Prognostications On The Economy (update 6-26)

Most people reading this blog will have read some prognostications on the economic future of the next 1-2 years, talking of what will happen in 2010.

These longer-term forecasts are fantasies.

While the mainstream prediction of some economic stabilization this year followed by modest GDP growth and continuing job losses makes sense, even this middle-of-the-road 6-month forecast is similar in reliability to a 2-week weather forecast during the spring or fall.

It might happen that way.

Exactly like a weather forecast, and for precisely the same scientific reasons, economic forecasts are relatively useful for a short-term outlook, and less and less meaningful for a longer term outlook.

I'm quite deliberate in this choice of language. Just as randomness changes the weather progressively more over time versus any specific scenario, the same effect applies to large economies. But while long-term weather usually follows seasonal averages with moderate deviation in most years, the long-term economy has more randomness and higher deviations.

Right now the biggest unknown is future evolution of expectations and the consequent choices individuals will make in response.

This is not at all predictable.

We can predict some aspects of the economy, such as national housing price changes, due to the highly consistent effects of supply versus demand -- when the supply of homes for sale is significantly more than 6-7 months worth, prices fall. The effect of significant supply along with significant expected shadow inventory (those with houses not currently on the market who would like to sell, and are waiting for the recession to ease) practically guarantee further price falls in many areas, and on national averages.

But some critical economic factors in the broad economy are fully unpredictable. That is, the degree of unforeseeable change is very high.

The economy is, after all, the joint decision of all of us together.

We can en masse pull back on our spending out of fear of job losses, creating a self-fulfilling outcome of continuing high job losses.

Or we can en masse gain confidence in the economy, and thus feel more secure in our jobs, and spend a little more, creating a self-fulfilling outcome of reduced job losses, and even an improving economy.

The most crucial part of the stimulus program -- the American Recovery and Reinvestment Act of 2009 -- is how it affects general confidence in the economy.

This is because general confidence will determine changes in consumer spending of greater scope than the amount of actual stimulus spending.

A popular forecast like "weak growth of 0.5% in the 2nd half of the year" is only a guess.

Fortunately, one of the greater forces in the economy has changed direction.

We can all breathe a little easier to see this news today:

Consumer confidence extended its rebound in May, soaring to the highest level since last September as more shoppers are feeling the worst of the recession is behind them....

This is no small thing.

Sufficient confidence could give the actual stimulus dollars much more traction, leading to a very different economic outcome over time. How different? Well, long-term interest rates for instance depend on investor confidence in America, which in turn depends on the American economy, which itself depends on small changes adding up over time...

-----------------------------
Update 6-26

(Reuters) - U.S. consumer confidence rose in June to the highest since
February 2008, as expectations grew that the worst economic recession since the
Great Depression may be ending, a survey showed on Friday.

Today we also learned the savings rate has shot up to 6.9% for May from 5.6% in April. New unemployment claims are still very high, ticking back up a bit.

But of all the indicators, most key are confidence and actual consumer spending (up 0.3% month over month).

These two suggest some possibility of real stabilization, instead of a downward spiral. What's unknown is how many layoffs have been delayed on hope of a bigger rebound in spending. The next 2 months will decide if this stabilization is firm, or only a pause. But I'm cautiously hopeful that this stabilization can hold, so that the economy may be at the bottom here, instead of a worse scenario. It's not certain, but it's a good sign.

Will The Recession Cause A Population/Economy Sea Change?... And What We Could Do Instead

There were absolute declines in the number of births in 13 of the 50 US states, including some of the poorest, such as Louisiana and Mississippi, while North Dakota, which showed strong economic growth due to an oil boom, had the biggest increase in births.

High house prices, which peaked in 2006, may have also played a role in discouraging couples from having more children.

And more recently, there is evidence that immigration into the US has dropped sharply, further lowering the population growth rate.

BBC--US birth-rate mirrors recession

Kids are "expensive", we hear these days. Most couples, the great majority, think twice about having a child. Many people choose not to have children, or not to have another child, because they cannot afford it.

We have focused in our national debate quite well on the general direction for our economy, such as a green technology future. But if the number of new families with kids decreases sharply, what effect will that have on our future economy?

If technology alone could drive an economy well regardless of the birthrate, one must wonder why the Japanese economy gradually fell behind the world during a period of growth in demand for Japanese exports. There are several factors, but the striking fact right now is how domestic Japanese demand for its own products is relatively weak due to an ageing population, and this lack of demand weakens the Japanese economy.

