This is the first time I have posted a diary and I am not the best writer, so bear with me. I will try to stay organized and focused, but this diary is going to be a mixture of analysis, part anecdotal, part statistical and part rant.
Let me start by saying that I believe that America is basically, at this point, a paper tiger. We are by far the most powerful militarily, but it is going to be economic factors that bring us down. There is a lot of talk about how the falling dollar and the twin deficits are a huge threat (and they are), but there is also an overlooked aspect to our financial weakness that plays itself out on the micro level on families all over this country. If our economy was a tree, the twin deficits and falling dollar are like chainsaws (external factors) that could potentially chop us down and the family-level factors would be like dry rot eating away our economic tree from the inside. The reality is that over the last several decades, it has gotten harder and harder to get ahead and stay ahead in our economy. The basic reason for this is that for the average citizen, the cost of living has far outpaced the growth in real wages.
I am mainly looking at things over the last three decades (I was born in 1973). As an example, just before I was born, my father had gotten his masters degree in electrical engineering from Penn State University (a good school). He then moved to California and secured a job with a large firm out there with a starting salary of $18,000. In that same year he bought a house in Lomita, California for $30,000 and a used Porsche 911 Carrera (1 year old) for $6,000. In other words, for his one year worth of labor (ignoring taxes for the moment) he was able to purchase 60% of a house in a nice neighborhood in California or 3 Porsche 911's. Fast forward to today, and I have a friend that graduated with a master's degree in engineering from Princeton University (an even better school) in 2002. He was getting offers for starting salaries for around $60,000 or 3.3 x what my dad started out at. Here is a link showing starting salaries for electrical engineers in Los Angeles, CA. from monster.com
http://salary.monster.com/salarywizard/layoutscripts/swzl_compresult.asp?zipcode=90717&metrocode
96&statecode=CA&state=California&metro=Long+Beach&city=Lomita&geo=Lomita%2C+CA+
90717&jobtitle=Electrical+Engineer+I&search
&narrowdesc=Engineering&narrowcode=EN01&
amp;r=mnstr_swzttsbtn_psr&p=MNSTR42X&geocode=&jobcode=EN04100006
As you can see, it is right around the $60,000 mark. However, based on today's prices, the SAME house in Lomita, CA. is selling for over $400,000 (and the neighborhood has declined) and a used Porsche 911 sells for around $60,000 (the lowest price I could find on autotrader.com for a 3 year old 911 was 56,000). So while salaries for the same professional job have risen by 3.3x, prices for comparable homes and cars in the same area have risen by factors of 13x and 10x, respectively. This means that for the same year of labor that my father had to give up, my friend could only purchase 15% of the same house (in a declining neighborhood) or only 1 Porsche 911 (as opposed to 3). Similar ratios apply to non-luxury cars as well. You could buy a new car from GM or Ford in 1973 for a couple thousand dollars and today you are lucky if you can find a new GM or Ford for under $20,000. The biggest family expenditures are housing, transportation, education and healthcare and all of the big four have been compounding at higher rates than the general level of wages for decades. In the case of education and healthcare, the rate of increase has actually been ACCELERATING over the last four or five years with no end in sight.
