Over the last 10 years, the character of our national politics has become dominated, even overwhelmed, by the loss of American prosperity. Our pain seems to come less from the absolute decline in the average wage (20 percent over the last two decades by some calculations) than from the loss of confidence that the economy will again grow the way it did between 1870 and 1970. So much has changed: The communications revolution is bringing immense populations, all eager to work and shockingly underpaid, into the world labor market. Machines are getting steadily smarter. Organizations are learning to run leaner. While all these points might not prove that we face a steady decline in median wages, they sure suggest it.
But wage declines, logically speaking, do not rule out a prosperous life. We could get just as rich riding price levels down as we have riding wage levels up.
This point may seem entirely academic to many of us, since the idea of falling prices 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 downward pressure on wages are also affecting the prices of a wide range of goods, including food, consumer electronics, textiles, chemicals, energy, industrial materials, and many items of manufacturing equipment, from machine tools to steel plants. Today, an hour of the average American wage, shrunken as it is at US$10, can buy 15 pounds of chicken, a watch, a fully loaded camera, 10 dozen eggs, a new paperback, two solar-powered calculators, half a shirt, 20 megabytes of data storage, eight gallons of gas, 100 kilowatt-hours, a dozen pens, 15 hamburgers, 20 pounds of flour, four movie rentals, or a 40-minute phone call between New York and Los Angeles. These are all absurd prices, historically speaking.
Perhaps the most interesting example is digital hardware, such as computer processors and peripherals. Unlike most industries, which will lower prices only grudgingly and always press for an opportunity to raise them back up, the digital hardware industry has institutionalized continuous price cuts. Marketing strategists plot the trends, extrapolate the curves, and design to hit those pricing points. The designers and engineers, who are all convinced they have to meet these targets to keep their jobs, come through every time. (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 roof line, a level of execution that reassures investors they will not be caught in a deflationary spiral.) Digital hardware shows that it is possible, at least in theory, for an industry to lower prices deliberately and recurrently, decade after decade, and still 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 manufacture - so there are good reasons why they don't drop. The digital hardware sector suggests a second theory: that there is tremendous room to lower prices in almost every sector, and that prices are kept artificially high 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?)
Now imagine a culture that crossed over to the deflationary road to prosperity. For one, its social welfare perspective would be quite different. A society committed to the wage-inflation model sees low-paid populations as victimized and handicapped. A system organized around price deflation would see a pocket of consumer demand. The natural response of the inflation culture is to simulate the effect of high wages with a subsidy of some sort, a direct or indirect virtual wage; the deflation society pokes around to find what is preventing prices from following their natural trajectory downward, then fixes the plumbing. An inflation society sees a problem; a deflation society sees an opportunity.
A deflationary culture would fight malnutrition not with food stamps or surplus food programs but by unblocking the natural decline in the cost of producing and distributing food, would address homelessness not with rent subsidies but by deflating the market price of basic housing, would confront access to health care and cost containment not by supporting obscenely high prices with subsidies but by reversing the irrationalities that have allowed medical costs to rise by a factor of 35 in the last 40 years. (Veterinarians often deliver identical medications and services offered by physicians - at ten to a hundred times less. Why is that again?)
Perhaps the largest crack in the wage-inflation model is that it benefits only the fraction of the society that has "good jobs at good wages." Low prices benefit everyone, including those who don't want a "good job": youths who want to pursue esoteric experiments in music or art, parents who would like to spend more time with their children, seniors who want to keep working yet at a slower pace. These people may not meet 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 settling on a standardized 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 accelerating almost as fast as everyone says it is; barriers to trade are falling everywhere. We must look carefully at the professional subsidies and licensing monopolies that characterize the sectors in which prices are not falling - education, health care, real estate. Bringing them in line with the rest of the economy will open the door to a new and better dream of prosperity.
- Fred Hapgood (hapgood@pobox.com) is a freelance writer specializing in science and technology.