Not only are older Japanese naturally more conservative spenders than younger Japanese, but also there are fewer young Japanese to compete for Japanese investment capital, which causes the rate of return on domestic investments to be lower than it would be with a larger young population competing for that investment capital.

Having a dearth of young people weakens an economy directly through less domestic demand, but also forces an economy to either shrink or rely on increasing exports. Exports are an uncertain foundation for an economy though, as we currently are witnessing.

We are not talking here of simply a flat population. The Japanese population will shrink, as the low birthrate of recent times plays out. The same fate could begin it's first initial undramatic step right now here in America, even while it is obscured by the recent surge in births. What decisions are couples making now? Having babies has been popular in recent years, and this could change now that money seems tight.

---

What if raising kids in America was more affordable?

A few months ago after reading a post on Hedera's Corner, I calculated the increase in a family budget needed to raise 2 kids, in a detailed manner similar to the recent blog post here, where I try to be more realistic and specific than typical policy analysts. I considered what a median family could manage, with frugal choices, and arrived at a number of about $200/month extra costs during early childhood, without daycare expenses.

By my calculations, the bare minimum amount of budget help a median family would need to help them afford to raise 2 kids corresponds to a federal income tax exemption allowance of about $8000/child. For instance, if the stay-at-home mom takes a part time job after a few years, what part of the income should get taxed away? This depends on such tax detail as the exemption per dependant amount. Some could argue reasonably for more than only the $200/month extra I chose as a target increase in spending for raising 2 kids. But families typically adjust in several ways in order to afford to raise their kids -- some types of spending disappear while new types arise -- a tax break is only one piece of the picture. But it is an important piece.

"Perhaps the real way to best help families with kids is raise the federal 1040 exemption for dependents from $3500 to something more realistic like about $9000 for 1 kid, and $8000/each for more...." (my comment here)

This morning I was listening to David Goldman being interviewed by Tom Keene, and Tom brought up a point from David:

Tom: "This blew me away folks. The personal exemption on the tax form around World War II was $624 big dollars.... Now it's $3650.... You figure out that the World War II adjusted exemption should be $8000 [adjusted for inflation]. So a family with 2 kids is a $16,000 benefit which comes out roughly to around $240/week.... Essentially we could feed 2 kids in most American homes just if we got the personal exemption back to where it ought to be."

David: "The reason Japan had a lost decade is not only because their banks had a problem....their workforce has been shrinking."

By the way, this entire interview is excellent and will be in the best-of-the-month.

Now, "$240/week" (from the interview) isn't the correct result -- the actual take-home income increase from $16,000 more in exemptions at a 15% marginal federal rate (typical family rate) is $200/month, not $240/week. (Even at a much richer marginal tax rate of 25%, this result is only $330/month).

But $200/month is enough to significantly reduce the strain of feeding and clothing 2 kids, for a frugal family, as I calculated it with specific, realistic numbers. $200/month is not enough to stop being frugal. They'll need to be more frugal than they were just before they had kids -- they'll have to change spending priorities -- but that's normal.

An even better way to make having children financially feasible though would be to raise the amount of the Child Tax Credit (CTC) from the current $1000/child to $2200/child, and also make it "fully refundable" (paid fully even if a family's income taxes for the year are less than the $2200*number of children). If fully refundable, the credit would help better in real world situations. For instance, a family with significant medical expenses which lowers their taxable income drastically could lose some part of a $2200/child CTC due simply to the fact the current CTC requires the household have total income taxes after deductions that are greater than the credit in order to receive the full credit. But a family undergoing a medical crisis (and thus with significantly reduced taxable income after medial deductions) needs more tax help to keep their children clothed and fed, not less tax refund.

Here is a competent analysis of the CTC.

Readers may recall I pointed out how and why the Japanese had trouble recovering from their financial bubble, which included the decisive fact of not enough domestic demand from young Japanese people for Japanese products. Further, this implies older Japanese people will need overseas investments to have a chance to maintain income as the nation ages since the domestic Japanese economy will shrink due to demographics alone.

So...a nation normally needs enough young people to sustain its older people in retirement. Intuitively, we can understand a nation would need at least a roughly stable population to help avoid the strain of too many retirees per worker, or... otherwise they must have drastic savings and overseas investment. The latter is exactly the response the Japanese people worked out. The personal savings rate in Japan has been huge in recent decades, above 16% at times (but the total savings rate of the Japanese economy now shows a falling trend even separately from recent deficit spending, as more and more workers retire and begin to draw on their savings.)

