Working Class Blues

July 7, 2019

by Steve Stofka

This week I had a chance to watch two documentaries hosted by journalist Bill Moyers several years ago (Note #1). They featured the shifting fortunes of two blue-collar working-class families in Milwaukee. Each family had enjoyed the security and benefits of middle-class life – a house and dreams that they would send their kids to college one day. When each breadwinner lost their jobs in the manufacturing industry, they realized just how precarious their situation was.

With more education and skills, these blue-collar workers could have made a better transition. Higher education is certainly a solution for some but how will more education help the butcher, the baker and the candlestick maker? These professions play a part in our complex society and the marketplace has not found a viable solution for those workers and their families.

What is the middle class? The Census Bureau defines it as the middle three quintiles of income (Note #2). What does that mean? If incomes range from $0 to $100 the range of the middle class is from $20 to $80. Some economists use $25 and $75 as the upper and lower bounds of the middle class. A hundred years ago the middle class was a small sliver of the population in the middle. They were between the working class who relied almost entirely, if not exclusively, on work for their income, and the upper class whose major source of income was not work – profits, interest, dividends and rents.

When economists talk about the middle class, it is usually the lower middle-class or working class that they use to represent the fortunes of a wide range of people with far different circumstances, education and skills. Both videos focused on that working-class segment because the stories are poignant and the solutions difficult, if not intractable.

The Golden Age of the working class was after World War II when unions were strong and blue-collar incomes grew much faster than inflation. After the productive capacity of much of developed world had been destroyed during World War II, America was the factory for the world. The workers in those factories enjoyed strong bargaining power and could command a good benefit package and wage gains from employers.

Until the Roosevelt administration established housing and mortgage programs during the decade of the Great Depression, most families had to put a third to a half down on a house and pay off the mortgage in five to ten years. The FHA (1934) and FNMA (1938) lowered those requirements to as low as 10% (Note #3). The GI bill that was passed in 1944 promised returning GIs a home for little to nothing down and low-interest long-term mortgages.  Residential construction boomed.

As the European nations and Japan recovered in the 1960s and 70s American firms were challenged by low cost imported goods. As their pricing power eroded, they became more resistant to wage and benefit demands by working-class unions. Protectionist policies guarded against competition from foreign auto makers, but consumer buying power in America was a magnet for appliances and electronics from Japan and Germany, and foodstuffs from France, Spain, Italy and Mexico (Note #4).

The 1970s was beset by a series of bitter strikes in both private industry and in government service. The benefit and wage packages that union workers had negotiated in the 50s and 60s proved uncompetitive in the revived private international marketplace. Those who could afford the higher taxes to pay city workers began to move out of the cities to the suburbs. Cities like New York suffered under successive waves of strikes by fire, police, sanitation and transportation workers. If the firefighters got a 4% raise, other city workers wanted a similar wage package.

Rather than invest in refurbishing decades-old factories, manufacturers built new factories abroad, where labor costs were much cheaper. The savings more than offset the shipping costs of finished products back to America. Those shipping costs had been drastically reduced in 1955 when a transport owner and an engineer designed a shipping container that could be stacked and survive the rigors of an ocean voyage. They gave away the patent and the world adopted the new containers (Note #5).

As the manufacturing plants in the northern states, particularly the Rust Belt, began to shutter their doors, some families moved. Many families who had bought homes now found that the value of their homes had depreciated. Some with strong ties to the community and a lack of savings struggled on at lower paying jobs. Some lost their houses, their cars, their dreams. The two families that Bill Moyers interviewed exemplified this broad trend. 

For some journalists and economists, this short-lived post-War era became a benchmark for the way it should be. That benchmark may have been a historical anomaly, an aftermath of a global war.

What is to be done? Since the Johnson Administration ushered in the War on Poverty fifty years ago, the percentage of the population in poverty has not changed (Note #2). 42% of children born into poverty remain in poverty. Either the programs have been poorly designed, or the problems are complex and resist solutions.

Will raising taxes on the rich help? Most of the capital gains go to the upper class who pay lower taxes on those gains. Is that the solution? To fund their retirement, millions of seniors each year are selling some of their IRAs and 401Ks, and incurring capital gains when they do so. Will politicians change the rules in midstream on a generation of Boomers? Old people vote in high percentages. Probably not.

Some suggest that the government stop subsidizing rich people and give that money to people who need it. This would include means testing Social Security, but also include a plethora of “gimmes” that pass unnoticed to most of us from government to those who are well-off. Some farmers receive a check from the government to not grow crops in order to control the supply. “Dear Santa, do not give me money this year.” Who is going to write that note?

Some have suggested we implement a Universal Basic Income (UBI) program, a program which would give $1000, for example, to everyone. That would be a nice subsidy for Walmart and McDonald’s who could then pay their workers even less than they do now. Some economists argue that there are even more problems (Note #6).

What about a higher Federal minimum wage? $15 is a popular suggestion on the campaign trail. A $15 wage in Los Angeles has much less buying power than it does in Alamosa, CO. Why not implement something indexed to the median wage in each area? The BLS, the same agency that produces the employment report each month, has the data to implement such an idea. Why a one size fits all minimum wage? Those who prefer local solutions are not without compassion.

History tells us that large government solutions can exacerbate the very problems they were meant to solve. The housing assistance and student loan programs are examples of the bureaucratic bramble that characterizes active Federal programs. Given that caveat, I do think that a Job Guarantee program that operated at the state and local level but was funded by the Federal government would provide stability to the more vulnerable in our work force. It would reduce the cyclical and structural unemployment that corrodes our society (Note #7). There are several proposals to implement some trial programs in the states and I support those efforts. What do you think?

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Notes:

  1. Frontline’s Two American Families and Moyers & Co. Surviving the New American Economy
  2. A 2018 Census Bureau presentation (PPT) of income and poverty in the U.S.
  3. History of Government housing programs
  4. In 1964, the Johnson Administration enacted the “chicken tax,” a 25% import tax on imported autos
  5. History of Shipping Containers and the free of patent innovation that changed international commerce
  6. Economist Daron Acemoglu argues against a UBI program
  7. Search for Job Guarantee and choose the depth that you want to explore on this topic. On Twitter, #JG for many sources.

Country Roads and the Election

May 12, 2019

by Steve Stofka

I spent the past week traveling with my sister to a family reunion near Dallas, Texas. In our travels, we passed through rural counties in southeast Colorado, western Oklahoma, and northwest and central Texas. In contrast to the signs of a brisk economy in the larger cities, some rural communities show signs of stress. Some roads leading off the main route need repair; some houses could use a fresh coat of paint; some stores have delayed maintenance. In some small towns most of the stores remain boarded up ten years after the financial crisis.

Candidates for the 2020 Presidential election must speak to the two Americas. The Americans who produce the food we eat and the power that lights our businesses and homes are not doing as well as those in the urban corridors. Young people in rural America leave for the larger cities to find a job or pursue an education. Older people with medical needs must move to larger cities with hospital facilities available in an emergency.

Let’s turn to a proposal on the list of issues for the 2020 election – an increase in the Federal minimum wage. A person making a minimum wage of $15 an hour in Los Angeles earns a bit more than half of L.A.’s median household income (MHI). She may work 2-1/2 weeks to pay the rent on a one-bedroom apartment (Note #1). The MHI in rural America is about 20% less than the national average. In Limon, Colorado (population less than 1500), the MHI is about half of the national average (Note #2). $15 an hour in Limon is the MHI.

In 2009 and 2010, the Democrats controlled the Presidency, the House and had a filibuster proof majority in the Senate. They could have enacted a federal minimum wage that was indexed to the living costs in each county or state. Why didn’t they fix the problem then? Because Democrats use the minimum wage as an issue to help win elections. If Congress passes a minimum wage of $15 an hour this year, they will have something new to run on in five years – a raise in the minimum wage to $17 an hour. Voters must begin asking their elected representatives for practical and flexible solutions, not political banners like a federal mandated one-size-fits-all $15 minimum wage.

For decades after World War 2, Democratic Party politicians who controlled the House refused to allow legislation that would index tax rates to inflation. This resulted in “bracket creep” where cost of living wage increases put working people in higher tax brackets automatically (Note #3). The problem became acute during the high inflation decade of the 1970s and the issue helped Ronald Reagan take the White House on a promise to fix the problem.

A week ago, I heard a Democratic Senator running for President say that they knew all along that Obamacare was just a start. The program was poorly drafted and poorly implemented and now we learn that Democrats knew all along that it was bad legislation? Will Medicare For All also be built on poor foundations and require a constant stream of legislative and agency fixes? This provides a lot of work for the folks in Washington who draft a lot of agency rules that require a lot of administrative cost to implement. Democrats are fond of federal solutions but show little expertise in managing the inevitable bloated bureaucracy that such solutions entail.

