From Michael Green, Chief Strategist and portfolio manager at Simplify Asset Management at his personal substack, Yes I give a Fig, November 23, skipping past the introductory (worthwhile and interesting) comments on markets:
Part 1: My Life Is a Lie
How a Broken Benchmark Quietly Broke America
....And so now, let’s tug on that loose thread… I’m sure many of my
left-leaning readers will say, “This is obvious, we have been talking
about it for YEARS!” Yes, many of you have; but you were using language
of emotion (“Pay a living wage!”) rather than showing the math. My bad
for not paying closer attention; your bad for not showing your work or
coming up with workable solutions. Let’s rectify it rather than cast
blame.
I have spent my career distrusting the obvious.
Markets,
liquidity, factor models—none of these ever felt self-evident to me.
Markets are mechanisms of price clearing. Mechanisms have parameters.
Parameters distort outcomes. This is the lens through which I learned to
see everything: find the parameter, find the distortion, find the
opportunity.
But there was one number I had somehow never interrogated. One number that I simply accepted, the way a child accepts gravity.
The poverty line.
I
don’t know why. It seemed apolitical, an actuarial fact calculated by
serious people in government offices. A line someone else drew decades
ago that we use to define who is “poor,” who is “middle class,” and who
deserves help. It was infrastructure—invisible, unquestioned,
foundational.
This week, while trying to understand why the
American middle class feels poorer each year despite healthy GDP growth
and low unemployment, I came across a sentence buried in a research
paper:
“The U.S. poverty line is calculated as three times the cost of a minimum food diet in 1963, adjusted for inflation.”
I read it again. Three times the minimum food budget.
I felt sick.
The
formula was developed by Mollie Orshansky, an economist at the Social
Security Administration. In 1963, she observed that families spent
roughly one-third of their income on groceries. Since pricing data was
hard to come by for many items, e.g. housing, if you could calculate a
minimum adequate food budget at the grocery store, you could multiply by
three and establish a poverty line.
Orshansky was careful
about what she was measuring. In her January 1965 article, she presented
the poverty thresholds as a measure of income inadequacy,
not income adequacy—”if it is not possible to state unequivocally ‘how
much is enough,’ it should be possible to assert with confidence how
much, on average, is too little.”
She was drawing a floor. A line below which families were clearly in crisis.
For
1963, that floor made sense. Housing was relatively cheap. A family
could rent a decent apartment or buy a home on a single income, as we’ve
discussed. Healthcare was provided by employers and cost relatively
little (Blue Cross coverage averaged $10/month). Childcare didn’t really
exist as a market—mothers stayed home, family helped, or neighbors (who
likely had someone home) watched each other’s kids. Cars were
affordable, if prone to breakdowns. With few luxury frills, the
neighborhood kids in vo-tech could fix most problems when they did.
College tuition could be covered with a summer job. Retirement meant a
pension income, not a pile of 401(k) assets you had to fund yourself.
Orshansky’s food-times-three formula was crude, but as a crisis
threshold—a measure of “too little”—it roughly corresponded to reality.
A family spending one-third of its income on food would spend the other
two-thirds on everything else, and those proportions more or less
worked. Below that line, you were in genuine crisis. Above it, you had a
fighting chance.
But everything changed between 1963 and 2024.
Housing
costs exploded. Healthcare became the largest household expense for
many families. Employer coverage shrank while deductibles grew.
Childcare became a market, and that market became ruinously expensive.
College went from affordable to crippling. Transportation costs rose as
cities sprawled and public transit withered under government neglect.
The labor model shifted. A second income became mandatory to maintain
the standard of living that one income formerly provided. But a second
income meant childcare became mandatory, which meant two cars became
mandatory. Or maybe you’d simply be “asking for a lot generationally
speaking” because living near your parents helps to defray those
childcare costs.
The composition of household spending transformed
completely. In 2024, food-at-home is no longer 33% of household
spending. For most families, it’s 5 to 7 percent.
Housing now
consumes 35 to 45 percent. Healthcare takes 15 to 25 percent. Childcare,
for families with young children, can eat 20 to 40 percent.
If
you keep Orshansky’s logic—if you maintain her principle that poverty
could be defined by the inverse of food’s budget share—but update the
food share to reflect today’s reality, the multiplier is no longer
three.
It becomes sixteen.
Which means if you measured
income inadequacy today the way Orshansky measured it in 1963, the
threshold for a family of four wouldn’t be $31,200.
It would be somewhere between $130,000 and $150,000.
And
remember: Orshansky was only trying to define “too little.” She was
identifying crisis, not sufficiency. If the crisis threshold—the floor
below which families cannot function—is honestly updated to current
spending patterns, it lands at $140,000.
What does that tell you about the $31,200 line we still use?
It tells you we are measuring starvation....
....MUCH MORE, why housing costs are so important.
November 30 - Part 2: The Door Has Opened
December 7 - Part 3: The Pursuit of Happiness
You may also know Mr. Green as ProfessorPlum99 on X
Also:
"Evidence – And an Explanation – For the Recent Surge in Inflation Inequality"
The Purpose Of A System Is What It Does, Not What It Claims To Do
