Eric Sprott On America's Great Endangered Species: "The 99%"

Tyler Durden's picture

Via Eric Sprott and David Baker of Sprott Global,

How does the US achieve a sustained recovery if “the 99%” continues to suffer perpetual decline in real income?

Other than some obligatory arrests for disorderly conduct, the Occupy Wall Street movement celebrated its one year anniversary this past September with little fanfare. While the movement seems to have lost momentum, at least temporarily, it did succeed in showcasing the growing sense of unease felt among a large segment of the US population – a group the Occupy movement shrewdly referred to as “the 99%”. The 99% means different things to different people, but to us, the 99% represents the US consumer. It represents the majority of Americans who are neither wealthy nor impoverished and whose spending power makes up approximately 71% of the US economy. It is the purchasing power of this massive, amorphous group that drives the US economy forward. The problem, however, is that four years into a so-called recovery, this group is still being financially squeezed from every possible angle, making it very difficult for them to maintain their standard of living, let alone increase their levels of consumption.

One of the central themes that arose out of the Occupy movement was the growing sense of unease among the average American citizen with regard to growing imbalances in wealth within the US. The rich are getting richer while the poor get poorer. That feeling is entirely legitimate. According to the US Census Bureau, in 2011 the median income of US households, adjusted for inflation, fell to $50,054. This is 4.9% below its 2009 level, and 8.9% below its all-time peak of $54,932 in 1999. This is not encouraging data. It implies that the average American household is almost 9% poorer today than it was thirteen years ago.

The Census Bureau data is even more troubling if one acknowledges that the Consumer Price Index (CPI) inflation rate it uses to adjust annual income doesn’t properly account for food, energy or healthcare prices – all key inputs to the average US consumer, and all items that have gone up considerably in price over the last decade, particularly since the advent of quantitative easing. Under current CPI, the items pertaining to food, fuel and healthcare only make up 28% of the total basket. The average US family, however, especially among the 99%, is spending far more on these three items as a percentage of their total income. Figure 1 below compares the average price of gasoline and select food items in 1999, when the average household made $54,932 in real terms (inflation adjusted), versus 2012, when the average household made just over $50,000 in the same relative dollars. As can be seen, the increase in food and energy has grossly outpaced the official CPI inflation rate, which conveniently dropped or shifted many of the food and energy components back in the 1990’s. If the Census Bureau used a more appropriate measure of inflation to compare the median household income in 1999 to today, it would result in an even lower annual income number, implying an even worse decline in real wealth over that time period.

FIGURE 1
MAAG_Oct2012-FIG1.gif
Sources:
http://www.dailyfinance.com/2009/12/29/then-vs-now-how-prices-have-changed-since-1999/ http://www.thepeoplehistory.com/pricebasket.html
http://www.dailymail.co.uk/news/article-2159624/American-children-cost-235-000-raise-age-18.html http://answers.google.com/answers/threadview/id/757601.html
http://assets.aarp.org/rgcenter/econ/fs87_income99.pdf
http://www.davemanuel.com/median-household-income.php
http://www.census.gov/prod/2005pubs/c2kbr-36.pdf 

Figure 2 below is courtesy of Shadow Government Statistics, and shows US Average Weekly Earnings adjusted for inflation using two versions of inflation measurement. It is a sobering chart. The blue line shows inflation-adjusted earnings using government CPI, and shows a small but steady increase in real earnings since the mid-1990s. The green line, however, shows what inflation adjusted earnings would be today had the US Bureau of Labour Statistics not made changes to the CPI in the early 90s, and reveals that average weekly earnings have actually been in contraction for over 17 years. Forget blaming our current woes on the hangover from 2008-2009. The average American worker has been losing income in real terms since the late 1990s. This is clearly a long-term trend which has compounded itself over the last ten years. Weakness begets more weakness.