Some Democratic Party candidates are promising to fix the harsh sentencing guidelines that they themselves passed in the 1990s, which fixed sentencing guidelines enacted 25 years earlier by Democratic politicians in the 1960s and 1970s. This party’s platform consists of fixing its earlier mistakes.

According to a Washington Post analysis of election issues (Note #4), some candidates are concerned about corporate power. A Democratic president would have to work with the Senate’s Democratic Leader Chuck Schumer whose main support comes from large financial corporations based in his home state, New York. While a President Elizabeth Warren might propose regulatory curbs on corporate power, Mr. Schumer would be gathering campaign donations from the large banks who needed protection from those same regulations.

Large scale industrial power production has a significant effect on the climate. The few blue states that supported a Democratic candidate for President in the 2016 election also consume most of the final product of that power production. Have any candidates proposed solutions that lower the demand for power? Temperature control systems in commercial buildings could be set to a few degrees warmer in the summer and a few degrees cooler in the winter. That would have a significant impact on carbon production. Some candidates propose solutions that regulate the production and supply of power – not the demand for power. Most of that production occurs in states that supported a Republican candidate in the 2016 election. Proposals to install wind and wave generating stations in Democratic leaning coastal states in the northeast and northwest have been met with local resistance. Voters in the blue states want green solutions to be implemented in the red states, but not inconvenience residents of the blue states. Voters in the red states see through that hypocrisy.

A viable Democratic candidate must convince independent voters who are wary of political solutions from either party.  Donald Trump won the Presidency without visiting rural folks on their home turf. He landed his plane near a staged rally and the folks came from miles around to hear him. Compare that approach with former Republican candidate Rick Santorum who visited many small towns in Iowa in the months before the 2012 Iowa primary. In small restaurants and rural post offices, Santorum listened to the concerns of voters. Trump’s approach was successful. Santorum was not. Go figure.

Trump convinced rural folks that he was going to go to Washington and drain the swamp. This in turn would help the economy in small town America so that those folks could get themselves a new roof, or a new pickup truck, fix the fence or get a few potholes patched. From what I saw, those folks are still waiting. Some rural folks may run out of patience with Trump by next year. The success of any Democratic candidate depends on that.

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Notes:

  1. One week’s take home pay of $550 x 2.5 weeks = $1375. A 1 BR in L.A. averages $1350 L.A. Curbed
  2. Areavibes.Com assessment of Limon, Colorado.
  3. Tax indexing
  4. Washington Post article on various election issues

A New Minimum Wage

November 20, 2018

by Steve Stofka

Several readers had questions about the minimum wage article a few days ago. Why did I suggest 40% of the average wage? Why not 80%? How much of a difference is there between the average and median wage?

In May 2017, the annual BLS occupational survey found the average wages of all workers was a third higher than the median (Note #1). This survey is conducted only once a year and published six months after completion. I suggested 40% of the average regional wage. That would equal 53% of the median wage. I am not saying that 40% is a livable wage. Only that it might be a practical benchmark that moderates of both parties could support.

In 2015, the BLS estimated that there were 870,000 people making minimum wage. Over one million earned below minimum wage because they were in occupations where tipping is customary, and they have their own lower minimum wage. 870,000 workers out of 150 million is ½ of one percent. So why all the brouhaha about the minimum wage?

Approximately 42% of all workers make less than $15 an hour (Note #2). The percentage is closer to half of workers when adding union workers whose contract wages, particularly starting wages, are pegged to the minimum wage. A 2015 Forbes article quotes the UFCW:
“But the United Food and Commercial Workers International Union says that pegging its wages to the federal minimum is commonplace. On its website, the UFCW notes that ‘oftentimes, union contracts are triggered to implement wage hikes in the case of minimum wage increases.’ ” (Note #3)

I like several aspects of the Raise the Wage Act (Note #4) put forth by Bernie Sanders and Patty Murray. I like the gradual nature of the increases and the indexing of the wage. This is something that economists have been suggesting for decades. The summary published on Bernie’s web site (Note #4) is an embarrassment of errors:

“The Raise the Wage Act is front loaded to provide the biggest impact to workers. Upon enactment, the federal minimum wage would be increased from $7.25 to $9.25. The following increases are: $10.10 (2018); $11 (2019); $12 (2020); $13 (2012); $13.50 (2013); $14.20 (2023); $15.00 (2024).” They can’t even get their date sequence correct. Their calculations of the aggregate raise in wages is half of my estimate using BLS and BEA data (Note #5). Large companies like Wal-Mart are sure to lobby against the 14% cut in profits.

