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Better Off?

Are you better off now than you were however-many years ago?  It’s a classic political slogan, first used by Ronald Reagan in 1980.  The answer then was a pretty solid “No”.  Take it out of the cycle of elections and into the business cycle that we find ourselves in, however, and the course of action is not as clear as a political strategist might like.

One quarter into 2011 it’s time for a check-in on the economic front.  The news we’re likely to hear in coming months is likely to shift focus once again, moving from joblessness to the quality of jobs that people have right now and their ability to make ends meet.  It’s not likely to be pretty.

The focus on creating jobs, which was intense just a few months ago, has seen some remarkably good news.  We aren’t losing jobs rapidly any longer as initial unemployment claims have fallen to a 30-month low at the end of March.  There are many reasons for this, including more people who aren’t eligible for unemployment insurance when they lose a temporary job, but the improvement is significant.  It’s the first step towards increasing employment, and it’s a good one.

What comes next is the logical result of a long period of weak labor markets, namely that wages have been stagnant for a long time.  Combined with significant inflation in prices for food and energy and we have a situation where household income has fallen substantially.  This chart of Real (inflation adjusted) Median Household Income shows what has happened:
This graph, courtesy John Mauldin’s excellent newsletter, is taken from Census Bureau data that is released each May.  It shows that the midpoint of all households is roughly as well off as it was 14 years ago – the boom of the 1990s essentially never happened.  When the report for 2010 comes out in a month we can expect that the sickening plunge over the last decade has probably worsened dramatically.  That will change the focus away from job creation and towards the plight of workers who already have jobs.

But wasn’t the big worry just a few months ago the potential for Deflation?  It was, and for good reasons.  The world has a large excess of manufacturing capacity, meaning there is downward pressure on prices for many consumer goods – and, as we can see, people do not have money to buy as much of them as they did in the past.  But energy prices, driven up in part by unrest in the Middle East and continued demand in the developing world, are offsetting this.  Corn prices have also increased, partly because a lot of corn is being used for fuel, raising food prices around the world.

There are two counter-forces right now that are working towards a balance.  One is the growth of the developing world, particularly South Asia, and the other is the ongoing maintenance of the developed world.  The focus is shifting from consumer goods to basic necessities as this takes place.

In short, the real problem is that the USofA does not have as much control over its own destiny as it is used to.  Years of public debt accumulation and completely out of whack trade are taking their toll.

While there is improvement all around there are still plenty of problem areas that require attention.  Job growth, while improving, is still nowhere near what is necessary to employ the next generation of workers.  Debt is a real issue in Washingtoon for the first time in a while, even if they are incapable of addressing it in a way that makes any sense.  Household income will be the next item to get a lot of attention as the focus shifts to the erasure of the gains of the last 14 years or more.

Are we better off now than we were some period of time ago?  The answer is no, we’re pretty much treading water at best.  But this has happened for some complicated reasons that require us to examine what is happening in a picture much bigger than ourselves.   Attention will continue to move from one issue to the next until we’re able to take that step back and realize what has been happening over the long term with the great and powerful nation that we inherited when we were born.

13 thoughts on “Better Off?

  1. That is unbelievable! It’s a huge drop. Why hasn’t anyone else said anything about this? When I think about it I am not surprised but to think that all the gains since the 90s have been erased really puts perspective on why people are so angry. If they do report another drop in May I can see how this will become a big issue but it sure takes a long time before anyone says anything.

    Is that what you mean by fault tolerance – how slow everyone is to react & then how the media totally spazzes on it for a while before moving on?

  2. There are a lot of ways to look at this. Why should real household income constantly rise in the first place? If you look at it right there is a big increase since the 1970’s. That means we have more money to spend on a lot of different things like internet phones and LCD TV’s. There is still progress no matter how you look at it. Perhaps what happened in the 1990’s was not sustainable at all and we should be happy with what we have now.

  3. Thank you for this article. There was a guy at the Humphrey Institute (on Minnpost) who also spoke to two of your points. Offering retirement t0 60 year olds and the trade dollar deficit.

  4. Thanks, everyone. Jim, you raise an interesting point – a truly stable society will not have a rising real income. However, we do have those productivity gains, so we can expect rising income just from that. There’s a difference between “average” or “mean” and the “median” presented here, but that’s another story altogether.

    Dan, I’ll check out MinnPost. I do hope that retirement for 60 year olds or so catches on – I do think that I was the first to present that idea.

  5. Jim, I liked your comment also and had previously made a similar point to Erik.
    I mean I’m not a deep ecology guy (had 1 birth child) but seeing ewer contrails in the sky and fewer large lake homes in northern Minnesota might not be such a bad thing. Or fields planted fence row o fence row, but I certainly do not have the answer.

  6. If one adds in the costs of housing and healthcare adjusted for inflation, I bet the results would be even scarier. It would be an interesting to look at the 3 data sets overlayed on top of one another. My gut feel with a bit of hand waving makes me think its been a downward financial path since 67.

  7. Ron, I’ll file that under “How do they figure this stuff anyways?” The official inflation rate has always been questionable, especially when you think about things like health care that greatly exceed it. And I’m not really sure where we are on housing these days – I know it did rise in price faster than inflation, but I have no idea how much has been given back in the last few years (or will be in the next few) – but it’s not good, I’m sure.

    One thing you didn’t think of – the big increase in household income that came in the 80s had a lot to do with women entering the workforce:
    (although in the 1970s, when that phenom started, households barely kept even).

    So a similar amount of pay for more people working? Not good.

  8. OMG if you think about the cost of day care and all the other things there is no way we are ahead since the start of that graph!

  9. Eric and readers, If you want to read another good article google guardian and e.f. schumacher. The guy lived in an internment camp, was on the British Coal board and wrote a best selling book Small is Beautiful.

  10. Pingback: Four Years On | Barataria – The work of Erik Hare

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  13. Pingback: Inflation and “Real” | Barataria – The work of Erik Hare

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