Ezra Klein reproduces two charts from the Center for Budget and Policy Priorities showing that the real income of the upper quintiles is rising dramatically faster than those of the lower quintiles.

These gains are impressive, indeed.  But not exactly surprising.

After all, the bottom quintile is bounded.  Some significant percentage of them have no taxable income at all.  And welfare benefits don’t count as income for tax purposes.   The top quintile, meanwhile, is essentially infinite.

In 1979, most people knew the names of every single billionaire on the planet; there were only a handful of them.  There are more billionaires in India now than there were in the world then.  The United States had thirteen as late as 1985.  And then it started to explode — we had 99 a mere five years later.   We’re well over 700 now.  That’s going to skew the numbers a bit!

But, remember, these are inflation-adjusted numbers.   So, the poorest quintile has seen an 11 percent gain, the middle quintile a 21 percent gain, and so on.  In real terms.   And that’s not accounting for the fact that the cost of luxury goods, especially electronics, have plummeted and that things that were either luxury goods — or the stuff of science fiction — in 1979 are now commonplace even in the lower strata.

And, of course, there’s significant social mobility.  To be sure, there’s a wide gap in what the poorest of the poor and the richest of the rich can do for their children.  But, outside perhaps the top and bottom five percent, these economic strata aren’t a caste system.

Really bad news on the jobs front:

The nation’s unemployment rate bolted to 8.1 percent in February, the highest since late 1983, as cost-cutting employers slashed 651,000 jobs amid a deepening recession.

Both figures were worse than analysts expected and the Labor Department’s report shows America’s workers being clobbered by a wave of layoffs unlikely to ease in the coming months.

“There is no light at the end of the tunnel with these numbers,” said Nigel Gault, economist at IHS Global Insight. “Job losses were everywhere and there’s no hope for a turnaround any time soon.”

Not much to say to that.  A few months ago, when the economic mess was mostly confined to the financial sector, most of the hand-wringing seemed over the top.  The stock market and other indicators were bad news, of course, but the core indicators that directly affect most people — interest rates, inflation, and employment — were still excellent.

Now, we’ve got record low interest rates, inflation remains quite low — indeed, there’s talk of deflation on the horizon — but truly worrisome numbers on the jobs front.  One hesitates to put much stock in forecasts, given that nobody seems to have any idea what’s going on, but I fear Gault is right.

Michael Kinsley has a rather rambling column about the “upside-down economics” of the stimulus plan that’s subtitled (or, whatever one calls the SEO-driven title tag that appears at the top of the browser and in search results) “Recession Economics – How Do We Repay the Stimulus Spree?”

But even if the stimulus is a magnificent success, the money still has to be paid back. The plan of record apparently is that we keep borrowing, spending and stimulating, faster and faster, until suddenly, on some signal from heaven or Timothy Geithner, we all stop spending and start saving in recordbreaking amounts. Oh sure, that will work.

There is another way. If it’s not the actual, secret plan, it will be an overwhelming temptation: Don’t pay the money back. So far, even as one piggy bank after another astounds us with its emptiness, there have been only the faintest whispers about the possibility of an actual default by the U.S. government. Somewhat louder whispers can be heard, though, about the gradual default known as inflation. Just three or four years of currency erosion at, say, 10 percent a year would slice the real value of our debt — public and private, U.S. bonds and jumbo mortgages — in half.

Anyone who regards the prospect of double-digit inflation with insouciance is either too young to have lived through it the last time (the late 1970s) or too old to remember. Among other problems, inflation works only as a surprise or betrayal. It can never be part of any public, official plan. Plan for 10 percent inflation, and you’ll get 20. Plan for 20 and you’ll need a wheelbarrow to pay for your morning Starbucks. But if that’s not the plan, what is?

I don’t know whether this is a plan, secret or otherwise, but it’s a strong possibility.  We’re basically printing money at an extraordinary rate and spending it out of any relation to income.  Inflation is a natural consequence.

Story via Memeorandum. Image via Solicitor Bulgaria.

Harry Brighouse expounds on the novel argument that maybe what we’ve dubbeed “grade inflation” is really a legitimate response to increased quality of work from the students rather than a lowering of standards on the part of the professors.