As the Slate op-ed notes, a national minimum wage of $15 is an “economic gamble” in a global economy that beckons business owners with lower cost labor. I am suggesting a compromise between Bernie Sanders’ proposal and the current policy.

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Notes:
1. BLS Occupational Survey
2. Slate article on raising the minimum wage.
3. Forbes article
4. Summary  of the Raise the Wage Act
5. My estimate: The summary of the Raise the Wage Act says “Increasing the federal minimum wage to $15 an hour by 2024 would give workers $144 billion in additional wages by 2024.” The Bureau of Economic Analysis’ current estimate of wages and salaries is almost $9 trillion. Using a low estimate of 2% annual wage growth would equal $10 trillion in 2024. There are currently 150 million workers. Estimating low employment growth of just one million workers a year gives an average of $64,000 per year. Let’s say that the 42% of wage earners who will be affected by a higher minimum wage make only 40% of that average, or $25,600 a year. That averages $12.80 an hour. The total wages that will be affected equals almost $1.7 trillion. The Raise the Wage Act is estimating that the average effect will be 8.5%. Using the estimates above gives us an effect twice that size, or 17.2% – close to $300 billion annually. That only includes the wages. Add in 25% in taxes and mandatory employer insurance costs equals $375 billion. Corporate profits after tax are currently $2 trillion. Estimating that they increase by 5% per year produces an estimate of $2.7 trillion in profits. $370 billion in additional costs is 14% of profits. Large companies like Wal-Mart are sure to lobby against such a bill.

A Real Minimum Wage

November 18, 2018

by Steve Stofka

Near the top of the Democratic agenda in the new Congress is a minimum wage of $15. The bill is unlikely to pass the Senate, but it will signal to the voters that the Democratic House is meeting campaign promises. The states with the most solid Democratic support are those on the west coast and northeast coast where the cost of living is much higher. A single minimum wage for the entire country is not appropriate. Republicans control the Senate and they are from states with much lower costs of living. They will reject an ambitious minimum wage that is one-size fits all.

Housing is the largest monthly expense for most families. Below is a graph of home prices in several western metropolitan areas (MSAs) and the national average of twenty large MSAs. Home prices in Dallas and Phoenix are a 1/3 less than Los Angeles and San Francisco. Housing costs in many smaller cities will be below Dallas and Phoenix.

CaseShillerComps

Why isn’t the minimum wage indexed to inflation? Because politicians of both parties, but particularly Democrats, have used it as a wedge issue to gain voter support. If the House Democrats wanted to pass bi-partisan legislation on a minimum wage, they could use a flexible minimum wage that is indexed to the average wages for each region within the country. These are published regularly by the Bureau of Labor Statistics, the same agency that publishes the monthly report of job gains and the unemployment rate. I’ve charted the annual figures for those same cities.

HourlyEarnComp

A $15 minimum wage is 40% of the average wage in San Francisco, and a bit more than half of the average wage in Los Angeles. It is almost 60% of the national average. The current minimum of $7.25 is 28% of the national average.

If the House passed a minimum wage bill that set the wage to 40% of the average wage for each region, Senate Republicans might at least consider it. In Denver and L.A., the minimum wage would be about $11.50. In Dallas and Phoenix, it would be about $10.60. Democrats could show that they are in Washington to pass legislation for working families, not pound some ideological stump as Republicans did for eight years with the repeal of Obamacare.

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Stocks and Taxes

There is a close correlation between stock prices and corporate tax collections. The tax bill passed last December lowered corporate tax revenues in the hope that businesses would invest more in the U.S. The divergence between prices and collections has to correct. Either tax collections increase because of greater profitability or stock prices come down.

StocksVTaxes
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Income Growth

The financial crisis severely undercut income growth. Real, or inflation-adjusted, per capita income after taxes decreased for three years from 2008 through 2010, and again in 2014. It is the longest period of negative growth since the 1930s Depression.

IncomeRealPerCapGrowth

Work

April 1, 2018

by Steve Stofka

This week I’ll look at several aspects of work, from cryptocurrencies like Bitcoin, to the minimum wage.

What is work? In general science or physics, the subject of “work” pictured a horse hitched to a pulley lifting a weight (an example). In one minute, the horse could lift so many pounds a foot in the air and that equaled so much horsepower. Thus we could reduce our definition of work to three components: weight, distance and time.

Even this mechanical definition of work illustrates a problem. If the horse lifted the weight, then let it down again, how would we know that the horse did any work? Should we give the horse a few cups of oats, or have we got a lazy horse?

