The Great Recession and Its Looming Aftermath

“In retail, wholesale, leisure, and hospitality,” Derek Thompson explain in the December 3, 2014, issue of The Atlantic, “real wages have fallen more than 10 percent since 2007. To be clear, this doesn’t mean that most of millennials [young people born between the early 1980s and late 1990s] are seeing their pay slashed, year after year. Instead it suggests that wage growth is failing to keep up with inflation, and that, as twentysomethings pass into their 30s, they are earning less than their older peers did before the recession.”

Thompson further states:

“The picture isn’t much better for the youngest group of workers between 18 and 24. Besides health care, the industries employing the vast majority of part-time students and recent graduates are also watching wages fall behind inflation. Forty percent of this group is enrolled in college.”

Why are real wages falling across so many fields for young workers, Thompson asks. According to him, “The Great Recession devastated demand for hotels, amusement parks, and many restaurants, which explains the collapse in pay across those industries.”

Furthermore, he argues that globalisation and technology (particularly information technology) have conspired to gut middle-class jobs by sending work abroad or replacing it with automation and software. He cites a 2013 study by David Autor et al. which found that although the computerisation of certain tasks has not reduced employment, it has reduced the number of decent-paying, routine-heavy jobs, replacing them with cheaper jobs so that overall pay has declined.

As to why health care wages have been “the exception to the rule,” he opines:

“The demand for medical services is dominated by the government (i.e., Medicare, Medicaid, and the employer insurance tax break), which doesn’t face the same vertiginous up-and-downs as the rest of the economy. So as the Great Recession steamrolled many industries, health care, propped up by sturdy government spending, kept adding workers… Americans are spending 4% less on food away from home than in 2007; but we’re spending 42% more on health insurance. As prices have increased, so have wages for younger workers in the medical field.”

The graphic below, published recently in TheWall Street Journal, shows the change in average spending and income from 2007 to 2013 for American middle-class households. According to the WSJ, the data includes the middle 60% of Americans by income, which was not adjusted for inflation. According to the Bureau of Labor Statistics, famous for its fairytales, inflation increased only 12.4% during that period.

Above shows just how badly squeezed the millennials are. The have never been a cohort that spends much, or anything at all, on residential phones, household textiles, home ownership, and major appliances — that is, the categories where spending (and most likely also prices) have declined; whereas they spend more on categories such as education, healthcare, rents, health insurance, mobile phones, internet, etc., where prices have tended to move up.

Furthermore, and importantly, The Wall Street Journal data didn’t include the cost of raising a child. The SFGate blog recently published an article entitled “The cost of raising a child is going through the roof” (December 4, 2014), which explained:

“While the cost of buying stuff has declined in relation to median income, the expense of childcare and college tuition is flying at breakneck speed into the heavens. If you’re concerned about money, you’d be wise to skip having a kid and buy a new computer and dishwasher instead.” (An Index of Childcare and Tuition with a base of 100 in 1990 is now at 571.) The blog further notes:

“Policy analyst Scott Andes and policy manager Mark Muro over at  the Brooking Institute comment on this data: ‘The price of hospital services and child care and tuition has grown by an astounding 200 percent faster than median wage. Prices have outpaced income in housing rental, legal and professional services, and hotels and lodging as well. These large sectors and the high prices they charge are contributing heavily to the slipping economic position of American households.’”

I appreciate the findings of Mark Perry and Alex Pollock of the American Enterprise Institute and their explanation as to why median US household income has declined since 1999. However, the overriding fact is that real per capita income has declined since 2000.

Moreover, if we adjusted nominal per capita incomes by the true cost- of-living increases, rather than by the Personal Consumption Expenditure Index or the CPI, the loss of people’s income in real terms would be far larger. Finally, as the New York Times recently reported, “The share of prime-age men — those 25 to 54 years old — who are not working has more than tripled since the late 1960s, to 16 percent.”

Perry and Pollock also suggest that the decline in household income is a consequence of the decline in the marriage rate. However, they fail to identify the main cause of a declining marriage rate, which is an economic issue. How can anyone get married without money? People below 35 years of age have no savings and a negative savings rate. Derek Thompson opines:

“Some of these young people could afford to save more, even if it’s a small share of their meager income, since small amounts of money put away several decades before retirement (or an unexpected emergency) can help later. But it’s easier to see why young Americans aren’t saving any more than we used to: Their wages are falling behind the cost of basic goods and many are going into debt to pay for a college degree.

“The evaporation of real wages for young Americans is a real mystery because it’s coinciding with what is otherwise a real recovery. The economy has been growing steadily since 2009. We’re adding 200,000 jobs a month in 2014. That’s what a recovery looks like. And yet, overall U.S. wages are barely growing, and wages for young people are growing 60 percent slower than overall U.S. wages. How is a generation supposed to build a future on that?”

I am not agnostic to the view that society has changed because millennials prefer not to have any responsibilities and therefore opt not to get married (a view for which I have great sympathy, I should add). Young people are more inclined than their elders to view cohabitation without marriage in a positive light. (My grandparents on both sides would have considered cohabitation without marriage a terrible sin.)

