Mish's Global Economic Trend Analysis

Will Republicans Please Put Up Or Shut Up? (I Expect Neither)
Income-Wise, What Percentage of People are Worse Off Now Than in 2000?
Reader Question: "How Can One Calculate True Price Inflation?"

Will Republicans Please Put Up Or Shut Up? (I Expect Neither)

Posted: 24 Sep 2013 10:53 PM PDT

For the third time in a couple years, the administration, mainstream media writers, and various Republican members of Congress all pretend there is some sort of budget story in the works.

Government Shutdown Hype

Lisa Rein at the Washington Post kicks off the government shutdown hype with After past shutdowns, Congress gave federal workers back pay. This time? Don't count on it.

A government shutdown next week would jeopardize the paychecks of more than 800,000 federal workers who could be told to stay home. More than 2 million other employees who are deemed essential by the government — including the active military — would be entitled to their salaries but might not get paid on time.

While there is no law requiring that nonessential employees be compensated if they are ordered off the job, Congress has in the past voted to reimburse their losses once shutdowns ended.

But this go-round could be different. The bitterly divided Congress includes many lawmakers who are unsympathetic to the plight of federal workers and could be loath to help them recoup their money.

"It's a very different time and a very different Congress," said Colleen Kelley, president of the National Treasury Employees Union, which represents 150,000 federal workers. "I'm concerned when employees who were here remember that last time employees were paid and think it will happen again, because it's not a given at all."

More Hype

Erza Klein adds to the Washington Post hype with There's much less time to avoid a government shutdown than you think

In theory, the deadline for avoiding a government shutdown is 11:59 p.m. Sept. 30. That gives Congress seven days to figure something out. But those seven days are, at this point, pretty much spoken for.

Still More Hype

Paul Kane, also writing for the Washington Post says Sen. Ted Cruz happy to be outlier in shutdown showdown

Ted Cruz began a frantic effort Monday to bend the Senate to his will by employing tactics that have earned him mostly enemies in his less than nine months in the chamber.

A master of fiery conservative oratory, the freshman senator is trying to block funding for President Obama's health-care law with a strategy that, if successful, will almost certainly lead to a partial government shutdown next week. The Texan has become the face of an effort variously described as the "dumbest idea," leading Republicans to a "box canyon" and ending with their political "suicide note."

And those descriptions were from Cruz's fellow Senate Republicans. On Monday, Minority Leader Mitch McConnell (Ky.) and Minority Whip John Cornyn (Tex.) joined the list of longtime GOP senators objecting to Cruz's strategy, which is intended to shut down the government until and unless Democrats agree to abolish funding for Obama's health-care law.

This has left Cruz in a relatively familiar place, almost alone in advocating a tough strategy that is winning him the adoration of conservative activists but isolation and quiet disdain among his colleagues on Capitol Hill.

The Key Sentence

Did you catch the key sentence in the above article?

Here it is: "Minority Leader Mitch McConnell (Ky.) and Minority Whip John Cornyn (Tex.) joined the list of longtime GOP senators objecting to Cruz's strategy, which is intended to shut down the government until and unless Democrats agree to abolish funding for Obama's health-care law."

Another Wolf Call?

In simple terms, Republican leaders have no intent on doing anything but making noise (and complete fools out of themselves).

How many times can Republicans cry "wolf" on a government shutdown and have the call be believed?

Of course mainstream media, especially the Washington Post is ready to go along with the hype, effectively creating a story where there is none.

I Hope I Am Wrong!

I actually hope I am wrong. I hope government shuts down and stays shut down until there are significant, verifiable cuts in the budget (not game-playing cuts in future budgets that won't be honored).

My comment may sound harsh, but it isn't.

The quicker we stop funding insane military actions the better.
The quicker the US stops being the world's policeman the better.
The quicker the US balances its budget the better.
The quicker we get rid of government employees, the better.

My comment holds nothing against Federal employees trying to do their job. It's not their fault.

But do we really need a BLS? Do we really need a Department of Energy? HUD? FHA? etc., etc. I suggest we don't. There are countless government agencies that deserve no funding at all.

