The long term effects of recession & middle class squeeze

Great Debates
1

I want to have a debate, but w/o one that involves assumptions that an entire generation of people are bad (ie serves those lazy, spoiled dumb kids right), that kind of stuff.
So as it stands health care, real estate, daycare and tertiary education are increasing in price far faster than wages. Education and health care are growing at 6-10% a year while wages grow at 3%. This has been happening for decades, and probably isn’t letting up. Real estate went up, then crashed. Daycare becomes a necessity because when both parents have to work they need to pay for childcare.

Add into the fact that taxes are becoming more regressive. Sin taxes, sales taxes, fuel taxes, payroll taxes and property taxes have all gone up in the last 30 years, largely to compensate for declines in taxes on capital (lower dividend, corporate, capital gains, federal income, estate, luxury, etc).

Many of us in Generation X and Y are still struggling in our 30s. We aren’t perfect, but we did try to do many things right. However the high unemployment, middle class squeeze is making it harder to really act and feel like autonomous adults.

On top of that, our parents generation is approaching retirement age when the stock market and housing market collapsed. Which means they have their own problems now.

It just seems like Generation X and Y are more likely to depend on family for help than our parents. But now our parents are struggling too. And what happens in 20-30 years when our kids are our age (thank god I have no kids and never will)? What happens after another 30 years of wages going up at 3% and year while health care, tertiary education and real estate go up at 7% a year? Wages will double every 24 years while other important needs (health care, education, real estate) will double every 10 years. By 30 years we will make 1.3x as much income but pay 8x as much as we do now for these things.

Add on natural resource shortages the world may run into (oil, metals, agricultural products) which we are already getting a taste of which will drive up prices.

Plus there is a chance that regressive taxes (state taxes, fuel taxes, sin taxes, payroll taxes, property taxes) will go even higher, hitting the middle class even harder.

So what do you feel will happen? I know you can’t really make accurate predictions, but what are your assumptions?

Do you think we will revert to dormitory living? Will we have tiered healthcare where a basic public plan covers everyone with bare hospital rooms, generic drugs, treatments that are 5-10 years old and physician assistants but the people who want more advanced medical care have to pay far extra? Obviously the care would still be high quality, but it would be far more tiered.

What are generation X and Y going to do when they are parents, their kids need help and our parents need help too since they will be in their late 70s and their retirement funds will be dwindling? Baby boomers generally were only able to save about 60k for retirement on average. And many are underwater with their houses.

I really don’t mind the decline in standard of living (I have reasonably low standards, at least by western standards). However it seems we will have more situations of multiple families or 3 generations in one home, sharing cars, more public transit, less meat, fewer consumer goods, etc.

Mentally, what do you feel the effects will be? Things like owning a home, having kids or being an autonomous adult feel difficult to achieve and probably going to get harder. Many in our generation depend on parents, who themselves are facing massive financial problems (low retirement savings and a housing collapse). We (generation X and Y) can barely take care of ourselves, so what are our kids supposed to do?

I assume good and bad will come from all this. But I’m having trouble seeing the potential good. People all over the world survive and function on far less income than we do in the west. So it can be done.

2

The United States has been declining ever since the end of the 1960s, when the advantages it had once had (emerging victorious and unscathed from WW2, having let Britain and France pay for maintaining the world order before that) began to vanish. Arguably, US economic policy has been geared around ameliating or disguising the true extent of that decline while still fielding the world’s most powerful military- since the end of the USSR, most powerful by an order of magnitude. Many feel that what happened in 2008 was not simply a temporary derangement of the market but an inevitable crash of unsustainable policies, akin to an amphetamine addict finally reaching the point of collapse. If the US continues to try to maintain a military/strategic preeminence it simply cannot afford anymore, it will decline to an extent reminiscent of the Spanish Hapsburg Empire. I’m starting to think the current joblessness situation will not end until everyone in America becomes resigned to earning three-quarters as much as they used to.

3

Eventually there will be a full-fledged credit crash, resulting in a drop in the availability and use of credit by average people. This will result in a drop in the ability of the middle class to pretend they’re actually middle class, resulting in them buying less stuff. This will force the market to adjust prices down, restoring actual market prices (rather than credit-market prices).

