Why People Say The Economy Is Terrible

The Daily Escape:

First snow, Doubling Point Lighthouse, Kennebec River, ME – December 2023 photo by Rick Berk Photography

Wrongo may have stumbled upon the reason why people say the economy is bad when so many economists say it isn’t. From a LendingClub report from last May: (emphasis by Wrongo)

“For some Americans, earning a six-figure income doesn’t guarantee a comfortable lifestyle….many Americans are struggling to make ends meet — with 61% of those surveyed saying they feel stretched too thin, and 49% of those earning $100,000 or more saying they’re living paycheck to paycheck.”

This ties together with other information, some of which comes from the issue, who reported this from the Aspen Institute: (emphasis by Wrongo)

“Though routinely positive cash flow is the starting point for financial stability, it remains largely out of reach for many Americans. Even before the fallout of the COVID-19 pandemic, nearly half (46.5%) of households reported that their income did not exceed their spending over the course of a year. For households with annual income of less than $30,000, this number increases to three in five (61.5%).”

Now there may be many reasons why people spend beyond their means. Some seem to be unable to defer gratification until there’s money in the bank, so they buy on credit. There was a $48.5 billion jump in spending from September to October 2023. For others who make less than a living wage, the problem isn’t one of choice, it’s existential.

The searing takeaway from the above is that negative personal cashflow was a problem even before the post-Covid inflation drove prices through the roof in America. The Aspen Institute provides this handy chart showing how individuals build financial security:

Financial security starts with having a routinely positive cashflow. But, nearly 50% of Americans today aren’t cash flow positive (see quote above), while 49% of people earning more than $100k are living paycheck to paycheck.

This dovetails with Wrongo’s Monday column which showed that “Nearly 3 in 10 Americans say they have had to forgo seeing a doctor in the past year due to costs.” If you’re one of the 7.5% of uninsured Americans, and have money in your checking account that isn’t going to necessities, you can definitely go to the doctor.

Aspen has another chart that shows the breakdown of who lives paycheck to paycheck by income levels:

Seventy-four percent of those making less than $50k are living paycheck to paycheck, and while the percentage gets smaller as annual income rises, it’s still 48.7% for people making more than $100k, in an economy where the median income is around $54K!  FYI, the percentage of Americans who make $50k or less is 37.8%.

More from LendingClub: (brackets and emphasis by Wrongo)

“The share of consumers in the US earning over $100,000 per year who live paycheck to paycheck increased 7 percentage points in April year over year. High-income consumers are particularly likely to live in urban areas, at 36%, and these tendencies toward higher incomes…[don’t] prevent almost 70% of urban dwellers from saying they live paycheck to paycheck.”

It’s hard not to conclude that the majority of Americans are currently experiencing dire financial conditions, including many who live with negative cashflow. When your cashflow is negative, you either cut back, borrow or sell assets. For most people selling assets isn’t a real choice. So while some cut back, the majority borrow to make ends meet. According to the issue, the:

“…highest risk, and most expensive forms of debt are now growing fastest. Payday loans, online insta-loans, and so forth. That means that people are exhausting the more mundane forms of debt—credit cards, bank loans, government loans, etcetera.”

This squares with a report by Achieve, a personal debt management firm, that shows:

“In the first nine months of 2023, the average monthly participation in debt resolution programs increased by 119% compared to 2020, even though the average earnings rose by approximately 37% during the same period.”

It gets worse:

“In 2023, the typical household income of individuals enrolled in debt resolution programs was $59,900, which is a notable increase from $43,598 three years prior.”

Americans are earning 37% more but are still struggling with debt. Not a pretty picture to take before the voters.

Meanwhile, Democrats still are touting how “strong” the economy is. The aggregate numbers hide terrible personal experiences that are happening out of sight of our politicians and surprisingly, our economists. However, it’s clear from the polls that few Americans are buying that message apart from the true believers, the media and pundits.

The disconnect between economic data and the lived experience of average people needs to be addressed by Biden and the Democrats. If nothing is done to at least acknowledge the actual problems of many Americans specifically, their negative personal cashflow, these angry folks will certainly tilt toward giving Trump another chance.

Let’s give the issue the last word:

“What is this? What do we call it when the majority of people can’t make ends meet, as in, they’re literally spending more than they make, because they don’t make enough to live a stable or secure life?

Today the averages are hiding a truth: that a near-majority of American citizens are financially underwater. These are big numbers. The Census Bureau says as of now, 258.3 million Americans are adults. And the Aspen Institute says that 46.5% of them can’t make ends meet. That’s 120 million of us that are going deeper in debt every month.

That can only happen when those at the very top are skimming off more than 100% of the growth in the economy. This suggests that Biden et al need to run on policy that will help the majority of voters, not simply the moneyed people who finance political campaigns.

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Monday Wake Up Call – April 3, 2022

The Daily Escape:

Makapu’u Lookout, Oahu, HI – January 2022 photo by TwoBongs on Tour

Let’s talk about the “Wealth Effect”. It’s the notion that when households become richer as a result of a rise in asset values, such as stock prices or home values, they spend more and stimulate the broader economy. The idea is that consumers feel more financially secure and confident about their wealth, even if their income and costs are the same as before.

This concept has been endorsed by two recent former Fed Chairs, Janet Yellen and Ben Bernanke. It’s simply another term for trickle-down economics.

In 2019, after nearly 11 years of the Fed’s policy of adding money to the economy, by “Quantitative Easing” (QE), the National Bureau of Economic Research (NBER) did a study on the Wealth Effect, to quantify how much richer the rich would have had to become to have x% impact on the overall economy, and how long this boost lasts before it fades.

They found that QE makes 10% of the population a lot richer, producing immense concentration of wealth at the top 1%, and mind-boggling concentrations of wealth at the billionaire level. After which, there were some very muted trickle-down effects on the economy.

Wolf Richter used the Fed’s wealth distribution data to create a chart he calls the Wealth Effect Monitor. The Fed divides the US population into four groups by wealth: The “Top 1%,” the “2% to 9%,” the “next 40%,” and the “bottom 50%” to report on wealth.

Richter divides this data by the number of households in each category, to obtain the average wealth per household in each category. Here’s his chart for the past 21 years:

Note the immense increase in the wealth for the 1% households after the Fed’s latest QE effort that began in March 2020. They have been the primary beneficiaries of the Fed’s policies since 2020.

True to the Wealth Effect’s concepts, the Fed’s policies helped to inflate asset prices, and thus only asset owners benefited: The more assets held, the stronger the benefit. Here’s Richter’s analysis of average wealth (assets minus debts) per household, by category in the 4th quarter, 2021:

  • “Top “1%” household (red): $36.2 million
  • The “2% to 9%” household (yellow): $4.68 million
  • The “next 40%” household (purple): $775,000
  • The “bottom 50%” household (green): $59,000

The Fed doesn’t provide separate data on the 0.01% and the Billionaire class, but they were the biggest beneficiaries of the Fed’s monetary policies. The top 30 US billionaires have a total wealth of $2.12 trillion, sliced into 30 slices for a wealth of $70.8 billion per billionaire, according to the Bloomberg Billionaires Index.

Compare that to the bottom half of the US population (the “bottom 50%”) who have a combined wealth of just $3.7 trillion, divided into 165 million slices for each individual. The way percentages work, you would think that households in the bottom 50% would have the largest percentage gains since they start from a lower base. But because they own fewer assets, when adjusted by population, they stay mired in last place. From Richter:

“When the wealth of the bottom 50% increases by 5%, they gain about $3,000. And when the average wealth of the top 30 billionaires increases by 5%, they on average gain $3,500,000,000.”

More from Richter:

“In 1990, the wealth disparity between the average top 1% household and the average “bottom 50%” household was $5 million.”

Since March 2020, the wealth disparity between the average top 1% household and the average bottom 50% household has grown by $11.2 million per household.

