Questions About Inflation and Productivity Over Time

Reader Mark Hessel sends a few questions and some answers…


What exactly is the rate of inflation?
I realize that prices are always going up, but shouldn’t inflation be based on some type of average or median income. In other words, shouldn’t the rate of inflation be based on what I can buy for an hour of my work?

The 7th amendment in the US constitution deals with civil law suits.

In Suits at common law, where the value in controversy shall exceed twenty dollars, the right of trial by jury shall be preserved, and no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.

What is $20 dollars worth today as compared to 1800 – quickly checking, it’s about $327. [1] How long did an average US worker take to make $20 in 1800 and how long does it take today to make $327?

I would assume that it took longer in 1800 to make $20 than it takes someone today to make $327 dollars. So in real terms, inflation has gone down since 1800.

Does GDP include money made off the stock market and what does that mean in terms of real growth or productivity increases?
I believe that it should be included in any GDP statement. Money earned. Money taxed.

But, what exactly does money made off the stock market mean? Did it really increase productivity? How does that affect inflation or what my real hourly wages are?

It seems to me that it would create real inflation in terms of wages, my hour of work would buy less because there would be more money with nothing real in terms of output except more money.

Shouldn’t any formula that predicts real growth be dependant on population size and productivity?

I know this sounds a bit Marxists, but isn’t real growth in the world now totally dependent on population size and productivity?

It’s been almost 80 years since a real world depression. The world has integrated into an economic whole. Forgoing a catastrophic world disaster, i.e. global warming, an asteroid, another world war, etc., the world will economically chug along it’s merry way with it’s chaotic ups and downs.

I still think we can screw things up. I think global warming and population growth are huge, but even smaller things may cause unforeseen outcomes.

For instance, I recently heard that China is running into a labor market shortage because of their one child per couple mandate. How is China going to handle that?

What are the consequences of consistently under rating the real inflation rate? (Which is apparently what the FED has been doing since I don’t know when. Wouldn’t this would cause the FED to lose money in the long run. Shouldn’t the FED be
pegging the rate as closely as possible to just above the real inflation rate?)

I’m a bit scared by the current Administration and how economic information is being release to the public. If they were incompetent enough to cherry pick information to go to war with Iraq, if they were deceptive enough to use the Justice Department and apparently most of the other Executive departments for political purposes, why wouldn’t they try to jigger the economic reports


cactus here… this post was by Mark Hessel. I’d try to take a stab at these questions, but I got up way too late. So I’m throwing it open to the readers. Have at it.