Could the students really be more talented? Well, think about the Ivy League schools, which while most of them still practice affirmative action for the children of their alumnae, do it much less than they used to. It is hard to imagine, for example, even a legacy student as weak as now-President George W Bush was at the time gaining admission to Harvard or Yale or any other elite college today, as he did (to Yale, admittedly) in 1964. Nor do most top universities practice affirmative action in favour of men, as they used to (at least, not as much as they used to). In fact, the talent pool from which they can draw has expanded massively, because for a while they admitted women on an equal basis with men, and even now they only put a thumb on the scale for men so that the sex ratios aren’t too severely skewed. The “Gentleman’s C” which both the 2004 Presidential candidates were awarded by Yale in the 1960’s is reputedly a thing of the past, but that is because of the absence of the gentlemen who were awarded them.

Could the students really be better prepared? Here are some possible reasons why they might be. In the past 40 years the mean number of children born into upper middle and upper class families has declined, enabling those families to invest more in each of child; the women who are now eligible for admission have been socialized to be ambitious in academic and career terms over that time. These are also reasons for finding it plausible that students are harder working, at least at elite (top private, and top public) institutions, than they used to be.

It is not even inconceivable that they are better taught, even if it is self-serving for me to say so. The academic job market is much more open and much more competitive than it was 40 years ago, when people routinely got jobs where their friends were without open searches.

I think all that’s likely true for students at top universities, which are more selective even than they were a quarter century ago when I was entering college.  On the other hand, having taught at several less prestigious institutions, I can attest to both very low student performance on basic skills such as writing as well as very high pressure from deans and the educational bureaucracy to award grades indicating acceptable performance.  A much larger portion of high school students go to college now than half a century ago.  And, Flynn Effect or no, we’re not producing kids who are college material at a rapidly accelerated rate.

There are also practical considerations.  Untenured professors are keenly aware that their continued retention is determined, in part, by evaluations by their students.  Being an easy grader improves evaluations.  Further, giving good grades minimizes the time one has to devote to dealing with students coming to the office whining about their grades — or appealing to department heads and deans, who are going to be annoyed at having to deal with the complaints.  That’s especially true at a research institution, where the prime goal is to find time to do productive research.

Brighouse also engages in a longish and interesting consideration of what grades are for, anyway, and argues that those who get got grades aren’t necessarily “meritorious,” merely gifted and lucky enough to be in the right environment.  Undoubtedly, there are those who simply skate through based on outstanding natural talent.  Most, though, still have to do the work to earn good grades.  Or, at least, they would if not for grade inflation.

Photo by Flickr user Eric McFarland under Creative Commons license.

Barry Ritholz calculates that the various government bailouts under way amount to $4.6165 trillion dollars.  To put it in context, he shows the cost of some other government expenditures you might have heard of:

• Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
• Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
• Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
• S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
• Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
• The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
• Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
• Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
• NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

Of course, we don’t know the costs of not doing the bailouts, so it’s still possible that it’s worth it.  Still, a hell of a lot of money.

via Kaimipono Wenger

President Bush isn’t alone in being unpopular: Congress is down to 14 percent approval, the lowest in the history of the Gallup poll. While the approval numbers are the worst ever, there is a silver lining: “The 75% currently disapproving of Congress is just shy of the record-high 78% in March 1992″

Lydia Saad calls these numbers “extraordinary.”

Approval of Congress has fallen below 20% only six times in the 34 years Gallup has measured it. Including the latest reading, four of those have come in the past year: in July, June, and May 2008, and in August 2007. The two additional readings were from March 1992 (in the midst of the House bank check-kiting scandal) and June 1979 (during an energy crisis that resulted in surging gas prices and long gas lines), when either 18% or 19% of Americans approved of the job Congress was doing.

The most recent decline comes almost exclusively from Democrats, whose approval of Congress fell from 23% in June to 11% in July, while independents’ and Republicans’ views of Congress did not change much. As a result, Republicans are now slightly more likely than Democrats to approve of the job the Democratic-controlled Congress is doing (19% vs. 11%).

Emphasis mine.  That, more than the low overall approval ratings, is simply stunning.  It gets better!

The 11% of Democrats now approving of Congress is slightly lower than Gallup found in 2006, toward the end of the Republican-led 109th Congress. Democratic approval of Congress initially surged after the Democratic takeover of the U.S. House and Senate, from 16% in December 2006 to 44% in February 2007, but by August 2007 it had fallen to 21%. Democrats’ approval of Congress rebounded to 37% later that year, but has since been in a nearly continuous decline.

Yes, Democrats were happier with the Republican Congress that got thrown out on its ear in 2006 than they are with their own leaders in charge!   Presumably, this is an artifact of greater general dissatisfaction with the state of the country than with Reid, Pelosi, and company per se.  Still, an absolutely amazing finding.

Saad makes two other very interesting points:  President Bush’s numbers seem to have a floor of about 28 percent because of “a core group of Republicans nationally who continue to stick by him” and that “Congress may simply be less able to engender this kind of political loyalty.”  She ends with this depressing observation:

Finally, 2008 now looks an awful lot like 1979, and for some of the same reasons: mounting inflation, record-high gas prices, and a looming recession. Public approval of President Jimmy Carter in mid-July 1979 was 29%, very similar to Bush’s current 31%. And approval of Congress was also comparable: 19% in June 1979 vs. 14% today.

Frankly, it doesn’t feel like 1979 to me.  Inflation is higher than it’s been in years but it’s still low by 1970s standards and unemployment and interest rates are much, much lower.  Gas is ridiculously expensive but we don’t have long lines or rationing.  We’re sort of being held hostage by Iran again, albeit in a much less palpable way.

Another huge difference between now and then is that the incumbent president isn’t eligible for re-election. The question is whether Barack Obama will be able to make his “John McCain is a third Bush term” meme stick or, to keep a strained analogy going a bit, whether McCain can instead successfully push the “Obama would be a second term for Jimmy Carter” theme.

In commenting about John McCain’s budget plans, Matthew Yglesias threw out this comment:

Given the present circumstances, I can’t think of any good reason for a presidential candidate to be promising to that we’ll be at balanced budgets in four years. It would be nice to see the deficit on a decreasing trajectory rather than an increasing one, but achieving short-term balance isn’t necessary or even necessarily desirable.

While it’s true that a balanced budget probably isn’t possible in the next four years, getting the deficit back on a decreasing trajectory is an absolute necessity. Why? Because it’s one of the easiest steps we can take towards strengthening the dollar, which as of today is now trading at an all time low against the Euro.

A weak dollar right now is part of the cause of high oil prices, and is causing a cascading effect of higher prices everywhere else in the economy, too. Wholesale prices rose 1.8% last month alone, and are up 9.2% over the past year. When you consider that the U.S. is a large net importer of goods, it’s impossible to think that a weak dollar isn’t behind this rise in prices.

Now, with our credit markets in crisis, the last thing this country needs is for foreign investors to get scared off by a weak dollar. As this excellent post at Information Arbitrage explains, we need those investments if we’re going to carry through this problem in the credit markets, and that ain’t gonna happen if investors don’t have confidence in the dollar.

One of the best ways to stengthen the dollar and bolster U.S. credit is to show that we can get our spending under control. In other words: we can cut spending and put ourselves on a trajectory towards a balanced budget. Alas, this is Presidential campaign season–which means that all investors can see right now are promises of tax cuts and spending increases from both candidates.

That’s not the message we need to be sending.

Image: Market Preview blog.

UPDATE: One thing that needs to be made clear, as my colleague Dave Schuler points out in the comments below, that part of “balancing the budget” means we need to stop accounting federal expenditures as “off-budget.” It’s easy to make it look like you’re doing something about the deficit when you “don’t count” large expenditures. The reality is that ALL federal spending needs to be in balance with ALL federal income, period.

Two articles cited in today’s Small Wars Journal roundup have almost nothing to do with wars, small or otherwise, but are nonetheless interesting in showing the state of flux of some key international institutions.

Steven Erlanger reports on a bold attempt to forge a “Union of the Mediterranean” which would be something of a minor league for the European Union.

