Real Inflation, A Real Worry?

How is it impacting the people of South Dakota?

People with very good jobs are struggling to get by. Even families with dual incomes are facing financial struggles. The total household debt in the United States is over $18 trillion and the average American family has $105,056 in debt.

Why do Americans have so much debt? Are people just poor stewards of money or are there other issues?

Strangely, when we look at the inflation numbers, there does not seem to be a huge difference between what we would expect the inflation adjusted current wages to be and wages in the past.

In fact, based on the current government inflation numbers, a young person who started their career at $50,000 per year in 1997 would have to start their career at $99,000 today ($1 = $1.98 today). They are probably starting at around $80,000 today, so there is some wage depression, but not enough to put families under significant stress.

However there is something going on behind the curtain. In the late 1980s and early 1990s, Michael Boskin was Chairman of the President’s Council of Economic Advisers (CEA). During that period he changed the way we tracked inflation. He argued that you could make substitutions in the basket of goods that was used to calculate inflation rather than comparing the same items. This substitution made the reported inflation numbers much lower than actual inflation.

While this adjustment was great cover for politicians, it was terrible for the American people. There are some financial sites that do inflation comparisons between the old and new systems. One of the best sites is shadowstats.com. By the late 1990s the new system was in full swing. At this point, the government reported inflation numbers were about 7% lower than the actual numbers (look at the lower graph).

Once we have this information, we can easily understand why people are experiencing financial stress. During the 27 year period, the average annual inflation is 9.47% (2.47% official rate + 7% adjustment to get to rate before the government started hiding things). That means $1 in 1997 is equivalent to approximately $3.88 today, or someone would have to make $233,000 today to have the equivalent earning power of someone who made $50,000 in 1997. WOW!

Even if two people are working they would both have to bring in $115,000 to have the same earning power of one person making $50,000 in 1997. That adds a huge stress to families.

To make matters even more challenging, the cost of university education has been increasing about 2% a year. And public schools have become so bad (60-70% of the kids are not at grade level), that many parents want to send their children to private schools. Private schools can run over $100,000 if someone has their child in the school for primary and secondary school. Some parents have become so desperate that they are home schooling their children (which means one parent is not able to reach full earning potential). Then there are kids activities, family vacations, food, medical expenses, etc.

Given the situation, the citizens need some relief and need it quickly.

The tax load needs to go down substantially, which means the state budget has to be cut A LOT. Then we need to stop subsidizing international students and take care of the kids who grew up here. And companies need to stop importing foreign workers that depress wages. We could easily get companies to make the right decision by forcing them to cover the full cost of foreign/refugee workers and their families - indigent medical care, subsidized housing, subsidized food, public education, transportation, etc. Also, the state must get the public education system under control. We can’t afford to pay $1.6 billion for an education system that is failing our kids.

It’s time for us to move beyond the partisan rhetoric and work together and come up with some real solutions before it is too late. We need to protect our seniors and our kids.