By Evelyn Black, on October 1st, 2008
When I was a kid (I’m 55 now), I looked forward to holiday dinners because that was when my parents and my grandparents held their traditional “Was FDR a scoundrel or a savior?” debate. My grandparents, who worked for public utilities and, thus, survived the Great Depression with conservative opinions intact, argued for FDR the scoundrel. My father, who worked for a public utility company on the blue collar side and was a union steward, argued for FDR the savior.
The FDR argument was a traditional debate in our household even though the issue itself was a historical one, and though I already knew what every single participant was going to say, I looked forward to it because it was so exciting to see people I loved all vehemently disagreeing without really hurting each other. That’s the democracy I saw as a kid and the one that I miss today; a democracy that encouraged informed debate and tolerated strongly divergent views.
Watching the wrangling in Washington over the current banking crisis reminded me of that debate. The holidays are approaching, lots of Americans are scraping for turkey money, and, in an effort to maintain calm, the press is trying hard to replace the “D” word (Depression! Run for your lives!) with the more awkward but also more calming phrase “possible severe recession.” Once again we are witnessing an autumnal debate about the role of government in business and financial markets. Once again we are witnessing the spectacle of a televised tag team match between Emergency Socialism and Unfettered Capitalism.
Was FDR a scoundrel or a hero?
I don’t know. I do know that our current economic situation is similar in some ways to the one our grandparents (or in many cases, great-grandparents) survived. The stock market collapse that kicked off the Great Depression in 1929 came at the end of a bubble that included high-rolling, unfettered speculation and wildly indulgent personal lifestyles. The Dust Bowl disaster of the 1930s is parallel in some ways to our current climate change and energy crisis, with the displacement and disenfranchisement of huge numbers of people due to Katrina and now Hurricane Ike, and the promise that these kinds of monster storms will most likely become the norm, not the exception.
Like working Americans during the Great Depression, working Americans today are witnessing a rapid increase in costs concurrent with wage stagnation. Unemployment, while nowhere near Depression era levels of 25%, is rising rapidly and will rise even more rapidly should the current credit crunch continue. Just as in the aftermath of the stock market crash of 1929, we have a Hoover-like presidential candidate and an FDR-like candidate, acting out their respective roles in the holiday FDR debate on the national stage.
But there are real differences between our current situation and the one FDR seized by the horns in the ’30s.
The first difference is that American industry was still strong in the 1930s, and gearing this industrial base up for WWII arguably helped FDR turn the country around. Now, not only is U.S. infrastructure shot, our industrial base is gone, too, shipped overseas by multinational corporations in the wake of NAFTA for better profit margins.
A second difference is a loss of skills in the general populace. While my grandmother loved to regale me with stories about how she walked six miles for a 20 pound sack of government-issued potatoes once a week and fed her family of six on that and not much else, today’s consumer would be hard pressed to know what to do with a potato if there wasn’t a Wendy’s nearby. While we can relearn these skills (and many are doing just that: agricultural markets are “ripe for picking,” so to speak, and purchase of vegetable seed skyrocketed this year), in the short term, we have lost a lot of self-reliance and capability as individuals.
But maybe the most striking difference between that time and this one is the lack of a unifying political vision. My parents and grandparents argued about FDR at the Thanksgiving dinner table in part because FDR, scoundrel or hero, was able to bring everyone together for the common good, at least for awhile. Today, we have political machines that are still feeding the culture war in America, drawing a line between red and blue and even underhandedly pitching to white – something we all hoped we were past but clearly are not.
Who has the 21st century New Deal for America?
Hank Paulson doesn’t. But between the stock market’s meltdown after the House rejected Paulson’s bailout plan on Monday and tonight’s Senate vote on their version of a financial rescue package, we are finally hurting bad enough to come together to fix the mess wrought by 25 years of free market capitalism. Even then, freeing up U.S. credit markets will not in and of itself stop the free-fall in home values and home sales. It will do nothing to bring back the tax bases of our major cities. It will not encourage energy independence or investment in U.S. industry and infrastructure, and it will not address the problem of declining wages and rising costs.
Finally, helping Wall Street get its credit markets back on track will not bring together a populace split down the middle over issues of religion and personal lifestyle. It will not stop the feckless political pandering that has brought us to this sorry state.
I think we do need a New Deal, a vision of where America wants to go and who America wants to be on the world stage. Until that emerges, we will be seen only in terms of what we once were, and our suffering will continue. Debt cannot be a nation’s only commodity if that nation intends to prosper.
The parallels to our time and the time of the Great Depression are there alright.
But we haven’t seen anything, yet.
By Evelyn Black, on September 29th, 2008
“OK, everyone, stay calm. Hand over the $700 billion right now, and no one gets hurt. Make a wrong move, and the whole economy goes down! Make it quick, or you can all kiss your retirements good-bye!”
Dialog from an old-fashioned “stick-em-up” Western? No, actually, this drama was playing out in real-time Congress last week as Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, and President George W. Bush promoted a $700 billion financial bailout plan to Congress and, I might add, a mob of very angry constituents. The drama ended today with the House of Representatives voting to reject the plan.
Paulson’s bailout plan has forced Main Street and Wall Street into a really ugly confrontation, and if you think I’m overstating this, read the comment sections attached to the New York Times editorials. Those comments are running at around a thousand or more each day. Wading through them, I found not one that said anything remotely resembling, “Thanks Hank! What a great idea! Thank goodness we have a smart guy like you in charge at a terrible scary time like this!”