The bottom 50% of Americans spend all or nearly all their income on housing, transportation, food, healthcare, etc. They hold few stocks and very little real estate. Add that to our current round of inflation, and in order to get by, the bottom 50% are spending nearly all of their income.

They’re the ones paying for the Fed’s policy of enriching asset holders.

We know that average wages and salaries have gone up a lot. Ben Casselman of the NYT says that the wages of low-wage workers have gone up by nearly 12% in the last year; but remember, that’s on a low base. So the worker bees in our economy have a long way to go, while the richest asset holders got vastly wealthier, thanks to the Fed’s policies.

Time to wake up America! The phony trickle-down theory has amazing persistence among US policy makers, despite being amazingly damaging to most of us.

To help you wake up watch an American icon, Taj Mahal perform “Good Morning Ms. Brown” in 2014 while riding in a mule-drawn carriage in the French Quarter in New Orleans:

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We’re In Uncharted Territory

The Daily Escape:

Sunset, Factory Butte, UT – photo by goat_chop56

Blog reader David K. emailed:

“Now, what do we common folk do?  Start our “victory gardens” and shelter in place?  Volunteer to help our local farmers raise food? Hoard?  Wish I had a great idea, because I agree that our leaders don’t have a clue how to respond.”

That gave Wrongo pause. What do those of us who aren’t part of the “smart money” crowd supposed to do, particularly if what we’re facing is a worldwide depression? John Pavlovitz frames the existential issues quite clearly:

What happens if the stores run out of essentials for good?
What if you run out of money to stockpile them?
What if your neighbors stop sharing with you?
What if the government won’t help you?
What might you do then?

Politicians say we’re at war, but as Kunstler says: “At least in wartime, the bars stay open. That’s how you know this is a different thing altogether from whatever else you’ve seen in your lifetime.”

We’re attacked by a novel virus that’s created a completely novel social and economic situation. By definition, we aren’t prepared for an abrupt crash of both our social fabric, and our economic well-being.

Our politicians have no answers, despite most of them having been around for the 2007-2008 Great Recession. The Fed hasn’t done us any favors since then, either.

Last Saturday, Wrongo said that we’re crossing a threshold between what we know and an unseen future. Our traditional systems are no longer capable of keeping society and the economy on an even keel. Nobody really knows how deep and how harsh this will get, but the situation presents two questions:

  • How much disorder will we have to endure?
  • What does the world look like when this thing is over?

All this is happening in an election year, when the entire government and the political parties’ power structures are vulnerable, and could change. We are facing a new reality, for which no one has any answers.

Politics being what it is, the White House and the Congress are trying to work together to come up with solutions. On Monday, Trump gave another press conference on COVID-19. During his talk, the stock market dropped nearly 3,000 points. It was the market’s worst day since Black Monday in 1987.

The smart money was behind Trump in order to get its corporate tax cuts, but now, they’ve voted with their money. And Trump’s starting to look a little bit like Herbert Hoover.

Sen. Mitt Romney (R-UT) floated Democrat Andrew Yang’s idea of giving every American $1,000. He was joined in principle by Sen. Tom Cotton (R-AK). We’ll see if this is just more Republican grandstanding, or if they actually back a real plan of support for working people.

With Trump, you can expect to see bailouts for several industries, including banks, airlines, casinos and cruise lines. Imagine: Casinos are asking for help from the guy who only knows how to bankrupt casinos.

Reuters reports that the US airline industry said that it needs $50 billion in grants and loans to survive the dramatic falloff in travel demand from the COVID-19 outbreak. This is just more socialism for America’s corporations.

Two thoughts: First, $50 billion is higher than the book value of all the airlines combined. Why should they have any of our money? Either Republicans are for free market capitalism, or they should just shut up. Most of these airlines have implemented stock buyback programs when they should have been building contingency funds instead.

Second, this $50 billion should be added to whatever Congress spends on small businesses that are forced to close due to quarantine, or on parents forced to stay home to take care of kids who aren’t going to school anymore. They’re the ones who are really hurting.

