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Are We Financially a “Lost Generation”?

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My friend Glen Craig from Free From Broke shared an interesting article on Facebook last night. With a comment of "wow", and former Lending Club friend Rob Garcia chiming in with "whoa", it got my attention. The article The typical American family makes less than it did in 1989 from The Washington Post has nearly 900 comments as I write this.

I read the article and shrugged. I must be missing something.

The article compares inflation-adjusted median household incomes between now and 1989. It even gives showing all the years in between. The author states:

In 1989, the median American household made $51,681 in current dollars (the 2012 number, again, was $51,017). That means that 24 years ago, a middle class American family was making more than the a (sic) middle class family was making one year ago.

This isn't a lost decade for economic gains for Americans. It is a lost generation.

Why should we expect to make gains on median household income on an inflation-adjusted basis? It's like getting on a treadmill and being upset that you walked for a half hour and went nowhere. I guess according to the author this is a lost half hour and yet millions and millions of people find value in it every day.

It seems quite an over-reaction to a loss of 1% of income... or about half a percent after taxes.

The Value of Living Today

Glen on Facebook brought up and interesting point, "After reading the article I also wondered what the cost of living is compared to back then. What if we just don't need as much money for some things as we did back then, like computers?"

My family was one of the earlier families on the block to get a personal computer (The awesome PCjr) back around 1985. Even as we upgraded to 286, 386, and 486 computational behemoths, we never had more than one computer. Today we have numerous laptops, mp3 players, and tablets. The $2000 that my family spent on a computer back then is pretty similar to the $2000 that we spend on various similar technologies today.

We can look back at what my family paid for a landline. I think it was around $40 a month and there were extra charges if you wanted to call long-distance. Today we have Ooma Telo free home phone service, but it piggybacks on a cable bill that has grown from around $20 a month to $125 a month. In addition, many people spend another $100-$110 a month on cell phones and service.

The price of cars have gone up over that time. However, when you adjust for inflation they are pretty much the same (at least through 2006 in that chart). The price hasn't changed, but you get many more safety features, better gas mileage, increased technology, and comfort.

Lost Generation? Really?

Are we really saving money on computers nowadays? Probably not. Are we really saving money on cars? Nope. However, in both cases our money gets us exponentially more than it did back 1989.

The mere fact that an ordinary person with no journalism degree like me can write to thousands of readers and convey this article is noteworthy.

Does that sound like a "lost generation" to you? Me neither.

Posted on September 18, 2013.

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18 Responses to “Are We Financially a “Lost Generation”?”

  1. Glen Craig says:

    You definitely made me think after I posted the article to Facebook. And you make a great point that what we spend on some things today can do so much more for us.

  2. Kosmo says:

    “The $2000 that my family spent on a computer back then is pretty similar to the $2000 that we spend on various similar technologies today.”

    Are you adjusting that for inflation? According to the government (http://www.bls.gov/data/inflation_calculator.htm), $2000 in 1989 has the buying power of $3772 today.

    • Lazy Man says:

      Darn you Kosmo and your meddlesome fact-checking ;-). I think most of the families didn’t spend $2000 on a computer back then. If you look at the families that did, like mine, you might be able to make a case that we do have $3772 of computers (including similar technology) today. I’m notable frugal which should come as no surprise, and we have a $500 HTPC an $1100 Asus ZenBook, a $400 budget HP laptop (my wife’s computer), and a $200 Nexus 7, and probably another $200 in sundry MP3 players and bluetooth speakers. That’s $2400, not adding in the cell phones that would be about another $400.

      Also, in 1989, I was 13. When my son is 13, he’ll probably have his own tablet computer technology (tablets or what not).

      I know a few people who have a couple of MacBooks that will take you close to the number by itself. Throw in a couple of iPads and a couple of iPhones and we have far more than the $3772 buying power going towards general computer tasks.

  3. MBirchmeier says:

    I believe you are right on the fact that we are spending less on technology and cars (or getting more value for them) but this isn’t why we’re going backwards, it’s housing healthcare, and childcare.

    Elizabeth warren puts it much more eloquently than I could in this video taken before she was a senator.

