Category Archives: Economics

What Percentage of Personal Income Comes From Private Pay?

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If you had to guess what percentage of Americans' personal income would you say comes from wages paid by private employers?  75%?  60%?  50%?  The answer, my friends, is 41.9%.  That's a record low, and to me it's an amazing number.  From the USA Today article:

Key shifts in income this year:

• Private wages. A record-low 41.9% of the nation's personal income came from private wages and salaries in the first quarter, down from 44.6% when the recession began in December 2007.

•Government benefits. Individuals got 17.9% of their income from government programs in the first quarter, up from 14.2% when the recession started. Programs for the elderly, the poor and the unemployed all grew in cost and importance. An additional 9.8% of personal income was paid as wages to government employees.

Okay, I have a question that I'm hoping someone smarter than me and with more time to do research can answer: If about 42% of personal income comes from pay and about 28% comes from government programs/wages, then where does the other 30% come from?  I can think of medical benefits and interest on investments, but my little pea brain can't come up with anything else.

h/t to Fec for the link.

Economy Explained With a Fable

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FT.com columnist Martin Wolf explains the current international economic environment with a play on Aesop's fable The Ant and the Grasshopper:

Everybody in the west knows the fable of the grasshopper and the ant. The grasshopper is lazy and sings away the summer, while the ant piles up stores for the winter. When the cold weather comes, the grasshopper begs the ant for food. The ant refuses and the grasshopper starves. The moral of this story? Idleness brings want…

As it happens, in the wider world, there are other ant nests. Asia, in particular, is full of them. There is a rich nest, rather like Germany, called Japan. There is also a huge, but poorer, nest called China. These also want to become rich by selling goods to grasshoppers at low prices and building up claims on grasshopper colonies. The Chinese nest even fixes the foreign price of its currency at a level that guarantees the extreme cheapness of its goods. Fortunately, for the Asians, or so it seems, there happens to be a very big and exceptionally industrious grasshopper colony, called America. Indeed, the only way you would know it is a grasshopper colony is that its motto is: “In shopping we trust”. Asian nests develop a relationship with America similar to Germany’s with its neighbours. Asian ants build up piles of grasshopper debt and feel rich…

Yet there is a difference. When the crash comes to America and households stop borrowing and spending and the fiscal deficit explodes, the government does not say to itself: “This is dangerous; we must cut back spending.” Instead, it says: “We must spend even more, to keep the economy humming.” So the fiscal deficit becomes enormous.

This makes the Asians nervous. So the leader of China’s nest tells America: “We, your creditors, insist you stop borrowing, just as European grasshoppers are now doing.” The leader of the American colony laughs: “We did not ask you to lend us this money. In fact, we told you it was a folly. We are going to make sure American grasshoppers have jobs. If you do not want to lend us money, raise the price of your currency. Then we will make what we used to buy and you will no longer have to lend to us.” So America teaches creditors a lesson from a dead sage: “If you owe your bank $100, you have a problem; but if you owe $100m, it does.” 

Gulp

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Just when you thought it might be safe to go back in the (real estate) water:

These seriously delinquent loans are the 4.3 million loans MBA Chief Economist Jay Brinkmann referred to as the "shadow inventory" on the conference call this morning. Not all are really "shadow inventory" since some of these loans will be modified, some will be cured (probably very few), and some are probably already listed as short sales. But it does suggest a significant number of distressed sales coming…

Thirty four states and the District of Columbia have total delinquency rates over 10%. This is a widespread problem.

h/t to Ed Cone for the link.

Tomorrow’s Economic Forecast Decidedly Mixed

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You know how weather forecasters always hedge their bets with phrases like, "Tomorrow's forecast is decidedly mixed" which, to me, is like saying "You may or may not wake up tomorrow."  Anyway, all the recent economic news has me thinking that our economic forecast is, well, decidedly mixed.  In bullet point fashion:

Yep.  All in all I'd say our economic outlook is decidedly mixed, and I'll even go out on a limb and say that the markets will close either up or down tomorrow.  Tomorrow I'll tell you why the winner of the 2011 Super Bowl will most likely be a team that plays in the NFL.

We Are What We Do

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Russell Roberts, an economics professor at my alma mater, has written a compelling paper about the financial meltdown.  An excerpt from the summary:

How did this happen? Whose fault was it? Some blame capitalism for being inherently unstable. Some blame Wall Street for its greed, hubris, and stupidity. But greed, hubris, and stupidity are always with us. What changed in recent years that created such a destructive set of decisions that culminated in the collapse of the housing market and the financial system?

In this paper, I argue that public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed money. The increasing use of debt mixed with housing policy, monetary policy, and tax policy crippled the housing market and the financial sector. Wall Street is not blameless in this debacle. It lobbied for the policy decisions that created the mess.

