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Published on the Doomstead Diner on November 2014
Discuss this article at the Economics Table inside the Diner
One of the most persistent explanations circulating around Economics websites is that a major reason for our current economic problems lies in the fact the Boomer and GenX generations failed to Save money over the last 30 years, and spent profligately on stuff they could not afford, racking up huge credit card debt along the way. There is of course some truth to this, but to understand the whole phenomenon you have to dig a bit deeper.
The first thing you have to realize is that at any given time, half the population has above the Median Income, and half below it. Currently, the Median Income in the FSoA is $51,000.
The Median Income has changed over the years, here it is in adjusted 2009 Dollars
In fact in REAL Dollars available at the time, the 1967 Median Income was nowhere near $40,000, it was around $6000.
If somebody making median income in 1967 was saving 5% of their income, they could save $300 for that year. If they had it invested in something that brought in a 10% return every year for the entire time since then, that $300 would be $24,000 today. However, few things brought a steady return of 10% every single year since 1967, there have been a few busts and low interest rate periods along the way, so your real return probably was a good deal lower than that.
The 5% target is a good one, and probably can be achieved by most people making the Median Income at any given time. However, it doesn’t account for “disasters” which occur periodically for everyone statistically, like you get sick, your union goes on strike, you get in a car accident, your wife gets unexpectedly pregnant before you are making the big bucks, etc. That $300/year nest egg you started in 1967 all gets wiped out in 1972 when your factory job moves over to China and you are unemployed for 6 months. Or The HUGE Nest Egg you had in 1990 all goes up in smoke because you invested in Dot Coms. Not only do you wipe out your nest egg in many of these situations, you have to go in debt to stay floating, and thereafter you are always behind the 8-Ball.
||No. of Households
||Inflation Adjusted $
The next problem to look at is what the cost of living was back then, and how plausible it was for someone making $6000 to save $300 each year? From Flashback.com, we get these stats for 1967:
||Lyndon B. Johnson
||Hubert H. Humphrey
|Consumer Price Index:
|Cost of a new home:
|Cost of a new car:
|Median Household Income:
|Cost of a first-class stamp:
|Cost of a gallon of regular gas:
|Cost of a dozen eggs:
|Cost of a gallon of Milk:
Slight discrepancy here between the stats, Flashback has the Median Income $1,143 higher than Dave Manuel, which is quite a significant difference. Let’s go with $6600 as a compromise figure. That means the 1967 Median Wage Earner had a Gross Monthly Income of around $550. On a 20% Downpayment 30 year fixed rate mortgage at 5% with 3% property Tax, the Mortgage Calculator comes in with a monthly payment of around $168.
There is no car cost for 1967 from Flashback, however from People History, I get the figure of $2750. For a 4 year auto loan @ 4% interest, payment comes in a $63. Now we are up to $231/mo expenses.
A Gallon of Gas, $0.33, say you drove 20 miles/day, 600/mo, 10mpg that is $10/mo. Now you are at $241.
I didn’t take out taxes from the Gross Income, I haven’t worked up the food budget or home heating, insurance costs etc but fairly obviously here if you made the Median Income in 1967, you would easily exceed $550/month, no savings, long as you had a Car anyhow. Which explains why in 1967 the median household probably did not have a car.
There were of course many ways to reduce your expenses, as there always are. Used Cars are an option, living in small rental units to save money also an option. However, the EXPECTATION for everyone was to live the Median Lifestyle on the Median Income, generally meaning you would buy a house on credit, buy a car on credit and live the lifestyle portrayed on Leave it to Beaver and Father Knows Best.
So the expansion of credit to live this way predates the Boomers, in fact the Greatest Generation from WWII really began to live this way in earnest, and even prior generations did also, because the whole monetary system has ALWAYS been predicated on expanding the debt.
You could do similar calculations for today, and actually it is mostly a good deal worse with car and McMansion prices an order of magnitude higher, and Gas prices also an order of magnitude higher, even with the recent deflation in these prices.
This brings us to the next problem, which is what would have occurred if the Silents, GGs and Boomers had NOT taken on Debt over the decades here? We would have had Deflation and Depression much sooner, that is what would have happened! The issue here is the Paradox of Thrift.
The paradox of thrift (or paradox of saving) is a paradox of economics, popularized by John Maynard Keynes, though it had been stated as early as 1714 in The Fable of the Bees, and similar sentiments date to antiquity. The paradox states that if everyone tries to save more money during times of economic recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy. Both the narrow and broad claims are paradoxical within the assumption underlying the fallacy of composition, namely that what is true of the parts must be true of the whole. The narrow claim transparently contradicts this assumption, and the broad one does so by implication, because while individual thrift is generally averred to be good for the economy, the paradox of thrift holds that collective thrift may be bad for the economy.
The tendency is to forget that the entire Monetary System is based on Debt, and has been so since before the FSoA ever became a country, in fact even before the Bank of England was chartered in 1692. Without debt, the whole biz collapses. Even more important, without Debt EXPANSION the system collapses. The trick here is to be the one who can access the debt, but pawn it off on others to pay it off. This is what the TBTF Banks do. Corporate structure allows Oligarchs to issue ENORMOUS sums of debt, they skim off bonuses and then eventually leave the rotting hulk to be paid off by the Taxpayer. See the Railroads, the Electric Grid, the Auto Companies, the Airlines and the Dot Com Bubble to review the history here.
As, a system, it has never been able to pay it’s debts, and for the average J6P the main issue has been to try to stay ahead of the whole game, and collect a greater than average median level of the debt money to pursue your life in the society, and to Save if you have enough of the surplus. Generally speaking though, only the Top Half has a surplus, the Bottom Half always runs a Deficit. Assets on the Balance Sheet of the Savers are the Debts on the Balance Sheet of the Debtors. That is how the system works. If there were not Debtors, there would be no Rich people.
Could you Save Money if you were in the Lower Half of the Demographic? Sure you could, as long as you did not buy new cars, did not buy big McMansions and take vacations to Hawaii, if you were Frugal over these years you could save, and some people in this demographic did. MOST of the savers though come from the Top Half, and in fact from the top 20% or so of Wage Earners over the period. These folks DID save, and the numbers are there to prove this. It is a canard that Boomers did not save, it is only true that most of the half of Boomers below the Median income did not save. That however is true of every generation, not just Boomers.
In the final analysis though, it did not matter whether individually you Saved or not, because as a whole the Industrial Society has been accumulating ever increasing amounts of Irredeemable Debt since the beginning of the Industrial Revolution. In terms of the Debt issued through the period, the VAST majority of that Debt was taken on by Industrialists to expand the Industrial System, and the War Machine which is a big part of that. Consumer debt over the period was a small part, although it definitely did expand in the last 30 years, but it is played out now. Consumers are indebted up to their eyeballs, in fact so are corporations, so now Goobermints through the Central Banks are taking the debt onto their balance sheet, but this debt will never be repaid. It is IRREDEEMABLE DEBT. When this finally is recognized, the whole system collapses. It has very little to do with Boomer spending and Savings habits over the years. The whole system was Doomed from the get-go, because you cannot have Infinite Growth in a World of Finite Resources. Libertarian Ideologues who blame Doomers for this are Pissing in the Wind.
Coming Soon to a Theater Near You.