A variation on that problem – I cut my lawn. My neighbor looks at my lawn and sees that work was done. In a week or two the grass has grown and time has erased any sign that I did work.

Thus, we need a way of recording work done. The product of the work performed may serve as a record. A big pyramid sitting on a desert is a permanent record that work was done. If workers dig holes in the ground, then fill the holes, how do we know any work was done? If they have dug up gold from those holes.

Bitcoin and other cryptocurrencies (crypto) are assets like gold. They recognize that some work was done. Equipment, technology and workers were needed to dig up gold. Likewise, electricity was an important resource needed to generate a bitcoin, and even more electricity will be needed to generate a replacement bitcoin if one were lost.

This Politico article is an account of a crypto mining boom in a rural area in Washington state. The electricity consumed is enormous. The mighty Columbia River nearby provides electricity at a fifth of the average cost in the country. By the end of this year, there will be enough electrical capacity in this small area to power the equivalent of a tenth of the homes in Los Angeles. Shipping containers house computer servers which generate so much heat that the exhausted air melts the snow around the containers. As gold records the digging of dirt, a bitcoin records the expenditure of some quantity of electricity.

Assets can represent past work, future work, or a combination of the two. Precious metals, jewels, books and artistic works represent work done in the past. On the other hand, a machine represents future work. Other assets include stocks and bonds, both of which are claims on future work. A bond is a fixed limit claim on a company’s assets. In contrast, a share of stock is an undying claim on a portion of a company’s assets.

The blockchain algorithm behind crypto requires agreement among many parties to confirm a property right to the crypto. The recording of property rights might seem rather ordinary to a reader in the U.S. In some countries, however, property deeds are more easily altered by those in power. In contrast, a blockchain system of recording property rights prevents forgery and alteration.

As a record of work done, money relies on a relatively stable value. High inflation damages the money record of work done. Consequently, high inflation can fracture the social bonds among people. As an example, I cut someone’s lawn on Saturday and am paid. When I spend the money on Sunday, it is worth half the amount. In effect, the money has only recorded that I cut half a lawn. Examples of this hyper-inflation are Zimbabwe in the 2000s, and Yugoslavia in the 1990s (Wikipedia article). Look no further than Venezuela for a current example of the destruction that inflationary policies can have on a society.

Let’s turn from the recording of work done to the doing of it. New unemployment claims are at a 45 year low. A decade ago, job seekers despaired. In contrast, employees today are confident they will quickly find new employment. To illustrate, the quit rate is at the same pace as the mid-2000s, at the height of the housing boom. As a percent of the labor force, new unemployment claims are the lowest ever recorded. Last week’s numbers broke the record set in April 2000 at the height of the dot-com boom.

Equally important to the strength of a job market is the fate of marginal workers who are most vulnerable to the shifting tides of the economy. This includes disabled people who want to work. During the recession, the unemployment rate for disabled men of working age reached almost 20%. Today it is half that.

Let’s turn to another disadvantaged sector of the job market – those who work for minimum wage. The 1930s depression put many employers at an advantage in the job market. The Fair Labor Standards Act of 1938 (FLSA) enacted a wage floor, but many workers were not subject to the new law. In 1955, almost twenty years after passage of the law, “retail workers, service workers, agricultural workers, and construction workers were still not required to be paid at least the minimum wage” (article).

The minimum wage affects many lower paid workers who are making more than minimum wage. In some union jobs, starting wages for helpers are set by contract at a percentage above minimum wage. The understanding may be non-written in some cases. In 1966, the rate was increased from $1.25 per hour to $1.60 per hour. Non-union clerks at a NYC hospital who had been making $1.70 per hour now complained that they were making minimum wage. As a result of their pressure on management, they got a raise within a few months.

Here’s a chart showing the annual increases in the minimum wage for each period since 1950.

MinWagePctInc

In the three decades after World War 2, annual increases in the minimum wage exceeded inflation. Since 1977, the minimum wage standard has not kept pace with inflation.

MinWageLessCPI

If Congress truly represented all of their constituents, they would make the minimum wage adjust automatically with inflation. On the contrary, Congress represents only a small portion of their constituents, and the minimum wage is used as a political football.

Finally, there is the destruction of the record of past work by war. Every minute of every day, living requires calories, another measure of work. Therefore, each of us is a record of work done.  War destroys too many human records, and the unliving records of work like buildings, roads and bridges. Perhaps one day we will fight our battles in video games and stop destroying all those work records.

