Despite what you hear these days, it’s not true that the rich in this country are getting richer and the poor are getting poorer. The data show that every quintile is getting richer.
Median household income just hit a record-high inflation-adjusted $61,372 – the fifth consecutive annual increase. (Factor in that today’s average U.S. household is 24% smaller than it was in the early 1960s and the news is even better.)
According to the Census Bureau, more people than ever live in households pulling down an inflation-adjusted $100,000 or more per year. (And fewer households than ever take in an inflation-adjusted $35,000 or less.)
A recent Pew poll found that 51% of people in households making over $100,000 a year consider themselves “middle class.”
In high-cost cities and high-tax states, this may be true.
But there is no evidence that income inequality has grown over the last few decades.
The middle class is shrinking, yes, but that’s because more people are moving up.
The typical U.S. household earns 25% more in inflation-adjusted dollars than it did in 1975.
True, education and healthcare are more expensive. But when you consider all the products that have become cheaper over the years, it translates into a much higher standard of living.
In 1985, for example, the average computer cost $2,495. Today it’s $1,099. The average TV – which was not flat, thin or high-definition – cost $1,200. Today it’s $160. The average 30-year fixed rate mortgage was 12.43% back then. Today it’s 4.87%.
And the average cellphone in 1985 cost $1,495. Today it’s $670.
Today’s phones also have a feast of standard features, including watches, stereos, calculators, cameras, video cameras, voice recorders, GPS trackers, video teleconferencing equipment, web browsers, books, games, films and music.
Author Peter Diamandis estimates that 25 years ago these same goods and services would have cost more than $1 million. (An $8 million supercomputer from three decades ago now sits in your pocket and costs less than $200.)
Even the poor in this country are filthy rich by historical standards.
The average person below the poverty line has a home with electricity, running water, central heat and air, a car, a smartphone, and countless modern appliances.
Their health insurance is either subsidized by Obamacare or, more likely, paid for by Medicaid.
A family with a flat-panel TV and a $12 monthly Netflix subscription entertains itself in a way that John D. Rockefeller – a titan worth more than $340 billion in today’s dollars – could never have imagined.
And let’s not forget all the free services available to us today, including Facebook, Twitter, YouTube, Wikipedia, Google and many others.
The Federal Reserve reported last month that U.S. household net worth rose by nearly $2.2 trillion in the third quarter to $106.92 trillion.
That’s all household assets – stocks, bonds, mutual funds, real estate, etc. – minus all liabilities: mortgages, car loans, credit card debt, student loans, etc.
This, of course, is where some folks come back to the economic inequality issue.
As I reported in my earlier columns on this issue, nearly 80% of Americans claim to live paycheck to paycheck. Half say they would have trouble finding $400 to pay for an emergency.
Why is that?
Economists such as Cornell’s Robert Frank argue that we seek relative status above all else, incessantly comparing ourselves with others. (This is a recipe for misery and impecuniosity.)
Americans live in bigger houses than ever. We drive late model cars, wear designer labels, buy the latest electronic gadgets, eat out frequently and travel to exotic locales.
Bankrate recently reported that Americans spend on average $2,944 a year on takeout, prepared drinks and lottery tickets. (Generation Xers spent more than $3,473 on these items.)
And they can’t find $400 for an emergency?
The difference between the haves and the have-nots in this country is not bad breaks or flawed institutions. It’s behavioral.
Those with higher earnings stay in school longer or learn a skilled trade. They live beneath their income and save diligently. They put those savings to work in investments that earn higher-than-average returns. And they let the money compound as long as possible.
It has less to do with circumstances than how you invest your time and money.
If you develop marketable skills, work hard, persist through tough times, practice deferred gratification and take responsibility for your life, you will accumulate wealth.
Those who don’t – or won’t – claim the economy is rigged, the wealth “distribution” is unfair and economic inequality “is the defining challenge of our time.”
You want to be in the former group, not the latter.
Good investing,
Alex