Photograph by Wang Zhongju/Color China Photo/AP Images

Inside the factory of a Foxconn subsidiary in Zhegzhou, Henan Province

Bloomberg’s Kevin Hamlin and Xin Zhou today bring readers to central China, where they chase down factories spreading to new locales as employers fight China’s labor squeeze. They find that even far away from the centers of industry, a limited pool of young workers has extracted higher wages from factory jobs–and is pushing for more gains. And that’s sending powerful ripples through the world economy.

Some context is useful here. U.S. research on Chinese manufacturing shows hourly wages going from the equivalent of 62 cents an hour in 2003 to $1.36 an hour in 2008. Today’s story cites more recent numbers from a Japanese survey that put the average base monthly wage in Guangzhou at $352 a month and $317 in Shenzen. That Guangzhou wage is the equivalent of $2.20 an hour for a 160-hour month.

There are many sources for numbers on China’s wages, not all of which agree precisely (China’s National Bureau of Statistics shows somewhat smaller increases). Even if all the numbers aren’t exactly comparable, the pattern is extraordinary. In less than a decade, wages have probably more than tripled. Hamlin and Zhou find that with factory workers expecting raises, workers’ pay is likely to rise still further.

Try to imagine something similar in a developed economy such as the United States, where factory wages have remained flat, and you start to see the level of social change involved. No, really: Try to visualize that. Some numbers will help. In January, 2003 the average U.S. manufacturing industry wage was $15.61 an hour. So imagine that instead of going up to $19.28 an hour (just short of keeping up with inflation; $15.61 would be $19.78 in current dollars) they had gone up to $46.23. How would the U.S. change if the typical factory worker was making close to fifty dollars an hour?

If you think about this mainly in terms of where to locate factories, this may strike you as a problem. Indeed, China’s cost advantage over the United States, Europe, or South Korea is dissipating, especially compared to Vietnam and Bangladesh. That potentially shifts the flow of trade and pushes up prices around the world.

That, however, is just one (albeit important) part of the macroeconomic story. The other part involves consumption and standards of living. From that point of view ultimately the increases in wages in China will be good for the world economy.

A lot of attention has already been paid in the media to the emergence of China’s small urban upper class, evident in all the stories about real estate bubbles and luxury consumption. The growth of China as a fully developed economy, however, depends on a much broader increase in salaries and living standards, not only for an elite but for factory workers. The bottom line here is that China is far too big to take the path of South Korea and Singapore and bring itself up to first world standards of living through exports. At some point the main driver of growth in China will have to be consumption in China itself. Rising wages are a big step in that direction.

An earlier version of this post appeared in the Market Now daily email. Click here to register and subscribe.

Photographer: Chris Ratcliffe/Bloomberg

Cyprus in April, 2012. Looks like everyone’s already left to line up at the ATM.

Update: Boom! With 36 votes against, the Cypriot legislature nixed the deposit tax. Let’s see if the alternative is any kinder to ordinary Cypriots. And if foreigners take out their cash anyway when banks reopen.

Every nation, no matter how small, eventually gets a minute in the spotlight. Usually it’s not for good news. So it with Cyprus, where the plan to pay for a bailout by taxing bank deposits has elicited outrage among everyone from Cypriot citizens to Vladimir Putin to kibitzers who could barely find Cyprus on a map.

The photos of long lines at empty ATMs haven’t been great PR for the government of Cyprus or for European policy-makers. Nothing says Coming Depression as crisply as a bank run. The early consensus is that taxing bank deposits shakes the very core of the financial system.

Economist Tyler Cowen says this could go down as a blunder of historic proportions. At Reuters, Felix Salmon notes that the vow that your bank deposits are safe is one of a government’s most important promises. “Botched and improvised,” is how one expert characterized the plan to Bloomberg’s James G. Neuger. The only people who don’t seem to hate the plan are those who are just left speechless. The New York Times’s Paul Krugman confesses he didn’t see it coming — a moment for the record books.

