Yesterday, as is typical on Thursdays, I participated in Backstory on Eric Von's show. I was frustrated - as I often am - about the fiercely held economic ignorance of certain of my co-panelists. They haven't studied the subject and they are proud of it. For guys like Dave Berkman, the idea that the GOP and free markets have ruined the country is a matter of faith. Yesterday I heard that free markets do nothing for anyone except me and my rich cronies. (Note to cronies: I'm working hard for you here. Shake a little my way.)
One of the things that we constantly hear is that the average family can't get ahead. Real wages are stagnant. This has always struck me as about a third of a truth. We can find studies that claim this but many economists have come to believe that the CPI overstates inflation (because the market basket of goods doesn't accurately reflect what people buy) and, although there have been improvements, use of the CPI to generate constant dollars significantly understates wage growth over time.
There is some corroboration for that in what we see around us. Measures of consumption and product quality show substantial increases over time. Although housing is expensive and we have recently seen the subprime snafu, the percentage of households owning their own homes keeps rising and houses themselves keep getting bigger. College education is expensive but more and more people are going.
Having said that, it does seem that the divide between skilled and unskilled labor has gotten larger. When I was in college, the financial return to a bachelor's degree was rather modest. It has gotten much larger. It does seem that it is more important than it used to be that you get an education or otherwise develop marketable skills.
It also seems clear that, particularly over the past few years, compensation increases have increasingly gone to health care benefits. While some of the latter is certainly attributable to the aging nature of the workforce (if you have older employees, you buy more health care), that is not a problem that is going to go away soon.
Finally, there has certainly been an increase in income inequality in the sense of those at the very top of the income distribution gaining more than those below them, although that this comes "at the expense of" those below is certainly not self evident.
These things are worth worrying about, but the assumption that they can be addressed by things like higher taxes, more social welfare, heavy regulation and unionization doesn't prove itself. Europe has all of these things and folks there are complaining about - stagnant wages.
On yesterday's show, certain of my colleagues seemed to suggest that the solution to high gas prices was for the oil companies to make less money. This seems exactly wrong. We tried a windfall profit tax in 1980. It brought in about 25% of what it was expected to and depressed oil production. ExxonMobil's recently announced net profit margin is a bit under 10%. That's good but hardly seems excessive. If we want to encourage investment in new sources of oil and in alternative sources of energy, there has to be prospects for return to capital deployed in pursuit of those things. As the price of oil goes up, opportunities to develop alternatives or to sell things like hybrid vehicles will present themselves.
We could, of course, tax away those profits and have the government seek these alternatives, but the market - disciplined by consumer demand - is far more likely to develop the best alternatives than legislators who are disciplined by rent seekers. Put the solution in the hands of the government and you get ethanol - a product that is chosen not because consumers demand it but because those who want to supply it are politically powerful.