Increase to living standards has not been through paycheck

By DAVID MOON, Moon Capital Management, LLC
September 25, 2011

After a third consecutive annual decline in real wages, the typical American family now earns an inflation-adjusted amount equal to what it did in 1996. That’s fifteen years of no increase in purchasing power.

Yet, despite the economic effects of the past three years, most people have enjoyed an increase in living standards in this decade and a half, at least as measured materially.

More than 75 percent of Americans now have a computer at home, a significant increase from the mid-1990s. We have cell phones, better cars, TV sets and kitchen appliances. Collectively, we have more and better stuff.

If family incomes have only increased at the same rate as consumer prices, how can living standards have actually improve?

Even ignoring the government’s twisted methodology for calculating changes in consumer prices, much of the increase in our living standards in the past 15 years has been as a result of monetizing assets, not from real increases in income.

We lived off of the housing and stock market boom.

As home prices increased, many people began withdrawing their newfound equity in the form of new loans or refinancing. By 2005, a Merrill Lynch economist noted that a third of the annual increase in the GDP was as a result of consumer spending made possible by “cash-outs” from new refinancing mortgages.

Many of the people who tragically lost homes in the past four years didn’t lose the equity in their homes. Many of them withdrew their equity by increasing their mortgage balances - and then spent the cash. They were then able to increase their standards of living more than their incomes would otherwise support.

Lower interest rates meant lower house payments, which resulted in more monthly cash available to spend at restaurants and Circuit City. This increased spending was not the result of increased income or worker productivity.

In fact, worker productivity over the past 15 years increased slightly less than the 2.68 percent annual increase in consumer prices.

Real family income hasn’t increased, but neither has real (after inflation) productivity. Each of us produces about the same amount as we used to produce. Our pay reflects that.

But our consumption has increased more than both our pay and our productivity.

Weak home and stock prices put an end to our consumption gravy train. Looming potentially higher interest rates pose a second threat to consumer spending.

All of the news is not dreary, however. At least not for everyone.

Although the Bureau of Labor Statistics reports that there were no new jobs created in August, it also reports that there are 2.5 million available existing jobs in the United States. More than a quarter of all employers say they are struggling to find people who are qualified for their specific openings.

Career Builders compiled a list of large companies with significant numbers of unfilled jobs. The top 14 companies have almost 10,000 current job openings among them. The 12th company on their list is Pilot Flying J. It reportedly has more than 500 retail and restaurant management positions available.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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