GDP and Education

June 29, 2014

This week I’ll review some of this week’s headlines in GDP, personal income, spending and debt, housing and unemployment.  Then I’ll take a look at some trends in education, including state and local spending.

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Gross Domestic Product First Quarter 2014

The headline this week was the third and final estimate of GDP growth in the first quarter, revised downward from -1% to -2.9%.  This headline number is the quarterly growth rate, or the growth rate over the preceding quarter.  A year over year comparison, matching 2014 first quarter GDP with 2013 first quarter GDP, shows an annual real growth rate of 1.5%, below the 2.5 to 3.0% growth of the past fifty years.  The largest contributor to the sluggish GDP growth was an almost 5% drop in defense spending.  Simon Kuznets, the economist who developed the GDP concept, did not include defense spending in the GDP calculation.

Contributing to the quarterly drop was the 1.7% decline in inventories.  Businesses had built up inventories a bit much in the latter half of 2013 in anticipation of sales growth only to see those expectations dashed by the severe winter weather.  Final Sales of Domestic Product is a way of calculating current GDP growth and does not include changes in inventory.  Let’s look at a graph of the annual growth in Real (Inflation-Adjusted) GDP and Real Final Sales of Domestic Product to see the differences in the two series.

Note that Real GDP growth (dark red line) leads Final Sales (blue line) as businesses build and reduce their inventory levels in anticipation of future demand and in reaction to current and past demand.
  
The Big Pic: if we look at these two series since WW2, we see that ALL recessions, except one, are marked by a year over year percent decline in real GDP.  The 2001 recession was the exception.

Secondly, note that in half of the recessions, y-o-y growth in Final Sales, the blue line in the graph, does not dip below zero.  We can identify two trends to recession: 1) businesses are too optimistic and overbuild inventories in anticipation of demand, then correct to the downside, causing a reduction in employment and a lagging reduction in consumer spending; 2) consumers are too optimistic and take on too much debt – selling an inventory of future earnings to creditors, so to speak – then correct to the downside and reduce their consumption, causing businesses to cut back their growth plans.  In case #1, a decrease in consumer spending follows the cutbacks by businesses.  In case #2, businesses cut back following a downturn in consumer spending.

In this past quarter, employment was rising as businesses cut back inventory growth, indicating more of a rebalancing of resources by businesses rather than a correction.  Consumer spending may have weakened during the first quarter but, importantly, did not decline.  We have two hunting dogs and neither is pointing at a downturn.

For a succinct description of the various components of GDP, check out this article written for about.com by Kimberly Amadeo.  Probably written in the first quarter of 2014, her concerns about the inventory buildup in 2013 were proved accurate.

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Income and Spending

Personal Income rose almost 5% on an annualized basis in May but consumer spending rose at only half that pace,  2.4%.  The spending growth is only slightly more than the 1.8% inflation rate calculated by the Bureau of Economic Analysis, revealing that consumers are still cautious.

I heard recently a good example of how data can be presented out of context, leading a listener or reader to come to a wrong conclusion.  Data point: the dollar value of consumer loans outstanding has risen 45% since the start of the recession in late 2007. Consumer loans do not include mortgages or most student loan debt. If I were selling a book, physical gold, or a variable annuity with a minimum return guarantee, I could say:

My friends, this shows that many consumers have not learned any lessons from the recession.  They are living beyond their means, running up debts that they will not be able to pay. Soon, very soon, people will start defaulting on their debts and the economy will collapse.  This country will suffer a depression that will make the 1930s depression look tame.  Now is the time to protect yourself and your loved ones before the coming crash.

Data is little more than an opportunity to spread one’s political message.  Data should never lead us to reconsider our message, our point of view.  If I were penning a politically liberal message, I could write:

The families in our country are desperate.  Without enough income to satisfy their basic needs, they are forced to borrow, falling ever deeper into debt while the 1% get richer.  We need policies that will help families, not the financial fat cats on Wall Street.  We need a tax structure that will ensure that the 1% pay their fair share and not have the burden fall on the shoulders of most of the working Americans in this country.


Selling a political persuasion and selling a car brand often employ similar techniques.  Data should never lead us to question our loyalty to the brand.  If I were crafting a conservative message, I could write:


The misuse of credit indicates an immaturity fostered by cradle to grave social programs, which are eroding the very character of the American people, who come to rely less on their own resources and more on some agency in Washington to help them out.  People steadily lose their sense of personal responsibility, becoming more like children than self-reliant adults.

