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Who Really Lives on a Fixed Income?

July 8, 2008

Tags Free MarketsMoney and BanksInterventionism

After months of higher fuel and food prices, I would have expected the outcry to happen sooner than the past week. Usually screams of despair about the cost of living come from special-interest groups representing the aged or the poor. But the siren came this time from my 88-year-old father-in-law. When the topic of the economy surfaced during a recent conversation, my wife's father groused how his retirement checks, which include a company pension and Social Security, do not buy what they did just a few months ago. His sentiment echoed those that have been heard repeatedly over the years from the self-appointed spokesman for the elderly. General price rises impose a harsh penalty on those who live on a fixed income. In an almost instantaneous response, my wife shot back that all of us live on a fixed income.

I thought immediately that she was right — but then again, maybe not. As with many falsehoods, the untrue becomes fact when repeated often enough. During our bout of central-bank-induced price rises in the 1970s, it was often spouted how higher prices penalize the elderly, who have no means to offset the higher cost of living. This concept of fixed income would eventually come to include anyone dependent upon a government check for their daily living expenses, even government employees. The corollary of this idea is that those who work in the private sector have the ability, almost at will, to increase their wages or find supplemental income on a moment's notice. Acquiring additional dollars in the private sector becomes merely a function of asking for it.

Though the granting of higher wages or employment rest with the entrepreneur, it is the economic forces governing profitability that ultimately determine the correctness of such decisions. Inputs necessary for production will only be acquired when the benefits derived from the resource exceed its cost; or as we learned in Econ 101, resources will be employed as long as the marginal revenue is greater than the marginal cost. The life span of a company that ignores this elementary concept will be rather short.

History, however, has shown that the disease of inflation does not spread evenly through the economy. One initial effect of expansive monetary credit is upward pressure on commodity and raw-material prices. For businesses, this translates into higher input costs, which also include the price of fuel. If businesses are not able to pass on the full effect of higher raw-material costs (and most cannot), then profits diminish or evaporate altogether. Continuing business operations, therefore, become a function of controlling labor costs either through a direct reduction in wages and benefits or by eliminating jobs.

According to government statistics, approximately 400,000 private-sector jobs have been lost in the last six months. Even as this is being written, airlines, whose bottom lines continue to drift further into the red, are reducing their headcounts by 10%–20%. On the other hand, government employment increased by nearly 77,000 jobs through the first three months of this year.

Contrary to the myth, workers in the private sector have little ability to increase their nominal wages during times of rising prices. But the same cannot be said for the recipients of government checks. Instituted under federal legislation passed in the 1970s, citizens receiving Social Security and Supplemental Security Income get an automatic increase in their checks every December that partially compensates for the rising costs of daily living. Beginning with the cost-of-living adjustment at the end of 2007, the hike in Social Security income has been 2.3%, 3.3%, and 4.1% over the last three years.

Labor contracts that cover government employees also give annual bumps in pay. According to a report released by the American Federation of Teachers, the wage increases for government workers from 2006–2007 in 45 different job classifications averaged 5.7%. A USA Today news story earlier in the year reported that the total compensation for government employees from 2000–2007 had risen by 16%, while their private-sector counterparts lagged behind with an increase of 11% over the same period. With increases in private-sector compensation trailing in comparison to that experienced in government pay, the income gap that once heavily favored the former has all but disappeared.

Making the fixed-income myth even more dubious is the fact that government must confiscate the wealth of the private sector — either in the form of taxation or inflation — to pay for the government-endorsed checks with their cost-of-living adjustments and annual raises. It does not take a mathematical theoretician to realize that the real standard of living of those supposedly on fixed incomes will eventually rise significantly higher than those in the private sector.

But like other government myths, living on a fixed income is not a description of one's financial status. It is merely another passkey to take the wealth of some and put it into the pockets of others.

Today, the 400,000 individuals laid off since the beginning of the year have more than likely experienced a significant decline in income. With more layoffs coming across a wide spectrum of industries, I am sure many of those affected individuals would, unlike my father-in-law, find some solace in a fixed income.

 

 


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