You Guys Should Enjoy This- Howard Davidowitz Says Americans Going Downmarket

[Alan]

When you outsource your manufactoring base a decade later you outsource your quality of life.

Happens every time.

I don't believe this is true. In the 70's and 80's the UK lost most of its manufacturing base - Cars, Steel, Ship Building, Coal Mining all gone, but the economy thrived in the 90's and quality of life has not suffered.

 

[Grep]

I don't believe this is true. In the 70's and 80's the UK lost most of its manufacturing base - Cars, Steel, Ship Building, Coal Mining all gone, but the economy thrived in the 90's and quality of life has not suffered.

Hmm, wasn't all that substantially replaced by their becoming (even more of) a financial capitol of the world, complete with a real-estate bubble that made the U.S. bubble look penny-ante?

 

[Rustic23]

Pundits, and others that write articles, are real good at predicting the continuation of a current trend. When things are good, things are going to get better, when housing prices are climbing, the are going to even go higher, the stock market will be 15,000 by the end of 2008, and below 6000 by the end of 2009!

If any of them were really good they would be really rich, retired, and writing on this board for free!

 

[Koolau]

Interesting discussion.

I've thought for many years that the upward spiral of the standard of living would have to come to an end or at least slow down. Neither of those possibilities bothers me too much. I can adjust to a gradual shift. What is frightening is the "collapse" of our standard of living which may be in the works. When the net lenders decide to stop lending, the party will truly be over. Then, we might find ourselves back in "the good old days". Except they weren't all that good - and it will be difficult to adjust.

Since the majority of posters so far seem to believe we are at the end of an era (post WWII boom or bubble) do we have strategies to deal with this scenario? I have built considerable slack into my FIRE plan, but if the whole game has changed, I'm not sure there are any obvious moves. We don't even know if we're headed for deflation or inflation in the future. Makes planning problematic, especially for those of us who've already committed to retirement.

I'm pessimistic by nature, but it sounds like I'm not the only one at this point.

 

[ziggy29]

Since the majority of posters so far seem to believe we are at the end of an era (post WWII boom or bubble) do we have strategies to deal with this scenario? I have built considerable slack into my FIRE plan, but if the whole game has changed, I'm not sure there are any obvious moves.

I don't think the whole game has changed. I just think expectations have to be reset. The things that have historically been the right thing to do -- working hard, investing wisely and aggressively (age appropriate), and a simple LBYM lifestyle -- will continue to be the best way to secure your financial future, but I think the expected payout will be a bit lower.

 

[Alan]

Hmm, wasn't all that substantially replaced by their becoming (even more of) a financial capitol of the world, complete with a real-estate bubble that made the U.S. bubble look penny-ante?

Absolutely agree, that disputes the statement

When you outsource your manufactoring base a decade later you outsource your quality of life.

Happens every time.

Accepting the fact that the loss of manufacturing is a sure thing to losing your quality of life is not the attitude that made America great.

 

[Meadbh]

I have no evidence, but I suspect our *real* standard of living -- inflation-adjusted and without including borrowed prosperity -- has mostly been falling for at least 20 years and maybe longer.

Another factor contributing to a fall in the standard of living was the fact that it took two salaries rather than one for families to afford the material things that Americans and others began to take for granted. As the vicious cycle took hold, then came the debt...

When I first went to live in the US (from Europe) many years ago, I found the conspicuous consumption very, well, conspircuous. At the time it did occur to me that it felt like the Roman Empire, and I mused whether it would be subject to the same fate.

 

[Dawg52]

As I mentioned in another post we saw similar predictions after 9/11 - it didn't happen.

Permanent changes will depend upon the length and depth of this recession.

I don't thing it will change much.

Once the recession is over we will see stories about Americans spending again.

I agree. Spending will be reduced as long as we have a bad recession. And that may be for a long long time. But when ever we do get out of this thing, spending will pick up again. BTW, I haven't cut my spending. If I did, I would have to disconnect my electricity. Certainly not cut on golf.

 

[haha]

Don't you think that spending may be restricted for a good while at least not by what consumers would like to do, but by what lenders and asset prices will allow them to do?

I really don't think that many people will ever go back to old time frugality (except of course those on this board) but they may be forced by circumstance to throttle back, even after employment picks up again.

And retirees may be premanently constrained. I think it is possible that many retirements that began around 1998-99-2000 may be busted already. Not because the losses have been or will necessarily be greater than ever before, but because 4% of an outrageously overvalued portfolio is just too much to draw over time.

Ha

 

[unclemick]

"Worst Is Yet to Come" Americans' Standard of Living Permanently Changed: Tech Ticker, Yahoo! Finance

Saw it. ? Cheap Bastardhood - with panache.

heh heh heh -

 

[Gone4Good]

Those who borrowed a higher standard of living than they could afford will see their quality of life decline. But it is wrong to extrapolate that idea too broadly, as many tend to do. U.S. wealth isn't a mirage. It is a function of worker productivity where the U.S. still ranks #1. And hardly resting on our laurels, the gap between the U.S. and the rest of the developed world has actually been growing in recent years.

the report also shows that the productivity gap between the US and most other developed economies continued to widen. The acceleration of productivity growth in the US has outpaced that of many other developed economies: With US$ 63,885 of value added per person employed in 2006, the United States was followed at a considerable distance by Ireland (US$ 55,986), Luxembourg (US$ 55,641), Belgium (US$ 55,235) and France (US$ 54,609).

New ILO report says US leads the world in labour productivity, some regions are catching up, most lag behind [Press releases]

What's more, standards of living aren't a zero sum game. It isn't true, despite what seems widely assumed, that if developing countries improve their standard of living than ours necessarily needs to decline. As India and China, and elsewhere become more productive, their standard of living increases, and the world becomes richer in aggregate.

 

[ziggy29]

What's more, standards of living aren't a zero sum game. It isn't true, despite what seems widely assumed, that if developing countries improve their standard of living than ours necessarily needs to decline. As India and China, and elsewhere become more productive, their standard of living increases, and the world becomes richer in aggregate.

I agree, which is part of the reason I believe protectionism would be a mistake. When India and China rise, it may put a damper on our growth, but in the end if they gain $10 and we lose $1 ultimately the world economy is $9 richer.

 

[Gone4Good]

Another factor contributing to a fall in the standard of living was the fact that it took two salaries rather than one for families to afford the material things that Americans and others began to take for granted.

Two salaries that are buying tons more stuff. Houses are much bigger and have air conditioning, one small car has been replaced by 2 large ones, one telephone vs. several, one T.V. used to get a couple of channels for free vs. several much larger T.V.'s that are all now equipped with cable, TIVO, DVD players, and surround sound, a vacation used to mean hoping in the car whereas now it often means hoping on a plane.

Not to mention that both couples have the luxury of pursuing careers now because of all of the other things we buy that make such choices possible (dishwasher, clothes washer, dryer, child care, etc.).

And what other generation enjoyed the luxury of even considering something as crazy as "early retirement"?

Maybe I'm missing something, but when talking about standards of living, I wouldn't trade living in the U.S. today for living in any previous decade or in any country in the world in all of history.

 

[samclem]

Those who borrowed a higher standard of living than they could afford will see their quality of life decline. But it is wrong to extrapolate that idea too broadly, as many tend to do. U.S. wealth isn't a mirage. It is a function of worker productivity where the U.S. still ranks #1. And hardly resting on our laurels, the gap between the U.S. and the rest of the developed world has actually been growing in recent years.

the report also shows that the productivity gap between the US and most other developed economies continued to widen. The acceleration of productivity growth in the US has outpaced that of many other developed economies: With US$ 63,885 of value added per person employed in 2006, the United States was followed at a considerable distance by Ireland (US$ 55,986), Luxembourg (US$ 55,641), Belgium (US$ 55,235) and France (US$ 54,609).

New ILO report says US leads the world in labour productivity, some regions are catching up, most lag behind [Press releases]

What's more, standards of living aren't a zero sum game. It isn't true, despite what seems widely assumed, that if developing countries improve their standard of living than ours necessarily needs to decline. As India and China, and elsewhere become more productive, their standard of living increases, and the world becomes richer in aggregate.