This wasn’t a well-thought-out plan. Nonetheless, it’s worth considering whether what Cyprus is doing is worse than what other governments have done in similar circumstances. There’s a case to be made that (a) for most Cypriots it beats the alternatives and (b) a devastating run on the banks as soon as they reopen isn’t the sure thing many commentators assume.

Ultimately, taxing bank deposits (or, as Caroline Baum at Bloomberg View says, “confiscating” them) has many of the same effects as a currency devaluation. Whether the devaluation happens overnight, as it did in Argentina in 2002, or over an extended period of inflation, the ultimate hit to savers of all kinds is the same as a tax on deposits.

Devaluation has always been the final, and often not-so-final, resort of governments unable to pay their debts. In the euro zone, it’s no longer an option. But a deposit tax punishes savers just as a devaluation would. By taking money out of the economy, it makes Cypriots relatively poorer, and less able to afford goods from abroad, (eventually pushing the balance of payments in favor of domestic industry: the upside of devaluation).

These are the same effects as Cyprus would face if it left the euro zone — except that would be a much, much bigger and more sudden shock. Citigroup estimated last year that Greece would face the equivalent of a 60 percent currency devaluation if it got kicked out of the zone. You can assume that the consequences for Cyprus would be similar. By that standard, the deposit levies that Cyprus is considering — whether 9.9 percent or 6.75 percent — are a bargain.

So why the outrage? I would venture to say that the real difference between the bank levy and other solutions is that the levy is transparent and obvious, while the wealth effects of devaluation or inflation are hidden.

That would seem to be an argument for the levy, except that optics do matter in these cases, and, as Cowen notes, there seems to be great resistance to a transparent wealth tax. It’s possible that cutting the rate on smaller deposits, something that Cyprus is already contemplating, could remedy that.

That finally brings us to point (b): An immediate general run on the banks isn’t the certainty the empty ATMs might suggest. Of the 40.1 billion euros in deposits at Cyprus’s banks, 8.8 billion euros — about 21 percent — are immediately redeemable. If you look only at the 30 billion euros in household (ie. non-business) accounts, the share is even lower. The rest is tied up in time deposits of up to two years.

That means that if Cyprus goes through with the tax on deposits, there’s plenty of opportunity to cool off before every penny gets pulled out of the banks. Yes, foreign depositors, including the oft-mentioned Russian oligarchs, will pull out their money. But with the shakiness of the Cypriot financial system, you can bet that was going to happen anyway.

Given the choice of a tax on wealth or half-baked European austerity measures to achieve raise the same 5.8 billion euros, TMN would be inclined to go with the deposit tax. At Marginal Revolution, Tyler Cowen says the tax reflects the deeply anti-democratic impulses of European policy-makers. It doesn’t take a Machiavellian command of politics to see that taxing bank deposits isn’t an easy sell to voters anywhere. Fair enough.

But at least with a bank deposit tax, Cypriots get to see exactly what money is getting taken from them and where it’s going. That’s more than can be said for most other austerity plans.

Update, March 19: The bank levy now looks like it won’t pass the Cypriot legislature, even with the sweetener of exempting deposits under 20,000 euros. That would mean no deposit tax revenue — while very likely still leaving plenty of foreign depositors jittery enough to withdraw their money at the first opportunity. It seems to me that means much of the pain, and none of the benefit. That’s happening just as a few commentators seem to be turning around on the plan. Andrew Ross Sorkin at the New York Times also defends it, and points out that despite dire predictions, there’s certainly no Europe-wide bank run. That said, if you want to recap all the mistakes that policy makers have made in the last days getting to this point, and all the ways this makes Cypriots feel their national policy has been hijacked by Germany, make sure to read James G. Neuger’s masterful story about the negotiations.

Photograph by Christian Heeb/laif/Redux

The San Remo apartment building, on New York’s Upper West Side.

The most expensive apartment in the twin towered Art Deco masterpiece looking out over Central Park, the San Remo, rented for $900 a month. The tenant was a stockbroker named Meno Henschel who, according to what he told the Census Bureau, lived in his apartment together with his wife, a cook and two maids. Henschel had one of only two apartments that rented for more than $600. Another, with room for a family of five, plus the requisite cook, butler and maid, rented for $540.