In America our savings rate has been much less --we are relying on having enough young people, enough workers per retiree, to help in part to sustain retirement for our older people via transfer payments -- taxes on workers to help fund Social Security benefits.

But here's where a problem arises.

If our birthrate declines from this recession, while our savings rate increases, our level of demand in the nation will continue to decline. Retirement will then face a triple hit -- fewer young workers to fund Social Security, less domestic demand to drive the economy and create profits (on investment), and finally less competition for investment capital itself, further lowering returns on retirement investments.

America has had a growing population mostly due to immigration from Mexico.

Now the recession has slowed that trend, and also is likely to make Americans newly reluctant to have kids, which they feel they would have trouble being able to afford.

The projected trend in future U.S. population is likely to reverse unless the economy turns up better than expected over next few years. It's like a tipping point. As having kids remains expensive, and retirement looks less certain, families of productive age pull back further and have fewer kids. The U.S. could change onto a path for a much lower future population than previously expected, and if the change is dramatic the negative effects would be dramatic.

The concern isn't a flat population -- there are virtues in that situation. The concern is having a sharply falling population in 20 years.

This change isn't inevitable. We could simply instead change tax policy, and alter our economic future in the most profound way.

We can help solve this very serious problem by simply returning the Federal Income Tax Personal Exemption back to roughly its inflation-adjusted WWII value. Nothing more extraordinary than adjusting for 64 years of inflation, and then rounding up the number some to $8000 (or alternatively enacting a $1200 increase in the Child Tax Credit to $2200/child).

Households across the nation of child-bearing age could then easily see that having kids becomes feasible in their budgets.

Economics matter.

If this seems interesting, you'll find more interesting stuff -- economics yes, but a lot of insight that is more broad and far-reaching than economics -- in the book I'm working on. I will be providing links here for it when it is finished. The book has some new insights into the situation we face now, not available in other books, but it's more than a book about 2008 or 2010. I'm aiming for this book to be meaningful in 2020, or 2040.

Usury is OK, and Guns in Parks...

The Senate passed its version of credit card reform today. Several current tricks of credit card issuers will be out of bounds...in the future....eventually...when the rules finally come into effect. But if your card issuer just hiked your rate in a big way, well....

Current usurious rates aren't even on the table. 18%, 25% or 29.99% are all just fine.

One article mentioned that about 1/5 of card holders pay over 20%. Was that data from today?

One of our rate hike notices, which arrived a few weeks back, will raise one card of ours from 12% to about 19%. While these hikes won't affect us much at our house, it's quite easy to imagine the effect on other households. But compare this to the above seemingly reassuring statistic. Our new rate will be below 20%, and isn't in effect yet.

In 6 months, we may find that the above statistic of 1/5 has increased....

The elephant in the room is the question of the rate hikes that have just recently occurred or are on the way, since the card industry could see the new rules coming for miles. Card rate hikes are on the way, notices already sent, and these will slow the economy.

You can check out how your own Senators voted on the question of how many more of your dollars should go to the card industry right now, instead of, for instance, to local businesses where you live. If you are just now starting to pay an extra $40 or $80 a month in interest (a 12 percentage point rise in interest rate on an $8000 balance costs $80/month), will you spend the same amount on local goods and services that you have recently?

If you pay $40 a month more in interest now, will you tip the waiter the same amount? For that matter, will you cut back on eating out even further?

But, while usurious rates are OK with Congress, it's still up in the air whether the guns we need in parks can be loaded:

One amendment attached to the Senate bill by Senator Tom Coburn, Republican of Oklahoma, would restore a Bush administration policy allowing loaded guns in national parks. That provision is not in the House version, so there may be discussions between the two chambers over the issue.

Check to See How Your Senators Voted on Credit Card Reform (Updated)

Here is the first vote to check:

A Yes vote supported a 15% cap on credit card interest rates, limiting usury. A No vote was against the 15% limit on credit card interest. (note that this vote was on whether to include amendment 1062 in HR 627)

Senate Vote on H.R.627: Motion to Waive CBA Sanders Amdt. No. 1062; To establish a national consumer credit usury rate.

People, let's hold them accountable. Let's pay attention. Let's know how they voted, and let's remember and tell our friends.

