Saturday, August 20, 2011


The race for prosperity

Paul Krugman writes in the New York Times about how populations shifts and lower wages can appear to create jobs locally, but notes that it doesn’t translate into prosperity and doesn’t scale to a nationwide job plan. I agree with his analysis. But I have another question, which I’ll introduce in a sort of roundabout way.

A friend of mine once commented about arcade-game scores. Typically, when you hit a target in an arcade game, you score thousands of points — maybe 1000 for this, 5000 for that, and 10,000 for a big target — resulting in final game scores in the hundreds of thousands, and, for top scorers, in the millions.

Is that really any different from having the targets give you, say, 1, 5, and 10 points, with final scores in the hundreds, or maybe the low thousands? Everything is relative, isn’t it? If we peel three zeroes off of everyone’s score, all players still rank against each other in the same way. It may be a psychological thing to have a score over a million, but in comparison to other players, does it matter in real terms?

Put another way, does adding zeroes to everyone, equally amount any real improvement. The numbers are bigger, but is anyone better off than before?


Now, is it the same with wages, prices, and cost and quality of living?

Were I to get a 10% raise, I’d be happy, of course. It certainly feels great to bring in 10% more money. And, hey, my co-workers are good at what they do also, so they deserve 10% more as well, don’t they? And if my boss is going to give us all 10% more pay, he’ll want that for himself as well.

Before we know it, lots of people are getting 10% raises. How does the company afford to do that? The folks controlling the profits want their 10% too, of course. So that means that prices have to go up. Now the people who work at other businesses, affected by rising prices at the ones that are giving out 10% raises, need wage hikes as well — they want to continue to afford the products and services they’re used to buying.

At some point, everything — everyone’s wages, as well as the prices of everything from food to fuel, housewares to housing to haircuts — is up 10%.[1] And, of course, I’m still doing a great job and I deserve a raise... and the process repeats.

But is anyone better off? Does it matter, when this all accumulates for some years, whether I earn $10,000 a year and a dinner for two costs $5... or I earn $100,000 a year and a dinner for two goes for $50? If renting an apartment has also gone from $200/month to $2000 in that time, and gas, which used to cost 40 cents a gallon, is now $4, has anything changed in real terms? Despite the extra zero in my salary, the extra zeroes in the prices mean that my buying power is the same as it was. And if everyone has gotten that added zero, we’re all just keeping up with one another.

Nothing has changed.

I’m better off for a short time after getting my raise, until everything catches up to me. And that’s assuming I’m on the leading edge of the cycle; the people on the trailing edge of the cycle are always behind, and only catch up at the end, just in time for things to start moving away from them again soon.

The economic cycle is a zero-sum game, at least for the vast majority of the population. It will only ever be the people in control of the top who will make out. The rest of us place ourselves somewhere else in the hierarchy, some of us better off than others, and then, for the most part and with only small variations and jockeying, we’re all just running a perpetual race on stationary treadmills.

[1] In fact, since the people getting the profits also want their raises, the prices need to go up by 10% to cover our raises, plus more to increase the profits. And since our suppliers want raises too, and are raising their prices, our prices have to go up even more to account for that. So the cycle is more complicated than this, but the point is the same.


Brent said...

You ignore a second-order effect...if tax rates are not indexed to inflation, then as everyone moves up the salary curve they break into higher tax brackets or AMT zones and end up losing out. There is a related opposite effect as FICA taxes phase out at higher salaries.

Barry Leiba said...

Oh, indeed: as I say in the footnote, it's more complicated. The complications aren't limited to what's in the footnote, or even what you've added. And that all makes it even less possible for anyone in the middle or the bottom to benefit in any real terms.

scouter573 said...

If you assume that the 10% raise is just for the passage of time, then it leads to inflation as you describe. But if the 10% raise is because you are 10% more productive (or more), then you get more dollars andy your prosperity actually improves. COLA is just for subsistence; raises should recognize increased value.

Barry Leiba said...

Sure, Andy, but performance-based raises and cost-of-living-based raises are usually bundled together. It's also more typical to get a performance-based raise because you're “doing a good job” than it is because you're actually, measurably, n% more productive to merit your n% raise.

Unions often negotiate standard annual pay raises: if you keep your nose clean and do your job, you get the raise, year after year.

And as long as wages mostly keep up with prices, we don't really consider it damaging inflation. We're just all staying even as the numbers get bigger.