Economic and political analysis-Window on culture-Media criticism

Saturday, February 17, 2007

Decline of the Middle Class; Bernanke Warns Congress

The first part of this post discusses the economic crisis being faced by middle income Americans. The rich are getting richer. A debt spiral to nowhere impairs the financial future of millions of Americans.

I devote the latter part to this post to the debt our government is generating. Our borrowings are the result of what I call deferred taxation, which are government expenditures made through borrowed money. I focus on Fed Reserve Chairman Bernanke's recent comments before the Senate Banking Committee (February 14th) and a January report to the Senate Budget Committee.

The state of fiscal deficits which the US now faces call for immediate action. Rather than leap from a state of denial to one of desperation, as Al Gore said of global warming in An Inconvient Truth, we should take steps to reduce borrowing now, both by our government and ourselves. Lower government spending will be essential to prevent heavier taxes on already burdened taxpayers.

Financial Uncertainty for the Middle Class

Senator Bernie Sanders provided some hard statistics on truthout.org:
"...since he (Bush) has been in office, 5.4 million middle class Americans have slipped into poverty, 6.8 million Americans have lost their health insurance, median income for working-age families has declined for five consecutive years, and 3 million manufacturing workers have lost their jobs. At the same time, the costs of education, prescription drugs, energy, and housing have risen dramatically."

Numbers don't lie; they can however, be bent. One of the easiest ways to underestimate income is to average incomes of a group of people. Just one multi-billionare can dramatically inflate the income of thousands of others. Skewed results lead to faulty analysis of income trends.

For measurements of income, a far more appropriate statistical tool is the median--a level exactly in the middle, where half of the population earns more, and the other half less.

According to "US income figures show staggering rise in social inequality" by Jerry White, "median household income...fell by 3 percent, or about $1,600, between 2000 and 2004..."

Average increases in wages really mean little to the majority. A far more important source of information on the state of financial health of the American public lies in looking at how the average person is doing, or what the average wage is, not to average all wages paid.

In their article "What's Hurting the Middle Class" (September/October 2005 issue of Boston Review), Elizabeth Warren and Amelia Warren Tyagi describe the situation so many now face:

"Today there are five times as many families filing for bankruptcy as there were in the early 1980s. Home foreclosures have more than tripled in less than 25years. Nearly half of families with credit cards report that they cannot afford to pay more than their minimum monthly payments. One in every three families with an income above $35,000 reports owing medical bills they cannot pay.

"...a 255 percent increase in the foreclosure rate, a 430 percent increase in the bankruptcy rolls, and a 570 percent increase in credit-card debt.

"The impact of rising mortgage costs has been huge. The proportion of families who are “house-poor”—that is, who spend more than 35 percent of their incomes on housing—has quadrupled in a single generation. Today it often takes two working people to support a mortgage. A police officer or elementary-school teacher earning an average salary could not afford to pay the mortgage of a median-priced home in two thirds of the nation’s metropolitan areas."(source

The costs of passing on unpaid taxes have begun to show in the area of debt burden. Already taxes have increased. Is there room to increase the tax burden in the future?

"...The total tax burden for today’s two-income family is about 38 percent larger than that of their one-income counterparts of a generation ago.(source)

More woes merged out of the Senate Banking Committee on the 14th, where Senator Menendez stated:"The percentage of middle-class families who had three or more months salary in savings rose 72 percent, from 16.7 percent in 1992 to 28.8 percent in 2001. So families, middle-class families, were becoming more secure, year by year. But unfortunately, in the span of less than four years, that percentage dropped by over 36 percent, down to 18.3 percent in 2004."(link)

He continues, this time about debt:"...By the third quarter of 2006, outstanding household debt was 130 percent relative to disposable income. That means that the average family is in debt of over $130 for every $100 it has to spend. And, additionally, the average household savings rate has actually been negative for the past seven quarters, averaging about a negative 1 percent rate for 2006."

The US on the whole faces a debt trap not very different from that of many Americans. The desire to spend is always present in both; people like to spend like our government likes to spend. Both consumers of debt find it easier to borrow rather than earn, in the governments case, to tax (that word has gained awful connotations.) Like the errant personal spender, government faces a cut-off time certain, which is where traditional sources of credit choose not to lend as the risk of default is too high.

The government must spend and tax. Critics of taxation are incapable of shrinking government, so lower taxes do nothing to enhance fiscal discipline. Both our government and people spend more and more. And if the spending stops, everyone suffers.

My personal experience with debt led me into serious difficulties, so I know well the temptation of debt. I think acknowledging my problem was a crucial step in designing a way out. Now as far as addictive behaviours are concerned, I would rank the US and the vast majority of its people in the denial phase.

Fiscal responsibility is hardly acknowledged in our society, but is of critical importance in order to keep the country's economy running smoothly. A big part of assuming responsibility for one's financial situation requires a willingness to learn more about personal finance, and how our government spends money, our money.

Perhaps Americans--and their government--have been lulled into a sense of complacency. Changing spending habits is vital to solving the debt problem. Like most disorders, the longer we take in admitting we have a problem, the worse it becomes.


A few years ago, Congress passed a law making bankruptcy harder, much to the delight of the credit card industry. The propensity of consumers to overspend recklessly has been blamed for much of surge in personal bankruptcy (which is more often than not declared for medical purposes.)

The Warren/Tiyagi article brings up the "over-consumption myth":
"The idea that families are in financial trouble because they spend irresponsibly is deeply intertwined with the politics of personal responsibility...So long as Americans can be persuaded that families in financial trouble have only themselves to blame, there will be no demand to change anything."(source)

A Center for American Progress report released in January 2007 focuses on the absence of financial reserves. Its author, Christian Weller, points out:

"Since 2002, the share of families capable of coping financially with a period of joblessness has declined by 6.9 percentage points."

Perhaps more frightening even than the distinct possibility of losing a job, is the reality that it could take months to find another, and that expenses would continue unabated.

Massive layoffs have been announced by Ford, Hershey's, Chrysler, and other large corporations. Companies need little justification for mass firings; individuals are typically terminated en masse and without regard to job performance. Anyone could be downsized at any time.

Downsizing has become part of the American economic landscape; with the possibility of a lost job comes massive uncertainty over the length of time needed to find a new job. And as manufacturing jobs are lost, wage earners face the prospect of working in the service industry, or for smaller companies offering fewer benefits than their former employers.

The bare minimum living expenses for an average family are $3500 a month, with perhaps double that in some cities. A new job on average may require 60-90 days to acquire, with better paying ones perhas taking even longer. So where is the family to come up with ten or twenty thousand dollars if it hasn't been saved? They will likely borrow.

The Warren/Tiyagi article summarizes the situation faced by so many Americans:

"With 75 percent of income earmarked for fixed expenses, today’s family has no margin for error. There is no way to cut back if one person’s working hours are cut or if the other gets laid off. There is no room in the budget if someone needs to take a few months off to care for Grandma, or if someone hurts his back and can’t work. The modern American family is walking on a high wire without a net; they pray there won’t be any wind. If all goes well, they will make it across safely: their children will grow up and finish college, and they will move on to retirement. But if anything—anything at all—goes wrong, they are in big, big trouble."(source)

Primer on Saving

When I was working in the field of insurance and financial products, selling to the public, we would customarily identify family financial reserves, called the "emergency fund." Our principle, which we believed to also be the right thing to do, was to make sure a family had a bare minimum amount in the emergency fund before selling them anything. Then we'd look to make sure they'd have insurance. Then we'd confirm that the emergency fund had been fully funded--this meant 3 to 6 months worth of living expenses.

Working with lower middle income people, we virtually never found a family with anything more than a rudimentary savings account. What's more, money there was usually being saved for some specific purpose, and thus an emergency would deny that purchase down the road. Things break down, emergencies happen; as a direct financial consequence, a nest egg can be crushed, a vacation denied, or a business opportunity lost.