---------Somehow it doesn't occur to all our Senators that 20% or 25% interest is a bad thing.

Bad for the nation.

One can imagine the lobbying arguments they heard, probably carefully targeted to individual Senators, depending on their temperament and beliefs.

Here are a couple I can imagine:

For a Senator that is a "staunch" "free enterprise" "pro-market" person, but doesn't really understand the basic necessities of markets or enterprise (non-finance enterprise) -- the necessity of having enough potential customers with disposable income left over to buy your product(!) -- an effective pitch could go:
"We gave them a low introductory rate, and planned our business on the premise that the rate later would be higher. Now that defaults are up everywhere, we need higher rates."

For a Senator that is more realistic and down-to-earth, perhaps he'd hear:
"Senator, we'd really like to help you again during your next campaign, but we need your help now."

The 2nd hardly needs any further examination here, but the first pitch is worth batting down.

If a credit card issuer cannot make enough profit at 15% even with a background default rate rising towards 8%-11% for instance (some credit issuers are more careful than others), if that company cannot make it on a 4%-7% spread, then....that isn't a well run company. For issuers that fold at a 15% cap (if any would), we should pleased to let the free market run them out of business and replace them with a company that can live on a 5% or 7% spread of interest (more if the issuer is prudent), which the market would indeed quickly do, in only months. Prohibiting 20%+ interest credit card rates is similar to outlawing an addictive substance that is harmful to health.
---------

Let's illustrate how 20% or 25% interest is ruinous.Consider a typical family carrying a commonplace level of household credit card debt of about $7,000 who then suffer a few (commonplace) financial hits -- too many major expenses at one time, such as multiple large auto repairs in a few months, and some expensive dental work and all of this just after a major replacement expense for a quality refrigerator or money sent to help a kid or relative. (Of course some households could have a previous balance on their cards from items such as furniture before the new expenses...but less discretionary expenditures are also common in debt ramp-ups.) It could easily be the case that after some bad luck for a few months they could end up carrying a significant credit card balance, perhaps even as much as 40% of their annual income for instance.

Let's suppose a family with a household income of $50,000 ended up with a temporary balance on their credit cards of $20,000. Otherwise they are quite average, with a house costing $160,000 at purchase (just a bit over 3 times their annual income) which they bought with 10% down and a good prime mortgage at a nice low fixed 30-year rate of 5.25%.

In other words, a financially responsible family that pays their bills, with excellent credit, who just had some large bills all at once, and not really more than they could handle over time...

...given a normal, reasonable interest rate, such as they expected they would have, due to the advertising of the credit card issuers.

Normally, a credit-worthy family could expect to carry such a balance on a few cards and at an interest rate in the range of 11%-14%.

First, clearly the credit card companies are making a nice, fat profit on balances carried at 12% or 14% interest that are paid over time (account holders that pay on significant balances without defaulting are very profitable for card issuers). In fact, you'll see that shortly.

Do the credit card companies need a higher rate here? Can the family handle a significant rate hike on this existing balance, a practice that is now commonplace according to the news.

So, let's imagine the outcome for this family financially if the $20,000 is carried at 12% in one scenario, and at 22% (21.99%) in the alternative scenario.

What will happen?

Suppose our responsible family with excellent credit spends quite carefully during the next few years, and even gives up their previous plan for a ski trip, settling for a much less expensive trip to SeaWorld once a year.

So, the family is cutting back, paying what they can.

What will happen?

Let's see.

A plan that reduces financial risk is to aim to pay back a high balance like this in around 4 years, because it is likely there will eventually be further expenses, and the family needs to be making real progress reducing debt before those unpredictable future expenses hit.

Putting our balance of $20,000 into the calculator for a 4-year payoff at 12% and 22% yields the following monthly payments:

12% -- $527/month
22% -- $630/month

So, only a difference in our scenario of $103/month more. Is that enough to matter?

Let's see, over 4 years, the roughly $103/month extra adds up to about $4,944 in extra payments (all interest).

Leaving aside for a moment what that $4,944 could have bought, such as two years of $2,470 contributions to an IRA, or $4,944 put into a 529 plan for college for the kids, while the years until college are still enough to earn some returns on the contribution, or....say a replacement used car when the old wagon goes.

Well....the last isn't a trivial example (though neither are the first). Because, in our example this frugal and responsible family has already chosen to repair their old car instead of buying a replacement, because the repair was still cheaper than buying another used-car as replacement....but, in several years, that old car is going to need some more repair, or replacement finally with a newer used car.

hmmm.....

