This article was originally published in February of 2020, just before the Covid-19 pandemic hit with a vengeance. Though our focus of late has been on more immediate concerns, the fundamental issues discussed in here are perhaps even more relevant now than they were 7 months ago.
Statistics are like lawyers. You can find one to support your position no matter how ridiculous.
As the final part of an ongoing series on “affordability,” this article looks into the biggest elephant in the room: statistics that have been abused by every federal and state administration for the past 40 years, about the cost of living.
What the heck is going on?
Trying to apply the rules of finance to the world, today, is like trying to apply the rule of law to Bill Barr’s Justice Department. It makes your head hurt because it’s disconnected from reality.
Tesla, a company that has annual earnings of about $24.8 billion is “valued” by the market as a $145 billion company, even though it does not make a profit. Meanwhile, General Motors has annual revenues of about $137 billion and made $8.1 billion net profit and is valued by the market as a $49.6 billion company. Granted, Tesla’s growth rate is currently projected to be three times that of GM’s, but when Tesla gets as big as GM, it’s not going to be growing that fast, anymore. Tesla is presently valued at more than Honda, Ford, and General Motors, combined.
This defies common sense. What ever happened to the efficient market theory?
Now consider that the U.S. Federal Reserve is incessantly talking about easing interest rates and being ready to flood the markets with cash (quantitative easing) at the slightest sign of economic “weakness,” at a time when all the major stock market averages are making all-time highs, almost dialy.
This has never happened before in the history of modern finance. And, it is enabling bad actors in the markets, propping up insolvent, “zombie” companies that have no business continuing to exist, and encouraging wild speculation in stock and bond markets around the world.
What has also never happened is that banks have been tightening lending standards for individuals even as the federal government is flooding them with cash. This is leading to the public increasing savings from their paychecks, even though interest rates are going down.
While pundits spin elaborate theories about all of this, one thing is glaringly obvious. This represents a climate of uncertainty and fear at a time when the government is telling us there’s nothing to fear.
Someone has it wrong.
As fascinating as all this might be, you may be asking, what does any of this have to do with “affordability” and the average person being able to afford to live a middle class lifestyle?
The answer is it’s all symptomatic of an economy that our government has been Jerry-rigging for decades to persuade the public into accepting what might be called “modern indentured servitude:” a life that is the equivalent of being a “debt mule” to feed an economic system based on a lust for unlimited consumption, that rewards those who control assets over those who contribute labor.
It’s a system in which stock market valuations are now directly tied to many other major systemic financial problems, such as unfunded pension obligations that stand to bankrupt more and more American cities in the next major downturn. It’s a system that is increasingly brittle.
Perhaps that is what the Fed is so worried about.
Affordability and personal bankruptcies
Amidst our record-breaking "prosperity" recent Harvard University Study reports that
“Medical expenses account for 62% of bankruptcies. Out of these, 78% of bankruptcy filers had medical insurance. With rising health coverage costs and co-pays, a serious hospitalization can cause severe debt. Once savings has been exhausted, the only option left to deal with medical bills may be bankruptcy.”
The February 14, 2020 edition, the Guardian notes that
“Millions of Americans can’t afford the prescription drugs they require to survive, forcing them into bankruptcy, trips to Mexico or cutting off utilities.”
In a recent article published in the Atlantic, The Great Affordability Crisis Breaking America, author Annie Lowrey contends that our country's decreasing affordability is a consequence of the aftermath of the 2008 financial crisis.
Regarding the past ten years, she writes,
“This crisis involved not just what families earned but the other half of the ledger, too—how they spent their earnings. In one of the best decades the American economy [2008 to 2018] has ever recorded, families were bled dry by landlords, hospital administrators, university bursars, and child-care centers. For millions, a roaring economy felt precarious or downright terrible.
“Viewing the economy through a cost-of-living paradigm helps explain why roughly two in five American adults would struggle to come up with $400 in an emergency so many years after the Great Recession ended. It helps explain why one in five adults is unable to pay the current month’s bills in full. It demonstrates why a surprise furnace-repair bill, parking ticket, court fee, or medical expense remains ruinous for so many American families, despite all the wealth this country has generated. Fully one in three households is classified as “financially fragile.”
