The Leveraged American Dream

Having grown accustomed to expecting an ever-increasing improvement in their standard of living, Americans are understandingly concerned about today’s lingering recession (an impending depression, really). But is it true that until now each American generation was materially and qualitatively better off than the previous one? The stats tell a different story.

In 1950, the average yearly income of a non-union unskilled American worker, was $2,700. Inflation adjusted in 2010 dollars (9.15 to 1), that was the equivalent of $24,705, about the same as the $25,000 the average unskilled entry-level American worker earns today. The 1950 worker, however, was relatively much richer. He could buy a brand new Ford (again in 2010 dollars) for $12,000, a house for $40,000, go to the doctor, or have the doctor come to him, for $30 a visit, and send his kid to a private university for $6,000 a year. Much of those costs he could fully cover out pocket by saving or working overtime, including the 20% - to 40% down-payment required for the house mortgage. If he was married with children, he could easily support his family without his wife having to work outside the home.

His counterpart today could not possibly buy a new car, a house, get proper health care, or send his kid to college without incurring an onerous debt, and that provided that he had a high enough credit score to get a loan, or else mortgage everything he owned, at the risk of going bankrupt if he lost his job, as it is happening as we speak to many like him If he was married with children, his wife would have to work full-time outside the home just to make ends meet.

The situation for higher earners today may not be quite as bad, but compared to their 1950 counterparts it’s not that good, either. Sure, many folks today have two or more cars in the driveway of their $400K house, a speed boat in the garage, stainless steel kitchen appliances, and state of the art electronic equipment. But it’s their bank and credit card companies, not them, that own most the stuff. They are just borrowing it, and at a steep price. At 4.5% interest for a 30-year mortgage loan, more the half the amount paid for that $400K home would be for interest alone, some of which may be deducted from Federal taxes for now, as the law on interest deductions is provisional. If some fiscal conservative politicos get their way, no deductions would be allowed at all. To entertain the illusion that they have achieved the American dream most Americans, at all social and economic levels, have become mired in debt up to their eyeballs. Parents who worry that their children’s future generation might be condemned to standard of living lower than theirs, should consider that they really are no better off than their own parents and grandparents. The progression they believed in could well turn out to be a veiled regression.