FIGURE 2: REAL AVERAGE WEEKLY EARNINGS PRODUCTION AND NONSUPERVISORY EMPLOYEES
Deflated by CPI-W versus SGS-Alternate (1990-Base)
To September 2012, Seasonally Ajusted (ShadowStatus.com, BLS)
MAAG_Oct2012-FIG2.gif
Source: Shadow Government Statistics, October 16, 2012

Meanwhile, as the Occupy movement also repeatedly highlighted, the increase in wealth inequality within the US has grown steadily over the past thirteen years. Figure 3 below shows the “Gini Ratio” of US household income, which statistically captures income inequality within the country. A Gini Ratio coefficient of 0 corresponds with perfect equality, while a coefficient of 1 describes a situation where one person has all the income, and everyone else has nothing. As can be seen, a clear trend towards inequality has been in place since the late 1960s, and that trend appears to be accelerating today. Just as weakness begets weakness, strength begets strength for those with the most wealth.

FIGURE 3 : INCOME GINI RATIO FOR US HOUSEHOLDS
MAAG_Oct2012-FIG3.gif
Source: US Department of Commerce: Census Bureau

These two central tenets of the Occupy movement – that the rich are getting richer while the poor are getting poorer, are the same tenets that are hindering a real recovery within the US. We simply cannot expect the US economy to grow if the 99% are not generating more wealth and disposable income over time. Any discussion of a US recovery that doesn’t acknowledge the deteriorating reality of this group is not an honest discussion in our opinion. And it’s only getting worse. On top of consistently losing purchasing power to inflation over the past decade, the 99% is faced with a pronounced deterioration in job quality (in terms of average salary), chronic youth underemployment, an inability of retirees to generate income from savings, and a steady increase in outright poverty. Market pundits can get excited about a 1.1% increase in September retail sales, but they can’t expect that increase to be sustainable unless we see some relief for the core consumptive engine that ultimately drives those sales.

In this vein, it was very interesting to watch the reaction to the most recent US Bureau of Labor Statistics (BLS) unemployment release on October 4, 2012, which optimistically reported US unemployment falling to 7.8% – representing the lowest level of unemployment since January 2009. Rather than elicit jubilation, the report prompted cynicism, most notably from the former General Electric CEO, Jack Welch, who famously tweeted, “Unbelievable jobs numbers… these Chicago guys will do anything… can’t debate so change numbers,” immediately after the release. Welch’s tweet elicited a torrent of defensive responses, most notably by the BLS who were outraged that anyone would question their methodology. But it’s not the methodology that should cause concern (it is just a survey, after all, although continually lowering the “participation rate” of the US labour force does deserve some eye-rolling), it’s the fact that the jobs numbers are shrouding the painful reality of the post-2008 US labour market: that the jobs lost tend to be higher-paying, while the jobs gained tend to be lower-paying.

It doesn’t take much to see this trend evolving. A cursory review of the most recent layoff announcements makes it fairly clear what type of workers are being laid off in 2012:

“Bank of America slashing 16,000 jobs before December”
“Pharmaceutical giant Merck to cut nearly 12,000 jobs”
“Computer giant Hewlett Packard to slash 27,000 jobs by October 2014”
“AMD Announces 15% Cut in Workforce”

Meanwhile, the new jobs allegedly responsible for lowering the unemployment rate tend to be coming from companies seeking part-time workers, like Amazon.com, which announced that it will be hiring 50,000 part-time workers for the holiday season. This is also reflected in the latest BLS report, which accounted for 582,000 of the reported 873,000 new jobs gained in September as “part-time for economic reasons”. The reality is that were it not for those part-time jobs gains, US unemployment would look dismal. Public hiring announcements by US companies have totaled a mere 84,937 workers for the first eight months of 2012, which is significantly lower than the 224,243 workers that were announced for the same period in 2011. The BLS labour surveys don’t account for the difference between a Bank of America job cut vs. an Amazon.com hire, but that’s the difference that has the biggest impact on the disposable income netted by the job loss/gain.

The trend of high-salary job losses offset by low-salary job gains is increasingly evident among the youngest participants of the 99% – recent college graduates. Figures analyzed by Northeastern University’s Center for Labour Market studies stated that, in 2011, approximately 53.6% of bachelor’s degree-holders under the age of 25 were either jobless or working in positions that didn’t require a college education, representing the highest percentage in at least 11 years. The data cited in the study implies that at least one out of four recent college graduates was completely out of work last year. This trend is unlikely to change anytime soon. According to government projections, “only three of the 30 occupations with the largest projected number of job openings by 2020 will require a bachelor’s degree or higher to fill the position – teachers, college professors and accountants. Most job openings are in professions such as retail sales, fast food and truck driving, jobs which aren’t easily replaced by computers.” With two thirds of the national college class of 2011 burdened with an average student loan debt of $26,600, the US economy will not be able to count on this demographic to generate increased spending in the years to come. If anything, most of these recent college grads are essentially an economic write-off until the US labour market improves.

