Mauldin: The Distribution Of Pain

Tyler Durden's picture

Authored by John Mauldin via MauldinEconomics.com,

When you write about economics, you learn very quickly that the economy doesn’t care what you say about it. The forces that drive it are beyond any one person’s comprehension, much less control.

But at the same time, the economy doesn’t work like a law of nature. Unlike gravity, for instance, the economy responds to human choices and preferences. We influence it, even if we don’t understand exactly how.

In last week’s “Fragmentation of Society” letter, I wrote about the coming technological changes that will replace many human jobs and disrupt society. Some of the disruption will be good and necessary. Much of it will be painful, too, and the pain won’t be evenly distributed.

That is a problem whether you personally feel any pain or not. People don’t like pain and will change their behavior to avoid or relieve it. Like the drowning who desperately seek something to hold onto, they will vote for politicians who say they can relieve that pain, regardless of whether they actually can. And if those who suffer see that you don’t share their pain, they will wonder why not and seek to gain whatever advantage you possess. And then it gets ugly.

That’s not a moral statement but simply a fact-based observation of human nature. Whether we like the facts doesn’t really matter: We have to face them. Presently we are not handling them very well.

We have engineered society so that we at the upper end of the financial spectrum have little interaction with or knowledge of the people who feel the most pain. I wrote about this chasm between classes last year (see “Life on the Edge”) as the US elections made the split in our nation harder to ignore.

Peggy Noonan talks about the “Protected” class that makes public policy and the “Unprotected” who must live with those policies. The gulf between those classes continues to widen. The changes I wrote about last week will probably make it worse over the next 10–15 years.

Today I want to delve a little deeper into this widening split and consider where it may take us. As you’ll see, the possibilities range from “not so bad” to “very, very bad.”

The Two Economies

Ray Dalio is no stranger to my readers. The billionaire founder of top hedge fund Bridgewater Associates got where he is by having keen insight into both human nature and economic trends. Occasionally he shares some of his wisdom publicly. I featured his reflections on the then-forthcoming Trump presidency in Outside the Box last December.

Last month Dalio posted a new article, “The Two Economies: The Top 40% and the Bottom 60%.” He believes it is a serious mistake to think you can analyze or understand “the” economy because we now have two of them. The wealth and income levels are so skewed between top and bottom that “average” indicators no longer reflect the average person’s experience or living conditions.

Dalio launches with this chart:

The red line is the share of US wealth owned by the bottom 90% of the population, and the green line is the share held by the top 0.1%. Right now they are about the same, but notice the trend. The wealthiest 0.1% has been increasing its share of wealth since the 1980s, while the bottom 90% has been losing ground.

Looking back, we see a similar pattern in the 1920s – which dramatically reversed in the following decade. Then there was an almost 50-year period during which the masses gained wealth and the wealthy lost ground.

(Important note: This doesn’t mean the 0.1% ceased being wealthy. It just means they owned a smaller portion of the total wealth. An economy in which 0.1% of the people own 10% of the wealth is still skewed, just less so. But more on that later.)

In the big picture, we see about a half-century when the net wealth gap widened in favor of the bottom 90%, followed by another 30 or so years in which the wealthiest gained ground while most of the population lost it.

It’s not a coincidence that populism emerged as a political force in both the 1920s–1930s and the 2010s. In each case, people at the bottom could tell the economy wasn’t working in their favor. The best tool they had to do something about it was the vote, so they elected FDR then and Trump now – two very different presidents but both responsive to the most intensely angered voters of their eras.

That previous, roughly 10-year period in which the green line was above the red line included the Roaring 20s, the 1929 market crash, and the first part of the Great Depression. For the 0.1%’s share of the wealth, 1929 was roughly the high point. Wealth lost in the crash sent their share plummeting. It has not fully recovered to this day, but it’s getting close.

Thinking about this situation, I can’t help but correlate it to my friend Neil Howe’s idea of a historical “Fourth Turning” every 80 years or so. It fits well with Dalio’s data. Neil said at my 2016 Strategic Investment Conference in Dallas that we are in the middle stages of that Fourth Turning, and he expects conditions to worsen from here. He repeated that warning this year at SIC in Orlando. As he points out, for almost 500 years the last half of Fourth Turning has always encompassed the most tumultuous times in Anglo-Saxon history.

