The Great Recession and Its Looming Aftermath

by Marc Faber, Daily Reckoning In retail, wholesale, leisure, and hospitality,” Derek Thompson explain in the December 3, 2014, issue of The Atlantic, “real wages have fallen more than 10 percent since 2007. To be clear, this doesn’t mean that most of millennials [young people born between the early 1980s and late 1990s] are seeing their pay slashed, year after year. Instead it suggests that wage growth is failing to keep up with inflation, and that, as twentysomethings pass into their 30s, they are earning less than their older peers did before the recession.” Thompson further states:

“The picture isn’t much better for the youngest group of workers between 18 and 24. Besides health care, the industries employing the vast majority of part-time students and recent graduates are also watching wages fall behind inflation. Forty percent of this group is enrolled in college.”

Why are real wages falling across so many fields for young workers, Thompson asks. According to him, “The Great Recession devastated demand for hotels, amusement parks, and many restaurants, which explains the collapse in pay across those industries.” Furthermore, he argues that globalisation and technology (particularly information technology) have conspired to gut middle-class jobs by sending work abroad or replacing it with automation and software. He cites a 2013 study by David Autor et al. which found that although the computerisation of certain tasks has not reduced employment, it has reduced the number of decent-paying, routine-heavy jobs, replacing them with cheaper jobs so that overall pay has declined. As to why health care wages have been “the exception to the rule,” he opines:

“The demand for medical services is dominated by the government (i.e., Medicare, Medicaid, and the employer insurance tax break), which doesn’t face the same vertiginous up-and-downs as the rest of the economy. So as the Great Recession steamrolled many industries, health care, propped up by sturdy government spending, kept adding workers… Americans are spending 4% less on food away from home than in 2007; but we’re spending 42% more on health insurance. As prices have increased, so have wages for younger workers in the medical field.”

The graphic below, published recently in The Wall Street Journal, shows the change in average spending and income from 2007 to 2013 for American middle-class households. According to the WSJ, the data includes the middle 60% of Americans by income, which was not adjusted for inflation. According to the Bureau of Labor Statistics, famous for its fairytales, inflation increased only 12.4% during that period. SpendingPatterns Above shows just how badly squeezed the millennials are. The have never been a cohort that spends much, or anything at all, on residential phones, household textiles, home ownership, and major appliances — that is, the categories where spending (and most likely also prices) have declined; whereas they spend more on categories such as education, healthcare, rents, health insurance, mobile phones, internet, etc., where prices have tended to move up. Furthermore, and importantly, The Wall Street Journal data didn’t include the cost of raising a child. The SFGate blog recently published an article entitled “The cost of raising a child is going through the roof” (December 4, 2014), which explained: “While the cost of buying stuff has declined in relation to median income, the expense of childcare and college tuition is flying at breakneck speed into the heavens. If you’re concerned about money, you’d be wise to skip having a kid and buy a new computer and dishwasher instead.” (An Index of Childcare and Tuition with a base of 100 in 1990 is now at 571.) The blog further notes:

“Policy analyst Scott Andes and policy manager Mark Muro over at the Brooking Institute comment on this data: ‘The price of hospital services and child care and tuition has grown by an astounding 200 percent faster than median wage. Prices have outpaced income in housing rental, legal and professional services, and hotels and lodging as well. These large sectors and the high prices they charge are contributing heavily to the slipping economic position of American households.’”

I appreciate the findings of Mark Perry and Alex Pollock of the American Enterprise Institute and their explanation as to why median US household income has declined since 1999. However, the overriding fact is that real per capita income has declined since 2000. REC_02-02-15_Capita Moreover, if we adjusted nominal per capita incomes by the true cost- of-living increases, rather than by the Personal Consumption Expenditure Index or the CPI, the loss of people’s income in real terms would be far larger. Finally, as the New York Times recently reported, “The share of prime-age men — those 25 to 54 years old — who are not working has more than tripled since the late 1960s, to 16 percent.” Perry and Pollock also suggest that the decline in household income is a consequence of the decline in the marriage rate. However, they fail to identify the main cause of a declining marriage rate, which is an economic issue. How can anyone get married without money? People below 35 years of age have no savings and a negative savings rate. Derek Thompson opines:

“Some of these young people could afford to save more, even if it’s a small share of their meager income, since small amounts of money put away several decades before retirement (or an unexpected emergency) can help later. But it’s easier to see why young Americans aren’t saving any more than we used to: Their wages are falling behind the cost of basic goods and many are going into debt to pay for a college degree. “The evaporation of real wages for young Americans is a real mystery because it’s coinciding with what is otherwise a real recovery. The economy has been growing steadily since 2009. We’re adding 200,000 jobs a month in 2014. That’s what a recovery looks like. And yet, overall U.S. wages are barely growing, and wages for young people are growing 60 percent slower than overall U.S. wages. How is a generation supposed to build a future on that?”

I am not agnostic to the view that society has changed because millennials prefer not to have any responsibilities and therefore opt not to get married (a view for which I have great sympathy, I should add). Young people are more inclined than their elders to view cohabitation without marriage in a positive light. (My grandparents on both sides would have considered cohabitation without marriage a terrible sin.) I seldom agree with Larry Kudlow of CNBC and “Free market capitalism is still the best path to prosperity” fame (the slogan should be amended to: “Manipulated markets and crony capitalism are the best path to endless wealth for the top 0.01% of the population”), but I am interested in the point he makes in an article entitled “Marriage is Pro-Growth,” published in the National Review of November 14, 2014. He writes: Continue Reading>>>

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