It All Fits Together If You Know Where To Look
By Mark Wallace
Estimated Reading Time: 5 minutes
During the Gilded Age of 1865 to 1900 — a moniker coined by Mark Twain — the United States was on the gold standard, government regulation was slim to none, federal government deficits were nearly nonexistent and economic liberty was paramount. Consumer price inflation was essentially nonexistent. There was no central bank. And one of the results of all this was that real wages grew by about 40 percent between 1860 and 1890. The country prospered as never before.
Now we have a central bank, we are off the gold standard, we have millions of federal government employees, federal regulations are piled to the sky, and federal government debts and deficits are spiralling up out of sight. And how has the average guy fared after all these changes? Very poorly indeed — real wages per hour for production workers and nonsupervisory employees in February 1973 was $23.24. In March 2019 it was — get ready for it — $23.24. So what all these changes have yielded us is a 46 year period where real wages for the average guy haven’t risen at all.
Since 2019, wages have risen a little, but hardly a windfall (see title chart).
It may seem a bit of a stretch to say that the abolition of the gold standard, federal government debts and annual budget deficits, the existence of a central bank, floods of illegal immigrants providing cheap labor, stagnant real wages, declining birth rates, and the multiplication of government regulations and government employees are all related, but that is the essential fact of the matter: they are indeed all related.
The story begins in the Franklin Delano Roosevelt administration. FDR greatly increased the power of labor through the National Labor Relations Act and other legislation. Unionization of the economy jumped from about 10 percent to about 30 percent. Real wages for the average guy grew. I grew up during the late 1950s and the 1960s. On our block, there wasn’t one mom who had to go to work for economic reasons. The dads were all able to maintain a middle-class lifestyle for their families on just one income.
Then came the Vietnam War. Lyndon Johnson refused to raise taxes or cut expenditures to finance the war. A compliant Federal Reserve was happy to print all the money necessary for war finance. Economists warned LBJ that he was going to create consumer price inflation because that’s what classical economic theory dictated: print money to finance budget deficits and you’ll get inflation. But LBJ didn’t care. The war was so unpopular that raising taxes to pay for it was quite obviously political suicide. Had a gold standard been in effect domestically, the federal government would have run out of money because although you can print greenbacks, you can’t print gold.
And so the inflation came. It continued on and off (but mostly on) for about 15 years, reaching the torrid level of 14 percent by the end of the hapless Carter Administration in 1980. Finally, the Federal Reserve said “enough is enough” and raised interest rates to around 20 percent beginning in the fall of 1979. Interest rates this high crushed the economy and caused a major recession, but inflation was, in fact, brought down in a big way.
There was a problem, though. The medicine of ultra-high interest rates couldn’t be continued indefinitely — it spelled permanent recession, perhaps even depression. Now, classical economic theory tells us that, as Milton Friedman famously said, inflation is always and everywhere a monetary phenomenon. Print a bunch of money to fund budget deficits, and you will get inflation.
Nevertheless, a strange thing happened during the early 1990s and thereafter, all the way down to the 2020 Covid pandemic. The federal government continued to run huge budget deficits, the Fed financed these budget deficits with printed money, yet consumer price inflation remained tame. Using the Social Security cost-of-living adjustments as a proxy for consumer price inflation, we find that inflation remained below 4 percent from 1991 all the way through 2020 (with the twin exceptions of 2005, when it was 4.1 percent, and 2008 when it was 5.8 percent). Indeed, it remained below 2 percent in 1998, 2002, 2009-2010, 2012-2016 and 2019-2020. Yet it is clear that the federal government continued to run huge budget deficits in all these years, with nary a single exception.
So how was this possible? Is classical economics wrong? Was Milton Friedman wrong?
No, classical economics remains correct, and Milton Friedman continues to be right. The answer to this mystery is to be found in the suppression of wages and salaries of average Americans. Keep the average American pinned to the mat economically, and the federal government can continue to run huge budget deficits with full financing from a compliant Federal Reserve for year after year.
Average Americans spend money differently than moguls. Let’s run a thought experiment. Imagine you have $1 billion and you have two choices: (1) give $1,000 to one million average Americans, or (2) give the entire $1 billion to Bill Gates. What are the different economic effects? Average Americans are likely to spend their windfall in the consumer economy, buying big screen TVs, taking a vacation, dining out more often, etc. How about Bill Gates? Is he going to buy a big screen TV? Not likely, he probably already owns as many big screen TVs as he cares to own. No, Mr. Gates will probably invest the $1 billion in some fashion. Now, there will be some leakage on either side: some average Joes will save/invest all or a portion of their windfall, and Mr. Gates may put the money to work in one of his charitable causes where some will be spent in the consumer economy. But you get the picture nonetheless: Americans in the bottom 90 percent are more likely to spend their earnings in the consumer economy than those in the top 10 percent.
So how are average Americans kept pinned to the mat economically? Answer: by importing huge numbers of peons (otherwise known as illegal aliens), thereby reducing wages under the law of supply and demand; by exporting our good manufacturing jobs to China and India; by crippling small businesses with stifling government regulations (note here that big business can amortize the cost of compliance over hundreds or thousands of stores, so the cost of compliance, being lower on a per store basis, enables them to outcompete small business); by creating a large class of government apparatchiks who write these regulations and can be depended upon to support and vote for the Deep State. When times get tough, birthrates decline because people can’t afford having children. This, in fact, happened during the Great Depression. Wages then rise in response to a reduced work force. But this defense of the working class has been stripped by importing illegal aliens to augment the workforce.
Politicians of all stripes love this arrangement, because it allows them to continue to spend like drunken sailors (apologies to all drunken sailors who are not this reckless), to finance their pet projects and to pass out government largesse to buy votes. The whole rotten structure would immediately collapse if we ever returned to the gold standard because then it would be impossible to print money to fund the budget deficits.
It’s highly speculative, but there may be light at the end of the tunnel for the United States. If Trump is successful and real wages for average Americans rise because (1) expelling millions of illegals will put upward pressure on wages and salaries, and (2) high tariffs bring good manufacturing jobs back to the United States from China and India, the normal inflationary effect of such an increase in real wages may be offset by the contractionary effects of (1) firing millions of worse-than-useless government bureaucrats and (2) getting rid of one wasteful government project after another (less government spending in other words).
An important side effect of eliminating economy-crippling government regulations will be a huge boost to gross domestic product. Instead of wasting their time dealing with government apparatchiks like those who killed P’Nut, people can focus their efforts on good, solid work.
Admittedly, it’s a lot to hope for, but perhaps the surge in productivity and the boost to GDP will provide enough cushioning for the United States to return to a balanced budget, to begin paying off the national debt, to abolish the Federal Reserve and to return to the gold standard. If the United States is able to return to the gold standard, the U.S. dollar will remain the world’s reserve currency not just for decades but, in all probability, for centuries.
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Image credit: American Enterprise Institute, other chart Statistica
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