    It’s almost an hour, and she compares today to I believe the 70’s (it’s been a while since I’ve seen it) but here’s the TL;DR:

    our buck not only goes farther in virtually every category, but we’re spending less per household. But we need closer to two incomes to bring in this amount of money, which also means we pay more for childcare. Housing costs more (even adjusting increasing house sizes) and we’re paying a lot more for healthcare.

    Just because some toys are getting cheaper, doesn’t mean everything is.

  4. Jin Won Choi says:

    You’re the first blogger that’s ever implied that the official rate of inflation Overstates actual inflation. Most people (gold bugs, usually) argue for the opposite.

    I understand what you’re saying – that we’re not that much poorer (if at all) compared to 28 years ago. However, real GDP per capita went up by more than the rate of inflation, which means that the average (not median) inflation adjusted income went up for the past 28 years.

    The problem is, most of those gains went to the top 1% richest people. Hence the ‘Lost Generation’.

    • Lazy Man says:

      Jin Won Choi, any time someone says these 6 words to me, “You’re the first blogger that’s ever…” I get giddy. I don’t know if I was really trying to make a case about the official rate of inflation vs. actual inflation though. There’s a lot of math that goes into the official rate of inflation that I quite frankly don’t want to know. I’m going to treat it like the making of sausage.

      The article didn’t go into average (just median) and didn’t go into the top 1%. I believe it is quite possible that those things could lead to a “lost generation”, but the author of the Washington Post has to present that data as the basis of his/her argument. What was presented didn’t support the conclusion.

      Big-D, I agree with you that determining median income alone can be a hairy beast. I was going to let that one go for the sake of argument, but thank you for pointing out that it can be challenged as well.

      I was definitely cherry picking things, but it was in response to the conversation on Facebook Glen Craig where he brought up computers. I segued into cars because it seemed like the biggest item that wasn’t heavily location dependent (you can compare car prices well nationally unlike a house in Boston vs. Wichita. I had no desire to go any further to do a more comprehensive/exhaustive comparison to prove the point that I was trying to make.

  5. Big-D says:

    I would like to take even a step back further in abstract. When I read the posit paragraph, I had to ask the first question of “Define median American Household”. Define all of the things on there. One of the biggest failing of taking statistics like this, makes it really hard to determine what exactly you are looking at. How many people are unemployed? How many people work lower level jobs? Were they all taken into account? I can almost guarantee you the methodologies have changed over the last 24 years, and “median” is not the same on those two numbers. While yes some things are more expensive, some things have gone down in price (or stayed the same). The CPI is there to make a class for class comparison of 26,000 items every month, from the same store, to determine price changes. That is how inflation is determined.

    You appear to be cherry picking items in your response, but your basic premise is correct. The way to determine this would be to pick a class of people, (say middle 40%, since this is middle class) and take an average of both (as median skews things when you stack rank), and see how they stack up. Even then, if you are looking at tax records, it is not of “Americans” it is of “Legal, Tax Filing Americans”, which is a big difference.

    I am sorry – but when numbers are thrown around – my inner nerd statistician comes out. To answer your question however, yes, people earn less than they used to 24 years ago (class for class, cpi adjusted), but also items which are necessities (food, clothes, housing, etc.) have been below CPI and only “wants” have been things that in general have outpaced inflation in the last quarter century. I did a project on this in grad school last year, so the numbers are quite right.

  6. Abigail says:

    Monday’s Daily Show had an interview with a guy who talked about similar things. There’s a clip of him from a documentary where there are graphs to show what he’s talking about. Like MBirchmeier said, childcare and healthcare costs are making us poorer than our counterparts for the last 60 years or so. You should check out a clip of the interview. It’s pretty interesting.

    I think I have to take issue with your idea that we get so much more value for our computers. We absolutely have great technology — and certainly PCs can be had for less.

    But our lifestyles have expanded along with the technology. Yes, you can get a pretty good laptop for under $1,000. But now you’ll also have a smartphone (with the associated data plan), maybe a tablet and, if there’s anyone else in the house, probably another computer. Any “savings” on an individual computer is quickly eaten up by the cost of a smartphone, its data plan, the basic cell service bill, purchased songs/apps, cable/DSL Internet, and maybe that tablet or a second laptop. I’m guessing we spend significantly more on computers these days.

