Statistically speaking, the economy is doing great.
Unemployment is at 3.7%. Anything below 5% unemployment is considered good.
Our Gross Domestic Product (GDP) grew 3.3% in 2023.
The Dow Jones Industrial Average, NASDAQ, and S&P 500 are reaching new highs.
Inflation is at 3.4%. The FED targets 2% inflation to control prices.
Wage growth was 5.2% in 2023. A few percentage points greater than inflation.
Interest rates remain elevated but are off their highs a few months ago.
Why do many people (42%) believe our economy sucks?
The Last 50-years Tells the Story
The numbers that I just stated are accurate. There is no sleight of hand by the Bureau of Labor & Statistics or the Federal Reserve. The problem is that those numbers do not tell the story of our economy. Our economy has gone through significant shifts since 1970.
The U.S. left the gold standard.
The U.S. lost many skilled manufacturing jobs in foreign factories.
China is shipping us cheap stuff made by cheap labor.
The U.S. national debt has increased exponentially.
Technology has made our lives more efficient.
Each of these events affects the buying power of working-class Americans.
From an economic perspective, only one parent needed to work in a two-parent family in 1970 to provide a good living for a family of seven. Today, two parents must work full-time and struggle to earn enough to support their family of four.
Americans have started paying attention to inflation in the past two years as they’ve seen an abrupt change in gas and grocery prices. This is a small part of what has happened to middle and lower-income Americans for the past five decades.
The Cost of Living
We get cheap goods from overseas. TVs, clothing, and other goods have not increased as much with time. Everything else has increased more than income. The average annual inflation for basic living expenses in the past 50 years is listed by category in the table below:
Category | % Budget | Annual Inflation |
House | 35.0% | 5.65% |
Transportation | 17.5% | 4.80% |
Food | 15.0% | 4.00% |
Utilities | 5.0% | 6.17% |
Clothing | 4.0% | 3.08% |
Medical | 5.0% | 7.20% |
Taxes | 18.5% | 4.00% |
When you combine this budget of necessities with each inflation rate, the weighted inflation rate over the past 50 years is 4.95% per year. The average household income has increased by 3.94% per year. At first glance, these two numbers don’t seem that far apart.
The average household loses 1.01% per year in spending power over the previous year. A middle-income earner who earns $60,000 annually has $35,000 in spending power, 42% less than they would have had in 1970.
If you’re poor, the government will help with food stamps, Medicaid, housing subsidies, tax credits, and general welfare payments. The picture is bleak if you’re middle or lower working class. Most young people have not lived over these 50 years, so they are unaware of how affordable life in the U.S. used to be.
If you’re rich, you have become wealthier since 1970. Why? Because your wealth has been growing in passive investments at a rate of 7.94% per year. This is 3% over the average inflation rate. A rich person with $100,000 in income in 1970 has $477,000 in spending power today. The rich are not experiencing a drop in lifestyle. Instead, they can afford lavish vacations, large homes, boats and live lives of leisure. With high discretionary income levels, wealthy people spend money on low-cost foreign manufactured goods. Low-income earners must spend their limited budget on highly inflated domestic living expenses, housing, food, and energy.
Income Inequality Disclaimer
I am not writing this article to fuel the fire of class warfare. Instead, I am trying to add clarity to our current economic picture. I have no problem with the rich getting richer. I’m an entrepreneur and a businessman who has benefitted from a country that supports free enterprise. I also believe that our government and the Federal Reserve have taken most financial actions with the best intentions. Like all central planning efforts, they have failed.
What is Causing Financial Hardship to the Working Class?
Several items at work over the decades have led to a reduction in lifestyle for average Americans.
Financial Assistance from Government
The two areas that have experienced the highest annual inflation rate over the past 50 years are healthcare (7.20%) and higher education (6.35%).
Higher Education
The government attempted to make college more affordable by guaranteeing student loans and giving Pell Grants to help students pay for college. This attempt at generosity increased the demand for college with a restricted supply of colleges. When demand is increased and supply stagnates, prices must rise. This price increase required students to borrow more money, resulting in an astronomical amount of unpaid debt.
Healthcare
Healthcare is a necessity. Even though medical technology has improved the efficiency of medical care, more medical services are offered to an aging population that lives longer than people who lived in the 1970s. While people are living longer, they are not living healthier. To combat rising insurance premiums, the U.S. passed the Affordable Care Act. This law diverted tax increases to Medicaid programs to pay for low-income earners to pay insurance premiums. With increasing demand and little resistance from private insurance companies, the middle class must pay higher health insurance premiums. Again, well-intended government subsidies create high demand with a limited supply of medical care.
