Is This the Best We Can Do Mr. Greenspan?

Economists are more arrogant than weather reporters. They not only try to predict the future, they attempt to control it. But like all things humans try to control, the real world is far more complicated than our limited understanding of it. When their plans don’t work, they stand back, smoke a cigar and write a book.

Thank you, Alan Greenspan. After 18 years of expanding the money supply that recently financed the turn of the century tech bubble and the greatest housing inflation in history, you’re saying that we are all in for a prolonged recession with double-digit interest rates and no growth (USA Today). The main reason Greenspan gives is that Chinese labor is growing more expensive so (dangerous) stuff from China is going to cost more at Wal-Mart. Unfortunately, I am not making this up. He said this is to Lesley Stahl in the interview for 60 Minutes (cbsnews.com).

It is time to break this economic myth that labor costs are the primary cause of rising prices. It’s become patriotic to restrain wages by any means. But it’s not. In fact, it makes us all weaker. This faulty thinking has led to a world of unrelenting economic insecurity for the typical American. Males between 25 and 34 earn 17% less than their fathers did. The average American household sees $2000 less in real income than they did in 1975 and that’s with more people per household working longer hours! (economy.com).

Meanwhile, low real inflation is a tragic myth. In the 1990’s budget pinheads in Washington decided to change the way we calculate inflation to avoid cost of living hikes in social security. This is a serious deception. They overweigh any price that declines and don’t count prices that rise on the most important things (financialsense.com). Just open your eyes. The inflationary price of assets has exploded on all the things that matter. The house I bought for $40,000 in 1975 sold recently for over $500,000. This is a three bedroom, two bath 1960’s tract house bomb with tar covered compressed cardboard sewer pipes. That’s a 350% increase in real dollars. College tuition is up 300% in 25 years. We spent $1.79 per gallon for gas 5 years ago. Is today’s $3.00/gallon gas any better? Or does it just cost more? Yes, inflation is really low for hamburgers and CD players because we use Illegals to make our food and Chinese peasants to make our electronics that keep our wages right where they need to be. Meanwhile real inflation is raging on all the things that matter, and we may be headed for a big fat recession. And we’re supposed to think this is the best we can do?

Much of this is unnecessary. Real inflation is mostly caused by bad economic policy, special interest tax and trade policy, and a host of other myopic leadership blunders. The biggest thinking error of all is to think the labor costs is the primary cause of inflation therefore it is a national goal to keep labor costs low. The real cost of goods and services is mostly driven by waste. It’s everywhere. All the non-added-value materials and effort that go into building, manufacturing, unnecessary shipping, inventorying, packaging, and handling only add cost. Eighty percent of the raw materials and energy consumed to make a car are not in the final product. A typical 3000 square foot home can easily be constructed in 30 days if the work and materials are organized. How many homes are built in 30 days? The music industry makes more profit per song (about 60 cents) from an itunes download than a CD that they manufacture, package, ship, unload, and stock, while another layer of retailers handle, sell and put it in a plastic bag so you can spend time and gas driving back and forth to the store. So why do music companies, and builders, and car manufacturers do what they do? Because they’ve built their business models on assumptions that are no longer sustainable. Every industry has its bad habits. But please don‘t blame inflation on labor. Inflation is the product of leadership. With new leadership and new thinking we can invent ways of making and consuming that lower costs and raise living standards everywhere.

In the meantime, we are not powerless. All of us have suffered from creeping inflation in our own lives. Our old habits may cause us to spend time and money on activities and stuff that no longer add value. We all know the greatest compensation in life is not money or stuff. It’s loving friends, enriching experiences and satisfying service. So the real question for each of us is, “What thinking habits are enticing me to waste time or money on things that don’t enrich me? What new priorities, activities and experiences would bring lasting satisfaction?” As we look to a bumpy future, these personal choices will have a lot more impact on our well-being than some arrogant economist who actually stimulated inflation and blames us for wanting a piece of our own productivity. Get even. Live well.

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