Perhaps the grandest new idea of France’s president, Nicolas Sarkozy, looking to give his presidency of the European Union a lasting stamp, is the Union of the Mediterranean. An effort to bind the 17 nations bordering the Mediterranean Sea with the European Union around regional projects, the new union will be inaugurated next week at a Paris summit meeting.

But as with some of Mr. Sarkozy’s other ideas, the execution has been haphazard. The Union of the Mediterranean has created resistance among vital allies, like the Germans and the Spanish, and confusion within his own government. The result may be more show than substance.

Peter Alford reports on the emergence of what would be a radical transformation of the G8.

The largest, most expensive gathering of world leaders under the G8 banner convenes today confronted by an awesome array of problems, from runaway oil prices and scarce food to flaring inflation and global warming, but with little prospect of real breakthroughs on any front. Failure this year could call seriously into question the viability of the Group of Eight industrialised nations, a 33-year-old gathering originally of the top Western powers, struggling now for relevance against huge shifts in the world’s political and economic geography.

That shift will be underlined when the “Plus 5″ developing nations issue for the first time their own communique after meeting the G8 leaders on Wednesday at the Windsor Hotel, the luxurious and now heavily-secured summit site on Lake Toya, in Toyako, near here.

Since the 2005 Gleneagles summit, China, Brazil, India, Mexico and South Africa have met annually as the “G8 plus 5″ with the chief summiteers, the leaders of the US, Japan, Britain, Germany, France, Italy, Canada and Russia. But because of their rising economic power, their huge hunger for energy and food and their critical role in deciding a new climate change regime – or not – after the Kyoto Protocol expires in 2012, the Plus 5 communique will carry as much weight as G8 statements.

The summit situation also gives force to calls from France’s Nicolas Sarkozy and Britain’s Gordon Brown, lately joined by Canadian Prime Minister Stephen Harper, for the eight to be expanded to a G13 with the emerging powers as full partners. This idea is strongly resisted by Washington and Tokyo, the Japanese apparently fearing further dilution of their claims to Asian leadership if China gains a seat.

The addition of Russia, a major regional actor but an economic lightweight, to the group in the 1990s opened a Pandora’s box that may be impossible to close. Certainly, China, Brazil and India have stronger claims to membership in the elite economic club than Russia although, I must confess, what Mexico and South Africa are doing on the list eludes me.

Both of these developments — potential breakthroughs in long emerging trends — point to the continual reshuffling of the world order. Attempting to confine major international institutions to its charter members excludes those who now merit membership and who could contribute the the organization’s goals. Opening the window for new members, however, threatens the interests of existing powers in the institution whose ability to steer policy would be diluted.

Ann Dunwoody has been nominated for a fourth star, making her the first woman to achieve that rank in American history.

“This is an historic occasion for the Department of Defense and I am proud to nominate Lt. Gen. Ann Dunwoody for a fourth star,” said Defense Secretary Robert Gates. “Her 33 years of service, highlighted by extraordinary leadership and devotion to duty, make her exceptionally qualified for this senior position.”

[...]

The Army Material Command handles all material readiness for the Army. During her career, Dunwoody has been assigned to the 82nd Airborne Division, 10th Mountain Division and the Defense Logistics Agency. She served with the 82nd Airborne in Saudi Arabia during the 1991 Persian Gulf War.

Honestly, I didn’t know that AMC was a four-star command. Indeed, while that’s a huge task, it strikes me as odd that it is; it’s part of an overall trend toward rank inflation in the armed forces. Neither George Washington nor Jack Pershing ever wore a fourth star.

Regardless, this is a historic appointment. CNN’s rundown of firsts shows how amazingly recent all of them are:

The first woman to become a general officer in the U.S. armed services was Brig. Gen. Anna Mae Hays, chief of the Army Nurse Corps, who achieved the rank in 1970 and retired the following year. Elizabeth Hoisington, the director of the Women’s Army Corps, was promoted to brigadier general immediately after Hays. She also retired the following year. Maj. Gen. Jeanne M. Holm, the first director of Women in the Air Force, was the first woman to wear two stars, attaining the rank in 1973 and retiring two years later. In 1996, Marine Lt. Gen. Carol A. Mutter became the first woman to wear three stars. Mutter retired in 1999.

