Living the Good Life: The Good Old Days Are Now
Here's another comparison of consumer purchasing power in the 1960s versus today, based on the time cost of common household appliances like a kitchen oven. The Sears Kenmore oven pictured below retailed for $330 in 1966, which would represent 121.3 hours of work (about three weeks) at the average hourly wage in that year (ignoring taxes).
At the current average hourly wage of $19.10, today's average consumer would earn a little more than $2,300 working 121.3 hours, and would be able to furnish their entire kitchen with the new appliances pictured below (click to enlarge) from Best Buy including a high-efficiency front-loading washing machine, super capacity gas dryer, 30-inch gas stove, 8.8 cubic feet chest freezer, 16.5 cubic foot refrigerator, dishwasher, mid-size microwave and blender:
Measured by what is ultimately most important, the value of our time, household appliances keep getting cheaper and cheaper, thanks to innovation, technology improvements, supply chain efficiencies, increases in productivity and other market-driven efficiencies that drive prices lower and lower year by year. As much as we hear about declines in median income, economic stagnation, the disappearance of the middle class, falling real wages, increasing income inequality, the data tell a much different story: The rich are getting richer and the poor are getting richer.
25 Comments:
Another wonderful example of how productive businesses in a competitive environment have had to keep increasing their efficiencies and pushing prices lower. The problem that we face comes from the massive spending regimes that has been pushed by governments at all levels. Those regimes will have to be financed by taxes from taxpayers, which means that the items you have shown are not as affordable in after tax income as you may be claiming.
VangeIV, tax rates don't need to rise to finance government debt:
1. Foreign saving that flowed into the U.S. can continue to "erode" from currency exchange rates, inflation, and interest rates.
2. Government spending and regulation can be reduced.
3. The U.S. economy can expand at a faster rate to increase tax revenues.
4. Foreign owners of U.S. debt (e.g. the wealthy or highly skilled) can sell their assets, exchange their currencies for dollars, and move to the U.S. (which would raise their living standards substantially).
Here's what Scott Grannis wrote recently:
"We don't need higher tax rates to balance the budget, we need an extended period of much slower growth in spending. If revenues were to continue growing at the rate of the past six months, and if spending were to be frozen at current levels, the budget would be balanced within 5 years, with revenues and spending likely to be about 19% of GDP. That would put us back to the levels that prevailed, on average, for most of the postwar period."
I think, the best course of action (next year) is reducing government spending and rolling back regulations. Then use those saving for tax cuts to facilitate economic growth, which will raise tax revenues.
1. Foreign saving that flowed into the U.S. can continue to "erode" from currency exchange rates, inflation, and interest rates.
OK, I'll play. What you are saying that instead of having to pay off debts by having the revenue come from taxpayers you propose to reduce the real value of the currency by inflating the supply so that the people hurt the most are the savers that are required to make capital accumulation possible and the bond holders that financed the government's operations. How exactly will hyperinflation be a positive thing?
2. Government spending and regulation can be reduced.
It does not make any difference. The sum of the public debt and unfunded liabilities stand at more than $100 trillion. The only way to reduce spending is to end SS and Medicare benefits for many of the people who have paid the bills for current recipients. The resulting riots would make what we saw in Greece and France like a Sunday walk in the park.
3. The U.S. economy can expand at a faster rate to increase tax revenues.
Of course it can. All you have to do is to fire most public sector employees and cut government to the bone. Do you see that happening?
4. Foreign owners of U.S. debt (e.g. the wealthy or highly skilled) can sell their assets, exchange their currencies for dollars, and move to the U.S. (which would raise their living standards substantially).
That only happens in a deflationary environment that would coincide with a huge regulatory and immigration overhaul. There is no way that the Fed would allow deflation so you would have to close it down. Do you see that happening?
Here's what Scott Grannis wrote recently:
"We don't need higher tax rates to balance the budget,...
Either I was not clear or you misunderstand. I have never called for more taxes. I have called for a massive cut in spending by governments. But knowing what we know about voters, politicians, and human nature, I do not see anything that would convince me that the cost cutting path is seriously being considered.