(A Fourth Turning is a time when society’s foundational institutions are challenged. The generation who are young adults at that time must face the challenge, and hopefully overcome it. The so-called Greatest Generation did so by persevering through the Great Depression and fighting World War II. It may not be a war, but the Millennial Generation will face a similar test.)

Back to Dalio’s article. He goes on to quantify the 60/40 split with some startling numbers. Just a sampling:

  • The average household in the top 40% earns four times more than the average household in the bottom 60%.
  • Real incomes for the bottom 60% have been either flat or down slightly since 1980.
  • In 1980, the average top 40% household had six times more wealth than the average bottom-60% household. Now it is 10 times as much.
  • Only about a third of the bottom 60% saves any of their income.

Dalio also found some very useful data I had never seen before: household income adjusted to show the impact of taxes, tax credits, and government benefits. This adjustment gets closer to the resources people actually have available for living expenses, savings, and investment.

Splitting that data by the top 40% and bottom 60%, we see a sharply growing difference in the percentage changes since 1980. The top saw its after-tax net household income grow almost three times faster than household income for the bottom 60%, even including government transfer payments.

And note something in the right-hand side of the chart, which depicts income changes for the bottom 60% only, divided into three segments. There is a significant difference in the income growth of the middle 40–60% segment and the bottom 40%, too, and that difference accelerated during and after the Great Recession. Think about that in the context of recent political trends.

You see the problem here? The bottom 60% know their own experience. Thanks to the Internet and social media, the bottom 40% are particularly aware of it and increasingly resentful.

Note also that the lower ranks of the top 40% are not “wealthy” by any stretch. Anyone below the 80th percentile is probably struggling to some degree.

Since the 1980s most of us at the top have believed that a rising tide would lift all boats. We were half-right: It has lifted all the boats but not at the same rate, and a good many boats have sprung holes and are taking on water. We’re now near the point where our differences in income and wealth are too great to ignore.

Think back 30 years. None of us would want to go back and live with that same technological base. All of our lives have dramatically improved. From health care to communications to entertainment to transportation and a host of other things, we are all better off.

But the key here is that no matter how much better our lives have become, those in the bottom 20 or 40 or 60 or 80% notice the relative differences between where they are and where the top 10% or 1% reside, and they can see those differences growing.

While the majority of those living in Africa, in some parts of Asia, and in the slums in Latin America would see the lives of what we call the poor in America as vastly superior to their own lifestyles, that is not who the bottom 20–40–60% of the income strata in the US are comparing their lives to. It is simply human nature that we compare ourselves to those who have more, and that we want more for ourselves.

Leveraged Stress

Last week the American Psychological Association released the results of its latest “Stress in America” survey. Not surprisingly, it revealed we are not happy campers.

A big majority (59%) think we are now at “the lowest point in our nation’s history.” To me, that seems a stretch, given that we killed each other in staggering numbers in the Civil War. And the 1820s was not a decade of great civility either. But then, people didn’t watch the fighting on their phones. Now we do, and it fills us with anxiety.

I look back on my youth and realize that the late ’60s was the first time when the reality of war confronted my generation in our homes, on our TVs and in our newspapers, every day. What we experienced with media coverage of social turmoil in that era was a harbinger of what the internet and social media have created today: instantaneous analysis of almost everything. Now, social media have become a monstrous breeding ground for conspiracy theories of all kinds. It is most disheartening.

The specific issues that worry people are interesting:

First on the list is health care, by a pretty wide margin. That concern can cover a lot of territory. Maybe you or a family member are seriously ill, or maybe your health is fine but buying insurance causes financial stress.

Just over a third of respondents reported that the economy causes them stress. That seems a little low, but I remind myself that most people don’t observe the economy the way I do. “High taxes” are well down the list, at 28%. That’s surprising but probably reflects the fact that a small number of people pay most of the income taxes.

“Unemployment and low wages” is also near the bottom with 22% of respondents stressed about it. Maybe that figure reflects today’s low unemployment level, or maybe people are just glad to have any sort of job.

One source of considerable stress that isn’t on the list but probably should be is household debt. I talk a lot about government debt and pension debt, but for most people the more immediate concern is probably their mortgage, auto, credit-card, and student loan debt. There is a mountain of it.