This trend of lower pay is also starting to show in post-graduate professions. According to statistics from the National Association for Law Placement (NALP), of law graduates in 2011 whose employment status was known, only 65.4% obtained a job for which bar passage was required. NALP writes, “Moreover, with about 8% of these jobs reported as part-time, the percentage employed in a full-time job requiring bar passage is even lower, 60%.” Figure 4 shows the decrease in average law salaries since 2009, with the most striking decline evident in the median salary at law firms, which has fallen 35% over the past three years as law firms shift to more lower paying jobs.

FIGURE 4: STARTING SALARIES: CLASSES OF 2009, 2010, AND 2011
MAAG_Oct2012-FIG4.gif
Source: Source: National Association for Law Placement, Inc.

Think of the difference in disposable income between a salary of $130,000 in 2009 vs. $85,000 in 2011. That’s the difference that isn’t being expressed in today’s labour statistics, but has a profound impact on consumer spending.

Then there are the retirees, and while they may not yet identify themselves with the Occupy movement, they do undeniably make up a key component of the 99%. This is a group that has not only faced continual inflation erosion, particularly due to massive increases in healthcare costs (see Figure 5), but also now faces the burden of generating retirement income in a perpetual zero percent interest rate environment. If there is any group that has felt the decline in living standards over the past decade it is this one. Consider, for example, that in 2012 a savings of $1 million dollars invested in a generic 10-year Treasury bond currently pays a mere $17,000 in interest before taxes. And that’s $17,000 in 2012 dollars. In comparison, $1 million invested in 10-Year Treasuries in 1999 would have generated $47,200 before tax in 1999 dollars, when a gallon of gas was $1.22 and the cost of almost every household item was lower by half. There is no statistic that measures the impact of this decline on the disposable income for retirees, but it doesn’t take much imagination to realize that it has completely changed the prospects for an entire generation of savers.

FIGURE 5: HEALTH CARE COSTS EXPLODING
MAAG_Oct2012-FIG5.gif
Source: US Department of Labor: Bureau of Labor Statistics

Then there are the millions of Americans who haven’t saved enough: According to the Transamerica Center for Retirement Studies, an estimated 54% of workers in their 60’s do not have enough financial wealth to sustain themselves in their retirement. According to the Employee Benefit Research Institute, 60% of all workers in the US have less than $25,000 of savings and investments. That’s less than $25,000 in an investment environment that only pays 1.7% on 10-year Treasury bonds. If they don’t have enough saved for retirement today, how can we expect them to spend more tomorrow? Couple this with the 46 million Americans who are now enrolled in the federal welfare food stamps program, (more than double the amount from a decade earlier), and it paints an extremely bleak picture. But this is the reality of the 99%. This is the reality affecting the class of consumers that is expected to drive the US out of recession.

When Ben Bernanke announced QE3 in September, he discussed the importance of increasing the US consumer’s willingness to spend: “The issue here is whether or not improving asset prices generally will make people more willing to spend… If people feel that their financial situation is better because their 401(k) looks better for whatever reason, or their house is worth more, they are more willing to go out and provide the demand.” The 99% will not spend more unless the trend in declining real incomes can be reversed. The current antidote of quantitative easing has indeed helped the equity market and lowered the costs of mortgages. But on the flipside, it has driven the prices of food and energy far beyond the rate of inflation, destroyed retirees’ savings through zero percent interest rates, and ultimately done nothing to boost the confidence and investment required to reverse the persistent labour trend towards lower paying jobs.