However, the facts behind the data point lead us to a different story. In the spring of 2010, consumer loans spiked, rising $382 billion in just two months.

That surge represents more than a $1000 in additional debt per person. Consumers did not suddenly go crazy.  Banks did not open their bank vaults in a spirit of generosity. Instead, banks implemented accounting rules FAS 166 and 167 that required them to show certain assets and liabilities on their books. $322 billion of the $382 billion increase in consumer loans during those two months in 2010 was the accounting change. If we subtract that accounting change from the current total, we find that real consumer loan debt increased only 5.5% in 6-1/2 years.  And that is the real story.  Never in the history of this series since WW2 have consumers restrained their borrowing habits as much as we have since December 2007.  We had to.  In the eight years before the financial crisis in 2008, real consumer debt rose 33%, an unsustainable pace.

About two years ago, loan balances stopped declining and since then consumers have added $80 billion, much of it to finance car purchases. $25 billion of that $80 billion increase has come only since the beginning of this year.  On a per capita, inflation adjusted basis, consumer loan balances are still rather flat.

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Housing

New home sales in May were up almost 20% over April’s total, and over 6% on an annual basis.  Existing homes rose 5% above April’s pace but are down 5% on an annual basis.  Each year we hope that housing will finally contribute something to economic growth.  Like Cubs fans, we can hope that maybe this year….

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Unemployment Claims

New unemployment claims continue to drift downward and the 4 week moving average is just below 315,000.  Our attention spans are rather short so it is important to keep in mind that the current level of claims is the same as what is was last September.

It has taken this economy six months to recover from the upward spike in claims last October.  The patient is recovering but still not healthy.

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Minimum Wage

The number of workers directly affected by changes in the minimum wage are small.  We sympathize with those minimum wage workers who try to support a family.  The Good Samaritan impulse in many of us prompts us to say hey, come on, give these people a break and raise the minimum wage.  What we may forget are the implications of any minimum wage increase.  Older readers, stretch your imagination and remember those years gone by when you were younger. Workers in their early working years often see the minimum as a benchmark for comparison.  The much larger pool of younger workers who make above minimum wage may push for higher wages in response to increases in the minimum wage.

Fifty years ago, Congress could have made the minimum wage rise with inflation, ensuring that workers in low paid jobs would get at least a subsistence wage and that increases would be incremental.  Of course, there are some good arguments against any nationally set minimum wage.  $10 in Los Angeles buys far less than $10 in Grand Junction, Colorado.  Ikea recently announced that they will begin paying a minimum wage that is based on the livable wage in each area using the MIT living wage calculator .  Several cities have enacted minimum wage increases that will be phased in over several years but none that I know of are indexed to inflation as the MIT model does.

Congress could enact legislation that respects the differences in living costs across the nation.  For too long, Congress has chosen to use the minimum wage as a political football.  Social Security payments are indexed to inflation because older people put pressure on politicians to stop the nonsense.  There are not enough minimum wage workers to exert a similar amount of coordinated pressure on the folks in Washington so workers must rely on the fairness instinct of the larger pool of voters if any national legislation will be passed.

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Education

Demos, a liberal think tank, recently published a report recounting the impact of rising tuition costs on students and families.  Student debt has almost quadrupled from 2004 – 2012.  Wow, I thought.  State spending per student has declined 27%.  More wows.  How much has enrollment increased, I wondered?  Hmmm, not mentioned in the report.  Why not?

The National Center for Education Statistics, a division of the Dept. of Education, reports that full time college enrollment increased a whopping 38% in the decade from 2001-2011.  Part-time enrollment increased 23% during that time.  Together, they average a 32% increase in enrollment. Again, wow!  Ok, I thought, the states have been overwhelmed with the increase in enrollment, declining revenues because of the recession, etc.  Well, that’s part of the story.  Spending on education, including K-12, is at the same levels as it was a decade ago.

From 2002-2012, states have increased their spending on higher ed by 42%.  Some argue that the Federal government should step up and contribute more.  In 2010, total Federal spending on education at all levels was less than 1% ($8.5B out of $879B).  Others argue that the heavily subsidized educational system is bloated and inefficient.  As much cultural as they are educational institutions, colleges and universities have never been examples of efficiency.  Old buildings on college campuses that are expensive to heat and cool are largely empty at 4 P.M.  Legacy pension agreements, generously agreed to in earlier decades, further strain state budgets.  We may need to rethink how we can deliver a quality education but these are particularly thorny issues which ignite passions in state and local budget negotations.