We found that most often credit cards were the method of financing emergencies. People had therefore been dependent on going into more debt, since emergencies always came up. Often the ease of borrowing through credit cards became an incentive to spend, not for the benefit of short-term emergency, but rather as a ticket to greater consumption, typically unnecessary.

Perhaps if the financial services industry were to pre-qualify customers, more people would be aware of the need to fully fund an emergency fund. The pragmatic inevitability of an emergency is surely beyond doubt; the average American will go through multiple jobs and most likely face being downsized, so the need for longer-term resources is vital.

As it is, financial intermediaries push product and the middle and lower classes are mass marketed, their situation weighed and measured for maximum short-term profitability. Ideally, salespeople need to make emergency funds a requirement, even before insurance or mutual funds are sold. Otherwise the marketing of investing and insurance products can undermine a family's overall financial security.

Absent any funds for emergency, retirement savings will diminish as they are cashed in to make up for some unexpected yet entirely predictable crisis that will occur. The lack of solid basic savings will invariably push people into greater debt and expose them to risks which would otherwise be covered by insurance.

The advance of age is clearly an enemy when people are spending more than they save. Debt accumulates then later, at a stage in life where they would rather not work, many will find themselves working til their deaths.

The future financial situation for the Middle Class looks bleak. Retirement investments require an excess of income over expenditures--a positive savings rate.

According to Warren/Tiyagi, "...half of all families have not one dollar of savings put aside for their retirements, and 73 percent have not one dollar in the stock market."(source)

Financial Report Card

How are you doing under George W. Bush? I could probably know how you would answer based on your income. If you were rich chances are you've grown much richer; if you income was average before, it probably hasn't gone up that much.

Americans often blame the President changes in the economy. It's a personal kind of animosity, blaming the President as we do when things get bad for us.

Holding the President personally accountable may also be a positive for Presidents who claim credit for sustained economic growth, low inflation, and low unemployment.

Presidents don't direct our economy. Changes in the macroeconomic environment may be the result of factors way outside the control of the US government.

Did Bill Clinton lead the economy? No, but his free trade policies created wealth for the middle class, who invested their new higher incomes in the market. The misery index (inflation + unemployment) was low during his time. Productivity improved, which slowed inflation and allowed corporations to increase their profitability.

The general impression people had of the economy was positive at the time, and Americans thought Clinton was in some part responsible. In this sense Presidents lay claim to the positive aspects of the economy, to show off the results of their policies and leadership. Presidents can bolster confidence in the state of the economy, and their speeches build on signs of economic progress.

How things have changed. First and foremost, the wealthy are making more money, a lot more money. Bush tax cuts passed in 2001 have yielded dramatic benefits for the already-rich. Just how much?

The Congressional Budget Office produced a powerful report on the Bush Tax Windfall for the rich:
"...income inequality widened significantly between 2003 and 2004. The share of after-tax income going to the top one percent rose from 12.2 percent in 2003 to 14.0 percent in 2004, an increase of 1.8 percentage points. As noted above, this amounts to $146,000 per household in the top one percent, equivalent to an additional $128 billion in income for the top one percent as a whole."

The rich are growing richer; the "...top one percent own more wealth than the bottom 90 percent" (source).

Under Bush, the tax cuts have largely benefitted the rich, and contributed to rapidly rising public debt.

Revolutionary Economics

Historically, the amalgamation of wealth can create a popular impetus for political change. The multitudes might seek to redistribute wealth through political mobilization.

Societies do become more unstable when wealth gets too concentrated. Always few in number, the political elite are often forced to adopt harsh conditions to maintain their rule against the popular will. Economic exploitation also justifies political action and even violence.

Popular revolutions were seen in Iran (1979) and Cuba (1959), two nations whose dictators were backed by the United States prior to their ouster. Economic factors may have played a large part. Much to the chagrin of powerful business interests from outside the country, private industries were nationalized, as we now see under Venezuelan leader Hugo Chavez.

