The other day I wrote at www.tradingurus.com that the current inflation rate is historically low. That article was geared towards investors, and pointed out that the current administration has a lot more room to give money away to avert the current financial crisis.
By the way, the idea behind www.tradingurus.com is that since American workers are forced to finance the companies they work for in order to retire (that’s what your 401k is), it would be great to have a financial web site that works for the American public and not for the financial institutions. The site is just born, and there is already a number of people trying to help other investors make the best of their money.
Going back to the inflation issue, I showed the following chart showing the periods of high inflation of the 70s, and the current inflation rate which is below the historical trendline.
However, the current extremely low inflation rate, hits Americans much harder than previous higher inflation rates did. Why is that?
The answer is painfully simple, in 1973 24% of the American workers belonged to a Union, in 2006, only 12% did. The numbers among factory workers are even worst, and they dropped from 38.9% in 1973 to 11.7% in 2006.
These numbers count for the increasing gap between the needs and wants of salaried workers and the means to obtain them.
This is based on sound economic principles as follows: The traditional economic theory assumes that salaries will remain high enough for workers to decide to go to work, and if they go too low, workers will refuse to work for that salary. The reality is that for that to actually work you need that the worker has 0 liabilities (no debt), enough savings to endure without work until a better opportunity shows, and there needs to be full employment.
Those ideal conditions seldom exist in real life, and on top of that you have the issue of the individual bargaining power. Let’s see how that works. At the individual level, the theory says that if you don’t want to work for a given salary you can negotiate with the entrepreneur a higher salary that satisfies both parties. The problem with that reasoning is that the entrepreneur, or the corporation, can live without increasing production, but you can’t live without shelter and food. So the individual has no leverage when it comes to negotiate his or her salary.
This is hardly a new discovery, XIX century workers found out that Adam Smith’s theory did not work to their benefit and they created Unions, that gave them leverage and bargaining power. The Unions protected the bargaining power by keeping a strike found that would cover the basic needs of the members during salary negotiations with strikes so the companies could not wait out for the workers to have to return to work in order to avoid starvation.
The current situation, where only a minority of the workers belong to a union that can provide any leverage during wage negotiations, is worsen by the high debt that every individual carries. Today, when you walk out of a job you walk out of your car, home, and life as you knew it.
The following chart shows the ever growing gap between Personal Income and GDP. This shows how the American individual is becoming poorer than the American Nation.
Without the help of an Union no American can make enough
This is no propaganda but a mathematical reality. You may have noticed that the previous chart goes up and up. That is because it is not adjusted for inflation, but that is not relevant now because we are comparing two series of data that are not adjusted for inflation.
The next chart is the exception to the ever rising chart and the mathematical reason you will never make enough money without the help of others.
The sad, dismal, dim line at the bottom of the chart is Americans’ personal savings. It would be bad enough if it were adjusted for inflation, because the levels in 2007 were lower than the levels in 1973, but it is even more dramatic because it is adjusted for inflation. Face it, your parents saved in 1973 almost 1% of their personal income. We are saving 0.04% of it. With that kind of savings it is impossible to afford any period of "voluntary unemployment", which is the traditional economics term for strikes and wall outs.
Before you call Susie Orman to tell her you have been bad, let’s get out of the propaganda zone and let’s see why you are not saving.
The truth is that American workers’ salaries are growing at a much slower pace than the economy as a whole.
The speed at which the economy as a whole grows apart from salaries compensations however, is not constant. The following chart shows the percent of the GDP that salary compensations represented at different times. Lower numbers indicate that the salaries grew less than the society as a whole, and higher numbers indicate that the society grew more harmonically, with employees salaries being a bigger percentage of the GDP.
Amazingly enough, the anti-union government of Reagan shows increased National wealth at the expense of the salaried workers, and more union-friendly governments (like the last Democratic administration) show a healthier participation of the salaried workers on the wealth of the nation.
Although the chart may give the impression that Democratic governments equal equality and Republican governments equal inequality, the reality is not that simple, as shown by the peak of salary participation as percentage of National wealth of 1974 (a Republican presidency). I think that there is also a correlation between Union participation and Union action and salaried wealth (i.e., if you don’t fight for it, nobody is going to give it to you).
So, to answer the question of why inflation hurts so much, it is because you relinquished your bargaining power when you left the Unions.
You may not like the local chapter of your Union, you may not like traditional Unions at all, but you will have to find a way to increase your bargaining power if you don’t want to lose every chance to realistic well being.
Franklin @ February 14, 2008