In the United States we like to believe we are a capitalist society based on individual responsibility. But we are what we do. Not what we say we are. Not what we wish to be. But what we do. And what we do in the United States is make it easy to gamble with other people’s money—particularly borrowed money—by making sure that almost everybody who makes bad loans gets his money back anyway. The financial crisis of 2008 was a natural result of these perverse incentives. We must return to the natural incentives of profit and loss if we want to prevent future crises. 

Things Are Getting Better, but…

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The Dixon Hughes Triad Business Index for March, 2010 shows that the local economy is improving, but it's not by much and we've got a heckuva long way to go before we can say things are good.  It will be interesting to see what happens in real estate when the stimulus plan expires at the end of this week, but when you read this from the report you wonder how much worse it can get (knock on wood):

At the end of the 1st quarter of 2010, the inventory of homes on the market was 9,098, or 6.3 times the number of homes sold in the 1st quarter.  At the current sales pace, it will take 18.9 months to exhaust the existing inventory.  The number of existing homes offered for sale was up 16.5% from what it was at the end of the 4th quarter, and it was 9.5% higher than at the end of the 1st quarter one year ago. 

The price of the average home sold in the 1st quarter was down 2.8% from the previous quarter.  The average quality-adjusted price of an existing home in the Triad was $158,718.  The average this quarter was down 1.7% from the average recorded in the 1st quarter of last year.  By comparison, over the past year, consumer prices nationally have risen 2.2%.

Something for Nothing

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I was doing some research for the day job and came across this article about a panel discussion on the future of GSEs (Fannie Mae and Freddie Mac).  There are several good quotes contained within, but these two really caught my eye: 

But according to White and Booher, it was a broader cultural issue, an unbalanced federal housing policy that stressed homeownership at the expense of rational underwriting. “I believe that the deception of our culture, that money grows on trees, that there can be action and no reaction, is so prevalent that we live in a fantasy world,” White said. “And members of Congress were the ultimate actors there.”

That unbalanced housing policy was prevalent on the operations side as well. "The problem really starts with a culture that’s increasingly looking for something for nothing,” Durkin of Wood Partners explained. “That permeates our housing policy.”

I really do hope my children's generation ends up being smarter than mine or my parents'. 

Don’t Just Blame the Banksters or the Bums

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It's easy, convenient, a good story line, etc. to blame the Great Recession on a-hole investment bankers trying make a quick buck, or stupid home buyers who should have known better than to buy a $500,000 house on $45,000 a year in income, but it's also wrong.  As with most things in life it's complicated, and hopefully we'll start seeing more in-depth explanations for the financial meltdown as we move out of crisis mode and into recovery/finger-pointing mode.

I might have found a good place to start in today's Wall Street Journal.  Columnist David Wessel profiles the University of Chicago's Raghuram Rajan who has an upcoming book (July publication date) titled "Fault Lines: How Hidden Fractures Still Threaten the World Economy."  Based on the quotes that Wessel provides from his interview of Rajan it sounds like the book will look at the crisis from a big-picture angle, and while the usual suspects are identified as key players in the crisis they are also seen as role players and not arch villains.  I think that's an important distinction if we're going to learn anything from this crisis and fix whatever we need to fix if we're not going to completely torch the economy.

Anyway, here's my favorite quote from the column:

 "When easy money pushed by a deep pocketed government comes into contact with the profit motive of a sophisticated, amoral financial sector, a deep fault line develops," Mr. Rajan writes.

Less than Zero

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Before I start let me please ask one thing: family and friends who know me well, please try to keep the snickering to a minimum as you read this.  Here goes.

One of the requirements of my day job is working with our finance committee to figure out how to manage the association's money.  Cash management is a given for any company, but like many non-profits we have emergency reserves that we have to manage and make sure they will indeed be there for a rainy day.  (The thought of me managing emergency reserves is what probably has my family and friends snickering since I'm the same guy who in college, and the ensuing years until marriage, managed his checking account via ATM. If there was money there I took it and if there wasn't I just shrugged, wondered where the hell it had all gone and resigned myself to eating peanut butter until the next payday arrived). The association's bylaws limit what we can do with the reserves so there's really not a lot of thinking to do.  We just have to find the best possible return in money market funds or CDs and we have to make sure they are structured so that they're fully insured. Here's the rub: CDs and money market funds currently have rates that range from zero (that's right, nada) to one or two percent.  Unless inflation stays that low then our money is effectively losing value as it sits in the bank.

All that's to say that if you have financial reserves with which you need to play it safe then you're going to have to accept break even as a good deal for the time being.  Along those lines Fred Wilson has a very pertinent and must-ready post here.