We’ve lived through a time of unprecedented affluence. We’ve told ourselves we deserved it all, that we were entitled to all that our country has provided.

But that’s most likely over, and it might not return in Wrongo’s lifetime.

We have to think about what must change if we are to have a functioning society and economy in the decades to come.

The list of all the things that we need to change is far too long to enumerate here. At a minimum, we need to reform capitalism, make health insurance universal and strengthen worker’s rights.

We have to do a better job of sharing the wealth. It we don’t do that voluntarily, our children’s children’s generation will come and fight us for what we have.

To protect our families and their future, we need to become even more active politically in order to make these and other changes happen.

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Fed Study Shows Rising Financial Desperation in Poorer Zip Codes

The Daily Escape:

Aliso Creek State Beach, near Laguna Beach, CA – 2019 photo via

Simon Johnson observes at Project Syndicate: (emphasis by Wrongo)

“To defeat populism requires coming to grips with a fundamental reality: bad economic policies no longer necessarily result in a government losing power. In fact, it is now entirely possible that irresponsible populists may actually strengthen their chances of being re-elected by making wilder and more impossible promises – and by causing more economic damage.”

Johnson, former chief economist for the IMF, believes that structural economic factors, including automation, trade, and the financial crisis have left many people feeling neglected by those who control economic policy.

When politicians back policies that add economic uncertainty, or that discourage investment, we see lower economic growth, and fewer good jobs. Ordinarily, dissatisfaction shows up at the ballot box, holding that government accountable at election time.

But this is no longer reliable, because politicians wiggle out of the trap by saying that the media are biased, that the experts are wrong, and that the facts are not the facts. And the angrier people become, the easier it is to persuade them to accept that no one is to blame, and vote again for those who helped to cause their economic distress in the first place.

A new study by the St. Louis Federal Reserve Bank examined American financial distress by Zip Codes. It sheds light on a topic we regularly debate: Why are there so many signs of distress in a supposedly robust economy? And this time, will politicians be held to account?

Since 2015, the lowest income households have been taking on more debt. Their wealth has become even more concentrated in home ownership. The level of distress in lower-income households has also increased, despite the official story of increasing prosperity.

The study drills into Zip-Code level data to show that even adjacent Zips show striking divergence in wealth accumulation (or erosion). For instance, they looked at the percentage of people within a Zip Code that have reached at least 80%t of their credit limit on their bank-issued credit cards.

That is believed to be a good proxy for financial distress.

Before the 2008 crisis, analysts missed the rising levels of household debt. That debt was often funded by borrowing against home equity. Rapidly falling home prices after 2008 showed how fragile many of those borrowers were.

The contrast between national averages and Zip Code households is stark. Looking at averages, the recovery appears to be quite broad.  But zooming in by Zip Code showed a bifurcated economy still suffering from the 2008 crisis. The researchers found that looking at the value of assets and reliance on debt shows a clearer picture: (emphasis by Wrongo)

“…the poor and high-leverage ZIP codes that are more affected by wealth shocks may still be vulnerable. What’s more, trends in less affluent groups are masked in nationally aggregated statistics by groups with more wealth.”

“May be vulnerable”? They will certainly be vulnerable when the next downturn begins.

Since 2015, debt and financial distress have been rising the fastest in these low-wealth areas, while it rose the slowest since 2015 for the wealthiest households. We already see softness in economic indicators like retail sales, home sales and housing construction. It’s reasonable to expect that the next recession isn’t far away.

We’ve had a long economic recovery, but its gains were not distributed as broadly as they had been in previous downturns. What we got was an uneven economic recovery, with most gains going to an increasingly narrow group.

More people are left out of this supposedly robust economy than the politicians and most economists think. The Fed study shows that the averages conceal plenty of pain. Maybe this isn’t an earthshaking idea. We all see income and wealth disparities in our communities, it’s not that unusual. But the fact that the differences are now extreme enough to show up in ZIP Code level data seem significant, and worrying.

