Income-Wise, What Percentage of People are Worse Off Now Than in 2000?

Inquiring minds are wondering "Income-Wise, What Percentage of People are Worse Off Now Than in 2000?"

I asked Doug Short at Advisor Perspectives that seemingly simple question after posting his chart of Real Disposable Income in Illusion of Prosperity: Deflating the American Dream; No Recovery in "Real" Income.



click on any chart for sharper image

My comment from the above link: "Real median incomes are down 7.3% since 2000. That means at least half of the population is worse off now than 13 years ago!"

Notes Regarding Disposable Income

Not only is half the population worse off, it is worse off by at least 7.3% in "real" inflation-adjusted term, using the CPI as the deflator.

Unfortunately, the true situation is far gloomier.

Here's the primary reason: Disposable Personal Income (DPI) includes income from all sources (including transfer payments – Social Security, Medicare, private pensions, etc.) less all taxes on income: Federal (including FICA), State and (if applicable) local. Other taxes (e.g., property or sales taxes) are not subtracted from income in the DPI formula.

It's also safe to assume that substantially more than half the population has no disposable income from stocks or bonds. Meanwhile, interest on CDs and other bank accounts is next to zero (not that the bottom half holds substantial CD assets either).

Ignoring sales taxes and property taxes, I asked Doug Short "The chart of median real income since 2000 shows 50% of the people are negative by 7% or so. Where is the zero-Line? In other words, since the year 2000, what percentage of people are actually ahead in terms of real income?"

Doug Replied ...

The monthly household income data from Sentier Research has only the median incomes before taxes (not just disposable income). The annual data (now through 2012) from the Census Bureau has a number of breakdowns of the data, but none, I think, that would enable the calculation you mention. However, a telling graph is a comparison between the median (middle) and the mean (average).

Check out the mean skew of these chart (all households) – real (inflation-adjusted) data. It shows how much faster the mean has grown over the median.

Income Skew in Percentage Terms



Income Skew in Dollars



Note the slopes on the lines in red that I added to the charts.

• Since the year 2000, the mean (average) income fell from $76,180, to $71,274 (a decline of $4,906 or 6.44%).
• Since the year 2000, the median income fell from $56,080 to $51,017 (a decline of $5,063 or 9.03%).

As I have stated repeatedly, Fed bubble-blowing tactics benefits those with first access to money (the banks and the already wealthy). From the mid-60s until the year 2000, at least most boats were rising.

Since the year 2000, however, both the mean and the median income has been sinking, but not at the same rate. Worse yet, that income decline does not even properly take into account rising sales taxes and property taxes!

Although the data cannot precisely answer my question "Income-Wise, What Percentage of People are Worse Off Now Than in 2000?", I believe it's safe to assume that the top 10% has not taken much of a hit at all (if any),  while the top 1% gains year-in and year-out.

Yet, year-in and year-out a parade of Keynesian and Monetarist economic fools plead for more inflation to fix the problems.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Reader Question: "How Can One Calculate True Price Inflation?"

Reader Mel writes ...

Hello Mish

I really enjoy your blog.  You provide a very interesting viewpoint.  One question:  I have seen an analysis based on the old Sears catalogs of 30-50 years that shows how much more an average income can buy today versus 30-50 years ago based on actual prices in the catalog.  It is very convincing.  Do you think that is a valid approach or not?

Keep up the good work,

Mel

Hello Mel

I cannot comment on the catalog because I have not seen it. However, I will suggest that many such comparisons that I have seen are invalid.

For example, I have seen reports comparing home prices and car prices today vs. the average house or car in 1920. But how valid is such an approach?

I suggest, not very. For example ...

• How much house did you get in 1920 vs. today?
• Did it have dual pane energy efficient windows? Appliances? Carpet? Cabinets?
• How much electronics was in a car 50 years ago?

Would you even want to drive a 1920's car today? Legally, you probably couldn't, for safety reasons. Thus, all such comparisons are totally invalid.

