Striving to Stay Afloat

As an inveterate follower of the news, I keep abreast of our nation’s economy as best I can. What with the two major newspapers I subscribe to, as well as the massive plethora of details regularly presented on the Internet, there’s little of what’s happening in the world of business and enterprise to which I’m not fully apprised. Despite this, I’m not certain the information I’m receiving is as beneficial to me personally as it’s presumed to be.

A far more vital analysis of what’s truly important was cleverly illustrated by Bob Thaves in his 9/9/19 Frank & Ernest cartoon. In it, the title characters are viewing a newspaper on a corner newsstand, with the headline emblazoned “ECONOMIC DATA.” One of them is commenting: “I’m not as interested in the strength of the economy as in whether it’s on my side.”

If there’s one particular circumstance verifying the accuracy of this observation, it’s the nation’s reported unemployment rate – quite likely the single most quoted statistic measuring the health of the economy. For those of you not aware of how the U.S. Department of Labor views those persons without gainful employment, I’ll bring you up to date. If you’re including every individual without a job of any sort, then the 2017 unemployment rate calculated out to be 52.9 percent. However, this included anyone without employment, including children and infants; such an evaluation is meaningless as it tells nothing of the strength of the economy.

If we omitted everyone below the age of 16, the rate becomes 39.9 percent. This is a little more meaningful, but still counts the retired, those staying at home with the family, attending school and other valid reasons for not seeking employment. Shall we now refine our search to require that someone must actually want a job to be included? If so, then the 2017 jobless rate drops to 7.5 percent. This is referred to as the comprehensive jobless rate and as it includes every adult or adolescent without a job, but capable of and desiring work, is a realistic measurement of the unemployment rate.

We’ll now shift to the method the Federal government uses to officially report unemployment. It’s categorized as U-3 and counts only those people without employment who have actively looked for a job during the past four (4) weeks. Thus, any person going without work for four weeks and a day is no longer counted as unemployed; this certainly makes for a remarkably favorable unemployment rate.

Let’s now take a look as a man who qualifies as employed, to see how things are going in his life. His name is Todd Little and a recent newspaper article describes his plight. As a 55-year-old college graduate, and a thoroughly reliable employee, he worked steadily until spring of 2019, when his firm went out of business. Since then he’s filled several temporary jobs, but none paying a living wage. He is at this time open to any line of work and has applied for dozens of positions, but none with an adequate salary has yet been offered. His problem, like those of so many other Californians, is that wages are low while the costs of living are high. As Mr. Little mused at the end of his interview, “I wonder what happened to the middle class. Where did it go?”

A current report reveals just under 40 percent of the California population is at or near the poverty level. Distressingly, in 2017 nearly 2 million Californians ages 26 to 64 were working, but living in poverty. According to Julien Lafortune, holder of a PhD in economics from UC Berkeley and a researcher at the Public Policy Institute of California, “It’s harder and harder to keep up each year; California’s strong economy has underlying economic realities that don’t look so good.”

What Dr. Lafortune says about California – it’s harder and harder to keep up each year – is not confined to select areas. The same is true throughout the nation. The reality cannot be denied; the American middle class is, as Todd Little suggests, fading away. And who are they? As defined by the Pew Research Center, those earning 67% to 200% of the median household income, or in the range of $40,000 to $120,000. The questions deserving an answer are: Why are they fading away and what, if anything, can be done about it? I harbor a few thoughts on the subject – I’ll share them with you.

There appear to be three major factors effectively draining money from the pockets of our middle-income citizens. The first of these is the massive number of students – approximately 19.9 million in 2019 – attending universities they can’t afford, to earn degrees of no consequence. And when I say can’t afford, you must consider the average annual cost of tuition and resident costs of a public 4-year institution is $40,940. If, instead, a private school is chosen, the average price escalates to $50,900.

And if the student is led to believe a prestigious university is a must, there’s the University of Southern California at $56,225, or Columbia University priced at $59,430. But when valuing the worth of a particular course of study, the average annual salaries following graduation depend upon the degree. A few examples: Chemical Engineering $62,371 – not at all bad. Accounting $46,305 – considerably tighter. English & Literature $37,372, Language & Drama $36,252 and Social Work $31,050 – what else need I say?

Unfortunately, the only way many students can pay for such schooling is now the traditional student loan. As for its prevalence, in 2019 there were 45 million U.S. borrowers who collectively owed more than $1.5 trillion – second in amount only to the nation’s mortgage loans. Can there be any doubt as to what this diminution of money in the hands of so many citizens is doing to the number of middle class Americans?

A second factor impeding the middle class is most certainly the high cost of housing accommodations, both owned and rented. The reason for this is the abandonment by investors of less profitable alternatives. With interest returns pathetic, dividend yields less than attractive, and uncertainty in the market generally, real estate is now heavily sought after.

The ownership of residential properties with annual capitalization rates as low as two percent becomes acceptable, despite the resultant escalation in its value. Accordingly, this has priced many of the middle income earners out of the market … and with corresponding rents high and long term home appreciation denied to potential homeowners, more of the middle class disappears.

The third factor has been long in coming. It’s that with the increased capabilities of technology, more and more jobs for ordinary people cease to exist. As paperwork is shifted to the computer, many secretaries and file clerks are no longer needed. When Sketchers Shoes built its gigantic warehouse just off the 10 Freeway in Riverside County, they did not need to hire hundreds of employees. A relatively small group centrally located in the electronic control area, together with vehicles requiring neither drivers nor handlers, functioned flawlessly. And further complicating matters, if a governmental agency rules the minimum hourly wage of all employees of firms located in a community are to be raised from $10 to $15, certain tasks being performed may be transferred to Shanghai, China, where the minimum hourly rate is $3.27.

You should be aware jobs lost through technology are nothing new. During the early 19th Century Industrial Revolution, a radical faction of English textile workers engaged in destroying machinery. They said it jeopardized them in a “fraudulent and deceitful manner.” Known as the Luddites, they feared their skills of the trade would go to waste and their jobs lost.

The Luddite movement began in Nottingham and culminated in a region-wide rebellion lasting from 1811 to 1816. Mill and factory owners took to shooting protesters and eventually the movement was suppressed with legal and military force. We can only hope our current problems don’t get equally violent.

A final thought: In past centuries revolutionary advances invariably produced more jobs than were lost. Many technology enthusiasts today feel the result will be the same. If so our middle class will prosper, but I admit to having my doubts. As we’re now enmeshed as a part of the third world, I fear we must paddle hard if we’re to stay afloat.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. Al can be contacted at al@abjacobs.com.