Only counting one side of the equation gives you the wrong answer
by digby
The wonks are at it again. Apparently, there's a new paper that suggests we've been measuring inflation all wrong and naturally it shows that people are a lot richer than anyone thinks. (So let's cut some gummint programs!) Anyway, Dean Baker rudely points out that if people are richer today because we've been measuring wrong, it only stands to reason that they were poorer before, right? And guess what? That throws off all the projections about how rich we're going to be in the future:
If income is growing more rapidly than the official data indicate then people were much poorer in the recent past than official data indicate.
The Census Bureau's data show that median household income, measured in 2011 dollars, was 9.4 percent lower thirty years ago in 1981 compared to 2011. It was $46,024 in 1981 compared to $50,054 in 2011.
However if we make the Meyer and Sullivan adjustment then real income has been rising by 0.8 percentage points more rapidly each year than these data assume. This means that Meyer and Sullivan would say that the median income for a household in 1981, measured in 2011 dollars, would be $35,637, 28.8 percent less than the 2011 level. Meyer and Sullivan's adjustment implies that today's elderly were considerably poorer in their working lifetime than the official data show.
This goes in the other direction as well. If we apply Meyer and Sullivan's adjustment to projected income growth then income will be rising much more rapidly. If the Meyer and Sullivan adjustment is applied to the projection of average annual wages from the Social Security trustees then the average real (inflation adjusted) wage in 20 years will be more than 50 percent higher than it is today. If we go out to 30 years, then the Meyer and Sullivan adjustment means that average wages will be more than 80 percent higher than it is today.
This pattern of income and wage growth would likely be relevant to anyone trying to make an assessment of the relative well-being of the young and old. If today's old were relatively poor through most of their lives then we might think it makes less sense to take away benefits that sustain their current standard of living. On the other hand, if today's young can anticipate rapid wage growth in the future we might be less concerned about providing them additional support.
You see, you can't just have it one way. Baker makes this point repeatedly, but it doesn't seem to penetrate. If all the assumptions people are making about the past are untrue, then you have to adjust the assumptions for the future. And that means, for instance, that if we have been underestimating inflation for the past three decades, we need to adjust our projections for the future as well --- and guess what that means? That's right, presumably people would be making more money and there would be more available for programs like Social Security and Medicare, right? So cutting the programs because our poor kids and grandkids are going to be burdened by these huge costs doesn't have quite the same resonance. Indeed, in a sane world one would assume that the deficit would take care of itself as well, since higher wages should also mean more revenue to the government.
Unfortunately, while this deficit isn't really a problem, we do have one, and it's the real reason we're so screwed. And it's a doozy.
Baker again:
Virtually all economists agree that in the long-run productivity is the main determinant of economic prosperity. This means that if we can sustain high rates of productivity growth, as we are now doing, then the economy will be able to provide our children and grandchildren with a prosperous future – one where they will be far richer on average than we are today.
Of course if we continue to allow the Wall Street boys, the CEOs and their high-living friends to get the bulk of the gains from growth then our children and grandchildren will have much to worry about. But the problem then, as now, will not be the debt that we have left them.
The problem will be that we let the rich take over the country. If we leave the Wall Street crew in charge, then we will have done much to bankrupt our children.
This is what the Big Money Boyz don't want us to notice. They don't really care about deficits, we know that, because unless they think we're going to institute a soylent green program it doesn't make any sense. Somebody's going to have to take care of the old people, whether it comes directly out of their family's pockets or via a program like Social Security. They're not so stupid that the think these costs to society will simply disappear if they manage to make people poorer. But what they do care about is keeping their outsized share of the nation's wealth as far as the eye can see. So, perhaps we have the answer as to what austerity's really all about: misdirection. The oldest trick in the book.
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