To convince me that anyone is serious about cutting taxes and reducing spending I need to see a few things.
1. Cut the size of government substantially.
2. Close the military bases in Germany, Japan, and South Korea.
3. End the war in Afghanistan.
4. Cut aid to Israel, Turkey, and Egypt.
5. Repeal Obamacare.
VangelV, the Mundell-Fleming model (and variations) shows when the U.S. current account deficit was $800 billion (a year), with an $800 billion capital account surplus (to balance the balance of payments), the U.S. was near an optimal point. The U.S. shifted towards a suboptimal point during the recession. However, it's moving towards the optimal point again. There are several mechanisms. However, I'll explain one:
Export-led economies sold their goods too cheaply and lent their dollars too cheaply to generate a virtuous U.S. cycle of consumption-investment to maintain their employment levels.
Those economies lost investing in the U.S., because a weaker dollar means they had to exchange more dollars for their currencies, and from relatively low interest rates (U.S. T-bonds are the safest investment in the world), and they exchanged their goods for dollars instead of exchanging their goods for U.S. goods, which means if they bought U.S. goods in the future, prices would be higher (from inflation, i.e. they'd receive fewer U.S. goods).
Anyway, I don't expect hyperinflation, because the Fed will drain dollars out of the economy to maintain sustainable growth or price stability.
Your $100 trillion of unfunded liabilities is not a real number. Future workers will help support future retired workers. It's likely benefits will be cut one way or another.
Who knows what the results of the Tea Party and Republican House will be in 2011. Also, it's possible a Republican will win the White House in 2012 with a 60-seat Senate.
Health care is very expensive in the U.S., because the government made it expensive and inefficient, e.g. through 150,000 pages of regulations. Obama stated we cannot afford "bubbles" and then went on a huge spending spree. Who knows, he may have prevented a huge Biotech-Health Care bubble.
"Who knows what the results of the Tea Party and Republican House will be in 2011. Also, it's possible a Republican will win the White House in 2012 with a 60-seat Senate"
***************
Under republican rule the economy was fantastic and we never had a federal defecit or a failing economy before Obama.
The republicans will save our economy again just like they did in 2008. The year 2008 was our last great fiscal year.
We can only dream about another 2008 under Obama !!!!
Living The Good Life
peak trader,
I agree that the $100 trillion unfunded liability number is not real. Both medicare and social security costs will be somehow reduced before they are allowed to consume all government revenues. Unfortunately, the solution will likely include means-testing.
Jet, yes. The time frame of that $100 trillion is also important. Is it till 2050?, 2070?
$100 trillion is a lot of money, e.g. compared to the current $14 trillion of government debt. However, over the next 10 years, the U.S. may produce over $200 trillion of output (at 6% nominal growth per year).
Between 2010 and 2050, the U.S. may produce over $1 quadrillion of output.
Peak Trader wrote:
“Your $100 trillion of unfunded liabilities is not a real number. Future workers will help support future retired workers. It's likely benefits will be cut one way or another.”
Believe the correct depiction is: “+$100 trillion of FUTURE unfunded liabilities”.
Social insurance schemes are pay as you go schemes. That no reserve is set aside to fund future liability in social insurance schemes and “reserve” is replaced in social insurance by the ability of the government to raise taxes to cover future liabilities.
“…is not a real number” means that private insurers that reserve for future liabilities are merely reserving for a not real number? Then private insurers should end their reserve system?
“Future workers will help support future retired workers”. Do not the future workers also create a future unfunded liability of their very own?
Taking the entire statement at once, an observer might conclude: “Your $100 trillion of unfunded liabilities is not a real number” is a depiction of/solicitation to a ponzi scheme with “ Future workers will help support future retired workers” as a continuation of the ponzi scheme with “It's likely benefits will be cut one way or another” being the conclusion and collapse of the ponzi scheme.
Heasley,
I do not understand why you are trying to relate Medicare/Social Security and the liabilities of private insurers.
As I understand it, private insurers have made a legal and binding commitment to provide some specific future benefit if a certain event or events occur. By contrast, the U.S. government has made no legal and binding commitment to those who pay social security and medicare taxes. The U.S. government can - and has - changed the terms and amount of benefits it provides social security and medicare beneficiaries. It will do so in the future.
