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The Biggest Mistake Middle-Class Families Make...

Today, every gas and electric meter in Baltimore is spinning. It's a winter wonderland here. Which means, it's damned cold.

Our thoughts turn to heat... and then to the expense of it... and then we begin to wonder how ordinary families keep up with it all.

Heat... food... cable. It adds up.

But we have advice. In a few words: Don't play that game.

We'll explain that later. First, let's review America's middle-class families. Everyone seems to be worried about them. President Obama thinks they're getting a bad deal. So did presidential challenger Willard Mitt Romney. Some think the middle class are disappearing. How are they really doing?

Real, hourly wages have not gone up since 1964. Nearly half a century of flat earnings. We've been saying that for years now.

But wait. How come people seem richer?

Because they are richer. At least in a way. They have bigger houses, more marble countertops, more cars, wide-screen TVs.

They've got a lot more stuff. Even better stuff.

Better Off Than in 1964?

That is the point of an article in yesterday's Wall Street Journal. The authors argue that America's middle class is actually much better off today than it was in 1964.

For one thing, they say, families have more members working (wives went to work in the 1970s and 1980) so that family income is higher.

OK. Whether that is good or bad... we don't know.

They also get the benefit of more health benefits.

Hmmm... We don't know about that either. Families didn't seem to need healthcare benefits back in the 1960s. Because healthcare was reasonably cheap and simple back then. Now, it's complicated and expensive.

Yes, say the authors, but it's also a lot better. Which would you rather have, they ask, 1960s healthcare at 1960s prices or 2013 healthcare at 2013 prices?

Hmmm... Again, we're not sure. They say people live longer today. But that may have nothing to do with healthcare. They live longer in other countries too - places where people spend a fraction of what we spend on healthcare.

And many of those tests that are included in our healthcare plans - mammogram, PSI, colonoscopy - might be useless. That's what the latest research shows.

Oh... And now we all have access to jet airplane travel, iPhones and big TVs with options out the wazoo.

Electronic Voodoo

As to this last point, we offer a little personal anecdote. We didn't have a TV for a long time. Not from about 1982 to 2012. We bought our first one this Christmas. A gift to the family. We watched a few movies over the holidays. After the children left, we forgot about it.

Until last night...

Wife Elizabeth was away so we decided to turn it on for company. Trouble was, we couldn't figure out how. There were four remote control devices. Which controlled what? It was far from obvious. We clicked every button we could find. Nothing. Then we picked up the phone and clicked a few buttons on that too. Perhaps there was some sympathetic communication going on... some electronic voodoo.

In 1964, we turned one knob to turn the machine on. Another changed the channel. There was no doubt about it.

But come the miracle of electronics, and it took us a good 15 minutes to figure out how to get the thing to work. Then we spent another 15 minutes riffling through dozens of programs before we realized that there was not a single one that we wanted to watch.

Time lost: 30 minutes. Gain: negative.

So as to the wonders of modern gadgetry, we are less than impressed.

An Awkward Situation

But there is no doubt that the middle class is better equipped in stuff than its hourly wages suggest. This is partly because the price of the important stuff - food, shelter, clothing and utilities - has actually gone down as a percentage of household income, from 52% of disposable income in 1950 to only 32% today.

But the piece in the Journal doesn't pay any attention to the other side of the ledger: debt. In 1964, total public and private debt in the U.S. was 140% of GDP. Today, it is 375% of GDP.

Hmmm... That's about two and a half times as much debt per family.

The figures show NET WORTH per household at about the same level it was 50 years ago: about five times disposable income. But those figures do not include government debt - a huge and largely uncharted iceberg.

With so much debt to reckon with, the typical family is much more exposed to interest rate increases and other setbacks.

Right now, the cost of carrying debt is low. Because interest rates are at their lowest point in more than half a century. But they were low in 1964 too. And if they go up from here - as they did then - we'll have quite a hoopty-do. How many families could afford a 10% mortgage interest rate?

And, of course, this calculation doesn't include the trillions of dollars in unfunded liabilities that the feds choose to ignore. Those liabilities barely existed in 1964. Today, they come to (according to professor Lawrence Kotlikoff at Boston University) more than $200 trillion - or about $150 trillion more than net assets. Now, how's the middle class doing?

But families don't yet feel the weight of those unfunded liabilities because they don't have to pay them. In fact, they hope to be on the receiving end... to be collecting Social Security... disability... and health benefits, not paying for them.

Which just goes to show how corrupt and awkward the whole thing is. Middle-class families work as hard as they can to keep up with expenses now... and everyone hopes to live at everyone else's expense in the future.

It ain't going to work.

A better approach... on Monday...



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