Monday, August 02, 2004

Elizabeth Warren's and Amelia Warren Tyagi's book The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke is still on my list of to-do summer reading. Now that August is here, I really need to get to it! The basic argument is that the American middle class is spending all its income (and then some) on housing, education and medical expenses, desperately trying to retain its middle class lifestyle in the midst of incredible inflation.

Of course, the story of runaway inflation is not one you hear very often in the US these days. Core CPI is running now at an annual rate of just 1.8% and as recently as January at a mere 1.1%. That deflation scare was just last year, after all. And yet, allow the General to diverge from his basic deflationista argument for just a moment to make a point about social class in America.

The Wal-Mart economy runs on ultra-cheap commodities for the masses, and it has delivered. According to BLS figures, since 1956 the real price (deflated by CPI) of commodities in the US has declined 29%. Since the start of Clinton's first term they are down a full 11%.

Of course, Wal-Mart a middle class lifestyle does not make. While the real price of commodities has steadily declined, the real price of middle class stalwarts like medical care and education have skyrocketed. Over the same period that commodities fell 29%, the real price of medical care has risen 138%; since January 1993 the cost of medical care is up 19% in real terms. The story is more of the same in education, the cost of which is up a whopping 43% in real terms since January 1993. And when it comes to house prices? According to the Office of Federal Housing Enterprise Oversight, the average house price in the United States since Clinton came into office is up 31% in real terms. Over the last 11+ years, real compensation (ECI index) for white collar workers is up only 12%; white collar wages and salaries up just 9%.

No wonder the American middle class is getting the blood squeezed out of it. There is serious inflation in the American economy. You just won't see it at Wal-Mart.

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