2008 March 08 Saturday
US Wages Never Returned To Late 1990s Peak
The US economy is entering a recession. So how did we do during the period of economic gowth since the last recession that started in 2000? Most American households have yet to regain the level of income they achieved before the last recession.
And if the good times have really ended, they were never that good to begin with. Most American households are still not earning as much annually as they did in 1999, once inflation is taken into account. Since the Census Bureau began keeping records in the 1960s, a prolonged expansion has never ended without household income having set a new record.
David Leonhardt of the NY Times thinks a whole decade will go by before most Americans receive a raise. I think he's being optimistic.
The median household earned $48,201 in 2006, down from $49,244 in 1999, according to the Census Bureau. It now looks as if a full decade may pass before most Americans receive a raise.
The 1999 high point might persist for a long time. We are in a period of a bumpy oil production plateau while Asian oil demand is rising and internal demand by oil exporters is preventing increased production from translating into increased oil exports. At the end of the production plateau comes the fall. To put it mildly, I expect that to be most unpleasant.
We can no longer afford to party like its 1999.
Median family income in the United States has decreased about $1,000 since peaking in 2000. The income decline came after more than a quarter-century of slow growth. Between 1973 and 2000, incomes increased at just a third the rate of worker productivity, a sharp break from the previous generation when family incomes and productivity both doubled, fueling an unprecedented expansion of the middle class.
The wage stagnation experienced by many Americans has been accompanied by a sharp growth in income inequality. After-tax family income for the nation's middle tier of wage earners increased 21 percent between 1979 and 2005, to $50,200. Incomes of the top 1 percent of wage earners, meanwhile, tripled, to just over $1 million, even as the after-tax income of the bottom fifth of income earners grew just 6.3 percent, to $15,300.
Rose says that if total compensation -- which includes the increasing cost of health and other benefits -- is included, American workers have done better than census numbers would indicate.
Yes, costs of non-wage benefits have gone up faster than salaries. Rising medical insurance costs are the major reason why. How much of that rise in medical costs is due to newer and better yet more costly treatments?
But some economists think we really are doing better since people own more gadgets and live in bigger houses.
Items once considered luxuries -- dishwashers, central air conditioning, video cameras -- are now common. The average size of new homes has increased 40 percent in the past generation. And as many consumer items cost less, Americans are shopping more. In 1991 the average American bought 33.7 pieces of apparel; by 2002 he or she bought 48 items, according to Boston College sociologist Juliet Schor. In 2005, she said, Americans were projected to discard more than 63 million computers.
I wonder how much of that improvement came before 2000.
The big China export engine drove down costs of lots of products as factories closed in the US and opened in China. But that way to lower product costs came with drops in wages of those who used to get paid to make things in the United States. Now that the US dollar is dropping and inflation is heating up in the US and China the foreign sourcing of products isn't going to be a source of lower prices any more.
I see a few things coming together to cause at best a stagnation of US living standards. First off, we live in what Warren Buffett calls Squanderville where we run up debts to the world and our government destroys wealth in a pointless war while signing itself up for more unfunded liabilities for old folks. Plus, our demographic picture looks grim between the retirement of the more skilled Baby Boomers and the swelling ranks of low skilled Hispanics. On top of all that comes Peak Oil. We aren't going to build new capital equipment to generate energy from non-oil sources fast enough to make up for the decline in oil production.
In a few years, the United States will no longer be able to afford any foreign trade deficit. At that moment, a very important form of destruction of wealth will stop, because the consumption in the U.S. will have to be supported by jobs in the United States. But on the other hand, let us note that currently, the U.S. "pays" for the $700 billion trade deficit by printing worthless paper (instead of gold) and if we divide $700 billion by 300 million American citizens, then we see that each American gets a lot of supplementary free goods and services worth $2,300 per year year. For nearly a decade, this supplemental income was financed by debt (trade deficit), but as the value of the dollar is finally declining fast, this scheme will not work anymore. But there was a hidden benefit for the U.S. because while many of the manufactured goods made in Asia, were purchased for free by means of printed dollars, the U.S. did not incur any pollution and suffering to manufacture these goods, even though the Asian countries have suffered terrible pollution and destruction of their environment, which was a severe net loss to them. In comparison, the interior of the U.S. stayed relatively unpolluted, and many of the American natural resources were conserved. But one thing that went wrong with this scheme is that not only the value of the dollar is finally declining, but also, finally the amount of dollars accumulated abroad is becoming large enough for other countries to compete with America to buy natural resources and corporations.
The current war is inflationary and destroys wealth because war related goods and services raise the standard of living only when there is a victory that leads to the enlargement of territory and a new influx of raw materials from conquered territory. In the case of the British Empire, militarism paid of extremely well because easy victories were achieved outside Europe. Currently much more than 10 % of the jobs benefit from military spending, and the entrenched defense industry is responsible for the relatively low unemployment. If the defense spending slows down in the future, the U.S. unemployment will rise to levels well above 10 % because many of the normal productive jobs were lost to Asia and Europe.
Of course, the entire rationale of the 'globalists' and 'economic liberals' (ie the shitheads who write for The Economist and WSJ), is predicated on the belief that growing prosperity in China and elsewhere would somehow 'drag-up' US prosperity by means of trade.
All the evidence actually suggests that the deal is entirely one-sided ie China has waxed fat at America's expense - although to actually hear this sentiment voiced is the ultimate heresy.
Those much derided 18th Century 'Mercanitilists' weren't ignorant bigots as some like to paint them - they were more clued-up than the clowns we have in charge of us today.
Every few weeks my local paper treats me to USA-Today style graphics demonstrating how bad-conservatives have lowered American standards of living, compared to prior times when good-liberals raised them. There seems to be a measure of truth in the assertion of declining wages.
However, I can't help but wonder how the past few decades of Ted Kennedy-led immigration policy have skewed the numbers. If the US labor pool is continually and liberally salted with large additions to the low-skill labor pool (both legal and illegal), it would hardly be surprising if:
-- There are more low-wage earners than there would otherwise have been, and
-- Always-increasing supply more than meets the demand for low-wage employees, thus suppressing the bottom end of the wage scale.
"Greater equality" is a social good. On that much, the Baltimore Sun and New York Times agree with Charles Murray. So then, what is the opportunity cost of the decades-long Open Borders policy that the left's party organs have supported? Are the numbers too hard to crunch, or do they yield an answer that won't do, won't do at all?
"All the evidence actually suggests that the deal is entirely one-sided ie China has waxed fat at America's expense - "
You are partially correct, but at the same time note that the financial gains of China are at the expense of terrible environment destruction and unimaginable pollution that is bad enough to make life unsustatniable in many parts of China. Additionally, the export income is very unevenly distributed in China, even by capitalist standard, and the economic separation between the elite and the average Chinese citizen is such that the standard of life has not increased much for most people over there.
Moreover, let me mention some statistics about China's trade surplus: According to the article below, the net trade surplus of China in 2007 was $262 billion (7 % of their GDP):
But at the same time, in 2007, the following article says that the United States lost $256 billion to China in trade:
Thus in 2007 the U.S. was responsible for more than 97 % of China's net trade surplus. But when we take into account the fact that the net trade deficit of the United States in 2007 was at least $700 billion, then it follows that if the United States totally stops its annual trade deficit, then the other nations will start refusing Chinese imports, because the extra $438 billion ( $700,000,000,000 - $262,000,000,000 = $438,000,000,000) that the nations other than China are gaining every year from the United States was subsidizing much of their imports from China.
I read Buffet's article linked here. Very interesting, but he loses me with his
proposed solution. Maybe I'm too simple minded, I don't know. The entire
problem comes down to debt. So, how do you solve this problem? I would suggest
a rather simple minded solution. But first, it is necessary to understand the
reason that debt has become the problem that it has. In my opinion, it has come
to this because the USA went off the gold standard in 1933. When that happened,
it became possible to run deficits, and to pay them off by not paying them off.
That is, by printing dollars and repudiating debt through inflationary policies.
America got away with this because WW II put a lot of the world's gold in
our hands. But this dwindled away steadily until the early seventies when Nixon
took us off the gold standard entirely. It should also be noted that budget
deficits started going up in the late seventies. And of course, there was the
inflation, and then, stagflation. It appeared to have been beaten with tough
monetary policies and free trade. But now the inflation and stagflation is back.
But the problem was never really solved, because the cause was not addressed.
We remained on the paper money standard which encourages debt.
Returning to the gold standard will work because it will force people into better
habits. That is, it will force people to save. It will discourage bad habits.
That is, it will force people to avoid debt. Inflation favors debt because it
inflates away purchasing power. Once that stops, there will be no further
incentive to going into debt. Inflation discourages saving because inflation is
a tax on savings. The national savings rate has dropped along with the rise in
debt. Clearly, the two go hand in hand.
I agree that Buffett's proposed solution is not ideal. Though maybe it is better than doing nothing.
However, I would place the problem elsewhere: Other sovereignties buying US debt in order to keep their currencies low against the dollar so they can run large trade surpluses against the United States.
Their purchase of US debt lowers interest rates and causes asset bubbles in the US. It also causes a large US trade deficit.
To amplify Randall's point, if the US were on a gold standard, the Chinese would just buy gold and print Renminbi, which would have exactly the same effect.
What clowns... did anyone of you actually been to China? Studied some economics? You're mindlessly repeating the ancient mercantilist nonsense.
Chinese became richer (they're still dirt poor on average) because they are working for less, and because their rulers do not screw the business with regulations. They trade real, tangible goods to Americans in exchange for the ever-growing pile of the increasingly worthless greenbacks.
