Is the cost of living in the United States about to fall?

The basics of the American economy include rising incomes, high median wages, low unemployment, and declining poverty rates. To sustain this system, job growth is critical.

Although we're still very early in the game, globalization is presenting several hurdles to this system, as a result of the flight of hundreds of thousands of jobs from the U.S. to lower-cost production centers around the world, particularly in emerging markets.

One argument holds that the United States must find new engines of growth -- and new, high-wage jobs -- to replace the ones that have left. If no new growth engines emerge, decidedly bad things could occur: falling median incomes, falling disposable income, and a plunge in the standard of living. Under this argument, no good jobs means no good living standards.
The other side of the argument

However, there is a way, at least in theory, that this scenario could be averted -- a way in which U.S. living standards could remain the same (or even rise), despite the lack of the appearance of hundreds of thousands of new, high-wage jobs. And that's if prices and costs also fall, in a sustained or permanent way.

Right now the U.S. economy is incongruent: it's experiencing stagnant and falling wages in many job segments, outsourcing to foreign lands of higher-paying positions, but prices and costs remain high. Economist Peter Dawson told DailyFinance that over time this will lead to a host of problems: economic stagnation, soft revenue and earnings growth, and rising poverty rates (with all of the social costs associated with the latter).

However, if prices and costs subsequently fall, the lower cost structure will offset, if not eliminate, the affect of stagnant or falling wages, Dawson said, and maintain the U.S.'s standard of living.

This is the supply side economist's dream. How likely is it to occur? "At least in theory, the pressures are there. If supply side theory is correct, prices and costs are going to fall to meet the fewer dollars available in the U.S. economy, and the net effect of lower wages from globalization will be lower costs for everyone in the U.S., without a reduction in the standard of living. Wages fall, costs fall, we're even," Dawson said, while underscoring that he is not a supply side economist, but a Keynesian. "The problem is, with a few exceptions there are so many pressures working against falling prices and costs."

One factor is wealth, which can maintain (or boost) costs and prices, even after wages fall, Dawson said. "A membership at a golf course club may not be worth $10,000 per year, but if there are people with substantial assets able to pay $10,000 per year, the price won't drop," Dawson said.

A second factor concerns taxes. The value of, for example, an acre of beach-front property in Rhode Island may drop to $700,000 from $1 million, but if the $10,000 annual property taxes don't drop, the property is less affordable on a carrying-cost basis, assuming lower incomes from globalization, Dawson said. "For the property to be just as affordable, a key cost, in this case the property tax, has to drop as well," Dawson said. "So far, we've seen no universal decrease in taxes at the state and local level during globalization because there are high, fixed costs for public services. In fact, taxes have increased this decade in most states."

Further, there are other factors, such as environmental regulations and requirements, limited suppliers to markets, and regulated public monopolies, among other factors, that add to costs in the United States that also will serve to keep prices and costs high.

Hence, unless some unforeseen trend or breakthrough technology appears, Dawson says "in the United States it's highly unlikely that prices and costs will fall as fast as wages and incomes have, at least in the initial stage of globalization."

Nevertheless, at least in theory, living standards in the United States could remain the same, despite wage and income declines, if prices and costs decrease universally, in a sustained way.

"Just don't hold your breath waiting for that $1 gallon of milk or men's suit that costs $50," Dawson said.

Financial Editor Joseph Lazzaro is based in New York.
Read Full Story