Here’s an interesting Deutsche Bank chart on that point:

We see here household leverage ratios spanning 1992–2016, broken down by income quintiles. Focus your attention on the 1992 (darker blue) and 2016 (rightmost black) bars. In that 24-year interval, leverage more than doubled for the lowest-income 20% and rose significantly for the lower-income 80% of the population. It dropped slightly for the 80–89.9th percentiles and even more for the top 10% income group.

Now recall Dalio’s data on household income, adjusted for taxes and benefits. The top 20%, whose incomes grew the fastest, managed to reduce their leverage. The lower groups, whose income was up slightly or flat, added large amounts of debt, with the poorest adding the most, percentagewise.

This data doesn’t tell us what specific kinds of debt create these leverage ratios. Maybe some of the debt is productive, like mortgages on reasonably valued homes or student debt that helps borrowers eventually raise their incomes. But I’d bet much of the money that was borrowed is simply gone with little or nothing to show for it.

This likely-unrecoverable debt also appears as an asset on some lender’s balance sheet. It ends up being sold as asset-backed securities, possibly to a mutual fund or pension fund near you. And it’s generally in the high-yield category, with leverage on it.

At the risk of repeating the obvious, debt that can’t be repaid won’t be. Somebody will eat the loss; the only question is who. Banks managed to socialize much of their losses in the last recession. I’m not sure that plan will work a second time.

I started off talking about pain and how we distribute it. It may not be physical pain. Financial and employment-related pain are very real. Boredom, too, can be painful, as can loneliness or the feeling that no one needs you. We’re on the verge of many medical breakthroughs, but we won’t cure every disease or heal every kind of wound. People will still suffer, and it’s clear we need a lot of societal as well as personal healing.

One Nation, Two Labor Markets

In a recent column on Bloomberg, Jeanna Smialek and Greg Quinn write:

Goldman Sachs economists agree with Bridgewater Associates’ Ray Dalio: The U.S. economy is running at two speeds.

Headline joblessness may be at a more than 16-year low, but that bullish trend obscures the fact that the labor market is split into two “quite different stories,” Goldman Sachs economists write. A pool of would-be workers remain on the sidelines, and there are reasons to think they can be pulled back into the game. The share of discouraged workers has shrunk, and people are even coming back into jobs from disability. If the labor market gets as hot as it was back in 1999–2000, the economists think participation could climb by a few tenths of a percentage point.

That conclusion is important. Goldman had been skeptical that a tight labor market could push up participation, so this marks a shift in their thinking. If the Fed concurs, it leaves the central bank with a tough choice: should the rate-setting Federal Open Market Committee run the economy hot to attract disenfranchised workers, even if that risks overshooting on inflation amid low headline unemployment? “The FOMC seems to find this trade-off unappealing and is likely to continue to tighten steadily as a result,’’ the economists write. 

While the Goldman analysis focuses on the labor market split, Dalio pointed out that aggregate statistics mask a division in labor, retirement savings, health care and wealth building. The common theme is that uneven outcomes mean the Fed must take underlying details into account when assessing economic progress. 

Working Class Versus Service Class

One final thought, which we will be revisiting in detail in future letters as we think about the future of work. We have had this notion of the “working class.” These are the people who do not own the businesses and are not professionals in the sense of being doctors or lawyers or accountants.

I have spent a great deal of time thinking about the future of work. It is the single most difficult chapter to write in my upcoming book, partly because I don’t like the conclusions I’m coming to. One of the things I am realizing is that there is a distinction between what we have seen as the working class and what I am coming to see as the service class. A working-class person is somebody who has a trade, and because of their skill, they can generally command a decent income.

Then there is the service class – bar and restaurant workers, retail salespeople, general manual laborers, and so on. These jobs are almost plug-and-play. It is not that the greedy restaurant owner doesn’t want to pay his staff more; it’s that competition generally won’t let him do so and still make a profit. So he holds his labor costs down; and he can do so, because in today’s market there are typically more people available for jobs than there are jobs. And because of the Obamacare mandate, if you are a business with more than 50 employees, you simply cannot afford to have full-time employees; so you resort more and more to part-time positions, which do not allow a worker to earn an adequate wage.

Health care being number one of the worry list? I think a large part of that is the fact that young people are required to buy ridiculously expensive health insurance packages in order to subsidize a sick elderly population. And if you’re making $10–$12 an hour working two part-time jobs, trying to figure out how to hold onto a place to live, eat, have adequate clothing, and a bit for entertainment, you’re just not able to spend $400–$600 a month on health care. And then you find out that your taxes are much higher than you thought they would be because now you have to pay the penalty for not having health insurance. Yes, that might stress me out, too.