Before rejecting it, Congress had managed to negotiate some governmental oversight to be added to the plan (the original bailout deal specified no oversight allowed and complete immunity from prosecution) and also negotiated the addition of some provisions for helping homeowners in foreclosure refinance and stay in their homes. Still at issue were CEO salaries and consequences for banks and lending institutions that avail themselves of the Paulson plan to buy up the worst junk on their books: mostly dubious and impossible-to-value mortgage-backed securities, credit default swaps, and other weird, overly creative investment vehicles that threaten to bring the U.S. economy to a catastrophic halt.
What was emerging, as Paulson’s request sunk in, was an incredible amount of public outrage. Initially, the request was for Congress to push the bailout plan through in a day, if not sooner, or suffer dire consequences. It didn’t take long for the American public to start calling their representatives nonstop to let them know that they would, personally, rather suffer dire consequences than hand over $700 billion in taxpayer money to a Wall Street investment banker on the strength of two words: “Trust me.”
Putting dire warnings and assurances of fiduciary responsibility aside, there was no guarantee that this plan (which was literally cobbled together overnight) would work. Comparisons have been made between Paulson’s plan, or, as NYT columnist and Princeton economist Paul Krugman calls it, the “Cash for Trash” plan, and the Resolution Trust Corporation of 1989. The RTC took home mortgages seized during the savings and loan crisis of the late 1980s and sold the homes attached to those mortgages, eventually recouping some of the money lost in the S&L failures. The markets stabilized, and the RTC was widely credited for helping to get the economy back on track.
The original RTC took in $225 billion worth of bad assets and sold them for $140 billion over time, reducing the actual taxpayer cost of that bailout to around $85 billion. But the Paulson plan was widely expected to top $1 trillion for the initial purchases, and there is a big difference between the assets seized then, which were backed by real property, and the assets clogging the books today, which are so complex and poorly constructed that decoding what backs them and where that property might be has become a nightmare in its own right.
No one knows the actual value of these assets, or if they even are assets, and whether they will ever have any resale value. If they are purchased too cheaply, banks will have to declare large losses and may fail anyway. If they are purchased at too great a cost, it amounts to handing over taxpayer money to the very institutions that created the problems in the first place.
Acknowledging the difficulty in valuing and purchasing these junky securities, Paulson’s solution was to hire investment analysts from the private sector to broker the deals and to protect the brokers and the buyers under a cloak of immunity from scrutiny and prosecution. The appeal of such an approach for Wall Street is obvious. On September 19, stocks rebounded insanely, causing even sympathetic investors (the few that remained) to recoil in disgust. But what was the appeal to taxpayers?
The appeal was, “This will stop The Great Depression II from happening.”
Whether it will or won’t, Congress has killed the chance to find out. For now.
By Evelyn Black, on September 26th, 2008
If you watch the news at all these days (and a case could definitely be made for avoiding this habit), then you already know that the United States imports way more cheap stuff from China than it sends over there for sale to the Chinese people. That big difference between the huge amount we import and the tiny amount we export is called the trade deficit, and you’ve almost certainly been hearing for eight years now about how it keeps going up and how that isn’t such a great thing.
What you may not realize, however, is that the recent federal bailout of the mortgage giants Fannie Mae and Freddie Mac stems in part from the strange and delicate trade relationship the U.S. has forged with China; a relationship that consists of lots of imported Chinese goods that Americans buy up with money that is essentially loaned to the U.S. by, you guessed it, the Chinese.
The Chinese do not issue loans directly to the U.S. the way that a bank would issue a loan to an individual. What the Chinese government does instead is buy up U.S. debt, mostly in the form of mortgage-backed securities. The recent tax rebate stimulus package designed to get shoppers out and spending money again to shore up the flagging U.S. economy came largely from this kind of investment by the Chinese in the debt held by American financial institutions.
While it may seem circular and confusing to think of the Chinese actually loaning the U.S. the money to buy Chinese products, the fact is that right now the U.S. government is heavily dependent on this kind of Chinese investment just for the continuation of its day-to-day business. In other words, without Chinese money being poured into the U.S. in the form of securities purchases, our government would experience such a budgetary shortfall, it would have to shut down.
The linchpin in this arrangement, obviously, is U.S. housing values. If the value of the properties backing the mortgage debt purchased by the Chinese remains stable or increases steadily, everything continues to hum along normally (or at least normally on the surface of it). The Chinese have an asset they see as increasing in value (that is, American mortgage-backed debt securities), and the U.S. government has the money it needs for its day-to-day operations. The Chinese make money off of their exports to the U.S. and off of their investments in U.S. housing-backed debt, and U.S. citizens continue to consume the cheap Chinese goods we have grown accustomed to buying.
That’s the U.S. consumer economy in a nutshell, and if it sounds a bit Orwellian, bizarre, and unbalanced, that’s because it is. Nevertheless, that’s how we roll these days, or did, until the housing bubble burst and the values of the properties actually backing all this mortgage debt began to drop precipitously. At first it was only subprime debt that went bad, but that spread to what is known in the mortgage industry as Alt-A debt (which is a notch above subprime and once considered quite a safe risk).
Now even homeowners who are in no danger of defaulting on their mortgages are seeing dramatic drops in their property values due to a badly inflated housing market and the subsequent bursting of that bubble. And as if that isn’t all bad enough, the problem is rapidly spreading to other kinds of U.S. debt: credit cards, car loans, home equity lines, and small business lines of credit.
To put it in just a few words: the actual assets backing U.S. debt are now depreciating instead of appreciating in value, leaving the Chinese holding substantial investments in the U.S. that are looking less and less profitable. The Chinese have been friendly to the U.S. because they are making lots of money from the relationship. With the bursting of the housing bubble, not so much. They have been growing more and more nervous about this fact.
What does that have to do with Fannie and Freddie?
Fannie Mae and Freddie Mac back most of the mortgage debt in the United States, but because they have always had a quasi-governmental status, they have not kept the kind of prudent reserves on hand that a private financial institution would be required to keep to mitigate such losses. As it became more and more clear over the course of the past year or so that Fannie and Freddie didn’t have adequate financial reserves to back the debt they held, the Federal Reserve and the Treasury Department began to talk about a bailout.
It’s a bad thing that housing values are plummeting in the U.S., but it has to happen because they were so wildly inflated during the boom years. That hard correction would be painful for the U.S. no matter what, and we are certainly feeling the pain already in the form of a major economic turndown that looks like it will last at least through the better part of 2009. But what would be even more catastrophic than the pain we are already feeling in our collective national pocketbook would be a decision by the Chinese to pull back on their investment in us. Such a move would literally throw us into a financial meltdown that would make the Depression era look pretty cheerful by comparison.
So, while it may or may not be true that Fannie and Freddie “are too big to be allowed to fail,” what is unquestionably true is that the U.S. government is too big to be allowed to fail, and fail it would without a steady influx of Chinese money.
All of this is more food for thought that I can possibly digest in a single sitting. If you pay close attention to the expressions on the faces of Bernanke and Paulson, you may well detect a hint of dyspepsia there, too.
The day is saved. Again. For now.
And yet once again, in the smoking (and indigestible) aftermath, a familiar and phrase rears its ugly head:
“What next?”
By Evelyn Black, on September 22nd, 2008
I confess I wasn’t happy to wake up Wednesday morning and find out that Federal Reserve Chairman Ben Bernanke and Secretary of the Treasury Henry Paulson had decided to put taxpayers on the hook for up to $85 billion in loans to AIG, the world’s largest insurer of mortgage-backed securities.
I was even more dismayed at the news that the Treasury wasn’t just loaning money to AIG (money it doesn’t really have), it had actually seized AIG, relieved its managers of their duties, and had taken over, at least for the short term. So now, the U.S. owns and runs AIG. Wow.
Was that really necessary?
Early on, the talking points Wednesday were familiar ones: lots of “too big to fail” sorts of statements, along with frequent reassurances by government officials and financial pundits that the worst that could come of the AIG bailout would be an orderly dissolution that would not roil markets as traumatically as a sudden bankruptcy would. In a better case scenario, they assured that there was even a chance that the government could actually make some money selling off parts of AIG, since only the divisions that insure structured investment vehicles and bad mortgage debt are unprofitable.
The reassurances fell mostly on deaf ears.
The Dow dropped 200 points right after the opening bell, swung wildly all day but mostly down, and ended the day down almost 450 points. Down 500 on Monday, 450 on Wednesday, what next? Press Secretary Dana Perino was out in front of cameras expressing confidence in the economy’s ability to withstand these shocks, and John McCain was out in front of cameras trying hard not to repeat the phrase, “Our economy is fundamentally sound,” without, at the same time, inducing further panic.
Carly Fiorina, former (deposed, as in “fired”) CEO of Hewlett-Packard was, I think, hiding in a closet somewhere after telling the press on Tuesday that McCain, Palin, Obama, and Biden were all unqualified to run a major corporation. (Many pundits gleefully pounced on the fact that, apparently, so was Fiorina.)
Fiorina is a McCain adviser. But maybe not for long.
Weirdly, the cable news channels seemed much more interested in who was getting the most political traction out of the queasy atmosphere on Wall Street: the McCain campaign or the Obama campaign. Real, thorough analysis of the day’s financial events was not easy to find. At one point, I did catch a brief televised interview with a member of the Reagan administration who expressed the (rather off the wall) opinion that what was most needed to calm this crisis was immediate corporate tax cuts, and lots of them.
That would have been funny if he didn’t mean it, and the markets weren’t really tanking.
While it may seem trite, the problem, as I see it, is that markets don’t like uncertainty, and right now, no one knows how deep these problems go and how many more financial institutions might fail. The government takeover of AIG sent a message that the situation is now dire, so dire that a bridge loan wasn’t enough; nothing less than a complete government takeover would do. Even though the intent was to stabilize markets by slowing down the collapse of AIG, markets were not calmed by the realization that AIG was collapsing, and that it would have collapsed over the course of a single day without government intervention.
It’s hard right now to take in the magnitude of what is happening, but if we all keep in mind how long this bubble has been building, how disguised all this bad debt is, and how enmeshed it still is in the worldwide financial system, it shouldn’t be a surprise. By most accounts, Washington Mutual may well be next, and after that, it’s hard to take an educated guess who else will fall.
Things could go on like this for another week, another month, another year. No one knows.
All of which spells a rough ride for financial markets for the foreseeable future. I don’t think there is anything that will soothe these troubled waters anytime soon. But I’m pretty certain of one thing: these bailouts will not play well on Main Street. People were already upset over Fannie Mae and Freddie Mac. Now we’re taking on AIG, the auto industry has its hand out for $50 billion, no one knows how many banks will fail after that, and ordinary people are getting really fed up.
Wall Street may be in shock. Main Street saw this coming a mile off.
By Evelyn Black, on September 17th, 2008
OK, I know Lehman Brothers just tanked, Fannie and Freddie have been seized, and AIG has been taken over by the Fed, but can we put all that aside for just a few minutes and talk about me for a change, please? I have liquidity problems of my own, and that being the case, I only have so much patience for Wall Street melodrama anyway anymore. It’s getting exhausting. I mean, seriously, what are are you and I going to do about it right this minute? Won’t things still be totally, terminally screwed up tomorrow? Am I right? Of course I am. So let’s take a little “me” break today for a change of pace.
Here’s what’s going on this month in Evelyn’s life:
Last Friday, I got a letter from the escrow department of my mortgage company letting me know that the dying, rust-belt city where I still own a small house in a bad neighborhood (because I couldn’t sell it after I moved to another state to take a job) has decided to hike my property taxes by $610 a year, thus causing a shortfall in my escrow account. I now have a choice. I can send the mortgage company $610 today, or I can pay an extra $50 each month on the house payment for the next twelve months.
The city, which is in northern Indiana, was once a major manufacturing center but has been decimated in recent years by the fall of the U.S. steel and auto industries. The government there is now in serious financial trouble. The tax base has eroded, companies have moved overseas, businesses are failing, unemployment is off the charts, and now, thousands of people are losing their homes to foreclosure.
Because the situation is so dire, and because the city has already cut essential services to the bone and still can’t generate the revenue needed to maintain normal operations (not public services, just day-to-day government operations), the city has seized on an opportunity and is hiking property taxes in the poorest neighborhoods so that the owners will be forced into foreclosure and the city can then sell the property back to the mortgage companies for pennies on the dollar (plus the cost of the back tax bill).
That strategy is indeed generating a small but steady stream of revenue for my old home town. It is also creating boarded up, bombed-out slum neighborhoods full of squatters, crack addicts, and meth labs, just like inner Detroit or the neighborhoods in Flint, Michigan. My dying city is literally eating itself to stay alive, and appeals by concerned citizens to turn the trend around fall on deaf ears. When there is nothing else to eat, we eat each other. Just shouting, “Stop it!” isn’t effective in such situations, no matter how passionate the shout may be.
“Scrapping” (the practice of pulling scrap copper and steel out of abandoned homes and buildings) has become a huge cottage industry here, and though such break-ins are illegal and the trade is dangerous, it continues to grow. A few months back, two homeless men were killed by other scrappers who wanted their haul. They stole the stolen scrap from the men, killed them, and stuffed them down a manhole. Such is life in the post-industrial Midwest in 2008.
On the block where my little house is located, fully half of the buildings are vacant and boarded up. I had my house on the market for a year and a half, asking only what was left on the mortgage and offering to pay all closing costs, everything negotiable. Not one person ever viewed the house, much less made an offer. The house has a new roof, a new furnace, new siding, and new appliances, and I couldn’t get anyone to even view it, much less make an offer, and this at a negotiable asking price of $39,000.
After a year, my real estate agent started to get testy. “People want nice kitchens and bathrooms. Why don’t you put some money into these two rooms and see if that helps?” I have no money to put into upgrading a house in a slum neighborhood in a dying city; I can barely pay my own bills where I am, and honestly, if no one is looking at the house, what difference would it make if I installed gold leaf appliances? A house two doors down is still for sale for $8900. Four years ago, when I bought this house, it was in a nice neighborhood. A new grade school was built right across the street in 2005. All that doesn’t matter.
So when my realtor asked me after a year and a half of not showing my house even one single time why didn’t I remodel the place, I said, “Why don’t you?”
That was the end of my realtor.
After flailing around for a couple more months once the realtor fled, I was finally able to rent the house to my daughter’s mother-in-law. She likes it there, and renting to her also means that our kids get to keep their privacy. But now, with the tax increase, I pay more on the mortgage than I take in for rent. I still take the homestead deduction because, if I don’t, the property taxes will shoot up to $4000 a year on a house I can’t sell at any price: not for the $37,000 I owe on it, not for $20,000, and not for $4000.
People tell me, “Walk away. Don’t waste another cent.” But I do still see some good coming out of renting it: one less bombed-out house in my town, a place where my daughter’s mother-in-law is happy, the knowledge that I am not directly contributing to the decay of a major urban center. So for now I will pay the extra $50 a month and pray for the best. But I know it can’t last.
Like a lot of Americans right now, I am always one disaster away from bankruptcy. So, apparently, is our entire financial system. That cheers me up a little bit (as in, at least it’s not personal), but it’s hard to maintain my good humor when I keep getting love letters from the city, the mortgage company, the insurance company, and God knows who else. I get depressed sometimes. And now the bank where I took the job (the one that landed me farther north with an unsold home in Indiana) is on a short list of four or five big regional banks most likely to tank in the near future, right behind WaMu.
So, OK, Wall Street is (once again) having a very, very bad week. That’s a problem. Pundits are all over the TV and radio explaining that this promises to be the worst financial disaster since the Great Depression, and that no easy fixes loom on the horizon. A hard correction is in process, they say, and it won’t be finished this year, next year, or maybe the year after that. (A few weeks ago, these same pundits were saying that it was way too early to call the current economic slowdown a recession.)
Here’s what bugs me today: while Wall Street is having its Very, Very Bad Week, Main Street is having a very, very bad yesterday, today, tomorrow, and what’s more, a fairly miserable foreseeable future. For every Bear Stearns that goes down, thousands of cities lose jobs, tax income, and infrastructure. For every Lehman Brothers that cashes in, millions of people like you and me lose homes, cars, and retirement benefits. For every AIG that goes bust by betting high on the wrong horse, another couple generations of kids can kiss college and all hope of progress goodbye.
