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Denying Inflation: Who, Why, and How

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Mason Gaffney, Georgist Scholar and Author by Mason Gaffney

Professor Mason Gaffney*, the commonly acknowledged leading Georgist of our day, gave me permission to republish this article from 2007. It is particularly timely now that the rejiggered CPI is about to deny Social Security recipients a second year of no COLAs.

Henry George foreboded that landowners might take a growing wedge [1] of the national "pie", or product. Labor's wedge might grow absolutely, as the whole pie grows, but still fall as a fraction. [2] It might even shrivel.

In our times, George's grimmer scenario is coming true. Since about 1975, labor's wedge of the pie is shrinking as an absolute. "Real" wage rates have been falling since about 1975. "Family wage" used to mean a breadwinner's wage high enough to support a family; now it means the combined wages of two adults. Many of these are "DINKS" (Double Income, No Kids) because that is all they can afford without cutting their customary material and educational standards.

What is this "real" wage rate? It is a ratio: the nominal money wage rate on top, divided by an index to the Cost of Living (COL) on the bottom. The higher the COL, the lower the real wage. Landowners cut into labor's share from both the top and the bottom, because the COL includes many products of land (like building materials and energy) and land itself (like homesites). Shelter costs are by far the largest part of household budgets.

The standard index to the COL is the Consumer Price Index (CPI), calculated and published regularly by the Bureau of Labor Statistics (BLS). This index is, we will see, a political football.

Henry George said little about inflation because it was not a threat in his day. That was a time of "hard money" and the gold standard. Prices were stable or falling; Deflation was the great bugbear. Today, though, to check on George's forecast, we have to distinguish between nominal money wages, and real wages.

An old Kingston Trio classic offered the following folk wisdom about survival in The Everglades: "If the skeeters don't gyitcha then the gators will." If the skeeters of life are nicks taken from money wages, the big gator now is the price of buying and owning a home.

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Why deny inflation? Those in power have several reasons to understate rises in the cost of living (COL), measured by the CPI.

1. To mask the fall of real wage rates. This is supposed to placate working voters. It is supposed to support orators declaiming that our standard of living is ever rising, and we should all feel good. Actually, real wage rates have fallen steadily since peaking in about 1975. That is using the official Consumer Price Index (CPI) to measure rises in the COL. If the CPI understates rises in the COL, real wage rates have fallen even faster than the data show.

As a by-product, this denial of inflation supports those who like to dismiss George as a false prophet of doom.

2. To mask the fall of real interest rates, making savers and lenders feel better, and more willing to lend to governments. In this age of massive and growing federal debts, the U.S. Treasury depends on willing lenders more and more, to stay solvent.

3. To cut the real value of social security payments. This point is straightforward. These payments are also indexed to the CPI. If the CPI understates the COL, real social security benefits fall every year. Congress gets to spend the savings on wastes like Alaska's "bridge to nowhere", redundant imperialistic ventures, tax cuts for major campaign contributors, and no-bid contracts for the well-connected.

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4. To cut rises in labor union and other wage contracts that are indexed to the CPI. The Federal minimum wage, like most state minima, is also indexed to the CPI.

5. To give the Federal Reserve Bank credit for having "tamed inflation", when in fact inflation of land prices is running wild.

6. A lesser point today, but important before Congress leveled out the rise of tax rates with income, is to slow the rise of income tax brackets. That is because these brackets are indexed to the CPI. That is, when the CPI rises by, say, 5%, the income level at which you pass into a higher tax bracket also rises by 5%. Congress, briefly in a reasonable mood, enacted this sensible provision when enough people became aware that they were victims of "bracket creep". Bracket creep is when inflation boosts your money income into a higher tax bracket, although your real income has not risen.

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