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Is the Fed Stealing our Productivity?



April 19, 2011 – Comments (0)

Author: FreeMarkets's CAPS Blog

If there is one thing business leaders know, it is the importance of productivity.  GE knows this well, and their previous CEO Jack Welch commented on productivity often.  According to Welch, "A single percentage point increase in productivity translates into an extra $300 million of pretax income."

It is not just economic theory, but common sense, that productivity increases the over all standard of living.  Even the ancient empires knew this - the more productive their agricultural sector, the more people could be devoted to building roads, buildings, the arts, shipping and commerce, etc.

In fact, without increases in productivity, there is no increase in the standard of living.  But we haven't seen our standard of living increase in the past twenty years.  In fact, our children are most likely facing a decrease in the standard of living.  Has productivity gone NEGATIVE?! No, it has not.

So if productivity is still increasing and the standard of living is going down, the culprit has to be someone is stealing the productivity of workers for their own benefit.  And here I will argue that the theif is the Federal Reserve - and I'll show you EXACTLY how much they have stolen.

In 1914, just one year after the FED was created, an entrepreneur named Henry Ford began paying his workers $5/day.  These weren't college educated workers, they may not have even been high school graduates.  They were what we would call the working class.  Today, a working class UAW worker at GM or Ford starts at $112/day.  Add in benefits that the 1914 worker didn't get, and you are up to approximately $130/day.  Now even the least financially savvy American will say "Things cost more today than back then."  So we do a quick Google search on the web and find out that $5 in 1913 bought the equivalent of $111.70 today. After all, that inflation calculator looks pretty authentic. So the average person says, things are about the same today as they were back then.

Of course, we're not the average person, and we know that productivity should make things cost less, not more.  If productivity pushes price DOWN and monetary devaluation pushes prices UP, then the DIFFERENCE between the two is INFLATION!  For example, if I magically created a method that drops the cost of producing everything by 50%, but someone doubled the monetary supply and prices stayed exactly the same, inflation is not 0%, it is 100%.  If you "Got it" then move on.  If not, re-read.

Now a day laborer in 1800 received $1/day.  About 114 years later, Ford had jumped that wage to $5 day.  That's a 500% increase, but who cares if inflation eats away your earnings.  Now back to another calculator (NOTE: I don't use gov't number after the changes made to the inflation indicators post 1970, but before then, the gov't actually compared item for item) - this one shows that what you bought in 1914 actually cost 40% less than it did in 1800.  Not only were workers making MORE in 1914, but stuff cost a lot less.  This FORD worker had almost 9x the earning power of his great grandfather.  The productivity of the American economy was changing the nation.  A vibrant middle class was emerging even for Americans who lacked formal training and schooling.

100 years after the Federal Reserve, the FED likes to say $20 today buys what $1 did in 1913.  But THEY HAVE CHANGED their inflation calculations (e.g. swapping margarine for butter).  According to it takes nearly $50 today to buy the exact same things that $1 bought in 1913.

We remember from earlier that inflation must take into account both the increase in prices AND productivity gains.  According to this source, the American worker can produce 10x more than they did just 100 years ago.  So what cost $1 in 1913, without monetary devaluation, would cost 10¢ today, yet EVEN according to the FED, it costs $20 - according to statistics that match item for item it costs $50.

So we can have two calculations - one, the FED's own inflation numbers which would show they have STOLEN EVERY PENNY of our productivity gains of the last 100 years, or we can use which would say they have stolen EVERY PENNY and taken another 60¢ of every dollar earned - thus the REDUCTION of our standard of living even WITH TWO household incomes.

Unfortunately, I can not only blame the FED.  Bureaucratic red tape, the confiscation of money for the welfare/warfare state, has created a gov't that is now 25% of our GDP (in terms of spending).  That should be well UNDER 2% for a Constitutional gov't, and I would argue 40¢ of the 60¢ money stolen from workers is not due to monetary devaluation, but our gov't (remember the FED is a private bank).

CONCLUSION: Workers made 5x more in 1914 than in 1800 and there buying power through productivity and earning power increased 8.6x.  This under a sound monetary system (yes, there were a couple of periods where money was not sound - Civil War, 2nd National Bank).

Today, workers are making the same wage as in 1914 (according to gov't figures), and 60% less according to figures where the EXACT same products are purchased.  Yet our workers are 10x more productive than they once were.

The FED has stolen your PRODUCTIVITY!

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