So, there is already a danger this budget difference could put the family on a "crash" course.

But, let's go ahead and look at the budget numbers carefully.

For their monthly mortgage payment on the house described above with $2000 in annual property taxes and a quality $700/year homeowners insurance policy, and PMI (loan to value is 90%) of about $60/month, we arrive at a monthly house payment of $1,080/month.

Let's suppose our family has 1 child, 2 cars, one with a payment of $420/month for another 2 years, and the other older car paid off.

While both parents work, they pay $500/month for daycare for their 3 year-old.

While neither employer provides health insurance, the family has a good quality blue cross policy with a $3500 deductible for which they pay $750/month. To cover their deductible in case of a major medical expense (their regular office visits are covered at a $25 co-pay and no deductible), they funded an traditional IRA last year with $2500, as an emergency fund for medical care (IRA withdrawals are allowed for medical expenses).

For comparison note that the national average health insurance cost for a family is $12,000/year. This family is carefully aiming at a lower cost, but using a significant deductible, for which they have saved up money to help cover.

This is a frugal, money-careful family.

Normally, they contribute $2000/year to a Roth IRA, and this is the only retirement savings they have.

Being an old hand at Turbotax, I ran through all of this family's 2008 tax year. They were able to itemize deductions, due to the costs of medical insurance and home mortgage interest.

With only 5 $25 office visits during 2008, the family had no major medical expenses other than just the basic cost of health insurance. They are healthy and lucky, and don't have significant health costs other than the braces they just had to get for their kid's teeth.

Turbotax revealed they received $600 for their child tax credit, and also a significant child-care tax credit of $1,000, which was a major help, reducing their family federal taxes from about $2800 down to under $1200.

We'd like to list the federal income taxes in our budget, so to figure the family take home pay, we'll subtract only FICA taxes (social security and medicare taxes), and nothing else. All other expenses -- income taxes, health insurance, and retirement will not be withheld, but paid in our budget below.

Take home pay after FICA for our family is then $46,175 or $3848/month.

Also, our lucky family lives in a state with no income tax.

Nice. So this careful, prudent family, who are in many ways lucky and who Uncle Sam has treated very well in 2008, how will things turn out for them financially?

So, with all these advantages, with all these favorable basic facts, but with a few typical large expenses all at once of $20,000, will our family make it financially???

Let's suppose the family doesn't mind sweating some in the summer and is lucky enough to choose a low-cost electricity plan at only 10 cents/KwH. Nice. Their electric bill will average out over a year to only $120/month.

This is a careful, conservative, prudent family, remember?

So here are the budget results (on a few items like gasoline I just use some commonplace amounts):

Monthly Expenses before Credit Card Payments:
Housing Payment: $1080
Health Insurance: $750
Roth IRA Savings: $167
Auto Payment: $420 (5-yr, 6% auto loan for a car just under $22K)
Auto Insurance: $80 (they have good $100K/$300K insurance but comprehensive on 1 car).
Auto tags/inspections: $12 (about $140/year)
Child Care: $500
Federal Taxes: $100
Electric Utility: $120 (average over year)
Gas Utility: $35 (average over year)
Trash/sewer/water: $65
Grocery Budget: $600
Eating Out: $80 (yes, that's only $80 for a whole month -- they cook a lot at home)
Gasoline: $110
Phone and Internet: $75 (our frugal family forgoes cable TV and uses an antenna)
HOA fees: $20
Cell Phones: $65 (this may seem low, but these people are frugal)
Movie Rentals: $15 (cheap entertainment)
Clothing: $35 (some work clothes, some GoodWill clothes)
Dog food: $30 (most families have a pet)
Haircuts, cosmetics, toiletries: $45
Life Insurance: $50 (both parents, prudent, are insured with term life insurance)
Health Club: $20 (they have a deal!)
Babysitter: $25 (obviously, this is about 1 night's worth, again: think frugal)
Ok....let's see where we are at with this very basic, frugal family budget
-----------------------------------------------
Basic Frugal Budget $4499


....

UH OH

(it seems paying the full cost of health insurance has shot this family's budget)

....

It seems our family can't quite....live....this basic budget on $50,000/year.

OK, let's suppose the parents have been working quite hard at their jobs, and are great at them, and they just got BIG raises....(perhaps in part due to their employers canceling health insurance benefits).

