“The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.” – Adam Smith
It’s no secret by now that America is in an economic rut. I’ve described our current predicament as a balance sheet recession which is essentially the hangover after a great great party. And let’s not kid ourselves – Americans threw one hell of a great party over the last 20 years as they accumulated massive debts as they stockpiled McMansions with all the big boy toys a person could dream of. But the bill on these toys has come due and now we find ourselves with a sizable private sector debt issue which is capping real growth.
But it’s also important to keep things in perspective. What is not happening in America is some dramatic collapse in our livings standards. I know it’s not popular to try to imply that things aren’t so bad in the USA these days, but we have to keep things in perspective. We are after all, the largest economy in the world and our GDP per capita ranks at an astounding 7th in the world. A remarkable feat for such a large country. We are an enormously wealthy group of people despite the recent economic woes.
While recent times have certainly been tough, let’s not forget that the American growth story is, without a doubt, the most remarkable in the history of human kind. This country has achieved an incredible amount in just 235 years. In this brief period we went from a small group of colonies to the world’s superpower. We have grown from poor immigrants to the wealthiest country on earth. We have grown into the greatest innovation machine that man has ever witnessed. These accomplishments are not good. They are flat out incredible and anyone who tries to downplay them has not opened a world history book in their lifetime.
But this bigger picture gets lost in a “what have you done for me lately world” where we can’t remember anything past the last 140 characters we typed out. So, how bad have things been lately? Not great, but not horrible either. As the above Adam Smith quote mentions, the true price of everything is the toil and trouble of having to acquire it. So, when our wages don’t outpace inflation our standard of living declines as we have to do more work to obtain the same amount of goods and services in some prior period.
A good example of our extraordinary increase in standard of living over the last 100 years is to imagine all the things we can accomplish in an hours time. Last night at 7PM I put my laundry in the wash, I put the dishes in the dishwasher (yes ladies, I am a man who cleans dishes), ordered dinner from a local restaurant and went upstairs into my office where I did an hour of work. At 8 PM my dinner arrived, my laundry was done, I ate dinner on a fresh clean plate and I had done an hour of work in this period. Imagine trying to do all that 100 years ago? How long would it take you? Days? Perhaps even weeks? That is a remarkable increase in living standards. This is why, when someone says the dollar has fallen 95% since 1913, you should remind yourself never to listen to that person’s opinion ever again as they are just misconstruing the reality of our living standards, most likely in an effort to push some personal agenda.
But let’s put this into perspective with some data. An analyst at Nomura forwarded me the median wage statistics from Social Security. This data cannot lie for obvious reasons. And if we compare it to inflation data we can see just how much our standard of living has increased or declined. Over the last 20 years the data shows the following:
Not a bad looking picture considering the mess of the 2000’s. As figure 3 shows us below, the total real increase is approximately 15% over this period. Not great, but not a decline either. Our real standard of living has increased since 1990. The same cannot be said since 1999. It has been a terrible period for the USA in terms of our living standards:
Social Security doesn’t have this data going back beyond 1990, but we can obtain a similar picture from the St Louis Fed database. It confirms the Social Security data even though it is the per capita wages and not the median wage. What we see is a near doubling in our living standards since 1960 and a rough patch in the 2000’s:
Don’t get me wrong. I am not here to try to downplay the magnitude of the problems we face today. If there is anyone that is familiar with the horrid disease that is the balance sheet recession, it is me. But we have to keep things in perspective. America is a fabulous country. It always has been and I am confident that it always will be. We will get out of this rut and one day we will look back at this period and hopefully learn from it. But what we should not do is try to convince ourselves that the world is ending or that things are worse than they really are. History, even our relatively brief history, has shown us that this would be a colossal mistake.
* Standards of living is being viewed from a purely economical perspective in this piece. Clearly, there are many differing definitions of living standards.