I have been critical of Economics as taught in our colleges and universities and how those who have graduated with Economics Degrees have demonstrated their knowledge. I am going to see if I can apply some basic "compound interest" to see if it sheds some light into a very dark place.
Far too much of the economics dialog is devoted to the percentage growth of the economy as though that is the only objective. We know that people change jobs, get raises and tend to earn more as they get older. I don't think that the general economics as taught in our colleges and universities has dealt very well with this point. Isn't it the individual that we should be talking about rather than how big is the "pot"? Here is my try at this complex subject.
First off, shouldn't we take into account "inflation"? That is when the same things cost more in dollars over time. We all know that our money does not go as far today as it used too. We need to take that into account when we look at the economics of the individual. For my example, I am going to take a "typical" person who works for 40 years in an economic system that has a 1% rate of inflation. To buy the same stuff 40 years from now we would need 48.9% more dollars than today. Does that sound logical to you? If you started out earning $10,000 per year, to stay even, you would need to earn $14,890 dollars 40 years from now.
Most of us do better than that, because we get more productive in our "starting" job. Let's assume that we are rewarded for our greater skill while in the "same" job at the rate of 1.5% annual increase. That is a compound interest factor of 1.814. Now if we multiply that by the inflation you would earn $27,010 after 40 years. Now, that would be if you are in the same job, like a mailman whose job has not changed.
Now, how does this square with the growth of the economy? We need to multiply these together and see what interest rate would give us the same value. It comes out to 2.701 or just over 2.5% which is close to the economic growth rate which gives us some confidence that we are not too far off with our estimates so far.
Next, what about the impact of getting promoted? That is a big number because we will assume that you started out at $10,000 per year and 40 years later you were earning $100,000 per year. Remember that if you stayed in that first job, you would only be making $27,010, so what is your promotion economic growth rate? The factor is 3.702 which works out to approximately 3.25%.
Now, when we look back at these numbers, it has to be clear that job promotion is the biggest factor in determining how economics applies to the individual. Why is it then that this number is not reported or discussed? Is it because we are too stupid to understand it? It appears that there is more opportunity for promotion if the economy is growing, but even if the economy is static, people are leaving the workforce for different reasons all the time. When Japan's economy was static a few years ago, I am sure that individuals were being promoted and were earning more.
When we vote, we vote as individuals, not as some average of people doing the same things that they did 4 years ago, so why doesn't our economic dialog point these types of things out? I challenge you to discuss this with your friends and see if we can all get a more accurate view of our economic situation.
PS--There is a clear shift in the USA from physical labor value added to intellectual labor value added. Anytime there is a shift like this there will be a disproportionate number of job promotions in this new and expanding area. For many, this will be great, but for some it will mean that they will be left behind. Given that promotions pace personal economic growth, it is critical that individuals avoid "dead end" type careers knowing that most promotions will occur in the new intellectual areas.
Far too much of the economics dialog is devoted to the percentage growth of the economy as though that is the only objective. We know that people change jobs, get raises and tend to earn more as they get older. I don't think that the general economics as taught in our colleges and universities has dealt very well with this point. Isn't it the individual that we should be talking about rather than how big is the "pot"? Here is my try at this complex subject.
First off, shouldn't we take into account "inflation"? That is when the same things cost more in dollars over time. We all know that our money does not go as far today as it used too. We need to take that into account when we look at the economics of the individual. For my example, I am going to take a "typical" person who works for 40 years in an economic system that has a 1% rate of inflation. To buy the same stuff 40 years from now we would need 48.9% more dollars than today. Does that sound logical to you? If you started out earning $10,000 per year, to stay even, you would need to earn $14,890 dollars 40 years from now.
Most of us do better than that, because we get more productive in our "starting" job. Let's assume that we are rewarded for our greater skill while in the "same" job at the rate of 1.5% annual increase. That is a compound interest factor of 1.814. Now if we multiply that by the inflation you would earn $27,010 after 40 years. Now, that would be if you are in the same job, like a mailman whose job has not changed.
Now, how does this square with the growth of the economy? We need to multiply these together and see what interest rate would give us the same value. It comes out to 2.701 or just over 2.5% which is close to the economic growth rate which gives us some confidence that we are not too far off with our estimates so far.
Next, what about the impact of getting promoted? That is a big number because we will assume that you started out at $10,000 per year and 40 years later you were earning $100,000 per year. Remember that if you stayed in that first job, you would only be making $27,010, so what is your promotion economic growth rate? The factor is 3.702 which works out to approximately 3.25%.
Now, when we look back at these numbers, it has to be clear that job promotion is the biggest factor in determining how economics applies to the individual. Why is it then that this number is not reported or discussed? Is it because we are too stupid to understand it? It appears that there is more opportunity for promotion if the economy is growing, but even if the economy is static, people are leaving the workforce for different reasons all the time. When Japan's economy was static a few years ago, I am sure that individuals were being promoted and were earning more.
When we vote, we vote as individuals, not as some average of people doing the same things that they did 4 years ago, so why doesn't our economic dialog point these types of things out? I challenge you to discuss this with your friends and see if we can all get a more accurate view of our economic situation.
PS--There is a clear shift in the USA from physical labor value added to intellectual labor value added. Anytime there is a shift like this there will be a disproportionate number of job promotions in this new and expanding area. For many, this will be great, but for some it will mean that they will be left behind. Given that promotions pace personal economic growth, it is critical that individuals avoid "dead end" type careers knowing that most promotions will occur in the new intellectual areas.
