It's wages stupid!

Over the last several years gasoline prices have doubled, so has the cost of bread, and a ticket to the movie. When the government reports changes in prices they are frequently adjusted for improvements. Take the movie - the government adjust the price for improvements in technology or comfort, regarding labor – it is adjusted for productivity. These adjustments are deflators, or they reduce the actual change in cost.

Another fallacy - the items we use on a daily basis are stripped from reporting inflation. 4th quarter 2007 with toilet paper, food and energy added back in inflation was 6%. Add the cost of non durable goods back into inflation and it is much greater than reported.

Actual wages have been under reported by productivity gains. Productivity gains are great indicators of corporate management ability to produce more with less. But it diminishes the compensation done by those fewer employees by paying the same for more work or output. The beneficiaries are those who are compensated by profitability.

In the previous two periods of time the stock market marked time for 15 to 20 years were marked by periods of above average wage inflation. I submit we are in just a period where the middle and lower wage-earners wages will begin to rise in order to catch up with unadjusted/actual inflation rate. During these periods wages rose 3 to 6 per cent per year.

The current debate over stimulus for the consumer/economy will only be solved when the consumer has liquefied his balance sheet by an increase in wages and a reduction in debt. The debate between dems and conservatives is on how this be done. Raising wages or by a redistribution of wealth, which shall it be? Both will slow the economy, the question is will we have a bigger government or a bigger economy during the next up cycle?