Repost: How Then Should We Live? Thoughts on Possible Adaptations in Household Economics in the Wake of Generation Greed

Just over four years ago, when any real opportunity to improve the New York City schools was de-financed by the pension deal to allow New York City teachers to retire years earlier, it was for me both a last straw and an epiphany of sorts. Our common future has been sold, and the increasingly frantic efforts by the beneficiaries to delay the reckoning and shift the blame only amount to selling the future even more. What is best and fair for everyone, now and in the future, was never really up for discussion among those in the room making deals in their own interest, I now understand. The result could be, and perhaps should be, institutional collapse.

Realistically, I concluded, “perhaps all the time, energy and money directed toward trying to reform or improve our social institutions, particularly our government institutions, would be better spent preparing to do without them.” Or try to replace them. But rather than writing about such preparations, I’ve spent most of the last four years tallying the damage and venting. Over the next few posts, however, I’ll try to review what the household economic situation is now, and what it is likely to become, for each of the most important goods and services each household needs to obtain and pay for – housing, transportation, food, health care, education, and income in retirement. (I was going to write about health care, but with the direction of Obamacare uncertain I have yet to do so). I’ll review the reasoning behind my personal choices, choices people make mostly in young adulthood, and describe the options that will remain in the environment Generation Greed will leave to those who come after. I’ll describe how federal, state and local policies enacted by Generation Greed politicians have affected those choices. This post provides some background, while those following will go through each of the major categories of household expenditures in turn.

Note: This series was written and posted on Room Eight in mid-2012. At the time Room Eight was in much worse shape that it is now, and I was advised by the site owner that I might want to make other arrangements if I wanted to keep posting. So it is possible, if not likely, that I wrote 48 pages that even those who once read my Room Eight posts have never seen, unless they went back and read the posts when that site was repaired. In any event, those posts are repeated here.

First let’s emphasize that this is a discussion of household economics, not a discussion of the meaning of life. The fact that many have thought of the meaning of life, and indeed the “American Dream,” in strictly materialistic terms for much of the past 35 years is one of the reasons we are in the situation we are in. The situation we are in and are likely to be in, moreover, is still better economically than in it had been in virtually all of human history, and is virtually everywhere in the world today. It is certainly possible for Americans to cut back and still be good people living good and fulfilling lives. In fact, for the foreseeable future it will be far easier to be a good person, and to live a good life, if one does cut back, and does not feel compelled to live the lifestyle that most of those in recent generations only obtained at the expense of the future, the common future or even their own.

At the risk of repeating myself, we are at the end of an epoch in U.S. economic history. For more than 35 years the pay level of most American workers has been going down, starting first with high school dropouts and then moving up the educational and economic ladder. Many of those young folks protesting against the one percent are probably in the 20 percent, the offspring of those who were the last to see their compensation level fall in the workplace. First it was the top half who were becoming better off as the bottom half was left behind, then the top 20 percent, then the top ten percent, and now the one percent. Up next – only the .01 percent may be still be getting better off, and soon perhaps not even them.

During the economic epoch now dying out although the compensation of most U.S. workers was falling, American consumer spending and the standard of living continued to rise. The world’s companies would not have had anyone to sell to, and all those profits and paper wealth for the one percent would never have been created, if those who were being paid less did not continue to somehow spend more. Without the majority of Americans spending more than they earned, the distribution of income could not have become this unequal, and the U.S. could not have imported more than it exported in global markets. But somehow the excess consumption continued for more than 35 years.

During the 1970s and early 1980s falling wages were more than offset by a rising number of workers per household, as married women entered the labor force in large numbers. Household income, as opposed to individual worker earnings, continued to rise.

Starting in the early 1980s recession, large private businesses cut the compensation of their workforces further by reducing their future income, as 401K plans were substituted for defined benefit pensions, and then employer contributions to those 401K plans were gradually eliminated, along with retiree health care. This long-term pay cut didn’t reduce consumer spending at the time, because Americans didn’t increase their own savings to offset their lower employer-funded benefits. But it will lead to a drastic reduction in well being in old age over the next few decades, when most of those in my generation and after reach retirement with little savings, no pension, and perhaps not even Social Security. And as the percent of the U.S. population in impoverished old age increases and the labor force shrinks, spending in the economy and the rate of economic growth is set to fall, as in Japan.

The final phase of the old economic epoch was a debt explosion, as people sought to maintain their higher standard of living despite lower pay. That debt explosion is demonstrated by the charts in this spreadsheet:

Total Credit Market Debt Outstanding Stat Abst

Note: I’ve substituted in the latest U.S. debt spreadsheet for the one I used at the time. I wrote about it in this post.

It became a public debt explosion starting in 2008, as governments tried to keep the consumer debt-driven economy going and avoid its total collapse. There is, in fact, a crisis of demand all over the world, as no one has come up with an alternative to Americans spending more than they can afford as an engine to drive the global economy. The U.S. standard of living has fallen significantly, and there is more to come. And all those pieces of paper, the paper wealth of the wealthy, would have lost their value had not the government intervened by going deep into debt itself. Because those pieces of paper represent nothing more than promises to be poor in the future in exchange for having lived more richly in the past, not real economic assets producing real goods and services.

The idea that Americans could become worse off than previous generations is not new. My generation, those at the back end of the baby boom, entered the labor force in the stagflationary late 1970s and early 1980s, and is the first to be less well off at different points in their lives than those who came before. The reality of downward mobility is something my peers were aware of and discussed at the time, something reported on, measured and chronicled. We are the Generation Apathy that followed Generation Greed, and for the most part decided to look after our own affairs rather than work to turn our institutions around, something I expect we will end up regretting. Most of us, it seems, have not even looked after our own affairs very well. My spouse and I, however, drew some important lessons from our recession-riven formative years.

The first lesson is that one’s material lifestyle is a one-way ratchet. It is easy to slide up, quickly taking for granted every increase in goods and services consumed, but painful to go down. The higher the material standard of living that one requires to be happy, therefore, the weaker and more vulnerable they are. Beyond the real basics one does not miss what they have not had. But ratchet up the lifestyle to a level that is difficult to sustain, and one is more likely to experience what can seem like a diminishment of their life – or to constrain their options or make bad decisions to avoid that diminishment. Options as to where to live, what kind of work to do, how much time to spend out of work with young children, and how much can be donated to charity. Options like taking the risk of starting a business or running for public office (one of the reasons I decided to do so back in 2004 is that I figured if I couldn’t do it, who could?). Decisions about whether to do something unethical or even illegal to keep a higher paid job and the standard of living that goes with it.

This is well known. Take a quote from The Velvet Alley by Rod Serling in the late 1950s. “You know how they do it? They give you $1,000 a week (which would be $7,937 per week in today’s money or $412,725 per year – enough to put someone at the bottom of the one percent!). And they keep giving you $1,000 a week until that’s what you need to live on. And after that you live every day and you’re afraid they’ll take it away from you…In 24 hours you can develop a taste for caviar and in 48 hours fish eggs are no longer a luxury; they are a necessity.”

That was in the late 1950s. But since the 1980s people haven’t been getting the $1,000 a week anymore. But even so there is a whole industry, the advertising/ public relations industry, dedicated to conditioning people to believe that more and more luxuries are necessities, perhaps not necessary to live but necessary to live a decent American life as most people understand it. Year by year they try to upsize the definition of what is required to be in the middle class, even as pay levels fall, in a constant drone of propaganda with little or nothing on the other side. For all the complaints about the values spread by Hollywood over the years, the real shift in values has been generated by what comes between the TV shows – the commercials.

The one-way ratchet is why we have a feeling of economic loss and desperation in this country, and an inability to face our economic problems and bite the bullet now, as an alternative to biting the dust later. The problem is the direction of our standard of living, not its level, as a level of consumption that was very satisfying to most Americans in the 1960s would be thought of as poverty by many today. With our false economy having driven consumption to an unsustainable level, our society has become a nasty battle of the hypocrites as interests try to use their power to shift the inevitable decline to someone else – preferably to younger generations in the future.

The second lesson we learned in the 1970s is that a couple should strive to be “semi-independently wealthy” when two people are working. That is, a couple should live on one after-tax income, banking the other. This is necessary to provide economic security, given the possibility of unemployment or illness, and to provide the option to work less when raising young children, without debts being run up or the household budget going down (we both worked part time for several years).

And it is also necessary because there is always a large future expense that one should be saving for – a housing downpayment, followed by education for the children if you have them, followed by retirement. And if one doesn’t have children, they should be saving far more for old age rather than spending more in the short term, because there may be no family member to provide care when it is needed. If a two-worker household is spending more than one income, they have ratcheted up their lifestyle to an unsustainable level, and made themselves vulnerable.

A third lesson is that it is better to pay for things with savings rather than with debt. Doing so means you can’t have the things right away. But over time the difference between the interest earned on savings and the interest paid on borrowing becomes enormous. I’ve had a reputation as Mr. Thrifty since I was in high school, but as a result we have the option to end up spending much more than other people with similar incomes, simply due to the difference between interest earned and interest paid. And the option to give money away if we want to.

As a result of these lessons, when we first moved out on our own our goal was to live on as little as possible and still be safe and comfortable. And while we are more comfortable now that goal remains a consideration today, in part because we don’t want our children to become conditioned to a lifestyle that they might be unable to duplicate easily on their own – and thus trap them in the one-way ratchet. My wife and I are not typical – not every household has two workers with graduate degrees – but this strategy has worked well for us. It works well for recent immigrants who earn far less than we do but are also used to living on less, and are therefore able to send large sums of money back to their home countries out of those lower incomes. I believe it would work well for just about everyone.

When I have examined public policy, my perspective has been the same as in my own personal life. I want a solid foundation, with the common future always becoming incrementally better than the past. Unfortunately, with regard to our collective future my community, state and country have for the most part operated on principles directly contrary to my values. With the difference that those who benefitted by the ratcheting up of public spending and the ratcheting down of taxes, and those who will face the consequences, are not necessarily the same. This difference is a source of much frustration.

Compare our 1970s-driven attitudes with that of former Fed Chairman Alan Greenspan. It was fine, Greenspan said during the 2000s, for young families to go deep into debt, because they were rationally evening out their standard of living over their lives. Since people earn more money over time, he believed, why not spend some of those future earnings up front! He reached this conclusion despite publishing a paper on the boom in home equity lines of credit and cash-out mortgage refinancing, and finding that virtually all of the economic growth of the 2000s was paid for by people cashing out the rising home prices of the housing bubble and spending the proceeds on short term consumption. When I heard this, I knew we were doomed, but he thought we were fine. It is as if he ran all the way down the field and fumbled at the key moment, the Leon Lett of economists.

Greenspan had entered the workforce in the post-WWII period, and is part of the generation that had the largest-ever increase in their pay levels during their careers. A member of the richest generation, he was also an unusually talented and well-connected member, with an unusually successful career. And a man with no children to be concerned with. He had no business generalizing his life experience to what the typical American, particularly less favored members of less favored generations with more responsibilities, could afford to do.

It is still possible in this country to do something exceptional that is enormously beneficial to other people and become rich – as an entrepreneur, artist, inventor, or other creator. And it is still possible, unfortunately, to become rich at other people’s expense, the more common trend for the past 30 years. As I observe the lives of my peers and examine data on the public at large, however, I find that it is now very uncommon for the typical worker to stay in one organization and have their standard of living automatically carried up some kind of escalator. Pay levels rise very quickly early on, as people move from having little work experience and few usable skills to actually having value in the workplace, but after that all bets are off.

Downward mobility is a more likely pattern. Some start out worse off than their parents and remain there, particularly those that enter the labor force in a recession. Others remain employed but see their inflation-adjusted pay gradually drift downward during most of their careers, following the national trend. Still others happen to get lucky and fall into a situation that provides a higher standard of living for a while. They get the unionized job at the plant. They work in finance during a stock market bubble, or in IT during a bubble. They work as mortgage brokers, realtors or construction workers during a housing bubble, or in oil and gas during an energy boom.

These lucky workers could, and should, realize their good fortune in earning far more than others who are in reality worth just as much, understand that this is unlikely to continue, and put aside their excess earnings for the future, maintaining the lifestyle of their less fortunate peers. But inevitably most upsize their lifestyle as if whatever circumstance they are in will last forever. Then the plant closes, the company goes under, the bubble bursts.   There are tens of millions of Americans who will never earn nearly as much, adjusted for inflation, as they did at some point in the past. There are tens of millions of other Americans who, it they were forced to find a new job, would earn far less than they are earning in their current job right now. During the recession, I read, the average worker who lost their job took a 40 percent pay cut.

