Category Archives: Economics

A New Wave of Home Equity Disaster

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Found via the always-uplifting Fec is this cheerful article at Reuters:

U.S. borrowers are increasingly missing payments on home equity lines of credit they took out during the housing bubble, a trend that could deal another blow to the country's biggest banks.

The loans are a problem now because an increasing number are hitting their 10-year anniversary, at which point borrowers usually must start paying down the principal on the loans as well as the interest they had been paying all along…

Borrowers are delinquent on about 5.6 percent of loans made in 2003 that have hit their 10-year mark, Equifax data show, a figure that the agency estimates could rise to around 6 percent this year. That's a big jump from 2012, when delinquencies for loans from 2003 were closer to 3 percent.

This scenario will be increasingly common in the coming years: in 2014, borrowers on $29 billion of these loans at the biggest banks will see their monthly payment jump, followed by $53 billion in 2015, $66 billion in 2016, and $73 billion in 2017.

The mortgage meltdown is the gift that keeps on giving.

Is Lack of Competition Killing Americans’ Pay?

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An interesting article in the Wall Street Journal ties fat corporate profits to a lack of competitiveness in American industry which eventually leads to skimpy worker pay:

Never before have American companies seen so much of their sales drift down to the bottom line. In 12 months that ended in the second quarter, U.S. after-tax corporate profits as a share of gross domestic product, a measure of profit margins across the entire economy, came to 10.9%, according to the Commerce Department. That was the highest level according to records going back to 1929. Nor are there signs of erosion: S&P Dow Jones Indices estimates profits at companies in the S&P 500 as a share of sales hit a high in the third quarter…

Why aren't historically wide profit margins getting competed away? One reason may be that there isn't a lot of up-and-coming competition…

To some extent, the dearth of young businesses reflects an environment in which keeping your day job seems wiser than starting something new. But in a lending environment in which funding for newer, smaller businesses is constrained, many would-be entrepreneurs are willing but not able. Facing fewer newcomers, established businesses have one less reason to spend more on wages and equipment; why put effort into building a moat that isn't needed? This is great for profits but not the long-term health of the economy.

Poorly Educated Poor White Women Dying Young

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From a story in The American Prospect:

Everything about Crystal’s life was ordinary, except for her death. She is one of a demographic—white women who don’t graduate from high school—whose life expectancy has declined dramatically over the past 18 years. These women can now expect to die five years earlier than the generation before them. It is an unheard-of drop for a wealthy country in the age of modern medicine. Throughout history, technological and scientific innovation have put death off longer and longer, but the benefits of those advances have not been shared equally, especially across the race and class divides that characterize 21st–century America. Lack of access to education, medical care, good wages, and healthy food isn’t just leaving the worst-off Americans behind. It’s killing them.

The journal Health Affairs reported the five-year drop in August. The article’s lead author, Jay Olshansky, who studies human longevity at the University of Illinois at Chicago, with a team of researchers looked at death rates for different groups from 1990 to 2008. White men without high-school diplomas had lost three years of life expectancy, but it was the decline for women like Crystal that made the study news. Previous studies had shown that the least-educated whites began dying younger in the 2000s, but only by about a year. Olshansky and his colleagues did something the other studies hadn’t: They isolated high-school dropouts and measured their outcomes instead of lumping them in with high-school graduates who did not go to college.

The last time researchers found a change of this magnitude, Russian men had lost seven years after the fall of the Soviet Union, when they began drinking more and taking on other risky behaviors. Although women generally outlive men in the U.S., such a large decline in the average age of death, from almost 79 to a little more than 73, suggests that an increasing number of women are dying in their twenties, thirties, and forties. “We actually don’t know the exact reasons why it’s happened,” Olshansky says. “I wish we did.”…

Researchers have long known that high-school dropouts like Crystal are unlikely to live as long as people who have gone to college. But why would they be slipping behind the generation before them? James Jackson, a public-health researcher at the University of Michigan, believes it’s because life became more difficult for the least-educated in the 1990s and 2000s. Broad-scale shifts in society increasingly isolate those who don’t finish high school from good jobs, marriageable partners, and healthier communities. “Hope is lowered. If you drop out of school, say, in the last 20 years or so, you just had less hope for ever making it and being anything,” Jackson says. “The opportunities available to you are very different than what they were 20 or 30 years ago. What kind of job are you going to get if you drop out at 16? No job.”

If you were to poll folks here in the Piedmont of North Carolina you would find a lot of people who agree with this premise. We're in the midst of a tectonic shift from a manufacturing-based economy to a knowledge-based economy and there are a lot of people who once made a good living with their high school (or less) education who are now struggling to keep their heads above water. Scary, scary stuff.

 

A Revival of Compassion, Part II

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Earlier this week I wrote a post that was prompted by Rev. Mike Aiken's letter to the editor that calls into question our elected leaders' compassion for the poor. In that letter he wrote:

Congress continues to debate proposed massive cuts to the food stamp program. As a result of a computer glitch at the N.C. Department of Health and Human Services, the demand for emergency food bags more than doubled overnight. With the decision not to extend unemployment benefits, 12,000 Triad families are facing homelessness. In July, Urban Ministry assisted many of these families with more than $52,000 in direct assistance. The decision of our legislature not to accept federal Medicaid funding that would cover an additional 500,000 North Carolina medically indigent residents was a major factor in the decision to close the HealthServe Medical Clinic at the end of August.

Rev. Aiken is the Executive Director of Greensboro Urban Ministry and thus has an up close and personal view of the effects these cuts in government programs are having. His organization is being stretched thin trying to keep up with the increased need, and his isn't the only one. From an opinion piece in yesterday's Winston-Salem Journal written by David Heinen, director of public policy and advocacy for the NC Center for Nonprofits, and Holly Welch Stubbing, senior vice president and in-house counsel for Foundation for the Carolinas:

Sequestration spending cuts may cause members of Congress to assume nonprofits in our communities will always be able to fill the gaps in providing basic safety net programs. The reality, however, is that the ongoing effects of the recession have placed such a strain on nonprofits that many lack the capacity to take on this added responsibility.

The workload of many nonprofits has increased as the number of North Carolinians living in poverty has jumped to nearly 18 percent. In 2011, 93 percent of North Carolina nonprofits experienced an increased need for services, and 58 percent were unable to meet these needs. Two out of every five nonprofits operated at a deficit last year, and one-third had to cut programs or services.

The main point of Heinen and Stubbing's piece was to stress the importance of state and federal governments fully preserving the deduction for charitable contributions as they work on tax reform. They pointed out the stress being felt by nonprofits is extreme due to the increased demand for their services prompted by a still rough employment situation and a reduction in government aid, and they argued that if states and the federal government were to eliminate or reduce deductions for charitable contributions it would truly put the nonprofits in an even more tenuous position. 

Quite frankly we as a society are currently in the position of having to choose between negative options when it comes to the poor and needy: do we help them via government programs, nonprofit programs or some combination of the two? These are negative options because they are reactionary in nature and do nothing to address the root causes of poverty and hunger. Until we address those root issues – jobs, education, out-of-control health care expenses, etc. – our government/non-profit programs will continue to be needed by too many people instead of serving their proper role as a safety net of last resort for the very unfortunate who have hit rough times due to unforeseen circumstances.  Here's the crucial part though: until we do address and resolve those root problems then we must find away to keep people off the streets and my fear is that the programs we have in place won't be able to do it.

Race as a Distraction

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In college, way back in the dark ages of the 1980s, I had a roommate from Scotland who was intrigued with the racial discord he observed in America. To him it made no sense that people would hate each other based on their race, but of course it made total sense to him that the Catholics and Protestants back in Scotland were in a constant state of discord. He'd say, and I'm paraphrasing here, "Why do you Americans hate each other for what you are? At least in Scotland we hate each other for what we choose to believe."

Whenever race comes up as a topic I think about those words. Indeed, it's totally illogical for us to hate one another for something we have no control over. In fact it's probably the most absurd reason for people to hate and distrust each other. On the other hand, probably the most logical reason for any group of people to dislike another is if one group has disproportionately more of anything – wealth, food, opportunity, etc. – than the other, particularly if the group with less feels that the other group has gotten it off of their backs.

That's why the new data about the true nature of poverty in America, and the plight of working class whites in particular, should scare the bejeezus out of this country's power structure. Once all of the poor and struggling working class folks from every race realize they have more in common with each other than with the wealthy of their own race they will form a formidable body to deal with. From the article linked above:

As nonwhites approach a numerical majority in the U.S., one question is how public programs to lift the disadvantaged should be best focused — on the affirmative action that historically has tried to eliminate the racial barriers seen as the major impediment to economic equality, or simply on improving socioeconomic status for all, regardless of race.

Hardship is particularly growing among whites, based on several measures. Pessimism among that racial group about their families' economic futures has climbed to the highest point since at least 1987. In the most recent AP-GfK poll, 63 percent of whites called the economy "poor."…

While racial and ethnic minorities are more likely to live in poverty, race disparities in the poverty rate have narrowed substantially since the 1970s, census data show. Economic insecurity among whites also is more pervasive than is shown in the government's poverty data, engulfing more than 76 percent of white adults by the time they turn 60, according to a new economic gauge being published next year by the Oxford University Press.

There's another important societal component contributing to the economic struggle of millions of individuals in this country, and it's one we need to deal with head on: the breakdown of the traditional family. Again from the article:

–For the first time since 1975, the number of white single-mother households living in poverty with children surpassed or equaled black ones in the past decade, spurred by job losses and faster rates of out-of-wedlock births among whites. White single-mother families in poverty stood at nearly 1.5 million in 2011, comparable to the number for blacks. Hispanic single-mother families in poverty trailed at 1.2 million…

Marriage rates are in decline across all races, and the number of white mother-headed households living in poverty has risen to the level of black ones.

As a man who has been happily married for a long time I'm obviously a fan of the family structure. However, whenever the topic of single parent homes comes up for public debate we get pulled into the moral/religious rabbit hole and never address the economics of single parenthood. Why do we insist on approaching this problem from a moral standpoint, haranguing young men and women about their sinfulness and almost guaranteeing they'll tune us out, and not instead concentrate on developing societal structures that will help deal with a very real problem? I'm not smart enough to have a solution here, but it doesn't take a rocket science to realize that the answer is not browbeating people back into church and insisting that they live they way great-Grandma and Grandpa did. 

Our leaders, whether in industry or government, need to begin to deal with the reality that is portrayed in this new data or our country will soon be in even deeper doo-doo. They can no longer hide from the reality that our middle class is disappearing and that our "land of opportunity" could quickly become an empty slogan if they don't change things, and fast.

The Rise of 14th Street

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As a teen growing up in Northern Virginia in the early 80s I'd venture downtown with some of my buddies to witness firsthand the depravity that was on display on 14th Street. I really was too stupid to realize how dangerous it was to go down there to park and watch hookers pick up johns, dealers sell their weed/coke/whatever and pimps managing their "personnel." To me and my buddies it was like going to live theater, except that when we saw the inevitable beatings, assaults and brawls and realized that the blood that was spilled and the bullets that flew were very real, we retreated to our suburbs and ventured downtown only to visit the clubs in Georgetown or Foggy Bottom.

It's from that perspective that I read this article in the Washington Post about the gentrification of the 14th St. corridor.  Whether or not you're a fan of gentrification you have to be amazed at how a city can literally be transformed.

The formerly riot-scarred corridor has gone into gentrification overdrive, a boom fueled by investors looking for a safe place to park hundreds of millions of dollars, the relative ease of obtaining a liquor license, and the arrival of thousands of new residents longing to live downtown.

The result: more than 1,200 condos and apartments and 100,000 square feet of retail are being built or have hit the market in just the past nine months. At the same time, at least 25 bars and restaurants have opened or are under construction along 14th Street, adding more than 2,000 seats to the city’s dining scene at warp speed…

The street’s renaissance began decades ago, with the establishment of Studio Theatre (founded in 1978 and expanded in 1987) and other performing arts venues. But the pace of change accelerated after a successful community lobbying effort to lure Whole Foods Market to P Street, between 14th and 15th streets. A steady progression of improvements followed, with carryouts, auto repair garages and pawnshops giving way to sit-down Thai restaurants, fitness studios and window displays of $5,000 sectional sofas.

This next part interested me from a professional standpoint since I work for an apartment trade association:

Veteran commercial real estate broker Andrew McAllister, who has done $1 billion worth of business along 14th, likened the District’s post-recession situation to last call on a Friday night.

Were we the “best-looking chick? We were the only chick at the bar,” he said.

Washington quickly found itself at the center of a national apartment building boom, spurred by the transformation of millions of former homeowners and would-be home buyers into renters. Many of them experienced unemployment or had their credit ratings decimated by foreclosure. Others couldn’t muster the bigger down payments required to obtain mortgage loans.

Washington’s status as an oasis of job security, in particular, made it one of the nation’s top destinations for the young, highly educated and affluent, putting the city on track to drawmore newcomers between 2009 and 2011 than it had during the previous decade.

A note for our folks here in the Triad: notice how important jobs were to the revitalization of downtown Washington? Our small cities are doing a great job focusing on the redevelopment of their downtowns, but until we get significant job growth it will be hard for our cities to really take off.

Deskilling

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Is a lack of demand for skilled labor contributing to America's stubbornly high unemployment rate?

