While President Obama complains about not getting enough credit for the economy, we should ask whether we really have that much to celebrate.
Obama says that the unemployment rate is down to 5%, and the economy is growing according to government statistics, even if not as much as some would like. But — according to Obama — it is a recovery from the financial crisis of 2008/2009.
Of course, Obama doesn’t have to worry about paying for his health insurance premiums or the increasing deductibles. Obamacare has succeeded in making health care the second-largest budget item for some families (the largest is taxes).
The GDP can be misleading, as it essentially includes government expenditures. While it can be a somewhat telling statistic over the long run, it may be an inflated figure to a certain degree with an almost $4 trillion federal budget.
Even using the GDP doesn’t give us anything to celebrate in terms of the economy. Obama will go eight years in the White House without having one year that exceeds 3% real GDP growth. This is absolutely terrible.
To be sure, it is not all Obama’s fault that the so-called recovery has been so weak. He did take over the presidency when the economy was a complete mess. Congress and the Federal Reserve share a large part of the blame. The problem is that Obama is trying to take credit for something that isn’t good. He shares part of the blame, not part of the credit.
Meanwhile, the media is trying to figure out this anti-establishment uprising in political circles, particularly with the likely nomination of Donald Trump and the strong challenge by Bernie Sanders.
Political Backlash
Here is some news that may come as a shock: Most Trump supporters do not view building a wall on the Mexican border as the top issue. Maybe it really is the primary concern for a few people. But for most people, it is about their wallets. To famously quote the 1992 Clinton campaign, “It’s the economy, stupid.”
I am not saying Trump and Sanders have all the right answers to our economic problems. In fact, Sanders wants to do the opposite of what needs to be done in terms of his proposals for massive government expansion.
But at least Trump and Sanders have identified that a major problem exists. The American middle class is getting the short end of the stick. It has been a major fault of many conservatives in not acknowledging this.
I am all about hard work and budgeting wisely. But it comes across as either insensitive or naïve when I hear some politician (or anyone else) say Americans just need to work harder and make better spending decisions.
That may be the case for some, but many people who do work hard and do not spend frivolously are still struggling.
Median Income
The latest statistic showing the median annual household income was up 4.5% from a year ago. The median household income is now at $57,263. The problem is that it is slightly below the amount measured at the beginning of 2000 in real terms.
And it doesn’t really matter which statistic you use. Even according to government statistics, real income has remained stagnant or fallen slightly since the end of the last century. It may go back a lot further than this depending on the measure you use.
When it comes down to it, this is the statistic that really matters. Average income doesn’t matter as much because it can go higher based on a small percentage of high-income earners.
Unemployment rates don’t matter that much if productivity and purchasing power are not rising. Unemployment may be reported around 5%, but it doesn’t take into account all of the part-time workers and people who have just given up looking for work.
Unemployment has gone down over the last seven years, but that is because it had spiked up from the recession. You can always eliminate unemployment at some price, if wages are allowed to fall.
This is why unemployment remained high during the Great Depression. The government tried to prop up wages, which did not allow the market to clear the excess supply of labor. It doesn’t matter if it is a consumer product or labor; the price has to be able to adjust to clear the market. It is basic supply and demand.
So perhaps we are better off than in the Great Depression because wages have been allowed to fall (if you don’t count minimum wage laws). Still, it is understandable that Americans would not be happy with stagnant wages over such a long period of time.
Inflation: A Hidden Culprit
If you are a middle-aged adult right now, you may look back and say that you make a lot more money now than you did around the year 2000. In nominal terms, this is true.
But many people can’t figure out where all of their money is going. Their paycheck is higher than it used to be, yet they seem to be more financially strapped.
If your income has increased considerably over the last 16 years, consider that price inflation has also gone up almost 40% over the last 16 years. And this is according to government statistics, which are likely understated. This is during a time of supposedly low price inflation.
Let’s get back to Obamacare. Some people have seen their health insurance premiums double within just a couple of years, and that is usually coupled with a drastic reduction in coverage (higher deductibles).
The Federal Reserve can keep claiming that consumer price inflation is coming in below its target of 2% annually, but this is likely very misleading. And even if it were true, our purchasing power is still being reduced as wages lag behind.
Again, the real median household income is the statistic that matters the most to people.
A Needed Correction
As the economy has been mostly stagnant, technology has continued to advance in spite of weak economic growth. This is our great advantage.
While the economy is weaker today than it was in the 1950s, it doesn’t mean we want to trade places. We love our big-screen televisions, our smartphones, and our various gadgets. We should expect to enjoy these things without life becoming more expensive for basic needs. This is part of an increasing standard of living.
Right now, we are smothered by government at all levels. We fork over about 40% of our incomes to various levels of government. Some people pay over 50%. And after all of the taxes and inflation, we are still smothered with laws and regulations that stifle business and economic activity.
We need a correction that results in a significant reduction in government spending, particularly at the federal level. The problem is that the Federal Reserve steps in and creates money out of thin air to enable the federal government to keep spending at high levels. It was done from 2008 to 2014, and we should expect it again when the next recession hits.
Until there is a significant reduction in government spending, we should not expect a raise for the American middle class.
If you are going to get a raise, then you will have to leave your fellow Americans behind. This means being creative and providing great value to others. And yes, it also means working hard and budgeting wisely.
You also want to preserve and grow the wealth you already have. This means avoiding the sectors that go bust after being blown up by easy money and government spending. It means investing in individual stocks that will perform better than the S&P 500. It means investing in hard assets to protect yourself from the continued inflation of the Fed.
If you want a true raise, you will have to become a statistical aberration.
Until next time,
Geoffrey Pike for Wealth Daily