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Are we Better Off than Our Parents ?

Politics / Social Issues Feb 01, 2007 - 02:53 PM GMT

By: Clif_Droke

Politics

Who had it better: Our parents or us? Much adieu was made recently about the U.S. population crossing the 300 million mark. The latest report from the U.S. Census Bureau sparked a flood of news articles on the population debate and not a few discussions on how our present standard of living has changed over the years.

One well-known publication made this statement in response to the census report: "[T]he typical family is doing a whole lot better than their grandparents were in 1967, the year the population first surpassed 200 million." This statement was made in a Forbes.com article which appeared recently on Internet news wires around the country. The article went on to tout the incredible level of economic prosperity our generation enjoys compared to the generation 40 years prior. It was entitled "The Average American: 1967 and Today" and was written to convince today's younger generation that they've never had it so good and should stop their grumbling and be happy about their economic lot. Problem was, the article was extremely superficial and just barely scratched the surface of all the major economic influences that determine whether our current standard of living is higher than that of our parents' and grandparents' generation. In other words, it was a propaganda piece in the truest sense.


The Forbes article recognized that there is currently a high level of dissatisfaction among Americans of all ages over their economic lot, principally those in the 25-35 year-old category. As one example, a recent poll found that 22% of U.S. respondents said they had little or nothing left over at the end of the month after paying their bills. Another poll in Parade Magazine found that 48% of Americans believe they're worse off than their parents were (a survey cited in the Forbes article). Also, a study by the GFK-Roper group revealed that 66% of Americans said that their personal situation in the "golden years" of 1950-1980 was better than it is today.

There is a general feeling among countless Americans today that our economic plight is a perilous one compared to that of previous generations. Indeed, as evidenced by the explosive growth in the psychic and fortune telling industry, a growing percentage of Americans are worried about what the future holds for them, especially as it pertains to their financial condition. So along come our friends at Forbes to assure us that our take on our economic plight compared to that of our parents' is wrong – things aren't nearly as bad as they seem! After reading one blanket generalization after another I was left with a feeling that my intelligence had just been insulted by the folks at Forbes. Let me share with you some of the more outrageous assertions made in this article.

Forbes starts by noting that "Mr. And Mrs. Median's" annual income today is $46,326, which is 32% higher than that of 40 years ago "even when adjusted for inflation." The article also points out that average American household worth is $465,970, or 83% higher compared to 1965. Right here is where the Forbes article made its first error. The assumption is that the average American is a homeowner. In fact, most Americans do not own their own homes in the true sense of the word. They either rent, or in the case of those with houses of their own, they have a long-term mortgage. Until the mortgage is paid off they can't truly claim ownership. Even if the value of their home has increased relative from when they first bought it, they don't realize a profit until they actually sell. Then there is the tendency for mortgage owners to take out loans against their mortgage, thereby going deeper into debt. This is an illusory measure of wealth since the money isn't truly theirs.

But along with home ownership comes greater financial responsibility. Forbes doesn't mention that property tax rates have increased manifold over the last 40 years. In some parts of the country, notably along the coast of the Southeastern U.S., property tax rates have risen in excess of 100% in just the last 3-4 years alone! This also doesn't take into account higher property insurance rates in light of extreme weather trends in recent years.

Forbes also talks about cheaper airline travel being one of the hallmarks of our generation compared to 40 years ago. I would disagree with this. If one factors into the equation the opportunity costs of having to wait those extra hours before actually boarding the plane (for baggage, security checks, etc.) not to mention the increase in destination times due to the decrease in direct flights, we're paying more for airline travel than our parents did, as well. But it's not only the big things that make our lives so expensive compared with those of our parents, it's the little things as well. And the "little things" tend to add up over time a lot more than Forbes assumes.

Take the average telephone bill for instance. In the "good old days" our parents paid a mere fraction of what we're paying in the average month for the "privilege" of having a telephone. I emphasize "privilege" since that's apparently what the phone company considers it. Roughly 80-85% of any given telephone bill is comprised of taxes – local, state and federal taxes...even so-called "universal" taxes! There are hidden fees and surtaxes (taxes on top of taxes) and each year it increases without fail. One recent analysis found that a customer of a major U.S. phone company had an average monthly bill of $70 when the bill should have been closer to $20-$25 based on calls and basic service fees alone! So at the end of each month this person was at least $50 poorer than his parents were 40 years earlier.

