28 April 2019

Milton Friedman: Understanding Inflation

Milton Friedman, one of the greatest economists of the 20th century, explains inflation in simple terms that anyone willing can understand.

In case you were wondering the breakdown of Bob Crawford's tax situation, we can use a nifty inflation calculator to find out just how much he's being screwed.

Wages between 1972 and 1978 did not keep up with inflation*, and Mr. Crawford's buying power was lower even though he was making more. His wages did increase from $12,000 a year to $18,000 a year, an increase of $6,000 nominal dollars. However, adjusted for inflation, he was making just under $1,000 less in inflation-adjusted dollars. $12,000 in 1972 would be equivalent to $19,000 in 1978. While his company (which was in bed with the politicians, just as they all are today) did give him more money to make him think he was getting ahead in life, they conveniently gave him less in real terms than he was making before he had gotten the raise. Governments and corporations are demonic bedfellows. And, as if that wasn't enough, he was kicked into a higher tax bracket because his on paper earnings were higher.

Also, $18,000 in 1978 is equal to $70,000 today, and $12,000 in 1972 is equal to $73,000 today. The average wages for tool and die (Bob Crawford's profession) today is $49,000 a year, only 2/3 of what the equivalent job paid in 1972. Nominal wages may have quadrupled, but real wages have been cut nearly in half.

*Wages have not kept up with inflation to this day. In fact one study from the Pew Research Center indicates that real wages have been stagnant for the past 40 years.