By David Stanowski
24 September 2007
The Census Bureau web site has a treasure trove of data on the income earned by Americans. They have median, and average incomes for individuals, and families. There is data sorted by the region of the country, city, gender, age, ethnic group, etcetera.
When the data series begins, in 1945, the key benchmark used to measure how the country was doing, financially, was Median Family Income. In 1967, they started a new statistic called Median Household Income. This includes the income for all of the persons living in a housing unit, no matter what their relationship. Obviously, as people began living together in arrangements, other than traditional families, this measurement made more sense.
The Census Bureau calculated both statistics from 1967 to 1999, when they dropped Median Family Income in favor of Median Household Income. In order to study the history of Median Incomes, I started my data series with Median Family Income, in 1945, and switched to Median Household Income, in 1967.
Like all statistics, of this sort, calculated by the government, there are a lot of estimations involved, and a strong internal bias to produce annual number that always go higher. Knowing that most of the populace doesn't fully understand the stock market or how does an annuity work it is an easy way to convince them that the government is doing a good job at creating ever increasing prosperity!
The following graph displays this rosy picture of ever increasing prosperity, that we are all used to hearing about, during periodic updates. In fact, there are only two minor dips over the entire history! Median Income begins in 1945 at $2,379, and increases all the way to $48,201, in 2006. In 61 years, we have increased our Median Income more than 20 to 1!!! This is the story that the government, most of the people on Wall Street, and most in the media have been telling us for years.
The government even "admits" that these figures should actually be reduced "a little bit" due to the "small amount" of inflation that they inject into the system, to grease the wheels of the economy. When they do this, they utilize the very deceptive statistic, that they developed, for this purpose, called the CPI, to reduce these Median Income figures about 2-4% per year. What does this "small reduction" actually amount to?
When the annual Median Income data are divided by the annual CPI, this "adjusted income" peaks at a level of 236.22, in 1973. Then it works sideways for a quarter of a century until it reaches a new all-time high of 244.99, in 1999. After 26 years, the American people have seen their Median Income, after it is adjusted by the CPI, rise a measly 3.71% higher than it was in 1973! The government's official data doesn't look all that good when you see the whole picture.
But, what is the truth?
In my article, Inflation; the Big Lie, the point was made that we use Dollars as our standard unit to measure economic performance, but that presents a very serious problem, because the value of the U.S. Dollar has declined steadily over time.
Therefore, in order to get a sense of actual, or "real performance", we must find some way to factor out the decline in the value of the Dollar. There are many possible ways to do this, but rather than use an artificially contrived, and perpetually understated method, such as the CPI, I use the price of gold. This is not absolutely accurate, but a market price gives a much better approximation than a government statistic!
Dividing the Median Income, by the price of gold, at the end of each year, created the data series called "Real Median Income", shown in the next graph.
This data shows the rise in Real Median Income during the post-war boom from 1945 throughout the 1960's. Real Median Income peaked, at the end of this era, in 1970, when the Median Income would buy 240 ounces of gold. From there, the hyper-inflationary 1970's pushed Real Median Income down until it bottomed, in 1980, when the Median Income would only buy 29 ounces of gold!!
After that, Real Median Income rose throughout the 1980's and 1990's, and then peaked, in 2001, when the Median Income would buy 155 ounces of gold. At that point, we entered a new hyper-inflationary period, and Real Median Income has declined over 50% since then!
What does this data tell us?
From a long-term perspective, it clearly shows that the Federal Reserve, and the Federal Government have a long-standing policy to devalue the Dollar for their own political purposes, and financial advantage. This means that even though we are living in a world that has brought us untold riches, advantages, and comforts, through the advances in technology, since the 1960's; when it comes to paying our bills, for the necessities of life, like food, shelter, and energy; we have a more difficult time doing so today, than we did from 1965 to 1971, when our Median Income would buy about 200 ounces of gold! Even at the recent peak, in 2001, Median income would only buy 155 ounces of gold, and in 2006 it was down to 76 ounces!
The policy that was used to lower our standard of living, for the last 36 years, has separated Americans into two dominant groups. One group has continued to tighten their belts, and do with less, just to try to stay even in this quicksand. By being frugal, some have been able to save and invest a little of their earnings. By investing in inflating assets, their net worth has grown.
The other group only sees the futility of saving a depreciating Dollar, so they have spent all that they earned, borrowed more and more to maintain the standard of living that they desire, and started speculating, to try to get ahead. Their final step was to speculate using credit, i.e. leverage, which found its ultimate expression in the recent real estate bubble, when homes were purchased with no money down, i.e. 100% leverage. Some deals even gave the buyer cash back, which could be thought of as infinite leverage. Members of this group usually have some assets, but just as much debt.
Over this period of time, there have been a few big winners in the financial class, but millions of losers among the working and middle classes, who have been crushed in this process. We are now in a very precarious financial and political situation where the losers will demand more programs, like socialized medicine, to redistribute the wealth. These policies have created a situation that will not end well!
In the short term, the graph of Real Median Income shows that the expansion of the 1980's and 1990's did indeed end near the stock market top, in 2000, and, regardless of the inflationary illusions created by the real estate bubble, or new highs on the DJIA; a recession (negative growth) began in 2000! As the financial crises, and job losses continue, more and more people should begin to see this!
Does the change in the price of gold, between 31 December 2001, and 31 December 2006 overstate the amount of inflation and damage to Median Income in this country? During that period the price of gold increased 128.67%, the price of oil increased 207.71%, and the CRB Index (a basket of commodities) increased 106.49%. Therefore, the Real Median Income data series created using the price of gold should be a whole lot closer to the truth than adjusting Median Income using the government's CPI.
Which graph more closely reflects your own experience?
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