'Wage"ing a war on standard of living

A couple of days ago, students in one of my classes discussed the potential for a lower standard of living for their generation. While this is a distinct possibility, the students' argument is that wages in the U.S. will come down due to global competition. However, this does not take into account deflationary pressures on certain goods and inflationary pressures on others, not to mention the policies of the governments. If, in the aggregate, prices come down at a rate that is faster than the drop in income, standard of living might not be unduly affected.
Another consideration is that the U.S. enjoys a standard of living that is not commensurate with the underlying education, skill level and work ethics of the current generation. Like a pendulum that overshoots, the standard of living, often supported by wild credit and binge borrowing, has far out-shot the limit supported by underlying income generation, for the masses. A correction is underway, and it is likely that the pendulum will go the other way. The key question is whether the current young generation has learnt lessons from the past, and whether it is willing to buckle down and work hard and get a solid education. Some of us are trying- we have to wait for more evidence.

Sliding into the Future- Appendix A

* Update 7/21/2008

NYT article "Women Are Now Equal as Victims of Poor Economy" is an interesting read. It states that "Indeed, for the first time since the women’s movement came to life, an economic recovery has come and gone, and the percentage of women at work has fallen, not risen, the Bureau of Labor Statistics reports. Each of the seven previous recoveries since 1960 ended with a greater percentage of women at work than when it began........The Joint Economic Committee study cites the growing statistical evidence that women are leaving the work force “on par with men,” and the potentially disastrous consequences for families."

Another reflection on the past seven years, and an inkling of what to expect in the near future.

* Update 7/16/2008
The WSJ's article, "Retiree benefits take another hit" describes the decision of General Motors' management to "kill" retiree health benefits for salaried workers aged 65 and over.

On NBC, Matt Lauer had a migraine-inducing interview on this topic of retirement benefits with Jean Chatzky. Her brilliant healthy suggestion was that "that the writing is the wall, the companies will continue to do this, and you have to take a very hard look at your budget."

One more data point to support the thesis that the standard of living has to come down. *


Back on April 11, I had made the following forecasts:

#1. The median standard of living of living in the United States will come down 'substantially.'
#2. The role of the US as the world's police force will diminish.
#3. Real Inflation, not the bogus ones reported by governments, will go up substantially.
#4. Significant new business models will come from other countries, along with new managerial systems.

In this post I will put forth the argument for the first forecast.

• Despite the decline in the dollar (nearly 14% decline in the dollar index over the past two years) and the wage appreciation in the emerging economies, the wage differential for skilled workers between the U.S. and the emerging economies is still sufficiently large. Further the supply of skilled workers in the emerging economies is increasing. This will continue to put downward pressure on U.S. Wages for skilled workers.
• Unfortunately, there is no major outcry against the way the U.S. government massages (fudges) reports on labor, unemployment, and inflation. I have written in previous blogs on the way the government creates 'phantom' jobs and distorts the real employment picture. A few commentators, including myself, have written about the serious underestimation of inflation by the U.S. government. Recently, Mr. Bill Gross of Pimco, explained this fact in a well-written article. It is rather simple to prove that the 'normal' operating expenses for an adult in the U.S. has gone up by much more than 5% p.a. over the past five years.
• Nominal wage inflation in China and India (the primary manufacturing and services suppliers) is much higher than 10% p.a. in the relevant sectors. This, along with the local currency appreciation against the U.S. dollar, will continue to pressure inflation in the U.S.- prices of goods and services will trend higher.
• Domestic demand for goods and services in the BRIC countries is trending sharply higher. This creates a significant pressure on the 'supply' side, especially on food and energy.
  

Little to no wage increases in the U.S. + significant inflation + hot emerging market growth = serious decline in median standard of living in the U.S.
While some citizens can maintain their 'normal' standard of living through 'borrowing' this is just pushing pain further out into the future.

Added on 6/11/2008:
Pimco's McCulley: Government Understating Inflation