Friday, September 26, 2014

The Problem with Averages

Perhaps the most valuable tool for someone who wants to lie with statistics: average numbers. Here’s a simple example. A feudal lord generates ten million ducats a year from the gatherings of his 1,000 peasants, who generate about 100 ducats each a year for themselves (which generates 100,000 ducats to them all). He has to pay an army of 100, 1,000 ducats each a year (another 100,000 ducats) to protect his fiefdom. It costs the lord one million ducats a year to equip his army and pay his operating costs, and he has to remit another two million ducats a year to placate the king. So the poor lord has to take a 3.2 million dollar a year hit to his precious earnings, leaving him with a mere 6.8 million ducats. The average household income for everyone in this fiefdom is thus 6.8M/1101 = 6176 ducats per household, a healthy living. But if you take that lord’s income out of the mix – one single household – the “average earnings per household” in the fiefdom is 200K/1101 = 181 ducats! A 5994 ducat difference! The hoi polio make an “average” of less than 3% of what the lord makes.
And so it is with raw unemployment numbers, the earnings in the United States, the concentration of wealth at the top and household net worth. The numbers tell you that we are so into the recovery that we have absolutely nothing to worry about. But actual, inflation-corrected buying power for Americans outside-the-top-five-percent-statistics has been falling without let-up, year after year for well over a decade without relenting. Every darn year, this vast array of Americans has less buying power than they did the year before, just as they are watching the low-paying nature and the lack of growth and promotion potential in the vast majority of the new jobs that have been added to the economy. Student loans are mounting without the supporting earning power to pay them back.
But let’s focus on one of these mendacious statistics: household net worth. “The net worth of American households is now 20 percent higher than it was before it began to decline in 2007, the Federal Reserve reported... It said the households together were worth $81.5 trillion at the end of the second quarter, higher than ever and up 10 percent from a year earlier... By another measure, household net worth is a little short of the record highs reached before the recession. It amounted to 471 percent of the nation’s gross domestic product in the second quarter, just short of the record 473 percent set in early 2007.” New York Times, September 19th. Wow! Great news, huh?! Even adjusted for inflation, the numbers show a rise of over 4% from 2007.
Catch 22: “The biggest gains for households came in the equity markets. The Fed said households now owned $21 trillion in stock and mutual fund shares, 37 percent more than seven years earlier and almost 160 percent more than they owned at the bottom of the bear market in 2009.
“While many people own stocks and mutual fund shares, by far the largest holdings are among those who are the wealthiest. In 2012, more than a third of dividends reported on tax returns went to taxpayers earning at least $2 million a year. That is more than double the share of dividends that went to those with taxable incomes of $100,000 or less…
“Seven years after households’ financial conditions began to deteriorate in 2007, their net worth is 20 percent higher than the prerecession peak. Real estate values have not completely recovered, but households have a lot more money in the bank and have profited from rising stock prices. Their total debt is little changed from prerecession levels, but the makeup of that debt has changed. Households owe less in mortgage and credit card debts, but auto loans are up and student loan debt has doubled.” NY Times. But the overall net worth of households out of the top tiers, corrected for inflation, is less than pre-2007 numbers.
With interest rates and bond yields low, debt holdings continue to generate lower return unless you get to borrow money from the fed at almost nothing and get to use that money to buy equities or lend at higher rates (we call them banks that are part of larger financial institutions), the equity markets are where the money is… but has the stock market peaked? Today, if the bulk of your net worth comes from owning stocks and other equities, you are in good shape. If not, hey, you truly are average! And you get to read one new statistic after another about how the rich get richer… and you most certainly do not.
 I’m Peter Dekom, and for politicians who even care what life is like for most of us, they are going to see anger, polarization, disenchantment and disengagement from their constituencies until they deal with this income inequality issue and level that playing field.

No comments: