Oh dear, now it looks like people saving money and being more frugal is actually hurting the economy! The title of an article in the Wall Street Journal bears out this awful truth…
Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes
BOISE, Idaho -- Rick and Noreen Capp recently reduced their credit-card debt, opened a savings account and stopped taking their two children to restaurants. Jessica and Alan Muir have started buying children's clothes at steep markdowns, splitting bulk-food purchases with other families and gathering their firewood instead of buying it for $200 a cord.
As layoffs and store closures grip Boise, these two local families hope their newfound frugality will see them through the economic downturn. But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end. Americans, fresh off a decadeslong buying spree, are finally saving more and spending less -- just as the economy needs their dollars the most.
Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation's standard of living. But in a recession, increased saving -- or its flip side, decreased spending -- can exacerbate the economy's woes. It's what economists call the "paradox of thrift."
U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.
I really don’t think that excessive savings is the problem. The real culprit is that our economy is built in many ways on smoke and mirrors, and has been for a long time.
We are working with two big issues in the economy from my vantage point, keeping in mind that while I have worked in financial services and banking for a long time and have a rudimentary knowledge of economics garnered in college, I am not an economist. The two sides of the coin are inflated wages and debt based consumption.
Wages
One issue is that wages are artificially inflated by minimum wage hikes, which does little to help the lowest paid workers and drags workers with modest pay rates down. If you are making $10/hour and the minimum wages goes from $5.45 to $9.50, your pay hasn’t changed but now you are getting paid just slightly more than someone in a minimum wage job. That makes your job less valuable in comparison. On the other end, paying people more than the market rate for the lowest skilled jobs causes prices to go up. If you have to pay more for workers at McDonald’s, then you respond by raising the price of a Big Mac. The minimum wage worker gets more dollars in his paycheck, but those dollars don’t buy more than they did before and now the higher costs are passed on to everyone else. Wages must be market driven, each job has in inherent value and tinkering with that value by the government doesn’t change the fact that an electrical engineer should make substantially more than a cart collector at Wal-Mart. Payroll is not an unlimited pie, it is a expense line item and if it increases, something else must change to compensate.
Another issue, one that I have been complaining about for some time, are labor unions. For decades, unions have collectively bargained progressively higher and higher wages and more expensive benefits. That seemed fine 40 years ago when the manufacturing sector in America was strong and the Big Three car companies had virtually no competition domestically. We made our own cars, we bought our own cars. But today we have wages that are skewed compared to their actual value. Autoworkers have salary and benefit packages that are enormous compared to not just other blue-collar jobs but even some very specialized, highly technical jobs. The legacy costs for the UAW mean that an unreasonable percentage of the cost of a new car being manufactured goes to pay the benefits of a former employee who hasn’t worked at GM or Ford for years, or even decades. It is not just the UAW. Union represented employees in all sorts of industries have artificially inflated wages for service employees, unskilled workers and all manner of job categories.
The final culprit in wages, at the risk of being labeled a misogynist or Neanderthal or chauvinist (which doesn’t really bother me), is that a huge chunk of the workforce are married women with children. The workforce has a substantial number of employees or potential employees that are unemployed that really don’t need to be in the workforce. Married women with children work for a variety of reasons, few of which quite frankly are valid, and while they work, they store their kids in expensive daycare until they are old enough to go to free daycare, i.e. the public school system. Even then they are getting home before the parents in many cases, requiring some sort of afterschool care or the kids staying home day after day unsupervised.
So we have a whole service industry based on caring for children that could be cared for by one of their parents, which in turn causes upward pressure on wages and benefits so that these parents can afford daycare. The daycare/child-care industry is a whole business predicated on the model of delivering a service that people could and really should do for themselves. It would be like every family in America paying for a chauffeur, chef and maid. Sure I can drive myself to work, but why should I when I can pay someone else to do it? On the other hand, the increased number of consumers serves to drive demand which drives up prices. So women who work “because they have to in order to make ends meet” have unwittingly made making ends meet harder because they have inflated demand and wages. I have always argued that for most middle-class wage earners it makes very little economic sense to have the spouse working when you factor in daycare costs and increased taxes, as well as ancillary costs that are harder to gauge, things like eating more expensive prepared foods and eating out because who wants to work 45-50 hours a week and then come home and make dinner? The Four Horsemen of socialism, feminism, consumerism and secularism have conspired to convince families that they need two incomes to buy the things they MUST have, that public schools and day care actually are positive sources of socialization and that a woman who is “just a housewife” is repressed. The end result is two-income families, and while the children suffer, the family is not ahead any and the workforce is flooded with extra workers. The only beneficiaries are daycare providers and the Federal government that benefits from increased tax revenue and in turn subsidizes daycare to make it even more compelling for women to become wage earners while the institutions care for their children, thus fulfilling the socialist agenda of state control at an ever earlier age.
