"In the last three months, real wages did in fact rise at a 14.8 percent annual rate"

Dean Baker points out something that should be obvious, that, if prices on goods go down, and your wages remain the same or go up, your buying power increases:

"Suppose Real Wages Rose by 15 Percent and No One Noticed

Well, you don't have to suppose. In the last three months, real wages did in fact rise at a 14.8 percent annual rate, and no one in the media noticed, or if they did, they didn't bother mentioning it.

The basic story is simple. Nominal wages have continued to grow at a modest 3.2 percent annual rate. Meanwhile prices have plunged, mostly importantly the price of oil. This implies rapidly rising real wages. That is very good news for the folks who still have a job.

Reporters should have been talking about the surge in real wages, but they seem to have largely missed it. Here's a column I wrote on the topic."

There are some winners in Deflation. However, whether long term Deflation would effect some of these current winners negatively, is a good question. I wouldn't like to bet on it.

Felix Salmon, once again, has something to say:

"Dean Baker sees the upside of the recession:

You probably didn't see this in the newspapers, but real wages rose at an incredible 14.8% annual rate over the last three months. The basic story is straightforward. While nominal wages have continued to grow at a modest 3.2% annual rate, prices have plummeted, hugely increasing the value of the paycheques of those workers lucky enough to still have a job...
The real lesson that the public should learn from recent experience is how the income of one segment of society is a cost to others. The wealthy understand this point very well...
If they can get low-paid workers to tend their gardens, serve them meals in restaurants, paint their homes and serve as nannies for their children, it raises their standard of living...
In the same vein, when the rich lose wealth it is a gain to everyone else. In short, they have our money.

This doesn't feel right to me. Yes, it's true that the working classes saw their standard of living stagnate during the years when the income and wealth of the rich was soaring. But it's also true that the single event which most soured working-class Americans on Republican pro-rich economic policies was not the rich getting richer but rather the rich getting poorer when the stock market plunged in October. ( I HAVE A SLIGHTLY DIFFERENT PERSPECTIVE, WHICH IS THAT NO ONE CARES ABOUT THE RICH IF THERE'S A RISING MIDDLE CLASS AND A DECREASING LOWER CLASS, BUT THEY DO IF THE RICH GET WEALTHIER AND THE OTHER CLASSES STAGNATE OR SUFFER. MY PERSPECTIVE IS THAT ONLY A SOCIETY WITH A GROWING MIDDLE CLASS AND DECREASING LOWER CLASS IS SUSTAINABLE IN THE LONG RUN, AND IS THE ONLY REAL HOPE FOR A SOCIETY WITH A MUCH SMALLER GOVERNMENT, WHICH IS NO LONGER FELT TO BE AS NECESSARY. )

What's more, it's not easy to come up with examples of any country where the poor have seen a sustained increase in their standard of living as the rich have gotten significantly poorer. And if you're a low-paid waiter or painter or nanny, you're unlikely to feel better off when you're fired by your formerly-rich patron.( IF THE POINT IS THAT THERE WILL ALWAYS BE WEALTHY PEOPLE IN A FREE SOCIETY, THEN THE ANSWER IS YES. )

Baker's solution to this last problem is simple:

This just points to the urgency of a large government stimulus package. We need to replace the consumption of stockholders and homeowners with some other form of demand( I AGREE, BUT DISAGREE WITH HIM ON HOW TO DO IT. I BELIEVE IN SOCIAL SAFETY NET SPENDING AND INFRASTRUCTURE SPENDING THAT'S NECESSARY ON ITS MERITS, BUT I ALSO BELIEVE IN TAX CUTS. MY SOLUTION WOULD HAVE BOTH, BECAUSE I'M MAINLY FOCUSED ON ATTACKING THE FEAR AND AVERSION TO RISK. ). The government has the capacity to spend enough money to replace this demand (as Fed chairman Ben Bernanke said, we can always print more money( I AGREE).

This obviously isn't a permanent solution, and I wonder whether it's feasible even on a temporary basis( I BELIEVE THAT IT IS ). Does anybody have a ballpark number for how much the consumption of the rich has declined? I suspect that the drop-off in real-estate consumption alone is greater than any stimulus plan which we're likely to see.