Easy Comparisons

Food and energy costs can easily be compared.

I happen to know food prices exceptionally well. I worked in a grocery store as the night-manager for several years in high school and college.

I recall sales prices best because the meat manager was always bitching about how much money he was losing on them.

In 1969, whole chickens on sale were a loss leader at $0.21 per pound. I had farmers come into the store buying them, telling me they could not raise them for that price.

Flash forward to today: Whole chickens are on sale occasion for as low as $0.59 per pound (and I have seen $0.49). But let's be safe and assume today's sale price is $.69.

The price more than tripled, but over 45 years.

Similarly, a 1-poind loaf of generic white bread was something like $0.18. What is that today? I do not buy generic white bread, but a 1-pound whole-grain fresh artisan loaf is something like $2.69 not on sale.

Let's now compute the annualized rate of inflation using a Compound Annual Growth Rate Calculator.

Here is the result ....

Annualized Inflation - Chicken



Annualized Inflation - Bread



My bread example is very unfairly biased on the inflation side. Yet even so, the annualized rate of inflation is not through the roof.

Annualized Inflation - Gasoline

Gasoline is also an easy comparison. Other than a few additives, not much has changed over the years.

Please consider a chart from Inflation Data.



If one goes back to 1918, the annualized rate of inflation is about 2.84%. Instead, let's cherry-pick a starting point of $0.50 in 1974. Here is the result.



 If I use 1981 as a starting point the result looks like this:



Clearly the starting point matters greatly. One can easily cherry-pick starting points on any item to suit whatever story they want to tell.

Government Manipulation

Prices are most distorted where there has been the most government interference. The standouts are health care, education, and housing.

How many "affordable home" programs did Congress sponsor? What was the result? How much government interference in health-care is there? What is the result? How many student aid programs do we have? And what is the result of that?

Calculating health-care costs is problematic, but tuition is easy.

Annualized Inflation - Tuition

I recall that University of Illinois tuition for an engineering degree was on the order of $250 per semester ($500 per year) my freshman year in Autumn 1971.

The preceding link shows in-state engineering tuition is now $16,556. And here is the result.



One can go through all sorts of calculations like this. However, it's important to make sure the comparisons are valid (unlike my bread example). It's also important to use the same starting year for all of the calculations (something I did not do because I do not know historical prices for all of the items I mentioned for every year).

I suggest that a few simple calculations like this are all it takes to dispel some wildly popular cult-CPI calculations from hyperinflationists who claim CPI inflation has been 8-13% per year since 1997.

Consumer Prices Poor Measure of Inflation

Regardless of which CPI-variant you believe is accurate, consumer prices are an extremely poor measure of inflation for several reasons.

1. There is no such thing as a standard basket of goods and services that pertains to everyone
2. Prices of many items cannot be accurately measured because technology changes over time. For example, many medical procedures in place today did not exist 10 years ago. And what about such things as dual-pane argon-gas-filled UV-protection glass windows (now common-place in homes)? How long ago was it when such a thing was not available at any price? What was the price of a cell phone in 1962?
3. Consumer price inflation completely ignores asset bubbles, and asset bubbles are the most common result of monetary printing. The housing bubble and the dot-com bubbles are proof enough. Housing is not even in the CPI, although rent is.

So how can one calculate true price-inflation?

The answer is: It's impossible. More importantly, it's an invalid measure of inflation, even if one could accurately measure prices. But that does not stop people from trying.

For further inflation reading and who benefits from it, please see ...

• Illusion of Prosperity: Deflating the American Dream; No Recovery in "Real" Income
• Reader Asks Me to Prove "Inflation Benefits the Wealthy" (At the Expense of Everyone Else)
• The Morning After; Price Discovery is Zero; PUT on the Bond Market? Is Inflation Really Under 2%?
• Does Inflation Targeting Make Any Sense?
• Inflation Targeting Revisited; Three Major Fed-Sponsored Bubbles; Who Benefits From Inflation?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Illusion of Prosperity: Deflating the American Dream; No Recovery in "Real" Income

In The Morning After; Price Discovery is Zero; PUT on the Bond Market? Is Inflation Really Under 2%? I posted a chart with a caption of "wages" but the corresponding chart showed "income".

