Government Is Destroying our Standard of Living

Finally, the change in net worth has made the mainstream media. The statistics, as reported in the NY Times, are horrific, as are the implications for the future of the country.

Net worth may be the best single measure of a country's well-being. Median net worth is a reasonable marker for the standard of living. Medians (or averages) are not good measures to capture what is happening at the lowest or highest ends. (More about that below.)

In the simplest terms, net worth is the value of a person's assets minus his liabilities. If this measure is growing, a person is becoming better off. If it is shrinking then that person is becoming worse off, at least in terms of wealth.

Shocking Drop in Net Worth

Conditions economically (and politically) may be getting so indefensible that even the NY Times feels compelled to report them, in this article by Anna Bernasek, which reported:

The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline, according to a study financed by the Russell Sage Foundation. Those are the figures for a household at the median point in the wealth distribution -- the level at which there are an equal number of households whose worth is higher and lower. But during the same period, the net worth of wealthy households increased substantially.

She does not go out of her way to shield the Obama Administration:

 ...much of the damage has occurred since the start of the last recession in 2007. Until then, net worth had been rising for the typical household, although at a slower pace than for households in higher wealth brackets. But much of the gain for many typical households came from the rising value of their homes. Exclude that housing wealth and the picture is worse: Median net worth began to decline even earlier.

She also noted:

“The housing bubble basically hid a trend of declining financial wealth at the median that began in 2001,” said Fabian T. Pfeffer, the University of Michigan professor who is lead author of the Russell Sage Foundation study.

This report is damaging to any notion that there has been an economic recovery or that economic matters are back to normal.

The Original Report

The Russell Sage Foundation financed the original study. I think it is fair to say that this foundation is left of center, although that doesn't imply the research is tainted. Their focus is more oriented to highlighting the effect on income inequality. This graph shows the effects on various percentiles of the population since 1984:


All percentiles show declines since 2007. The declines are greater the lower the percentile group. This graph captures the concern over increasing economic inequality. While these divergences are important, there is a more important point to be made -- America is becoming poorer.

The Great Recessiion's Impact

The U.S. is getting poorer and has been doing so over a sustained period. That is a first in the history of this country, and it has all kinds of dire consequences, including an inability to continue funding the level of welfare currently promised. Unless this trend can be reversed, there is little point in talking about income inequality, at least in terms of taking more from the doers and providing it to the less well-off. Atlas Shrugged showed where that leads.

The Great Recession had a serious impact on all percentiles in the graph above. All are down from 2007. Liberals want to focus on how much better the "rich" are doing versus how poorly the "poor" are doing. The implication is that the rich are getting richer at the expense of the poor. This ideological nonsense is politically convenient and diversionary. There is no fixed pie where someone who gets a larger piece does so at the expense of someone receiving a smaller piece. That is only possible where government determines who the winners are.

The mindset of the loony left is that those at the bottom are not getting their fair share. The reality is that the government dole has locked them into this position. Ben Franklin recognized the corrosive effects more than two centuries ago:

I am for doing good to the poor, but I differ in opinion of the means. I think the best way of doing good to the poor, is not making them easy in poverty, but leading or driving them out of it. In my youth I traveled much, and I observed in different countries, that the more public provisions were made for the poor, the less they provided for themselves, and of course became poorer. And, on the contrary, the less was done for them, the more they did for themselves, and became richer.

Human nature has not changed since Old Ben made his observation. What has changed is the ability of politicians to buy votes with taxpayer money. The poor are merely collateral damage in the quest for office and greater power.

The distribution at the top is not independent of government. The more government controls the economy, the more important it is to "have a friend in government." It used to be what you knew enabled you to succeed. Today, it is increasingly who you know. Crony capitalism (there is no such thing, but there is "crony government") adds to whatever differences in income distributions are due to ability, occupation, luck, risk-taking and motivation.

Anyone who believes that government helps the poor need only look at the effects on the 25th percentile. Even before the Great Recession hit, this group was the only one failing to keep up. This result should not be interpreted as the need for more help, but the need to re-examine the entire structure of the Welfare State.

Matters Are Actually Worse Than They Appear

Were the economy and its components growing at a real rate of 2 - 3%, then median net worth presumably would be growing at a similar rate. Let's do some quick arithmetic based on the graph above. According to the report, median net worth in 2003 was $88,000. From the graph, it is approximately 25% higher than it was in 1984. That would mean that median net worth in 1984 was approximately 88,000/1.25 or  $70,400. Compounding that forward 29 years would produce what one might expect the median net worth to be at the end of 2013. At 2% that number would be $137,500; at 3%, $182,400. Instead, it is only $56,300.

Based on these quick calculations, American's median net worth has been reduced by 60% to 70% from what might have been expected. How is this possible?

There are several reasons. I would argue that most of the blame goes to government:

  • Government is taking a much bigger share of the economy.
  • Government understates inflation which results in an overstatement of real GDP.
  • Taxes are higher, especially on capital gains which are unadjusted for inflation and taxed as if they were true gains.
  • Government interventions have destroyed the economy's ability to grow.
  • Government transfer payments have reduced the workforce, spreading a reduced output over more people.
  • Government's encouragement of the use of debt has created behavior not in the best interests of unsophisticated citizens.

There are other reasons, some that are not related to government although I suspect they have minimal effect. Regardless, the fact is that the U.S. is becoming poorer by the day. For much of this period, people maintained their spending levels by borrowing or consuming capital. The good times of the last twenty years were nowhere near as good as we pretended they were. Now we must pay the piper and hope that government can be reduced back to an affordable level of spending and regulation.

This Knowledge Is Not New

Economists, particularly at the Federal Reserve, are fond of saying their models no longer work. That is one of the most disingenuous statements ever made by the economics profession. Unfortunately this profession has the same integrity as their masters, the politicians, who basically bought them lock, stock, and barrel.

There is nothing new in economics. The fundamentals of human behavior have not changed. Econometric models evolved to describe history. They were deliberately correlated with outcomes. That was the measure of a "good" model, how well it fit the data.  But the economy is not some large production machine that can be manipulated by altering inputs. The economy is millions and millions of individual decision-makers who respond directly to incentives and disincentives. These have nothing to do with the aggregate variables that government focuses on.

If individual incentives and disincentives remain reasonably constant, the aggregates tend to remain in relationship with each other. Once you begin changing incentives at the micro-economic level, then behavior changes and the correlations are altered. The model no longer describes reality.

The fallacies of macroeconomics were known and rejected long before John Maynard Keynes was born. His contributions were nothing new. What gained them credibility was the desperation of the political class to do something that might end the Great Depression.

Adopting something on such a basis is not rational. It is the same desperation exhibited by those looking for a cure for a terminal disease. They believe in quacks out of desperation.

Ludwig von Mises warned about the destructive policies that got us to this point. Here are a few pertinent quotes:

If it were really possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world.

The characteristic mark of economic history under capitalism is unceasing economic progress, a steady increase in the quantity of capital goods available, and a continuous trend toward an improvement in the general standard of living.

The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. The more optimistic they were under the illusory prosperity of the boom, the greater is their despair and their feeling of frustration.

The political class always despised economists because they recognized and criticized their political fantasies. The description "dismal science" came from their realistic approach to political dreams. Now that the political class has coopted the economics profession to the point where bribery can get them whatever opinion they want, they use economists to further these political fantasies. Any economist dependent on the government cannot be an honest man without risking his livelihood.

Unfortunately reality is not optional, and the last quotation of Mises above describes the current economic condition. Matters will worsen from here.