The Breaking Point

by James Dale Davidson

  According to Pew, the typical household among the lower third (counting pretax, posttransfer income) suffered a decline in its annual balance of income over spending of $3,800 in the decade after 2004. By comparison, the typical household in the middle third of earners saw its surplus of income over expenditure drop from $17,000 in 2004 to $6,000 in 2014. (Of course, this was calculated before taxes so families had even less slack than the numbers suggest.)

  The stated intention of the thoroughly detailed Pew study of household financial security was to more closely examine whether income is “sufficient to cover expenses.” Overall, they concluded that “overall median household expenditures grew by about 25% between 1996 and 2014,” while “income continued to contract” after the Great Recession. “By 2014 median income had fallen by 13% from 2004 levels, while expenditures had increased by nearly 14%.”

  Part of the story was that low income families had to spend a much greater share of their incomes than in the past on core needs, such as housing, transportation, health care, and food. In 2004, typical households in the bottom third of the income distribution had “$1,500 of income left over after expenses. But by 2014, ‘the household surplus’ had decreased by $3,800, putting them $2,300 in the red.”

  This raises an obvious question—where did the lowest income households find the $2,300 cash needed to fund the gap between their spending and their income? Remember, the Pew study already takes transfers into account. I doubt they all became Uber drivers. Presumably, they must have borrowed from relatives or depleted whatever meager savings they possessed. But with outlays exceeding income by $2,300 in 2014, it would seem impossible for the lower third of households to have continued spending at 2014 levels for any protracted length of time. Thus the insufficiency of income among the lower third of households to cover even core needs, such as housing, transportation, health care, and food, implies that time was running out on the economy in 2014.

  The surge in the expenditure to income ratio could be interpreted in many ways. Part of it is undoubtedly due to Obamacare. Before 2010, families in the lower third of the income distribution not covered by employer health insurance could choose to go without it. If they got sick, they had to pay out of pocket or depend on charity and declare bankruptcy if the bill became unpayable. By 2014, the average cost after assistance subsidies for the 87 percent of those who qualified for cost assistance was about $69 a month for the second-lowest-cost Silver plan. So in other words, $828, or about 22 percent of the household deficit among the bottom third of households, could be attributable to Obamacare.

  And announcements by insurance companies show that the predatory Obamacare squeeze on lower-income consumers was destined to skyrocket in 2017. Average premium increases proposed by insurers for individual Obamacare policy holders are topped by a 65.2 percent hike proposed by Humana in Georgia, a 38.4 percent hike proposed by Highland in Pennsylvania, a 31.6 percent hike proposed by New Mexico Health, and a 29.6 percent hike proposed by Provident Health Plan in Oregon. Ouch. If consumers were not already insolvent, another year or two in the tender embrace of Obamacare should complete the job.

  Some of the surge in the spending by lower-income consumers may also reflect an adverse change in relative market prices that loomed larger for the lower third of the income distribution. Remember, while housing costs have been soaring for decades, during the height of the subprime boom, families in the lower third of the income distribution temporarily seemed to be benefiting. But that changed abruptly with the 2008 subprime financial crisis.

  By 2014, households at the bottom spent more on gasoline than their counterparts spent on all transportation in 1996. Perhaps housing inflation required the poorer segment of the population to reside farther away from their jobs and thus commute farther, raising their required spending on gas disproportionately? Remember, housing costs have escalated sharply in recent decades. In most major cities, housing prices are up by 400–500 percent since 1980, with some like Boston (716.3 percent) and San Francisco (729.8 percent) up even more. If you are not rich or you didn’t buy years ago, you would be hard-pressed to find shelter in those cities.

  Another interpretation is that the ominous surge in the expenditure to income ratio confirms the Shadow Government Statistics conclusion that the CPI-W (the monthly Consumer Price Index for Urban Wage Earners and Clerical Workers) significantly understates the decline in consumer purchasing power. In this respect, it is noteworthy that the CPI-W was explicitly chosen as the index for the annual adjustment of benefits paid to Social Security beneficiaries and Supplemental Security Income recipients. The idea was that a low-ball inflation adjustment would save trillions as compared to a more accurate index. Social Security outlays would be approximately double their current level if inflation had been accurately measured.

  The Shadow Stats Alternate CPI-W (with 1990 as a base) is calculated, as John Williams of Shadow Government Statistics puts it, by excluding “gimmicked changes to reporting methodologies of the last several decades, which have tended to understate actual inflation and to overstate actual economic activity.” The implication is not only that real (or inflation-adjusted GDP) is much lower than official data portray, but all other economic series deflated by official measures are overstated due to gimmicked reporting methodologies that undermeasure official inflation. The muddling of that statistical series with reports of fake prosperity merely pollutes the data, making it harder to tease out valid information you need to plan your investments and your life.