The year was 1940, and that $540 is what would now generally be referred to as about $8,850 in today’s dollars. Except it’s  almost impossible to find an apartment like that to rent today. Like most  of the great prewar luxury Manhattan buildings, the San Remo has long since been converted into a co-op, owned by the residents.

Very rarely an apartment there will come up for a short-term rental. There is one listed now. The asking price is $29,750 a month.

At first glance, this may strike you as the kind of problem that rich people file under “even richer people’s problems.” So the price of Central Park views has gone up? Feh, probably you can find yourself another park to look at. You might assume that the price of living in one of New York’s most expensive buildings tells us nothing of value to most Americans, who (a) don’t live in New York, (b) don’t live in rentals, and (c) couldn’t come close to affording that kind of price.

In fact, it tells us a lot. Extraordinary as a rent of $29,750 a month may seem, the rise in the price of a rental at the San Remo is not exceptional. You can find similar or even bigger increases at every level of the market, down to the most ordinary middle-class apartments. Looking closely at rents at the San Remo and other places in New York opens up questions about whether we’re measuring inflation accurately. And those questions, in turn, have big implications for how we understand the cost of living and quality of life—not only of those who live in the San Remo, but of the middle class.

Nationally, according to U.S. inflation data, since 1940 rents have risen 1,014 percent, so they have gone up about 11-fold. For the New York area alone, the increase is a little higher, 1,250 percent. Though those are big numbers, they’re actually lower than the overall 1,536 percent rise in prices reported by the Bureau of Labor Statistics, the agency that gauges inflation.

Most New Yorkers, however, would guess that the price of housing has risen much faster. Diving deep into old records bears that out. The 1940 census found the median rent in New York City to be $38.10. In 2011, that was $1,100. That’s an increase of 2,787 percent—close to twice the rate of inflation. And when you start comparing specific apartments, delving into the newly released 1940 census forms in which I found how much Meno Henschel paid for his apartment, the differences are even starker.

At the San Remo the price increase is greater than 50 times. It’s a good example, because the San Remo is one of very few buildings not to have changed in character over 70 years. It was, as Dennis Hughes, the real estate agent handling the listing puts it, an “iconic” building then, and it remains so now. It’s a time capsule of luxury living. But that kind of increase hasn’t happened just at the top. You can see the same pattern in much more modest places.

One is the one-bedroom apartment I lived in from 2004 through 2009 in Williamsburg, Brooklyn. Back in 1940, as I found from the handwritten (and recently digitized) census forms, most of the tenants were Italian. Several were truck drivers; it’s not hard to imagine that one settled there and his friends followed. The rent was $18 to $24 a month. The upper end of that is $369 in current dollars. When I moved in late in 2004, the real estate broker cautioned me that it “wasn’t a luxury building.” Indeed, it wasn’t, as the broken front door lock suggested and the heat inspectors could confirm, but the rent was $1,500 a month, and later it rose to $1,615.

So what’s happening here? Most conventional stories of inflation hold that the consumer price index tends to overestimate how much prices rise. For a long time, the index, the government’s main inflation yardstick, didn’t adjust for changes in quality, and many economists believe that it still doesn’t do it enough.

With rent, it’s a different story. Rent is a particularly important piece of the consumer price index. The government uses data on rents not only to estimate inflation for those who actually rent their homes, but also to separate out the investment value of homes and derive a measure of how much homeowners pay to keep a roof over their heads. Together, “rent” and “owner’s equivalent rent” make up about 30 percent of the inflation measure.

Changes in rent, though, are not easy to measure. Rents tend to rise slowly over time, and a lot of what makes a home desirable changes, too—think “location, location, location.” Those difficuties have led to some awkward results. Mike Shedlock, a well-regarded blogger who looks at economic trends, has tracked how the rents the government measured barely budged during the housing boom and rose afterwards even as real estate agents wrung their hands over falling prices.