The post is now fixed, but newer data has come in, and Doug Short at Advisor Perspectives has updated charts that I would like to share.

click on any chart for a sharper image

From Median Household Income Growth: Deflating the American Dream, by Doug Short.

What is the single best indicator of the American Dream? Many would point to household income growth. My study of the Census Bureau's data shows a 600.7% growth in median household incomes from 1967 through 2012. The ride has been bumpy, but it equates to a 4.5% annualized growth rate. Sounds impressive, but if you adjust for inflation using the Census Bureau's method, that nominal 614.2% total growth shrinks to 18.8%, a "real" annualized growth rate of 0.39%.

But if we dig a bit deeper into the method of inflation adjustment, the American Dream looks more like an illusion, as in "money illusion".

The data for the charts is from Sentier Research. Sentier uses the CPI as the deflator for computing their real household income data series.

The above chart goes back to 1968. It shows that income growth since 1968 is nearly all inflation. Closer scrutiny shows "real" income growth has been negative since the year 2000.

Incredible Shrinking Income

Please consider this chart from Real Median Household Incomes: Another Monthly Decline by Doug Short.



Real median incomes are down 7.3% since 2000. That means at least half of the population is worse off now than 13 years ago!

Think the CPI is a flawed measure? Doug Short has a comparison using different deflators, including the Alternate-CPI from John Williams' Shadowstats.



Doug comments "The Alternate CPI is a rather bizarre outlier. What this deflator is telling us translates into something like this: The 1967 median household income of $7,143 chained in 2012 dollars would have had the purchasing power of $185,588."

By the way, a close look at the above chart shows that the Williams' deflator is 72% since 1989, not all the way back 1967!

Although it's easy to believe CPI is off somewhat, "bizarre"  is a polite description of how far off Williams is in the other direction. And Williams' views of hyperinflation in the US and when it is likely, go far beyond bizarre to the point of absolute ridiculousness.

No Recovery in Real Economy

While Bernanke can talk of "recovery" things started deteriorating badly, not in 2008 but all the way back in 2000. The stock market is back to previous highs, but the real economy sure isn't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

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Europe Hooked on Easy Money Too: ECB President Draghi Threatens Another LTRO, Sings Praises of Excess Liquidity

ECB president Mario Draghi is in on the no-normalization act along with the Fed. Of course, a mere reduction in asset purchases by the Fed from $85 billion a month to $75 billion is not even a baby step towards normalization.

Anyway, it's liquidity full throttle in the Eurozone as well because Draghi Says ECB Will Offer More Long-Term Loans If Needed.

“We are ready to use any instrument, including another LTRO if needed, to maintain the short term money markets at the level that is warranted by our assessment of inflation in the medium term,” Draghi said in response to questions from lawmakers in the European Parliament in Brussels today.

Euro-area money-market rates rose to a level that Draghi described as “unwarranted” in July after the U.S. Federal Reserve signaled that it would begin to ease stimulus and signs emerged of a recovery in the 17-nation region. While those rates have since declined, excess liquidity in the financial system is approaching the 200 billion-euro ($270 billion) level the ECB has previously signaled as a lower limit.

In his opening remarks at the hearing, Draghi said while repayment of central bank credit is “certainly a sign of normalization, the resulting reduction in excess liquidity can reinforce upward pressures on term money market rates.”

As the buffer of excess cash held by the financial system falls, the rates that banks charge each other for liquidity can rise as they shoulder more risk.

In Praise of Excess Liquidity

LTRO stands for Long-Term-Refinance-Operation. Here is a simple, easy to understand explanation:  The ECB is willing to offer unlimited loans against questionable collateral, at excessively low interest rates, to any bank that wants them. 