4

Here’s some “light” reading to go along with your debate.

His e-book (Survival +) is available on the site, but you can download the first 140 pages for free. Very interesting reading. Is it “right”, I don’t know, but it certainly is an interesting viewpoint. Completely trashes the fantasy of living off the land as an isolationist, so its not a survivalist mentality.

I think you have a lot of things correct. We will have to seriously curb our consumption, and will likely be more dependent on multi-generational living, as is done in other countries.

The question I am wondering is when.

5

Real estate crashed because it went up so much. While I share your concerns about some of the other things, house prices have a long-established growth rate that matches inflation. This got seriously out of whack starting about 10 years ago and we are now seeing it revert to the norm (which is why government programs to artificially prop up prices are counter-productive, but that is another thread).

See the second chart here.

6

What you are describing is known as Baumol’s cost disease. What you are missing is that prices for products that do not require as much labor are falling. We spend much more on health care than we used to but much less on food. Also remember Stein’s Law, “Trends that can not continue will eventually stop”.

7

In her book ‘the two income trap’ economist Elizabeth Warren talks about that (I don’t know if she references Baumol or not). But she talked about how some products and services have gone up in price (health care, daycare, real esate, education) while other have gone down (clothing, consumer electronics, food).

Are you saying that fields which have not seen productivity increases are seeing prices go up due to Baumol’s cost disease (health care, education, daycare)?

I don’t know enough about education costs, but my understanding is health care costs are going up due to higher demand and higher quality. More diseases are being taken seriously and properly diagnosed now and of those diseases there are more advanced treatments.

As an example, the rates of people who are properly diagnosed with type II diabetes has grown. At the same time the actual number of people with type II diabetes has grown too due to aging and lifestyle. And the interventions to control the disease have also grown. So prices and spending related to type II diabetes has gone up but mostly because more people have it, the ones who have it are getting treated and the treatments are better.

With mental illness a majority of people are not properly treated or diagnosed. This should follow the same trend in the future where more people are properly treated and the treatments are more advanced.

I do not have the chart onhand but I remember once seeing a chart showing most of the increase in health care costs comes down to the fact that the quality and quantity of it is increasing. Countries like Japan, Taiwan and the UK manage to provide health care of the same quantity and quality as the US for a fraction what we pay (roughly $2000 per capita vs. $7000 here), but costs are going up in all countries for health care more due to higher quality.

I agree with Stein’s law, and I’m curious what the long term effects will be. If a health care policy for a family of 4 costs $12,000 now, that means it will cost $50,000 by 2030 at 7% growth rates. However median family wages may only be $80,000 by that point.

I tend to think we will see more investments into making medicine cheaper instead of better (right now it seems the motive is to create newer and better interventions rather than cheaper versions of current interventions). As an example there are lab groups working on handheld MRI machines which can be plugged into a cell phone and give an MRI in the field (which is sent back to a central computer to process them), and would perform the function of an MRI for a fraction of the cost. I assume that is what the future of medicine will be since we cannot indefinately see prices double every 10 years. Reversible obesity surgery costs $10,000 but can eliminate symptoms of type II diabetes and save tens of thousands that way. The polypill which runs a few dollars a month may cut risks of stroke and heart disease by 80%.

With education I’d guess more online education and 2 year colleges will spring up.
These trends are not sustainable, and I’m wondering what’ll happen to us because of them. Psychologically we will change, and so will our lifestyles. I think we’ll see more co-op living.

When I was in college you could get a 2 bedroom apartment for $500 that was nice. With 5 people in it (2 in each bedroom and one in the living room) combined with utilities that comes to barely $150 per person per month. Add in bulk food purchases, a scooter for transportation (or shared car) and a bus transit pass and the basics of life can be had for $400/month or so per person. I think we will see far more of that kind of living (dormitories, co-ops, multi-family dwellings, more public transit, basic health care over advanced, online college, etc).

Another problem is that we have more wealth and productivity in the US, its just that the wealth has congregated at the top. So its not just a lack of wealth and productivity as much as a lack of income equality that is adding to these problems.

8

Isn’t the whole “independent adult with a house and a career at age 30” paradigm sorta uniquely American? Extended family living arrangements are pretty normal in many places around the world.

I’d like to believe that we can get back to a more equitable spread of prosperity among the population as a whole and reclaim the way of life my father enjoyed, but maybe we can’t. Maybe the baby boomer generation was an abberration. If that’s the case, then that makes things extra difficult for the younger generation that is expected to attain a lifestyle that’s become much more difficult to achieve (“You’re 18, you’re on your own.”). I’m actually jealous of my parents because I have WAY more education than they do and yet I feel it’s much harder to build the foundations for a secure future, whereas they found good paying jobs with high school diplomas.

9

Education costs have gone up far faster than inflation. You forgot one more bummer - college graduates today have a much higher burden of debt than my generation did. The interest rates are higher and the terms are worse. I had just a bit of debt, because my father, solidly middle class, was able to pay for a relatively high priced college for me. I didn’t have to pay any of it off until after I finished grad school, by which time inflation had reduces the real cost of the debt so much that I wound up paying it off early because postage was getting to be a big chunk of the payment. Today students face a tighter market with two strikes against them.

The problem is definitely not a lack of productivity, since productivity has been rising a lot. The problem, as shown by income inequality, is that the benefits of this productivity are not going to workers but instead going to execs and stockholders. Which is fine until they start to complain about the downward pressure on prices and sales that comes from people no longer being able to afford to buy their products. This is yet another case of where local optimization cause global disaster.

10

Your numbers are off here. In 30 years, we will make 2.4x as much, but pay 7.6x as much on those things.

I’m much more optimistic than most about the future. You didn’t mention this in your post, but many people are afraid of the growing economies in China and, to a lesser extent, India. IMHO, this is the best thing that has ever happened to humanity. If their economies continue to grow, we will be living in a rich world. The first rich world in human history. Along with their growth, we’ll see the number of scientists, engineers, etc. roughly triple. It seems likely to me that the benefits of having so many more brilliant people working on our problems will simply overwhelm all the things people are worried about today.

Regarding the cost of medical care, technological advance is one of the main drivers of increasing health care costs. If you think about it, this is extremely bizarre. What other industries have costs that rise with technological advance? IMHO, once this trend changes, the problem of health care will be solved.

11

I winged it and never even did the calculation.

I made a post a while back about healthcare asking a question similar to the one you are asking. My question was that since most health spending goes to a few dozen conditions (generally chronic conditions) will we reach a point where those conditions can be effectively prevented, cured and reversed and spending will decline dramatically? Treating disease of malnutrition and infectious disease used to take up a huge % of medical spending just 80 years ago. Now it requires far less since we know how to prevent, cure and reverse these diseases far better. And I’m assuming the same is starting to happen with diseases like Alzheimer’s, type II diabetes, CVD, cancer, osteoarthritis, etc.

As an example, type II diabetes costs $10,000 a year to treat. However we are learning tons of information on not only how to prevent it (get adequate vitamin D and magnesium, eat high fiber foods, eat breakfast, interval training, early medicaction, etc) but we are learning how to reverse it even after it happens via obesity surgery. Obesity surgeries that cost $10,000 can put blood glucose problems and type II diabetes in remission for 73% of people who have them. So instead of spending $10,000 a a year for someone who has diabetes for 20 years, you can delay the disease by 5-10 years with minor lifestyle changes then reverse it with obesity surgery, and only spend $15,000 or so total doing that. So it seems it’d be the same thing that happened with antibiotics. Instead of spending $10,000 on hospital stays for TB patients we spend $150 on hygiene and antibiotics instead to prevent and reverse the disease.

However the financial incentive for private enterprise will generally be to manage chronic conditions for long periods of time, not cure them over a short period of time (unless curing them involves a new mechanism via a different company than the ones managing the condition). But the incentives for public institutions (NIH, NIMH, etc) will be to cure and prevent chronic conditions. So hopefully we will get some R&D to overcome these diseases rather than just manage them.

I believe in health care there are price declines in some areas, but increases in volume overcompensate for it. Processors and computers cost less but we are selling so many more of them that we are still spending more on IT than we were 15 years ago. Its likely the same with health care. I believe some drugs can avert the need for surgery and save money that way. But volume increases compensate for higher efficiency.

12

Either you’ll have some capital resources yourself, you’ll serve your family, or you’ll be fucked.

