Real Military Pay

Donald Trump lies about everything including military pay:

Trump Brags To Troops About A Fictional Giant Pay Raise He Got Them - The president told military personnel in Iraq that they’ll get a raise of over 10 percent, their first in a decade. But it’s 2.6 percent, and they get a hike every year.

Dave Jamieson even notes that Bill Kristol has called out Trump on this whopper. But to me this is not the story. The real story is that Trump thinks our troops are stupid. As I read this sad account, I thought of a classic paper by Robert Lucas on the role of monetary policy in the New Classical model. Lucas postulated several island economies each with one individual who observes his own wage but not the general price level. Business cycles were generated by unexpected changes in the money supply which drives up everyone’s wages but people have yet to catch on to the fact that the general price index had also increased. I always found this an odd way of explaining persistent changes in output since most people shop at least on a weekly basis. But maybe the soldiers during the Vietnam War did not know their at home spouse and kids were facing higher grocery prices. But with the internet and advance telecommunications, this story is not tenable today even for our soldiers overseas. Dave links to this informative source:

Annual military pay raises are linked to the increase in private sector wages, as measured by the Employment Cost Index (ECI). In the 1990's, the annual military pay raise was capped at one-half percent below private-sector growth unless specifically granted a larger increase by Congress. The FY2000 National Defense Authorization Act directed that pay raises for 2000 through 2006 would automatically be one-half percent above the private-sector wage increases. Pay raises beginning in 2007 are equal to the increase in the ECI. Pay raises may exceed these automatic levels if authorized and funded by Congress.

Trump got the troops nothing – the 2.6% nominal increase for 2019 was automatic and will capture the nominal increase in ECI. For all this talk of nominal increases year by year, one would think our troops would realize that a nominal increase in ECI that barely keeps pace with the rise in the consumer price index does not represent an increase in real compensation. The point of our graph is to look at real compensation changes from 2006 to 2018 using the percentage increases stated in our link as compared to what has happened to the CPI from 2006 (base year = 1) through today. Note for some years real compensation did rise but for other years real compensation fell. I assumed that a soldier received $30,000 in 2006 and with these nominal increases, his nominal pay had risen to $38,779 by 2018. But with 2018 prices being 29.75% higher than they were in 2006, his real pay on net has declined. We do not know what inflation will be for 2019 but we should not be surprised if it turns out to be around 2.5%, which would mean real compensation will not grow appreciably. Our troops get that even if their Commander in Chief does not.