Debt
The flipside of the problem is debt. The infrastructure of this country is built on debt. Plain and simple. Not 100% of it of course, but much of it. Virtually no one buys houses or cars in cash. That is not in and of itself a huge problem but the ease with which people could get credit, even if they had shaky credit to begin with or way too much debt already, also served to inflate prices. Take cars for example. The number of people driving relatively new cars is crazy, but when you can get credit at will and stretch auto loans out for 84 months, it is going to encourage people to buy new and expensive cars. Hummers, SUVs, nice sedans, all brand new off the lot, fill parking lots, roads and garages. Prices skyrocket because people want these new cars and banks were willing to finance that desire. In the old days, young men looked at the latest muscle car and dreamed about saving up and buying one some day. Today, at least until recently, a 20 year old guy with minimal credit and a paycheck could drive out of the dealership with a brand new Mustang convertible.
Even housing, normally one of the few sound places to incur debt, has been a major culprit in our economic downturn. No money down loans that gave people little incentive to save to buy a house and put people into mortgages who were not really ready for them, adjustable rate mortgages that kept payments low for the first 3-5 years, interest only loans that also kept payments down in the hope that house values would appreciate and even loans where you could make such small payments that your principal balance would actually go up each month. All of these loan vehicles conspired to skew the housing market along with government programs designed to incent or punish banks into making loans to people they normally wouldn’t, in houses they normally wouldn’t and with terms they normally wouldn’t offer. Banks have become progressively more and more production based, so balance sheet and income statement growth is less important than product pushing to hit goals. So what if a loan goes bad, I already got paid for it and there is no downside for me if it goes bad? With all of this, it is little wonder we are in a housing crisis as housing sales plummet, home values decline every month and foreclosures make up almost half of housing sales.
But credit cards are the big culprit and the next big crisis about to hit the economy.
Many people used the inflated “value” of their home to take out a home equity line of credit, and in doing so lowered the rate on their debt but also transferred debt that was unsecured into debt collateralized by their home. This led to high-interest debt with no tax advantages being transferred into tax favored, lower interest debt but it also had two unintended consequences. First, people went right back out and used their unsecured credit card debt to purchase goods and services, basically using the appraised value of their house to fuel spending in the economy and second, they increased the total debt load against their house which is now working against them when trying to sell their home that is plummeting in value.
Drive around any urban or suburban area and look at all of the strip malls, shopping centers, big box stores. Look at our old hometown of Petoskey, Michigan where a brand new Lowes was built next to the Home Depot and where they are planning on building a Meijer supercenter to go along with the Wal-Mart super center, K-Mart and three traditional grocery stores. All in a town of 6000 permanent residents and all driven by consumer spending utilizing credit card debt. Many of the Bed, Bath and Beyond stores, Barnes & Noble bookstores, Best Buy electronic stores were built in response to consumer demand that is funded by money that consumer don’t have and likely never will have. It used to be that if you got in over your head in credit card debt, you could refinance it with your house that inexorably increased in value. But with housing prices plummeting, foreclosures making up almost half of the home sales, job losses, etc. that option is off the table and families are looking around at the bills and realizing that they will never be able to service the existing debt month to month, much less pay the debt off. For many people, the options are narrowed down to the point that they are walking away from houses, turning in cars and declaring bankruptcy because their income cannot pay for the debt.
We are in trouble economically, not because of a few bad quarters or some extra foreclosures in the last six months but because the foundations of our economy are rotten at the core. Despite the plan of Barack Obama to spend us into prosperity with trillion dollar deficits, that will not solve the underlying sickness in our economy. Until wages get under control and back to market driven levels and until the credit crisis burns out, the economy will struggle. The only upside is that it seems that based on this report in the WSJ and other reports showing spending is coming under control and women are leaving the workforce. It took decades of false affluence to get us into this mess, and it is going to take a long time and a lot of pain to get us out, but if we don’t we will inexorably slide further into socialism as Americans become more and more dependent on the government to care for them.
Hard-Hit Families Finally Start Saving, Aggravating Nation's Economic Woes
BOISE, Idaho -- Rick and Noreen Capp recently reduced their credit-card debt, opened a savings account and stopped taking their two children to restaurants. Jessica and Alan Muir have started buying children's clothes at steep markdowns, splitting bulk-food purchases with other families and gathering their firewood instead of buying it for $200 a cord.
