There are some truisms in America we hold dear. One is we see ourselves as a land of opportunity where if you work hard enough you can be a success. A second is that each generation will do better than the last.
If you were born in 1940 there was about a 90% chance that you would end up having a higher standard of living than your parents (fuller discussion in last month’s letter). By 1960 however, the likelihood had declined to 61%, and if you were born in 1980, there is only a 50% chance you will end up with a higher standard of living than your parents.
Life is getting harder and more expensive. I started the Hanson Index of Vermont prices in 1986 to see how every day local prices changed relative to the Government reported Consumer Price Index. It has been no contest so far. Every price in the Hanson Index save two has increased faster than the Consumer Price Index. Life is not cheap.
‘But wait! There’s more!” as Ron Popeil so famously said. If prices have gone up since 1986, so have incomes. Between 1986 and 2016, median family income (married households) has increased to $81,200, or a gain of 197%. After stripping out inflation the increase is 42%. So even though price increases have taken a bigger chunk out of our paychecks, those paychecks have grown.
Now I am not going to whistle past the graveyard here and say all is fine with America. Many people suffered greatly in the 2007-2009 housing collapse, losing both jobs and houses, and many have not recovered. Income of all households, not just married families, has been stagnant since 1986. But still, the economic recovery we are in today reflects income gains for many Americans.
Investment returns have also been positive the past three decades. The Dow Jones Industrial Average has gone up 11 times in price since 1986, an increase of 8% a year. This is much faster than inflation. So don’t forget the savings you salt away every year that are invested in stocks and bonds. This pot of gold will grow over time and will be the ‘saving grace’ of your later years.
Now some observations on the prices in the Hanson Index. The list is heavy in services, and services have increased a lot more in price than ‘things’ the past 30 years. I wish I had included a pair of blue jeans back in 1986. Clothing has been a bargain the past three decades.
Government services have also quietly (and maybe not so quietly) increased over time. Fishing licenses, parking tickets and beach permits have all gone up more than the CPI. And it is interesting to note how we have wrung our hands over the years about the high cost of gas. Gas prices have indeed spiked from time to time but overall gas has been a relative bargain in the Hanson Index.
I have said in the past the Hanson Index is a little like that piece of sticky flypaper that you just can’t seem to get off your fingers. We are well into the fourth decade of the Index and I guess we will just have to keep following up on these prices every Spring.