Because no legal commitment has been made to future beneficiaries, the unfunded liabilities of social security and medicare is not a real number. It can and will change to reflect the relative political power of separate generations and the relative political power of economic classes.
Jet Beagle writes:
“I do not understand why you are trying to relate Medicare/Social Security and the liabilities of private insurers“.
In the theory of insurance, be it social insurance or private insurance, insurance is a transfer of risk for a consideration. More specifically, an “obligation” has been transferred. The obligation is a liability.
In social insurance risk is transferred from the individual to a central planning authority i.e. government.. The consideration can be payroll taxes, other direct tax, or the tax dollars of exogenous entities. Regardless, the plan participant perceives a transfer of risk and expects a third party to pay if a loss triggers coverage/benefit. An obligation has been transferred from the individual to the social insurance purveyor.
Hence liabilities exist in social and private insurance, with both plans reserved. Private insurers goes the legal reserve route and social insurance reserves through the government’s ability to tax and raise tax. Therefore we have two separate systems, reserving in two types of fashion, both with transferred obligations (liabilities)
“Because no legal commitment has been made to future beneficiaries, the unfunded liabilities of social security and Medicare is not a real number. It can and will change to reflect the relative political power of separate generations and the relative political power of economic classes.”
Future beneficiaries are current beneficiaries. Past and future beneficiaries becomes meaningless as they are/were always current beneficiaries. When a non-reserved social insurance plan replaces the concept of reserving for future liabilities with the ability to tax, then all beneficiaries are current as we have not reserved for the future. Hence as time marches on current beneficiaries disappear due to death merely to be replaced by additional/replacement “current” beneficiaries. The transferred obligations of the stream of current beneficiaries is based on the government’s ability to tax and raise taxes to fund transferred obligations.
However, this never ending march of current beneficiaries through an un-reserved system means: the failure to reserve creates a claim against tax dollars to fund the un-reserved system. This “claim” exists due to the failure to reserve. Hence the claim is a claim against tomorrows tax revenue, next week’s tax revenue, next decades tax revenue, etc. by the never ending march of current beneficiaries through an un-reserved system. Its also a claim to raise taxes when the un-reserved plan can not meet current obligations.
Therefore the +$100 trillion unfunded obligation is in essence a claim against tax dollars and a claim to raise taxes by and through an un-reserved system ,with a stream of current beneficiaries moving through time, expecting their transferred obligations to be handled by a third party.
Think of it this way, if social insurance was based on a legal reserve system then contribution levels would be much, much higher. Your Medicare tax rate would be much higher. However the system would be reserved for liabilities. On the other hand, if we do not reserve the ability to meet obligations merely means you will depend on our ability to reserve through increased taxes.
The “no legal commitment” is a very abstract concept in that the plan participant is under threat of retributive and deterrence theories of punishment if they do not participate and/or have paid into a current account system expecting their past contributions to be a consideration paid for the transfer of risk.
If no legal commitment exists then no legal commitment is required of the participant and no retributive and deterrence theories of punishment would exist for non compliance.
Jet Beagle writes:
“I do not understand why you are trying to relate Medicare/Social Security and the liabilities of private insurers“.
In the theory of insurance, be it social insurance or private insurance, insurance is a transfer of risk for a consideration. More specifically, an “obligation” has been transferred. The obligation is a liability.
In social insurance risk is transferred from the individual to a central planning authority i.e. government.. The consideration can be payroll taxes, other direct tax, or the tax dollars of exogenous entities. Regardless, the plan participant perceives a transfer of risk and expects a third party to pay if a loss triggers coverage/benefit. An obligation has been transferred from the individual to the social insurance purveyor.
Hence liabilities exist in social and private insurance, with both plans reserved. Private insurers goes the legal reserve route and social insurance reserves through the government’s ability to tax and raise tax. Therefore we have two separate systems, reserving in two types of fashion, both with transferred obligations (liabilities)
“Because no legal commitment has been made to future beneficiaries, the unfunded liabilities of social security and Medicare is not a real number. It can and will change to reflect the relative political power of separate generations and the relative political power of economic classes.”