Perceptive recent work on rent comes from three economists who worked together at the Philadelphia Federal Reserve, Theodore Crone, Leonard Nakamura, and Richard Voith (Nakamura is a vice president of the Philadelphia Fed). Their research makes a good starting point for figuring out the rent puzzle.

The most important insight in their work is that for decades the inflation measures skipped over the cases in which a tenant moves out. Think about that for a second: A landlord avoids raising the rent for a decade for a good tenant, then when the tenant moves, ups the rent to a market rate. Or, as is common in New York, rent regulations keep rent from rising until a tenant moves out. Those are precisely the units in which the rent is most likely to rise, and for some four decades they weren’t counted in inflation.

Crone, Nakamura and Voith estimate that this and other problems bring down the government’s measure of rent increases by about 1.4 percent a year for the whole period that runs from 1942 to 1985. Nakamura outlines these findings in a very readable paper published by the Philadelphia Fed. Over such a long period, 1.4 percent into a really big number. Add that in, and instead of falling 20 percent in real-dollar terms over six decades, rents rise 50 percent.

Think about what that means for the middle class. Since 1970, the average hourly earnings of American workers (excluding managers) have stayed almost exactly flat by the official inflation measure. If, however, the cost of housing has risen faster than those measures say, then that means that many folks are actually worse off than they were then. You can see how that matters, and not just to the people in the San Remo with Central Park views.

Source: Google Street View

The building in Brooklyn I lived in from 2004 to 2009. Not exactly a model of luxury.

The reason I started with the San Remo wasn’t just to get you to marvel at how much a fancy apartment in New York costs these days. OK, that was part of it; it’s not an accident that Robin Leach’s show wasn’t called “Lifestyles of the Average to Upper Middle Class.” The other reason for focusing on the San Remo, though, is that in most buildings and neighborhoods, so much changes that it’s hard to compare prices over extremely long periods of time.

Often when you read stories about the economy they’ll translate a price from decades ago into “today’s dollars.” By that measure, the $540 that a San Remo apartment rented for in 1940 is $8,856 in today’s dollars. Except that it’s clearly not: If you’re talking about rent, it’s $29,750 in today’s dollars. We know that because that’s what a San Remo apartment rents for today.

If we work off that $540 price for a San Remo apartment (one of the more expensive ones then; many rented for less than $400), that’s an increase of 5,409 percent.

Notably, that number is a lot higher the calculations of Leonard Nakamura and his collaborators. By their measure, rents from 1940 to 2000 increased about 15-fold. That would make the increase in rent higher than the overall inflation rate—but still well below the change in median New York City rents. Even with this effort to fix the data, we still don’t get close to the kind of inflation you see for many New York apartments, those long turquoise and magenta lines at the bottom of the chart.

So what else is at play here? We just don’t know. It’s tempting to explain the San Remo by looking at the rise in income at the top. That’s the market for four bedroom apartments with park views. Strangely, however, the change in the price of a fancy Manhattan apartment is actually lower than the 67-fold increase in the price of the underheated Brooklyn walkup I lived in for five years.

It’s difficult to judge the degree to which that Brooklyn apartment—unlike the four-bedroom in the San Remo—is “the same” as it  was in 1940. The heat may have worked more reliably then, and the building had not yet been blessed with its current asbestos-shingled facade. On the other hand, it wasn’t within throwing distance of about half a million trendy restaurants, as it is now. How do you calculate the value of those kinds of changes and plug them into the inflation model?

“The main thing we cannot take into account [in measuring inflation],” says Leonard Nakamura, “is how a city changes over time.” That’s certainly part of the rent puzzle. In the post-war years there has been a major national transition from renting to home ownership. In New York, as in many parts of the country, many of the most desirable properties in most desirable neighborhoods can no longer be rented at all. This is essentially the case with the San Remo. As the San Remo and buildings like it turned owner-occupied, they’ve dropped out of the inflation measure.