One topic which the Forbes article fails to adequately cover is today's level of overall taxation compared with that of 40 years ago. There's no other way of saying it: today's tax rates are fierce compared to the taxation our parents were subjected to. We're not just talking federal, state and local taxes, either. We're talking surtaxes – hidden taxes and taxes on top of taxes on top of taxes. We're also talking about indirect taxes that may not technically fall under the government tax category but which nonetheless qualify as a tax since most of us can't avoid paying it. These stealth taxes can be found in everything from the cost of a gallon of gasoline, to a loaf of bread, to the cost of medical care. More perniciously they take the form of insurance costs. Health- and medical-related costs alone have skyrocketed in recent years thanks to the growth and increasing political power of the insurance industry. The cost of doing business for the average U.S. business has also increased significantly over the last 40 years in terms of local, state and federal taxes. These combined taxes are setbacks our parents didn't have to contend with, at least not to the degree that exists today.

Forbes tried to whitewash the discontent the median American feels today by attributing it to an economic theory of the establishment economist Milton Friedman. He called it "Permanent Income Theory," which assumes economic actors measure their current incomes compared to what they expected to earn a few years ago. In other words, they don't consider what the average income was 40 years ago – they're only concerned with the here-and-now. While there may be some truth in that statement, there is far greater evidence to support the "grumpiness" of the average American from the actual loss of income due to higher rates of taxation and costs of living.

One area that Forbes briefly touched on that actually comes closer to the truth is the "winner take all" phenomenon. This is something that is unique to our generation and something our parents didn't have to deal with. This phenomenon is discussed at length in the modern classic, "Winner Take All Society" written by the economists Robert Frank and Philip Cook. Briefly stated, the winner-take-all economy is characterized by only a relative handful of men and women dominating the highest places in any given economic area, including sports and entertainment, with the top participants commanding huge salaries and leaving everyone else competing for the crumbs. As the authors illustrate, this phenomenon was relatively unknown in our grandparents' generation and to a lesser degree in our parents' generation. It has accelerated especially since the 1980s.

Forbes at least acknowledged this in passing by observing that "people generally judge their fortunes not in absolute terms, but by comparing themselves to others, the super-success of the top 1% can make Mr. And Mrs. Median feel relatively poor." Forbes cites as an example golfer Tiger Woods making $87 million last year while a top athlete of the 1960s, Joe Namath, made only $142,000 a year in his day. Indeed, the winner-take-all phenomenon of our time only serves to increase feelings of dissatisfaction among the median.

Along with the winner-take-all phenomenon of our generation comes the corollary of economic fusion. The rich have not only become richer, leaving relatively less for the rest to compete for, but industries have merged and consolidated on a level that was unseen in our parents' time. In our parents' and grandparents' day, "trust busting" was the operative word as the government was urged to break down monopolies where they existed and prevent them from arising and threatening consumers. Today, just the opposite trend is in force. Monopolies and oligopolies are actually encouraged by the government and supported at every turn. This has led to the rise of the super-corporate state with U.S.-based multinational companies such as Wal Mart dominating entire industries where once competition among hundreds of competitors reigned supreme.

The Forbes article tries to make the reader believe that the growing income disparity between the elite and the median is a good thing, and that the elite haven't abused their growing economic consolidation by raising prices to consumers. But as we've seen in too many instances already, this is a far cry from the truth. An analysis of how Big Business operates is beyond the scope of this commentary. But to give one example, the business model used by Wal Mart for dominating the retail industry involves circumventing a variety of local, state and federal laws and is paid for by the taxpayers of whatever town Wal Mart has invaded in many ways. Money earned by Wal Mart and similar Big Businesses is funneled directly to overseas economies instead of being re-invested into the local economy, thereby rendering the median worse off.

Forbes also points out that the growth of the Internet and other forms of advanced communications make it easier for us to hear all about how the elite are making a lot more than everyone else. This is another major economic factor that few have dedicated much thought to. The Internet is a powerful tool for both good and evil. It can be used as a tool for propaganda for one thing – such as the Forbes article presently under discussion – but it can also be used to disseminate useful information.

In many ways the life our parents' and grandparents' enjoyed was much simpler, and sometimes simple is better. Our parents certainly never enjoyed the degree of communications we do today. But with advanced communications comes advanced opportunities for abuse. The Internet, cable T.V., and other forms of popular media and electronic entertainment have been used extensively by the elite to foster the mass consumer culture we have today. These technologies have been widely hailed as examples of modern luxury and convenience. But every time the average American turns on commercial television or surfs the Internet he is bombarded with a variety of advertisements – both overt and subliminal – enticing him to "buy, buy, buy" and go further into debt. Since most of the items offered up for sale through the mass media are frivolous in nature (i.e., something we can all do without) it doesn't take much analysis to realize how far down the path toward debt slavery our generation has been carried compared to our parents' generation. I would argue that the explosion in advertising and commercialism is another hidden cost to our generation that renders us less better off than our parents. In other words, the modern "luxuries" of Internet and T.V. mainly serve to widen the yawning chasm between the elites and the median.

