all) of your posts to date.
I feel the need to apologize. I'm not sure I'd wish that on my worst enemies, lol. :)
I see both deflation and inflation, but think the fed and markets will be fighting the last war so I don't necessarily see a 1970's repeat.
If I knew for sure deflation was coming, I'd sit long-term nominal treausury bonds. That feels so wrong to me, if nothing else, that plan has already worked for 20+ years. That's the business as usual plan in my opinion, and I do not expect business as usual.
If I knew for sure inflation was coming, I'd sit in gold and silver. Unfortunately, each have tripled in price in just the last few years. I'm not willing to take the risk that I might be wrong.
By sitting in TIPS, I'm basically saying that I can't decide. I simply want to preserve the purchasing power I already have and have chosen a rather wimpy solution. I should be fine unless we experience a severe hyperinflation. As I don't think housing prices are going to skyrocket from here and I do expect a global slowdown, severe hyperinflation is not something I'm planning on.
As for the 1970s, I think it isn't so much fighting the last war over again as much as it is simply continuing to fight that same war. The war started when we fell completely off the gold standard.
Investors were offered high real rates of return to stop hoarding goods. That worked in the short-term (20 years). However, did it actually improve the picture over the long-term? If nothing else, investors are generally much richer now and have a much greater capacity to hoard as a side hobby (should it come to that). In the grand scheme of things, it takes very little paper money to push the price of gold around these days (in both directions).
With 9,000 hedge funds I see our stock market much like a casino. I don't think there are many "sure thing" bets to be had. If everyone was long the market, it would also be easier to entertain the thoughts of a serious deflation.
I've often wondered what would happen if struggling companies used hedging to bet on their own demise. How the heck is that supposed to work over the long-term? It sure could delay the inevitable though, in theory.
You've no doubt already read this, but I offer it once again for others.
Profit Off Your Own Demise!
http://illusionofprosperity.blogspot.com/2007/10/profit-off-your-own-demise.html
While I'm not as confident as you regarding validity of the CPI, let's set that aside for the moment. Is there data available that would allow you to plot median rather than average hourly wage? Concerns are that the middle-class is bing hollowed out; comparing median to average wages would probably be useful in that discussion.
BTW Elizabeth Warren (The Two-Income Trap author) claims that while in the last 30 years the real median income for all workers has increased, ALL of the increase is attributed to female workers. Males real income actually decreased slightly.
Picosec,
Unfortunately, I've yet to find a good source for current monthly median wages.
I can point you to this though.
http://www.census.gov/hhes/www/income/histinc/p53ar.html
I think growing income inequality is the somewhat hidden statistic that turns otherwise somewhat decent looking average data into something not so brightly lit (to paraphrase Tales from the Darkside).
I tend to think that real wages are fighting some serious headwinds these days. Unemployment is still low and seems likely to rise. There's global rebalancing pressure (others will work for less money).
As seen in the link, 1974 to 1983 was the most brutal real wage adjustment in the last 60 years, and was also the most stagflationary period as well.
It just dawned on me that median wages rose substantially in 1974 (once again from the link I just provided). What a nasty recession that was.
Employment dropped from 55 million in 1973 to 44 million in 1974. Meanwhile, the median wage shot up from $32,677 to $35,955. I guess those at the bottom of the pay scale were laid off at a higher rate than those at the top. Why does that not surprise me?
Nothing is ever easy when looking at the averages (and/or medians) it seems.
Statistics: The only science that enables different experts using the same figures to draw different conclusions. - Evan Esar
Whoops! That 55 million to 44 million dropoff is a quirk in the data (and I missed it in the description at the top).
Between 1974 and 1976, wage and salary income restricted to civilian workers only.
That's been bugging me all night. I couldn't imagine in my wildest dreams 1974 was THAT bad.
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