What explains the current low rate of employment in the U.S.? While there has substantial debate over this question in recent years, we believe that considerable added insight can be derived by focusing on changes in the labour market at the turn of the century. In particular, we argue that in about the year 2000, the demand for skill (or, more specifically, for cognitive tasks often associated with high educational skill) underwent a reversal. Many researchers have documented a strong, ongoing increase in the demand for skills in the decades leading up to 2000. In this paper, we document a decline in that demand in the years since 2000, even as the supply of high education workers continues to grow. We go on to show that, in response to this demand reversal, high-skilled workers have moved down the occupational ladder and have begun to perform jobs traditionally performed by lower-skilled workers. This de-skilling process, in turn, results in high-skilled workers pushing low-skilled workers even further down the occupational ladder and, to some degree, out of the labor force all together. In order to understand these patterns, we offer a simple extension to the standard skill biased technical change model that views cognitive tasks as a stock rather than a flow. We show how such a model can explain the trends in the data that we present, and offers a novel interpretation of the current employment situation in the U.S.

Hidden Costs

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One of the interesting changes we're seeing in the US is the different behavior of health care consumers when they are actually allowed to act like consumers. From the Wall Street Journal:

Last fall, two big employers embarked on a radical new approach to employee health benefits, offering workers a sum of money and allowing them to choose their health plans on an online marketplace. Now, the first results are in: Many workers were willing to choose lower-priced plans that required them to pay more out of their pockets for health care.

The new online marketplace, operated by consulting firm Aon AON -0.29% Hewitt, a unit of Aon PLC, was used by more than 100,000 employees of  SearsHoldings Corp.  SHLD -0.86%  and Darden Restaurants Inc.,  DRI +0.43% as well as Aon itself, to pick plans for 2013. The employers gave workers a set contribution to use toward health benefits, and they could opt to pay more each month to get richer plans, or choose cheaper ones that might have bigger out-of-pocket fees, such as higher deductibles.

"When people are spending their own money, they tend to be more consumeristic," said Ken Sperling, Aon Hewitt's national health exchange strategy leader.

Go figure. When people are given pricing options and asked to consciously weigh costs/benefits and risks/rewards they make "consumeristic" decisions. Forget for a moment all the details about "Obamacare" and your feelings towards it, and instead ask yourself these questions: Can any health care reform program succeed if it doesn't allow people to behave like a logical consumer? How can a logical consumer exist in a market where pricing is obscured? To that end, the next time you go to the doctor's office try this exercise: ask them what your appointment is going to cost before they do anything. They likely won't be able to tell you because they simply don't know – the cost depends on what kind of insurance you have and the rates your insurer has negotiated with the doctor's network. Craziness, huh?

Changing gears, but sticking to the hidden costs theme, have you ever wondered why we it's been so difficult for people to grasp the true costs of the wars in Afghanistan and Iraq? It's because the bill has shown up in the form of an exploding deficit and not a "War Tax." Deficits are like credit card debt: you know they're bad and that they can be a drag on your financial well being, they are hard to get overly excited about because your daily life doesn't change much until you run out of credit and the bills come due. On the other hand if you're paying cash – or a War Tax – the cost of your action is immediately clear and you're far less likely to be so sanguine about whatever you're doing. 

So here's a rule of thumb we need to teach our children: if the cost of something is hidden, or if you aren't asked to pay for it up front, it is likely much higher than you think so you should really think hard before making that purchase decision. There should also be a corollary: if it's a politician doing the selling then you should probably just walk away or be ready to spend 100x whatever you think the cost is (see War, Iraq).

$22 Trillion Here, $22 Trillion There

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The GAO was tasked with studying the impact of the Dodd-Frank financial reform law to help determine what it's economic impact would be. So what did they find?

The 2008 financial crisis cost the U.S. economy more than $22 trillion, a study by the Government Accountability Office published Thursday said. The financial reform law that aims to prevent another crisis, by contrast, will cost a fraction of that…

The report, five years after the collapse of mortgage-focused hedge funds in late-2007 set off a yearlong banking panic and a deep recession, was published as part of a cost-benefit analysis of the Dodd-Frank financial reform law of 2010. The GAO tried to determine if the benefits of preventing a future economic meltdown exceeded the costs of implementing that law.

"If the cost of a future crisis is expected to be in the trillions of dollars, then the act likely would need to reduce the probability of a future financial crisis by only a small percent for its expected benefit to equal the act’s expected cost," the GAO concluded.

Obviously the banksters disagree.