Currently, there are 57 active-duty women serving as generals or admirals, five of whom are lieutenant generals or vice admirals, the Navy’s three-star rank, according to the Pentagon.

Truly remarkable.

Photo: Military Logistics Forum

UPDATE: An emailer points out that AMC “has been a four star position since shortly after its creation in 1962, when it was first commanded by LTG Frank Besson, who was promoted to General in 1964. It has been commanded by a four-star general since that time. I believe that among the major commands of the US Army, only three have more personnel than AMC–Forces Command, Training and Doctrine Command, and US Army Europe.”

I’m sure my biases on this matter were formed as an Army lieutenant twenty years ago; I’m not sure I’d ever heard of AMC. Further, my sense has always been that the “real” four-star commands were regional combatant commands like EUCOM and CENTCOM that oversee operational forces. It always struck me as overkill to have a four-star in charge of office workers.

School vouchers is an idea I’ve supported ever since I first read Capitalism and Freedom in 1989. It’s an idea so simple, and sound, that it’s a wonder it hasn’t been embraced. Yet here we are, forty-six years after CaF was published and choice hasn’t caught on (except when dismembering a fetus) and is even reviled by most of the American public (I can’t find the source, but a few days ago I read that close to 60% are against vouchers, no doubt reflecting teachers’ unions’ well-funded opposition).

In fact, people in Washington D.C., like House Del. Eleanor Holmes Norton are trying to strangle a pilot program in its crib:

On Tuesday, a House Appropriations subcommittee is set to take up provisions in President Bush’s budget for $18 million to continue the five-year-old D.C. Opportunity Scholarship Program for next year. It is part of an unprecedented $74 million earmarked for education in the District. In April, Mr. Fenty and D.C. Council Chairman Vincent C. Gray appeared before the House subcommittee on financial services and general government to speak in support of the initiative, which gives low-income students scholarships to attend private schools. Ms. Norton is not a member of that subcommittee, but she made a special appearance to attack the program.

Even worse, as The Post’s Valerie Strauss and Bill Turque reported Monday, it now turns out that Ms. Norton is preparing a plan that could end the program after just one more year. Ms. Norton won’t discuss her plan, and she would, rather disingenuously, have the public believe that she is acting only to ensure an orderly transition of students from a program doomed because of the opposition of others in her party. But, at best, by refusing to support the mayor, she is helping to doom a program that gives poor parents an opportunity that others in this country take for granted: the chance to choose a decent school for their children.

For parents such as Patricia William, that means the probable loss of an educational opportunity that has transformed her 11-year-old son. Ms. William is not alone in her praise of the program and in her panic about the possibility of its demise. The voucher pilot is intended to measure and compare children’s progress in private schools over a span of several years. But one result already is known: Poor parents do not want their children automatically consigned to failing schools any more than middle-class parents would. Talk to parents and grandparents of children afforded what should not be the luxury of choice and you’ll hear stories of thanks and success — stories of young women such as Tiffany Dunston, this year’s valedictorian at Archbishop Carroll High School. Ms. Norton turned a deaf ear to these accounts during a recent meeting, dismissing the scholarship families as “befuddled.” Catherine Hill, whose grandson graduated from the Academy for Ideal Education, told us that the only thing the group doesn’t understand is why Ms. Norton “hates a program that works so well.” (Her response to this editorial is here.)

The depth of the opposition to school choice has convinced me that a new approach is needed, though my proposal is a long shot at best. It is modeled on welfare reform and would involve breaking up the Department of Education and releasing the money to the states as performance-based block grants.

For instance, the almost $60 billion dollars in discretionary spending that was used to fund the DoEd this year could be allocated among the states and each individual block grant could be broken into thirds: one-third for construction of schools, purchase of books and computers; one-third for augmenting teacher pay; and, one-third for performance improvements. The data collection functions of the DoEd could be moved to Health and Human Services, along with administration of the block grants.

Whatever happens, something different needs to be done. Inflation-adjusted, per-pupil spending on education has more than tripled since the mid-1960s and we have very little to show for it. Time to try something new.

