Our economy is expanding impressively while also inspiring insecurity and an ongoing sense of stagnation. Paradoxically, the two are intertwined; the same forces that aid the economy also obscure its gains and foster anxiety. By now these forces are familiar. They are, first, disinflation–the quelling of double-digit inflation. In the past year the consumer price index (CPI) has risen only 2.6 percent. And second, there’s intensified competition from the usual suspects: trade, deregulation, new technologies, corporate “restructurings.”
Everything seems uncertain, a struggle. Companies face huge pressures to raise efficiency, increase profits, trim wages and cut prices. Just last week, it was reported that AT&T might cut thousands of jobs from its ailing computer operations. The Left talks as if only Bill Gates and Warren Buffett are getting wealthier in America. This is wrong. But the Right is also wrong when it describes the “market” as a wholly benevolent process in which everyone does fine.
Let’s review major wage and profit trends:
True, wage rates–adjusted for inflation–seem to have stagnated since 1973. But there are two reasons to qualify such numbers. First, most economists now accept that the CPI, used to adjust wages for inflation, overstates inflation. An overstatement of 0.5 percentage points a year (probably the minimum) means wage changes are understated by about 10 percent over 20 years. (Last week, a panel of economists appointed by the Senate Finance Committee put the bias much higher, arguing that the CPI might overstate inflation 1 percent annually.) Second, some income gains have been channeled into fringe benefits. Between 1970 and 1994, fringe benefits and payroll taxes rose from 6.6 to 10.8 percent of GDP. There is one last twist: since 1980, women have done relatively better than men.
So, it seems, we just have to wait. Companies are reinvigorated. As cash flows improve, more funds will be used to bid for new or better workers. Wages will rise, or firms will lose good employees. It’s always worked this way, right? Well, yes. But maybe it won’t quite work this way now. Productivity gains could also go to lower prices. Suppose competition forces firms to make more price concessions. And suppose competition quickens the introduction of better products, which effectively cut prices (more performance per dollar). The result: income gains are often lost in statistics and popular perceptions.
People see fewer large wage increases, the usual benchmark of “getting ahead.” Price cuts are not appreciated, because they are scattered and small. Moreover, price cuts are less and less of the traditional type (the $1 widget reduced to 95 cents). Instead, they’re increasingly customized to meet competitive conditions. Here are some examples: newspaper grocery coupons; car leasing by auto firms; discounts on airline tickets, gasoline or new cars tied to the use of specific credit cards. The CPI captures none of these nontraditional price cuts; nor does it reflect the higher quality of many new products–Windows 95, for instance.
Disinflation and competition, which are good for the economy, conspire to hide its progress. We see and feel the uncertainties and upsets; we barely sense the advances. Prosperity isn’t bypassing most Americans, but it is baffling them.