The sad fact is that the economic reality for the average family is far worse today than it was ten years ago… even fifteen years ago, and the trend of declining wealth is firmly in place. The youth need higher paying jobs and the retirees need yield, and for all the trillions of dollars that the US government and other western governments have spent and printed, none of it has addressed these key areas of weakness in a way that can reverse the long-term trend. As we approach year-end and the finality of the US election, there will likely be numerous indicators implying a US recovery. Unless they directly benefit the 99%, we would advise readers to take them with a large, bipartisan grain of salt. Weakness begets weakness, until something dramatic reverses the trend’s course. The 99% are firmly stuck in a declining trend, and we do not see it reversing any time soon.

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Spastica Rex's picture

Occupy was a project of the 1%.

Can I someday be called a person instead of a consumer? Is that just unreasonable?

Lost Wages's picture

You are a milk cow for the elite. Grovel before them.

RockyRacoon's picture

I prefer to think of us as turnips.  The last drop of blood is about to extracted.  What will the 1% do then, cannibalize each other?   The wanna-be alpha wolves will turn on each other and the massacre will definitely have a boosting effect on popcorn sales.

I apologize for the mixed metaphors.

malikai's picture

I'm a traditional guy. I don't really see myself as anything more than a slave.

Bicycle Repairman's picture

When consumption moves from the US to East Asia, game over.  You won't even be called a consumer.  The USA won't be like Mad Max.  It will be peaceful, Kafka-lite, punctuated by the occasional "security event". We will make nothing.  We will consume less.  We will live on small government stipends.  Most, including the old, will work for "their" stipend.  Work will consist of internal security,  "Eco-jobs",  menial health care jobs and paper shuffling.  Markets will be a thing of the past. Free time will be forbidden.  All focus will be on the coming American renaissance that is always just around the corner.

Pladizow's picture

"If you want a vision of the future, imagine a boot stamping on a human face - forever." - George Orwell

Spastica Rex's picture

Lots of boots on the board today.

RockyRacoon's picture

Kafka-like?  I can dig it.  I especially like the idea of slowly morphing into a cockroach.  Much more stuff becomes palatable that way.

Spastica Rex's picture

Turnips+wolves+popcorn=briliant!

If I'm looking forward to anything in the last 1/3 of my life (less, if I'm lucky), it's when(if) the snake really begins to eat its own tail.

Dr. Engali's picture

I'd rather see the turnips squashing the snakes.

Spastica Rex's picture

Me too, although I call myself a pacifist.

And really, we're all the same snake.

N. B. Forrest's picture

I haven't quite figured why there is so much animosity towards the  wealthy on this page.  Sometimes I get the feeling that the commenters on this page are more appropriate for the Mother Jones web site.   Yes a lot of the wealthy in the NY/WaDC corridor have stolen their money.  However most rich people have earned it. The failure to differentiate the two is quite intellectually lazy. 

 

Then again, if you are just over come with envy, I guess you don't care if it was stolen or earned.  If someone has money and you don't, then obviously you will hate them. 

Spastica Rex's picture

However most rich people have earned it

How do you reckon?

TheSilverJournal's picture

Working hard and smart to produce the most with the least means your an aweful human being. Save your soul, live in poverty and produce nothing and live off of others! Everyone stop producing! The way to save humanity is to produce so little that we starve!!

TheSilverJournal's picture

/ Sarc, guys. I was being sarcastic. I thought that was thick enough it didn't have to be stated.

N. B. Forrest's picture

I live in a medium sized Midwestern city.  I know many of the wealthiest people around here.  And I also know the source of wealth of a majority of the very wealthy. 

 

Most of them are entrepreneurs, and children of entrepreneurs.  Their wealth comes from real estate development, energy, high tech inventions, one is an HVAC entrepreneur who has worked her butt off her entire life and now has a net worth in the upper eight figures.  Another owns a well know trucking company. 

 

These guys are technically in the 1% net worth of America.  Yet they are vilified as leaches and slave owners on this site.  I, however look at them as heroes and role models for my children to look up to.  So you fools can all scream and call them names, but I will stick to my guns and say that you are a spoiled Marxist brat who is just envious of the wealth created by those who work hard and are successful. 

Spastica Rex's picture

Thanks for your response.

I've rarely been called a Marxist or spoiled, but OK. Sometimes I'm referred to as an "intellectual coward" for not being willing to argue either side of a statement like "most rich rich people earned it."

It must feel good to have all the answers.