Prof. Hamilton has an interesting post that argues that we are now seeing another oil shock like we say in 1973-74 (oil embargo), 1978 (Iranian Revolution), 1980 (Iran-Iraq war), and 1990 (first Persian Gulf war). Prof. Hamilton notes that in all cases the run up in oil prices was followed by a recession. Now, using recent data we see that we are again facing a very similar run up in oil prices.

However, when oil prices started to rise again five years ago, many of us suggested that things would be different this time, in part because the price was rising much more gradually and so should be less disruptive of consumer spending patterns. Others emphasized that, despite the price increases, oil was still cheaper than it had been historically if you took into account inflation. However, once you include the most recent data, neither of those claims would still be true.

Another reason consumers had been largely shrugging off the oil price increases of the last few years is that they could afford to do so, since energy expenditures had fallen so significantly as a fraction of total income. However, as a result of rising oil prices, that, too, is no longer the case.

Prof. Hamilton compiles additional evidence that the price of oil is possibly coming to a turning point. The dollar value of U.S. crude oil consumed as a fraction of GDP, the number of vehicle miles traveled, the consumption of gasoline, and the sales of SUV. All of these time series point in the same direction: consumers are reacting to the run in the price of oil, and in a way that could be lead to a recession. He also notes that Continental, Delta, United and American Airlines are all cutting jobs in response to higher oil prices. Factor in the problems in the real estate/housing market and it doesn’t bode well for the economy.

Joseph Altonji, Prashant Bharadwaj, and Fabian Lange observe that, despite increasing economic incentives for people to obtain college degrees, the percentage of people graduating high school and college has been declining. They note several studies showing the high correlation between college attendance and parental educational attainment.

They conclude,

At this point we can only speculate as to why the response in skills to the increase in skill premia is so small. It is possible that for many young adults the economic incentives for acquiring skills are less important than the non-pecuniary costs of skill investments. For these young adults, a change in the economic incentives to invest into skills might therefore induce only a small supply response. Another plausible explanation is that young adults are liquidity constrained or myopic in their investment decisions for other reasons. If this is the case, they might forego valuable investment opportunities in order to protect their consumption while young. This explanation would, for instance, be consistent with a number of studies (e.g. Kane (1994), Dynarski (2003)) that find that schooling decisions are quite sensitive to direct costs of schooling and tuition subsidies. The importance of liquidity constraints is controversial, however. Cameron and Taber (2004) is one of a number of studies that finds that liquidity constraints are not important for explaining schooling decisions.

Research summarized in Cunha and Heckman (2007) suggests that part of the explanation might be that parental investment during early childhood shapes the potential to acquire additional skills later in life. Parents might not have responded to the increase in labour market returns, perhaps because they were not fully aware of the large increase in the returns to skills or because their children’s labour market success might not be the primary motivating factor in determining the time and resources they devote to their children.

Brad DeLong summarizes the research: “Altonji, Bharadwaj, and Lange do not know.”

Tyler Cowen quips, “I can only conclude that Altonji, Bharadwaj, and Lange have never taught Introduction to Composition to a large group of freshman in a public university in the United States. Anyone who has taught such a class — or for that matter talked to anyone who has — will have some inkling why more people are not going to college.”

What’s not covered in the research summary, are two rather obvious trends: immigration and rising tuition costs.

First, a new surge in immigration, especially from less developed countries, surely skews the calculations. If kids are more likely to go to college if their parents have, and we’re increasing the population of less educated parents, this seems quite plausible.

Second, the cost of college is skyrocketing. While the return on a college degree may be increasing, the initial investment is going up tremendously. The state teaching college where I obtained my undergraduate degree two decades ago now charges $5070 annually for tuition. That’s still a relative bargain. But it was a mere $800 a year when I graduated. Adjusting for inflation, it should now cost only $1442.13. So, the cost has jumped 350 percent in real dollars. My strong hunch is that the value of a college education has not similarly appreciated in the intervening years. Surely, the changes the calculus?

David Leonhardt argues that, despite the belief that the Consumer Price Index understates inflation, the opposite is really true. The problem, he contends, is that everyone is keenly aware of rising prices but most people are oblivious when costs go down.