Another way to look at wages is to look at the minimum wage. The national minimum wage in 1973 was $1.90 and today in 2004 it is $5.15. That is an increase of 2.7 x over the last 31 years. Here is the link showing the minimum wage data:
http://www.workworld.org/wwwebhelp/external/minwage_chart.pdf
But the national average median sales price for an existing single family home in 1973 was $28,900 and the national average median price as of the third quarter of 2002 was $218,000. So while minimum wage levels have increased by a factor of 2.7x, the average median home price has grown by a factor of 7.5 x OVER THE SAME TIME PERIOD. Here is the link:
http://www.huduser.org/periodicals/ushmc/fall02/histdat08.htm
And interest rates are not as big a factor as you might think. In the early seventies, average mortgage rates were in the low 7% range and today they are in the low 6% range. Even factoring this in, the increase in costs over wages is extreme. Here is the interest rate data link:
http://www.mbaa.org/marketdata/data/02/fm30yr_rates.htm
Here is another story. My grandparents bought their home in 1955 in a nice neighborhood in a Philadelphia suburb for $14,000. The home was brand new construction. My grandfather was a bus driver his entire life and retired with a pension. My grandmother did not work full time, but did work as a cashier a few hours a week for some extra spending money. They did not live large, but they had enough (on a bus drivers salary) to pay off their home comfortably within ten years (not thirty), take month long summer vacations most years, raise two kids and put their kids through college AND STILL SAVE REGULARLY. Fast forward to today, and they have recently sold their home for $290,000 despite the fact that: (1) the house is now 50 years old, (2) the neighborhood has declined, and (3) they have not made any additions or major renovations since they bought it other than to enclose a small back porch. Based on that price, a bus driver today could not even afford to LOOK at the house, much less pay it off comfortably in ten years!! So my grandfather was a bus driver and it bought him a certain quality of life that today's bus drivers cannot have. I am not begrudging him, just pointing out the reality of the situation.
So we have wage factors for the average family growing at rate X and cost factors (for the major expenditures) growing at multiples of X. This has been happening over decades and it is analogous to putting a frog in a pot of water and slowly turning up the heat. If you picture a V turned on its side, that is what the chart looks like as there is an ever widening gap between wages and costs. The American family has responded to this growing gap by eliminating savings, taking on more debt to support consumption and swelling the ranks of two income households. The housing bubble has pushed the day of reckoning forward as home equity has been tapped to support consumption / pay bills over the last few years like never before.
Where is all this leading?
Well, if the now established trend lines continue, with costs compounding a couple of percentage points faster than wages for another 20 or 30 years, then something has to give. The average family has gone from living comfortably on one blue collar wage to just getting by with two non-blue collar wages. There is no more room to run. If things continue, you will see ever growing ranks of Americans that cannot afford even the basics. Historically, that has led to some type of revolution and I see nothing that would exempt this country from that fate. And I believe it will happen well within my lifetime assuming I live out a statistically average life span, so I am very concerned. The current administration has done NOTHING to address this reality and in fact have only made things worse. I really think they enjoy devising ways to push more and more of the burden on the working and middle classes and letting the upper classes off the hook. I think they want to abolish class mobility in this country. I believe we are in the middle of a class war and it is time we all started acting and thinking like we are. Make no illusions about it. The economic elite want you to stay where you are. They want you to be on a debt treadmill so you show up to work and keep your mouth shut. In the 70's, CEO pay as a multiple of average worker pay was about 40x. Today it is about 400x!!!! If average worker pay has risen 3 fold over the last 30 years that means that average CEO pay has risen 30 fold. What do they care if costs have risen 10 fold for the big four family expenditures. Based on their pay increases things are 1/3 the price that they were 30 years ago. That is war! And you may think I am overreacting, and that this discussion does not apply to you because you do well for yourself and that is great. But I am looking at figures averaged out as plotted on a distribution graph and it is very troubling and it is not happening by accident. The average American is just not informed and they are being slowly boiled like a frog in a pot. All of this is happening under the radar of most, but IT IS happening and the trend lines are not good for you or your family whether you do well for yourself or not. When the revolution starts, none of that will matter. The most regressive taxes we have are payroll taxes and payroll tax rates have been steadily rising for thirty years even as taxes on capital and investment have been slashed. That is war!!! Make no mistake about it. My only suggestions for dealing with this are:
1. Minimize your debt
2. Live frugally within your means and save
3. Start your own business and make the system work for you and your family
4. Resist Madison avenue telling you that you need all the crap they sell
5. Make as much as you can and set up exit strategies to leave the country if necessary
I don't want this to be the reality but that is where all the data is pointing.