And yes, I do know young people in exactly that situation. Several of my children literally cannot afford to buy health care, so dad does it for them. But many other friends don’t have parents who can buy them what is essentially ridiculously expensive health care, because the parents are struggling with their own healthcare costs.

We are a nation that is increasingly under stress. Dalio talks about it in terms of the bottom 60% versus the top 40%, but he could have made the same case using an 80–20 model or even a 90–10 model. I am reminded of Pareto’s 80/20 principle, which states that roughly 80% of effects come from 20% of causes.

Our socioeconomic situation is not going to get better, not for a long time. Let’s assume, wildly optimistically, that the US economy and the rest of the developed world grow at a 5% nominal rate for the next 15 years, so that our economies roughly double. Does that mean that the gap between the lower 60% and the upper 40% will be even wider? We will have more than a few people who will be worth more than $100 billion, that’s for sure.

Will the lives of those in the lower 60% be significantly better than they are today? Absolutely. They’ll have improved health care and health spans (if they have access to health care), lower food costs, far more access to services, etc., but the relative differences will be even greater between the top and the bottom.

Unless we somehow figure out how to help people deal with their stress and better manage the yawning differences in incomes and outcomes, we’re going to see increasing tension and fragmentation in our society.

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-.-'s picture

But, how can I get my pudding, then?

peddling-fiction's picture

Rothschild says no pudding for you.

Their is no true, free market. Fraudulent Ponzi's dot the skyline.

Just your imagination and some variants to fool you.

They pull the plug when it suits them by stopping financial and commercial loans.

bamawatson's picture

pain ?

odd how cuntlary & mcStain are both wearing a "boot" now

painful

Escrava Isaura's picture

Mauldin: Unless we somehow figure out how to help people deal with their stress and better manage the yawning differences in incomes and outcomes 

There’s a name for that fixing, sir. It’s called tax the rich at a higher rate.

Then take that money and invest in local business.

Note: It won’t grow the economy because this money is already on the economy. But, it will help with the stress you mentioned. Actually, that is not quite correct. The stress will be shifted to the rich so they will get very angry or fly into a rage. But, who cares, right?

Now, for you to grow the economy you need new money. You can do that three ways:

1. Public spending
2. Private spending
3. Consumption

 
Actually, there’s a fourth way, which is stealing.

Now you also need that the population grows. Capitalism is in constant need of new consumers, right?

See, accomplishing these things can’t be complicated, right?

Oh! Maybe the taxes can.

Which should be the easiest one, right?  

 

 

RAT005's picture

Maulding talks and talks and talks......I wouldn't count on him to provide any useful actionable advice.  His gig is the book and speach tour.

Escrava Isaura's picture

Humans are hardwired to lie as they age.

A study published in “Developmental Psychology” asked a set of 65 kids not to peek at a hidden toy. When the examiner turned away, 50 percent of 3-year-olds and 80 percent of 8-year-olds snuck a look. When asked whether they peeked, most of the set had lied.

 

peddling-fiction's picture

Isaura: You are hardwired to lie nonstop, and to spread TPTB's moronic studies.

Question is, do you lie for someone else or not? Maybe you believe your lies.

Lying is a sin, and thus mentioned in one of the Commandments.

It is not ok to lie. Take note trolls and shills, as well as agents.

It is a sign you work for the other fella.

And yes, you end up forfeiting your soul.

Stuck on Zero's picture

There is only one fix and we all know what it is: shrink government.

Black Warrior Waterdog's picture

Hilarious that you pimp taxes then mock stealing. You are a walking contradiction in too many ways to count.

JRobby's picture

 

Bone crushing / life annihilating depression

Bloody civil war / anarchy

serotonindumptruck's picture

If you don't eat your meat, you can't have any pudding.

How can you have any pudding if you don't eat your meat?

LawsofPhysics's picture

Don't overthink this, when fraud is the status quo, possession is the only law.

Get your tribe in order.

FORD_FIESTA's picture

EASY PEASY........Fewer people, fewer problems.