So yes, I’m worried about Wall Street.
What I want to know is, when will Wall Street worry about me?
By Evelyn Black, on September 15th, 2008
 Let me just say right off the bat that I’m not here to add fuel to the raging tabloid fires burning everywhere these days over John McCain’s selection of Sarah Palin as his running mate. Better bloggers than I have already said better things than I can even imagine, both pro and con and everything in the middle too, and this is after all an economics blog, not a political blog.
But I have noticed with growing interest a strange phenomenon that first appeared in the wake of the Palin announcement, kind of like the Loch Ness monster might have appeared briefly in the wake of a motorboat scooting across some Scottish pond, then submerged again, then appeared again, until finally nobody was really looking at the boat at all anymore because that re-emerging monster was so strangely familiar.
“The Palin Effect” is a familiar beast alright; it is none other than that long (we thought) debunked rhetorical 1970s chimera,
“Do working mothers damage their children?”
Can you believe that geezer has the nerve to reemerge after all this time, and what’s more, to do it in the company of a woman who admits to shooting large animals dead in Alaska and gutting them for fun?
Well believe it. It’s back. Thirty years after 1970s feminism held its funeral and catapulted Hillary Clinton into a force to be reckoned with on the political and world stage, here comes none other than Newsweek with a feature article entitled “To Work or Not,” pitched with the familiar tag:
“A new study finds that children of privileged families fare worse when the mother works outside the home. But what does the research really tell us?”
Really? A new study on the damage wrought by working moms? You mean to tell me someone is still doing these kinds of studies? Where? In a time machine? In one of the wormholes created this week when the Large Haldron SuperCollider was turned on to investigate the Big Bang? Is someone, somewhere, also burning a bra and refusing to shave her armpits? Is Gloria Steinem going to be on Oprah with Marlo Thomas again?
No, it turns out the only working moms of interest here, the ones possibly doing the most severe (possible) damage to their progeny, are the moms of privileged families, as in rich moms. Moms who are already rich, the article suggests, may be making their kids slightly fatter and less happy by working outside the home. According to a study published by University of North Carolina economist Christopher Ruhm, kids who come from low-income families with working mothers don’t seem to be nearly as disadvantaged as rich kids who come from homes in which rich mom goes off to a job.
Poor kids with working mothers actually perform at the same level on school exams, or slightly higher, than poor kids whose mothers stay at home. Rich kids, on the other hand, see a decline in their test scores under similar conditions. Rich kids with working moms also tend to weigh slightly more than rich kids with stay-at-home moms.
What conclusions are we to draw from this data?
Ruhm explains that, while no specific conclusions can or should be drawn, the data are suggestive and warrant further study and thought. Ruhm says his own wife worked while their children were small, and he doesn’t want his study to be taken as a warning that rich moms should stay out of the workplace.
“This comes down to a fundamental principle of economics: something has to give. We can’t have it all,” Ruhm says. “But I would never tell anybody what to do or not do about that. I certainly wouldn’t tell my wife.”
Right. And yet here we have this article in Newsweek strongly suggesting that poor women do their kids a favor by earning some cash for Pete’s sake, while rich moms need to understand that their desire for a career may come at the cost of little Tiffany getting a prom date (when that special time finally comes).
My own children were born on the declining cusp of the feminist movement of the 1970s, at a time when you couldn’t pick up a collection of recipes that didn’t have an article featured on the cover about the horrible dilemma faced by working mothers. Can women have it all? Should they? Does it harm the children?
Today, most women need to work. A single income is no longer sufficient to float a middle class family. The increase in the number of children in poverty is largely due to the increase in single mothers and the inadequacy of their less-than-equal wages. It takes two people working two or more jobs now to do what one guy could do back in the 50s and 60s: put food on the table. Everyone knows this. Working women have become the norm, and working mothers, while not having it easy by any bizarre stretch of the imagination, have more than proven it can be done and done well.
What interests me about the reemergence of these kinds of articles is that they are arriving concurrent with large numbers of women exiting the workforce. Back in 2000 when economists first noticed women leaving the workforce, it was assumed that with unemployment rising and jobs growing more scarce, affluent women were choosing to sit out the job hunt until their children were of school age, or even longer, because they had that choice.
That assumption was found to be false, however, by a panel of economists in a Congressional study described in a July 22, 2008, New York Times article. It turns out that women are exiting the work force for the same reasons men are: a bad economy. Women are losing their jobs through lay-offs or attrition and have been unable to find new ones. Many women are simply dropping off the charts.
Mark Twain famously noted that there are three kinds of lies: “Lies, damned lies, and statistics.” When Palin burst onto the national scene in a conservative venue with five kids in tow, a trendy suit, designer specks, a bun, and a hot body, it made a lot of people woozy. Was she a parody of a stripper librarian or the most amazing Superwoman in the History of America? Lots of tongues wagged about bringing home the bacon, frying it up in a pan, and who changes the diapers anyway? If the red phone rings at 3:00 a.m., will her hands be full of wet naps and talcum, or will she be able to put Putin in his place while applying fresh lipstick?
Weird stuff. We shouldn’t let it distract us from real economic issues, which are issues facing people today, not women. Declining wages, too few jobs, unequal pay, poor day care choices, expiring unemployment benefits, food prices that keep rising even though food stamps don’t: these are issues facing Americans, not women, and certainly not just privileged women.
It’s great to sell magazines and newspapers. That creates jobs and profit I guess.
But do we really have to return to the 70s to do it?
