Conventional wisdom revisited

Every so often when I come across an article in the mainstream media that makes bold and intriguing predictions for the future, I recall a Wall Street Journal article I clipped 12 years ago today — and how wrong the conventional wisdom it reflected has turned out to be.

The headline reads "Reason for Hope: Middle Class's Fears About Coming Years Might Be Misguided." 

CHATTANOOGA, Tenn. – Headlines scream "middle-class revolt." Politicians compete to appease middle-class voters with tax cuts. Polls find many Americans worrying that their children not only won't be able to live better than they have, but may not even be able to live as well.

Are their worries justified? Or is it possible the next two decades will work out better than the last two—that, first, the U.S. will grow faster over the next 20 years than in the past 20 and, second, people at the middle will reap more of the gain than those at the top?

Well, we're 12 years into the "next 20."  How does the "middle" compare with the "top?"  Well, one yardstick we can use comes from the Economic Policy Institute, which tracks the ratio of CEO compensation to that of the typical worker.  At the time the WSJ article was written, the ratio was somewhere in the low 100s… while the most recent figures show the average CEO is earning 262 times the average worker.

The article continues:

In fact, there is good reason to believe thst despite people’s jitters, living standards will get better for middle-class families over the next two decades.

Here's how it could happen: Changes in technology, trade and education would boost the fortunes of most Amertcans. Growing global markets would create big opportunities for dynamic U.S. companies and their employees. Broader computer use would make workers more productive, more in demand and able to command higher salaries. And growing college enrollment would shrink the gap between the wealthy and middle classes.

Kinda gives new meaning to the term "irrational exuberance," huh?  (For the record, the article was published nearly two years before Alan Greenspan made that expression famous.)  Three million manufacturing jobs gone bye-bye in the new millennium.  Salaries are stagnating and a bachelor's degree earns you something comparable to what a high school diploma earned you a few decades ago.  Maybe.

But enough of that.  Let's return to the article:

"If we play our cards right, we're at the beginning of a period of significant long-term prosperity," says Jeffrey Sachs, a Harvard University economist. "We are in the midst of one of history's greatest expansions of market capitalism."

The past 20 years have seen historically slow growth, causing problems for those in the middle. They can buy more, but often at great personal cost: two people working, rising debt, job insecurity.

But with a small acceleration of growth, the typical American family could expect to see significant changes for the better. Annual growth of the U.S. economy during the past 20 years averaged 2.4%, and government policy makers assume this will continue for many years. If so, median family income will increase to about $46,000 by 2010 from last year's $38,400, according to projections by Regional Financial Associates, an economic consulting firm in West Chester, Pa. The figures are in 1994 dollars.

However, if productivity improvements already under way add half a percentage point to the growth rate, median family income will rise to $50,900 in today's dollars, according to the firm, which did the projections at this newspaper's request. And if growth should average a full percentage point higher than in the past 20 years, median family income would reach $56,300, the firm figures.

Hmmm, let's do some back-of-the envelope calculations.  Median family income in 2004, according to the Federal Reserve, was $43,200.  Using the Fed's inflation calculator, we see that in 1994 dollars, we're talking about $33,900.  That's down $4500, or 11.71% from 1994!  Under what scenario will we reach that $46,000 projection by 2010?  To say nothing of $50,900 or $56,300?

Enough already!  I'm about to throw my computer through the window seeing how wrong, wrong, wrong these predictions were, and I've only gotten through rereading barely 400 words of this 2500-word article that I squirreled away 12 years ago today, figuring it might come in handy for god-knows-what, because blogs sure hadn't been invented yet.  Check back next year — maybe I can get a little further in picking apart the article before I get fed up with the exercise, but I make no promises.

The Daily Reckoning