And to further reduce government expenditures, it's high time we scrap Davis-Bacon and all prevailing wage laws.

There is so much government waste, it's hard to know where to start.

Where to Start, When to Start

Where to start is debatable; When to start isn't.

The time to start is now (years ago actually), but given that Republican leaders have already thrown in the towel on forcing the issue, the odds of a government shutdown are very small. The odds that a short government shutdown would really accomplish anything are precisely zero.

History suggests that somewhere along the line, Republicans will totally and completely wimp out (because they always do). But as I said, I hope I am wrong.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Income-Wise, What Percentage of People are Worse Off Now Than in 2000?

Posted: 24 Sep 2013 10:52 AM PDT

Inquiring minds are wondering "Income-Wise, What Percentage of People are Worse Off Now Than in 2000?"

I asked Doug Short at Advisor Perspectives that seemingly simple question after posting his chart of Real Disposable Income in Illusion of Prosperity: Deflating the American Dream; No Recovery in "Real" Income.

click on any chart for sharper image

My comment from the above link: "Real median incomes are down 7.3% since 2000. That means at least half of the population is worse off now than 13 years ago!"

Notes Regarding Disposable Income

Not only is half the population worse off, it is worse off by at least 7.3% in "real" inflation-adjusted term, using the CPI as the deflator.

Unfortunately, the true situation is far gloomier.

Here's the primary reason: Disposable Personal Income (DPI) includes income from all sources (including transfer payments – Social Security, Medicare, private pensions, etc.) less all taxes on income: Federal (including FICA), State and (if applicable) local. Other taxes (e.g., property or sales taxes) are not subtracted from income in the DPI formula.

It's also safe to assume that substantially more than half the population has no disposable income from stocks or bonds. Meanwhile, interest on CDs and other bank accounts is next to zero (not that the bottom half holds substantial CD assets either).

Ignoring sales taxes and property taxes, I asked Doug Short "The chart of median real income since 2000 shows 50% of the people are negative by 7% or so. Where is the zero-Line? In other words, since the year 2000, what percentage of people are actually ahead in terms of real income?"

Doug Replied ...

The monthly household income data from Sentier Research has only the median incomes before taxes (not just disposable income). The annual data (now through 2012) from the Census Bureau has a number of breakdowns of the data, but none, I think, that would enable the calculation you mention. However, a telling graph is a comparison between the median (middle) and the mean (average).

Check out the mean skew of these chart (all households) – real (inflation-adjusted) data. It shows how much faster the mean has grown over the median.

Income Skew in Percentage Terms

Income Skew in Dollars

Note the slopes on the lines in red that I added to the charts.

Since the year 2000, the mean (average) income fell from $76,180, to $71,274 (a decline of $4,906 or 6.44%).
Since the year 2000, the median income fell from $56,080 to $51,017 (a decline of $5,063 or 9.03%).

As I have stated repeatedly, Fed bubble-blowing tactics benefits those with first access to money (the banks and the already wealthy). From the mid-60s until the year 2000, at least most boats were rising.

Since the year 2000, however, both the mean and the median income has been sinking, but not at the same rate. Worse yet, that income decline does not even properly take into account rising sales taxes and property taxes!

Although the data cannot precisely answer my question "Income-Wise, What Percentage of People are Worse Off Now Than in 2000?", I believe it's safe to assume that the top 10% has not taken much of a hit at all (if any), while the top 1% gains year-in and year-out.

Yet, year-in and year-out a parade of Keynesian and Monetarist economic fools plead for more inflation to fix the problems.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Reader Question: "How Can One Calculate True Price Inflation?"

Posted: 24 Sep 2013 01:05 AM PDT

Reader Mel writes ...

Hello Mish

I really enjoy your blog. You provide a very interesting viewpoint. One question: I have seen an analysis based on the old Sears catalogs of 30-50 years that shows how much more an average income can buy today versus 30-50 years ago based on actual prices in the catalog. It is very convincing. Do you think that is a valid approach or not?