    The real issue, though, was pointed out by MBirchmeier. Dual income households are working the same (or more) and coming away with less. Based on the graphs I saw, people in the ’50s and ’60s had about $30k of income over and above basic needs. (That’s adjusted for inflation of course.) These days? It’s about $18,000.

    • Lazy Man says:

      Abigail, I thought that was exactly the point I was making, that we have more computers now and it essentially adds up to the same price of the one computer that some of us had back then. If I didn’t make point well, I apologize.

      I buy the stuff about health care and other things. That was a discussion, I didn’t really want to get into because I didn’t have the data to support it one way or the other. I think Big-D pointed out that we are doing about the same after necessities. You’d think that some things like clothes would be cheaper just from improvements in manufacturing. I’d think that transportation is cheap from cars that are more efficient with gas. I’d think that food would even be cheaper (although of lesser quality perhaps) with pink slime added to meat. Did that last one go too far?

  7. robyn says:

    let’s see …
    in 1989 it cost $15 of gas to drive my car [1986 honda accord] 350 miles.
    in 2013 it costs $42 to drive my car [2007 honda accord] 350 miles
    in 1989 it cost $40 month to provide electric to my 3 bd, 1 bath house
    in 2013 it costs $130/month to electric my 2bd 2bath apartment
    in 1989 it cost $1200 a year for my total medical coverage [2 adults]
    in 2013 it costs $7200 plus copays to insure only me
    in 1989 it cost $40 to fill the back of my car with groceries
    in 2013 it costs $90 and i am the QUEEN of BOGO [my receipt is usually 150-180 before BOGO and coupons]
    shall i continue?
    in 1989 you didn’t need a computer.
    today you are lost and unemployable without one. computers replace newspapers, phones, snail mail.
    off to work, where i make the exact same $ amount per hour as i did in [wait for it!] 1989. thank you wage deflation.

  8. Big-D says:

    Abigail – I would love to point out that the crux of your argument is that these are all choices. In 1970’s you could have bought a microwave oven for $1000 (when you made $10,000 a year). You could have bought a VHS player for the same $1000 when they first came out when you made the same $10,000 salary. If you make $18,000 a year as you stated, then paying $150 a month for electronic entertainment and phone service is all about your choices/priorities. I have a smart phone, I have a data plan, and it is $27.76 a month (including tax). I don’t buy apps, I use the free versions. I have internet, a home phone, and no cable for TV (I use OTA). These are my choices on how to handle my bills, my electronic entertainment, and my expenses.

    I will point out that I would love to see these statistics and what they call “over and above”. A cell phone is not required, cable is not required, internet is not required, these are lifestyle choices. Just like in the 1970’s getting cable was a lifestyle choice. Is the $20 a month cable bill being added to the 1970’s numbers as a “requirement”?

    I am not trying to be a downer, but when these numbers are thrown around, you have to find out what exactly they are saying. It is like when they say people make less money than they did 10 years ago (or 20, or 30), you have to look at the sampled people (a lot of this current administrations numbers are based on those on unemployment, not those working). But it makes headlines and proves someone’s point.

    Lazy Man – The biggest gains in manufacturing for clothes occurred around the 1920’s and there really is no better way to make things more efficient. Raw materials cost more now (due to inflation) and as such, you get things outsourced to keep prices low. You can still buy clothes for the same price as you could 20-30 years ago, but they might not be the same brand, or maybe a little less quality (T-shirts still cost $10, jeans still cost $20, etc. if you buy wal-mart brand stuff). Food has also been changed in the last several decades as they have added hormones and other things to the process so that they get higher yields per item, and they spoil less. Steak costs about the same, as does most other items (even cost less in a lot of cases, look at canned soup, as prices have not changed in 20 years). As for cars, they cost more (in terms of dollars and percentage of income) for like cars between the 60’s and now but you get more for your money, they last longer, and they are cheaper to maintain and run with better gas mileage.

