Posts Tagged: debt

American Society / Economics / Financial / Tax Policy — 0 Comments
18
May 10

Confidence, Savings and the Future

The first quarter 2010 savings rate dropped from 3.9 to 3.1 percent.  Given the severity of the recession, economists assumed that out of fear Americans would save more.  That has not been the case.

Theories abound for the abysmal savings rate: high unemployment, little incentive to save in a low interest rate environment, high debt levels siphoning off income, stagnant personal income and others. Yves Smith, founder of Naked Capitalism,  introduces an intriguing theory that when an economy features great income disparities, a “plutonomy” emerges wherein the over-confident wealthy spend rather than save.

Behaviors on both ends of the income spectrum no doubt played into the low-savings dynamic: wealthy people who spend heavily, and struggling average consumers who increasingly came to rely on borrowings to improve or merely maintain their lifestyle. And let us not forget: average consumers were encouraged to monetize their home equity.  See High Income Disparity Leads to Low Savings Rate

I would posit another theory.  Americans have no confidence in the future.

The “Me Generation”

Baby Boomers grew up with the threat of “the Bomb,” Viet Nam, the assassinations of President Kennedy, Robert Kennedy and Martin Luther King Jr., and drug and sexual experimentation.  Paul Begala, political adviser to Bill Clinton, Baby Boomer in Chief, commented in Esquire:

At the risk of feeding their narcissism, I believe it’s time someone stated the simple truth: The Baby Boomers are the most self-centered, self-seeking, self-interested, self-absorbed, self-indulgent, self-aggrandizing generation in American history. See The Worst Generation

Losing Confidence in the Future

Generational characteristics have macro-economic consequences.  We have discussed the “Greediest Generation” with the ethos of “I want it and I want it now.”  See The Greediest Generation – Where has Shared Sacrifice Gone? Missing from that analysis, however, is a less obvious underlying motivation:  my view is that collectively Americans have lost confidence in the future.

The Meaning of Savings

Savings requires deferring immediate gratification in order to provide for the future.   Savings requires a goal: a house purchase, kids’ college education, retirement, intergenerational wealth transfers, and future medical needs.

The task is daunting.  Society and even bogus patriotism conspire against a savings ethics: diner coffee for $1.25 or treat yourself to Starbucks?; extend yourself and buy a house now or save for a larger down payment?; buy a no-money-down car now?; take out a student loan for college or work for a few years first?  The present trumps the future.   With consumer spending representing 70 percent or more of the economy, is saving actually un-American?  And governmental policy discourages savings through ultra low interest rates, tax credits and deductions encouraging taking on debt and  consumption.

Save Some Money, Save Yourself

The siren song of indulgence and consumerism has led us directly into the path of this tornadic financial crisis.  We’ve accumulated too many houses, plasma televisions and attendant debt.  In the face of an anti-savings zeitgeist, saving money is a good idea for many reasons: a chance for personal financial autonomy, a better life for our children and grandchildren and a secure retirement. Savings requires self-sacrifice, thriftiness, a financial plan and debt avoidance.  And most of all, savings requires confidence in the future.  Lurching from crisis to crisis, dire headlines at home and abroad, house foreclosures, and high unemployment has sapped this much needed confidence.

In the end, we have always been a resilient, even optimistic people.  Let’s save some money and save ourselves.

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American Society / Economics / Political — 0 Comments
26
Jan 10

The President Wakes Up and Smells the Election Results

In Barbell Economy posted on January 21, I hypothesized that the Democrats lost the Massachusetts election because the Obama administration ignored the needs of the middle class.  The systematic destruction of the middle class is the most potent issue of 2010.  It appears the White House finally woke up and smelled the coffee.  President Obama yesterday proposed a series of initiatives to aid the middle class. The Christian Science Monitor reported the President’s remarks:

We … need to reverse the overall erosion in middle-class security so that, when this economy does come back, working Americans are free to pursue their dreams again,” said Mr. Obama Monday at a meeting of the administration’s Middle Class Task Force.

A White House fact sheet listed some of the specific initiatives:

Child care. The administration is proposing to nearly double the child-care tax credit for families whose income is less than $85,000 a year. For those folks, the percentage of child-care expenses eligible for reimbursement via the credit would rise from today’s 20 percent to 35 percent.

In dollar terms, the maximum credit for a two-child family making, say, $80,000 a year, would increase from $1,200 to $2,100. That’s a $900 benefit.

Families with incomes up to $115,000 a year would be eligible for at least some increase in their child-care tax credit, on a sliding scale.

The administration also is proposing to increase by $1.6 billion the amount of money in the Child Care Development Fund, which pays for child care for poor families, including those receiving public assistance.

Dependent care. The White House is proposing to add $52 million to the Caregiver Initiative, a Department of Health and Human Services program that provides temporary respite care, counseling, and referrals to critical services for hard-pressed families taking care of elderly relatives. According to the administration, this extra cash means the program will serve an additional 200,000 people.

The administration is also proposing to add a further $50 million to programs that subsidize adult day care, transportation, and aides who help seniors bathe and cook.

College expenses. …[T]he administration is proposing to limit the amount of student loan money that a borrower must repay to 10 percent of the borrower’s income, over and above a basic living allowance.

The proposal would also cap the total amount of money a borrower must pay. For borrowing students who enter a field of some kind of public service, all remaining debt would be forgiven after 10 years of payments. For others, forgiveness would follow 20 years of payments.

Retirement savings. About 40 percent of working heads of households don’t have any kind of employer-sponsored pension or retirement plans. The administration thus is proposing to require employers who don’t offer such plans to enroll their workers in automatic, direct-deposit IRAs (individual retirement accounts).

Employees could opt out if they wanted to. All contributions would be voluntary.

The administration also wants to streamline the process by which workers enroll in 401(k) retirement plans.

Where are the Jobs?

While providing some benefits to the middle class these initiatives do not create jobs.  The Administration seems to miss the larger point, perhaps the only point:  we have too much debt, too little savings and too little demand.   Economically it is impossible to return to the pre-2007 level of prosperity because we have not liquidated or paid off our massive debt.  Zero interest rates misprice risk.  Banks are hoarding money to reserve against future losses in their loan portfolios. There are few credit-worthy borrowers.

And so, both parties remain guilty of legislative gimmicks.  Bailouts and tax credits do not get to the heart of our problem, too much debt. When will we reach a moment of recognition that there are no quick fixes?  Debt must be liquidated or paid off, savings must become more important than spending, and we will all have to be more productive.

What we need now are leaders who understand these truths.

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