There’s little doubt that she is correct about some of the reasons for rising wealth inequality. And much of this has been used to reinforce the political arguments behind the removal of local control of planning and zoning laws in California. Yet, as compelling as her article often is, it devolves into a superficial analysis that doesn’t really get to the “why” of it all.
We need to ask ourselves, how can it be that according to private sector reporting, almost half of our households are living on the edge (have only $400 in emergency savings), when according to federal government statistics, wages are going up, unemployment is at an all-time low, and the number of families living in poverty is going down.
How does one reconcile claims that U.S. families are steadily being lifted out of poverty (from roughly 20% in 1963 to 12% today, according to the U.S. Census, and 20% to as low as 3% by conservative think tanks), while simple inflation-adjusted economic analysis shows that the average wage-earner is making less than they did 40 years ago, because inflation has been steadily eating away at the value of those earnings?
This suggests that the “rich man poor man” divide is not as simple as being just about education, lack of equal opportunity, tax laws, race, or other issues. Perhaps, it’s more deeply embedded in the statistical data upon which our financial and fiscal policies are based.
What if, over the past 40 years, the data that these claims are based on are the result of intentional manipulation of financial facts to make things look better than they are, to the point that the statistics themselves are now a major part of the affordability problem?
If this is true, it would explain a great deal about the affordability crisis and tell us that the U.S. economy and its prosperity are not anywhere near as healthy as everyone wants you to believe.
What is "poverty?"
Since 2012, The Robin hood Foundation, a New York-based nonprofit, has been working with the Columbia University Center on Poverty and Social Policy to assess poverty in New York City. Their findings have been that although one out of five people experienced poverty in 2018, one in three experienced what they called “material hardship.” This means that they could not afford necessities, such as food, rent, or medical care.
Studies like these suggest that across the country, almost half of American families fall into this “on the edge of poverty” category, even though according to government statistical measures, they are doing fine.
The government’s published statistics, based on the U.S. Census Bureau’s estimates, say that the U.S. poverty rate is only 12.3% (39.7 million families).
For 2020, the U.S. Government has set the poverty level for a household of four as an annual income of $26,200 ($12,760 for an individual). That equates to making $13.01 per hour, working a 40 hour work week for a year. It means that any family making more than that is not, statistically, poor (and more importantly, ineligible for a raise or certain types of government assistance).
Does anyone honestly believe that a family of four making $27,000 per year (officially, not in poverty) can even survive on that annual income, particularly if they live in any of our country’s major metropolitan areas?
The truth is that the government wants to keep the annual income threshold for poverty as low as possible. It allows them to pay out less in poverty assistance programs, make the federal deficit look lower, and a lot more.
When questioned about why the official poverty level is set so low, the government’s argument is that the poverty figures are backed up by decades of data that comprise the Consumer Price Index (CPI).
The Federal Reserve keeps detailed records of annual inflation rates dating back more than one hundred years, which it uses to make its case that they are faithfully keeping up with inflation to help American families make ends meet. The federal poverty thresholds are updated every year to reflect changes in the annual average CPI.
The CPI is a statistical inflation calculation that drives numerous public benefits payments: everything from social security payments to public assistance programs, and contractual wage and benefit increases for a wide variety of employees, public and private.
According to the CPI, in 1980, the U.S. Government’s poverty threshold for a non-farm family of four persons was $8,414. Using the 2020 number of $26,200, this means the U.S. Government believes that based on the CPI, the costs of living have only risen approximately 210% since 1980.
Does anyone actually believe that the cost of necessities has only risen 210% since 1980?
A common sense analysis of the data indicates that the CPI has been under-calculating the overall cost of living by a lot for a very long time. Let’s consider some common sense examples.
Family Expenses Compared to CPI 1980 to 2020
When it comes to housing affordability, a lot of people will find it surprising that despite all the noise being made by the media and YIMBY housing advocates about the “housing crisis,” one of the only things that actually remains close to the U.S. Government’s guidelines (210% inflation since 1980) is the cost of rental housing. And yes, even in San Francisco.
Between 1980 and 2020, the average cost of renting a 2 bedroom apartment in San Francisco went up about 221%: from about $1,400 per month to $4,500 per month, today. And it’s actually been going down in the past 12 months.
However, the cost of housing ownership is a completely different story. The average cost of purchasing a home in San Francisco in 1980 was roughly $175,000. Today, it’s closer to $1.3 million.
That’s approximately 750% of the original cost.
Consider that in a major job center like San Francisco or New York City, where the average two bedroom apartment rent is about $4,500 per month, the annual housing expenditure of a family of four living equates to earning $54,000 per year in after-tax income.
This means that per Federal Guidelines a family of four that is not statistically in poverty, making $27,000 per year, needs to spend 200% of their total annual income just on rent! Even if they lived in the lowest rental cost neighborhood in all of San Francisco, downtown, with the average monthly rent of $2,932 per month ($35,184 per year), they'd need to spend 150% of their annual income just for housing.
How is that family of four not magnitudes beyond being poor? And how do they pay for anything else they need in their lives?
It's true, there's nothing that says the government has to ensure that everyone can live in San Francisco. But clearly, our government's methodologies to arrive at the inflation in housing costs are nonsensical.
Looking at healthcare, in 1980, according to a study by the Kaiser Family Foundation, the average annual healthcare cost (using Medicare expenditures as a comparative measure) was about $1,108 per person. Today it’s close to $12,800.
That’s an increase of over 1,000%. And that doesn’t look at insurance costs, which are going even faster.
“In 2017, U.S. health care costs were $3.5 trillion. That makes health care one of the country's largest industries. It equals 17.9% of gross domestic product. In comparison, health care cost $27.2 billion in 1960, just 5% of GDP. That translates to an annual health care cost of $10,739 per person in 2017 versus just $146 per person in 1960. Health care costs have risen faster than the average annual income.”
In 1980, according to the Department of Education, the average annual cost of tuition, room and board, and fees at a four-year post-secondary institution was $9,438. Today, that cost is approximately $36,000 per year.
That’s an increase of 280%, not too much more than the CPI assumptions.
However, at the more desirable colleges and universities, the annual cost is close to double that amount, (an increase of about 660%), which helps explain why total student debt has reached almost $1.5 trillion.
So, if the truth about the rise in the cost of living is so much greater than the government says it is, why is the CPI so far off?
The CPI re-examined
Since the 1970s there has been nothing more feared by the government than inflation. That last time inflation reared its ugly head it took the Federal Reserve raising the prime rate to 18% to bring it to a halt. But, the powers-that-be have since discovered that no inflation is also a bad thing, because inflation serves a valuable “political” purpose: it can hide a lot of bad public policy and bad financial decisions, politically motivated giveaways, and bailouts to buy voter support.
As a result, the CPI has become highly politicized and has been tinkered with over the past 40 years to make things appear to be better than they are. This has been used to justify tax cuts for the wealthy, pile new taxes and fees on the middle class, reduce public assistance programs, balance the budget, and whatever else lawmakers need.
In a private study by Cornerstone Wealth Management, in 2011, it notes that starting in 1983, the government significantly changed the way it calculates CPI. And the government has continued to make major changes since that time, such as comparing their estimates of basic costs of necessities such as utilities less often (on an 8 year cycle versus a 4 year cycle), changing how they measure healthcare costs to follow government bureaucrat’s estimates (the National Association of Insurance Commissioners) rather than actual pricing and a long list of other changes.
In the study, examining the period from 1983 to 2011, the authors note,
“John Williams at Shadow Government Statistics estimates that if we calculated inflation today the same way we did during Carter’s administration, CPI would be closer to 10% rather than the 1.5% calculated as of 12/31/10 by the government.”
That’s a big difference. Just three of the CPI changes they considered in this study were:
(1) The removal of actual home prices and the use of something called the “owner’s equivalent rent" (a government estimate), instead;
(2) The introduction of something called “Hedonics,” which stopped using the actual costs of goods and instead used a formula to estimate a product’s value related to technological advances (i.e., per Moore’s Law), which dramatically lowered the "costs" of many 21st century necessities: smartphones, computers, internet connections, etc.; and
(3) The introduction of the concept of “product substitutions,” which is a guesstimated assumption that as the price of products goes up, consumers will simply substitute the thing they need with something cheaper.
Tell me, how does that work with nutritious food and clothing and prescription medicine for your kids?
This trend to use formulas and unsubstantiated assumptions instead of actual prices has now moved the CPI into the realm of wishful thinking and politicized goal fulfillment, rather than being a real gauge of inflation.