N. B. Forrest's picture

I'm not claiming to have the answers, that is just a big straw man on your behalf.  I'm  just observing that there is a strong Marxist thread on this page that is quite annoying.  As I have said before, outside of the NYC/WaDC orbit, most rich people are rich because the worked hard and were a little more lucky than everyone else.  Or their parents were. 

 

It is the Marxists and Fascists who vilify people solely based upon their wealth.  It's the Marxists, Fascists and purveyors of class warfare who accuse those who are successful of stealing their wealth.

Spastica Rex's picture

Well, you seem to think you have the answer to the question at hand, namely "Did most rich people earn it?" That you think you know the answer to that question demonstrates that you are stupid. That you think your anecdotal "evidence" is indeed evidence - or even that if it is evidence, it's sufficient to support your claim, demonstrates that you are stupid. 

Furthermore, I don't think you really understand what a "straw man" is, or else you haven't looked in the intellectual mirror lately.

Do you know what a red herring is?

PD Quig's picture

Read "The Millionaire Next Door."

80% of the rich did not inherit their wealth. Condensed version:

http://www.washingtonpost.com/wp-srv/style/longterm/books/chap1/milliona...

Spastica Rex's picture

Well, that's at least an attempt.

However, there's no supporting evidence in what you present, just more unsubstantiated claims. No, that the authors have "Ph.D." after their names doesn't substantiate their claims anymore than the Ph.D. after Paul Krugman's name substantiates his claims.

Listen - I'm not hating on rich people. My brother-in-law is the head of finance for Microsoft and my in-laws live up the street from Bill Gates, and I don't hate them. My in-laws are some of the finest people I know - they both come from poor backgrounds and live a very frugal lifestyle.

I'm also not making any claims one way or the other on the precentage of "rich" people who "earned" their wealth. I'll leave that to the real Marxists and real Randroids.

Maybe you could backtrack and define "rich" and "earn." I'm sure as Hell not going to try.

AldousHuxley's picture

millionares next door are rich but not wealthy nor influential. $3M  cash in the bank is just retirement money these days.

"Rich" as in wealthy I've got FU money is $10M+ in liquid assets with mortgage paid off.  The real capitalists. Not $2M in 401k after slaving away for 40 years ripping other slaves off while majority of profit goes to lenders.

 

also don't buy into meritocracy because one hard working guy gets lucky.

 

freeing one slave a year keeps their hopes up and keeps working as a slave when there is no merit for the slave owner except he had money.

 

that's right folks....It is mostly all LUCK.

 

Speaking of Bill Gates...he attended private school more expensive than Harvard which gave him the head start with computers when no one else had them, with mother able to pull strings with IBM executives to buy his software he bought from someone else.

 

Rich are either lucky, born with it, married into it, or sacrificsed everything worthwhile in life to obtain it making it worthless goal.

 

Also, look at the world. Chinese "communist" elites being billionares, Putin's ex-KGB gangsters in Russia being billionares....America isn't that different either if you trace wealth a little bit.

 

Rockefellers kill for money: http://en.wikipedia.org/wiki/Ludlow_Massacre

well, America herself raped and displaced natives with weapons, exploited imported slaves from Africa for agricultural economy, used Chinese to build railroad infrastructure, now using Mexicans for manual labor, and Chinese factory slaves for production.

 

dumb rich claim their individual hard work was what gave them success.

smart rich know luck had a big part of it and will give back to society.

 

 

 

Spastica Rex's picture

I'm with you 100%. The mere wealth or lack there of says little about a person, and materialism is a mind disease.

TheSilverJournal's picture

I accuse the central planners of stealing the world's wealth. I don't think that makes me a Marxist or a Fascist.

It's time to get rid of the theives. Get rid of the central planners. And if Romney wins, get rid of Romney's centrally planning ass. The highest increases in productivity in this country occurred when we had capitalism. Counterfeitting was once upon a time a capital offense too, just saying...

AurorusBorealus's picture

I don't think that there is a general hatred for the wealthy on Zerohedge.  Rather, there is a general hatred for all those who have made their wealth in finance, Real estate, and other endeavors without doing anything productive or innovative (unless you count inventing new fraudulent financial "products" innovation).  Similarly, I think you will find that there is a general hatred of a system the promotes crony capitalism and government favoritism, wherein vested interests retain all the power and it has become nearly impossible to begin a successful company or innovate without massive capital assets and political clout.