Own the right kinds of assets and your capital will inflate right along with inflation, and so on.

The middle class will have to either cooperate, get really clever, or go bust.

13

Are you assuming that people remain at basically the same salary throughout their lives? I don’t believe that the majority of people stagnate at a set salary and only wait for the minimum wage to increase or get a cost of living adjustment. Most people will receive promotions and salary increases over the life of their careers.

14

The problem is new recruits have to start at those entry level jobs after someone else is promoted and still have to pay for rapidly increasing premiums for education and healthcare along with higher regressive taxes.

My understanding is that early in a career people can see big growth in income. However for many people they reach a ceiling in income after a while and tend to stagnate there (ie many people do not receive fairly consistent promotions and dramatic jumps in income between 18-65, they get a few in their careers then stay roughly there). Plus new recruits need to fill those old entry level jobs anyway.

So what happens in 15 years when entry level jobs barely pay more than they do now but workers have far more debt from college and health care is unaffordable? What about 30 years from now when people need those entry level jobs?

15

People say this a lot, but I’m not convinced. Is there any evidence of this? For example, do cures for these conditions come primarily, or exclusively, from countries without private health care research? As I see it, the primary reason that we have methods to manage conditions rather than cure them is that finding cures is really difficult, and the majority of people greatly underestimate this difficulty. So they come up with conspiracy theories about drug and insurance companies to explain why there’s still no cure for cancer, or even the common cold.

I don’t think the bolded statement is true. If it were true, it would be a powerful argument against further government involvement in health care. That is, if rising costs are driven by increases in the volume of health care used, then the easiest (and perhaps only) way to decrease the price of health care would be to decrease the volume of health care. Which means that any program designed to decrease costs but not decrease volume is basically destined to fail.

16

I’m not saying there is a conspiracy to hide cures for chronic conditions, I said that the financial incentives seem to skew towards managing chronic conditions rather than curing them. A vaccine for HIV that costs $100 will not make as much money as HAART therapy which costs $10,000 a year in the US and must be taken for life. A cure for type II diabetes will not make as much money as lifelong management. I never said there was a hidden cure for cancer and the common cold.

I really don’t know what you are asking me to prove. Are you asking me to prove that financial incentives of some medical industries (namely pharmaceuticals or hospitals) are tilted towards managing chronic conditions rather than curing them (and their R&D funds will likely be invested to reflect this incentive)?

I love the internet, I referenced a chart I saw years ago and found it on google.

http://www.aafp.org/fpm/20020600/monitor_f2.gif

37% was due to increased consumer demand and newer technologies. Mandates might also be a form of new volume.

Either way, it is not an argument against increasing volume of health care since health care volume will increase anyway. The only difference is do you increase the volume of primary and preventative care or the volume of ER care because people put issues off until the last minute.

Also, like I said, other countries provide high quality care to everyone for 1/3 what we spend per capita. Some third world countries have universal health care programs that spend less than $1000 per person.

According to Peter Orszag, about $800 billion in health spending is wasted or not effective at improving health. So cutting inefficiencies would compensate for the increased volume.

17

I know the argument, but I think the intuition you’re providing is wrong. After all, the drug companies could increase their profit margins by paying their researchers minimum wage. McDonald’s could make much more money by charging $100 for every hamburger they sell. But neither of these intuitively obvious things occur. Why is your intuitive argument any different?

Provide some support for the claim that “the financial incentive for private enterprise will generally be to manage chronic conditions for long periods of time, not cure them over a short period of time” actually has detrimental effects in the real world. Do you believe that we would be better off if all medical research was done by public institutions? Can you back up this belief with any facts? For example, if private research tends to produce treatments over cures, then we might expect that countries with more public institutions for health (like Sweden or Canada) to produce more cures than countries with more private institutions (like the US). Is this the case?

That’s an interesting graph, but it doesn’t support your claim that some prices are decreasing.

