The Globe and Mail
October 18, 2011
It is a profound and enduring mystery: How could an ordinary family in the 1950s buy a home, a car and all the latest labour-saving devices and still sock away some significant savings in government bonds – all on a single income? Yes, houses were smaller. And, yes, taxes were lower. But these factors don’t explain why an ordinary family now needs two full-time incomes to make ends meet, even as it goes deeper into debt. What happened?
The question arises again from a sobering Wall Street Journal report the other day. Citing 2010 U.S. census data, the paper reported that U.S. median household incomes have fallen by 7 per cent since 2000 – and aren’t expected to make up the lost ground any time in the next decade. This means that, by 2020, American households will have lived on a real-dollar income treadmill for (almost) an entire generation.
In itself, this isn’t quite as gloomy as it sounds. U.S. median household income remains one of the highest in the world. Yet another decade of stagnant incomes, however, does add to the mystery surrounding the abrupt demise of the single-income household. For the fact is that real-dollar household incomes stopped rising in the United States decades ago. Indeed, by 2020, 45 years will have passed without a sustained real-dollar increase. U.S. census data show that household income rose year by year from 1950 through 1975 – when the increases abruptly stopped.
Expressed in year-2000 real dollars, here’s the progression in approximate, rounded numbers: 1950, household income of $25,000; 1955, $28,000; 1960, $35,000; 1965, $37,000; 1970, $40,000; 1975: $39,000 – the first decline.
Since 1975, household incomes alternatively increased slightly and decreased slightly – but didn’t exceed $40,000 again until 2000, the year of the dot.com bubble. Here’s the post-1975 progression: 1980, $38,000; 1985, $38,000; 1990, $40,000; 1995, $39,000; 2000, $42,000. And now we have another decline, a decade later, as reported by The Wall Street Journal – taking median household income back, in year-2000 dollars, to roughly $40,000, the income level first achieved in 1975.
Americans (and Canadians, too) have forgotten what it’s like to live in an economy of actual, annual real-dollar increases in household income. By 1950, real-dollar household incomes in the U.S. had risen by 178 per cent since 1936, had increased sixfold since 1901. Wages had risen to real-dollar $1.59 an hour from 58 cents an hour in 1936. The percentage of families that owned their own homes: 50. The percentage that owned a car: 60. The percentage that lived on a single income: 70.
Expressed in 1950 dollars, U.S. median household income in 1950 was $4,237. Expenditures came to $3,808. Savings came to $429, or 10 per cent of income. The average new-house price was roughly $7,500 – or less than 200 per cent of income.
By 1975, however, it took 300 per cent of median household incomes to buy a house; by 2005, 470 per cent. (With house prices battered by recession, it now takes 360 per cent.) So what happened in the early 1970s? The U.S. continued to record rising real-dollar productivity and rising real-dollar GDP. But real-dollar household incomes stalled. Various explanations have been advanced. Some economists, for example, have suggested that 1975 marked the beginning of the transition to a Sino-American global economy. But one radical thesis is more persuasive these days: president Richard Nixon’s decision in 1971 to end the U.S. dollar’s last link to the gold standard.
Mr. Nixon’s embrace of paper money, says Llewellyn Rockwell Jr. (founder of the Ludwig von Mises Institute and onetime congressional chief of staff for Ron Paul, the libertarian candidate for the Republic presidential nomination), sabotaged “the great American wealth-building machine.”
Mr. Nixon took the country off gold so that it could pay off debt with inflation, Mr. Rockwell says. In doing so, he wiped out people’s savings and devastated the capital base of the economy. “No longer,” he says, “can one generation of Americans expect to live a better life than the previous one.”
By this thesis, the second income in the two-income household provided “an escape hatch” that prolonged the American dream for another generation. In the end, it took two salaries to equal the purchasing power of one. The mystery of the demise of single-income household sustenance may not yet be solved but we do have a suspect that looks as guilty as sin.