By Evelyn Black, on September 11th, 2008
After posting a 24.5% decline in August sales, GM announced on September 3 that it was encouraged by falling gas prices and signs that the market might finally be bottoming out. It takes a whale of a positive attitude to see a bright spot in a sales report like that, especially when the drop occurred during a much-hyped “Employee Discount Sales Event” designed to rid GM lots of a backlog of large to mid-sized trucks and SUVs. Ford reported a 26% drop in August sales, Chrysler a 35% drop.
Sales at Honda and Toyota also dropped but less than 10%, while Nissan actually saw a 15% increase in sales.
Gasoline prices have fallen 11% since mid-July when they hit their peak price ever, but customers remain skittish and for good reason. With three new Atlantic hurricanes currently stacked up like airplanes waiting for a runway and a near-miss from Gustav on gulf oil refineries, there is little cause for celebration. One major disaster could send oil skyrocketing all over again, and that’s not counting geopolitical problems, just hurricane risk.
GM, Ford, and Chrysler are all looking forward to 2010 when they plan to put all kinds of brand new fuel-efficient and alternatively fueled small cars on the U.S. market. Until then, the “bottoming out” of the U.S. auto market is likely to be a long bumpy bottom, made worse by tightening credit conditions and the  possibility of a new waive of unsecured credit and auto loan defaults. In other words, it’s going to be a long year before the U.S. auto industry can expect to see much relief, and what the country will look like at that point is almost anybody’s guess.
Both major presidential candidates are championing $25 billion in low-cost loans to help the U.S. auto industry build the fuel-efficient cars it needs to sell right here in the U.S. Recently, the auto industry requested another $25 billion in government loans to retool their assembly plants. It’s been almost 30 years since the U.S. bailed out Chrysler to give them a leg up against the Japanese, and now here come all three of the Big Three again, hats in hand, asking for rescue so they can “keep jobs in America.”
I confess, I have a chip on my shoulder when it comes the the Big Three. Why is it that lately, after hearing for 25 years about how free markets always regulate themselves when allowed to do so, the U.S. government is suddenly expected to bail out some of the largest corporations on earth? The airlines, the Big Three automakers, Bear Stearns, Faddie Mae and Freddie Mac, and what next?
GM built a successful and wildly popular electric car in 1996 – 12 years ago – to show the state of California that it couldn’t be done, and that people would hate it and refuse to buy it. They wanted to show that new fuel emissions standards enacted by the state would cripple the auto industry.
What happened?
People in California loved the GM electric car, which was dubbed the “EV1.” They loved the EV1 so much that nearly every single person who agreed to the trial lease of the vehicle (it was not for sale but only leased to select customers as a test) wanted to purchase and keep it. GM reacted in 2003 by recalling and destroying every single EV1 in the state. An excellent documentary on this bit of recent history can be purchased or rented almost anywhere; it’s called Who Killed the Electric Car?
It’s a little known fact that the very first car ever built was an electric car. William Morrison built the first model in 1890. It ran for 13 hours at a stretch and achieved an average speed of 14 mph. In 1900 Camille Jenatzy built an electric car that reached a maximum speed of 66 mph. In 1903 the first electric/gas hybrid car was manufactured by Krieger. Then, in 1930, with the invention of the internal combustion engine and the release of Ford’s famous Model-T, production of electric cars came to an abrupt halt until once again, in 1996, GM released one to prove a point and ended up making itself look ridiculous and corrupt.
Here’s a thought: maybe the Big Three are ridiculous and corrupt. They knew in 1996 that 1) they could build an efficient electric care at a reasonable price and 2) there was a market for this car. Why didn’t they keep building it? The documentary has some things to say about that, but I submit that one less conspiratorial reason is that they have rarely been much for innovation, preferring to stick to what (they think) works and ignore what is actually happening in the wider world. And electric cars aren’t even all that innovative: they’ve been around for 118 years!
Businesses that conduct themselves so pigheadedly often fail.
I want to see automobiles made in the U.S. as much as the next guy. More, actually. (I live in Michigan.) But why give $50 billion the U.S. doesn’t have to robber barons who squandered their inheritance by thinking short term, playing it safe, and shipping their factories overseas? Why not give someone else a chance? Why not subsidize start-ups with great automobile ideas in the area of alternative energy and fuel efficiency instead? Hand it off to the little guy, see if he can score a touchdown, because these three sure can’t.
It’s going to be a long, slow 2009 any way you cut it.
Am I worried about how the Fords are doing this winter?
Not on your life.
By Evelyn Black, on September 9th, 2008
By the time November rolls around, Americans will have heard more economic numbers crunched in more creative ways than anyone ever would have imagined possible. That’s the mathematical formula for recreating any candidate in the image of a populist hero: numbers and more numbers. Bury ‘em in numbers, and if they start asking questions, well, pull out some more numbers!
While Mark Twain’s infamous line about “liars, damn liars, and statistics” is more than apt here, it’s also true that sometimes numbers tell a story more powerfully than any orator. Such is the case with a pile of numbers put together in an article in the New York Times by Princeton economist Alan Binder, who took the time to discover that, statistically speaking, during the period from 1948 through 2007, the U.S. economy grew faster under Democratic presidents than Republican presidents. (See chart below right.)
Binder reports that “data for the whole period from 1948 to 2007, during which Republicans occupied the White House for 34 years and Democrats for 26, show average annual growth of real gross national product of 1.64 percent per capita under Republican presidents versus 2.78 percent under Democrats.” He continues that that statistical difference between parties of 1.14 points, “…if maintained for eight years, would yield 9.33 percent more income per person, which is a lot more than almost anyone can expect from a tax cut.”