As layoffs and store closures grip Boise, these two local families hope their newfound frugality will see them through the economic downturn. But this same thriftiness, embraced by families across the U.S., is also a major reason the downturn may not soon end. Americans, fresh off a decadeslong buying spree, are finally saving more and spending less -- just as the economy needs their dollars the most.
Usually, frugality is good for individuals and for the economy. Savings serve as a reservoir of capital that can be used to finance investment, which helps raise a nation's standard of living. But in a recession, increased saving -- or its flip side, decreased spending -- can exacerbate the economy's woes. It's what economists call the "paradox of thrift."
U.S. household debt, which has been growing steadily since the Federal Reserve began tracking it in 1952, declined for the first time in the third quarter of 2008. In the same quarter, U.S. consumer spending growth declined for the first time in 17 years.
I really don’t think that excessive savings is the problem. The real culprit is that our economy is built in many ways on smoke and mirrors, and has been for a long time.
We are working with two big issues in the economy from my vantage point, keeping in mind that while I have worked in financial services and banking for a long time and have a rudimentary knowledge of economics garnered in college, I am not an economist. The two sides of the coin are inflated wages and debt based consumption.
Wages
One issue is that wages are artificially inflated by minimum wage hikes, which does little to help the lowest paid workers and drags workers with modest pay rates down. If you are making $10/hour and the minimum wages goes from $5.45 to $9.50, your pay hasn’t changed but now you are getting paid just slightly more than someone in a minimum wage job. That makes your job less valuable in comparison. On the other end, paying people more than the market rate for the lowest skilled jobs causes prices to go up. If you have to pay more for workers at McDonald’s, then you respond by raising the price of a Big Mac. The minimum wage worker gets more dollars in his paycheck, but those dollars don’t buy more than they did before and now the higher costs are passed on to everyone else. Wages must be market driven, each job has in inherent value and tinkering with that value by the government doesn’t change the fact that an electrical engineer should make substantially more than a cart collector at Wal-Mart. Payroll is not an unlimited pie, it is a expense line item and if it increases, something else must change to compensate.
Another issue, one that I have been complaining about for some time, are labor unions. For decades, unions have collectively bargained progressively higher and higher wages and more expensive benefits. That seemed fine 40 years ago when the manufacturing sector in America was strong and the Big Three car companies had virtually no competition domestically. We made our own cars, we bought our own cars. But today we have wages that are skewed compared to their actual value. Autoworkers have salary and benefit packages that are enormous compared to not just other blue-collar jobs but even some very specialized, highly technical jobs. The legacy costs for the UAW mean that an unreasonable percentage of the cost of a new car being manufactured goes to pay the benefits of a former employee who hasn’t worked at GM or Ford for years, or even decades. It is not just the UAW. Union represented employees in all sorts of industries have artificially inflated wages for service employees, unskilled workers and all manner of job categories.
The final culprit in wages, at the risk of being labeled a misogynist or Neanderthal or chauvinist (which doesn’t really bother me), is that a huge chunk of the workforce are married women with children. The workforce has a substantial number of employees or potential employees that are unemployed that really don’t need to be in the workforce. Married women with children work for a variety of reasons, few of which quite frankly are valid, and while they work, they store their kids in expensive daycare until they are old enough to go to free daycare, i.e. the public school system. Even then they are getting home before the parents in many cases, requiring some sort of afterschool care or the kids staying home day after day unsupervised.
So we have a whole service industry based on caring for children that could be cared for by one of their parents, which in turn causes upward pressure on wages and benefits so that these parents can afford daycare. The daycare/child-care industry is a whole business predicated on the model of delivering a service that people could and really should do for themselves. It would be like every family in America paying for a chauffeur, chef and maid. Sure I can drive myself to work, but why should I when I can pay someone else to do it? On the other hand, the increased number of consumers serves to drive demand which drives up prices. So women who work “because they have to in order to make ends meet” have unwittingly made making ends meet harder because they have inflated demand and wages. I have always argued that for most middle-class wage earners it makes very little economic sense to have the spouse working when you factor in daycare costs and increased taxes, as well as ancillary costs that are harder to gauge, things like eating more expensive prepared foods and eating out because who wants to work 45-50 hours a week and then come home and make dinner? The Four Horsemen of socialism, feminism, consumerism and secularism have conspired to convince families that they need two incomes to buy the things they MUST have, that public schools and day care actually are positive sources of socialization and that a woman who is “just a housewife” is repressed. The end result is two-income families, and while the children suffer, the family is not ahead any and the workforce is flooded with extra workers. The only beneficiaries are daycare providers and the Federal government that benefits from increased tax revenue and in turn subsidizes daycare to make it even more compelling for women to become wage earners while the institutions care for their children, thus fulfilling the socialist agenda of state control at an ever earlier age.
