A rising tide lifts all boats, we’re told. There’s some truth in this – a growing economy means more people are making more money. Unfortunately, the tide has a habit of rising faster than the boats being lifted. This is what we call inflation. And it’s one more reason Reagonomics ain’t right.
A booming economy portends more jobs and higher wages, although America’s lowest caste will always be stuck making minimum wage. The next level, people above the poverty line and even some of the middle class, may see their nominal incomes rise. Unfortunately, Reagan never attended a class that taught about real interest rates. Example: say economic growth means you make 2% more this year than last year. That’s great! Unless inflation rises by 3% - than you’re comparatively poorer and have less purchasing power, even though you technically earned more dollars.
The vast income gap that began exploding during the ‘80s (and has further ballooned ever since) means that the rising tide has certainly lifted a select few. However, the purchasing power of the rich fuels greater demand, which increases prices, which means higher inflation. When those at the bottom rung are then told they’re better off because they’re making more money, they’re often presented with nothing more than a farce.
(Here come's the pie!): The comeback is often presented by way of another lame analogy: we needn’t reapportion the economic pie as long as the pie grows; then every piece is bigger. And the poor’s slice of pie may technically be bigger. Unfortunately, the real cost of pie just increased too.
Note: this phenomenon is further exacerbated when certain types of economic growth happen. Companies may become more profitable when they become efficient by shipping jobs overseas or mechanizing them (e.g., computers and robots replacing accountants and welders). There may be short-term economic growth, but at the expense of real purchasing power from non-dividend holders.
More Economic Pie!: