The worst mistake your family can make
Bill Bonner Jan 25, 2013
Today, every gas and electric meter in Baltimore is spinning. It's a winter wonderland here. Which means, it's damned cold.
Our thoughts turn to heat and then to the expense of it and then, we begin to wonder how ordinary families keep up with it all. Heat, food, cable. It adds up.
But we have advice. In a few words: don't play that game. We'll explain that later. First, let's review. America's middle class families. Everyone seems to be worried about them. President Obama thinks they're getting a bad deal. Some think they are disappearing. How are they really doing?
Real hourly wages have not gone up since 1964. Nearly half a century of flat earnings. We've been saying that for years now.
But wait. How come people seem richer?
Because they are richer. At least in a way. They have bigger houses, more marble countertops, more cars, wider-screen TVs.
They've got a lot more stuff. Even better stuff.
That is the point of an article in yesterday's Wall Street Journal. The authors argue that America's middle class is actually much better off today than it was in 1964.
For one thing, they say, families have more members working (wives went to work in the '70s and '80s) so that family income is higher.
OK, whether that is good or bad, we don't know.
They also get more health benefits. Hmm... We don't know about that either. Families didn't seem to need healthcare benefits back in the '60s. Because healthcare was reasonably cheap and simple back then. Now, it's very complicated and very expensive.
Yes, say the authors, but it's also a lot better. Which would you rather have, they ask: 1960s healthcare at 1960s prices or 2013 health care at 2013 prices?
Hmmm... Again, we're not sure. They say people live longer today. But that may have nothing to do with healthcare. They live longer in other countries too – places where people spend a fraction of what we spend on healthcare.
And many of those tests that are included in our healthcare plans – mammograms, PSI, colonoscopy – might be useless. That's what the latest research shows.
Oh... and now we all have access to jet aeroplane travel, iPhones, and big TVs with options up the wazoo.
As to this last point, we offer a little personal anecdote. We didn't have a TV for a long time. Not from about 1982 to 2012. We bought our first one this Christmas. A gift to the family. We watched a few movies over the holidays. Then, when the children left, we forgot about it. Until last night...
Elizabeth was away so we decided to turn it on for company. Trouble was, we couldn't figure out how. There were four remote control devices. Which controlled what? It was far from obvious. We clicked every button we could find. Nothing. Then, we picked up the phone and clicked a few buttons on that too. Perhaps there was some sympathetic communication going on, some electronic voodoo.
In 1964, we turned one knob to turn the machine on. Another changed the channel. There was no doubt about it.
But come the miracle of electronics 2013 and it took us a good 15 minutes to figure out how to get the thing to work. Then, we spent another 15 minutes riffling through dozens of programmes before we realised that there was not a single one that we wanted to watch.
Time lost: 30 minutes. Gain: negative.
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So as to the wonders of modern gadgetry we are less than impressed.
But there is no doubt that the middle class is better equipped in stuff than its hourly wages suggest. This is partly because the price of the important stuff – food, shelter, clothing and utilities – has actually gone down as a percentage of household income, from 52% of disposable income in 1950 to only 32% today.
However, the authors don't pay any attention to the other side of the ledger – debt. In 1964, total public and private debt in the US was 140% of GDP. Today, it is 375% of GDP. Hmmm... That's about two and a half times as much debt per family.
The figures show net worth per household at about the same level it was 50 years ago: about five times disposable income. But those figures do not include government debt, which is a huge, largely uncharted iceberg.
With so much debt to reckon with, the typical family is much more exposed to interest rate increases and other setbacks.
Right now, the cost of carrying debt is low. Because interest rates are at their lowest point in more than half a century. But they were low in '64 too. And if they go up from here – as they did then – we'll have quite a hoop-dee doo. How many families could afford a 10% mortgage interest rate?
And, of course, this calculation doesn't include the trillions of 'unfunded liabilities' that the feds choose to ignore. Those liabilities barely existed in 1964. Today, they come to (according to Professor Lawrence Kotlikoff) more than $200trn or about $150trn more than net assets. Now, how's the middle class doing?
But families don't yet feel the weight of those unfunded liabilities because they don't have to pay them. In fact, they hope to be on the receiving end, to be collecting Social Security, disability and health benefits, not paying for them.
Which just goes to show how corrupt and awkward the whole thing is. Middle class families work as hard as they can to keep up with expenses now and everyone hopes to live at everyone else's expense in the future.
It ain't going to work.
A better approach in the next issue...
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