Friday, December 19, 2014

Too much poverty, or too much aid?

In a report released earlier this month, the Census Bureau finds that "Almost two-thirds (65 percent) of children [in 2011] lived in households that participated in at least one or more of the following government aid programs: Temporary Assistance for Needy Families (TANF); the Supplemental Nutrition Assistance Program (SNAP); the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC); Medicaid; and the National School Lunch Program."

Question: does this mean we have too much poverty in the U.S., or does it mean we have too much government aid?

The following charts might help to answer that question:


In 1970, the population of the U.S. was just over 200 million. Today it is approaching 320 million. When the food stamp program (SNAP) started in 1970, it covered about 1.5% of the population. Today it covers about 14.5% of the population—a ginormous increase by any standard. An increase of this magnitude could only be driven by a reduction in eligibility standards, because we are all richer today than ever before.


In 1951, government transfer payments amounted to only 5% of disposable income. Today, transfer payments total a staggering $2.6 trillion, and make up almost 20% of disposable income. The U.S. government is trying very hard—too hard—to address a supposed problem of "inequality" by massively redistributing income from the upper classes to the middle and lower classes. The problem is not that the poor have gotten poorer, it's that the poor haven't gotten richer to the same extent as the rich. Supposedly.

As Mark Perry notes in a post today, the average American has never had it so good—we enjoy an unbelievable level of prosperity. In inflation-adjusted dollars, for the price of a single color TV entertainment system in 1964, a family today "could furnish their entire kitchen with 5 brand-new appliances (refrigerator, gas stove and oven, washer, dryer, and freezer) and buy 7 state-of-the-art electronic items for their home (a Toshiba Satellite 14″ laptop computer, a Garmin 5 Inch GPS, a Canon EOS Rebel T5 DSLR Camera, a Sony 1,000 Watt, 5.1-Channel 3D Smart Blu-Ray Home Theater System, a Sharp 50 inch LED HDTV, an Apple iPod Touch 32GB MP3 Player, and an Apple iPhone 6)." That's why people who use food stamps can also sport smartphones.


The chart above corroborates Mark's findings. Real household net worth today is over $80 trillion, up over 400%—more than $66 trillion—from what it was in 1964. Living standards, as defined by how much you can buy with a given amount of work, have risen by an extraordinary amount over the years. Yet the government is handing out more money to more people than ever before.

The huge increase in income redistribution is almost entirely driven by a political agenda that refuses to recognize that the average person today is better off than kings were yesterday, and instead focuses on the "problem" that some of the rich have gotten more richer than everyone else has gotten richer. 

If there is a real problem today, it is the redistribution of wealth. It has grown to such an extent that two-thirds of our children are being taught to believe that they can only enjoy a modern standard of living with the help of government handouts. A few generations ago, America was proud to teach its children that anyone could become rich if he or she were willing to study and work hard. Today's children are being taught to believe that they are entitled to be rich, no matter how little or how hard they work. That is a prescription for decline and servitude and ultimately, great social unrest.

The answer to the question is obvious: we suffer from too much aid, not too much poverty.

Thursday, December 18, 2014

Commercial real estate boom continues

U.S. housing starts have almost doubled in the past 5 years, and according to Case Shiller, housing prices have recovered a bit more than half of their recession-era losses. But the recovery of the residential real estate market pales in comparison to the boom in commercial real estate, where prices have recovered substantially all of their recession-era losses and are rising at double-digit rates.


The chart above shows two measures of commercial real estate values as calculated by the folks at Co-Star Group. Their value-weighted measure of commercial property price indices has risen at a 10% annualized pace for the five years ended October 2014, and prices now exceed their pre-recession high. An equal-weighted measure is up over 14% in the past year. And these very positive trends continue. Here are some of the headlines:

Most major property types continued to benefit from minimal speculative construction, a firming economic recovery and rising rental rates.
The sale price-to- asking-price ratio narrowed by 2.5 percentage points in the 12-month period ended in October 2014 to 90.4% — the highest ratio since 2008. Meanwhile, the average time on market for properties listed for sale fell 4.3% in the 12 months ending in October 2014, and the share of properties withdrawn from the market by discouraged sellers continued to recede, falling to 35.3%.

We may be in a sluggish recovery, but that does not mean that everything is sluggish. I note that since October 2009, the total return of the Vanguard REIT (VNQ) is an annualized 19.5%, almost three percentage points per year better than the annualized 16.6% total return of the S&P 500 index. Year to date, the total return of VNQ exceeds that of the S&P 500 by over 15%. Wow.

Wednesday, December 17, 2014

Ex-energy inflation still 2%

The unexpectedly large decline in the November CPI (-0.3% vs. -0.1%) was almost entirely driven by falling oil prices. The CPI ex-energy rose 0.1% for the month and is up 1.9% over the past year.


The chart above shows the year over year change in the CPI and the "core" CPI (ex-food and energy). By these measures inflation has been bouncing around between 1% and 4% over the past decade, and currently looks to be declining a bit on the margin.


Most of the bouncing "noise" in the year over year measure disappears if we remove energy prices from the CPI. The chart above shows the CPI index ex-energy, and it uses a semi-log scale on the y-axis to show that the average annual rate of increase in the index has been 2.0% for the past 12 years. No sign of anything even remotely deflationary here. Once energy prices stabilize, we are likely to discover that CPI inflation is running right around 2% a year, as it has been for a very long time.

The Fed is unlikely to delay its plans to raise short-term interest rates just because the CPI index has declined in two out of the past four months (November and August). Any hint of deflation is entirely oil-related, and therefore not something that should concern the Fed.