Let's revise the family income upwards to a very average family level of $60,000

$10,000 is a nice raise, yes?

But...we'll keep that credit card debt unchanged at $20,000, now about 1/3 annual income.

Federal taxes increase (TurboTax says) to about $232/month.

Take home pay after FICA withholding only is now increased to $55,410 or $4618/month.

The basic budget though is increased by only the new income tax increase, or another $132/month:Basic Frugal Budget $4631

whew....not so good...

It seems $60,000 is not enough for our "frugal budget" above.

Notice that some or several of the items are *less* than your own family spends?

Ok, let's cut costs to the bone, and put on a 2nd job for dad.

Of course, some families don't have a $420/month auto payment.

Let's give them a cheaper car there.

Let's cut that car payment to $350/month -- they bought a cheaper car to begin with, say. This cuts the basic Budget by $70/month.

Dad is now working 55/hours week (40hrs + 15 hours on the 2nd job at $9/hour) and brings in an extra $6750/year now in 50 weeks.

The little boy sees less of dad now, but....life is sometimes hard (and sometime made harder by decisions of other people though), and that's a reality.

Of course, another job will require a little more gasoline, and probably the family will need fast food a few times also, being too exhausted to cook sometimes. Let's suppose $20 more for gasoline, and $25 more for fast food.

This brings home another 6233/year after FICA, or $520/month, for a total of $5,137/month. Federal taxes increase by another $91 to $323/month now. Against the increase of $91/month in taxes we decrease the car payment by $70, then add $45 for more fast food and gasoline for a net increase of $66 in the budget:

Basic Frugal Budget $4697/month

Ok, now with 3 jobs and a cheaper car the family is bringing in enough for their basic frugal budget and will have

$440/month left to pay on... credit cards.

hmmm.....

remember this payment amount on the $20,000?:

12% -- $527/month
22% -- $630/month

We are still not making it here...
ok, we have to be somehow more favorable, less desperate. Let's say that that credit card balance for those unexpected expenses all at once was only $15,000.

We are now under 1/4th of family income from that expensive, unlucky 4 months.The new 4-year payment amounts (on $15,000) are:
12% -- $395/month
22% -- $473/month


Ok, now we've made it. The family can pay the credit cards. Sort of.

They can pay about $400/month at 12% interest. Or with the help of Congress, they can pay more, about $470/month, lining the pockets of bank executives and investors. Perhaps they can save somewhere else in the budget to close that $33 a month gap needed to make the $473 payment when the interest rate is 22%.

Is one scenario better for the economy than the other?

I'm not just being rhetorical with that question. The $78 more each month the family has available under the lower interest rate is sustainable (non-credit) money that will be spent, sooner or later (more later if saved first), in the ordinary economy -- giving a waitress an extra tip, or buying a little iPod. It's discretionary money like this that ultimately provides you and I with our jobs. If that is sent off instead as extra interest, it can go to investors overseas, or into an U.S. high-wealth portfolio of securities somewhere, and be socked away for decades.

-----------
Update: A helpful reader pointed out that the example of buying a couch (in addition to medical and repair bills) suggested the example family wasn't prudent enough, so I substituted an equally realistic example without a couch. But ultimately the issue wasn't what a family chose to buy in piling up debt, so much as just simple usury, and worse usury after the fact.

I liked this metaphor from Austan Goolsbee in a NYTimes article on the credit card reform bill to describe the practice of raising rates exorbitantly on existing balances:

Austan Goolsbee, an economic adviser to President Obama, said that while the credit card industry had the right to make a reasonable profit as long as its contracts were in plain language and rule-breakers were held accountable, its current practices were akin to “a series of carjackings.”

“The card industry is giving the argument that if you didn’t want to be carjacked, why weren’t you locking your doors or taking a different road?” Mr. Goolsbee said.

Elizabeth Warren on Charlie Rose

Elizabeth Warren appeared on Charlie Rose last night.



Warren has lately appeared in many places (here's a new link to an unedited Planet Money full interview, and even "Tech Ticker"), which is encouraging, as she is talking of the most important situation/issue facing the country: the increasingly impossible situation of the middle-class squeeze. Unlike many prominent commentators though, Warren has real insight into some of the causes (another couple of fundamental causes and also solutions are a significant part of the book I've been writing). Instead of only being a raised voice or trying to present an economic ideology though, Warren gives non-ideological insight, and actually pinpoints some of the real causes.