At this point most of those age 40 and or older have made their choices, and will face the consequences. Or try to make others face the consequences using their political clout, like the bailed out on Wall Street or unionized public employees still expecting raises on top of their retroactive pension benefits. Those younger, however, still have a chance to alter their expectations and their choices – though they will probably have to battle against a host of dying and corrupt institutions and a wave of propaganda to do so. It will be a battle on two fronts, to change or replace our institutions and/or work around them. The next few posts will provide specific advice about how to do so.

To see the most important subjects of household economic decisions, download the spreadsheet I have placed here – with data taken from the federal Consumer Expenditures Survey – and print out the table and chart.

Note: I’m not sure where that spreadsheet is now, but the reader can find updated Consumer Expenditures Data on the Bureau of Labor Statistics website here.

As the chart shows, in 2010 housing accounted for 27.0% of the spending of the average U.S. household. The share spent on transportation was 15.9%, with 12.7% for food. Government policy has a significant influence on how people live in each of these categories, favoring some choices and people over others – and older generations at the expense of those following. To cope with the diminished circumstances Generation Greed has left behind, younger generations will have to fight against those policies and and/or try to work around them to avoid being further disadvantaged.

Although health care only accounted for 6.6% of consumer spending according to the Consumer Expenditure Survey, that survey only includes spending by households. The government, directly or indirectly, actually pays for three-quarters of all third party health care spending in the U.S., with a smaller share paid for by private-sector employers. Health care now accounts for 20 percent of the U.S. economy, and ultimately people pay for that one way or another – unless they manage to shift the cost to someone else. Prior to Obamacare, the trend had been more and more publicly financed and subsidized health care going to fewer and fewer people, with more and more who were paying for this getting nothing. Obamacare timidly reversed this trend slightly, causing a huge backlash by the beneficiaries of existing arrangements.

Similarly education only accounted for 2.2% of spending by households, but its share of what people actually consume is far higher if spending by the federal, state and local governments is included. Unlike in the case of health care, the government provides most education services directly rather than paying private sector firms to do it.   As has been discussed here repeatedly, education spending has increased but its purpose is shifting from education to the longest period of “retirement” in human history for select members of Generation Greed.

Retirement funding accounted for 10.5% of household consumer expenditures, including both the employee share of Social Security and their pension and 401K savings. Since most of those with pensions are public employees, and 401Ks can be funded on a tax-deferred basis, the government’s role in this category of consumer spending is also large.

Each of these will be considered in turn, and the likely direction of public policy will be discussed as well.

On May 1st, Occupy Wall Street has called for a general strike by workers and students. The organization seems to have limited understanding of where the serfs’ real power lies. As workers they have virtually none, because workers are abundant and easily replaceable all over the world. But as consumers, no one can make them spend more money than they are paid, with their debts turned into financial instruments that the wealthy can use to pay each other more. I don’t want to hear about the one percent or the impact of trade with China from anyone who has ever carried a balance on their credit card. Your debt is their wealth, and in running it up your have collaborated in your own impoverishment, rising inequality, and economic imbalances all over the world. For those who would prefer to make other choices, read the next few posts.

Update: Some people are beginning to catch on that what has happened is not just a normal recession, but the end of an economic era of debt-driven consumption. Take economist Larry Summers, for example, who now says we face an era of “secular stagnation.”

A newly coined macro-economic term for what happens when a country can’t go deeper and deeper into debt and blow the proceeds anymore, and has to start paying the debt back. Hey Summers, too bad you didn’t figure this out when you were part of President Obama’s original economic team, and had him react as if it was just a normal recession instead. The whole response has been to try to get total U.S. debt rising again, for younger generations to pay back someday, but it hasn’t worked. That recession ended five years ago, although most people didn’t notice, and we are overdue for another one, although we remain deep in the hole.

Pretending that everything could go back to the way it was is useful for Generation Greed, which can then rationalize away what it has done. Those younger cannot afford to engage in those fantasies. What they are doing, and need to do, will be discussed in the next few posts.