Debt
The flipside of the problem is debt. The infrastructure of this country is built on debt. Plain and simple. Not 100% of it of course, but much of it. Virtually no one buys houses or cars in cash. That is not in and of itself a huge problem but the ease with which people could get credit, even if they had shaky credit to begin with or way too much debt already, also served to inflate prices. Take cars for example. The number of people driving relatively new cars is crazy, but when you can get credit at will and stretch auto loans out for 84 months, it is going to encourage people to buy new and expensive cars. Hummers, SUVs, nice sedans, all brand new off the lot, fill parking lots, roads and garages. Prices skyrocket because people want these new cars and banks were willing to finance that desire. In the old days, young men looked at the latest muscle car and dreamed about saving up and buying one some day. Today, at least until recently, a 20 year old guy with minimal credit and a paycheck could drive out of the dealership with a brand new Mustang convertible.
Even housing, normally one of the few sound places to incur debt, has been a major culprit in our economic downturn. No money down loans that gave people little incentive to save to buy a house and put people into mortgages who were not really ready for them, adjustable rate mortgages that kept payments low for the first 3-5 years, interest only loans that also kept payments down in the hope that house values would appreciate and even loans where you could make such small payments that your principal balance would actually go up each month. All of these loan vehicles conspired to skew the housing market along with government programs designed to incent or punish banks into making loans to people they normally wouldn’t, in houses they normally wouldn’t and with terms they normally wouldn’t offer. Banks have become progressively more and more production based, so balance sheet and income statement growth is less important than product pushing to hit goals. So what if a loan goes bad, I already got paid for it and there is no downside for me if it goes bad? With all of this, it is little wonder we are in a housing crisis as housing sales plummet, home values decline every month and foreclosures make up almost half of housing sales.
But credit cards are the big culprit and the next big crisis about to hit the economy.
Many people used the inflated “value” of their home to take out a home equity line of credit, and in doing so lowered the rate on their debt but also transferred debt that was unsecured into debt collateralized by their home. This led to high-interest debt with no tax advantages being transferred into tax favored, lower interest debt but it also had two unintended consequences. First, people went right back out and used their unsecured credit card debt to purchase goods and services, basically using the appraised value of their house to fuel spending in the economy and second, they increased the total debt load against their house which is now working against them when trying to sell their home that is plummeting in value.
Drive around any urban or suburban area and look at all of the strip malls, shopping centers, big box stores. Look at our old hometown of Petoskey, Michigan where a brand new Lowes was built next to the Home Depot and where they are planning on building a Meijer supercenter to go along with the Wal-Mart super center, K-Mart and three traditional grocery stores. All in a town of 6000 permanent residents and all driven by consumer spending utilizing credit card debt. Many of the Bed, Bath and Beyond stores, Barnes & Noble bookstores, Best Buy electronic stores were built in response to consumer demand that is funded by money that consumer don’t have and likely never will have. It used to be that if you got in over your head in credit card debt, you could refinance it with your house that inexorably increased in value. But with housing prices plummeting, foreclosures making up almost half of the home sales, job losses, etc. that option is off the table and families are looking around at the bills and realizing that they will never be able to service the existing debt month to month, much less pay the debt off. For many people, the options are narrowed down to the point that they are walking away from houses, turning in cars and declaring bankruptcy because their income cannot pay for the debt.
We are in trouble economically, not because of a few bad quarters or some extra foreclosures in the last six months but because the foundations of our economy are rotten at the core. Despite the plan of Barack Obama to spend us into prosperity with trillion dollar deficits, that will not solve the underlying sickness in our economy. Until wages get under control and back to market driven levels and until the credit crisis burns out, the economy will struggle. The only upside is that it seems that based on this report in the WSJ and other reports showing spending is coming under control and women are leaving the workforce. It took decades of false affluence to get us into this mess, and it is going to take a long time and a lot of pain to get us out, but if we don’t we will inexorably slide further into socialism as Americans become more and more dependent on the government to care for them.
2 comments:
Empty those piggy banks, boys and girls... the country depends on your pennies!
Enjoy the blog and got you added to the RightMichigan blogroll yesterday evening, by the way.
--Nick
www.RightMichigan.com
Nick, I saw the link yesterday, thanks! We can expect the IRS to come into our homes and get the change from our couches soon to fund the "stimulus" package...
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