Reality Road Check: Undecided Voters Part IV You And Your Money

In my post, Undecided Voters Part II - Politics of Numbers, we discussed the timing of the recession, the indicators of that recession and the incident which compelled it past where it might have gone to the reality of a post September 11 economy. As I noted in that posting, we had hit our economic peak somewhere around October 2000, slightly before President Bush took office. There were a number of things that contributed to it, but, as the National Bureau of Economic Research indicated, we had experienced one of the longest upward climbing economic booms in history. It was bound to come down some sooner or later based on normal economic trends.

We will be reviewing some charts that show this climb as well as historical economic trends that fairly indicate that continuous economic booms do not exist in our history and probably never will. I will also review some things that leant to this economic boom, not the least of which was "hope". "Hope" is an important factor and based on one of the most important historical factors in economic history: the fall of the USSR. This one instance made the United States the last remaining super power on the planet with the strongest economy. It also negated the possibility of nuclear holocaust at the hands of the "evil empire". "Hope" for a future of peaceful economic expansion around the globe was driving investments as not seen since post World War II.

Some might point to China as our next biggest "arch enemy" and the concern of their nuclear weapons. A potential conflict over the right of Taiwan to continue as a free and democratic country at the edge of a post Communist China (yes, "post" communist because China is edging towards capitalism even as we read here). But there is a reality that must be taken along with these concerns that make China less of a danger than many might otherwise consider: Money. Simply, China is in the middle of their own economic boom, largely dependent on trade with the free world (including the US) and global investments. Money trumps all and China is very unlikely to want to damage it's own economy with threats of war.

What about your money? Your money drives this economy. Your money is what will bring us from recession and is working now. But the consumer confidence index shows that you, the consumer, are not as confident. Why is that when economic indicators have shown that we are on the road to recovery?

"Recovery" is in the eye of the beholder. Are we recovering? Do you have money in your pocket? Go to the inner sanctum to find out about your money and why you wonder if we are "recovering".

Do you have more or less money?

Undoubtedly, there are some people reading this that know, after the tax cuts of the last three years, you actually have more money in your paycheck. Others will point out the lost jobs that they experienced that required them to take a job that paid less, even if it was $5 or $.50 less and, understandably, would say they have less in their pocket. Those that have fallen victim to "outsourcing" will point to that as a factor in their considerations for how and when and under who's administration their job loss occurred. It is only you, as the individual who can decide if you have more money in your pocket and determine if this is the sole director of your vote.

What about the country as a whole? Have we lost income or gained income?

During the debate, Senator Kerry claimed that the average household had lost over $9,000 in salary. President Bush claims that his tax breaks put more money into people's pockets, particularly the middle class.

Who is correct?

According to the National Bureau of Economic Research, economic trends indicated, even as we went into recession, your real personal income (money from salaries, interest from investments, sale of realestate, etc) steadily increased through 2001:


real personal income through 2001

The solid line represents your income during this recession period and the dotted line represents historical trends in income during all other economic recessions.

Why would your income increase, but the country head into recession with job losses as per my post "The Politics of Numbers"? Largely because of two things:

1. Effects of economic down turns compared to income have a verifiable lag time.
   
2. Job losses in 2001 were extensive in the first few months and had tapered off considerably during June, July and August. August showing none. Which means we were set to have one of the shortest recessions in history.

In short, had all economic trends continued as they were, you would have felt very little impact in your pocket. But, as I pointed out in "Politics of Numbers", something else happened entirely. September 11, 2001.

This was not just a human tragedy or even a national tragedy. It was an economic tragedy as well. And it was timed with near perfection.

What does September 11 and Al-Qaida have to do with our financial situation?

As I pointed out in "Politics of Numbers", the economic impact was felt immediately. What might have been a slow game of leap frog back to a growing economy, was exacerbated by immediate unemployment of over 1.4 million people within the first four months after the tragedy.

And you felt it even as the president urged us to go shopping, continue our lives as normal and try to not let it effect us or the economy. In reality, it would be hard for many not to feel these effects. But, it is actually sound advice that we will discuss a little later.

What about Al-Qaida and finances? Did they plan to have this kind of impact or was it incidental to the entire tragedy?

The first thing that you must understand about Osama bin Laden and the advisors that work with him is that they are not stupid people. As much as we might like to imagine them cowering in a cave eating goat cheese and cooking over a campfire, it would be highly disingenuous of anyone to believe that they do not understand finances and impact at least as well as you do. They did not attack the World Trade Centers because they were the tallest buildings in America. They did not attack them because they thought they would get the highest number of casualties (in fact, on a video later released, Osama is heard laughing with amazement over the amount of damage that was actually inflicted). The did not attack them because they were symbols of American ingenuity or freedom.

The attack was orchestrated specifically because these two towers represented the epicenter of American finance and economy. The purpose was to inflict as much damage on the US economy as possible in hopes of forcing just such an economic disaster and, hopefully, force the US to withdraw from some of it's global endeavors.

And what about the timing?

As noted, Osama bin Laden and his top lieutenants were not scruffy goat herders without education or understanding of finance. They understood it perfectly well and had been using it to invest money and collect dividends by which to support their own endeavors and launder money. They understood perfectly well the condition of the US economy. The plan had been in place for nearly five years and, yet, had not been unleashed. We could speculate about operational issues and training, etc, but, if we look at the last years of the Clinton administration and the financial indicators, we can see that the US economy was in a "boom". Certainly, an attack would have set us back, but would not have had the impact on a growing economy that it would have on an economy in recession.

With the recovery of August 2001 looming, it was now or never for Al-Qaida to strike and they did. According to some reports, Sheik Khalid had actually tried to get it off the ground in April when the recession had first been called, but that had been postponed due to operational issues.

So, what happened to your money, post September 11?

Almost immediately, you felt it in the pocket book. Within a few months, prices for commodities, dairy, food, clothing and gasoline began to see an increase in cost. Almost immediately, 1.4 million people were unemployed and were desperately searching for any job to sustain them. In which case, there are two factors that effected your money and they are based on "supply and demand" rules of economy:

1. 1.4 million people searching for a job along with the original 7 million unemployed at the time
   
2. Available jobs paid less in salary

The reality is, with so many people looking for a job, employers no longer had to offer top salaries and benefits to attract good employees. The employees were now competing at a rate of 20 to 1 for a position and the employers had the upper hand. The reality is, because so many companies were effected by September 11 and the recession, they no longer had top management positions available or many jobs at all. What was left was lower paying wages which you competed for.

This had a direct impact on your wage earning per family:


median household Income 1967 2003

According to these statistics, you, the average family, went from an average household income of $45,000 in 2000 to approximately $43,500. Losing approximately $1500 per year per household.

In answer to our earlier question, was Mr. Kerry correct when he said that the average household had lost nearly $9000 in yearly income? The answer is no although this graph is an "average" so that means that, statistically, someone could have lost as much as $9000 in yearly income. But that would mean, because this is an average, that others would have gained nearly $7500 per year in income. Leaving the aggregated amount of -$1500. However, there are no statistics that support this conclusion, therefore, we must assume that Mr. Kerry's claim is incorrect.

Is President Bush correct when he claims that he has put more money in your pocket?

The answer is "nuanced" as Mr. Kerry likes to say.

The numbers don't lie. You, on average, have less income today then you did in 2000. So, was the president lying? Not exactly. For those who did not lose a job or income, most of you would have realized an additional amount of "take home pay" in your check. This is due to the re-alignment of tax levels. On average, you, whose salary was not directly impacted, saw approximately a 2% increase in your take home pay. In addition, if you have are married, you received approximately 1% additional take home pay for relief from the "marriage penalty" and if you have children, another 1% in take home pay for the child credit. Some of which were only first realized when you did your taxes last year and received your refund check (or paid less to the IRS).

In short, most of you realized an additional 4% in cash from your paycheck.

For those who were impacted by the loss of a job and/or the taking of a lesser salary, your total income was effected, but you probably did not note the additional take home pay in your check because it was less than you were used to making after all.

