Elusive Wealth

One of the topics I would like to cover over the coming weeks is wealth and income distribution. There are several reasons why I want to cover it, first and foremost I think it is relevant to many people. There is concern about the shrinking middle class, increasing poverty and rising health costs. I want us to look at what might the contributors to that, and find some ways to address it.

To start this discussion, let’s take a look at some statistics on the distribution of income in the United States. Maybe from this there is something to learn, or perhaps its just interesting data.  First let’s look at some of the 2005-2007 census data. Statistics show that we have 111.6 million households. So what is the relative wealth breakdown of those households?

Income Levels (2005-2007 Census Data)

The median income during this time period is right around $50,000. If you are significantly lower than that, you might be struggling to make ends meet. If you are higher than that, you might have a good income, especially relative to the rest of the country… but even then you might not feel like it is sufficient. And if you are way off the charts, you might be Obama-rich (congratulations if that is the case)!

So how do these numbers differ from the past?  Below is the same data from 1993.  You can see the trend as fewer households are in the under $15k range, and significantly more households are in the greater than $75k range.

Income Levels (1993 Census Data)

In 1993, the median income was $31,553 compared to the $50,000 number for 2005-2007.  During this time period (1993 to 2005) the consumer price index grew from 213.7 to 284.3, an increase of 33%. The median family income grew over 58%. So why are incomes outpacing consumer price index during that time period?  One of my thoughts is that a certain portion of that increase is represented in the increase of dual income families.

At the same time that households appear to have more money relative to the cost of goods, people have felt increasingly more strapped. Take a look at some data from Pew Research (The Median Debt-to-Income Ratio for Households With Debt Holdings) that really highlights what I believe to be a major contributor, if not the largest contributor, to any disparity in wealth and the “fading middle class.”  This graph shows the median debt to income ratio of high, middle and lower income earners in 1992 and 2004:

Median Debt to Income (1992 and 2004)

Notice the tremendous growth in debt compared to income! We can consider what goes into that. For instance, I have no doubts that rising health care costs are a contributor. But I also believe that our excess is a factor as well — our Starbucks, BMWs, and our willingness to take on house we cannot afford.. If you compare the income data, it seems we should feel better about our position not worse. And certainly it is difficult to see the middle class disappearing from the income data. Compared to inflation it seems middle class should be getting richer. But this debt is a tremendous burden. And doesn’t Congress provide a wonderful example of keeping debt within reason?

What are your thoughts on what contributes to this drastic increase in debt?

Many look at the current economic conditions to point out that Capitalism is failing us. They say that capitalism has taken away so much of our

Uncle Sam?

wealth. The reality though?  Capitalism has merely taken a small portion away of the vast wealth that Capitalism provided in the first place. Sure, it does not seem like a small portion. Times are tough and jobs are scarce. Only jobs aren’t as scarce as they have been in the past. And times aren’t as tough as they have been before.

Will times be as tough as they once were?  Maybe, if we keep trying hard enough. If we continue to get better at spreading the wealth around through taxing wealthy, we can get there. If we socialize health care, that will help. If our government keeps taking companies over that will help too.  We can go all the way to the dark ages and beyond if we want to.

What about the great disparity in wealth in our country? Clearly capitalism has increased the gap between the haves and have-nots, right? No again.  The haves are the have-nots employers! Take away the haves (by taking their money) and all you have are have-nots. Sure it’s just a little bit here and there, the haves won’t miss it. The haves won’t use it to hire someone either then. The government cannot hire everyone. The gap between wealthy and the middle class may be growing, so do we take the money away?  Or do we earn it by providing products they can use. And does the money of the wealthy sit under a mattress providing no value to anyone?  Sometimes, but usually it is invested in something that helps everyone produce goods that people need. If it is invested, what else might it be doing besides earning more money for the investor?  Providing jobs.

Well, take the banks — what an example of unfettered capitalism going wrong. Clearly they demonstrate that there must be regulation, right?  Sure, there must be some regulation – not everything fits into an absolute, capitalism is no different. But did capitalism really result in the mess we are in?  To a point, because with capitalism there will always be fluctuations in the marketplace. That is a good thing. But let’s look at other events that contributed to the mess:

• We, the people, borrowed any money we could get our hands on.  We, the people, bought houses we could not afford.
• We continued to be customers of mega banks that increasingly provided lower interest rates and poor customer service.
• Our U.S. Government decided that everyone deserves life, liberty, happiness, and a home. The Community Reinvestment Act encouraged banks to lend to people who could not afford homes. [This is not the cause, it is a contributor]

Do banks have an obligation to ensure that their customers can repay their loans. Absolutely. If they cannot, what happens?  The bank, its management, its shareholders, and unfortunately its employees move on to better endeavors. Why is this important?  Because this is creative destruction, where companies that fail and cannot produce go away. This is capitalism’s way of handling poor management, poor products, poor service, and corruption.

So after I say all of this, I must not care about others, right?  Me, and others that think like me, must be hoarders without empathy. No, I support capitalism because I care. Capitalism is the only system that allows the level of entrepreneurship we have seen in this country.  It is the only system that produces so many millionaires from the have-nots. Those who believe in the opportunity to create wealth for themselves must believe in capitalism, for without it that opportunity does not exist.

Certainly the economy remains a major concern in most people’s minds. This could be in either a negative way for the many people who have been affected by job loss, income reduction, or loss of investments. In a more positive view, some people have seen new opportunities and others have begun to save more. The media plays a bigger role in our perception of things than it ever has in the past. Social networking also helps contribute to that perception in both positive and negative ways.

Let’s take a look at the economy as an example. A Pew Research poll (Interest in Swine Flu Remains Strong) shows that 44% of people follow the economy very closely as of early May. This is down significantly from a peak of 70% last September.  Remembering back to that time, the economy was the top story almost daily.  And usually the word crash was thrown in for good measure.

World Crisis

The same Pew Research study shows that while 24% of the people surveyed view the economy as their top interest from the media, only about 12% of the news coverage is now on the ecomony. Most of the coverage, on the other hand, is given to the terror and torture discussions.

Perhaps “swine” flu, or H1N1 provides an even better example. The actual hysteria over H1N1 lasted a few weeks, and of course it was a top story. Since then, we have experienced a flu that, at least in the United States, is less deadly than the seasonal flu. That’s not to say that there is not reason to be concerned with new strains of the flu like H1N1, but is media coverage proportional? Today 21% of people surveyed still look to stories on H1N1 as their top media priority, yet media coverage of H1N1 has been reduced to 2%.

Although this is not necessarily definitive, what this demonstrates to me is the extreme effect that media has on the public mindset. For the vast number of people to still have H1N1 as their top concern shows me that media coverage and hysteria were over the top.

Once the hysteria and fear begin to fade away, it does not necessarily leave the public mindset, even for those less affected by the events, until well after recovery begins. The media on the other hand tends to ignore the signs of recovery, relatively speaking. Sure there is some media coverage on signs of recovery in the economy and the less than anticipated potential impact of H1N1. But the reality is that the coverage is disproportional to the coverage of the negative events.

As time passes it is important that we keep these things into perspective and avoid panic. Panic breeds on itself, and very likely made both the economic and H1N1 situations worse than they could have been.