I wanted to follow up a bit on my post from yesterday, because it goes to the shape of the overall economy — something that impacts more than just one or two firms.

The long-term strength of the economy really is dependent on having a healthy and vibrant middle class. Median real household income is perhaps the best single measure of that. After all, what could be more middle than the point at which 50% of the households earn more than and 50% earn less than?

Yes the aggregate amount of income is important, but so is the distribution. If the economy grows by, say, $100 billion (a small increase in the context of a $14 trillion economy), but that is a result of 100 families each gaining a billion, and the other 99.999% of families seeing no increase, how much do you think demand will increase?

True, you would stimulate spending on yachts and private airplanes, but really — how many jobs does that translate to? It’s nice for those 100 families, but from the perspective of the overall society, what is the point? It might be good for Textron (TXT) and Outboard Marine (OM), but they make up a very small segment of the overall market and economy. Recently, Carlos Slim of Mexico joined the ranks of the richest people in the world, but does that mean that Mexico is getting substantially more wealthy?

If, instead of that $100 billion increase going to 100 families it was split up with 10 million families each seeing an increase of $100, the money will be far more likely to be spent and put into circulation, and more jobs will be created. It would also result in more overall happiness. At the margin, how much more happiness does an extra $100 bring to a billionaire? How much more does it bring to a pauper?

From the perspective of the overall market, that widely dispersed $100 billion would stimulate sales at Walmart (WMT), McDonald’s (MCD) and countless small private businesses. I know that the market generally does not care about poor people. If you don’t have money you can’t consume or invest.

But that is sort of the point, though — if more and more people are in poverty, they will not be consuming or investing. The fact that the poverty rate has risen by 16.8% — from 11.3% in 2000 to 13.2% in 2008 — is hardly a sign of a robust economy.  

The graph (which originated here) below shows the historical record on real median family income. Note that for half of all Americans, the real standard of living is now at its lowest point since 1997.

Further, 2008 just captures the early part of this recession, and the worst damage was done late in the year and into the first half of 2009. Barring some sort of miracle, all of these numbers will look significantly worse when the 2009 numbers come out a year from now. The last recession ended in late 2001, but the median income continued to fall, and the poverty rate continued to rise until 2004.

Things are even worse when you consider that the burden of poverty falls hardest on those who are not responsible for being in poverty, namely children. As with the overall poverty rate, the child poverty rate is back to its highest level since 1997 (same source for the second graph). However, the overall rate is substantially higher at 19.0%, or almost one in five kids.

Health insurance is clearly the topic of the day, and the report provides some insight into what is going on with the current system. The third graph (same source) shows that the current employer based system is in the process of falling apart, but it is a slow and gradual process.

There were 5.1% fewer people covered by employer-based health insurance in 2008 than in 2001. It was only those big bad government health insurance programs that have prevented the levels of uninsured from growing much faster than they already are. With the rise in unemployment this year, and most likely into 2010, employer-based health insurance is likely to drop dramatically when the 2009 figures are released.

Read the full analyst report on “TXT”
Read the full analyst report on “OM”
Read the full analyst report on “WMT”
Read the full analyst report on “MCD”
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