You Get What You Pay For

Fred Hapgood

Over the last ten years the character of our national politics has become dominated, even overwhelmed, by the struggle of coming to terms with the loss of American prosperity.

Our pain seems to come less from the absolute decline in average wage (by some calculations, 20% over the last two decades) than the loss of confidence that the country will ever again fly the way it did between 1870 and 1970, when growth in wages was 40% higher than it is now. So much has changed: The communications revolution is bringing immense populations, all eager and shockingly underpaid, onto the world labor market. The machines are steadily getting smarter. Organizations are learning to run leaner. All these points might not prove we face a steady decline in median wages, but they sure do suggest it.

Of course logically speaking wage declines do not rule out a prosperous life, so long as the prices of a given basket of goods and services decline even faster. To many of us this point must seem entirely academic, since the idea of prices going down each year instead of up is alien to our experience. However this is to some degree an illusion, since price increases stick in the mind more firmly than decreases. The same processes causing such anxiety on wages are also placing the prices of a very wide range of goods, including food, consumer electronics, textiles, chemicals, communications, transportation, energy, industrial materials, agricultural and extractive commodities, and many items of manufacturing equipment, from machine tools to steel plants, under unrelenting pressure.

Today an hour of the average American wage ($10), as shrunken as that is, can buy 15 pounds of chicken, a watch, a fully loaded camera, ten dozen eggs, a new paperback, two solar-powered calculators, half a shirt, 20 megabytes of data storage, eight gallons of gas, a hundred kilowatt-hours, a dozen pens, fifteen hamburgers, twenty pounds of flour, the rental of four movies, a forty minute phone call between NYC and LA (peak rate) or a half ton of coal.

These are all absurd prices, historically speaking. Digital hardware (processors and peripherals) is perhaps the most interesting example in that unlike most industries, who lower prices only grudgingly and are always pressing for an opportunity to raise them back, this sector has internalized continuous price cuts as part of life. Marketing strategists plot the trends, extrapolate the curves, and design to those pricing points. The engineers, who are all convinced they have to hit those points to keep their jobs, come through with them every time. (Note that though this brings prices down steadily it does so in a very controlled way -- plots of the price behavior of digital hardware are usually straight as a roofline. This level of control is needed to reassure investors they will not be caught in a deflationary spiral.)

Digital hardware shows it is possible at least in theory for an industry to lower prices deliberately and recurrently, decade after decade, and prosper. Of course prices in most other industries drift down much more slowly or even rise, as they have in health care. Nobody finds this unnatural; we tend to think that prices come reasonably close to the "real" cost of making goods, the cost defined by the physics of the function, so there are good reasons why they don't go down.

The digital hardware sector proposes a second theory, which is in reality that there is a tremendous amount of room to lower prices in almost every sector, and that prices are kept far higher than need be by inadequate technologies, poor organization, sheer waste, and pervasive attitudes that equate high price with high value. (How many times a day do you hear someone observe 'You get what you pay for'? How often do you say it yourself?) Every CEO thinks that because his products have value his company is owed an annual price increase, just as every worker expects to be paid more next year for showing up to work in this one.

It's interesting to speculate on how a culture that crossed over to the deflationary road to prosperity might work. For one point, its social welfare perspective would be quite different. A society committed to the wage inflation model naturally sees populations that lack high wages as victimized and handicapped. One organized around price deflation would see a pocket of demand that for some reason is not being sold to. The natural response of the former culture is to simulate the effect of high wages with a subsidy of some sort, direct or indirect (a subsidy is a virtual wage); that of the latter, to poke around the process, find what is preventing prices from following their natural trajectory downwards, and fix the plumbing. The first sees a problem; the second, an opportunity.

A deflationary culture would deal with malnutrition not with food stamps or surplus food programs but by unblocking the natural declines in the cost of producing and distributing food; to homelessness not with rent subsidies but by deflating the market price of basic housing; to the double issues of health care access and cost containment not by freezing in obscenely high prices with subsidies but by illuminating and reversing the irrationalities that have allowed the national health care bill to rise by 35 factors in the last forty years. (Identical medications and services as sold by medical doctors and veterinarians often differ by two orders of magnitude. Why is that again?)

Perhaps the largest crack in the wage inflation model is that it only benefits the fraction of the society that has 'good jobs at good wages'. Low prices benefit everyone, including people who wouldn't want a 'good job' if it were offerred them: youth who want to pursue esoteric experiments in music or art, parents who would like to spend more time with their children, and seniors who want to stay working but slow down. These people are not necessarily needy by the standards of most subsidy programs, but a decent society should accommodate their aspirations even so.

The simplest and strongest argument for a low-price prosperity strategy is that it sails with the winds now blowing through the global economy instead of against them. The world is standardizing on a single basket of goods and services; the number of people looking for ways to sell into this basket is growing very rapidly; the pace of technological innovation is probably accelerating almost as fast as everyone says it is; and barriers to trade are falling everywhere. If we look carefully at the professional subsidies and licensing monopolies that characterize the sectors where prices are not falling -- education, health care, real estate -- we might even find ways of bringing them in line with the rest of the economy, thus opening the door to a vision of a new and better dream of prosperity.