Viewpoint: U.S. monetary policy has a 'devastating impact' on poor people

October 3, 2008

Spectacular growth of the national income looks good only until we see the plight of poor people mired in declining-industry jobs and preparing for retirement by making deposits into their savings accounts.

If Governor Arnold Schwarzenegger and the presidential hopefuls get their wishes, California and the rest of the nation will see more health care than ever before and a reduction in its unit cost. In contrast to the plans of politicians, however, the transition to more affordable health care should begin-and continue indefinitely-without the first new state or federal law.

In the 1950s, blue-collar workers could afford health care, housing, and higher education. Their children were graduating from universities with few (if any) loans, and even low-wage workers were able to maintain households and save for the future. This affordability has vanished, though, and we want to know why. Liberals will argue that private-sector greed is responsible; conservatives will counter that high taxes and complex rules and regulations are to blame.

The Great Depression dealt such a devastating economic loss to so many people that economists have focused on keeping our economy from experiencing another such downturn for nearly 80 years. The writings of John Maynard Keynes, the Employment Act of 1946, and a 1958 journal article by economist A.W. Phillips supported a policy whose mainstay is a constant upward pressure on prices across the economy. This is seen as being the ideal way to keep employment full, spending high, and the national income in an endless climb.

For more than 200 years, our economy has never had more than six consecutive years of rising prices (currency depreciation) without at least one intervening year of falling prices (currency appreciation). This natural order preserved the purchasing power of the dollar. Prices fell slightly in 1949, for example, and again in 1954. From 1952 to 1956, prices increased a total of 2.4 percent. In retrospect, these were very favorable years for our economy, and for rich and poor alike.

Poor people are usually employed in declining industries, while rich people are usually employed in-and invested in-advancing industries. Workers in declining industries can't see their wages increase in step with the general increase in prices. Flat or falling demand for declining-industry goods and services eliminates this as an option.

Also, the only hope that poor people have for retirement planning is to save via their savings accounts. But the upward pressure on prices destroys the potential that savings accounts would otherwise have for retirement planning. Between 1954 and 2004, and as a direct result of the upward pressure on prices, the dollar lost 85 percent of its purchasing power, and any savings account left alone during those years could purchase far fewer goods and services in 2004 than it could in 1954.

A continuation of the current policy ensures that conditions for poor people will steadily worsen. It is why poor people can't afford as much health care now as they could in 1954, and it will be the reason why poor people won't be able to afford as much health care in 2054 as they can now.

Spectacular growth of the national income looks good only until we see the plight of poor people mired in declining-industry jobs and preparing for retirement by making deposits into their savings accounts.

Were it not for this policy, the presidential hopefuls wouldn't be foundering about the high cost of health care, and prices across the economy would be just as affordable today as they were in 1954. Entry-level workers would still be self-sufficient, and the current subprime mortgage crisis would not have developed.

But the policy, seen as a blessing to the economy, is instead its largest problem. It has been flawed from the outset and should be abandoned. Only then can we transition to more affordable health care.

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