Learning About The United States Economy

It all started when I posted a question on Facebook:

Is it true that America wouldn’t need a $15 minimum wage if there was no inflation?

I stated that “$1 in 2020 had the purchasing power of $6.43 in 1971” based on the chart at Value of one US dollar in the United States 1635-2020 – Statista. Thanks to William Betz for correcting my wording: “The chart is probably accurate, but you said it backwards. $1 in 1971 would buy what $6.43 would buy today.”

A number of people also pointed out that as of March 2021 America has near-zero Inflation, so purchasing power was not affected. Then a Living Wage was recommended as a better alternative to minimum wage.

…the AFL in 1886….The American Federation of Labor (AFL), proposed a general living wage that adequately supported a family and maintained a standard of living higher than the 19th-century European urban working class.

Steve Funk

Living Wage

• What Is a Living Wage? – Investopedia: A living wage refers to a theoretical income level that allows an individual or family to afford adequate shelter, food, and other basic necessities. The goal of a living wage is to allow employees to earn enough income for a satisfactory standard of living and to prevent them from falling into poverty.
• Living Wage – Wikipedia: A living wage is defined as the minimum income necessary for a worker to meet his or her basic needs. Needs are defined to include food, housing, and other essential needs such as clothing.

What stands out:

1. “The living wage will vary by family size and the cost of living in a particular city or location.”

Takeaway:

Q: What if I’m a family of one and live in Skid Row, Los Angeles county?
A: Move to Beverly Hills and have children.

2. [Regarding minimum wage] “As of March 3, 2021, the federal minimum wage remains at $7.25 per hour and has remained at that level since 2009. Indeed, this hourly rate hasn’t kept up with the cost of living since the late 1960s.

“In 1968, the federal minimum wage was $1.60 per hour but had a constant dollar value of $10.75 per hour.”

Takeaway:

I leaned about Constant Dollar value, “which accounts for the effects of inflation…”

What is a Constant Dollar?

A constant dollar is an adjusted value of currency used to compare dollar values from one period to another. Due to inflation, the purchasing power of the dollar changes over time, so in order to compare dollar values from one year to another, they need to be converted from nominal (current) dollar values to constant dollar values.

Looks like inflation is always fucking with purchasing power.

Why does my rent keep getting increased every year if, as some say, America is at near-zero Inflation/Consumer Price Index (CPI)? Rent on the rise: Sacramento on nation’s top 10 list of rent increases

Rent increase in Sacramento is a result of a shifting remote workforce that no longer has to work nearby their place of employment. Your perspective is that rent is increasing because you live in a location that is in high demand right now. Alternatively, those that are living in certain parts of the bay area are seeing decreases in rent because of increased vacancy. The entire country “on average” is at near zero CPI, doesn’t mean Sacramento is at zero.

Steve Nguyen

My reply: I think what you’re saying is: inflation and CPI are completely separate from supply and demand housing factors.

A $15 min wage does not solve for inflation. Inflation is the culprit.

“A loaf of bread in Berlin that cost around 160 Marks at the end of 1922 cost 200,000,000,000 Marks by late 1923.” Hyperinflation in the Weimar Republic

From 9 Common Effects of Inflation – Investopedia

• Inflation erodes purchasing power or how much of something can be purchased with currency.
• Because inflation erodes the value of cash, it encourages consumers to spend and stock up on items that are slower to lose value.

Inflation in the news

“Powell cautioned that as the COVID-19 vaccine rollout continues, the Fed could see signs of rising prices amid surging consumer spending. But the Fed chairman noted that he does not expect higher inflation to turn into anything resembling the double-digit inflation of the 1970s.”

“…worried about whether or not unprecedented stimulus from the Biden administration will drive inflation quicker than the Fed expects.”

Fed Chair Powell: Fed will be ‘patient’ on keeping easy money policy – Yahoo! News – March 4, 2021

CPI, Inflation, and Purchasing Power

It’s good to observe how the ingredients are intertwined.

“Consumer Price Index (CPI) is an economic indicator. It is the most widely used measure of inflation.

“Additionally, it can be used to value a consumer’s dollar to find its purchasing power.”

Consumer Price Index (CPI) – Investopedia

Inflation vs. Consumer Price Index (CPI), How They Are Different – US Inflation Calculator:

I always knew inflation existed. Duh, the cost of a cup of coffee goes up over time. But I never knew how inflation was determined. Neat to see how “…the Consumer Price Index is a factor in determining inflation.” Inflation is directly derived from the change in CPI of two different years, say 2014 vs 2013.

Then I learned about the controversy of Cost of Goods (COG) VS Cost of Living (COL) to determine Consumer Price Index (CPI), resulting in different rates for inflation.

“The Controversy: Originally, the CPI was determined by comparing the price of a fixed basket of goods and services spanning two different periods. In this case, the CPI was a cost of goods index (COGI). However, over time, the U.S. Congress embraced the view that the CPI should reflect changes in the cost to maintain a constant standard of living. Consequently, the CPI has evolved into a cost of living index (COLI).”

Why Is the Consumer Price Index Controversial? – Investopedia