The entire US "trade deficit" is caused by the dollar inflation - i.e. by the emission of the money by the Fed. Fed prints (not literally, of course, converting debt into "assets" is a more obscure way of doing the same thing) money to finance the demented wars on everything looking funny to Amerikans and the pensioner vote-bying schemes of the politicos. The newly created money has to spread out in the economy as the prices adjust to reflect lower value of currency, so the part of the excess goes abroad. Hence the trade deficit. The spreading-out effect of monetary expansion by a central bank causes "trade deficit" even when there's no trade in goods at all (consider a pair of countries having no external trade, but having the same fiat currency and allowing transfer of capital - and one having means to increase volume of money).
Between economies with hard currencies there cannot be any long-living trade deficit, it is as simple as that. People do not get money just to sit on the pile - they buy stuff with it; so if some side spends too much on buying from the other side, they'll soon discover that they have to produce something in exchange.
At some point Chinese will figure out the scam and will start offloading their dollar holdings en mass. Then the US economy will collapse in the hyperinflationary spiral. I suspect they already understand what's going on, but are afraid to rock the boat (economic crash in US will hit them hard, too). If they try to offload their dollars fast, they'll get nothing.
Keeping currency low to increase exports is a totally moronic undertaking - it surely increases exports, but also reduces prices. Profits = revenus - expenses; revenue = volume*price; expenses=capital+volume*input_costs. In the low-level manufacturing input costs dominate, and margins are small, so increasing volume by decreasing prices (that's what holding exchange rate down does) below the market rate results in sharply decreased profits for the producers. The only purpose of stimulating exports is to raise revenue of the gang controlling borders and tariffs at the expense of the actual producers.
"Americans sitll not earning that much" - heh, the feds got way down on the right-side slope of the Laffer curve as inflation drove more and more people into higher tax brackets, and the hidden inflationary tax added to the burden. The parasite got to the point of making the host seriously ill. That's what you get in democracies, when the rotating gang of rulers is allowed to plunder only for a limited period of time, and so doesn't care about long-term capital value of their (do you seriously think it's yours?) country.
The theory of free-trade hinges on the assumption of 'comparative advantage' if the Chinese flood the USA with their goods, supposedly this creates amarket for American goods in China that is equal and opposite to the deficit in the USA, and thingsare suppsed to 'iron-out' evenly.
So much for the theory, but in practice it simply does not work - the only result is that China gets richer and richer and the USA correspondingly poorer and poorer - just like those 'ignorant' mercantilists would have predicted.
This is merely a reflection of facts that are deeper and more subtle than bullshit economic theories- simply that that the Chinese are a harder working, more disciplined and well organized people, on the average, than Americans, and thusly will always outproduce them given a level playing-field.
If the American political class (aided and abetted by the personified excrement at the Economist and WSJ), keeping o stupidly believing that 'economic salvation' is to be found in the paper theories of an 18t century Englishman then they on the road to ruin - and deservedly so.
Averros and Kenelm,
Ricardo's theory hinges on the immobility of capital and labour. Comparative advantage is not an assumption but the conclusion of the theory.
Ricardo explicitly relies on the capitalist's love of his homeland to keep him from moving capital. Corporations have neither homelands nor love to keep them in one place.
Through currency manipulation, the Chinese have successfully encouraged a large-scale move of capital from the US to the PRC. Under the gold standard, what the PRC has done is no different than if they bought all the gold and loaned it back to the US for the US reserve.
What the PRC did masked the otherwise inflationary effects of a US money supply growing too fast. However, it only partially masked the inflation. Instead of consumer goods inflation, the US experienced an asset inflation. Randall has been warning folks for years that the asset inflation is just as damaging to the economy as a consumer goods inflation. Eventually, the assets will deflate (relative to everything else) and everything else will inflate.
At the same time, peak oil is going to cause stagflation. The inevitable outcome of energy price inflation is stagflation. The rising cost of energy makes many products unattractive to produce and/or to buy which slows the economy. At the same time, the rising cost of energy inflates not only energy but every substitute for energy, which includes many basic staples like corn. This in turn causes consumer price inflation because food prices increase not only because the basic staples increase in price but because every other food is a substitute for a staple or has staple foods as an input or competes with the staples for resources.
Who exactly doesn't understand what?
Apparently with all those dollars they are getting, the Chinese use them to purchase oil, minerals and other vital commodities, for their industrial machine, whilst purchasing relatively little from the USA.
In turn, the commodity producing nations, where the dollars end up, put the cash in Sovereign Wealth Funds.
These dollars are recycled by the SWFs by the purchase of US assets, equities, stocks and property.
Hence future generations will pay the price for today's profligacy every time they pay an electricity bill, pay rent or even purchase groceries at the supermarket.
As Milton Friedman may have said "There's no such thing as a free lunch".
Hey, when you compete with a slave, you are one.
Ever seen video of a Chinese sweatshop???
Americans need to practice for the future.
The true cost of "Free trade(laugh)" and non immigrant visas.
Sometime in the near future, if the CEOs and cheap labor scum get their way...
American Tech worker, "may I shine your shoes massa???"
CEO, "how much will you pay me for the privilege?"
Until that day the corporate hogs will whine about "protectionism", "labor shortages", and other faerie tales.