  You often have to await the calculation of benchmark revisions to get a more realistic feel for how the economy has performed. Of course, this entails difficulties. For one thing, you may have to wait a long time for the government bean counters to grudgingly amend their lies. For another, you have to go clawing through the footnotes to find benchmark revisions because the mass media only report the headline confections, not the subsequent revisions that at least partially amend the record. News reports of benchmark revisions, if any, are confined to small articles in the business section.

  For instance, if you were here across the table and prepared to make a friendly wager, even though I am not a gambling man, I would be willing to bet that you could easily have missed the May 18, 2016, benchmark revision to “Manufacturers’ Shipments, Inventories and Orders.” (Again, think durable goods.) The benchmark revisions show that 12 percent of the pickup in manufacturers’ shipments since the officially declared end of the recession in 2009 actually never happened. Not only did billions in imaginary manufactured shipments vanish in a twinkle, but $12.66 billion of business inventories, along with $57 billion of unfilled orders vanished as well. In other words, the recovery has not been nearly as strong as Obama and his minions pretended.

  A hint of the magnitude of the coming economic adjustment can be gleaned from the fact that wholesale sales peaked in July 2014. This means that as of June 2016, the supply chain contraction in the US economy had already lasted more than twice as long as the nine-month supply chain adjustment in the Great Recession following the Lehman bankruptcy. Total business sales have been declining for years—as suggested by the Pew audit of consumer finances—and were running about 15 percent lower in 2016 than in late 2014.

  Of course, the fact that $12.66 billion of business inventories don’t actually exist makes the task of rectifying the supply chain somewhat less daunting. No store will have to stage bankruptcy sales to liquidate the billions of dollars of inventories that were never more than statistical fictions in the first place.

  “Only ‘Dummies’ Believe the Unemployment Figure”—Donald Trump

  Speaking of fake prosperity, I return to a sensitive topic—the chronic and remorseless lies fabricated by the Obama administration to portray the US job market as more vibrant than it is.

  Not incidentally, a reason I respect Donald Trump is that he has tried to advance the national conversation by underscoring a point that should be evident to any thinking person—namely, that the “re
covery” the establishment is so keen to have you embrace is a fraud. If elected president, Trump promises to draw back the veil of statistical flummery that disguises reality for credulous people. Trump is the first candidate in my memory to say he “will investigate the veracity of U.S. economic statistics produced by Washington—including ‘the way they are reported.’” No wonder the establishment hates him. As George Orwell, the author of Nineteen Eighty-Four, put it, “The further a society drifts from truth the more it will hate those that speak it.”

  Let’s look more closely to see why my comments and those of Donald Trump on the employment situation are not merely impudent name-calling but sober conclusions informed by the facts.

  Start with the issue of business dynamism that lies at the heart of a lot of statistical mischief in government pronouncements on the job market. “Business dynamism is the process by which firms continually are born, fail, expand, and contract, as some jobs are created, others are destroyed, and others still are turned over. As indicated above, research has firmly established that this dynamic process is vital to productivity and sustained economic growth. Entrepreneurs play a critical role in this process, and in net job creation.”

  As economists Ian Hathaway and Robert E. Litan pointed out in research conducted for the Brookings Institution, “Historically one new business is born about every minute, while another one fails every eighty seconds.” That was then. Since the Great Recession, not so much. Now there are more failures than start-ups.9

  Business dynamism in the United States has been in long-term decline, so not all of the recent problems of entrepreneurial stagnation could be fairly attributed to Barack Obama. Nonetheless, extensive research shows that the old ratio of business births to deaths no longer obtains. Quite the contrary.

  The rate of business dynamism collapsed when the subprime bubble popped. Obama’s presidency is the first to see more firms go out of business than be created. As you will readily understand, it makes a difference in a supposed “economic recovery” if business deaths run considerably ahead of new firm formation.

  One of the areas where it makes a big difference is in job creation. Historically, dynamic new firms have been a large source of new jobs. But that is no longer the case when old firms are going bust faster than new firms are being created. Obviously, if the Brookings Institution can figure out that more firms are going out of business than are being created, that insight should not elude the Bureau of Labor Statistics (BLS). But it has, primarily because it gives the lie to the fake job strength the BLS ballyhoos every month.

  In fact, Obama’s bean counters add about 200,000 imaginary jobs each month through the “Birth/Death” model that continues to suppose—contrary to the evidence—that more jobs were created in new firms (births) than lost in firms going out of business (deaths). These fake jobs account for a big percentage of the growth in employment announced by the BLS. The bottom line is that at least four and a half million jobs announced during the Obama presidency never existed. They were statistical adjustments inserted in the data reflecting outdated historical ratios that no longer hold true.

  But this is only part of the story. The Brookings data, along with surveys conducted by Gallup, show that far from adding 200,000 jobs through the “Birth/Death” model, a more accurate report would have subtracted 70,000 jobs a month to account for the jobs that disappeared when firms died.

