As the American middle class continues to struggle, the question of wages comes up more often now.  Wages have gone just about nowhere over the last several decades.

When we talk about stagnant wages, we are talking about real wages.  It does little good to talk about nominal wages.  If you are getting a 3% raise at your job every year, you aren’t coming out any further ahead if the price inflation rate is also at 3%.

The scary thing is that price inflation is likely understated.  I don’t follow someone like John Williams who is almost always claiming that actual price inflation is around 10% or more.  That is rather ridiculous.  That would mean prices are doubling every 7 years, which just isn’t the case.

It is the case with health insurance, but that is just one consumer good.  It is likely weighted far too low in the government’s statistics, but there is no way that most food prices have doubled in the last 7 years.  Car prices certainly haven’t doubled in that time.

Of course, the huge rate increases in health insurance is not just a phenomenon of monetary inflation.  It is also due to government interference in the marketplace.  Still, it is an expense for most households, especially since it is now essentially mandatory.

The CPI should likely be higher than it is reported, but it really is impossible to measure.  But really, I don’t even need any government statistics to tell me that real wages are stagnant, or probably going down.  The American middle class is struggling.

So why are real wages stagnant or declining?

The reasons mostly lie with the government and the central bank and its monetary policy.  The federal government alone spends about 25% of GDP.  Most analysts will look at tax collections, but it is better to look at spending.  For all of the money spent through debt, it is still taking resources out of the voluntary marketplace and misallocating them.

When you add in state and local government spending, government at all levels is consuming over 40% of our productivity.  This doesn’t even account for the massive regulatory burdens and red tape faced by individuals and businesses.

Since the government is consuming and misallocating so much in terms of real wealth, it leaves a lot less for savings and investment.  And it is important to be clear on this point that savings and investment are what ultimately raise wages and improve living standards.

Henry Ford supposedly raised wages for his employees so that they could buy his cars.  But that would be a stupid reason for anyone to raise their employees’ wages.  The reason he raised wages was to keep his employees, and he was only able to do so because of prior savings and investment.

With savings and investment, business owners can invest in machinery and tools to be more productive.  This makes their employees more productive, which means they can be paid more.

The only reason that average wages in the U.S. are so much higher than in China or India is because there has been far higher rates of saving and investment in the U.S. economy, at least in the past.  This is due to government – or more precisely – less government.  It is due to stronger property rights.

Unfortunately, not only do the U.S. government and the Federal Reserve consume our wealth, but the Fed also discourages saving through its policies of easy money and artificially low interest rates.

Most economists make the mistake of saying that savings is not good for the economy.  Even many free market economists make this mistake.  They will say that savings is only good because it means that the money gets invested.

But if someone takes their money and puts it under a mattress, this is deflationary (in a good way) for prices.  The person produced something of value for society and then took the money and hid it away.  In other words, the person gave something away to society without redeeming anything.  This means lower prices for everyone else and is in no way harmful to the economy.

Politicians and others can talk all they want about minimum wage laws, labor unions, education, and other labor laws, but the only thing that is going to raise overall wages for a society is savings and investment that increase productivity.

America needs a raise.  It has been a while.  It needs to start with a drastic reduction in government spending.  And if we can’t abolish the Fed right away, we at least need it to maintain a more neutral monetary stance.  Until that happens, I’m afraid that real wages aren’t going to go up any time soon.