Future beneficiaries are current beneficiaries. Past and future beneficiaries becomes meaningless as they are/were always current beneficiaries. When a non-reserved social insurance plan replaces the concept of reserving for future liabilities with the ability to tax, then all beneficiaries are current as we have not reserved for the future. Hence as time marches on current beneficiaries disappear due to death merely to be replaced by additional/replacement “current” beneficiaries. The transferred obligations of the stream of current beneficiaries is based on the government’s ability to tax and raise taxes to fund transferred obligations.
However, this never ending march of current beneficiaries through an un-reserved system means: the failure to reserve creates a claim against tax dollars to fund the un-reserved system. This “claim” exists due to the failure to reserve. Hence the claim is a claim against tomorrows tax revenue, next week’s tax revenue, next decades tax revenue, etc. by the never ending march of current beneficiaries through an un-reserved system. Its also a claim to raise taxes when the un-reserved plan can not meet current obligations.
Therefore the +$100 trillion unfunded obligation is in essence a claim against tax dollars and a claim to raise taxes by and through an un-reserved system ,with a stream of current beneficiaries moving through time, expecting their transferred obligations to be handled by a third party.
Think of it this way, if social insurance was based on a legal reserve system then contribution levels would be much, much higher. Your Medicare tax rate would be much higher. However the system would be reserved for liabilities. On the other hand, if we do not reserve the ability to meet obligations merely means you will depend on our ability to reserve through increased taxes.
The “no legal commitment” is a very abstract concept in that the plan participant is under threat of retributive and deterrence theories of punishment if they do not participate and/or have paid into a current account system expecting their past contributions to be a consideration paid for the transfer of risk.
If no legal commitment exists then no legal commitment is required of the participant and no retributive and deterrence theories of punishment would exist for non compliance.
VangelV, the Mundell-Fleming model (and variations) shows when the U.S. current account deficit was $800 billion (a year), with an $800 billion capital account surplus (to balance the balance of payments), the U.S. was near an optimal point. The U.S. shifted towards a suboptimal point during the recession. However, it's moving towards the optimal point again. There are several mechanisms.....
I am sorry but there has never been any empirical evidence of any economic model that has accurately been able to predict future economic developments.
Export-led economies sold their goods too cheaply and lent their dollars too cheaply to generate a virtuous U.S. cycle of consumption-investment to maintain their employment levels.
I used to live in China for a couple of years and have been there a number of times. If you are right we would have seen China suffer over the past twenty years because what you are saying has been going on for a better part of two decades, if not longer.
But from what I can see, even though China has seen some significant malinvestments that it will have to pay for, it has been able to upgrade its capital structure significantly over that period. In many areas its infrastructure is better than what we see in the US. (Try going through a US airport and compare it to the experience of going through a Chinese airport and then tell me which is the more developed country.) The real standard of living has exploded. Most people are far better off than they were.
And what is true of China is also true of other export oriented economies such as Vietnam, Germany, Canada, Brazil.
Heasley,
There is no specific legal commitment being offerred to medicare and social security contributors. Among the many options for reducing overall benefits, Congress can at any time:
1. change the full retirement age, which they did for everyone born after 1948;
2. change the deductibles for medicare;
3. charge higher Medicare premiums for those with above average incomes;
4. institute means-testing to reduce costs for potential beneficiaries who have accumulated savings over their lifetimes.
Do you really believe, Heasley, that everyone who pays Social Security/Medicare taxes now is going to receive the benefits they have been "promised" but not guaranteed by law?
Social Security retirement and Medicare benefits are not insurance, Beasley. The difference will soon become apparent to everyone who retires with other sources of income.
Those economies lost investing in the U.S., because a weaker dollar means they had to exchange more dollars for their currencies, and from relatively low interest rates (U.S. T-bonds are the safest investment in the world), and they exchanged their goods for dollars instead of exchanging their goods for U.S. goods, which means if they bought U.S. goods in the future, prices would be higher (from inflation, i.e. they'd receive fewer U.S. goods).
