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Fletcher: Lower value of ‘real’ dollars

February 26, 2013
The Alpena News

Let's talk about real rates of growth - ones where we subtract the rate of inflation from the published rate of GNP or GDP growth to see where we are in "real" dollars.

I remember discovering a labor contract from 1948 and the top rate of pay was 48 cents per hour. Today the rate for that work is around $25 per hour and it's about the same buying power in a week's pay as 48 cents was in 1948.

According to published reports the average national income has dropped nearly $4,000 annually over the last four years to $50,000. To understand the real loss, we have to subtract about 8 percent more for four years of inflation at approximately 2 percent each year. Thus, your real buying power is $46,000 in 2008 dollars.

When we couple this "real" income with the fact that in the face of general prices for gasoline and food actually outstripping average inflation, we quickly understand our dollars aren't going to stretch as far as they used to. Housing prices are down nationwide. Locally the newspaper has printed stories about how the City of Alpena has had property tax receipts drop precipitously due to lower valuations, thereby impacting government spending.

Survey after survey states that the major problem seen by everyone is the economy and jobs, yet the discussion in Washington involves gun control, gay marriage, and immigration. It's almost as though someone is trying to distract us from looking at government expenditures as a problem. If there is a smoke-screen going up, then what's behind it?

After four years of near zero percent interest rates that have torn apart every pension plan in the United States, the Federal Reserve Board is now thinking that monetary policy is not working. Normal fiscal policy calls for a tax decrease in such a situation, yet we just increased taxes by $160 billion. Remember that in economic theory, the expenditures by government are an expense on the economy. Growth in the economy comes from the private sector because all the government does is redistribute the money. Redistribution of income is a stated goal of President Obama.

I went to Wal-Mart the other day for some ammunition. Being a shooter, I am always on the lookout for a deal. Cheri and I shoot about 6,000 rounds each year at clay targets and, being of Scottish extraction, thrift is important.

I was disappointed in the selection and asked the clerk in back of the counter if the store was going to discontinue selling ammunition. To the contrary, she said the store was very much in the ammo business but each time she received a new shipment someone would come in and buy all she had in the varieties in which the customer was interested. She said it was even worse now with talk of gun control. The last time shortages happened, she said, was when President Obama first was elected.

Uncertainty like that is distorting the economy. Folks are hoarding items they think might become scarce, thus accelerating purchases and perhaps, pricing. Consumers are scared and it impacts their purchases.

I mentioned that pension plans are having a difficult time with their funding in this period of governmentally mandated low interest rates. The reason for this is a little obscure, but it basically has to do with the rate at which the assets of a pension plan can earn interest in order to cover the benefits outlined in the plan. If rates are lower than inflation, as they are now, the plan cannot earn enough to cover the proposed benefits at retirement. It's like the building I built eight years ago. I can sell it for what I put into it eight years ago but the money that I would receive would not buy as much as it did at the time of construction.

Monetary policy has failed pretty much all of us in the last four years. What a relief it is to hear rumblings at the Fed that this endless non-stimulus is about to end.

 
 

 

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