Keep up the good work,

Mel

Hello Mel

I cannot comment on the catalog because I have not seen it. However, I will suggest that many such comparisons that I have seen are invalid.

For example, I have seen reports comparing home prices and car prices today vs. the average house or car in 1920. But how valid is such an approach?

I suggest, not very. For example ...

How much house did you get in 1920 vs. today?
Did it have dual pane energy efficient windows? Appliances? Carpet? Cabinets?
How much electronics was in a car 50 years ago?

Would you even want to drive a 1920's car today? Legally, you probably couldn't, for safety reasons. Thus, all such comparisons are totally invalid.

Easy Comparisons

Food and energy costs can easily be compared.

I happen to know food prices exceptionally well. I worked in a grocery store as the night-manager for several years in high school and college.

I recall sales prices best because the meat manager was always bitching about how much money he was losing on them.

In 1969, whole chickens on sale were a loss leader at $0.21 per pound. I had farmers come into the store buying them, telling me they could not raise them for that price.

Flash forward to today: Whole chickens are on sale occasion for as low as $0.59 per pound (and I have seen $0.49). But let's be safe and assume today's sale price is $.69.

The price more than tripled, but over 45 years.

Similarly, a 1-poind loaf of generic white bread was something like $0.18. What is that today? I do not buy generic white bread, but a 1-pound whole-grain fresh artisan loaf is something like $2.69 not on sale.

Let's now compute the annualized rate of inflation using a Compound Annual Growth Rate Calculator.

Here is the result ....

Annualized Inflation - Chicken

Annualized Inflation - Bread

My bread example is very unfairly biased on the inflation side. Yet even so, the annualized rate of inflation is not through the roof.

Annualized Inflation - Gasoline

Gasoline is also an easy comparison. Other than a few additives, not much has changed over the years.

Please consider a chart from Inflation Data.

If one goes back to 1918, the annualized rate of inflation is about 2.84%. Instead, let's cherry-pick a starting point of $0.50 in 1974. Here is the result.

If I use 1981 as a starting point the result looks like this:

Clearly the starting point matters greatly. One can easily cherry-pick starting points on any item to suit whatever story they want to tell.

Government Manipulation

Prices are most distorted where there has been the most government interference. The standouts are health care, education, and housing.

How many "affordable home" programs did Congress sponsor? What was the result? How much government interference in health-care is there? What is the result? How many student aid programs do we have? And what is the result of that?

Calculating health-care costs is problematic, but tuition is easy.

Annualized Inflation - Tuition

I recall that University of Illinois tuition for an engineering degree was on the order of $250 per semester ($500 per year) my freshman year in Autumn 1971.

The preceding link shows in-state engineering tuition is now $16,556. And here is the result.

One can go through all sorts of calculations like this. However, it's important to make sure the comparisons are valid (unlike my bread example). It's also important to use the same starting year for all of the calculations (something I did not do because I do not know historical prices for all of the items I mentioned for every year).

I suggest that a few simple calculations like this are all it takes to dispel some wildly popular cult-CPI calculations from hyperinflationists who claim CPI inflation has been 8-13% per year since 1997.

Consumer Prices Poor Measure of Inflation

Regardless of which CPI-variant you believe is accurate, consumer prices are an extremely poor measure of inflation for several reasons.

There is no such thing as a standard basket of goods and services that pertains to everyone
Prices of many items cannot be accurately measured because technology changes over time. For example, many medical procedures in place today did not exist 10 years ago. And what about such things as dual-pane argon-gas-filled UV-protection glass windows (now common-place in homes)? How long ago was it when such a thing was not available at any price? What was the price of a cell phone in 1962?
Consumer price inflation completely ignores asset bubbles, and asset bubbles are the most common result of monetary printing. The housing bubble and the dot-com bubbles are proof enough. Housing is not even in the CPI, although rent is.

So how can one calculate true price-inflation?

The answer is: It's impossible. More importantly, it's an invalid measure of inflation, even if one could accurately measure prices. But that does not stop people from trying.

For further inflation reading and who benefits from it, please see ...

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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Mish's Global Economic Trend Analysis

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