I remember making the same point as you made above to a Chinese economist. He said that by the time the USD and USTs become worth much less China will have built most of the infrastructure that it needed to modernize its economy. And when the 'losses' did come they would be partially (or fully) offset by the fall of the USD as a reserve currency and the ascendency of other currencies in its place.
Anyway, I don't expect hyperinflation, because the Fed will drain dollars out of the economy to maintain sustainable growth or price stability.
The Chinese, Taiwanese, Koreans, and Japanese would love that. The increased value of their treasuries would allow them to buy much more of the commodities that they need to support their economies and they would be able to step in and purchase American businesses, farms, houses, etc., at liquidation prices as a wave of bankruptcies sweeps away the over-indebted individuals, municipalities, and states. Do you really think that the Fed would allow that to happen?
And if it did, how would the government pay for all of the unfunded liabilities?
Your $100 trillion of unfunded liabilities is not a real number. Future workers will help support future retired workers. It's likely benefits will be cut one way or another.
There is no way to make the math work. Look at the work done by Laurence Kotlikoff or David Walker. You would need taxes to double from here and would still need spending cuts even with the projected GDP growth.
Who knows what the results of the Tea Party and Republican House will be in 2011. Also, it's possible a Republican will win the White House in 2012 with a 60-seat Senate.
It will not make a difference if the Republicans win because they are statistics just like the Democrats. Nixon, Reagan, Bush I, and Bush II did not decrease the size of government even though they talked a good game and, in the case of Reagan, understood economics. The US needs the two main parties to be marginalized before there can be a hope of recovery.
Health care is very expensive in the U.S., because the government made it expensive and inefficient, e.g. through 150,000 pages of regulations. Obama stated we cannot afford "bubbles" and then went on a huge spending spree. Who knows, he may have prevented a huge Biotech-Health Care bubble.
Obama is a fool and has no idea about how the real world works. He is a law professor who does not seem to understand law and a proponent of value free science who appoints dogmatic fools to regulate and fund science.
From what I can see it makes sense to take advantage of spikes to the upside by betting against the USD.
Under republican rule the economy was fantastic and we never had a federal defecit or a failing economy before Obama....
LOL...
Be careful. This blog has so many ridiculous postings that one has a hard time trying to figure out when someone is being ironic or sarcastic.
VangeIV: "It will not make a difference if the Republicans win ... Nixon, Reagan, Bush I, and Bush II did not decrease the size of government even though they talked a good game"
I agree that total government spending is not going to be reduced, either in real dollars or as a percent of GDP. But I'd like to make three points about that:
1. Gingrich and Clinton came closer than at any other time in my lifetime to achieving a halt in government spending;
2. some forms of government spending are worse than others (social security disbursements still leave the decision-making about resource allocations in the hands of the private sector, for example);
3. government spending is not the only means by which government interferes in the economy. Washington could halt the growth in government spending and still be an increasing drag on the economy.
Living The Good Life
There you go. After a fine start you go and post a stupid link that misses the point.
In the video that you linked there are a number of serious errors. For one, the line, 'sweatshop labour in the foreign factory,' provides images of poverty and oppression. But anyone who has been to China knows just how attractive those sweatshops are to the individuals who fought hard to be accepted to work there. They pay very well in comparison to other available jobs and allow people with modest skill sets to make a good life for themselves.
The video goes on and in a very elitist fashion accuses people of buying junk with money that they do not have. It equates low prices with junk when that is not the case. After all, as Mark has pointed out in a previous post, for what it cost to purchase a Sears Kenmore oven (price of $330 in 1966), an individual today could buy a microwave, a front-loading washing machine, a large capacity gas dryer, a gas stove, a chest freezer, a refrigerator, a dishwasher, and a blender. The price declines did not come about just because the producers wanted to cut costs for consumers. Part of the price decline came from competition from the very retailers that your video tries to make fun of.
Are you implying that consumers better off if they had to pay much more for their food, light bulbs, shavers, deodorant, soap, toilet paper, shampoo, medicine, clothing, toys, and other things that they use?
