The Changing American Economy

According to a recent Politico poll, the economy is voters’ top concern ahead of the 2014 midterm elections, ranking higher than national security. Yet campaign rhetoric is showcasing leaders unwilling to discuss the true state of the American economy. Incumbents point disingenuously to the falling unemployment rate as a positive, knowing full well it’s falling largely due to decreased labor participation. They probably also know that even if structural improvement were evident, they would deserve no credit. However, it’s not evident.

The Social Security Administration released wage statistics for 2013 last week. Among them, we find that half of all American workers earned less than $28,031 and that 39 pct made less than $20,000. The $20,000 line is a memorable one, as it’s the annual salary of a full-time worker paid $10 per hour with two weeks off. This did not used to be an especially difficult financial hurdle to clear, but well over a third of American workers were unable to do so last year. Plus, 72 pct made less than $50,000. The median household income of $51,939 is the same as it was in 1995. The once-feared lost decade is now the lost two decades.

No wonder both parents need to work full time to keep a family afloat amid rising prices outside the consumer price index. Have you seen the price of ground beef lately? The BLS says it averaged $4.10 per pound last month, up 17 pct on year to its highest level ever. The Food and Beverage index tracked by the BLS has risen from 40 in 1970 to more than 240 now, a 500 pct increase. Despite this, economic reports continue showing no inflation and the Federal Reserve keeps referring to this as a reason it can postpone raising interest rates. The decline in the price of oil has helped families via lower prices at the pump, but the overall cost of living is on the rise for most consumers.

This seeming disconnect between official economic reports and reality was discussed by Mike Bryan, vice president and senior economist in the Atlanta Fed’s research department, in a June 23, 2014 article on the bank’s macroblog, “Torturing CPI Data until They Confess,” from which:

“The Economist retells a conversation with Stephen Roach, who in the 1970s worked for the Federal Reserve under Chairman Arthur Burns. Roach remembers that when oil prices surged around 1973, Burns asked Federal Reserve Board economists to strip those prices out of the CPI ‘to get a less distorted measure. When food prices then rose sharply, they stripped those out too — followed by used cars, children’s toys, jewelry, housing and so on, until around half of the CPI basket was excluded because it was supposedly “distorted”‘ by forces outside the control of the central bank. The story goes on to say that, at least in part because of these actions, the Fed failed to spot the breadth of the inflationary threat of the 1970s.”

Bryan himself recalls a 1991 meeting of the Cleveland Fed’s board of directors, at which he was a scheduled speaker. He was welcomed to the lectern with “Now it’s time to see what Mike is going to throw out of the CPI this month.” He remembers, “It was an uncomfortable moment for me that had a lasting influence.”

So, the population’s income is stuck or shrinking, and the cost of living is rising but tracked in such a way as to hide the increase for most people. What about savings? Have people been able to squirrel much away? Given the above conditions, the answer would almost have to be “no,” and it is.

Wells Fargo surveyed more than 1,000 middle class Americans about their savings plans. About two thirds of respondents said saving for their retirement had proved “harder” than anticipated. One third said they won’t have enough to “survive,” a figure that rises to almost half among Americans in their 50s. A particularly sad finding of the survey is that 22 pct said they would rather suffer an “early death” than retire without enough money to live comfortably. Why don’t politicians pick up on this? It could be turned into a catchy slogan — “Why try? Just die!” — which even doubles as a rally chant.

Not everybody is doing as badly, which partially explains why the economy is the top concern this election. It’s one thing to feel we’re all in this together, quite another to feel the imbalance inherent in a meritocracy is reaching unhealthy proportions. The wealthiest 5 pct of American households owned 63 pct of wealth in 2013, up from 54 pct in 1989. That’s from the September 2014 Federal Reserve Bulletin, reporting on the triennial Survey of Consumer Finances (SCS). More from the SCS:

“Income also shows a strong positive association with education; in particular, incomes for families headed by a person who has a college degree tend to be substantially higher than for those with lower levels of schooling. Incomes of white non-Hispanic families are substantially higher than those of other families. Income is also higher for homeowners than for other families, and income is systematically higher for groups with greater net worth.” Related, the median net worth for white non-Hispanic families rose 2 pct in the 2010-2013 time frame, while falling 17 percent for the “nonwhite or Hispanic” demographic.