I seldom agree with Larry Kudlow of CNBC and “Free market capitalism is still the best path to prosperity” fame (the slogan should be amended to: “Manipulated markets and crony capitalism are the best path to endless wealth for the top 0.01% of the population”), but I am interested in the point he makes in an article entitled “Marriage is Pro-Growth,” published in the National Review of November 14, 2014. He writes:

“I worry that we are creating a permanent underclass of poverty. Broken homes and children that have only one parent are at the root of this poverty trap. And when I think of young people from broken families, barely existing economically, this is what I find myself telling them: Please go to school.

“Do what it takes to finish high school, be it a trade school, or a tech-related school, and then maybe a community college. You will learn things — how to fix things. And you’ll open the door to a pretty good living. Then get a job. And stay with the job for several years, perhaps climbing the ladder along the way. And then get married…. Then stay married for several years. Learn the sacrifices and responsibilities and compromises — and the happiness. And only then, have a kid…. The trouble is, in our society, we are doing this backwards. People don’t finish school. Don’t take a job. Don’t get married. But do have kids. Wrong order. Wrong formula.

“Now some statistics. Naomi Schaefer Riley writes that ‘children of married parents are more likely to graduate high school, less likely to go to jail, and more likely to delay sexual activity. And of course, children of unmarried parents are more than five times as likely to live in poverty.’

“Economic writer Robert Samuelson notes that single-parent families have exploded, that more than 40 percent of births now go to the unwed [more likely, close to 50% — ed. note], and that the flight from marriage ‘may have subtracted from happiness.’ Citing a study from Isabel Sawhill, he notes that some unwed mothers ‘will have multiple partners and subject their children to a degree of relationship chaos and instability that is hard to grasp.’…

“A recent report from the American Enterprise Institute and the Institute for Family Studies, authored by W. Bradford Wilcox and Robert Lerman, reveals that married men have higher average incomes, seem to be more productive at work, and work more and earn more. Wilcox and Lerman write that 51 percent of the 1980-2000 decline in male employment is due to the drop in marriage rates, and is highest among unmarried men. They find that ‘differing employment rates among married and unmarried men aren’t simply due to education levels or race either.’

“They conclude: ‘Promoting the importance of marriage, looking for ways to reduce marriage penalties in current means-tested welfare programs, and engaging leaders at every level to find ways to strengthen marriage in their communities, are other critical steps to take to restore a culture of marriage.’… In short, marriage is pro- growth. We can’t do without it.”

I am less sure that marriage is necessarily pro-growth, but I am aware that children of married parents are more likely to graduate high school and less likely to go to jail, while children of unmarried parents are more than five times as likely to live in poverty. According to a report released recently by UNICEF, almost a third of all children in the US “live in households with an income below 60 percent of the national median income.” (Some 45% of all African- American children in America live in areas of “concentrated poverty” and almost 41% of all children in the United States who are living with only one parent are living in poverty.)

As Will Durant said, “A great civilization is not conquered from without, until it has destroyed itself from within. The essential causes of Rome’s decline lay in her people, her morals, her class struggle, her failing trade, her bureaucratic despotism, her stifling taxes, her consuming wars.”

But the question is why, nowadays, there are so many unwed mothers. A sociologist is probably better equipped to answer this question than I, but it would seem to me that there is also an economic explanation. As benefits have increased, an unemployed or low salary earning unwed mother can probably improve her mostly extremely modest standard of living by having some children for whom she can claim all kinds of allowances. (In some Western European countries, such allowances are far higher than in the US.)

I have mentioned these issues because, as Kudlow opined, we have a problem if “in our society … people don’t finish school. Don’t take a job. Don’t get married. But do have kids.” So, whereas the US has far more favourable demographics than Japan or most Western European countries, where the population will likely decline, the quality of the young people who will join the US labour force in the future may leave much to be desired (there are, of course, many exceptions to this observation) and may lead to slower economic growth.

More importantly, however, I intended to show how complex is the field of economics. As I said earlier, I have great sympathy for the views of economists Mark Perry and Alex Pollock, but I believe they have failed to address the question of why the structure of society has changed so much over the last 50 years or so. (As an aside: When I was in primary school in Geneva in the early 1950s, one of my classmates was a girl whose mother was unwed. The general opinion in the school and the neighbourhood was that the girl’s mother was a whore.) My view is that the increase in Western governments’ transfer payments (all kinds of benefits) and interventions, combined with the nonsense that typifies most political correctness, has led to a largely centrally planned socialistic and fascist system that enriches the 0.01% and impoverishes the majority of the population by suppressing the free market economy and the pure capitalistic system (which, despite all its faults, is probably still the best system for lifting people’s standard of living).

Perry and Pollock’s explanation for the decline in median household income also reminds me of a physics professor of mine who tried to explain to our class the importance of perspective. The good professor described how when Odysseus (also known as Ulysses) was captured by the Cyclops Polyphemus (the Cyclops were brutally strong giants with a single eye in the middle of their foreheads), he managed to escape by blinding Polyphemus with a wooden stake. The professor then stated that Polyphemus threw huge rocks at Odysseus’s fleeing ships but, having only one eye, he lacked the proper perspective and was thus unable to gauge the distance correctly.

When one of my classmates reminded him that, since Polyphemus had only one eye, he was without any sight at all after Odysseus blinded him with a stake, the professor immediately admitted that “dies kommt noch dazu” (this was an additional reason why Polyphemus missed hitting Odysseus’s ships with his rocks).

The point is simply that the principal reason for the decline in median household incomes is a sluggish economy for most Americans and stagnating or declining personal incomes in real terms.

Regards,

Marc Faber
for The Daily Reckoning

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