In 2003, a pound of hamburger cost all of $2.20. More than two decades earlier, in 1980, it cost $1.86, which means that the nominal price of burger meat rose only 18 percent over a period in which the nominal hourly pay of the typical American worker rose 150 percent. Similar stories can be told about eggs, bananas, bread and frozen orange juice. Food was getting cheaper relative to everything else, as Neil Harl, an agriculture professor at Iowa State University, explained to me, because of a combination of government subsidies, global trade and the rise of industrial farms.

During the 1980s and 1990s, though, did you ever stop and marvel at what a small share of your paycheck you were spending at the supermarket? I didn’t. I also didn’t really notice that gas cost less in the late 1990s than it had in the 1980s. Yet lately, every time my wife or I pass a new benchmark for filling up our tank — $40, $50 and now $60 — we have a conversation about it.

Price increases are simply more noticeable — more salient, as psychologists would say — than price decreases. Part of this comes from the notion of loss aversion: human beings dislike a loss more than they like a gain of equivalent size. If you have to sell your house for less than you bought it for, you’re really unhappy. You hate that ground chuck now costs $2.83 a pound, but you didn’t notice that oranges are 31 percent cheaper than they were a year ago.

There is also something particular to inflation that aggravates loss aversion. Price increases are obvious. But price declines are often hidden. The cost of an item stays about the same for years, while everything else gets more expensive and nominal incomes rise.

When you dig into the Consumer Price Index, you start to realize just how many things fall into this category. The price of major appliances has been flat over the last year. Furniture is 1 percent less expensive. A decade ago, a basic four-door Toyota Corolla LE cost $16,018, according to the company. The 2009 basic model costs $16,650, and it’s a safer, more powerful, more fuel-efficient car than its predecessor.

To top it all off, most people don’t buy any of these items very often. “People tend to remember things they do frequently,” says Stephen Cecchetti, an economist at Brandeis University who studies inflation. “And what do you buy more frequently than gas and food?”

Indeed, gas prices seem to have a peculiar psychology attached to them. Not only do we buy it frequently, but everyone’s prices are in gigantic signs visible from the road. People who couldn’t tell you within a dollar what they pay for a gallon of milk know to the penny what they pay for gas — and will often go out of their way to save a couple cents a gallon.

The way the statistics themselves are calculated and talked about add to the problem:

The conspiracy theories about inflation play off these human instincts, but they also depend on two other oddities. The first is the amount of attention given to the so-called core inflation rate. This is a version of inflation that excludes food and energy, which makes it a little like a grade point average that excludes math and French. The core inflation rate does have a purpose. Its movements help Federal Reserve officials base interest rates on underlying price trends, instead of being overly influenced by food or gas prices, both of which can be volatile. But when Ben S. Bernanke, the Fed chairman, talks publicly about core inflation, he can leave the impression that the government is cooking the books. In fact, all the important economic indicators, including real wages, are based on overall inflation, as are Social Security checks and cost-of-living raises.

The final piece of the puzzle — and the focus of the Harper’s article — is the way that the Bureau of Labor Statistics has changed the price index recently. Back in the mid-1990s, a committee of academic economists concluded that the Consumer Price Index overstated inflation. To take just one example, years would often pass before the index included new products — like cellphones — and therefore it missed the enormous price declines that occurred shortly after those products entered the mainstream. In response, the bureau tweaked the index. But economists who have studied the changes say they have had only a modest effect on the inflation rate, lowering it by perhaps a half point a year. More to the point, the changes seem to have made the index more accurate than it used to be.

Quite right.

To be sure, the poorer you are, the less any of this matters to you. If you’re barely getting by, even modest increases in the price of food and gasoline have an enormous impact on your standard of living and, of course, you’re not consuming a lot of modern luxury items recently introduced into the index. But the inflation rate is supposed to describe the aggregate economy, not how things impact any given consumer.

via Tyler Cowen

Fred Kagan Kaplan makes the argument that, as a matter of practicality, the only way for Robert Gates to move 7,000 more troops into Afghanistan is to take 7,000 troops out of Iraq.

Let’s look at the numbers.