The United States is not immune from the effects of a growing economic gap between the have and have-nots. Our middle class may be a buffer between more radical political change and its decline could signal a turn toward political extremism.

During the Depression, radicalism was embraced by many disenfranchised by the harsh volatility associated with Industrial Age economic cycles. Many Americans viewed communism as a viable alternative to the economic starvation faced by the masses at the time. Communist and revolutionary dogma found fertile ground amongst the unemployed.

Marx believed that capitalism was inherently flawed and inadequate, more prone to favor the individual over the society. The idea was that the more dehumanizing aspects of capitalism could be overcome through socialism; Lenin utilized the resources of a totalitarian State with centralized economy. Both philosophies defined a common goal of economic prosperity revolving around full employment and fiscal equality. Capitalism was seen a stage in political evolution, its advanced economy and hard-working proletariat the base upon which a more advanced socialist state could be built.

Today in America, the wealth gap is maintained through political power. The wealthy exert an inordinate level of influence over our government. If you were rich, wouldn't you use your wealth to lobby government, to lower tax rates and thereby make more wealth?

Marx would have said controlling the means of production leverages the political influence of the wealthiest Americans, who've shaped our tax policies to their benefit. Marx would claim that political equality will remain impossible as long financial disparity abounds.

Lenin's state, command-controlled, failed economically. Some have said the Soviet Union moved too quickly into a socialist model, and that Marx's called for conversion of a fully developed capitalist economy, rather than an agrarian one, as the Soviet Union was in 1919.

Debt Politics

Contrary to the musings of radio talk show hosts and self-labelled "small government conservatives", the scope of tax reduction symbolize a future tax deficit. Tax reduction is tax deferral--subsequent generations will have to pay even more in taxes, not to mention interest. The idea of lower taxes is politically expedient; who wants to give up more of their money to government?

The promotion of a lower taxes theme appeals to the leadership of our country today. Lower taxation is being sold as inherently good because it benefits the individual and--theoretically--reduces the size of government. But "conservatives" aren't fiscally conservative, if the results of Republican control over Washington is any indicator of "conservative" frugality.

The Republican theory of less government has become an hypocritical oddyssey of spending. Raising taxes has been positioned as the greatest political sin among those calling themself conservative.

Regressive taxation is nothing new to the Republicans, who ballyhoo lower taxes even as the country slides into ever more debt as a result. As a percentage of income, the poor and middle class pay more since the Bush tax cuts were enacted.

It's simply easier and politically popular to defer taxes; the young don't vote as often, so the elderly may be able to continue passing the costs down to the unborn. Sooner or later there will be a reckoning, probably in a generation or two.

One great danger of tax deferral is a shock to the economic system as the higher costs of government are passed on in the form of higher taxes. The longer the US waits to enact spending reform--or tax reform to prevent the deficit from growing, the harder the change will be on the economy.

Our fiscal imprudence is already being reflected in increasing interest on debt incurred in order to reduce taxes.

According to Senator Casey who spoke on February 14th in the Senate Banking Committee (link), "we are up to 8.6 trillion in government debt. Interest payments on that debt in 2006 increased by 23%."

In testimony February 15th, I believe Bernanke indicated that a combination of rising interest on the debt and entitlements would force taxes to be raised about 40% in 30 years, assuming no new spending. [ I've been unable to find Bernanke's statement cited here. I did see that he had made similar comments to the Senate Budget Committee in January. A transcript of Bernanke's address is available here.]

A written transcript for Bernanke's Question and Answer Session on Wednesday, February 14th, is available here. Hopefully I'll be able to find more from Thursday's Question and Answer Session, in front of the House Financial Services Committee and post it in a comment at the bottom of this post.

For more see Looking for Mr. Bernanke below, alongside Additional Commentary.


Unfortunately, Americans will have to face a world of higher taxes and a standard of living that will be lower than those of their parents. There will be exceptions, of course, but the economic trend will invariably turn down at some point. Some would say there is nothing we can do to change our future, but the fiscal solvency of our government is vital.