Leaving the Gold Standard
In 1972, the U.S. left the modified gold standard. Before this time, the government owned gold. The number of U.S. dollars in circulation depended on the amount of gold held in the U.S. Treasury.
When the U.S. ceased backing its currency with gold, the Federal Reserve was allowed to create money without backing. This is called fiat currency. Fiat currency is not a direct cause of inflation. Inflation is caused by the lack of discipline in controlling the value of the U.S. dollar. Before leaving the gold standard, inflation averaged 2.02% annually from 1924 to 1973. From 1974 to 2023, the CPI averaged 3.96% per year.
Even though inflation was low during the gold standard days, it was highly volatile. Inflation swung from a high of 14.4% to -10.3% from 1924 to 1973. Inflation ranged between 13.5% to -0.4% from 1974 to 2023.
Fiat currency allows a country to bail out banks, large companies, and the federal government with money created out of thin air. This control can dampen swings from inflation to deflation. However, it devalues the country’s currency over time. While large companies, the government, and banks get bailed out, no one bails out the working class.
Ill-Conceived Energy Policy
The cost of energy is highly volatile. Oil and natural gas prices have cycled up and down throughout the past 50 years. However, these prices stabilized when the U.S. became energy-independent in recent decades. Coal has been the lowest-cost fuel for as long as our country has existed. Since most electricity was generated by coal, the cost of electricity has also been stable.
With the Paris Climate Agreement and a fear of climate change caused by carbon dioxide emissions, the U.S. has attempted to switch from carbon-based fuels like coal, oil, and natural gas. The U.S. consumes more energy than it had in the 1970’s. With cheap airline tickets, increased use of modern electronic gadgets, and the addition of air conditioning in buildings that had no air conditioning in the past, we are consuming more energy per capita than we did in 1970. The cost of electricity is increasing above the inflation rate, and wind and solar power are not as cost-effective as coal or natural gas at generating electricity.
Misaligned Central Banking Goals
The Federal Reserve aims to keep inflation at 2% and unemployment below 5%. Both goals seem reasonable. However, the actions taken by the FED to achieve these goals hurt the middle class and the poor and enrich passive investors. In our recent inflationary period, the FED raised the FED Funds rate from 0.25% to 5.5% in 18 months. When the FED raises the FED Funds Rate, companies lose access to financing, banks fail, and home buyers pay high mortgage rates.
The government pays failed bank depositors through FIDC insurance, or the FED creates money out of nothing to pay them.
The ordinary person loses their job and gets a small unemployment check. Many lower-income earners may have banks foreclose on their homes as their employment prospects dry up. If you’re a saver, you will earn money from higher savings. However, most working-class people don’t have “extra” money.
When the economy starts doing better, the FED lowers the FED Funds Rate. This creates greater borrowing and allows banks to loan more money at lower interest rates. The stock market surges upward as investors believe they can make better money in growing companies. Homeowners share some of this benefit by refinancing their home mortgage. Unlike banks, homeowners must pay loan origination fees to get that lower mortgage rate. As the economy heats up, inflation grows, and wages barely keep up.
This constant cycle of bailouts, quantitative easing, interest rate manipulation, and money printing negatively affects the ordinary family and dramatically helps financial institutions and passive investors.
Government spending & debt
The national debt in the U.S. was 35% of Gross Domestic Product or GDP in 1970. Today, the national debt is 120% of GDP. There is more debt when people want lower taxes and more government services. Since we have left the gold standard, the FED can print as much money so that the U.S. Treasury can create as much debt as they want. The only downside is inflation. Prices must rise when the FED prints too much money and the U.S. economy does not provide as many products and services.
Government spending is creating higher inflation in areas where it disrupts free-market actions. The working class pays more, and the poor get free services. The rich don’t care because inflation increases their assets and net worth.
Fiscal Irresponsibility
In 1970, the U.S. had a highly progressive tax rate that started at 14% on the low and 70% on the high end. This onerous tax rate forced rich people to move their wealth into tax shelters to avoid high U.S. taxes on their income. However, the tax revenue was sufficient to prevent government deficits. When a new government service was proposed, voters scrutinized the value of that service because they believed it would cost them more in taxes. Any added government service is ignored today because tax rates won’t increase. Any politician who speaks of a tax increase won’t be elected. Likewise, politicians who advocate cutting government services won’t get elected.
This fear of taxes and desire for more government services has created a moral hazard. A moral hazard is when there are no consequences for stupid financial decisions.
If you want healthcare, get it from the government for free.
If you want housing, get it from the government for free.