So what happens when a clear, non-ideological mind like hers faces the labyrinth of money and influence and interests that is the TARP and the current situation? It's a fascinating moment in American history.

She cut through the fog to say the heart of the problem is indeed what's happening in the American family. This is true in that there were forces that pushed families into the choices they made, which in combination with choices banks and nations made (for instance the Chinese monetary policy of holding down their currency value) helped create this situation and outcome which is now threatening a world-wide depression.

I think she's right we have to address the problems faced by American families (specifically the problems of families with kids), of which there are several pieces, in order to be able to solve the big economic problems. For instance, banks' continuing troubles flow from continuing loan defaults (on mortgages and credit cards and auto loans, etc.) But the start and base source of loan defaults is from the middle class squeeze, which preceded the recession, and even if the recession eases will still keep banks in trouble and at risk, crimping normal lending.

Warren has superior insights versus many popular opinions. For instance, contrary to the popular perception of families buying fancy houses they could not afford is the bigger, far more widespread reality of a larger number of families that brought very average houses which were expensive and which they could not afford because they were competitively bidding up house prices in locations with good schools, which appear key to a successful life for their kids. Instead of getting sidetracked by the appearance that many "average" houses in newer areas are bigger than houses used to be, Warren cuts through the fog and pinpoints what's really happening: competitive bidding to be inside good school districts, whether in newer neighborhoods, or old. Small, 1950s era houses in the East have been bid up right along with the newer houses in the South.

That's an insight. Warren's insight.

That's a clear pinpointing of the real situation.

Fixing the big economic situation finally comes down to several specific problems, some complex, some quite simple. The insight is to be able to figure what really matters and what is more a side issue. There are even some simple problems that really matter, in addition to some complex problems (complex for instance are such as fixing banks or the situation of education and competition for schools). So in addition to talking about complex problems, Warren also talks sometime of simple problems. Credit card deregulation in the 70s and 80s for instance leading to the current unsustainable, theft-like practices. Sometimes to fix an engine you need to fix several things, and you have to fix them individually, even the smaller issues. So even with a major fix like a timing belt, you might still have to fix a relatively simple problem like a bad spark plug wire.

Warren has found some of the trouble other mechanics did not, and that makes repairs easier.

The Best of the Week

As a regular feature I'll be posting on the weekend a Best of the Week, which will occasionally be updated on Sundays also (if not posted on Sunday to begin with). Work is proceeding on the final draft of the book I've been working on (see my profile).

This week a couple of pieces stood out for drama:

Charlie Rose had an interview with Neel Kashkari (notes below):



some interesting moments (times):

9-11 minutes: house prices, loan modifications, what will end the "housing crisis"
17-23 minutes: the $700 billion, the crisis, the changes, the reasoning
24: "Nationalize (sic) the banks" vs. reality

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And not to be over-shadowed, Adam Davidson, whom is usually fun to listen to, ended up going overboard on Elizabeth Warren, finally resorting to labels and pigeonholes. Of course, such don't fit so well. If Elizabeth Warren is "left", then the left is smaller than I thought, and we'll be needing a new label (or not) for what used to be "left". If you listen, here are a few economists Adam forgot when he said no economists agree that the problem of household debt is a central, primary problem on par with fixing banks (and I'm including any public/blog/interview statement to the effect that consumer/household debt is central and a main source of the problems banks face):

Ken Rogoff
Timothy Geithner
Nouriel Roubini

There are more (for instance Krugman has suggested this a few times lately), but these three could suffice. (Still if readers want to suggest more or offer links, I'll include them).

Notice these three don't fit in a common pigeonhole, unless it's "realist".

Ok, here's the link for that interview.

We hope Adam will re-balance. Sometimes a person has to make a mistake in order to find their own next step.

Update: After Adam's apology Monday, Planet Money posted the full unedited interview on Tuesday, which really is a lot more interesting.

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One broad point I'd like to make: No one really knows the economic future. We have profound insights such as from Irving Fisher, but even standing on the high platforms of insights such as these don't afford a clear view through the fog of all the ever-changing decisions and efforts that together will sum and multiply and modify each other into true complexity.

One insight I can offer: ultimately our economy is a joint decision of all of us. We can indeed decide to move up, down, or in a new direction, and the mass decision of tens of millions moving together in response to the bully pulpit is no small matter. It could be decisive.