An established explanation isn’t agreed upon yet. One view is that the political system is so thoroughly owned by entrenched business interests that everything is skewed toward feathering wealthy nests. Those taking this view point to the bailout of bad banks with tax revenue, without sending a single suit to jail. Another view is that the wealthy actually exert no more influence over policy today than they did at any point in the past, but are naturally shrinking as a percentage of the population as the less wealthy demographic groups grow more quickly, creating the impression that the wealthy are taking more when in fact they’re just ending up with relatively more. Those taking this view point to unqualified home owners triggering the collapse of 2007-08.

The truth undoubtedly lies in the middle. Banks did dangle tantalizingly low-rate, low-down-payment loans to the unsophisticated NINJA crowd (no income, no job, no assets), knowing full well that most wouldn’t navigate the fine print successfully and would eventually default. This was mean-spirited, cynical, and ultimately bad for banking as well as the rest of the economy. A few bad apples looking to pad their closed-loan lists turned into a crop of bad apples following entrenched industry protocol. On the other hand, why is it that in an age of information abundance, so many financially stupid people exist? Understanding a 30-year monthly payment schedule, and where it’s vulnerable to a spike due to variable interest, should not be a rare ability.

We may face the worst possible combination of factors, taking a page from each side of the argument. If we grant that big banking and other parts of the financial business are out to profit off people in whatever way they can, and we grant that the percentage of the population growing the fastest contains the people most vulnerable to falling for scams, we have a real problem. The result would be not just another housing crisis on the way, but a steady widening of the gap between the haves and the have-nots as the economy’s good jobs become suitable only for the best-educated applicants, who are shrinking as a percentage of the population.

While the falling labor participation rate could be indicating just such a trend underway, most economists attribute it to an aging population. This is a legitimate factor, but doesn’t explain the whole story. Another way of looking at involvement is by tracking the economically inactive population, which the OECD defines as “all persons who were neither employed nor unemployed” during the reference period due to attendance at educational institutions, retirement, engagement in family duties, or some other reason for being economically inactive.

Focusing on US males age 25-54, we find that the figure has risen steadily since 1980, from 2.3 million to 7.3 million. The total pool of American males age 25-54 was 41 million in 1980; it’s 61 million now. Thus, the proportion of inactive people has risen from 5.6 pct to 12.0 pct. Why economists at the Fed and elsewhere refuse to acknowledge this when discussing the potential reason that labor force participation is falling, is a mystery. The only reason we’re ever offered is that people are retiring, but there’s more going on.

While government has been largely asleep at the switch, the central bank has been trying to repair the economy through monetary machinations. Low rates and asset purchases were intended to pack banks full of money that they would lend to businesses, home buyers, and consumers, which would then presumably invest in growth, improve the value of homes, and purchase goods in the economy. This has not happened to the extent desired. While some are quick to blame banks for not lending, the banks say they would have lent more if they’d been approached by more qualified applicants. As they’re being told to pay billions in damages for their role in the last round of lending to unqualified borrowers, banks have hesitated to join in again.

It seems government has given up addressing the real problem, which is that the modern work force is not the same one America had in the past. It is not as well-educated, and the poorly educated, less wealthy segment is growing at a faster rate than the educated, wealthy segment. Rather than meeting this challenge head-on by designing dramatic changes in education, immigration, vocational training, social spending, and tax benefits for employers, politicians have accepted that the population isn’t as well-off as it was in the past, and that the middle class is in danger of extinction. The rich are rich, so they’re fine; the poor are helped by tax revenue; but the middle class are seeing their resources drained.

Just in time to bolster the view that government is giving up on improving the financial situation for most Americans, we received the FHFA’s mortgage overhauls last week. Its current director, Mel Watt, has been in place since January. His confirmation sparked long battles due to some conservatives believing Watt would move to immediately broaden access to mortgage lending, thereby lowering the average credit score of successful applicants, which could spark another subprime crisis.