    • Lazy Man says:

      Big-D, I’m starting to view internet access as I do a car (or maybe even other transportation). You can make a case that it isn’t required, people live without them. However, there is a great expectation that you have internet access and cars, to the point where an employer may not hire you if you don’t have them as you could be viewed as less reliable than other candidates.

      Thanks for the information on the cloths and food. I would have thought through outsourcing of clothes and hormones and preservative techniques for food, some of the savings would be realized by the end consumer. I’ll take your word for it, because I don’t have the bandwidth to do my own research on it.

      Robyn, sounds like you were overpaid in 1989 ;-). I wasn’t sure about the gas price thing. I was thinking that inflation might equal things out. What a surprising gas chart from the US department of energy: https://www1.eere.energy.gov/vehiclesandfuels/facts/2012_fotw741.html. Even in constant 2011 dollars we are really up there. What’s also interesting is that the gas prices went down sharply from 1982 to 1989. It makes me wonder if the author cherry-picked 1989. Why not use 1988 which would be a nice even quarter century?

      On part of the article that I was going to go into was the stress that all these things have added. There’s an assumption that we are always available for work because we have our mobile devices around us. So while I painted a picture that we have more comforts today (TVs are better, cars are better, computers are better, technology in general is better etc.) the end result might not lead to an overall better lifestyle. That’s a can of worms that I certainly didn’t want to open… at least today.

  9. Big-D says:

    How many articles did you just think up by reading the comments section of this post ;)

    • Lazy Man says:

      Well, I reference in the article set to publish tomorrow at 7:55 ET tomorrow. I should dig for a few more ideas, however the October issue of Kiplinger’s has given me a few already.

  10. robyn says:

    overpaid? cum laude graduate, MBA from a top 5 school, controller for a 20 million/yr fine watch company, reduced accounting staff from 12 to 7 personnel yet able to produce better reports, converted computer system 3 times, rewrote budget software so it could be modified with a 20 minute instead of 8 hour turnaround, reduced insurance costs by improving inventory reporting, automated commission reporting for outside sales [saving about 15 manhours per month] during my 5 years with the company etc etc? i don’t think $18.50/hr was overpayment. in fact, it was a significant savings to the company over my predecessor, as i was paid less AND i declined the garage and car allowance, $400/month.

    1988 prices versus 1989 or 1990? i know the prices VERY well. i bought my first home in dec 1984 [mortgage rate 14.5%] i was married feb 1988 and had my 1st child in 1990. i probably have copies of all my bills tucked away some where.

    btw i remember the gas embargo of 1976? my now ex had a chevy impala, 20 gal tank it cost $12 to fill. no one ever thought gas would go higher than .60/gal.

  11. robyn says:

    one of the worst side effects of cellphones is the stress of being always available. you are never off the clock. how do you even begin to account for the negative effect on personal life in this schemata?

  12. […] the discussion of one of my article published this week, Are We Financially a “Lost Generation”?, readers noted that the price of health care has sky-rocketed. As a military family, I'm thankfully […]

  13. Kevin says:

    Some of the examples in the comments allude to this. I believe you are overlooking the hedonic adjustments made when calculating inflation to see why we are calling the negative inflation adjusted income a lost decade. Hedonic adjustment refers to CPI controlling for technological improvements when estimating inflation. Example: if you bought a computer 10 years ago for 1000 and you bought a computer today for 1000 the cpi calculated inflation is NOT 0. They estimate how much better the computer is, faster, smaller, more memory etc. and try to make an apples to apples comparison which would suggest that the same computer you bought ten years ago would cost 200$ now, so you would have had significant deflation. Obviously not every item in the CPI basket is susceptible to technological deflation so you see a net inflation number.

    The bottom line is that technology improvements are already controlled for in the inflation measure, so even though technically today we are really no worse off than we were 10 years ago this is entirely due to technological progress.

    If living standard improvements due to technological improvements were equally distributed among the middle and upper class the inflation adjusted income for everyone would have increased.

    Alternatively, if there were no technological advances over this time frame you would indeed expect inflation adjusted incomes to remain unchanged. (I don’t think anyone would suggest there have been no technological advances)

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