Kash’s post on the latest consumer price inflation news allows us to raise a couple of additional points. Our first graph provides the latest on real wages for production or nonsupervisory workers, which have generally been declining over the past two years as nominal wage increases have not kept pace with consumer price inflation. While most students who have taken a couple of principles of economics classes understand the difference between nominal wage increases versus changes in real wages, apparently John Snow does not:
To which Frank said: “OK, because you’ve got hourly earnings going up 3.8%, and I believe…that’s not adjusted for inflation. So my understanding is that even in the past 12 months, which are your best 12 months, hourly wages have barely kept up with inflation….. But you would acknowledge that 3.8% increase in wages you’re talking about is nominal, not adjusted for inflation, correct? Snow, who has a Ph.D. in economics, was a bit flummoxed at first. “I’ll have to go back, Congressman, and check these numbers,” he said.
Our second graph shows the recent increase in real interest rates, which Kash attributes to the tightening of monetary policy in order to avoid an acceleration of inflation.
The fiscal situation in 2006 is reminding me more and more of the 1966 fiscal situation and the resulting Credit Crunch. As we noted, the economic advisors to President Johnson warned him that continued fiscal stimulus would crowd-out investment. I hope (and suspect) that the Council of Economic Advisors are saying similar things to President Bush. I fear (and suspect) that the President refuses to listen to his own economists. Why? He and his political hacks are too busy telling us his fiscal fiasco is good for long-term growth even though most economists argue just the opposite.