Hi My Friend!
Thank you for forwarding the article in the Wall Street Journal, “The American Dream is Alive and Well”, by Michael R. Strain. In that article, he proposes that the “populist” concern about the demise of the “American Dream” is unfounded.
I agree that the American Dream is alive and well. It lives in the hearts and souls of the vast majority of our population, many of whom are legal immigrants and their children. The average American is working hard, raising a family, trying to put something away for the future and hard times, getting their kids educated, trying to stay healthy, etc. The tiny fraction of the population that is internally fighting over ideology and policy unfortunately drags the rest of the population along with it. It’s been that way since the dawn of civilization, I’m sure.
There are some disputed figures in the article, but the statistics cited are largely accurate, however incomplete. As Mark Twain said, “There are lies, damn lies, and statistics.”
For example, the half of the working population that is not in supervisory or managerial roles has seen an inflation-adjusted increase of wages of only 22% over a 35 year period. The ratio of net income that must be spent on housing, whether renting or buying, has increased from 25% to as much as 40-50% in urban areas, where the majority of the population resides. The annual savings rate, which is critical for future income security when a person can no longer work, was over 10% in 1960. It dropped to 2.5% in 2005, and has inched up after the Great Recession to just under 9%. However, the return on those savings, if not placed in the stock market, has been less than 1.5% for nearly 20 years. And the median retirement savings through 401K plans is $62,000 for people between age 60-69. It’s about half that for people between 40-49 years old. Financial security, for the bulk of the population, is therefore tenuous.
That savings rate can’t support retirement, even if Social Security is preserved at the current level (which it no doubt will be). Back in the 1960s, most people in corporate America had defined benefit pension plans, so they could actually retire after 30 years of work and live comfortably. Pensions are a thing of the past, and some have been gutted by bankruptcies anyway, including municipalities during the Great Recession. (My high school town, Vallejo, was famous for being the first city in America to declare bankruptcy. Ever. It was 2008.)
Healthcare is another economic factor that the article didn’t address. Just as housing is taking up a larger portion of disposable income, so is healthcare. The premium sharing with employer-sponsored plans has escalated as companies shift the costs more to the employee. The deductibles have risen and the copayments as well.
As the old adage goes, “It’s not how much you make. It’s how much you keep.”
My concern about the state of America’s middle class has been a focus for me for the last 15 years. I and a dozen others formed KI Investment Holdings in 2005, to invest in companies that could grow profitably (hopefully) while creating middle class careers. Things have only gotten worse for the middle class since then. It was not until I read Thomas Piketty’s “Capital in the 21st Century” that the reasons for the erosion of the middle class became clear. He points out that the data show the existence of a middle class in this country—the second 40% of the socioeconomic strata, which actually owned 40% of the available wealth—was an anomaly in the 300 years of capitalism.
Between 1945 and 1975, we actually had a middle class by that definition. Piketty called it “Les Trentes Glorieux”—the Glorious Thirty. For most of the three centuries the top 10% has owned more than half of the wealth. The two factors which contribute to the inexorable concentration of wealth at the top, proven by the data, are 1) the return on invested savings (capital) has always been higher than the annual increase in wages for work, and 2) wealth transfers to the next generation through inheritance creates a higher starting point for that generation and thus the concentration continues.
Piketty, and historians of wars, demonstrate that wars are economic in nature, and that social conflict within a country occurs when the ratio of those who “have” to those who don’t reaches a Gini coefficient somewhere between .4 and .5. At the end of the Glorious Thirty, the Gini coefficient in the U.S. was .34. In 1990, the U.S. had a Gini coefficient of .43. In 2018 it was .49. Other countries are higher, like South Africa, which is above .60. And psychologists have demonstrated that absolute standard of living does not abate the social disruption caused by higher inequality. The lower 50% of the U.S. may enjoy a quality of life that the bottom half of other countries would consider privileged. But the disparity is what causes depression and disillusionment.
Right now, I see our national economy like a balloon that has expanded to a nice, large volume. But like a balloon, any stressor that penetrates it could cause a burst. What are those stressors? Back to the savings rate.
Most working class Americans don’t have the financial cushion to withstand a loss of income for even a single paycheck, let alone the six months minimum financial advisors recommend. Most working class Americans don’t have disability insurance to cover them should they have a medical challenge that prevents them from working. And while the number of uninsured Americans, those without health insurance, dropped from a high of nearly 50 million people prior to the Affordable Care Act, there are still about 27 million (over 8% of the population) who have no coverage.
Another pin that could prick the balloon is debt. When I decided to form KI Investment Holdings, I was alarmed that our national debt had reached $7.5 trillion dollars, which was about 45% of GDP at that time. Today it stands at over $23 trillion, over 100% of GDP. If interest rates increase to pre-Recession levels, we will either have to increase that debt service cost (raise the rates on T-bills) or suffer a spending collapse at the federal level, which would cause a recession. Government spending accounts for 20% of GDP, and 25% of that spending, currently over a trillion dollars, is deficit spending above tax revenues. We can thank the Republican administration and Congress at the time of the tax reform bill two years ago that caused the dramatic jump in deficit spending as tax revenues fell, during one of the longest economic expansions in the history of the country, post the Recession.
I agree that the American Dream is alive.
It’s the American Reality that I’m concerned about, for our kids and for their kids.