Gas station without pumps

2015 November 27

Why don’t I feel rich?

Filed under: Uncategorized — gasstationwithoutpumps @ 22:03
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When I was a child “millionaire” was synonymous with “rich man” (and, yes, gender was included in the meaning), and being a millionaire meant having a million dollars. I didn’t think about it at the time, but “having a million dollars” probably meant having a net worth that large, not necessarily having that much in cash or even in liquid assets.

Now Zillow tells me that my modest 2-bedroom house that I paid off the mortgage for several years ago has a market value over $1 million.  So I must now be a millionaire.  Why don’t I feel rich?

Perhaps the difference is inflation.  But what index of inflation should we use?  In 1960, the median house price (nationwide) was $12,700, about 2.4× the average salary. So a million dollars would buy about 79 houses.  The median home price now is about  $230,000, so to be a millionaire by 1960 standards, I’d need to have about $18 million.  Of course, not everything is as expensive as housing, and using the consumer price index for inflation puts $1m 1960 dollars at about $8m today.  OK, I don’t have that much money, even if you add all my retirement savings and my son’s college fund.  So, I’m not as rich as a 1960 millionaire.

Granted, I live in one of the most expensive places to buy houses in the country in terms of  median house price/median income.  The median house price is approximately $755,000 and the median household income is $63,000–87,000 (depending whose statistics you believe) making the ratio 8.7–12 years income to buy a house. Rents are not quite as bad: the price-to-rent ratio is about 25 (that is, the price of a house is about 25 times the annual rent for the house), so people are not buying houses as rental income investments.  In this town, a million-dollar house is a 2-bedroom house in a good neighborhood, not a McMansion.

Of course, being “rich” is always a relative term—it is how well off you are compared to others you are aware of.  According to various distribution plots I’ve seen of US household income, our household income has been hovering recently at about the 80–85%ile.  That sounds to me like “upper middle class” or “comfortable”, not rich.

However, because I have paid off my mortgage and my house has appreciated so much, together with the amount I’ve saved for retirement, I’m probably in the top 1–2%ile of net worth for households in the US (I’m not really sure of that, because it is so hard to get consistent information about the wealth distribution in the US).

Of course, those retirement savings and my son’s college fund have come by being very frugal—I’ve never owned a car, I don’t take vacations most years, I buy a new bike about once every 15 years, I get a new computer about every 4 years, many of my clothes come from the thrift stores or garage sales, most of my books are used paperbacks, we don’t turn the heat on until the temperature in the house drops below 60°F, most of our furniture was bought cheaply 25–30 years ago, we only eat meat once or twice a week, and so forth. By one definition of “middle-class”—the one based on consumption rather than income, I’m solidly middle class, and only getting to that level because my wife and I eat out once a week.

Wait, that’s not quite right—we’re paying full-freight for my son’s college tuition and housing, and that combined with even very frugal living makes our spending more than the middle fifth of the population. College has gotten very expensive even at state schools, now that the state pays almost none of the cost.

So perhaps the reason I don’t feel rich is that I’m still living much the way I did when I was grad student—even though my retirement savings are now large enough that I could probably retire this year and still have enough money to last the rest of my life (unless medical insurance and medical expenses eat it all up—apparently a very common scenario these days).

 

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2012 July 2

When did things go wrong?

Filed under: Uncategorized — gasstationwithoutpumps @ 11:10
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For decades, the prevailing belief in the US has been that increases in productivity help everyone—the usual cliché is “a rising tide lifts all boats”.  When I was growing up, this actually seemed to be true, but lately it seems that the rich get richer and the working class stagnate.  Someone has finally put together a very simple graph that illustrates when the social compact started failing.  It looks like workers were paid proportionate to their productivity (on average, not necessarily as individuals) from 1948 to 1972, but from 1972 on there has been no real growth in their compensation, despite continuing increases in productivity.  The tide has continued to rise, but only the boats of the rich have risen.

Note: Hourly compensation is of production/nonsupervisory workers in the private sector and productivity is for the total economy.
Source: The wedges between productivity and median compensation growth | Economic Policy Institute. Lawrence Mishel‘s analysis of unpublished total economy data from Bureau of Labor Statistics, Labor Productivity and Costs program and Bureau of Economic Analysis, National Income and Product Accounts public data series

The nearly linear growth in productivity sustained over 6 decades is amazing, and the sharp change in hourly compensation from tracking productivity to being constant is equally surprising.  What policy change around 1972 affected almost all employment agreements from then on?

Note: the analysis was done in constant dollars (correcting for inflation), but there is an important technical point that the authors point out:

… the output measure used to compute productivity is converted to real, or constant (inflation-adjusted), dollars, based on the components of national output (GDP). On the other hand, average hourly compensation and the measures of median hourly compensation are converted to real, or constant, dollars based on measures of price change in what consumers purchase. Prices for national output have grown more slowly than prices for consumer purchases. Therefore, the same growth in nominal, or current dollar, wages and output yields faster growth in real (inflation-adjusted) output (which is adjusted for changes in the prices of investment goods, exports, and consumer purchases) than in real wages (which is adjusted for changes in consumer purchases only). That is, workers have suffered worsening terms of trade, in which the prices of things they buy (i.e., consumer goods and services) have risen faster than the items they produce (consumer goods but also capital goods). Thus, if workers consumed microprocessors and machine tools as well as groceries, their real wage growth would have been better and more in line with productivity growth.

Mishel breaks up the growing disparity between productivity and wage income into multiple components:

  • Growing compensation inequity: top earners getting relatively more compensation than workers
  • Shrinking labor share: more of the productivity gains going to the owners of capital
  • Terms of trade: divergence in the value of what is produced and what is consumed

He analyzes how much each of the components contributes to the gap:

Over the entire 1973 to 2011 period, roughly half (46.9 percent) of the growth of the productivity-median compensation gap was due to increased compensation inequality and about a fifth (19 percent) due to a loss in labor’s income share. About a third of the gap has been driven by price differences.

He concludes with a stirring call to action:

Reestablishing the link between productivity and pay of the typical worker is an essential component of any effort to provide shared prosperity and, in fact, may be necessary for obtaining robust growth without relying on asset bubbles and increased household debt. It is hard to see how reestablishing a link between productivity and pay can occur without restoring decent and improved labor standards, restoring the minimum wage to a level corresponding to half the average wage (as it was in the late 1960s), and making real the ability of workers to obtain and practice collective bargaining.

This approach will be totally ignored by our politicians, who rely almost entirely on highly compensated CEOs and the owners of capital for their re-election funding. Unfortunately, our populace is too easily manipulated by the rich, and will vote for the politicians most adept at increasing the gap between the rich and the workers.

Incidentally, the average hourly wage in the US was $23.41 in May 2012 according to the Bureau of Labor Statistics, so Mishel is arguing for a national minimum wage around $11.70/hour (rather than the current $7.25), undoubtedly with higher minimum wages in more expensive states with higher average compensation. Currently the state of Washington has the highest minimum wage at $9.04/hour, still far short of what Mishel sees as necessary.

(Thanks to Sociological Images for pointing me to this graph, even if they were too sloppy in their scholarship to follow the links to the original report.)

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