Captain Nemo de Erehwon's picture

The issue is how we are going to fix it. Redistribution does not help either, does it?

khnum's picture

Economics is for peons the elites use astrology and numerology

Hugh Mann's picture

This isn't capitalism, it's criminalism.

peddling-fiction's picture

Yes, a merry band of occultic brigands.

FredGSanford.'s picture

At this point most economists and people who write about these things are completely stumped and in the dark. And the reason is simple: Nothing like this has ever been done in the history of the world. It has never been done to put interest rates at zero and print, borrow and spend 200 trillion bucks. So we don’t know what is gonna happen or when.
Of course we all have a feeling that it won’t end well. But we don’t know. At least we don’t know in our lifetimes.

These people are flabbergasted. I am too.

Kidbuck's picture

It's already happened. The dollar has lost 99% of its purchasing power and it's on a steep slippery slope to zero.

rf80412's picture

The pain of economic transition is always perfectly distributed according to who made efforts to avoid it and how much of an effort they made.

Calvinism teaches that the lack of ability to believe and obey God does not exempt you from the duty to believe and obey, and the punishment for your inevitable failure is therefore justified.  Capitalism is the same way: any lack of ability to maximize your value does not exempt you from the duty to maximize your value, and any pain that follows is only that which you have brought on yourself.

serotonindumptruck's picture

As many have pointed out previously, society will remain somewhat functional provided the entitlement gravy train continues to roll on.

Once the 150 million lower-caste peasants are denied their free room and board, then whatever is left of civil society will rapidly disintegrate.

UmbilicalMosqueSweeper's picture

Is democide considered to be entertainment?

Lost in translation's picture

Fret not, dear Mauldin.

It’s all going to be sorted out with rocks, clubs, knives, and guns.

Very soon.

Pernicious Gold Phallusy's picture

Social media hammers into people the idea they're worthless unless they have huge numbers of expensive possessions. There is almost no aspect of our lives better than the 1970s and 1980s except auto safety and life expectancy / medical care. We did not have a computer in every pocket and a big screen in every room. The poorest people in the US are still envied by the 3rd world. A large part of our discontent is caused by comparing ourselves to false media portraits promulgated by marketers.

FreeEarCandy's picture

Each and everyone of us compete for resources. Hence, there are winners and losers. When one proposes to distribute the pain evenly, one is suggesting socialism. If one takes all the worlds estimated wealth and divides it among the entire population of the world no one would be able to make ends meet at current price levels. One could suggest there are too many people and that population reduction is the solution.  But, I think that reasoning is flawed, because one can go back to some time period, when the population of the world was smaller, and still find wealth distribution problems existed.  

Now again, if we distributed all the wealth evenly, we still can't make ends meet "at current price levels".  Perhaps it is better to suggest price control, rather than wealth redistribution.  Perhaps the thing to do is to assume we have distributed all the wealth evenly, and then determine from that point what prices must be in order to make ends meet with all the wealth evenly distributed. This would determined the max price one could charge of goods and service. One could charge less to become competitive, but never more. The price levels would need to be reevaluated as population increases and decreases, or as world wide wealth increases and decreases. 

This form of price control is not socialism and it still allows room for competition. We already control the price of milk because we view it as a special necessity for our children's health. Regardless if you agree with it or not, it seems to work with regards to dairy.  

What this article pointed out amounts to ones ability to make ends meet. It will never happen if there is not enough wealth in the world to go around. We may not be able to increase the wealth of the world, but we can cap the prices so that everyone has the real opportunity to make ends meet with what wealth is realistically available. This is not to say that everyone will make ends meet, as there will always be winners and losers in a competitive environment. But at least the world will have enough wealth to at least provide a realistic mathematical opportunity to make ends meet.

 

 Asking people to find what does not exist in necessary quantity is flawed logic. A game of musical chairs. Too many people and not enough affordable chairs to go around is what we have. No wonder everyone is stressed out. One last point. A system of competition is inherently monopolistic. Like a gladiator game or the movie the Highlander-there can only be one winner in the end. All the rest lose their heads. 

UnhingedBecauseLucid's picture

["Will the lives of those in the lower 60% be significantly better than they are today? Absolutely. They’ll have improved health care and health spans (if they have access to health care), lower food costs, far more access to services, etc.,"]

lol

You're in for a big fucking surprise...

William Dorritt's picture

The Median Family pays 62% of it's income in taxes.

 

The Median House cost 3x the Median income in 1963, in 2017 it costs 6x