I'd be interested to know what the ILO used to compute the value of the goods and services produced inthe US. I think many people wonder if the productivity they are measuring is real or some inflated thing based on the pushing of papers and doing esoteric financial transactions. For example, how does the ILO figure the value of the goods and services produced by a real estate agent? Is it just the value of the commissions he/she earned--which were in turn based on inflated home prices and a super-churning housing market fueled by easy cash? How about bankers, insurance agents, appraisers, etc. Even doctors-- Does the ILO value a tonsillectomy performed in the US the same as the tonsillectomy "product" produced in Botswana? I think the ILO probably can easily figure out the value of crates of sneakers and TVs shipped from China, but I don't know if they can do an accurate job figuring out the value of this intangible "production" in the US. I suspect it is partially a mirage.

Also note that while US workers may be the most productive, that doesn't mean that a dollar spent on labor costs inthe US buys more productivity than anywhere else. Far from it. It might just mean that the $75/hour US factory worker produced $200 in products, while the $5/hour Indonesian worker produced $199 in products. That's a tradeoff businesses are willing to make, and why factories are leaving the US despite higher US productivity (if it really is higher--see above).

 

[Grep]

Adding to what Meadbh wrote, it's almost impossible for people to truly go back to the "old" frugality. They are trapped in a "live to work" lifestyle by the devaluation of labor through the double-whammy of women entering the work-force and now overseas outsourcing, resulting in stagnant and declining wages (in real terms, at least). It is no surprise that the value of labor has fallen to just the level at which it barely makes sense for both members of a couple to work, resulting in a great deal of financial fragility.

Perhaps the only way for "good old" frugality to return is if two-income families are forced to give up one job due to massive unemployment. The value of labor will drop even further until it no longer pays for both to work (and things needn't fall far for that to happen). Then, families might move out of the echoing McMansion (or those homes will be devalued until affordable enough), ditch the second or third car, the house-cleaning person, halve their dry cleaning bills, do away with the expensive child day care, etc.

Of course, this is an extreme scenario that would involve staggering pain until a new equilibrium is reached. Much more likely is a milder middle ground in which people's consumption is more gently restricted.

 

[samclem]

. . . The value of labor will drop even further until it no longer pays for both to work (and things needn't fall far for that to happen).

So there is massive unemployment, earnings per hour go down, and the anticipated response is that families will reduce their family income by 50% by having one wage earner stay home? If wages went down, the cost of hiring people to watch the kids, clean te house, etc etc would also be expected to go down, right?

The stay-at-home Mom was a product of the post-war boom in the US--a blip in time and not the pattern through the centuries. In the past, extended families were the norm, and old folks watched the kids much of the time. Except for this period of artificially high wages, a single breadwinner was not a practical or desireable situation for most American families. Women worked in the commercial world before the War, and their labor was essential to family survival when most families lived on farms.

 

[Gone4Good]

Is it just the value of the commissions he/she earned--which were in turn based on inflated home prices and a super-churning housing market fueled by easy cash? How about bankers, insurance agents, appraisers, etc.

Yes. The same way G.D.P. is measured.

Even doctors-- Does the ILO value a tonsillectomy performed in the US the same as the tonsillectomy "product" produced in Botswana?

I assume some version of purchasing power parity is used to compare international output, but one would have to dig in to the methodology to be sure.

Also note that while US workers may be the most productive, that doesn't mean that a dollar spent on labor costs inthe US buys more productivity than anywhere else.

More productive workers will get paid more than less productive workers, period. And you can be absolutely sure that worker productivity is higher today than it was before. According to the Bureau of Economic Analysis, durable goods production in the U.S. increased more than eleven fold since 1960 as measured in constant dollars. Over the same time, manufacturing jobs declined from about 30% of all jobs to about 13%. Much more production with far fewer jobs is called increased productivity . . . it's real.

 

[Grep]

By the way, I’ve noticed a “chicken and egg” issue relating to two-income families.

Which came first, or which was the driving force in this transition: Did women enter the work force first, allowing families to buy more goods, or did improved efficiencies such as cheaper and better cars and appliances come first, allowing women to work?

I’m firmly in the workers came first camp. There was a huge one-time bonus here, with families suddenly having more money to chase better houses, buy more cars, etc. This spilled over into massive increases in national productivity and wealth. But once the transition was complete, that was it, people were stuck at that level unless they made very substantial sacrifices, for the cost of good housing had been bid up, they needed two cars and day care, etc. It was too late for families to gracefully back out; the noose was already uncomfortably tight around their necks.