Midas's picture

I hope you are right about that Aurorus.  But that is the problem with complaining about the 1%.  It doesn't make the distinction.  Occupy wall street seemed like a big tantrum to me, they may have made an argument as compelling and lucid as yours, but I never saw it.  I will admit I tuned out after a while.

Spastica Rex's picture

OWS was a Ye-Olde-Merry-Street-Faire for the hippies sponsored by Carls Jr. It was also a message to the plebs of America that resistance is futile.

dugorama's picture

you mean "regulatory capture"

http://en.wikipedia.org/wiki/Regulatory_capture

under the section heading American Examples:

"...forces pro se complainants to run a hostile procedural gauntlet until they lose hope, and either withdraw their complaint or settle for a pittance, regardless of the merits of the case."[14] Gramm, wife of former Senator Phil Gramm, was accused of helping Goldman SachsEnron and other large firms gain influence over the commodity markets. After leaving the CFTC, Gramm joined the board of Enron."

Tegrat's picture

My views are exactly the same.

Lost Wages's picture

I said "the elite," not "the wealthy" so this sub-thread is irrelevant.

TheSilverJournal's picture

To the central planners, you're not even a consumer. You're simply an input in their system built to suck the resources out of the world to be used to their personal benefit.

Matt's picture

A consumer is just a class of person. Besides, even corporations are "persons" so that is really too vague a term.

Ruffcut's picture

Kissingers "useless eaters" group.

Vince Clortho's picture

What is wrong with good old Debt Slave?

rpboxster's picture

I stopped using the term "consumer" a few years ago.  I also banned "leader" from my vocabulary. I cringe when I hear "our leaders..."  There is no such thing today.

Spacemoose's picture

there seems to be an unstated assumption in the article, that the 99% can perpetually continue to consume more than they produce.

even though the 1% are admittedly consuming far more than they produce, i doubt that reducing the consumption of the 1%, and transferring that consumption to the 99%, could make a detectable difference in the standard of living of the 99%. the real problem is the actions taken by the 1% in suppressing the productivity of the 99% (for instance, diverting capital to wind turbines to enrich GE or other similar situations where capital is diverted to campaign contributors).

Buckaroo Banzai's picture

From the above link: "A funny thing happened on a way to a "movement." It was exposed. The alternative media, including The Daily Bell, pointed out the various contradictions, suspicious funding and general nonsensical nature of this manufactured effort. And that has helped sink it, or at least diminish it."

LawsofPhysics's picture

Please Eric, it has been this way for 6,000+ years.  What else would one expect from a exponentially growing population of humans in a closed system where fraud and the massive mis-allocation and mal-investment of capital and resources has been the status quo for over one hundred years.

Same as it ever was...

1835jackson's picture

Totally agree. It has always been this way. No surprises. There will always be very rich people and very poor people. Get over it.

Spastica Rex's picture

King John agreed with this message as well. So did King Louis XVI. Revolutions happen occasionally. Get over it.

MachoMan's picture

So the mob is preferable to the aristrocrat?  I think not...  In the turmoil, a lot of innocent people get hurt...  I'm not sure why you would advocate it so nonchalantly.  In the end, we'll need to invent a form of government that works with complete apathy of the citizenry, but still somehow fairly apportions everything to the apathetic.

Spastica Rex's picture

No - not at all; I'm just pointing out the other side of the cavalier's coin.

dugorama's picture

Ah, but the ratio does change.  And teh gap as well.  Take a look on-line at Gini coefficients around the world and realize that it need not be this way.  In some countries, university professors can actually afford to send their children to college without a second mortgage!  

Vince Clortho's picture

The big exception of the last 100 years is the mass media and its control.

In previous times the serfs and slaves knew their position at the bottom of the shit-pile.

In the last 100 years you have the MSM promoting the fantasy of Middle Class and upward Mobility.

 

mr1963's picture

The reason "Occupy" is no longer a movement is it was found to be 1% of a far, far, far left fringe population, and its values and ethics was not in line with the other 99% of the population.