Why the difference? The obvious point is that back in the 70s many labor contracts included cost of living adjustments (COLAs). This in turn partly reflected stronger worker bargaining positions and also real doubts about whether monetary policy would contain inflation. Today, none of that: COLAs are rare, and commodity-price fluctuations don’t feed into wages at all.
That’s right. And if you’ve followed me for any length of time you know that this is why I am resoundingly in the “nope” on the “high inflation” or even “hyperinflation” camp.
Why? Because you can’t get there from here without a way to couple back into wages. And we lack that method. It simply doesn’t exist; not only are there no COLA clauses worth anything nowdays but we now have intentional (and admitted!) distortions in the CPI, including “Owners Equivalent Rent” and hedonic adjustment.
Neither of which is related to what you actually pay, incidentally.
See, the CPI’s weighting is an average for “all urban” residents, formally called “CPI-U”, and the claim is made that about 40% of your expenses are housing, and 15% or thereabouts are food and transport, respectively.
This of course is an average. I, for example, pay dramatically less than that for my housing as a percentage of my income, because I own my home outright. I therefore pay property taxes, hazard insurance and utilities and maintenance (the latter, incidentally, is essentially missing as a sub-category on the CPI-U, and that’s a load of crap – ask anyone what the amortized per-year is on a roof, or a water heater, or a furnace or AC unit. They claim “operations” is 0.8% of income – for a $50,000 income household they claim that the total spend on all such items, from lawn care to maintenance and upkeep of the residence, is less than $500 a year?)
I also pay less as a percentage for my transportation (cost of acquisition at present is zero, vehicle is paid for) and for food.
But I have a well-above-average income.
I remember quite well, however, when I didn’t. Unlike Krugman, Bernanke and the rest of these eggheads I didn’t grow up with a silver spoon in my mouth nor did Mommy and Poppy hand me a Piled-Higher-And-Deeper that I did not have to earn with my own sweat. In point of fact, one of my first “real” jobs paid $18,000 a year programming computers for a little dogcrap company in the 1980s. That was $1,500 a month gross and my apartment rental was $600, or 40% of my gross income. The CPI-U counts “rent” as 5.96% of the weight, or about one-sixth of what I actually had as my real-world “weighting” for expense.
My transportation was a literal $100 car and I carried minimum-legal insurance. Every stop at the gas station stung the wallet, and the stops at the grocery store were worse. 14% of my income for food? Baloney.
The CPI says that I had about than 30% of my income (net!) left after paying for my transportation, housing and food. My wallet said that I had about $40 per paycheck left, or about $100 out of $1,500, enough for me to afford a couple of six packs and a CD or two once in a while, or a movie. I occasionally had credit card companies try to entice into this or that, but I knew that was a trap from which I’d never escape, as I had a literal zero in terms of ability to service debt on my income.
I know there’s a school of thought that believes that the 1970s are coming back any day now. But I haven’t seen any sign of the return of bell-bottom pants, actually good Hollywood movies, or wage-price spirals.
No, what’s coming soon is what’s happened in Egypt. There is no coupling mechanism to wages in The United States any more.
Egypt has suffered a 45% cumulative inflation rate over the last three years. If you applied that to me in the late 1980s when I made $18,000 a year, I’d literally starve and, when my belly growled loudly enough, guess what I’d be very inclined to do?
Krugman, you’re full of crap. Refusal to confront this head-on and put a stop to it isn’t going to lead to the 1970s or some Weimar Germany outcome.
What it’s going to lead to is privation and starvation, and if we are unfortunate, civil unrest or worse.
One would hope that the impacted people, when their belly growls sufficiently, will choose to take out their anger on the eggheads who have argued for the last three years that The Fed and government are “doing the right thing” by forcing them into starvation so as to protect the banks and other well-connected who caused this mess in the first place.
Unfortunately that’s a hopium-laced belief, because history says that when the belly growls and leads to civil unrest or even civil war and revolution that the last thing the crowd cares about is who and what gets sacked.