  That would be another 840,000 annual jobs (or two and a half million jobs subtracted since 2014). All told, 6,950,000 (or 75 percent) of the officially announced 9,150,000 jobs supposedly created through the first quarter of 2016 were fake. I should point out that that might actually be a low estimate, as the BLS inflates jobs estimates with seasonal adjustment shenanigans that result in double counting of the same fake jobs and other frauds that are too complicated to get into here.

  Fake Employees Are Not Paid

  You don’t need to be a Nobel Prize–winning economist to realize that fake employees cannot form the basis of a strong economy. Suffice it to say that employers are not writing checks to employees that don’t exist outside of statistical models. The income those imaginary employees would be earning if they were real is not being spent at the businesses that are going out of business by the hundreds of thousands each year.

  And inevitably, if business deaths continue to outstrip business formations in an environment of slack consumer demand, the result to be expected is economic collapse. The slow-motion insolvency of American consumers as the economy regresses implies a coming surge of economic distress. This will inevitably be construed as a “recession,” although as explained above what is afoot is probably better understood as another installment of economic regression along the road to collapse.

  Slow-Motion Musical Chairs

  A good simile for the US economy is that it has performed like a cruelly disguised game of musical chairs. Each time the music stops, an ever-larger contingent find that their chairs have been taken away, and they are out of the game. And they had no clue by what rules they were playing.

  If you think about the implications of the decline in median income over half a century a lot of other dimensions of economic weakness come into focus. For one thing, the supposedly strong US employment picture is not at all what Obama pretends it is. Actual US job growth is concentrated almost entirely in low-wage service work. Among the jobs the US economy supposedly added during 2015, 360,000 were waiters, bartenders, and baristas, while 12,000 were allegedly hired for manufacturing jobs.

  Fake Jobs in Perspective

  Why so many baristas?

  Partly, that may reflect the fact that it is easier to fake the hiring of a 100,000 bartenders than it would be to fake 100,000 manufacturing jobs. A boom in manufacturing sufficient to account for a surge in manufacturing job growth would show up anomalies in many other statistical series. You can’t pretend with a straight face that employment in manufacturing is booming when manufacturers’ shipments are down in eight months out of nine.

  Declining Productivity Exposes Fake Jobs

  Yet another telltale statistical hint of the large number of fake jobs is the declining productivity that seems to puzzle so many mainstream economists. Duh. Of course productivity is disappointing. The millions of fake employees aren’t actually doing much heavy lifting, are they? The fake jobs obviously skew the denominator for calculating productivity growth. All the actual work is done by real employees who show up, not by statistical hypotheses.

  Fake Prosperity Winds Down

  The long-term decline in median income, amplified in 2016 by the biggest drop in weekly earnings in history, puts the lie to the pretense of self-sustaining recovery. Average people don’t have enough discretionary income to sustain expanded economic activity. And this shows up in lots of ways—if you care to look. In 2008, when the mortgage bubble burst, 18 percent of American children were officially living in poverty. By July 2015, after six years of supposed recovery, the Casey Foundation’s 2015 Kids Count Data Book reported that the number of kids in poverty soared by three million, with the total having risen to 22 percent.10

  Another detail that reflects the deterioration of living standards in the declining economy is the fact that federal outlays for the food stamp program have doubled since the last recession. They totaled $37 billion in 2008—by 2015 that number was $74 billion. Recall this telling detail that I have highlighted previously: the total number of business closures exceeded the total number of new businesses created during every year of Obama’s presidency. When business failures exceed the number of successful start-ups, you are no longer living in a growing economy, but a declining one headed for collapse. It is new work that stimulates an intensification of the division of labor. When new firms that embody new work are failing, the average age of firms in the economy goes up, and new jobs reflecting new occupations disappear. This is the essence of a declining economy.

  Worse than the Great Depression?

  Another confirming datum—So
far in this century, US manufacturing has suffered its worst performance ever. Americans lost 5.7 million manufacturing jobs, and the decline as a share of total jobs (33 percent) exceeded the rate of loss in the Great Depression.11

  Dr. Robert Atkinson, the economist, elaborates:

  U.S. government statistics significantly overstate the change in U.S. manufacturing output, and by definition productivity, in part because of massive overestimation of output growth in the computer and electronics sector and because of problems with how manufacturing imports are measured.

  Measurement of the computers and electronics industry (NAICS 334) is a particular problem. Because of Moore’s law computers get more powerful every year. But when a company makes a computer that is twice as fast than the one it did two years, ago, the government counts it as if they produced two computers. This is why according the government statistics, from 2000 to 2010, the computer and electronics sector increased its real U.S. output over 5.17 times. Compare this with electrical equipment, which saw a decline of 12 percent.

  It is hard to believe that the U.S. computer and electronics sector is producing 5.17 times more in the United States than it was a decade ago, given the fact that its employment declined by 43 percent and according the U.S. Census Bureau’s the number of units of consumer electronic products shipped from U.S. factories actually fell by 70 percent.12