But the real gain of the workers at the expense of the wealthy will come only if rents start declining. I'd love to see some numbers on the average rent paid by non-homeowners: does anybody collect that data?

Update: An email correspondent sends in some historical perspective:

In the US and much of Western Europe 1950-1980 the rich stagnated while the real standard of living of the rest improved.
In Revolutionary France the seizure of the assets of the aristocracy and the church and the elimination of many tolls, the emancipation of remaining surfs, and ending of the oppressive tithe system improved the standard of living of the middle and poor at the expense of the rich, at least those who did not die as cannon fodder.

Here's Casey Mulligan:

"Real Personal Income is Higher than Ever

[all of the statistics below are seasonally adjusted by the BEA or BLS]

Today the Commerce Department released its estimate of November nominal personal income, 12.1638 trillion dollars (at annual rates).

ECONOMICS 101: DIVIDE BY CPI

The press is emphasizing that the figure is 0.2 percent less than in October. But let's not forget that the BLS reported that consumer prices were down 1.7% over the same time frame. That means a real personal income INCREASE of 1.5% in just one month! ( TRUE )

We can argue about how exactly to deflate, but no resolution of that argument is going to change this 1.5% gain into a measure that screams disaster.

I'm not sure why the Commerce Department does not report real personal income, although at the bottom of its report it does show real disposable personal income, which was 1.0 percent HIGHER in November than in October. That's their calculation -- not mine -- so don't blame me from ruining your "economic disaster" parade.

Today's Commerce Department shows data back to April: over that time frame, personal income deflated by CPI was highest in November. I am pretty sure that makes November higher than ever!( COULD BE )

REAL PER CAPITA

If you like things in per capita terms, November real personal income (at a monthly rate) was $3311.61 per person. That's the second highest ever, with the first highest being $3311.79 per person in May. That's right, we missed the real per-capita record by 18 CENTS per person. Enough said! ( TRUE )

GUESS AT Q4 REAL GDP

The experts are saying that real GDP (at quarterly rates) will be more than 1 percent lower Q4 than Q3. Are any experts reading this? Can they explain to us why they have that expectation, given that October real personal income (quarterly rate) EXCEEDED the Q3 real personal income by 1.2 percent and November EXCEEDED it by 2.8 percent? Are you predicting that real personal income will fall more than 10% in just one month, in order to bring the Q4 average down that far? Or are you predicting a huge departure between the growth rates of real personal income and real GDP?

I am admittedly an amateur at high frequency forecasting (it has less to do with the basic economic forces I have been emphasizing, which may take a couple of quarters to work out), but there are enough significant inconsistencies with the experts' forecasts that I have to issue my own:

• Q4 real (and seasonally adjusted) personal consumption expenditure will fall less Q3-Q4 than it did Q2-Q3.
• Q4 real (and seasonally adjusted) GDP will fall less than 1.0% (that is: less than 4.0% at annual rates) Q3-Q4, and may rise.
• Q4 labor productivity will be higher than Q3's (that is, productivity growth Q3-Q4 will not be negative)."

I have to admit to being with Casey on this, so I pray that he's correct.

Here's Robert Frank from the WSJ about the decline in the fortunes of the wealthy:

"By ROBERT FRANK

Economic inequality has become a hot-button issue on the presidential-campaign trail, with Sens. John McCain and Barack Obama sparring about spreading the wealth in America. Yet even as the rhetoric about inequality is rising, inequality itself is falling, economists say.

The reason: The financial crisis is draining the rich of some of their riches.

Over the past week, the McCain campaign attacked Sen. Obama as "the wealth spreader" for his now-famous remark to "Joe the Plumber" that, "I think when you spread the wealth around, it's good for everybody." Sen. McCain also likened his Democratic rival's tax plan to socialism, because it would raise taxes on those making more than $250,000 and lower taxes, or keep them level, for the middle class.

"You see," Sen. McCain said in a recent radio address, "he believes in redistributing wealth, not in policies that help us all make more of it."

