Building an Economy that Works for Everyone

Looking past the banking crisis: Stagnating real wages (Part 1 of 3)

Guest blogger: Stan Sorscher, Seattle, WA

Part 1 | Part 2 | Part 3

America is focused on our banking crisis, the deepening recession and the trillion dollars demanded from taxpayers to avert even worse problems. We should look ahead to the recovery. What policies and mechanisms will restore prosperity?

Conventional economic wisdom failed to appreciate the $8 trillion housing bubble, the Ponzi scheme of financial derivatives, de-industrialization of our economy, and over $6 trillion in trade deficits since NAFTA and the WTO. Instead, we were alternately bullied and cajoled to trust “competitiveness” as the key to market solutions that would solve all our problems.

Let’s look at the record.

After the oil crisis in the early 70’s, prevailing wisdom shifted from policy solutions of the New Deal and the Great Society to market solutions. Milton Friedman was transformed from a crank to a visionary. Milton Friedman’s market-driven philosophy went by many names – supply-side, trickle-down, Reagonomics among others. The basic elements were smaller government, de-regulation, free market policies, dismantling social safety nets and tax cuts for the wealthy. That policy shift actually began in the Carter administration with de-regulation of airlines.

Stagnating real wages

We often hear that wages have stagnated for 30 years. Figure 1 visualizes that statement. Productivity has increased steadily since official record-keeping began. Real wages rose in proportion through the post-war period, but in the mid-70’s wages abruptly stopped rising.

Real wages are the nominal wages received by workers adjusted for inflation. The inflation adjustment takes into account cheap goods from China, improvements in computing technology, and various other lifestyle changes. So, even taking into account that we can buy Pocahontas pajamas at Wal-Mart for $7.88, our incomes have not improved since the mid-70’s.

The prosperity gap is significant and noticeable. We have lost about half our potential rise in standard of living over those 30 or 40 years.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of the Economic Opportunity Institute.

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