Lest anyone still needs some "cheering up," Forbes offers this parting observation: "When Lyndon Johnson occupied the White House in 1965, he earned $100,000 a year, or 14 times what the Medians earned. This year, George W. Bush will earn $400,000, or just eight times the Medians." This statement is laughable since it has been proven that every U.S. president since Johnson has left the White House several millions richer than when he first entered. Forbes has obviously overlooked the under-the-table deals and slush funds that are (unofficially) part of every presidential pay package. Despite the claims made in the Forbes article, a careful analysis of longer-term U.S. economic trends shows that our generation is definitely *not* better off than the generation of 40 years ago, on balance. Back then, Americans actually had savings while today the average American is only a couple of paychecks away from the street. Consumer debt has exploded to staggering levels and this can be at least partly blamed on the mass consumer culture created by the mainstream media. The modern banking establishment also shares much of the blame. What then can be done?

Dr. Stuart Crane used to always share with his audience members in his economic lectures back in the ‘70s and ‘80s his personal secret to becoming rich. The advice he dispensed is well worth repeating. To begin with, he said, one must avoid all forms of debt much as you would the plague. *All* forms of debt! Secondly, the prospective rich person must live on half his income. Notice what he said: *half* of one's income. He said this meant that what you made in your job or business at the end of each month must be used to pay for only the basic necessities and the remaining half would be saved and invested. Invariably, some member of the audience would protest, "But what if I can't afford to make my house payment on half my income?" His response was that the person must sell his home and buy or rent a cheaper one. "But what if I can't afford this or that?" "Then you'll just have to do without this or that (fill in the blank) until you can afford it," was his response.

Crane maintained that if you adhered to this basic rule of avoiding debt and living on half your income that one couldn't help but becoming wealthy over time. He also pointed out that as your income rose, so would your standard of living, i.e., the 50% rule would still apply but you'd still be living better than you were a few years earlier. Often his audience members would ask, "But what should I invest the remaining 50% of my money in?" His response was that it didn't matter what you invested in since you'd be using only a certain part of your discretionary income. If you bombed out on one investment you'd eventually come back on another one. His system is a beautiful testimony to the law of averages, and he was absolutely right!

A strict adherence to Dr. Cranes method of becoming rich would mean that many Americans would have to forego such amenities as cable television, dining at nice restaurants and perhaps even more conveniences that were previously thought to be indispensable. But as Crane pointed out, "Many of the things we take for granted and assume we can't live without are actually not really necessary at all. You'd be surprised how much you can get by without when you really try." The problem underlying the growing discontent of the average American in this modern winner-take-all society is that he doesn't think in terms of "getting by." Such a proposition is unthinkable to most. But as Crane points out, "getting by" is sometimes absolutely essential before you can really start to prosper in economic terms. An interesting by-product of the Crane method, however, is that it leaves the elitist-controlled corporate state out in the cold, which is something they hope and pray the average American never considers doing. Here's hoping more Americans give some serious thought to the advice of Dr. Crane!

Novelist Ayn Rand once wrote a famous book entitled "Atlas Shrugged." In it she posed a hypothetical scenario in which the super industrialists of the country decided to shut down their factories and retreat from society, abandoning entire industries and leaving mass unemployment and economic chaos in their wake. In her vision, the great captains of industry and super wealthy elites were the collective "Atlas" without which the country would collapse. Rand had it backwards. Atlas isn't the super elites, it's the collective backbone of the working middle class, or the "median" if you will. They are the ones whose energies and productive efforts translate into wealth for all, and without them even the elites would have no one to sell their merchandise to. As I argued in a recent article, production has always been the true money standard of any country and the middle class is the engine behind that production. Without them, the economy would retreat drastically and the American standard of living would decline.

What would happen to this country and its economy if "Atlas" (the middle class) truly shrugged? When the level of taxation becomes so onerous as to be unbearable to the "median," when mortgage and debt levels expand beyond belief, when the basic costs of living increases beyond the breaking point -- how will the average American react? The elites are banking on their belief that the average American will turn to the corporate state in his time of trouble, as he always has, and look for relief.

But what if next time is different? Will Atlas shrug off this heavy burden and simply turn his back on the American way of life, retreating from the cities and leaving the establishment elite to their own devices? Will the median American simply "drop out" of society (as the hippies experimented with in the ‘60s and ‘70s and as was briefly tried by some during the early ‘90s recession)? When the economic axe falls between 2010-2012 from the crashing 120-year cycle, will America as we know it come to an end? These questions for now remain unanswered but one thing is certain: things have never been as they are today and our generation has many more obstacles and challenges ahead of us than our parents ever had to face. It remains to us to make the right choices.

By Clif Droke
www.clifdroke.com

Clif Droke is editor of the 3-times weekly Momentum Strategies Report which covers U.S. equities and forecasts individual stocks, short- and intermediate-term, using unique proprietary analytical methods and securities lending analysis.  He is also the author of numerous books, including most recently "Turnaround Trading & Investing."  For more information visit www.clifdroke.com


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