So, the answer is, yes you have more take home pay, but, no, some of you are making less salary than previously. And, no, we did not lose an average of $9000 per household.

What else do these numbers tell us? Are we recovering?


median household Income 1967 2003

If you look at the graph and it's trending closely, you will note that in every recession period, once the downward trend in income leveled off, it never continues to go down, but does immediately begin to grow again. If you look at the end of the graph where it shows the 2002-2003 period, you will also note that household income had leveled off after it's loss. We have no complete numbers for 2004, but we may make conjectures based on known data.

1. According to the research in "Politics of Numbers", unemployment continues to steadily decrease. Sometimes faster and slower than others.
   
2. Average monthly job gain: 103,000.
   
3. GDP is steadily rising since it's nearly all time low of .8% in 2001 to appx. 3.7% in 2004 (to date).
   
4. Average hourly wages have increased from $15.55 in May 2004 to $15.77 in August 2004. This up from average hourly wages of $14.40 in September of 2001
   

So why then is consumer confidence down for a second month in a row?


consumer confidence Index 2004

There are a few reasons that persist:

1. Insecurity about continuing economic growth. The last three years have seen some ups and downs based on the financial data and many people are hesitant to believe that the upward trend will continue.
   
2. Unemployment continues to be a net loss of jobs (-585,000) which means there is still less money for consumers to spend
   
3. Cost of oil continues to rise, forcing the cost of gasoline to increase exponentially.
   
4. Increase in gasoline prices have caused an increase in cost of delivery of goods and services which means an increase in cost of living.
   
5. Continued fighting in Iraq and other hot situations continue to worry consumers and investors about the future (Iran, North Korea).

What then will the future hold and who best will guide it?

Frankly, there are no guarantees. Any number of factors can effect the economy. The truth is, if we are looking to climb out of this insecure economy in the next 6 months, we may be setting our expectations too high and, having them dashed, will see another leap frog effect on consumer confidence and improved economy. Neither candidate can actually control the economy or how many jobs are created. However, it is their policies that will effect those that create jobs and whether you have money in your pocket from tax reduction.

If we return to the graph above, the width of the blue bar indicates the length of the recession. For instance, the recession of 1981 last until mid 1982. Nearly one and a half years before the economy recovered and then, household income did not start increasing until six months after the recession began to recede or until 1983. After the recession of 1990, household income did not start increasing until three years later, 1993 and did not return to it's previous levels until 1995.

In our current situation, the recession appears to have ended by 2002. In 2003, income loss had leveled off and, according to current trends, will increase for 2004 eventually coming equal with pre-recession income in 2005. If no other financial issues arise, it will continue on past the pre-recession levels.

In short, barring any disasters, you will soon return to your original income and then some.

Is this sustainable?

Again, there are too many factors to accurately project what the economy will do, but today's numbers indicate we are in a recovery. Some things, regardless of who is in office, are unlikely to change:

1. We will continue in Iraq until it is pacified and the new government is elected for at least another year. Neither candidate is likely to withdraw or have a plan to withdraw any time before that. Continuing violence has an impact on people's buying habits. Only the election of 2005 and continued offenses against the terrorists will tell the outcome.
   
2. Oil prices will eventually top out, however, do not look for a fall in price equal to the increase. Countries like China and South Korea having growing populations and economy and require more oil. This is supply and demand economics and, as long as the demand is greater than the supply, prices of oil will not decrease significantly unless other countries can increase their output and few, besides Saudi Arabia, are willing to do so.

But, based on trends, we are recovering and, barring another attack, we will continue to do so. From this perspective, President Bush's economic package of tax cuts seemed to have worked as he indicated and is pulling us from recession. Some might say that this was nothing less than Herculean considering the effects of 9/11. They may be right in this case.

The question must be who will be able to insure the future. We will review each candidates proposals and on the next round of "Politics of Numbers".

Reference Materials
US Department: Bureau of Labor Statistics
Factcheck.org: Bogus Claims on Job Losses
Factcheck.org: Who received tax relief?
National Bureau of Economic Research
Income, Poverty and Health Insurance Index: 2003