Submitted by Erico Tavares of Sinclair & Co.*Thoughts on Prosperity in America*
With equity markets at all-time highs, does this mean that prosperity in the US is also at record levels?
The 1980s were a great time for many Americans. Jobs were plentiful. The civilian unemployment rate went from almost 11% in November 1982 to around 5% by May 1989. The number of households making more than $75,000 per year (in today’s money) increased by almost seven percentage points from the low in 1982 to the end of the decade. A new sense of optimism pervaded the nation. The hit song “The Future's So Bright, I Gotta Wear Shades” rocked the airwaves. After enduring some terrible years in the prior decade, America came roaring back.
*“The Future's So Bright, I Gotta Wear Shades” by the US band Timbuk3, 1986*
The Economist magazine agreed. In its “The World in 1988” publication, the US was ranked as the best place to be born out of 50 countries. It seemed as if American babies back then should all be wearing shades indeed.
So how did things turn out for them and their parents?
By definition, in a truly prosperous country the wealth going around rises and becomes more accessible to an increasing number of people. Stated differently, the percentage of households that earn more than a certain amount steadily rises, drawing in people from the poorer sectors of society.
The US Census Bureau provides information annually on income levels adjusted for inflation in America, with the most recent report (for 2013) published last September. Is there one that we can use as the most representative of a minimal prosperity threshold?
In a 2010 Princeton study, Daniel Kahneman and Angus Deaton found that making more than $75,000 per year will not significantly improve the emotional wellbeing of American households as a whole. It’s not like you have “made it” once you start making more than that; it’s just that the marginal comfort you get out of most things in life is much less than at lower income levels. OK, there are variations by State given different cost structures and even in attitudes towards money (it might be hard to get a date in New York City earning just that), but this seems like a reasonable demarcation line.
Therefore, we will assume that America is getting more prosperous (or at the very least getting more materially satisfied, according to Kahneman and Deaton) if an increasing percentage of households make more than $75,000 per year, which we will call the “prosperity line”.
Here’s how it looked like going back to the early 1980s:
*Households Split by Selected Income Levels (in 2013 CPI-U-RS adjusted dollars)(%): 1979-2013*
Source: US Census Bureau.
After the recession in the early part of the 1990s, the prosperity line just kept on rocking through the end of the decade. Not only people were getting richer, but less and less people at all lower income levels were staying poor, as evidenced by the decline in their respective lines.
The boom times were back. Technology was the new rage, promising a whole new era of corporate efficiency and affordable gadgets purchased online. Inflation was a fading memory and the great moderation was in. Equity markets were rising exponentially. Civilian unemployment dropped to levels not seen in thirty years. Everyone was getting rich. It was time to wear shades again.
*“Californication” by the US band Red Hot Chili Peppers, 1999*
Then the new century came, the tech bubble popped and the economy went south in short order. The ensuing recession turned out to be the deepest in a generation. As the bills came due, that’s when things really started to go wrong for a lot of people, more or less up until today in fact.
After peaking in 1999 at 37%, the prosperity line has gradually declined since, and is now sitting at 34%. In between there was a housing boom and a global financial crash, both with noticeable effects on the line. That decline may not sound like much, but it will take years to rebuild all that wealth – assuming that the economy is moving in the right direction.
Most of the households which left those happier ranks likely ended up in the next level down in the graph, which can be broadly regarded as the “middle class” (if we consider that median income adjusted for inflation has generally gravitated within that interval). While the percentage here stabilized at over 30%, this might mask an awful lot of turnover as other people got pushed down even further.
And it was exactly at the bottom of the earnings scale that things got pretty bad. People earning less than $35,000 per year went from 31% at the turn of the century to 34% today, more or less matching the decline in percentage points at the top of the table. The new century brought a lot more discomfort to a growing number of Americans, fueling a lot of talk recently about income inequality in the country.
*“Venomous Rat Regeneration Vendor” by the US artist Rob Zombie, considered to be one of the best rock albums of 2013*
Therefore, despite all the subsequent economic growth, large fiscal stimulus packages, unprecedented Federal Reserve intervention and booming capital markets, we could say that PROSPERITY IN AMERICA PEAKED IN 1999!
Now there’s something you don’t often hear in the news, especially with the S&P500 at new all-time highs. In fact, record equity markets don’t tell the whole story. There’s a deeper dynamic at work here that is worth considering.
Here’s a graph of the S&P500 expressed in terms of gold, or as the “real money” crowd prefers to call it, the true value of the stock market (presumably as any “artificial” efforts to boost nominal share prices are neutralized by higher gold prices, which in well-functioning markets tend to respond faster to credit-led inflation):
*S&P500-to-Gold Ratio (based on end of month data) and the Prosperity Line (%): Dec 1978 - Dec 2013*
Source: US Census Bureau, World Gold Council.
A correlation between the S&P500-to-gold ratio and the prosperity line (again, representing the percentage of households earning more than $75,000 per year) can be clearly observed. Both datasets sort of track each other and have peaked roughly at the same time.
This is not really surprising. It is the real (as opposed to just the nominal) value of equity markets that reflects the broader prosperity in society, a point which is often lost in financial commentary. And here the US still has a lot of ground to cover. This also somewhat validates the assumptions we have been using to gauge prosperity levels in the US.
Therefore, as equity markets roar and gold tanks, investors seem to believe that the US is well on its way to regain its peak prosperity, much to the chagrin of the “gold bugs”, which (implicitly at least) are making the opposite bet.
But US investors can also bet on the prosperity of others. And the fact is that other nations have been steadily climbing the prosperity ladder. To get a sense of how the mix has changed since the go-go days of the 1980s, when American babies seemed to have it all, let’s go back to the Economist, which updated the rankings of the best place to be born in late 2012.
This time they included many more countries and used a broader set of indicators, including: material wellbeing (as measured by GDP per head), life expectancy at birth, the quality of family life, the state of political freedoms, job security, climate, personal physical security ratings, quality of community life, governance and gender equality.
The latest results are presented in the following table, along with the 1988 rankings (only the top 25 countries are shown):
*Source: The Economist Intelligence Unit.*
(1) West Germany in 1988.
(2) Change disregards newcomers to the ranking.
While comparing the two rankings may not be as robust as we would have liked given the change in methodology and inclusion of new countries, some interesting trends can be observed.
Generally speaking, things have really improved in smaller advanced nations, which have shot up to the top of the rankings over the last 25 years. Pristine, tiny, organized and educated Switzerland came out on top. Singapore is an absolute star, jumping 30 places, and as Asia gains prominence it is a strong contender for the #1 spot next time around.
Equally striking is how much the economic “giants” have gone down in the rankings. The US dropped from #1 to #16, or 14 places disregarding newcomers to the list, only closely surpassed here by Japan and Italy, both countries not exactly known for their economic dynamism of late. Germany also struggled (fruit of integrating their Eastern neighbors?) and France did not even make it to the top 25, after ranking #3 in 1988. C’est la vie…
It seems that in a globalized world the creation of prosperity and general wellbeing is much less related to size and, we would venture to say, more to a nation’s ability to finding a niche where they can excel in, educating its people and properly managing its finances. Perhaps there is something to be learned here as people and investors think about future prospects around the world.
As it stands, Swiss babies are currently in pole position for a life of abundance. But if general prosperity does not return in earnest to the US, they may have a hard time beating them “gold bugs”. Reported by Zero Hedge 12 hours ago.