But, as you can see, these “new and improved” methods have huge political benefits if you want to keep government costs down and keep the public thinking that everything is fine, so they’ll pay their taxes and vote for new bond measures, and keep believing that “prosperity” is just around the corner if they just keep consuming more and keep taking on more and more unsustainable debt, the way the government itself is doing.
Perhaps, the most absurd abuse of the CPI is what the Federal Reserve is doing right now: claiming that the CPI, which they know full well is being “managed” to appear much lower than it actually is, represents an excuse to continue to rain money on financial markets under the premise that inflation actually needs to be higher!
This means that while the government is working to artificially decrease the CPI, to keep it far below actual costs to cook the books, the Federal Reserve wants to cut interest rates to increase inflation above that artificially low level.
This is insanity.
Meanwhile, 70 millions baby boomers heading into retirement are finding that the savings that they were told to accumulate all their lives, are worthless: $1 million in a "safe" savings account pays out $10,000 per year: no wonder personal debt is at an all time high.
In the hands of politicians, the CPI, the most closely watched measure of inflation, has become the tool of choice to manipulate the appearance of inflation. They have done this to the point that what CPI now “measures,” if you can even call it that, bears little resemblance to what it measured 40 years ago.
This leads one to wonder just how much current inflation is being understated.
As noted by Michael Lebowitz and Lance Roberts in their analysis, MMT Sounds Great In Theory…But
"Prior to 1998, inflation was measured on a basket of goods. However,
during the Clinton Administration, the Boskin Commission was brought in
to recalculate how inflation was measured. Their objective was simple –
lower the rate of inflation to reduce the amount of money being paid out.
"Since then, inflation measures have been tortured, mangled,
and abused to the point where it scarcely equates to the inflation that
consumers deal with in reality.
This, of course, has had a profound impact on how we measure profits, success, growth, entitlements, public programs, the “correct” level of interest rates, and affordability. And not for the better.
The federal government’s intentional perversion of CPI promotes a systemic mismatch between what taxpayers pay into benefits programs, such as Medicare, and what the government pays out to taxpayers as benefits, such as Social Security. For example, this year’s social security benefits will rise by just 1.6%, based on CPI, while the cost of Medicare Part B insurance that the government charges taxpayers will rise by 6.7%.
Heads they win, tails you lose.
This may answer the Tesla valuation conundrum. Ironically, by manipulating the CPI to mask real inflation changes in every aspect of the real world, it’s possible that, today, the valuations on the major stock exchanges may be the only thing that reflecting rapidly rising inflation.
All this is being subsidized by the government's relentless debauching of our currency. The money supply is currently growing not because of economic growth and demand (as it should) but simply due to the demand for money to speculate, do stock buy-backs, and a long list of other "non-productive," capital wasting uses, which is a whole other story.
All this explains why, amidst all our supposed “record-breaking prosperity,” the cost living for middle class families is so out of whack with what the government is assuring us it is.
The cold hard facts
If the government were to come clean about the real costs of living, the impacts would result in the biggest financial earthquake we’ve ever seen. And kicking that can down the road with endless money printing (quantitative easing), endless manipulation of data, pushing interest rates to move into negative territory, and other such shenanigans will only ensure that the magnitude of that earthquake will someday be greater.
Today, decreasing affordability and the simultaneous reductions in public services are a national problem. And this is not limited to high-priced cities. The cold hard facts are that more and more American families are falling further and further into unacknowledged poverty.
This might explain another troubling statistic.
While everyone is arguing about the need for affordable housing, hundreds of towns and cities across the country are shrinking in population. People are leaving and these towns and cities are actively tearing down housing.
Even though it is more expensive for residents to move to and live in a major metropolitan area, even after adjustments relative to wages paid, this phenomena is happening because in these cities, there is no longer enough critical mass of wealth and no longer a thriving middle class to create jobs.
Our nation’s “affordability crisis” is the direct result of a hollowing out of our society, facilitated and under-written by 40 years of the Big Con: a statistical lie that allows the government to increase taxes, while reducing the benefits and services, and declare that we are witnessing increasing prosperity using an accounting sleight of hand.
 This includes public services to treat the sick, the mentally ill, substance abusers, etc.
Bob Silvestri is a Mill Valley resident and the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization funded only by individuals in Marin and the San Francisco Bay Area. Please consider DONATING TO CVP to enable us to continue to work on behalf of Marin residents.