The cost of entitlements will rise. Coupled with increased borrowing, higher taxes will come in order to pay interest on the federal debt.Payroll taxes may have to be raised to sustain entitlements, and the tax burden compounded by the fact fewer workers must support more retirees.

The financial problems of the masses might impact the rich and corporations who are the chief beneficiaries of lower taxes at this time, so it is in there long-term interest to reduce government spending and borrowing. Many people left in the Middle Class could face the higher taxes necessary to keep up with entitlements, not just the wealthy and corporations, who would theoretically but not necessarily be the first to be taxed more.

We can simply borrow from creditors abroad to sustain our ways, but for how long? Millions of American face a retirement insulted from poverty only by Social Security. The Baby Boom generation begins to retire in just a year or two. Many will be unable to amass sufficient financial resources prior to retirement based on their current savings.

We can forestall the long-term consequences of so much borrowing now, before federal debt becomes too large. Like global warming, the US can either recognize the problem and lead the solution or be led by the folly of our mistakes to the true cost of doing too little.

While government can borrow, eventually it must pay for the money it borrows. So the individual must pay a price for governmental indiscretion one way or another--through taxes or inflation.

Without any individual savings, and the accumulation of massive amounts of debt, taxes will have to be raised. Otherwise we will see money simply continue to be spent, resulting in inflation and ever higher cost burdens, as we now see in the medical care fields. Theoretically, dollars could continually be printed and spent, to the point they have to be carted about in wheelbarrows as they were in Depression-era Germany.

We are facing a situation where continued spending will bankrupt our nation, which will make future borrowing nearly impossible. Our creditors will stop loaning to us, which will lead to a shortage of capital to spend, which will in turn lead to a massive recession. The pistol has been cocked, the bullet loaded into the chamber. We can change the time at which a reckoning might come, but we can cannot expect what is unsustainable to be sustained indefinitely.

* * *

Free Money

Bernanke's employer, the Federal Reserve, is the only private corporation in America that pays no taxes. Its Board sets the interest rates charged by banks which affect the overall economy. Media scrutinize what the Chairman, Mr. Bernanke, says and does vis-a-vis the economy.

The Fed essentially makes money from nothing. One startling fact is that money in fact is free; it's the banking system that survives based on its ability to charge interest.

There've been periods when the US government has sought to assert control over our money; Kennedy tried it and Lincoln did it, printing dollars called "greenbacks." Both those Presidencies ended harshly.

The principle is simple: have the Treasury make and distribute currency directly for what it spends. Money could be loaned at no interest, with nothing in collateral save to have the initial loan paid back. Interest-free money is an intriguing idea.

Money should be free; the right to produce money lies with Congress under our Constitution. Yet if Congress gained a monopoly and sole issuer of our nation's currency, spending would come without consequence. Congress would spend too much (look at them now.) The unrestricted spending would lead to an inevitable collapse in the value of our currency, with the money buying less and less over time.

Another key constituency would be banking industry which exists based on its ability to borrow and lend at interest. Both functions would be broken, perhaps much in the same way medical insurance industry might collapse--overnight--were national health care achieved.

If we removed Fed control over the issuance of money, we would in fact be asking for hyperinflation out of Congress, not to mention a lot of out-of-work bankers, however tragic that notion seems.

Looking for Mr. Bernanke

I sought any record of the comments from Bernanke's Question and Answer session with the House Financial Services Committee on Thursday, February 15th. While the Chairman's prepared testimony was only click away, I searched in vain through pages and pages to find any written record of Bernanke's answers to questions from the House Financial Services Committee. Apparently I haven't given my resources sufficient time to transcribe the event.

As a side note, I did find international reporting on Bernanke's commentary quite different from that presented in the domestic Media. Bernanke is clearly a man of tremendous influence. So playing to image, the Media fixates on anything which might roil the markets. Captivated by Alan Greenspan's whimsical style, financial media treat Fed commentary as if each kernel were the embodiment of ultimate truth.

