People who write for right wing outlets live in an alternative reality. The piece that Michael Thomas pointed out to me from the New Criterion, “Future tense, V: Everybody gets rich,” by Kevin D. Williamson, belongs in a special category of its own in terms of the degree of disconnect it exhibits.
As much as I enjoy shredding articles, this piece has so much wrongheadedness in a compressed space so as to make a full bore exercise of unpacking it a a major exercise. Let’s deal with just this part, which is a neat one-two effort to tell us no one need safety nets like Social Security because even people making minimum wage can be rich (and not by creating a business on the side and going public at a big multiple….):
The welfare state isn’t a very good buy. The average Social Security benefit runs just over $1,100 a month—peanuts, hardly enough to keep you in cut-rate butter once your median rent of more than $800 has been paid. For that, you’re taxed 12 percent of your take-home pay. Compare that to this: A married couple, each earning the minimum wage, investing only 10 percent of their earnings at a modest 7 percent return, retires with an annual income of more than $100,000 a year—even if they never touch the $1.5 million principle they’ll leave to their children. President George W. Bush was mocked for calling his proposal to cultivate such minimum-wage millionaires the “Ownership Society,” but it was the most important initiative of his presidency.
Erm, the worst is I get the strong impression Williamson believes every bloomin’ word he wrote. I gather no one told him the global financial crisis was the culmination of the ownership society, which was purchased with minimal equity and cheap leverage. It’s a broader scale version of Josh Rosner’s 2001 (!) comment on housing: a home without equity is just a rental with debt.
Let’s start with the most obvious reason why Williamson’s little tale of minimum wage people retiring as millionaires is observed about as often in the real world as unicorns: his
fantasy expectation that they save 10% of their incomes. The savings rate for Americans as a whole hasn’t been over 10% since 1984 (and it was only rarely above 10% from the beginning of the data series in 1959 through that date. With the exception of 1984, it was strictly a recession phenomenon). It is currently 3.5%.
How exactly do two people earning minimum wage save 10%? Kids are out of the question (although he refers to them), since two incomes and kids necessitates two cars, unless you live in a major city with excellent public transportation. Even if they do manage to save that much intermittently, has he not heard of how short job tenures are? Any job interruption at any income level leads to a depletion of savings. And minimum wage earners don’t get meaningful benefits. How are they to pay for anything in the medical category over and above an annual checkup? The Grand Canyon sized hole in this logic is you have to have an entire working career of uninterrupted earnings and nothing bad happening (oh, including a divorce).
And that’s before you get to the barmy investment return assumptions. Williamson is selling the Kool Aid that the crisis proved wrong and Beniot Mandelbrot debunked in his book written for the layperson, The (Mis)Behavior of Markets. In it, Mandelbrot describes how all the standard financial markets models greatly understate risk, leading both professionals and ordinary investors to take on far more risk than they can tolerate. This looked like a brilliant approach from the early 1990s through the early 2000s, since disinflation produced strongly rising asset values. That era is over. 7% returns? Sustained?
Williamson’s mention of the Bush “Ownership Society” was a major tell. The push to privative SS to help Wall Street earn more fees is on. You can see how this works. Trying to hit return levels that aren’t attainable with prudent risk assumption means more people will got into hedge funds. Maybe not minimum wage types, but certainly more of the middle class. And that means more fee extraction and more churning.
And to let readers in on the fun, let’s try a “Where’s Waldo?” exercise. Tell me everything you see wrong with this part of the article (hint: as a Manhattan resident, I can barely restrain myself from going after the car ownership part):
I noticed a fellow at the recent Occupy Wall Street protests carrying a sign reading: “They eat filet mignon. I eat the dollar menu.” This of course says a great deal, and not at all what he meant for it to say. Here is an American man in apparently good health complaining that, while he can have a modest meal for 8 minutes and 30 seconds of work at the minimum wage in New York, (including the sales tax)—and have somebody else cook it for him, at that—he’d really rather have filet mignon, thanks very much.
I sympathize: Earning the New York minimum wage, he could report for work at 9 a.m. and by noon have earned enough to have a two-inch thick USDA prime twenty-one-day-aged filet mignon for lunch, providing he is willing to cook it himself. If he reports back to work at 1 p.m., he must then work until 3:15 p.m. to pay the rent on his modest New York City apartment ($500/month in the Bronx, via Craigslist, with hardwood floors, heat, and hot water included) and then until about 3:45 p.m. to pay for his monthly subway pass or to make the lease payment on his Kia—which, at $99 a month, is a bit less expensive than the subway pass, but then there’s gasoline and insurance to think about. The money he earns between then and 6 p.m. ought to be sufficient to cover his other meals and incidentals, if he’s thrifty, though he’ll probably need to put in a few extra shifts a month or get some overtime to keep current on his taxes