F.I.C.A., Inflation and the Middle Class Squeeze

“What’s this F.I.C.A.?” said my son.  He was home from college (in 1992) and was deconstructing his first pay stub from his summer work at a local nursery.  F.I.C.A., which everyone knows is the payroll tax that feeds the Social Security and Medicare trust funds, was larger than any deduction on the stub.  Such are the travails of a 19-year-old working for minimum wage.

The tax is very regressive.  It penalizes low wage earners more than high wage earners as it takes 7.5% of every dollar earned up to $117,000 each year.   It’s only one of the ways in which middle class taxpayers are hurt more than those at the top and bottom.

The poor receive government benefits in the form of the Earned Income Tax Credit, Medicaid, Section 8 housing and food stamps to keep them afloat.  By the time your earnings get to around $35,000 annually, most of that is phased out.

At the top, the wealthy can lower their tax bill though a variety of credits and deductions associated with owning assets, like stocks and real estate.  Those factors typically don’t help the middle class as much.

The middle class squeeze is about more than just taxes though.  It’s about inflation.

We keep hearing that inflation is under control.  And, the numbers don’t lie.  Overall inflation has been running well below the Federal Reserve’s target of 2% for years now.  However, as the cost of manufactured goods has been going down, the cost of essential services has gone up a lot!  Here’s a chart from the liberal think tank Center for American Progress (CAP) that illustrates the problem very well:

Which of these services can you forgo?

Meanwhile incomes are dropping in real terms.  This chart compiled by Mother Jones using data from the US Census Bureau shows the trend going back to 1967 and indicates that 2012 median income is about the same as it was in 1989.

Politicians on the left and right are now talking about the middle class and I suppose that’s good. But, what are the solutions they propose?  It may be too soon to tell how the President and his Republican opponents in Congress will define the battleground.  However, it’s easy to predict that it will be more of the same standoff.

CAP proposes a long list of solutions reminiscent of the 1960’s before globalization and automation stripped good paying factory jobs out of the US economy. These include raising the minimum wage, strengthening unions, improving education, reforming healthcare and realigning factors leading to more equitable home ownership.  

Will a return to the policies of the Great Society work in the 21^st Century?

For their part, Republicans haven’t come up with a viable alternative – or any alternative other than lowering taxes and reducing the deficit.  Both are attractive but unlikely to trickle down to the middle class. 

But, if these policies won’ t work, what will?

It’s hard to know for sure.  However, I would favor those that provide opportunity through programs that would likely defy the dogma of both the left and the right. We can encourage the growth of high paying, blue-collar jobs in industries like energy and manufacturing through deregulation and subsidies. We can reform the tax code so that the burden falls less on employers and employees than on those who profit from asset appreciation.  And, rather than imposing huge tuition costs on those who might graduate without needed skills, we could provide support for technical skills demanded by the market. 

Moreover, capitalists – those who believe in a society built on opportunity rather than welfare – must find a way to ensure that the middle class can share in the benefits of our system.

WHO WILL LEAD?

If you can't score a touchdown, move the goal post

Have you bought any food lately?  How about gas?  Have you filled up your tank?  Of course you have.  And, it’s getting a bit more expensive, isn’t it? 

Take a look at this chart of inflation over the last 70 years.

So, why do we keep hearing that inflation is under control? 

Listen carefully the next time you hear it.  They’ll say, “Core inflation excluding volatile food and fuel prices” is under control or something like that.

If you can’t score a touchdown, move the goal post. 

There’s more.  The chart above shows the Consumer Price Index (CPI) which is the measure of inflation we have all grown up with.  However, the boys and girls over at the Federal Reserve have decided to use Personal Consumption Expenditures (PCE)as a measure of inflation (starting in 2000).   Here’s how the two compare.

So, what’s the difference?  In simple terms, the CPI measures the change in prices of a fixed set of goods and services – bread, clothing, gasoline, etc.  The PCE fiddles with that calculation a bit.  For example, if you bought a new computer a few years ago for $800, you got a certain amount of processing power, memory, ports to plug stuff into and so on.  If you spend $800 today for a new computer, you would get more of all that stuff.  Or, to put it another way, buying the same processing power etc. today as you did a few years ago costs less.  PCE averages that lower cost of the same features into its index holding down this particular measure of inflation. 

The Full Employment and Balanced Growth Act of 1978 established two goals for the Federal Reserve:  reducing unemployment and reducing inflation.

If your goals included holding down inflation like the Fed Chairman, wouldn’t you prefer to use PCE?