So, will politicians pay any price in 2020 for the continuing maldistribution of gains since the 2008 recession? Or, will politicians tell the people that no one’s to blame, that the Laffer curve will surely work this time?

The miracle of modern Republican economic theory allows for both the Laffer curve, and “pulling oneself up by the bootstraps” not only to be truths, but to be the desired outcome.

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Monday Wake Up Call – June 3, 2019

The Daily Escape:

Mont Rotui, Moorea, French Polynesia – 2019 iPhone photo by mystackhasoverflowed

Time to wake up America! Donald Trump has proven once again that he has no understanding of economics. From the Wall Street Journal:

“President Trump will award the Presidential Medal of Freedom to economist Arthur Laffer, one of the pioneers of the idea that tax cuts can boost government revenue, the White House said Friday.

Mr. Laffer is one of the founding theorists of supply-side economics, a school of public economics that rose to prominence during the Reagan administration and returned to the fore in the run-up to the 2017 package of tax cuts that Mr. Trump signed into law.

The White House described Mr. Laffer as “one of the most influential economists in American history,” and said his “public service and contributions to economic policy have helped spur prosperity for our Nation.”

Laffer is famous for his drawing his Laffer curve on a napkin, illustrating his idea to Dick Cheney and Donald Rumsfeld at a dinner in 1974. His curve showed that increases in tax rates will eventually cause government tax revenue to decrease, because people will begin to work and earn less. This was then taken to its theoretical limit, saying that tax cuts could pay for themselves by spurring economic growth.

The WSJ calls Laffer “one of the pioneers of the idea that tax cuts can boost government revenue”. Isn’t it weird that the fact that his “idea” has been completely disproven in the real world, doesn’t seem to matter?

Conservative economics is not a branch of economics, it’s a branch of Conservatism.

The Laffer curve was successful at its real purpose, providing a basis to funnel more money to corporations and the rich. Republicans traffic in propaganda, not knowledge.

Last year, Laffer co-wrote a book titled “Trumponomics: Inside the America First Plan to Revive Our Economy.” Laffer’s co-author was Stephen Moore, another conservative who styles himself as an economist. Earlier this year Trump nominated Moore to serve on the Federal Reserve Board of Governors. Moore had to withdraw, amid bipartisan opposition from Senators.

Laffer was the advisor behind the notorious Kansas state income tax plan that ruined the state’s finances. In 2012, Then-Kansas Gov. Sam Brownback passed a package of tax cuts based on Laffer’s ideas. The result was that Kansas lagged behind neighboring states with similar economies in nearly every major category: job creation, unemployment, gross domestic product, and taxes collected.

In 2017, the Kansas legislature repealed the Laffer/Brownback tax cuts. After the repeal, state taxes were boosted by $1.2 billion.

Laffer has spent years preaching his idea that almost any tax cut for businesses and the rich could potentially pay for itself. That idea has become the bankrupt conceptual backbone of the Republican Party’s entire economic theology.

For the 2017 Trump tax cuts, his administration also borrowed Laffer’s idea. Treasury Secretary Steven Mnuchin and National Economic Council Director Larry Kudlow, have repeatedly claimed that the Trump tax cuts will pay for themselves. But, a new report finds that the tax cuts were responsible for less than five percent of the growth that is needed to offset the revenue loss from the Trump tax cuts.

We must point out here that Larry Kudlow does not hold a degree in economics. He was once fired from an investment bank for doing cocaine. Imagine just how much cocaine you’d have to do to get fired on Wall Street in the 1980s.

Trump’s now added the Presidential Medal of Freedom to the American traditions he’s debasing. Other economists awarded the Medal of Freedom include Gary Becker, Milton Friedman, John Kenneth Galbraith and Robert Solow. Laffer can’t carry their briefcases.

There may be no man alive who has done more damage to America’s understanding of taxes and their effect on economic growth than Art Laffer.

Evidently, Trump is grading him on a curve.

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