Sen. Obama, who made the growing U.S. wealth chasm a pillar of his campaign from the start, argues for more-progressive tax policies that would shrink that gap and allow more Americans to share in the country's economic gains. Campaigning in Florida last week, he said Sen. McCain's tax plans -- like President George W. Bush's -- would "give more and more to those with the most, and hope prosperity trickles down to everyone else."

But the debate over rich versus poor ignores the changes likely to result from the financial crisis. If history is any guide, the upheaval already is shrinking inequality and could continue to narrow the wealth gap.

The share of income held by the richest 1% of Americans has declined during each of the past three downturns. Between 2000 and 2002, their share fell to 16.9% from 21.5%, according to Internal Revenue Service income data compiled by economists Emmanuel Saez and Thomas Piketty.

Their share also fell during the 1990 recession, hitting 13.4% in 1992 compared with 15.5% in 1988. The steepest decline was during the Great Depression, when the richest 1% saw their share of income plunge to 15.5% in 1931 from 23.9% in 1928.

"The Depression may be the best analogy for today when it comes to what will happen with income shares," said Mr. Saez, an economics professor at the University of California, Berkeley. He predicts that the share of income held by the top 1% will probably fall to 18% or 19% in the next year or two -- down from an estimated 23% or 24% in 2007.

Getty Images

Sen. Barack Obama walks with Sen. John McCain and wife Cindy.

During the Depression, the assets of the wealthy declined along with their incomes. In 1928 the richest 1% held 36.5% of the nation's wealth; by 1932 it shrank to 28%. Studies by other economists and researchers show similar declines.

The main reason for the declines: falling stock values. The wealthiest Americans have a greater share of their wealth concentrated in stocks and financial assets. When stocks plunge, as they have lately, the rich are hit disproportionately.

The wealthiest 1% of Americans held more than half the nation's direct holdings of publicly traded stocks in 2004, according to the Federal Reserve. Stocks accounted for 11% of their wealth, compared with less than 3% for Americans in the 50th to 90th percentiles. The rich also earn more of their incomes from stock options.

Of course, the rest of America also is losing wealth and income -- from falling home prices, rising unemployment and declining 401(k) accounts. But rising inequality has largely been fueled by surges at the top, and without capital gains or soaring business profits, those gains will reverse.

Robert J. Gordon, an economist at Northwestern University, says job losses in finance -- which accounts for an outsize share of wealthy income earners relative to other industries -- also will shrink the income and wealth share of the rich. Government limits on compensation imposed by the economic-rescue plan also could have a mild impact, he said.

So could a narrower wealth gap become the silver lining of the crisis? "Only if you don't like rich people," says Len Burman of the Tax Policy Center. "It's not like their share decline brings improvements for the middle class or the rest of America."

The bigger question is whether the falling fortunes of the rich and the coming decline in inequality will alter plans to tax the wealthy more. Some Democrats in Congress are urging Sen. Obama to go further with his plan to raise taxes on the wealthy if he becomes president.

"Inequality became the central argument for raising taxes on the wealthy," says Alan Reynolds, senior research fellow at the conservative Cato Institute. "Now that's obviously wrong. To the extent that there were perceived excesses in CEO pay, a lot of those were from the investment banks. Now the investment banks don't exist. And some of those CEOs have lost their shirts."

Adds Edward Wolff, an economist at New York University: "Now that the top has taken this hit, I think the whole issue of inequality is going to move to the back burner. The political momentum to do something about inequality may be gone -- at least for now."

Some economists say it would be wrong to abandon efforts to restrain inequality based on a momentary fall.

"Inequality cannot be totally undone by the financial bust," Mr. Saez says. "Policy makers now have a golden opportunity, like Roosevelt, to do something more permanent."

Mr. Saez says the next president should follow the example of President Franklin D. Roosevelt and impose crisis measures -- tax increases for the wealthy, massive public-works and jobs programs -- that helped usher in more than 40 years of more even wealth distribution.

The fall in inequality is unlikely to last. Immediately after the 1990 and 2000 recessions, wealth and income shares of the top 1% resumed their upward march. The share of income held by the top 1% rebounded after the 2001 downturn to 22.8% in 2006 -- the highest level since 1928.

When the stock markets return, so will inequality."

There you go. The question is what happens to the wealth of the Middle and Lower Classes.