Tag: Consumer Debt

Saturday Soother – August 3, 2019

The Daily Escape:

Wotans Throne, North Rim, Grand Canyon NP, AZ – photo by phantomcloud.

The WSJ has an important story on how people with what seems like pretty good household incomes, are getting more and more indebted trying to keep up a middle class lifestyle:

“The American middle class is falling deeper into debt to maintain a middle-class lifestyle.

Cars, college, houses and medical care have become steadily more costly, but incomes have been largely stagnant for two decades, despite a recent uptick. Filling the gap between earning and spending is an explosion of finance into nearly every corner of the consumer economy.

Consumer debt, not counting mortgages, has climbed to $4 trillion—higher than it has ever been even after adjusting for inflation. Mortgage debt slid after the financial crisis a decade ago but is rebounding.

Student debt totaled about $1.5 trillion last year, exceeding all other forms of consumer debt except mortgages.

Auto debt is up nearly 40% adjusting for inflation in the last decade to $1.3 trillion. And the average loan for new cars is up an inflation-adjusted 11% in a decade, to $32,187, according to a Wall Street Journal analysis of data from credit-reporting firm Experian.”

The Journal gives a generally sympathetic portrayal, provided you don’t go deeply into their comments section, where readers spout platitudes about Millennial’s lack of fiscal responsibility. Here’s a chart from the WSJ using some recent work by Georgetown bankruptcy law professor Adam Levitin showing how much certain costs have risen relative to wages:

More from the WSJ:

“Median household income in the U.S. was $61,372 at the end of 2017, according to the Census Bureau. When inflation is taken into account that is just above the 1999 level.

Average housing prices, however, swelled 290% over those three decades in inflation-adjusted terms, according to an analysis by Adam Levitin, a Georgetown Law professor who studies bankruptcy, financial regulation and consumer finance.

Average tuition at public four-year colleges went up 311%, adjusted for inflation, by his calculation. And average per capita personal health-care expenditures rose about 51% in real terms over a slightly shorter period, 1990 to 2017.”

Of course, in Wrongo’s youth, few young people were carrying large amounts of student debt. And if they went to coastal cities to build their careers, the cost premium over living in a city in the heartland wasn’t as high as it is now (except for San Francisco and New York, which have always been very expensive). Also, it isn’t just tuition that has gone up. All the other college costs, housing, meals, books, and fees, have also gone up more than 300% in the past 30 years.

It is notable that college costs have far outpaced the ability of those in the middle class to afford them. That is why student loan debt has become so high: working your way through college is no longer as realistic as it once was.

Turning to housing, the WSJ quotes Domonic Purviance of the Federal Reserve Bank of Atlanta, who says that people earning the median income can no longer afford the median-priced new home, which cost $323,000 last year, and barely have the means to buy the median existing home, which is now about $278,000.

Failure of wages to keep up with costs is a huge problem, and it has to be emphasized that this is not some inevitable outcome of our so-called “free markets” – it is driven by neo-liberal policy.

A few of the Democratic candidates are addressing the health and education cost burdens now adding to the debt load of all Americans. But we need more discussion that leads us to better policy.

With so much wrong in the world, we surely need to take a step back, and de-stress. To help with that, here’s your Saturday Soother. Let’s start by brewing up a large mug of Finca Las Nieves Green-Tip Geisha coffee ($35.00/8 oz.). This coffee is grown and roasted in Mexico. Located at an elevation of 4,000 feet, Finca Las Nieves is a 1,000-acre coffee farm located in Oaxaca State. It is completely off the grid — both solar- and hydro-powered. In addition to growing, harvesting, processing and roasting coffee, the farm also offers vacation bungalows for rent on the property.

Now, settle into a comfy chair and listen to Bach’s unaccompanied Cello Suite No. 1 in G Major, movements 1-3 of 6, by Yo Yo Ma. The video uses a painting by Hudson River School painter, Thomas Cole. It is called “The Oxbow”, located on the Connecticut River in Massachusetts near Northampton, MA. Here is Yo Yo Ma:

Those who read the Wrongologist in email can view and listen to the video here.

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Today’s Wages Have the Same Purchasing Power as in 1978

(Email publishing of The Wrongologist should be restored as Wrongo is using a different vendor, WordPress. Apologies to those who read in email.)

The Daily Escape:

Cliff Palace, Mesa Verde National Park, Colorado, as it might have looked at night in the 12th Century lit by camp fires. Mesa Verde is unique since it is the only NP that preserves the works of man – photo by Rick Dunnahoo

This is going to be a historic year, even when compared to 2018. And it’s starting out with a bang. The government is shut down, half the cabinet is empty, the 2020 presidential race has officially started, and the Democrats are taken over the House.

And that’s without whatever Mueller shoe will drop sometime in the year, or whatever Twitter atrocities Trump decides to commit. In other words, we’re going to have our hands full.

But today, let’s talk about how bad the economy is below the surface of the headline numbers. Debt is rising, and rising debt is supposed to be matched by rising income. It shouldn’t be a surprise that more income is required in order to service more debt. But so far, in the 21st century, for the bottom 90%, debt is growing while income is stagnating.

Pew’s Fact Tank has an analysis that speaks to this problem. Average hourly earnings for non-management private-sector workers in July were $22.65, 2.7% above the average wage from a year earlier. But in the years just before the 2007-08 financial collapse, average hourly earnings often increased by around 4% year-over-year.

And during the high-inflation years of the 1970s and early 1980s, average wages commonly jumped 7%, 8% or even 9% year-over-year.

However, after adjusting for inflation, today’s average hourly wage has about the same purchasing power it did in 1978. In fact, in real terms average hourly earnings peaked more than 45 years ago: The $4.03-an-hour rate recorded in January 1973 had the same purchasing power that $23.68 would today.

Here is Pew’s chart demonstrating the problem:

Because there’s been little growth in wages, the growth in the standard of living for those below the 90th percentile has been largely fueled by additional consumer debt. The WSJ reports that consumer debt, including credit cards, auto and student loans and personal loans, is on pace to top $4 trillion in 2019, the highest in history. Debt allows you to furnish your home, pay for education, and get a car without having to save for them. In that way, it supports the growing economy.

But Pew also shows how most of the income gains went to those at the top of the food chain:

 

 

Among people in the top 10th of the distribution, real wages have risen a cumulative 15.7%, to $2,112 a week – nearly five times the usual weekly earnings of the bottom tenth ($426).

This lack of symmetrical growth in debt and income actually matters. At some point household borrowers will default in greater numbers than they do today. When those losses occur, the monetary system won’t be able to bail out debtors (or banks) this time around as handily as we did in 2008.

 

Sluggish and uneven wage growth is a key factor behind widening income inequality in the US. Another Pew Research Center report found that in 2016, Americans in the top tenth of the income distribution earned 8.7 times as much as Americans in the bottom tenth ($109,578 versus $12,523).

Compare that to 1970, when the top 10th earned 6.9 times as much as the bottom 10th ($63,512 versus $9,212).

There is no simple solution to get American workers back on the right track. At a minimum, it will take a political groundswell aimed at overturning the way the tax code favors corporations. Along the way we will have to displace the political power of our corporate oligarchs.

Government must be made to serve the public interest, not Mr. Market.

Democracy is the sole mechanism enabling our citizens to have political and economic agency. But, democracy will cease to matter in a corporate-controlled, globalized system of government influence.

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