18

http://www.thebody.com/content/news/art7574.html

Pharmaceutical companies likely will wait for the government to develop an effective HIV vaccine because of a lack of financial incentive to develop a vaccine in the private sector, Edmund Tramont, director of the Division of AIDS at NIH’s National Institute of Allergy and Infectious Disease, said in July 2005 during a deposition regarding an employment lawsuit, the AP/Yahoo! News reports. Tramont’s deposition in the case of former NIH employee Jonathan Fishbein was obtained recently by the Associated Press. “[W]e’re going to have an HIV vaccine,” Tramont said in the deposition, adding, “It’s not going to be made by a company. They’re dropping out like flies because there’s no real incentive for them to do it.” Therefore, he added, government agencies must spend more “time and energy” toward developing new treatments for market. If the government develops an effective vaccine, pharmaceutical companies will then “make it and sell it and make a profit” without having “to make that big investment,” Tramont said.

The International AIDS Vaccine Initiative estimates that about $682 million is spent annually on HIV/AIDS vaccine research and development, with about $100 million coming from the private sector (Solomon, AP/Yahoo! News, 12/26/05).

An unpublished internal NIH study in February 2000 of the 5 top-selling drugs in 1995 (Zantac, Zovirax, Capoten, Vasotec, and Prozac) found that 16 of the 17 key scientific papers leading to the discovery and development came from outside industry [6]. In 2004, she published The Truth About the Drug Companies: How They Deceive Us and What to Do About It.[7]

At least a third of the drugs marketed by industry leaders were discovered by universities or small biotech companies, writes Angell, but they’re sold to the public at inflated prices. She cites Taxol, the cancer drug discovered by the National Institutes of Health, but sold by Bristol-Myers Squibb for $20,000 a year, reportedly 20 times the manufacturing cost. The company agreed to pay the NIH only 0.5 percent in royalties for the drug.

The majority of the new products the industry puts out, says Angell, are “me-too” drugs, which are almost identical to current treatments but “no better than drugs already on the market to treat the same condition.” Around 75 percent of new drugs approved by the FDA are me-too drugs. They can be less effective than current drugs, but as long as they’re more effective than a placebo, they can get the regulatory green light.
My statement on spending going down in other areas was based on a Clinton internal report showing $1 in pharmaceuticals resulted in $3.50 savings in health expenses in other areas (hospitalizations, etc). I haven’t read this whole report, but they claim the issue isn’t that clear (some apparely do save money, some do not).

http://content.healthaffairs.org/cgi/reprint/19/2/92.pdf

19

The US has not been declining. The rest of the world has been catching up.

Clearly it is difficult to make any sort of predictions with any degree of certainty. But it is likely that several major trends will continue for the forseeable future and Americans need to adapt to them:
-Increased globalization
-Global warming
-Rising scarcity of fossil fuels
-An increasingly diverse population
-Growth of China and India as major powers
-Islamic fundamentalism

I think what you will continue to see is a trend towards greater urbanization. People will graduate from more rural and isolated areas to the major urbanized megalopolisis (California, the Northeast, Texas, etc) in pursuit of jobs and opportunities but at a cost of lower standards of living.

The effects on my generation (Gen X - people in their 30s and 40s) have been pretty well documented. There is a constant sense of uncertainty regarding jobs and employment. We are waiting longer (or forever) to get married, buy homes or have kids. Many spend a significant time unemployed or underemployed.

And Gen Y may have it even worse. They are graduating from being taken care of and coddled into a world where they can’t find jobs at all.

The long term effects of this would include stress, frustration, apathy, and related issues like drug and alchohol abuse, increased crime and social conflicts.
But as I said, I don’t believe that you can extrapolate this data over decades or even years. And while we’ve been hearing about the end of the middle class for decades, it hasn’t happened. Most of my classmates have found jobs and bought houses and started families.

This chart chart actually shows a general increase in real mean household income. And it has generally been increasing for nearly every income group except the bottom quartile.

So I don’t know if you can even say the middle class is being “squeezed”. I do believe that they are living in a world that is increasingly volatile economically and uncertain though.

20

I’m glad this thread got pulled back up. I got distracted by some other things.

First, Wesley Clark, thank you for posting those links.

I saw this chart on Greg Mankiw’s blog a couple days ago, and it rather support’s msmith537’s first line, “The US has not been declining. The rest of the world has been catching up.” Be careful about interpretation, though: the fact that the USA line is constant means that the US economy has been growing at the same rate as the world economy, not that the US economy is stagnating.