In other words, what Binder is not-so-subtly suggesting is that if Americans had stayed with Democratic economic policies instead of experimenting with Republican supply-side theories, ordinary people would be a lot better off financially today: specifically, 9.33% better off. While hindsight is always 20/20, these numbers are interesting to say the least. And what’s more, they only tell half of the story.
The other half of the story, the half you may have heard much more about, is that income inequality has been steadily growing over the last 30 years, largely as a result of Republican economic policies. While the original idea was something to the effect of: more money at the top will result in more jobs and eventually more money for everyone; we know that in practice what has happened is that more money has simply floated to the top and stayed at the top. Real wages are falling, jobs are moving overseas, the middle class lifestyle that once flourished during the manufacturing era is showing signs of critical strain.
What’s worse, the trend is strengthening.
In 1947 the median family income in the U.S. was $23,400. By 2007 it had (roughly) doubled to $50,233, after hitting a pinnacle of $58,400 in 2005. During that same time period, the income of the top one tenth of one percent of all households has soared from $2 million to over $10 million. So, while the family smack in the middle of the census tables saw a doubling, more or less, of household income, the family at the very top 1/10th of 1% saw household income increase fivefold.
According to an AP article released on Labor Day, “all the data that Wall Street has seen lately seems to be pointing to a dual economy, one in which businesses are generally faring better than consumers.” The article continues, stating, “Evidence of this divergent economy keeps building — the average consumer is suffering, but business spending, particularly abroad, appears to be keeping the U.S. economy from sinking severely, even as the financial sector continues to struggle.”
In other words, yet another batch of numbers seem to show that U.S. businesses are holding up because exports and investment overseas are going well. Consumers, who have seen their jobs go overseas with all that corporate investment, are hurting. The fact that business has been able to thrive and prop up the economy while Americans wither on the vine is disturbing to say the least. That raw fact raises difficult questions about the capacity for the free market to self-regulate in ways that are not severely harmful to the U.S. populace at large. The mantra of the free market is sounding more and more hollow; and for sure it isn’t helpful at the grocery store or the pump these days.
If healthy businesses do not create healthy families, plentiful jobs, and consumers with money to spend, what interest should working Americans take in keeping business healthy? At the very least, the latest statistics indicate that issues of free trade, fair wage and labor laws, bankruptcy, and health are urgently in need of review and probably reform. The similarities to the the Depression era are striking.
The U.S. is not facing another Great Depression, or that, at least, is the consensus among experts. However, the U.S. working family is facing a painful protracted period of declining wages, increasing costs, and seeming governmental indifference.
When rhetoric, ad campaigns, and punditry grow tiresome (and do they ever), sometimes it helps to look at the numbers and ask yourself, am I voting my own interest? Am I better off than I was ten years ago? More and more Americans know the answer to that question without even having to think about it. They don’t need Alan Binder to prove it to them statistically, but it’s nice to know he can.
By Evelyn Black, on September 5th, 2008
In an election year, we hear a lot about the rich and the middle class and usually thrown into the discussion is the word “tax” and lots of rather heated rhetoric concerning how heavily the government should lean on people. One of the reasons this has become an issue this election is that Democratic candidate Barack Obama’s economic platform includes a plan to scale back tax breaks for people making over $250,000 a year while John McCain’s plan preserves tax breaks for anyone making under $5 million per year.
So, somewhere between $250,000 and $5 million is an imaginary line drawn in the economic sand that separates the middle class from the flat-out wealthy.
The million dollar question is, precisely where is that line located?
Newsweek columnist Dan Gross points out in an engaging column on the topic that an informal poll conducted by CNBC found that only 35% of the people making over $250,000 a year considered themselves rich, even though the median household income as of 2007 was only $50,233. Only the top 1.2% of U.S. households report incomes of $250,000 or better, and only 20% of all U.S. households report household incomes greater than $100,000. In some states, such as Mississippi, the median annual household income is closer to $36,000. That means in Mississippi, half of all  household incomes reported are lower than that.
Statistically speaking, these figures suggest “middle class” technically ends just shy of $100,000 per year per household, with some leeway this way or that depending on the specific state. This also feels intuitively right to me, speaking as a person who has for the past five years lived right in that income ballpark. Most of the working people I know in West Michigan have an annual household income in the $40,000 to $80,000 range, and most of the people who make more than that are people that we (at the lower income level) would consider rich.
But statistics and emotions are two very different things. In some of the priciest cities in the nation, a household income of $250,000 will not buy you a home in a really nice neighborhood. That’s obscene, but we have to ask ourselves if that fact alone means that a household placed squarely in the top 1.2% of all working American households is really experiencing the kind of distress that warrants tax relief. Certainly the family that can’t buy the house they want would say yes. And yet, a family in Mississippi getting by on $20,000 each year would say, “Give us a break.”
I recall as a child assuming my family was more or less “middle class.” My father was the sole breadwinner for a family of four kids and my stay-at-home mother. We had a small house in a city neighborhood inhabited mostly by factory workers.
By the time I entered high school I’d become painfully aware of an entire income class several rungs above us; the families of attorneys, dentists, accountants, and other white collar workers. These families also considered themselves to be “middle class.” Their lifestyle was so much more upscale, their problems so seemingly high-class (from my vantage point as a teenager in hand-me-downs), that I started to refer to our family as “lower middle class” or “working class.”
The blue collar/white collar distinction became a big deal in high school and an even bigger deal in college, where my blue collar roots branded me an interloper on campus and a traitor inside my old neighborhood: the worst of both worlds. It seemed to me that the fight over ownership of the middle class label was being won by white collar workers, with blue collar families by that time widely seen as uneducated and slightly more brutish by nature.
That was 35 years ago. Now, my husband and I have three jobs between us and worry about our health and our retirement. We seem to work all the time, and we’ve already accepted that we likely will never retire. We won’t be able to afford it, even though we’ve worked for our entire lives. A single healthcare crisis could sink us in a very short time, even though we both have insurance through our jobs. (We are still paying off about $7,000 in medical debt accrued for three days in a hospital over a year ago. That was what was left after insurance, for only three days’ admission.)
Our combined income is greater than $50,000 but nowhere near $100,000, and we do not look or feel rich. We feel stressed. We feel worried. We feel tired. Most people, looking at his truck-driving job and my entry level clerical job and freelance moonlighting work, would consider us “working class” even though we are both educated. The jobs we have are the jobs we have been able to get in the area in which we live. I worked my way through college (twice), and my kids had to do that, too.
Looking at the world today, it does seem to me that 1.2% of the population has successfully co-opted the “middle class” label. What’s more, the middle class label seems to me to have been floating upward for nearly forty years now, and if it floats any higher, it will turn in on itself, and we will all be living in some absurd economic farce. Perhaps that is how we are living now, and I just tire of thinking about it.
Whatever your feelings, whatever number you personally would choose to define the folks in the middle, it’s a pretty good bet you will include yourself in the category, and that you will feel strongly that you deserve more tax breaks. That much we know for certain.
But $5 million? How many houses does McCain own?
By Evelyn Black, on September 4th, 2008
Ever since Bill Clinton remarked, “It’s the economy, stupid!” the phrase has become a prominent part of the American political lexicon. This time around, we hear it all the time mouthed by pundits, and yet, watching the avalanche of political ads from where I live (in Michigan, a battleground state), it seems to me to be less about the economy and more about the patriotism and personal character of each respective candidate.
Plenty of “stupids” both implied and explicit are being bandied about.
Serious thoughts about the economy? Not so much.
Meanwhile, the U.S. economy has deep, unprecedented problems. Very serious problems. Problems so large that I think it is no exaggeration to say that they threaten to tank the United States politically, eventually relegating us to the world status of, say, Iceland – only without any of the socialized perks like healthcare and forward thinking energy policies.
While voters worry about who is wearing a flag pin and who will or will not raise their personal income taxes, inflation is hitting record levels; levels not seen in 17 years. The inflation rate for July alone was 1.9%. If the Fed raises interest rates (one conventional way to tame inflation), then mortgage rates will rise and lending will freeze up even more than it already has, driving the already catastrophic housing sector into an even deeper downward spiral, with the attendant loss of even more jobs, and yet another increase in foreclosures.
If inflation continues at this rate, the results will be just as toxic. Already there is talk of another economic stimulus rebate package, even though the first one was horrendously expensive and barely caused a blip on the consumer purchases screen. People needed that money to pay bills.
So there are no easy answers, but what strikes me in this campaign is that few are even asking the questions. Right now, Fannie Mae and Freddie Mac stock continues to deteriorate (20% in the past week alone) and the buzz is not about whether the recently passed rescue package will be used, but when and how. Remember, the rescue was tacked onto a foreclosure relief bill that was stuck in Congress for a year while representatives argued about “moral hazard” at an individual homeowner level. Once it turned corporate, boom, that bill was pushed right through, with the caveat, “We will likely never have to use this.”
Did anyone ever believe that?
Nouriel Roubini, the economics professor who correctly predicted the subprime crash and whom a recent New York Times article calls “Dr. Doom,” expects the cost of the Fannie/Freddie bail-out to hit $1.5 trillion before it’s all over. The famously bearish Roubini is quoted as saying, “A good third of the regional banks won’t make it,” and more disturbingly, “Our biggest financiers are China, Russia and the gulf states. These are rivals, not allies.” Roubini expects the worst to come throughout most of 2009, with a gradual recovery toward the end of that year, but he also notes, ominously,
We’re in uncharted territory where standard economic theory isn’t helpful.
He isn’t the first to say so. Henry Paulson of the U.S. Treasury has said as much, and all anyone has to do is look at Ben Bernanke’s face every time he speaks to Congress to understand instantly that we are in deep and confusing trouble. The man constantly looks like he’s about to wet himself.
Anyone who reads my posts for Amateur Economists can guess without any help which direction my personal politics lean, but I want to put it to the voters that, whatever your personal beliefs and political inclinations, now is not the time to indulge in American politics as usual with the chest thumping and flag waving and name calling and Boilermaker contests. Now is a time to listen very hard to policy making statements from both sides, to examine voting records and past behavior, and more than anything to ask yourselves how you will survive the coming hard times if no one who understands them is at the helm.
Thus far, what economic “policy” we have had has been reactive and seat-of-the pants. We’ve been plugging up holes in a leaky dike with wads of chewing gum. I don’t know if we have six months to waste, but it will be at least that long before a new administration is firmly in place and probably longer before that administration is able to formulate anything resembling an active response to the oil problem, the housing problem, the credit crunch, the bank failures, the crumbling infrastructure, the loss of American industry and jobs, declining wages, the healthcare crisis, and so much more.
John McCain owns seven homes, some of them condominiums, and all of them expensive. Barack Obama really was born in the U.S., does have a birth certificate here, and owns a million dollar home (just one though) near the Chicago law school where he used to teach. Both of them wear flag pins.
There. Now can we get serious?
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