Then there is the part where people lose their jobs because they work in an uncompetitive company and consumers want a better deal. What exactly is the problem? Should we keep uncompetitive practices by forcing people to pay more? Does this mean that we should get rid of machinery that make manufacturing operations more efficient? And if it does, how does that the ordinary worker?
It seems that an economic education may do you some good. That way you will be able to understand how the world works.
I agree that the $100 trillion unfunded liability number is not real. Both medicare and social security costs will be somehow reduced before they are allowed to consume all government revenues. Unfortunately, the solution will likely include means-testing.
It still won't work. For means testing to effectively decrease outlays it would have to impact many voters and if it does support for SS and Medicare will melt away. Young people do not want to pay for people if they know that they will be unable to collect benefits themselves. Means testing would make SS and Medicare just another welfare program and there are already plenty of those that have not worked as intended.
My bet is that the US economy collapses before a decision is made. I expect to see activity at the periphery first as the municipal bond market sees a continuation of its collapse and states have to start firing employees and reducing their pension plans. I suspect that some populist will come around and will run for office on a platform that turns the table on the progressives and liberals. After years of having the taxpayers be told by the liberals that they must do their part and sacrifice they will be asked to do the same. Those fat public pension plans will have to be cut down for the good of the nation. Salaries will have to come down and working time will have to increase. Teachers, policemen, firemen, local politicians, and everyone on the public payroll will be asked to sacrifice until the average compensation rate equals the private sector average.
Do you really believe, Heasley, that everyone who pays Social Security/Medicare taxes now is going to receive the benefits they have been "promised" but not guaranteed by law?
The numbers show that they can't receive benefits because the Ponzi scheme cannot possibly keep solvent for much longer. There will be a day of reckoning some time within the next ten years no matter which party wins Congress or the Presidency.
Social Security retirement and Medicare benefits are not insurance, Beasley. The difference will soon become apparent to everyone who retires with other sources of income.
If the government discourages people from obtaining another source of income it will get a lot more people who have little in extra income. That will further weaken the economy and put even more stresses on the Welfare State.
1. Gingrich and Clinton came closer than at any other time in my lifetime to achieving a halt in government spending;
It was not enough. Spending still went up. Clinton and Gingrich had strong tail winds behind them. The Fed was manipulating interest rates lower and the Treasury was reducing the duration on the outstanding debt. Favorable demographics kept SS expenditures low and tax revenues high. With capital tax rates low and the Fed blowing a bubble in the Internet and IT sectors tax revenues were rising very rapidly. That was also the time that Gingrich and Clinton decided that excess SS and Medicare contributions could be added to general revenues and counted as a reduction of the deficit.
I do not expect similar conditions to appear in the future. Interest rates are likely to increase. The demographic tide has turned and retiring Boomers will increase the stress on SS and Medicare. The outstanding federal debt is now three times the level it was when Clinton took office. The SS and Medicare surpluses are gone and we will soon be looking at shortfalls that will have to come from more borrowing, more taxes, or reduced benefits.
2. some forms of government spending are worse than others (social security disbursements still leave the decision-making about resource allocations in the hands of the private sector, for example);
When the government spends much more than it takes in, there is no way to spin it into a positive narrative.
3. government spending is not the only means by which government interferes in the economy. Washington could halt the growth in government spending and still be an increasing drag on the economy.
I agree. Government meddles far too much and needs to be made much smaller. I just don't see that happening any time soon.
Let us know if those things will last as long, or break down multiple times over 30 years.
VangeIV,
I wish I could convince you that deficits - at least at the levels of the past decade - are not very important over the long run. The evil, as I see it, is not that government spends more than it takes in. The evil is that the government controls the allocation of so many resources in our economy. The government can finance its spending through current tax revenues, through debt, or through inflation. Even if the government's revenues equaled its spending, the distortion would just about be the same.
Government spending and regulation - not government deficits - are the problem.
> Don Cluless said...
> Living The Good Life
Libtard economic twaddle, based on a high-school grasp of economics.... no, wait, I rather clearly overestimate the edumacation level.
Make that fifth grade... No, not REAL fifth grade, postmodern "feel good" fifth grade!
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