How the US government taxes productivity – MoneyWeek

Eventhoughmywalletwasnoticeablylighterafterpayingthebilltofillupmycar,Iproceededtogotothesupermarket。

Regardlessofallthegainsinproductivity,everythingonthesupermarketshelves–andImeaneverything–wasmoreexpensivethanthelasttimeIshopped。

Anaggingthoughtkeptbotheringme:“Ifmankind’smachinesproducemorewithlesslaboreachyear,whyshouldn’tthedollarImakethisyearbuymorenextyear?

”Shouldn’tthisincreaseinproductivityflowthroughtothewageearnerandsaver?

Thisbringsmetoaseriousexaminationofinflation。

BecauseI’matrainedeconomist,IknowthatinflationistheGovernment’sandFederalReserve’swayoftaxingfinancialassetslikecash。

Ialsorealizeinflationisahorribleandinsidioussilenttax。

Ievenencouragedmywifetopurchaseinflation-indexedI-Bondssoshewouldatleastbeabletokeepupwithinflation。

ButperhapsthoseI-bondshaven’tkeptupwithwhatIseeasrealinflation,whichisnotthesameinflationmeasuredbythegovernment。

So,anyway,backtothesupermarket。

HereIwasrollingthecartupanddowntheaislesstunnedatthecostofsimplegroceries。

We’renoteventalkingaboutthepriceofmeat–pushedupbythepriceofcattle,hogsandchickens,whichhasbeenpushedupbythepriceofcorn。

CornhasbeenpushedupbecausesomeWashingtonpoliticiansthinkthatturningallcornintoethanolforuseincarsispopular,butIviewthisasincrediblystupid,unless,ofcourse,youlikehigherfoodprices。

Asaconsumer,whenIthinkabouttheescalatingcostoffoodtoday,IrealizeIreallydidn’tbenefitatallfromallthoseproductivitygains!

Meanwhile,withinflation,thegovernmenthasbasicallystolen/taxedmyshareofproductivityaway。

Stunningandpainfulthought!

ShoppingwassostressfulthatIneededtogohometorest。

JustasI’mdriftingoff,realityhitsmelikeatonofbricksbetweentheeyes。

Ihavebeenwritingforyearsabouthowthegovernmenthasbeenusing“hedonic”priceadjustmentstoholddownreportedinflationandonewayinflationmeasuresaremodifiedovertimeisinthewayinwhichgoodsfromthepresentarecomparedwithgoodsfromthepast。

Let’susethepurchaseofyourcomputerasanexample:

Theconceptbehindahedonicadjustmentisthatbecauseyourcomputeristwiceasfastandstorestwiceasmuchdataforthesameprice,thepriceyoupaidiscutinhalf。

Theactualpriceyoupaidforthecomputerisnotcutinhalf,butthepriceasreportedinthepriceindexesis!

Wellsurprise,surprise!

Mostofwhatpassesforhedonicadjustmentsinthepriceindexesissimplyanotherwayofreportingtheimprovementsintechnology。

Anothernameforthisis,ofcourse,“productivity”。

Technologicaladvances,hedonics,andproductivityareallnamesandmeasuresforthesamefundamentalfact:technologicaladvanceallowsfortheincreaseinproductivitythatistranslatedintothehedonicadjustments。

Somethingdidn’tfeelright。

IgotupandexaminedtheshrinkingdollarinmywalletandIfeltlikeIwasrobbed!

First,bytheFederalReserveBankbecausetheyhavekeepinflationmovingaheadsoIneverreceivethebenefitofproductivity,andthenbytheslickBureauofLaborStatistics,(“BLS”)that

actuallymadethePriceIndexpayforproductivitybysubtractingitfromtheCPIandreportingitasasmallernumberthanitreallyis!

(It’sironicthatthebestandbrightestattheBLSareemployedtofigureouthowtousefancystatisticstorobtheirgrandparentsoftheirsocialsecurityincreases。

)

Ifourgovernmentwasfairandmoneyandcreditgrowthwererestrained,Iestimatethedollarcouldpurchaseabouttwopercentmoreeachyear,andwewouldbelivinginasaver’sparadise。

TakingproductivityoutofthePriceIndexmeansthatwhentheCPIshowsthreepercent,inrealityit’smorelikefivepercent。

Ourgovernmentgainsbydoingthisbecauseastheworld’slargestborrower,theybenefitfromincreasesinproductivity。

Ontheotherhand,saversandthoseonfixedincomereallygetrippedoff。

Ina$14trillioneconomy,thetwopercentproductivityrip-offislikelytoamounttoacool$280billion,andthetotalinflationtaxonfivepercentisoverahalftrilliondollars。

Thatisenoughtaxrevenuetopayforanotsolittlewar!

I’mworkingandmakingagreatlivingsowhyshouldI,ofallpeople,complainbecausetheinflationtaxiscruelandpushedhigherbecauseofproductivitybeingperverselysubtractedfrominflation?

Well,I’mgettingolder,too,andmyheartgoesouttotheretiredcouplenextdooronfixedincome,knowingfullwellthattheircostoflivingisadjusteddownbecauseofproductivity。

Iftherewasnoincreaseinproductivity,thegovernmentwouldhavetopaytheretiredcouplemoresincethehedonicadjustment,reducinginflation,wouldbezero。

Ifthehedonicadjustmentwaszeroalongwithzeroproductivity,thatsameretiredcouplemightbeabletostayevenwiththerealcostofliving!

Forpeopleonfixedincome,technologicaladvance–leadingtoincreasedproductivity–isacurseratherthanablessing。

So,whenlookingforward,itisimportanttorememberthatwheneverproductivityslowsdowninflationwillsuddenlypickup,becausethereisnohedonicadjustment(productivity)tosubtractfromtherealnumber。

NowthatIclearlyunderstandhowthisproductivitytaxworks,Iamlessinclinedtobuyinflation-indexedbondsandmoreinclinedtobuygoldandsliver。

Ibelievepreciousmetalsaremorelikelytotracktherealinflationnumbers。

Thegovernment’sphonynumbersareusedtohideandpretendthattheinflationtaxismuchlowerthanitreallyis。

Giventhesizeofourcountry’sdeficits,andthesizeofunfundedentitlements,theU。

S。

governmentisinsolvent。

TheU。

S。

isinflatinglikecrazy,andit’sonlygoingtogetworse。

Everytrickinthebookwillbeusedtomakesurethatthemassescontinueholdingthegovernment’spapermoneythatpromisestoalwaysbuyless,andless,andless。

Stickinginaproductivitytaxthroughhedonicadjustmentisacutetrick,butasasaverorinvestoryoushouldn’tfallforit!

WrittenbyRichardBensonandpublishedinBensonsEconomicandMarketTrends31/7/2006,www。

sfgroup。

org

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