Sterne Agee analyst Jay McCanless wrote in May that Watt’s comments indicated a new approach for Fannie Mae and Freddie Mac, in which they would shift from “a capital preservation, bunker-like mentality to an amenable and active buyer of mortgages at and potentially below the credit score averages of the last two years.” Robert Sichel, professor of business law at Kennesaw State University in Georgia, said in January that he expected Watt to change policy “from the goal of stabilizing the mortgage market from the lender’s perspective to a focus on addressing the difficulties existing on the borrower’s side of the market. The emphasis will shift from protecting the lenders to protecting borrowers.”

Last week’s announcement confirmed these predictions. The FHFA is, indeed, swinging the pendulum away from the strict lending rules that followed the Wild West lack of rules that preceded the crisis. The question is whether the pendulum missed the middle territory and already swung all the way back to the Wild West. Reducing the down payment requirement from 20 pct to 3 pct would seem to indicate “yes.”

This bears watching.

In the meantime, beware the campaign rhetoric. Republicans are wrong when they say America’s economic troubles began with the inauguration of President Obama. Democrats are wrong when they say policies under Obama have greatly helped the economy. No, the president has been all but irrelevant to the economy, which is possibly the most discouraging comment of all. The trends underway are independent of whomever wins the popularity contest. The job of a politician is to get elected, then stay elected, with policy solutions remaining strictly optional. The real show is run by unelected parties, hence little changes from one administration to the next.

Nonetheless, I wish more candidates would talk openly about the demographic crisis taking place in plain sight, and propose programs that would help people receive the education that interests them and is appropriate for their aptitude, and apply tax incentives to encourage employers to hire such qualified workers. Perhaps then people would be able to meet what was once considered the bare minimum down payment of 20 pct on a new home, and understand the rest of the payments involved after signing. Getting the population better educated and more economically active would produce stronger families, higher incomes, lower crime rates, and the ability of more citizens to pursue happiness, as the Founding Fathers intended.

Then again, why bother? Just give them mortgages.

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One Comment

  1. kg
    Posted October 28, 2014 at 11:59 pm | Permalink

    It is worrisome that there is a large labor pool of workers without skills. The machining company where my husband works hires temps from a industrial temporary agency. If the temps show they can come in on time everyday, be productive, have an aptitude for the work, and have the right work attitude then they get hired to be a full-time employee. This small to medium sized company then trains them on the job. I think that this is probably the new trend for employers. They get to test the workers before undertaking the expensive process of hiring and training them. However, the wages are not very high here. We manage because we are frugal.

    Just because people go to college doesn’t mean that they will get a good job. If you are going to spend the money to go to college you need to get a degree in a field where they need employees.

    I see a lot of younger people afraid of home ownership. They should wait to have kids until after they have their education, a decent job, and have bought their house. If you are lower income you have to sacrifice to buy a house but I think it is worth it. Buying a duplex/side-by-side where you live in one unit and rent out the other can help a lot. It’s important to pay off your mortgage so you have flexibility. We always lived on one income and took the smaller one to pay off our house. You can take the rent to make extra payment to pay down your mortgage faster or pick up an additional part-time job to do the same. It gives you flexibility once you have your residence secured. I am so grateful that we have running water, indoor toilet and regular gas heat.

    I am irritated that the CPI is a worthless number. It needs to include food, gas(travel to work expenses. No such thing as good, reliable mass transportation where we live), medical care, and housing costs at the bare minimum. How can you solve a problem if you have bad data?

    I actually saw these problems coming around 2000 when I undertook a self-study program to education myself about financial things. My husband does not like to read because it it difficult for him. He is getting better though. I am hoping that we can maintain our health long enough to finish establishing our retirement business. We are about half-way there but I know we can’t get medicare until we turn 65 so we need to figure out a way to pay for healthcare if we retire before then. (We’re approaching our 60s and the physical wear and tear of our jobs is starting to show on our bodies.)

    I do not know how you can financially educate a population that prefers to be entertained during their limited free time.

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