If you can’t score a touchdown, move the goal post. 

In fairness, a lot of economists think PCE is a better measure inflation.  But, out here in the real world where the cost of gasoline and food has been moving up steadily over the past five years or so, I don’t really care what they think.

So, what should we make of all this?

Perhaps the best perspective is provided Dylan Grice, author of the Edelweiss Journal.  He tells us “inflation is not measurable”.  He tells policy makers that “trying to control a variable you can’t measure (inflation) with a tool you don’t fully understand (money) in a complex system with hidden, unobservable and non-linear interrelationships (the economy) is a guaranteed way to ensure that most things which happen weren’t supposed to happen”. 

And, when was the last time the government’s forecast for economic growth came true?

WHO WILL LEAD?

Don't Send Your Kids to College

Everyone from Occupy Wall Street to those who occupy the White House have noticed the widening of the gap between rich and poor.  It has fueled resentment throughout the country beginning with the TARP bailout of the Too Big To Fail banks and the tone-deaf tendency among its recipients to continue to pay multi-million dollar bonuses to their executives.

There will always be people who get rich on Wall Street. The problem isn’t that bankers make too much money and the solution is not for the government to redistribute wealth. 

The greater challenge is the economic prospects of the middle class.  A new study by the Organization for Economic Cooperation and Development (OECD) concludes, “with manufacturing and certain low-skill tasks increasingly becoming automated… the demand for information-processing and other high-level cognitive and interpersonal skills is growing”.  Throughout the 23 industrialized economies included in the study, “literacy, numeracy and problem solving skills” are lacking.  By now, we shouldn’t be surprised that the United States ranked 21 out of 23 in these critical skills. 

A few weeks ago, I wrote about manufacturing in the United States (The Ford Fusion and How the Media Got It Wrong (Again)).  I cited a study by the Boston Consulting Group (BCG) that projects that the US will again be a global center for manufacturing due to lower costs of labor, energy and transportation.  But, it’s not a bed of roses.  Among the risks cited by BCG is the skills gap among American workers. 

But, what skills are we talking about?  Yes, it’s true that our primary and secondary schools are failing us.  But, would fixing that problem solve the larger problem of a skills gap?

Don’t look to the government, the school board or the teachers’ union for the solution.  If you’re the parent of a school aged kid, the place to look for a solution is the mirror.  Start by second guessing an ingrained assumption.  Sending your kid to a four-year college will not guarantee him or her a good job.  College grads now handle our customer service complaints, check us in at the Marriott and help us setup our iPhones in the Apple Store.  None of those jobs are high paying nor are they the first step on the corporate ladder to the executive suite.  And, they don’t pay enough to raise a family or pay off student loans.

To solve the skills gap, we need to expand our idea of what constitutes an education.

Corporate executives can find all the engineers, financial analysts and marketing professionals they need by sending their recruiters to the top universities.  And, they do.  There is a well-established process by which this type of recruiting has been taking place for the last 60 or 70 years.  So, if your kid is an A student, by all means, send them to the best university you can afford. 

But, finding employees with the skills to support computer networks, assist on a medical research project or operate a CNC machine is a greater challenge.  None of these professions truly require a four-year degree.  They require technical skills coupled with a work ethic and personal habits valued by employers. 

The answer to this challenge will spring bottoms up from companies working with local governments and institutions like community colleges. 

In Texas, Houston Community College provides training and certification to work on oilrigs to satisfy growing demand in the energy industry.  In Minnesota, Anoka-Ramsey Community College works with local manufacturers to provide the specific training needed to work in a modern factory -- geometric dimensioning, process control and measuring tolerances.  A non-profit institution, Corporate Voices for Working Families has developed a set of best practices – a blueprint, if you will – for employers to work with local colleges and community colleges with a goal of increasing employment among graduates.

College tuition is increasing 8% per year, well more than inflation and certainly more than real wages, which have remained flat for more than a decade.  Parents are right to question the value of a degree that leaves them or their children saddled with debt.  But, we shouldn’t expect the solutions to come from Washington or the state capital.  Industry will drive the demand for training and education to close the gap.  Competitive enterprises will develop the programs to satisfy their needs.

It all starts with the students, the job seekers.  They must take responsibility for demanding the skills necessary to get a good job with strong career prospects.  They must have the support of those who pay most of the bills for their education – their parents. 

Blaming institutions of government for their failures will not get your kid a good job.  Taking responsibility for the outcome, discovering what employers want and getting the training and education you need, will.

WHO WILL LEAD?