After the last of the five “surge” brigades goes home this summer, the U.S. Army will have 13 brigade combat teams in Iraq (the Marines have two more) and two in Afghanistan. One BCT serves as a “global response force,” ready to respond to a small-scale emergency elsewhere in the world. One is in Korea. One is dedicated to homeland defense and security. One, at a base in Fort Riley, Kan., is training soldiers to become advisers to Iraqi and Afghan security forces. That adds up to 19 BCTs. All the other Army brigades are either between deployments or in their 12-month downtime periods, having fulfilled their 12-to-15-month deployment tours.

[...]

This last option is the only one that’s at all practical. There is no way to put more boots in Afghanistan without taking boots out of Iraq. As one senior Army officer put it to me, having it both ways is, “in a word, impossible,” and anyone who thinks otherwise, he added, is “dreaming.” Gates, by the way, is not among the daydreamers. His press secretary, Geoff Morrell, said in an e-mail today that Gates well knows that, fundamentally, “the only way he can add significant forces to Afghanistan, while keeping the President’s commitment to reduce tour-lengths, is to continue the drawdown of troops in Iraq.”

Interesting, yet disturbing stuff. I freely admit that I don’t have enough knowledge of military logistics to properly evaluate Kagan’s argument, but if he’s right, that certainly doesn’t bode well for our ability to project force throughout the globe. Indeed, Kagan himself comments on this:

These calculations do point up to a larger set of problems. The United States has the world’s most powerful military. This military consumes more money (adjusting for inflation) than it did at the height of the Cold War. Not counting the costs of the two wars, it spends as much on the military as the rest of the world’s countries combined. And yet, despite all this money and global reach, the U.S. Army finds itself unable to sustain more than 150,000 or so troops in Iraq and Afghanistan.

Kind of makes you wonder where all that money is going…

The Middle Class is disappearing, the NYT reports. In Europe.

The European dream is under assault, as the wave of inflation sweeping the globe mixes with this continent’s long-stagnant wages. Families that once enjoyed Europe’s vaunted quality of life are pinching pennies to buy necessities, and cutting back on extras like movies and vacations abroad.

Potentially more disturbing — especially to the political and social order — are the millions across the continent grappling with the realization that they may have lives worse, not better, than their parents.

I blame Bush.

A study by the German Institute for Economic Research in Berlin found that the broad middle of the German work force, defined as workers making from 70 to 150 percent of the median income, shrunk to 54 percent of the population last year, from 62 percent in 2000.

[...]

To be sure, Europe’s middle class is still larger than the number of people at risk of falling into poverty — and, by many measures, more protected than the American middle class. But policy makers worry that could change as the European economy starts to feel the drag of an American slowdown and high inflation.

[...]

Much of the declining purchasing power of European workers can be traced to those numbers, and to policy decisions and economic developments over the last decade when globalization began to reshape Europe and the world.

In Germany, Europe’s largest economy, the decline in purchasing power began in 2000, when employers started wresting wage concessions from unions, or simply shifting jobs to Eastern Europe and China. Inflation-adjusted incomes rose from 1 percent to 2 percent in the late 1990s, but more than one million Germans lost full-time jobs during and after a recession in 2000 and 2001. Subsequently, workweeks got longer without extra pay, and from 2004 through 2007, inflation outpaced income increases for the average family.

In France, the 35-hour workweek kept average annual pay increases below 1 percent for nearly a decade, said Robert Rochefort, the director general of Credoc, an organization in Paris that researches living standards. But French hypermarkets — big-box supermarkets that dominate the retail market — kept prices high, he said.

Spain generated thousands of jobs by pumping up the housing market, but has undergone a joblessness jump since the turmoil in real estate markets while wages have been consumed by inflation.

In recent years, the American Left has pointed to similar trends in the United States and blamed deregulation, a flattened tax code, and other public policy decisions which have had the effect of letting the very successful keep more of their money while leaving those lower on the economic scale unprotected and having to compete with Third World labor. That essentially the same thing is happening in Europe, where even the most conservative governments are well to the left of any mainstream American Democrat and socialization of the economy is much more pervasive, would seem an indication that public policy is not the primary factor.