Looking Glass Economics

LOOKING GLASS ECONOMICS….The Federal Reserve, we are told, is likely to be disturbed over the fact that average hourly wages are down this year:

Of concern to those watching the report for signs of inflation, the average hourly wages rose 0.5 percent to $16.70. That was more than the 0.3 percent increase forecast by economists.

….The wage gain also represents a 3.9 percent year-over-year rise, the biggest gain in that measure since June 2001. That could be seen as being inflationary, and could prompt the Federal Reserve to keep raising interest rates in an effort to cool the economy and keep prices in check.

Sorry, did I say down? Yes: inflation over the past 12 months has clocked in at about 4.1%, so a 3.9% rise in nominal wages is a decrease in real wages. This is the “wage spike” the Fed is supposed to be concerned about.

Riddle me this: if the Fed tries to put the brakes on wages every time they creep up from negative to zero, what will hourly wages look like over the long term?

Answer: consistently down. Which is exactly what they’ve looked like over the past several decades.

The overall economy is doing fine. Growth is strong, productivity is strong, corporate profits are strong, CEO compensation is stratospheric. There’s plenty of new wealth being created. The problem is that financial markets and the Federal Reserve are bound and determined to make sure that none of this new wealth makes its way into the hands of the middle class. That’s why, in our looking-glass world, a real wage decline of -0.2% is described as an increase.