The absence of transparent reporting sets a dangerous precedent in controlling the flow of information. The absence of hard facts in the Mainstream Media narrative means that people have little reason to be curious, or alarmed. The absence of substantive insights into the core economic issues helps news divisions simplify their obligations. The American people to some degree oblige the dumbing-down process, content in their ignorance of anything beyond their immediate financial condition.

Like the Mainstream Media, the financial press encapsulates personal opinion--even that of the Fed Chairman--into neat packages. Celebrity-worship is after all at the heart of the mass commercialization process. For the Media, it's simply more convenient to have Fed commentary described in broad strokes like bullish or hawkish, than confront specific position or delve into details.

I also found transcripts of the Question and Answer sessions far harder to obtain than the prepared statements. It's not without risk that the Fed Chairman speaks; where Bernanke might stray from prepared comments, a breath of fresh air threatens the status quo. Spontaneity is not a friend of market conservatism; better than Bernanke's comments stay framed in expectations than risk rattling the boat.

One general perception I noticed in reporting on Bernanke is that he's seen as still new to the job. There seems to exist the premise in much of the reporting on him that he shouldn't be challenged or confronted this early in his reign. The lesson is clearly that what Bernanke says is wise and true, yes, and that Congress hasn't earned the privilege of challenging the Chairman of the mighty Federal Reserve Board, a company that in fact depends upon Congress' annual ratification of authority for the Federal Reserve.

I'm leery of any Media agenda that makes the people's sole representatives subordinate to the Fed in financial matters--or any other matter. Unfortunately, matters pertaining to our nation's money have essentially been delegated (or abdicated) to the Fed Reserve, who sets interest rates. Interest rates may be crucial in understanding the future direction of the markets, but fewer Americans are interested than during the bull market days of the late 90's.

Perhaps the Media feels dumbing down is acceptable, considering the absence of public understanding about basic economic issues. Maybe Big Media is content the sheer breath of financial analysis devoted to every detail of Bernanke's "Fed-speak" stand in lieu of more balanced coverage.

The public must commit to becoming better informed and learning more about personal finance and economics. To cut the budget, Americans must apply political pressure by voting for candidates who actually reduce spending.

Additional Commentary

Fed Chairman Bernanke comments Before the Committee on the Budget, U.S. Senate on January 18, 2007:
"...a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits. According to the CBO projection that I have been discussing, interest payments on the government's debt will reach 4-1/2 percent of GDP in 2030, nearly three times their current size relative to national output. Under this scenario, the ratio of federal debt held by the public to GDP would climb from 37 percent currently to roughly 100 percent in 2030 and would continue to grow exponentially after that."

...Ultimately, this expansion of debt would spark a fiscal crisis, which could be addressed only by very sharp spending cuts or tax increases, or both.6

...if government debt and deficits were actually to grow at the pace envisioned by the CBO's scenario, the effects on the U.S. economy would be severe. High rates of government borrowing would drain funds away from private capital formation and thus slow the growth of real incomes and living standards over time. Some fraction of the additional debt would likely be financed abroad, which would lessen the negative influence on domestic investment; however, the necessity of paying interest on the foreign-held debt would leave a smaller portion of our nation's future output available for domestic consumption.

...future generations of Americans will bear a growing burden of the debt and experience slower growth in per-capita incomes than would otherwise have been the case.

...in ensuring that we leave behind a stronger economy than we inherited, as did virtually all previous generations in this country, will be to move over time toward fiscal policies that are sustainable, efficient, and equitable across generations. Policies that promote private as well as public saving would also help us leave a more productive economy to our children and grandchildren. In addition, we should explore ways to make the labor market as accommodating as possible to older people who wish to continue working...

...if early and meaningful action is not taken, the U.S. economy could be seriously weakened, with future generations bearing much of the cost."(Source)



Post a Comment

<< Home