Although state and local governments have increased spending on higher ed by 42% in the decade from 2002-2012, the base year used to calculate that percentage increase was particularly low, coming after 9-11 and the implosion of the dot-com boom.  Nor does it reflect the economic realities that students must get more education to compete for many jobs at the median level and above.

Let’s then go back to what was presumably a good year, 2000, the height of the dot-com boom.  State coffers were full.  In 2000, state and local governments spent 5.14% of GDP (Source).  By 2010, that share had grown to 5.82% of GDP (Source). That represents a 13% gain in resources devoted to education.  But that is barely above population growth, without accounting for the rush of enrollment in higher education during the decade.

Let’s take a broader view of educational spending, comparing the total of all spending on education, including K-12, to all the revenue that Federal, state and local governments bring in.  This includes social security taxes, property taxes, sales taxes, etc.  As a percent of all receipts, spending on education has declined from 30% to under 18%.

Many on the political left paint conservatives as being either against education or not supportive of education.  Census data shows that Republican dominated state legislatures, in general, devote more of their budget to education than Democratic legislatures.  W. Virginia, Mississippi, Michigan, S. Carolina, Alabama and Arkansas devote more than 7% of GDP to education, according to U.S. Census data compiled by U.S.GovernmentSpending.com.  Only two states with predominantly Democrat legislatures, Vermont and New Mexico, join the plus-7% club (Wikipedia Party Strength for party control of state legislatures).

In the early part of the twentieth century, a high school education was higher education.  In the early part of this century, college may be the new high school, a minimum requirement for a job applicant seeking a mid level career.  What are our priorities?  In any discussion of priorities, the subject of taxes arises like Godzilla out of the watery depths.  People scramble in terror as Taxzilla devours the city. Older people on fixed incomes and wealthy house owners resist property tax increases.  Just about everyone resists sales tax increases.  Proposals to raise income taxes are difficult to incorporate in a campaign strategy for state and local politicians running for election.

Let’s disregard for a moment the ideological argument over Federal funding or control of education.  Let’s ask ourselves one question:  does this declining level of total revenues reflect our priorities or acknowledge the geopolitical realities of today’s economy?

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Takeaways

Reductions in defense spending, inventory reductions and a severe winter that curtailed consumer spending accounts for much of the sluggishness in first quarter GDP growth.

A surge in new home sales is a sign of both rising incomes and greater confidence in the future.

Consumer spending growth is about half of healthy income gains.

Spending on education has grown a bit more than population growth and is not keeping up with surging enrollment in higher education.

We Are Young

There are many conflicting opinions and studies regarding the effect that the minimum wage (MW) has on employment, particularly the employment of teens who often work at jobs that pay MW.  Some studies show an increase in employment of teenage workers after the MW is increased.  Some show a decrease, some show no change.  A 2006 paper by two economists at the University of California reviewed early studies of MW prior to 1982 and those after 1990.  Methodologies, correlations and conclusions in one study are criticized in another study.  Reading just the first six pages of the 150 page paper will give you a sense of the arguments.

How many people does the MW affect?  Is it only those making the MW or does it also include those making just above MW?  What is the effect on the local economy as well as local employment?  Whatever you want to claim about MW, you can probably find a study in this area that will backup your claim.  What we can know for certain is that the MW has declined in real dollars over the past 50 years.  Using MW data  from the Dept of Labor and a CPI calculator from the Bureau of Labor Statistics, I have graphed the minimum wage in both current dollars and real inflation-adjusted dollars.

From 1963 to 2012, the MW has fallen 17%.  The unemployment rate for teens aged 16 – 19 stays stubbornly near 25%.

The unemployment rate for those aged 20 – 24 years has been steadily declining since late 2010 but has ticked up in the past few months.

Low wages and high unemployment breed a sense of futility in young people entering the work force.  During the late sixties and early seventies, the prospect of being drafted into the Vietnam War prompted many high school male graduates to go to college to gain a student deferment from the war.  Almost fifty years later, this generation of high school graduates – both men and women – feel the pressure of having to go to college to escape the bleak job prospects of this labor market.  As I wrote last week, older people are continuing to hold onto jobs, making it doubly difficult for young people entering the labor market supply chain.  Few young people can comprehend the multi-decade generational employment mechanism.  In our late teens and early twenties, we first step on the slow moving employment escalator, gaining experience, knowledge and judgment as we work for relatively low wages.  During our working years we build our skills and the amount of money our labor can command.  For too many young people waiting to step on this job escalator, the escalator is broken.  Each year more young people gather at the base of the escalator and wait.