Why Living Standards Decline as the Economy Appears to Grow
Why Living Standards Decline as the Economy Appears to Grow

By Robert Genetski

Government data show the economy grew by 3 percent over the past year and is continuing to grow this spring. Normally, when the economy grows by 3 percent it is something to celebrate. Real growth means living standards are increasing and the main challenge is how to spend the newly acquired income. Unfortunately, for most workers, there is no surplus of income.

President Joe Biden promised to transform the economy with substantial new government programs, regulations, and legislation. What Bidenomics is doing is to hasten the shift from a market-driven economy to a regulated one. Official government statistics suggest Bidenomics is working. It is not.

One of the best examples of a regulated economy was the former Soviet Union. Prior to its collapse at the end of 1991, Russia’s government statistics showed the economy was growing and doing reasonably well. Soviet workers knew better. They had an insightful saying. “They pretend to pay us, and we pretend to work.”

After the Soviet charade ended, a market economy replaced the regulated economy. As prices adjusted, they revealed the true value of Russia’s economy was only half the value of the estimate of its highly regulated economy. The following chart from my book, Rich Nation, Poor Nation shows the downward adjustment in Russia’s economy.

(classicalprinciples.com)

Over time, a similar charade has been going on in the United States as our government has taken greater control over the allocation of resources. Obamacare legislation dramatically transformed health care, placing more power in the hands of the government. The result was a severing in the doctor-patient relationship, more government control, and a doubling in the cost of health care.

Bidenomics has put the transformation to a government-controlled economy on steroids. As in the old Soviet Union, economic statistics can be deceiving. Governments tell utilities what type of energy to produce and how to produce it. Businesses are paid to produce the things politicians want. Legislation and regulations incentivize both producers and consumers to purchase politically favored products.

Economic numbers can show the economy growing, but the real market value of what is produced is hidden. What can’t be hidden is the impact on workers’ living standards. Even conventional measures of living standards show real weekly earnings have been flat or down over the past three years. Unfortunately, the real cost of a regulated economy goes far beyond the obvious waste from brownouts, power failures, the need for battery backups, and the unsold surplus of EV cars, trucks, and buses.

(classicalprinciples.com)

In an economy where government decisions replace market decisions, there is a disconnect between official data showing real growth and an individual’s actual financial situation. Looking under the hood to three basic necessities—housing, energy, and food—shows the there is clearly something wrong with the engine driving the economy.

Home Affordability Declines

The sharp increases in federal spending, debt, and money creation have raised mortgage interest rates from 2.9 percent when President Biden took office to 7.0 percent. As a result, many who dreamed of owning a home have been priced out of the market.

The stark difference between today’s homebuyer and a homebuyer from January 2021 is shocking. In the first quarter of 2021, a worker with an average annual salary of $54,370 could get a 30-year mortgage at 2.9 percent. After putting 20 percent down on an average house, the monthly cost for mortgage and taxes was 16 percent of the worker’s annual salary.

Today, with a mortgage rate of 7 percent, the monthly cost of the mortgage takes 39 percent of the average worker’s gross income. When buying a house is more than twice as difficult as it was three years ago, living standards are down not up.

(classicalprinciples.com)

Even homeowners with low fixed-rate mortgages have not been spared the ravages of inflation. Those who need to relocate or sell a home due to changing circumstances face a decline in options. Moreover, the soaring costs for home repairs, insurance, and property taxes all put a further burden on homeowners.

The cost of energy, gasoline, and transportation further depresses budgets.

A key object in Bidenomics involves the government redirecting resources to change the climate. The effort to eliminate fossil fuels has led to soaring energy prices, particularly for oil and gasoline. Under Bidenomics oil and gasoline prices are up 50 percent and energy prices are up 40 percent. For homeowners heating their homes and those who must drive to work, a 50 percent increase in this basic necessity drives living standards down more than the overall inflation would suggest.

Supermarket Sticker Shock

We all have to eat. Food represents a critical component of the budget, particularly for those with lower incomes and those on fixed budgets. Under Bidenomics, consumer food prices have increased by two percentage points faster than overall inflation. Certain staples such as meat (up 4 percent more than inflation) and eggs (which doubled in price) have created an extra burden for those on limited incomes.

Current statistics falsely portray a healthy, growing economy. However, as government actions to redirect the economy override normal market forces, official statistics become less reliable. Americans sense a problem. Gallup surveys through April of this year show only 23 percent of Americans are currently satisfied with the United States.

With home affordability down more than 50 percent and with the cost of energy and basic necessities rising faster than inflation, the economy is not healthy. To restore true growth and rising living standards it will be necessary to limit government control over the economy. To restore a healthy economy, we must return to the free-market system that created the greatest prosperity the world had ever known.

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