Draghi wants to build back up the "buffer of excess cash" by any means if interest rates do not go where he wants them to go.

Heaven forbid that any baby steps towards normalization reduce "excess liquidity" causing interest rates to rise, either in the US or Eurozone.

The largest global-coordinated financial gambit in history shows no real signs yet of slowing down.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

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Reflections on Conspiracy Theories and Sensible Accounting by Reader "Alice", 89 Years Young; True Meaning of Banking Safely

I received several emails regarding my post on Risk-Free Banking and Fractional Reserve Lending that I would like to share.

Reader Alice who travels the world at a ripe young age of 89, says ...

Hello Mish

It is wise always for professionals to stand aside from conspiracy theories,  There is no sense compromising the future because the past misread the tea leaves.

Bernanke is doing what he was appointed to do....keep the money coming for the US Government to spend, thereby monetizing all expenditures no matter the purpose.

The growing call from citizens for some form of fiscal sanity is beyond the purlieu of the Fed.  It never was established to settle accounts, or keep them within bounds. 

The founder of modern international finance, Amschel Rothschild, gave the aims and direction of his enterprise simple instruction when he declared he cared not what governments did, all he wanted was the right to control, print their money. Governments took him at his word and his business grew exponentially so he must have been doing something right or as Lloyd Blankfein said "doing God's work!"

Bernanke knows Obamacare may be "defunded" and other excesses curbed, and he doesn't like that. His stewardship of the Fed is not to maintain status quo but to expand its power, its "credit" base worldwide, to continue the momentum his predecessors started. He doesn't have to curry favor with politicians, since they love to spend and he provides the means to do so across national borders and in all commodities sold worldwide. So long as that function maintains any semblance of order, the Fed goes on and on, gathering more followers in every year.

I would love to see a return to "sensible accounting" but I am hard pressed as to what constitutes "sensible" these days. When I began investing, one looked at the real property on balance sheets. In today's tech driven world, the definition of value is more cloudy than ever before, especially since all transactions and exchanges are literally fabricated from thin air and deposited in "The Cloud".

The third dimension is printing money as if it was a magic wand to create everyone's dream.

All I know is that when I travel the world, (and I do every year) I see people who have never lived so well in any other time in history, including the poor and downtrodden. I know the American Century has something to do with that but I also know the British Empire had almost the same effect in its time at bat and I am waiting to see what happens, progresses next.

Alas, I don't have much time to assay such things. At coming of age at 89, I may have to settle down here in Florida in my small villa and get reports second hand.

I do love your approach and you can be assured I will be reading you as you write.

Thank you,

Alice Maxwell

Moral Hazards

Reader Rick comments on the moral hazards of Fed policy.

Hi Mish

The title of Megan McArdle's article is "Banking Without Risk Is Impossible", yet she supports a policy that creates moral hazards. Instead of a system where both parties take a risk, one party is off the hook. This leads to bad lending policies because there are hardly any consequences to bad lending policies.

Rick

Indeed, as it stands banks are always bailed out at taxpayer expense, the very epitome of "moral hazard". In effect, the Fed encourages excess risk taking, and bubbles are the inevitable result.

True Meaning of Banking Safely

Reader Bruce pinged me with his thoughts on teaching his children the true meaning of "risk-free".

Hello Mish

I have tried to educate my children on this very subject. We as a family are working our way to being debt free.

This is the only way I can see to bank safely. We have purchased rental property, business property, and are in the process of paying off our last home. We are also building up a large cash reserve (aware that inflation takes it toll).

We also have gold reserves, and liquid assets.

Owning property free and clear, especially income property, gives one options that those with mortgages don't have.

Bruce

Thanks to all who wrote regarding fractional reserve lending (whether I commented or replied).

And also thanks to many of those who commented on Attack of the "Digger Bees".

