Is it really credible that the young couple of 1970 were half as rich as the young couple of today? Try imagining an average, modern young couple with two kids. Like most couples in this position they are budgeting and have very little surplus money. Now take away half their income so that they are as rich as we are told people were in 1970 - no, it cannot be easily done, they would lose their house and car and be on the streets. They would be as poor as the poorest in society nowadays but they live in the same house as a similar couple who lived there in the 1970s and use the same garage. The couple who lived in their house in the 1970's had almost everything that the modern couple has, barring electronic toys. In 1970 some couples would have supported the house, the car and the family with only the husband going to work. How could the 1970s couple be only half as well off as the modern couple when they had almost the same amenities? Something is wrong with the figures.
What is wrong with the figures? No government can allow income statistics to show that people got no richer whilst they were in power so they make the government statistical agencies add a percent here and there. There are also aspects to life that cannot be represented easily by RPI figures, for instance in the 1970s people had local sets of friends, free higher education, plentiful council housing, controlled private rents, needed fewer changes of clothing (washed less) and there was full employment so avoiding periods of unemployment etc. etc..
So how can we measure how much better things have really got? The government statistics are very keen to hide the truth about this behind a screen of RPI and CPI figures. Recently they may have tripped themselves up by introducing the "Net Wealth" statistic. Net wealth is the total value of all the assets that people acquire less their liabilities such as loans. If you are getting ever richer then your Net Wealth will increase, however, houses are included in the Net Wealth figure.
The Net Wealth figures suggest that in 2009 we were 208% wealthier than in 1987. This is a great message for any government. Wow! Twice as rich! But is it true?
The figures are 80% sensitive to house price changes (ie: if house prices change by 300% the net wealth figures would increase by about 240%). It turns out that house prices did indeed change by 300% between 1987 and 2009 so net wealth figures should have changed by 240%, in fact they only changed by 208% so our net wealth actually declined by about 32% apart from the wealth in our houses. (If the Net Wealth figures were fair they would retrospectively adjust the value of houses, after all, it is the same house now as it was then.)
So what about the wealth that we have in our houses? The trouble with wealth in houses is that you cannot easily cash it in - you always need somewhere to live. In fact many people have taken out loans on their houses which is why, when you remove the contribution of the value of houses from Net Wealth we are poorer by 32% than in 1987 - a lot of people have got massive loans. These people will get into financial trouble over the next few years as house prices fall by 10-20%. (See Immigration, House Prices and Boom Economics).
We are 32% less wealthy than we were in 1987 and this lack of wealth hits us where it counts, in our outgoings on debt and the failure of wages to keep up with these.
The truth is that before 1970, with the post war recovery etc. people were poorer than in 2009 but since 1970 there has been little change. In some decades someone on a median income might have had the equivalent of £400 a year surplus to spend on holidays etc. and in others £600 a year. Thats what an average person has today and it has been the same in real terms for the past 40 years.
If you and your wife are taking home about £25000 a year after tax, pension and National Insurance and you have kids you are not going to have more than a £1000 spare (4%). It was the same in 1970, if you were taking home £1600 a year you only had £70 spare but it was worth nearly £1000 (you could buy an 8 year old car in 1972 for £70).
Very little has changed, they pay you enough to get to work, feed, clothe and house yourselves and just about enough to reproduce if you budget tightly. If you are out of work it takes a month or two for all your savings to evaporate, just as it did in 1970.
Our GDP relative to commodity prices has climbed since 1970 so we should really be a lot wealthier than we are. It would be interesting to look at corporate wealth, government spending, pension fund wealth and the inequalities of wealth to see where the money goes.
Governments are obviously lying but they lie in exceptionally cunning ways.
The Office of National Statistics has an excellent article describing the RPI and CPI indexes: Consumer Price Indices, History of and differences between the Consumer Prices Index and Retail Prices Index. Here are two key points:
"...neither the CPI nor the RPI is a cost of living index." (page 6)
"The CPI has a much shorter history than the RPI. It was first introduced in 1996 as the Harmonised Index of Consumer Prices (HICP). HICPs were developed across the European Union for the purpose of assessing whether prospective members of European Monetary Union would pass the inflation convergence criteria and of acting as a measure of inflation used by the European Central Bank to assess price stability in the Euro area. "(page 4).
Ah, so the reason we are not really twice as rich as people in 1970 is that these indexes are not accurate cost of living indexes and the CPI was never intended to measure relative prosperity in the first place.
See also:
House prices and food prices - are you getting richer?
Principle source: Social Trends: Income and wealth (ST41) - data tables
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