When we left off yesterday, we had promised to take up an important theme on the morrow. The morrow is here. True to our word, we will do so.
The subject is wages. And we are digging in. On the surface, we lament the lack of any forward progress in US hourly compensation over the last half century.
Deeper down, in the clay and subsoil, we wonder how it is possible that the world’s richest, most technologically advanced economy ever, operating during a 50-year period which included the invention of the internet… the triumph of capitalism in China and Russia… and a landing on moon… that is the most bountiful half-century in human history, failed to make its most important component parts better off.
And at the bedrock level, we find the explanation: Fed policies are dangerous claptrap.
Yesterday, we described and illustrated the quackery and incompetence behind the Fed’s economic forecasts. Clearly, they never know what is coming. Today, we show what their policies actually have wrought.
Let’s begin with a conclusion: Thomas Piketty is wrong about the way the world works. He sees the working man and the investing man competing for the material rewards of a capitalist society. And, as an old-fashioned leftie, he presumes that the man with overalls will always get the short end of the stick. The working man has only the time on his hands and the sweat on his brow to offer his employer. Generation after generation, he has no more time or sweat than he had in the time of Jacob and Ishmael.
Capital, on the other hand compounds, year after year, growing larger by the day, with more and larger factories, darker and more satanic mills. Mr Piketty even gives a number – on page 356 of his tome – for the rate at which capital annually compounds, 4.5%. As Jim Grant helpfully points out, this is mathematically absurd. If wealth actually had compounded at that rate from the time of Christ until today, we would all be zillionaires. Instead, capital compounds, and then gets whacked by bear markets, depressions, wars, and central bank policies.
In fact, there is no competition between capital and labour. Both benefit, according to relative scarcity and abundance of what they have to offer, from each other’s contributions.
The capitalist puts up the resources. The working man turns them into something worth more – including the value of his own time – than the resources he had to work with. The richer the capitalist, the more pairs of skilful hands he needs to help him fructify his wealth. And the more the labourer has to work with – a backhoe, for example, rather than a shovel – the more new wealth he can create.
Generally, capitalists and labourers get wealthier, or poorer, together. When they don’t, something is wrong.
Readers of these pages already know what. The cronies always use the police power of government to cheat the working man, stifle competition, prevent progress, and generally strangle the public welfare with red tape, taxes, and regulation.
In the event, they have managed to keep wages more or less unchanged for 46 years.
On this issue, we quote our favourite ex-White House budget director, David Stockman:
“Real hourly earnings of production workers at about $20.50 per hour in May were exactly the same as they were when President Lyndon Johnson was hauling his hunting dogs around by their ears back in 1968…
“… monetary inflation seemed to work for a few years because in those times of trade account surpluses organized labour was able to push up wage rates faster than the CPI—so real wages reached an all-time record of $22.30 per hour in the early 1970. Ironically, the catalysts for that final wage push were soaring construction wages in NYC obtained by the building unions working on the World Trade Centre, and a 70-day strike at GM which resulted in the bountiful UAW “pattern agreement” that ultimately took Detroit down.
“More importantly, the surge of Fed-fuelled inflation in the late 1960s also took down the monetary system and paved the way for today’s destructive monetary central planning which erodes main street living standards and gifts the 1% with speculative windfalls on financial assets. Specifically, the CPI had averaged about 1.2% annually between 1953 and 1965, but then soared to upwards of 6% by 1970-1971 (a level never seen outside of the two world wars and post-war demobilizations after the Fed’s opening in 1914).”
Amazing, isn’t it? That is, in a period of apparent unrivalled progress, somehow the most important measure of economic success – the value of the working man’s time – went nowhere. Short end of the stick? He got no part of the stick at all. Why? What went wrong? Nasty capitalist cheating? Or Fed policies? More on Monday…