Monday, September 05, 2005

In honor of Labor Day, Where Has Your Money Gone?

What was the number one New Year's resolution in 2004?

Let's ask Dr. Elizabeth Warren of the Harvard Law School, who said last year:

WARREN: For the first time ever, overtaking "Lose weight," it was "Pay off some debt. I've got too much debt. I'm in trouble. I'm worried whether or not I can make my basic payments."

Alan Greenspan, our national economic leader, has stood up for the last four years and told Americans, "Borrow against your house. If you can't close the gap at the end of the month, just borrow against your house." Now, he never called it borrow against your house.

He said fancy things like, "Tap your home equity." Which sounds like some kind of dance, or, you know, some clever financial thing to do. But what it really was is borrow more money against your house.

And bet your house that you can continue to make all those payments. Do all that just as a way to make it to the end of the month. To put groceries on the table. To make that house payment. To keep the lights on.

That's really scary financial advice for someone to be giving American families. And what frightens me is millions of American families have taken that advice.

Why? Why has debt become such a major issue in this country well-known for it's obesity health crisis (they're related, obliquely, by the way)?

According to her book, "The Two Income Trap", Dr. Warren argues that middle American income has so drastically changed over the past thirty years, and that basic supply and demand has effectively priced Americans out of the market in terms of "socking away for a rainy day".

Real median income for men since 1970 has risen by less than one percent, while for women, almost a third . Sounds like good news, right? I mean, a second income, more money coming in for all, should be a good thing?

Well, let's take a look at that.

In 1970, that single median income ($10,478) for a family of four paid all the bills-- food, clothing, rent/mortgage, appliances, cars, entertainment-- and managed to put away 11% for a rainy day. That same income has grown by one percent in the intervening 30-odd years.

Now take the second income, the one that should be nearly doubling the median income, and it does, pretty much, get to that ballpark.

So why is it, in 2002, the median income ($62,732) of an American family of four, double income earners, two kids, couldn't even save a single dollar? What's changed?

Some conservatives point to $200 sneakers, the wide-screen TV, needing to eat out as Mom works now, and scoff at our spendthrift ways.

Trouble is, according to Dr. Warren, that's not the case.

Adjusted for inflation, clothing as a percentage of income has dropped. Food declined 44% (all those meals in restaurants are now take out from McDonald's), and appliances, including Gameboys and flat screen TVs have dropped 21% in the past 35 years.

Well, what has gone up? What has us now spending ALL of our income and adding debt on at a furious rate?

Five areas were identified by Dr. Warren. The first among these, car payments, can be explained as necessary to the commute of the second wage earner. Hardly frivolous there, is it?

Next, mortgages. As Greenspan indicates in his comments quoted earlier, more and more people are drawing deeper against the mortgages and lines of credit on their larger-than-necessary mortgages to pay for houses that are more house than needed. In roughly the past thiry years, inflation has been about 125%, cumulative. Housing prices have inflated by more than double that figure.

So if housing prices had kept in line with the rest of the economy, we'd all be living like kings. OK, so housing costs have had a major impact on why Americans owe more and save less. After all, real wages have remained basically flat to going up a third (so let's split the difference and say 20% higher), while housing costs have risen ten times that rate. Meaning people are borrowing more for housing, speculating that housing will continue to rise. Bubble, anyone?

What else?

Health insurance and hand in hand with that, health care coverage, or rather lack thereof. Things a union used to get employers to pick up the tab for.

Only 60% of Americans now get health insurance from their employer. An overwhelming percentage now pay some portion of their insurance premium. Just between 2000 and 2003, families paid 49% more in premiums. In addition, most HMO co-payments have risen, especially the prescription drug "benefit", deductibles have soared as companies seek to rein in costs, and the caps for cumulative medical coverage paid for an individual or family over the lifetime of the employee's relationship have remained frozen.

Insurance premiums now stand at 21% of the median family income (the employees paid about a third of that in payroll deductions). They are expected to rise to over 40% by the end of this decade. With a $500 deductible on average, a further 10% of family income goes towards out-of-pocket medical costs.

Another 20% are covered by government programs, (which adds to the tax burden. I'll get to that in a minute), so 20% of Americans, over 45 million, are uncovered by any insurance whatsoever.

The costs to cover those people (remember, a hospital HAS to treat anyone who walks in the doors, which means that someone picks up that cost) are added onto your insurance premium, mine, and our tax bill.

As implied above, the overall costs of medical care have skyrocketed as well, going up nearly fifty percent this decade alone.

So there's another huge bite out of your paycheck.

What else?


In the 1970s, corporations paid 15% of the US income tax receipts. In 2003, as Bush "made the pie higher", corporations only paid 7.4% of the US tax receipts. During the Clinton years, this rate was raised to nearly 12% after reductions during the Bush I and Reagan presidencies.

That's bad enough, but now look at what happens to personal income taxes as well as payroll taxes like Social Security and Medicare.

People, individuals like you and I, paid 10% of the US tax receipts in 1970.

Today, we pay 40%. Of a much "higher pie".

Now, correct me if I'm wrong, but our population, roughly 200 million in 1970, is not 800 million now, is it? And in fact, the baby boomers are starting to retire, meaning shortly, we'll have fewer workers paying taxes into the system than we do now.

We're all working harder for our employers to make enormous sums of money, not thru revenue growth and reinvestment, but from cost cutting.

If I'm an investor, I want to buy a company that's growing its business, not reconsolidating its expense base, that's opening new markets, not contracting continually.

So as you crack open that beer at the picnic this afternoon, pray it doesn't cause a heart attack. On average, we're all one illness away from bankruptcy.
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