That may have pushed down measured rent in New York and many other places as well. As the upper and middle class have moved to home ownership over the last decades, it’s possible that the the homes and neighborhoods that have stayed rentals are the ones that have been less desirable in hard-to-measure ways. That might help explain the enormous divergence between New York rents and the inflation yardstick, but it’s hard to test without a much deeper dive into real estate records.

1940 census forms from tenants at the San Remo. You can see Meno Henschel’s $900 rent at the left, the highest at the time.

Complaining about inflation can seem like an old person’s diversion; yes, at some point a steak dinner did cost three bucks and penny candy was a penny. So what?

With rent, however, the intuition that prices have risen faster than the inflation data appears very robust not only to laypeople, but to professional economists as well. Robert Gordon is an economist known for his pioneering work on how we’ve overstated inflation in durable goods, such as cars, which have improved over time. He suspects that housing may be different. As Gordon writes in an e-mail, ”the low prices my parents paid in the 1950s for a lot, a house, my Harvard education … seem unbelievably cheap by today’s standards.”

If rent has indeed risen more than the usual inflation measures indicate, it would help explain why many families have the sense that they are working ever harder to afford to live in what they think of as a nice neighborhood. More generally, understanding what’s happened to the price of shelter is key to the current debate on inequality and how we answer the question that gets asked (rightly) in every election year: “Are we better off?”

The other takeway from New York rents is that when you think about inflation, you may consider asking “inflation in what?” and “inflation for whom?” We are so used to talking about the headline inflation number that comes out each month that we tend to forget it includes changes in literally thousands of prices. The increase in rent at the San Remo is not the same as the increase at a new college grad’s shared apartment across the river in Brooklyn, or at a public housing complex in the Rockaways—or in a different city. Nor is it the same as the change in the price of steak or childrens’ clothes.

And because inflation isn’t the same for different items in the consumer basket, it’s not the same for different people, either. It may, for instance, be higher for the wealthy, who are competing for the same few ultraluxury properties. It may be lower for older people, who don’t worry about moving. And it may be higher for those who have to move often. Measuring inflation accurately is a hard problem, and over the years economists both inside and outside the government have made great efforts (and strides) to get it right. The evidence of New York is that we’re not there yet.

Already the national discussion has turned from talking about inflation in general to focusing on specifics, like the costs of education and health care. It may be time to start cutting up the data in even more granular ways to get more specific answer to those questions of “inflation in what?” and “for whom?” That may pose some questions for government policies. In return, it’s likely to offer up some answers to why we live the way we do up and down the economic ladder.

Photograph by American Stock/Getty Images

Deflation isn’t always accompanied by Depression-style soup lines.

“Deflationary spirals” have been a major subject on the economics agenda since the financial crisis hit. While the theory here is clear — falling prices lead consumers and businesses to hoard cash — there are few actual examples of deflation to study. The Great Depression in the United States is one, and the current long period of slow deflation in Japan is another.

In a surprising article, Bloomberg’s Toru Fujioka reports on the response of Japanese consumers and businesses to deflation, finding a startling face: many of them like it. The elderly benefit from savings and pensions that go further. And while deflation may harm the young by keeping wages stagnant in the long term, it’s also the only de facto wage increase they’ll see with businesses unwilling to raise salaries. Economist Tyler Cowen notes that though the Japanese economy has been stagnant, the unemployment rate is still 4.1 percent, a number that other countries must find enviable.

Over the past decade, Japan has seen the consumer price index for most periods hover just below the zero-percent inflation line (chart’s above). The notable exceptions were in 2008, when inflation rose as high as 2 percent, and late 2009, when prices fell at close to a 2 percent rate. The rise in inflation coincided a crash in capital spending. The worst period of deflation preceded an upturn.

This isn’t enough data to infer causal effects. It does seem, though, that the relationship between growth and Japan’s mild deflation may be more complicated than the Great Depression-inspired deflationary spiral narrative suggests.

A version of this post appeared in the Market Now newsletter. Click here to register at Bloomberg.com and subscribe to The Market Now daily email.