Monday, November 21, 2011

Are we getting Wealthier or Poorer?

Are the standards we use to calculate relative wealth at all accurate?
We talk a lot about the declining value of the dollar, as well as inflation over time as well as our so-called declining standard of living.  And we take, on faith a lot of numbers tossed around by the government, industry, and financial experts.

One problem with these numbers, however, is that they compare the price of apples today, with the price of oranges back in 1980.  And the two things are not equivalent.  At best, our inflation calculations are rough guesses at best.  And when you try to compare our level of wealth today, with that of years past, it is a false comparison.  We all have so much more today, although the way the press plays it, you would think we are put-upon.

I would argue, despite the loud voices to the contrary, that we are far wealthier today, in real terms, than we were in the past.  And comparing the price of houses, cars, food, and even gasoline today with prices in the past can provide you with little more than a rough estimate.

Let's take cars, for example.  In 1968, my Grandmother bought a brand new Chevy Bel Air for about $2500, which was a decent price back then.  It was an entry-level "full sized" car, with no A/C, manual windows, manual locks, two-speed transmission, six-cylinder engine, AM radio, bias-ply tires, and vinyl seats and a single, manual rear-view mirror.  It was a large, empty car, basically. 

According to the Consumer Price Index, that $2500 would have about $16,266 of buying power today.  That much money would put you in an LS model Chevy Cruz, which has power remote rear view mirrors, anti-lock brakes (discs, no less), 10 airbags, tire pressure monitor, AM/FM/MP3 CD Player, Air Conditioning, Power windows, power door locks with keyless entry, cruise control, and even floor mats!

As you can see, it is a heck of a lot more car, for the same effective price.  Granted, a Chevy Impala, which would be in the same size class as the Bel Air, costs $25,000 base price.  But again, even the stripped "LS" edition comes with a ton of features that were not even dreamed of in 1968.  And tellingly, a loaded 1968 Caprice would have run about $3570, which is equal to about $23,227 today.  If you could throw in the high-tech features not even available back in 1968, you can see that the price of the car is, well, about the same today as it was back then, if in fact, not cheaper.

So, has the value of the dollar dropped since 1968?  Yes it has.  Has the price of cars, in real terms, gone up?  I think not.   It takes about the same amount of money today, adjusted for inflation, to buy a car than it did in 1968.  But it is a hard comparison to make, because cars have changed so dramatically since then - you can't buy a Sally Stripper Bel Air with "no stove, no organ" (heater and radio delete) today.  Cars come fully loaded, and what were once considered rare luxury options are standard equipment in nearly every car.

As a result, we all are, in effect, wealthier.  Back in 1968, only a wealthy few could afford things like air conditioning, power door locks, and power windows.  Today, we all have this stuff - and far, far more.  We have more, and yet pay about the same.

The same is true of houses.  Houses have radically increased in size over the years.  Bathrooms are palaces today, whereas back in the 50's and 60's they were dark closets with mildewed tile bathtubs.  Kitchens are now 'eat in' with granite counter tops and standard appliances including microwaves, dishwashers, and disposals.  Back in the day, only the very rich had such things.  And even outside, we have landscaped lawns and sprinkler systems, once only the province of the rich.  Cheap PVC pipe has made all the difference in the world!

So comparing home prices from 1968 to today is a bit of exercise in self-deception.  Today, we live in homes that, back then, would be considered "luxury" or "upscale".

Even food is hard to compare.  Yes, the price of wheat is pretty easy to compare - it is a fungible commodity.  But in terms of groceries, we eat far better than we did back in the day.  Even something as simple as coffee gets more complex - the quality of the product is far better than what my Mother could buy at the IGA in '68.  And so on down the line - from vegetables (back then, there was one kind of lettuce - iceberg, baby!) to meats, to prepare foods, to beer and wine, to, well, just about everything.

And our obesity epidemic is testimony to the increased availability of food today and its relatively lower cost.  We are richer and fatter than ever before.  And yet some people will try to sell you on the idea that we are poorer than ever and that our standard of living is in decline.

Of course, when it comes to electronics, this is where the numbers get blown away.  Chances are, your cell phone (even the non-smart variety) has more memory and a faster processor than a mainframe IBM System 360 of 60 years ago.  Your typical desktop today is more powerful than a CRAY Supercomputer from the 1970's.  What were once exotic DoD research projects are now considered primitive compared to the guts of your iPod.

So your dollar goes a heck of a lot further today for computers than ever before.  And every year, it goes further.  And as a result of all this, computers are in everything we own, from our phones, to our cars, to even the thermostat on the wall.  We live richer lives as the result of this as a result.

Or take televisions. As I noted before, it was a proud day in our household in 1975, when the man from the TV store came to "install" our 25" RC ColorTrak and put an antenna on the roof of the house.  We got three stations!  And sometimes even that UHF station that showed Sesame Street!  Wow!  All that for only $500 and some change.  We didn't have Cable-TV there, but in the few places that had it, you might get a dozen channels - for about $12 a month.

Today, that $500 buys a 42" flat panel, which can pick digital signals off the air.  And if you want to pay for it, all the channels you can stand (I do not recommend that, of course).  The point is, we have a ton more than we had back then.  And yet, this is not factored in, when comparing things "then and now."

So why do so many people feel our standard of living is declining?

In part, I think it is because when you present things in terms of raw pricing, even compensating for inflation, it sounds like the "good old days" were so much better.  Gee, Grandpa, a loaf of bread was only 15 cents!  But of course, 15 cents was a lot of money back then.

Perhaps also, people with political or financial agendas profit when you feel put-upon.  After all, no one votes for change when they are satisfied with the Status Quo.  No, you need your taxes cut!  After all, you are "Taxed Enough Already" - right?  You have it so much worse than your parent's generation did!

Really?  Guess Again.  Back in 1965, the top marginal tax rate was a staggering 75%.  Sort of makes 40% look pretty attractive, don't it?  And of course, most of the people doing the complaining today are in the 15% bracket, if that.

Maybe, just maybe, these are the good old days, if we just look at them realistically and not through the skewed lens of media hysteria and the spin of campaign consultants.   Our economy has its troubles, but is basically sound.  It will take time to process all the foreclosures and work all that excess housing inventory out of the market.  And it will take time before companies start hiring again - once they are assured that sales really are on the mend.  But the signs of it are everywhere you look - if you choose to look.

But there are some that don't want you to see this.  They want to get you upset and angry, so you vote for their odious friends who will fund the stealth submarine with your tax dollars or outlaw gay marriage while they loot the treasury.  They want to make you feel put upon and used,  so they can manipulate you.

And how do I know this?  Because back in the 1990's and early 2000's, when the economy was booming, there was no shortage of stories in the media about how bad things were and how people were being laid off and about homelessness.  Things were going gangbusters, but we were still being told were were put-upon.  It has always been thus, and always will be thus.

And unfortunately, most folks look at the cover stories that the media reports and think it is the real story and not a political distraction to keep you from seeing the real picture.

Things are not as bad as they seem.   In fact, the best of times is now.