A Misguided Economic Experiment
Up until the mid-‘70s, the wealth of the rich and poor rose... together. At more or less the same rate. Then, they began to diverge... little by little at first... and then by a lot.
Tuesday, May 21, 2024
Bill Bonner, writing today from Dublin, Ireland
Our wonder for this week is how an economy... said to be the finest the world has ever seen...
... with capital in abundance... talent and skills drawn from all over the planet... more Ph.Ds and engineers than ever in history...
... and guided by the geniuses at the Fed and in the Capitol...
... could be such a dud.
Unlike the US economy up until 1975... and unlike the Chinese economy 1979-2024... it has not improved the lot of the typical citizen.
This is not to say that the median person is not better off. Today, for better or worse, we have electronic gizmos that we didn’t have in the 1970s. We can spend our whole lives hunched over our laptops... perhaps sitting in coffee shops or a basement office... playing games... and talking to undressed women with Russian accents. Is that progress, or what? We have TikTok, Facebook, X... AI... cryptos... Trump sneakers... We even have cars that will create their own traffic accidents. No human intervention required.
In 1914, Henry Ford doubled wages in his auto factory — to $5 a day. A job at Ford was a ticket to middle-class prosperity. Detroit became the most prosperous city in the country.
But workers in our new industries today, including those of our biggest employers, often live in shocking poverty. At least, that was the conclusion of a study done of Amazon’s warehouse staff:
“In this report, we present findings on economic insecurity among Amazon’s frontline warehouse workforce, drawing on a national survey of 1,484 workers across 451 facilities in 42 states. Key findings include:
“53% OF WORKERS EXPERIENCED ONE OR MORE FORMS OF FOOD INSECURITY in the previous three months.
“48% OF WORKERS EXPERIENCED ONE OR MORE FORMS OF HOUSING INSECURITY in the previous three months.
“MORE THAN HALF (56%) HAVE NOT BEEN ABLE TO PAY ALL THEIR BILLS without a remaining balance in the previous three months.
“ONE-THIRD OF WORKERS (33%) HAVE USED ONE OR MORE PUBLICLY FUNDED ASSISTANCE PROGRAMS in the previous three months, including 23% who have used the Supplemental Nutrition Assistance Program (SNAP).”
Let’s see... at $5 a day, a Ford assembly-line worker was able to buy a $20 US gold coin every four days. (We use gold as a reliable measure of inflation.)
Today, a warehouse worker at Amazon makes $17 per hour... times 8 hours, equals $136 per day. With the price of a one-ounce gold coin now around $2,300, this means it takes more than 16 days — or four times as long — for today’s worker to buy the same coin. What gives? What’s wrong with America’s economy?
Today, we will not let the cat out of the bag, completely... but we will open up the bag and take a peek inside.
We saw yesterday that the Soviet Union took raw materials, and following the logical precision and dumbass theories of its planners, worked them up into finished goods of such inferior quality that they were actually worth less, on the world market, than the resources that went into making them.
Death by Government
That is why, when the Soviet Union went to Misguided Economic Experiment heaven, its entrepreneurs and oligarchs went back to producing raw materials.
The Hitlerian economy of Germany 1933-1945 was a similar success. It put people to work. It made the trains run on time. It made the smokestacks from Bavaria to Prussia belch smoke. But what it produced — guns, tanks, chemicals and bombs — did not make people better off. It made them worse off.
In each case, you’ll notice the causal relationship. The government imposed its will on the economy... turning it away from producing the things people wanted... to producing the things insiders wanted.
And the US? It began its Misguided Economic Experiment in 1971. Thenceforth, it continued to be a powerhouse of output. But the output shifted... subtly... almost unnoticed... from the goods and services that made people wealthier and better off... to an ersatz form of wealth itself. Wall Street got rich (after 1982). Detroit got poor.
The shift was a spectacular success — for some. Unfortunately, it was a dismal failure for most.
Up until the mid-‘70s, the wealth of the rich and poor rose... together. At more or less the same rate. Then, they began to diverge... little by little at first... and then by a lot.
From our friend David Stockman:
Since 1989... the net worth of the top 0.1% has soared from $1.8 trillion to just under $20 trillion. That’s a gain of $138 million per household.
By contrast, the aggregate net worth of the bottom 50% or 66 million households has risen from $0.7 trillion to $3.6 trillion. That’s a gain of just $44,000 per household. [Mostly from an increase in house prices.]
Accordingly, the top 0.1% gained 3,100X more net worth each than the bottom half of America’s households.
So we see, the US economy was not a total flop for everyone. But something went very wrong.
Tune in tomorrow as we look at our hypothesis: another Misguided Economic Experiment gone wrong.
Regards,
Bill Bonner
Research Note, by Dan Denning
Are stocks now a leading indicator of inflation? Or of an embedded inflationary bias in monetary policy (a bias required by $35 trillion in debt and annual interest payments of $1 trillion)? The chart above from the Federal Reserve suggests that the answer is ‘yes.’ Why?
The chart shows the composition of (and changes to) household net worth in America. The size and frequency of the changes (both to the upside and the downside) began to change with the era of activist central banking. This makes the booms (in stocks especially) bigger. But it makes the busts bigger and more frequent too.
The last three large ‘drawdowns’ in the value of corporate equity were in $4.5 trillion in 2018, $7.8 trillion in 2020, and $7.7 trillion in 2022. Stocks added $4.7 trillion to household net worth in Q4 2023. That was the third largest quarterly rise in 25 years, trailing only the second and fourth quarters of 2020 ($5.7 trillion in both cases).
I worked at the second largest bank in Washington DC early in my career (around 1980). The CEO made around $250,000, about 15x more than a teller. It was around that time that boards began rationalizing ever-larger pay packages and golden parachutes. It became obvious that if one wasn't in the executive ranks of a business, one was out of luck. Who or what's to blame? The incestuous relationships that oft occurred between board members and execs? Lax enforcement? The replacement of individual shareholders with institutional ones? Simple greed of those in power? Regardless, the middle class dream of homeownership in a neighborhood with schools that actually educate our kids is dead...and it is really sad.
There is a problem in the USA, in the UK too and in other Western countries that we rarely hear of. It has become so financially rewarding to work in finance or the professions which support it, the law and medicine, that the nations` brightest go there. A long time ago, most of them might have trained as engineers or in other technical professions, but now they don`t. Making things has been downgraded, so Boeings fall from the sky and the country cannot make enough to satisfy everyone. But those in finance and their friends get to cream off an ever-bigger slice of the cake.
It`s dangerous too. Other countries, let`s say Russia and China, train for more engineers per head than does the West. If they go to work on armaments, ours may no longer cut it. Think of the Abrams tank which can`t survive the on front line in Ukraine.