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“The Fly-in-the-Ointment” -> Stagnant Wages & Hidden Inflation

Economics / Wages Sep 01, 2016 - 11:10 PM GMT

By: John_Mauldin

Economics

FRA Co-founder Gordon T. Long discusses with Charles Hugh Smith about stagnating wages and high real inflation rates, using the IRS tax reports as a guide to real economic activity, and the likelihood of future tax increases.

WHY WAGES HAVE STAGNATED

“The statistics we rely on are becoming more and more suspicious.”

Statistics are now used for perception management rather than reflecting the real economy. Of all these statistics we’re relying on to reflect reality, some of them are really suspect. We’re trying to stick with the ones that are valid. GDP is flawed but still our bellwethers, and we’re still relying on FRED database.


When you look at stagnant wages, two things pop out: GDP has continued to go up and the economy’s expanding, so wages and employment should be expanding as well. Productivity has also been rising until recently.  We would expect that wages and employment would be rising at the same rate as productivity and GDP, but what we find out is that wages for the bottom 95% have stagnated.

The GDP increases and the increases in productivity are not flowing through to the bottom 80%. They’ve actually lost purchasing power in their wages. The top 5% have done really well, and the middle sector has stayed even. There are huge disconnects.

PURCHASING POWER IN DECLINE

For the last 15 years, we see wages stagnating for declining for all but the top 5%.

“Our standard of living is falling. We’re working harder, longer hours for less in real disposable income.”

Spending in the bottom 95% has been flat for the last decade. The top 5% are skimming a good percentage of the productivity gains.

“I think that’s the best and only valid way you can reach an estimate of inflation: take a basket of goods and test them in the same metropolitan area over the years.”

As consumers see lots of evidence that inflation is running higher than 1%, we start wondering why the official statistic is suppressed to 1%. The answer is that the system would break down if that 7% was reveals as reality.

The bottom 60th percentile can’t afford to buy, even with cheap interest rates and rents are going through the roof relative to their salaries.

Both the charts from Dollar Tree and Dollar General are talking about how tough business is, and that it is a serious issue for the bottom 80%. Their biggest sellers are bread, eggs, and milk. The basics staples are where people are now going to buy them, because they can get them cheaper. They’re talking about the items being hit by by price hikes: rent, food, healthcare, taxes. Rather than raise the price by 15%, they’ve cut the amount by 15%. Regardless, it’s still a 15% loss in purchasing power.

FALLING TAX REVENUES

Tax receipts are falling across the board. We’ve lost so many small businesses, and the jobs that go with them. The chains have consolidated dramatically, but put all the mom and pop stores out of business.

“We’ve lost some 770,000 net losses of small business since 2000. That is crippling to the economy, and that’s where the bottom 60% have worked.”

The United States is not alone in suffering from statistics that are being gamed. China had the same problem – people started looking at the statistics for electricity consumption because that was a more accurate gauge of economic activity than the obviously phony GDP statistics the government was issuing.

“There’s always a way to get a better statistic, but it has to be outside whatever the official government agencies can manipulate. In the United States, the one thing you can’t manipulate is the IRS tax statistics.”

Everyone that reports to the IRS reports the facts because it’s not worth their time to try any gimmicks. These are as accurate statistics as we can get. These numbers can’t be gamed like GDP and the numbers we know are rigged.

TAX INCREASES COMING IN THE FUTURE

Major tax increases are coming. There’s no question. Hilary’s already mentioning it, Trump’s already mentioning it, they know it has to come: at the state level, at the federal level, and it’s going to be at the local level and it’s going to be property taxes. It’s happening in the US already.

The government is not collecting more taxes, but the cost of running the government is going up at a significant rate. Every time in the past that tax receipts fell to the zero line, the United States was in recession. So what we’re talking about here is a recessionary economy where people are suffering a stagnant or declining household income, and their taxes are going up if they owe any taxes at all.

“Even low income people have to pay sales tax – if you jack up sales tax, everybody pays that. Even the people who were barely getting by.”

JUNK FEES AND CIVIL FORFEITURES

There’s so many fees, licenses and tolls that you have to pay; that’s where the tax is coming from, not just on income. Even police fines have gone through the roof. These are extremely aggressive forms of taxation. These are regressive taxes that hit the lower income households a lot harder than the upper income households.

If you look at these charts, a lot of people are suddenly going to be classified as “rich”. There’s going to be surcharge on the upper middle class, and you can argue that it’s justified, but we’re likely going to see a double whammy: higher regressive taxes that everyone has to pay in the form of junk feels, and higher income and sales taxes as well. So it’ll be a tax increase across every form of taxation. There is no alternative. The government is going to get the revenue however they can.

They’re actually seizing assets and you have to prove that they were wrong to get your assets back, which can take a long time. The police departments are a revenue source now in many areas. They’re gambling that people will miss something, and they’ve got the assets. And you may not get it back.

“What we’re talking about here is a vice that’s slowly squeezing the households. We’re seeing stagnating income, hours cut, hidden inflation that’s eating away at our purchasing power at a far greater rate than 1%, and we’re anticipating a lot higher taxes across the entire spectrum of fees and taxes because we can see that government tax revenues aren’t rising anymore.”

As there’s more and more pressure on the government to sustain itself, it has to resort to more and more aggressive stances like this. There’s a lot of very good people in all levels of the government that feel like they have no choice, especially where there’s a lot of underfunded pensions that they have where they have pension obligations and no money to meet them.

“If taxes are declining, that means households and businesses are making less.”

Karan Singh karan1.singh@ryerson.ca

Sarah Tung sarah.tung@ryerson.ca

Charles Hugh Smith is the author of nine books on our economy and society, including A Radically Beneficial World: Automation, Technology and Creating Jobs for All;Resistance, Revolution, Liberation: A Model for Positive Change; and The Nearly Free University & the Emerging Economy. His blog, oftwominds.com, has logged over 55 million page views and is #7 on CNBC’s top alternative finance sites.

Gordon T. Long
Publisher - LONGWave

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Gordon T Long is not a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. Of course, he recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and barring that you are encouraged to confirm the facts on your own before making important investment commitments. © Copyright 2013 Gordon T Long. The information herein was obtained from sources which Mr. Long believes reliable, but he does not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that Mr. Long may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website. Mr. Long does not intend to disclose the extent of any current holdings or future transactions with respect to any particular security. You should consider this possibility before investing in any security based upon statements and information contained in any report, post, comment or suggestions you receive from him.

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