A second wave occurred when outsourcing, etc., meant that labor was now cheaper than ever. Again, during the early days of the transition, it meant huge gains on the consumption side (DVD players were being given away with rebate checks bigger than the cost of the player), and yet profits also flowed back home (albeit substantially into the pockets of CEO's and stock-holders, etc.).

For the same sort of growth spurts to occur again, some new frontier to exploit (or bubble, if you will) must be found. The easy rape of resources is long done. Productivity at home is done. Labor abroad is done in the sense that it is becoming more pricey, not less. I suppose we might hope to profit from improving productivity in developing countries (another one-time spurt at best, though perhaps an extremely powerful one). Who knows, maybe a magic bullet of ubiquitous clean energy?

 

[Grep]

In the past, extended families were the norm, and old folks watched the kids much of the time. Except for this period of artificially high wages, a single breadwinner was not a practical or desireable situation for most American families.

Sam, I didn't go back far enough to discuss the massive "blip" that industrialization brought to families and the country. You are certainly right about the wrenching effects, including some substantial financial benefits, that brought to families. But you are sort of making my point - a lot of the growth we have seen in the past century, if not most, has been the result of one time transitions and booms. The rest we could argue about on the margins.

P.S., if there are no jobs to be had, then someone isn't going to work. At least there are economies from a parent staying at home instead of working. Otherwise, wages will just keep falling, and we can all starve together while still at the yoke.

 

[Gone4Good]

For the same sort of growth spurts to occur again, some new frontier to exploit (or bubble, if you will) must be found. The easy rape of resources is long done. Productivity at home is done. Labor abroad is done in the sense that it is becoming more pricey, not less. I suppose we might hope to profit from improving productivity in developing countries (another one-time spurt at best, though perhaps an extremely powerful one). Who knows, maybe a magic bullet of ubiquitous clean energy?

Productivity is a function of technological advancement which is still moving forward . . . from man power, to mule power, to steam power, to gasoline, to Al Gore power. From ledgers to spreadsheets. From carrier pigeons to the internet. What is the next new thing? Who knows? But rest assured a whole world is busily working to find it in a million different ways, both large and small.

Be of good cheer.

 

[Gone4Good]

And from where I came from, both boys and girls looked forward to a career of their own. In fact, I think I remember a lot of folks making a big stink about getting rights to the same work opportunities as everyone else . . . I guess I never saw the dual income family as a burden forced upon people by the relentless crush of declining living standards.

I must have been somehow confused by all this great stuff I can easily afford that my parents could have never dreamed of.

 

[Grep]

It's not all bad. A career can be a good thing. Seems it's often something that folks around here desperately want out of, though.

 

[Tadpole]

Looking at my own family the stay-at-home mom model (the majority) have 100% children with high school educations; the working mom model have 100% children with Masters or above degrees. The former children have many life traumas and divorces. The latter have life traumas but no divorces. This is for the generation born in the 1940s. Economics seems to have won over breast-feeding.

I think the answer is polygamy. Since two wages no longer has the advantage that was gained back then, add productivity to the family unit. For people who believe in stay at home moms - two dads and one mom. For people who want greater productivity - two or three working dads and one or two moms (one works). For families where all work, any combination of three or more adults.

The efficiency gain is shared resources such as housing. The fertility rate can be lower when adults use less resources.

 

[W2R]

I think the answer is polygamy. Since two wages no longer has the advantage that was gained back then, add productivity to the family unit. For people who believe in stay at home moms - two dads and one mom. For people who want greater productivity - two or three working dads and one or two moms (one works). For families where all work, any combination of three or more adults.

The efficiency gain is shared resources such as housing.

True, and also a person doesn't need to be in someone's family to share housing with them. There's such a thing as a roommate. I remember some families (even some with children) having a roommate to help share expenses, babysitting, household chores, and so on back in the 60's. Rent helped in making mortgage payments as well. Maybe that practice will become more popular as people try to economize more due to the recent downturn.

I have often wondered why anyone would get behind on mortgage payments while living in a house, sometimes even losing their home, without first attempting to rent out a room. A roommate can sometimes make all the difference.

 

[ziggy29]

It's not all bad. A career can be a good thing. Seems it's often something that folks around here desperately want out of, though.

I thought I wanted a career. It turns out that I just wanted paychecks.