Yes, I knew that "digger bees" (yellow jackets) are not bees but wasps.

Bees, as many readers pointed out are generally docile. I like bees actually and put out a "humble bumble" home and nests for mason bees.

We are looking into the EpiPen antidote system, because this is now the third stinging event regarding yellow jackets on my property.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

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May Be a "Grand Coalition" Nightmare After All

As votes near final counting, CDU/CSU may be 1-3 seats short of an out majority.

The projections posted earlier may be incorrect. For example Haartez and PressTV had stories proclaiming an outright majority for CDU/CSU.

From Haartez

German Chancellor Angela Merkel's conservatives are on course to win a historic absolute majority in Sunday's election, according to a projection based on exit polls and some results from broadcaster ARD.

The projection put Merkel's conservatives on 42.5 percent, a whisker over the combined total for the left parties who together scored 41.6 percent

Even though it's a big win for Merkel, the Financial Times speaks of a "Grand Coalition Nightmare", noting  Coalition uncertainty hangs over Angela Merkel victory.

Even if Germany’s knife-edge general election ultimately produces a grand coalition, the result is still a big personal triumph for Angela Merkel.

A minority government – or one with a narrow majority – for Ms Merkel would be very difficult to manage, and the chancellor is more likely to prefer a coalition. The most popular in Germany – backed by some 52 per cent of voters – would be a grand coalition. But that could still be very difficult to negotiate.

On television on Sunday night, Ms Merkel insisted that she would not answer “speculation” over the shape of the next government until the final result was clear. “We will discuss this in our party circles,” she said. “Tomorrow we will have another look. It will not depend on us alone.”

Inside the SPD, many members regard a grand coalition as a nightmare.

Mr Gabriel has summoned a party convention for next Friday to consider how the SPD should proceed. Leftwingers want to call an all-party referendum on any proposal for a grand coalition. That could prove a severe obstacle.

If Ms Merkel is just one or two seats short of an absolute majority – something that was still unclear on Sunday night – she might be more tempted to approach the Greens, whose Jürgen Trittin, co-leader of the campaign, has never entirely ruled out such a “black-green” combination.

He is known to be keen to become finance minister, but many grassroots members of his party are horrified at the idea of co-operating with the conservatives, and especially with the Bavarian CSU.

One possibility is that Ms Merkel would approach the SPD for a grand coalition, and initially be rejected.

She would then try the other possibilities of an alliance with the Greens, or forming a minority government, before eventually returning to the SPD with a more persuasive offer.

Whatever happens, the negotiations could take many weeks. The longest negotiations ever were in 1976, when Helmut Schmidt, the SPD chancellor, took 73 days to reach agreement with Hans-Dietrich Genscher of the FDP.

The last grand coalition talks, in 2005, took a more modest 65 days. The average time is 37 days.

The latest projection tally I now have suggests CDU will be 1-3 seats short. This is going down to the wire.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

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FDP Out; Possible CDU Outright Majority; No Grand Coalition

Shortly after posting "Too Close to Call", reader Bernd pinged me with an update.

"Polling agency ZDF predicts CDU/CSU has an absolute majority of 304 seats in Parliament."

Bernd also added ...

Hello Mish

We are unlikely to know until very late tonight or tomorrow, if AfD made it. I will keep you posted. This has to do with a lot of technical/statistical problems and with the number of "voters by mail". This was the highest number of "mail voters" ever. Mail voters are people who voted beforehand by mail as per request.

The clear winner, undoubtedly, is Angela Merkel. 42+% is impressive.

Bernd

Those who assumed a Grand Coalition was inevitable were simply wrong. It could still happen, but I doubt it. Why enter a coalition if you do not need to?

Addendum:

If AfD does squeak in, the absolute majority for CDU-CSU goes away.

In that case, Merkel would have to choose between a coalition with AfD that would be relatively stable, or a coalition with SPD that would not be stable because of demands on minimum wages, banking unions, tax hikes, etc. 

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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