If you want food, get it from the government for free.
If you need daycare for your children, get it from the government for free.
If you're going to invade a country you don’t like, no problem, it costs me nothing.
This lack of moral hazard has trapped the poor into paid sloth and is meaningless to the rich. The people still paying full price for this fiscal irresponsibility are the working-class people. The working class will also experience financial failure in the Social Security system, which they’ve invested in all their working days. It is the working-class families that send their children to fight in the wars that cost the rest of our country nothing.
This unfairness is due to the lack of fiscal discipline by our government.
What can we do?
We can’t reverse 50 years of financial irresponsibility, but we can start reversing this trend over the next 50 years.
The FED
I believe our first change is with the Federal Reserve. Congress must change the goals set for the Federal Reserve.
If a bank fails, it fails—no more bailouts for banks or large companies.
Stop the tactic of quantitative easing. Quantitative easing involves the Federal Reserve purchasing government securities. It is a way to create a fake market for government securities that no one else wants to buy and increase cash in the economy. Where does the FED get the money to buy these securities? They create it out of thin air.
It just so happens that the government needs to sell more bonds in 2024, and they are having difficulty finding buyers of their debt in bond auctions. This means the FED or private banks will be encouraged to print more money to fund the government’s poor habits. The stock market will surge, and the working class will inherit more burdens from inflation.
Taxes
The tax rate must be sufficient to pay for the spending rate. All people must feel the weight of the tax burden. Double-taxation systems like property tax, double taxation with corporate dividends, sales taxes, and other areas of double taxation must be scrutinized. Tax loopholes must go away. Most importantly, congresspeople should stop lying about how taxes are paid and stoking the flames of class warfare.
As much as you may hate the rich after reading this article, I implore the reader not to fall into the trap of TAXING THE RICH as a solution. This solution results in further unfairness in our financial systems.
Government Spending
Lately, our Congress has overspent on an annual basis. They then add supplemental spending bills throughout the year because they want to spend more money on some emergency. There always seem to be more spending emergencies. Spending must be proportional to tax revenues. If we want the government to spend more, we must pay higher taxes. Few people take the debt limit seriously. A balanced budget amendment to the U.S. Constitution may be a better solution.
Stop Half Measures
I mentioned that healthcare and education are the most expensive services in our country due to government financing. It’s important to note that countries that have 100% of these services paid for by the government do not have the same cost overruns we are experiencing in these same services. Scandinavian countries like Sweden, Norway, and Denmark have government education and healthcare systems that operate at a fraction of the cost of our education and healthcare.
If we believe the government ought to pay for these services, we must go all the way and make them available to all citizens. There cannot be half-measures that make these services accessible to the poor, high-priced, and unavailable to everyone else. Health insurance companies must go. They are now an unnecessary player in the healthcare economy.
Save or End Social Security & Medicare
The notion that we can ignore Medicare and Social Security's eminent insolvency is immoral. The initial idea was that payroll withdrawals from working people would fund these programs. This idea is failing. Social Security and Medicare are forecast to be exhausted by 2037. Instead of burdening working-class individuals with more payroll taxes, Social Security and Medicare taxes must be levied on investment income. Either save these programs or end them.
Energy Policies
We need energy to grow our economy and maintain our lifestyle. There is no reason to sign an agreement led by climate activists who are convinced the world will end if we keep burning carbon-based fuels. Yes, there is a climate and air pollution challenge with elevated levels of carbon in the atmosphere. However, this challenge can be addressed more economically over an extended period. The government can temper its push to force electric cars, solar panels, and whatever other green technology on consumers. We can wean ourselves off fossil fuels over the next century. In the meantime, any detrimental effects of any fuel source should be considered in taxes directly spent on environmental remediation efforts.
The Economic Future
We have used every possible arrow in our economic quiver to make it from 1970 to 2023. We are out of options moving forward. We’ve printed money. We buy cheap goods from abroad that won’t get any cheaper. We use migrant and foreign workers to get cheap labor. We have stopped having children. We must change our ways with economic policies, or the story will worsen in the next 50 years.
About the Author
Jeff Schuster is an accomplished businessman, engineer, and writer. Three of Jeff's books are attempts at helping people understand and solve political problems that are being made worse by political partisanship. His first book, Trial & Error, is a collection of 14 short stories. ReEngineering Education is a story of innovative education reform in the midst of political corruption. Engineering Unity is Jeff's most recent book, published in August 2023, addressing political polarization on wedge issues that politicians use to divide us. You are welcome to join our private Facebook group called Reengineering Politics, where we discuss politically polarizing topics in a civil manner.