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Category: Consumer Squeeze Page 1 of 2

Rents Need to Be Stabilized Now – An Innovative Approach

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On November 14, 2018

In Consumer Squeeze, Household Debt, Housing, Low Income Finance

 

Photo: newsregistrysf.com

Since 2007 there has been a 20 % increase in the number renter households while the number of owner – occupied households has barely increased.  Why?   Right after the Great Recession home lending took a nosedive as foreclosure homes were worked off the inventory and lending standards were tightened.  Builders focused on construction of multi-unit buildings where the market was more lucrative.  Banks stepped back from mortgage lending, now the federal government backs about 70 % of all home loans.

Sources: The Federal Reserve Bank of St. Louis, The Wall Street Journal, The Daily Shot – 10/24/18

So, prospective home buyers saw few opportunities for them to buy homes, while wages for the 80 % in income were stagnant they had no choice but to rent.  When the economy started to recover builders focused on high margin, luxury homes that were priced why out of the budget for first time buyers.

As cities focused on bringing more jobs into their business center building homes or apartments were a secondary priority because businesses provided more tax revenue.  By 2011,  there was a 37 % increase in the number of households paying more than 50 % of their income in rent.  There were almost 11 million households paying more than 50 % of their income in rent, that is a staggering number of people who are financially squeezed.

Source: Joint Center for Housing Studies, Harvard University – 2016

While the economy was taking off inflation increased much faster than the price of homes.  Wages were not keeping up with the rate of home price increases which averaged about 6.7 % per year. The divergence between wages and  home prices only continues to widen to the highest level since 2007.

Source: The Federal Reserve Bank of St. Louis – 2016

Between 2000 and 2018 the rate of inflation was 2.12 % versus 3.09 % so the greed factor for landlords was about 45 %.  Why are rents moving up higher than the rate of inflation?  Lack of affordable alternatives is one reason.  In places like the San Francisco Bay Area and many metro areas, there is a huge jobs versus housing imbalance. In cities like Palo Alto there is a 20 to 1 jobs to household imbalance. With little competition in under housed growing metro areas landlords can charge any price they want. There just is not enough competition to keep an apartment building owner from raising rents.

Lack of homes means renters don’t have an alternate. Landlords have control because there  are no other cheaper units nearby and the buying a home alternative is not an alternative for most working class folks with the home affordability index at its worst level in 8 years.

This lack of competition economists don’t seem to understand when rent price controls are proposed.  When there is little competition apartment owners can just keep raising rents because there is nothing stopping them from gouging the renter.

Next Steps:

Most rent initiatives usually require a cap on rents as a way to deal with the problem. The problem with this approach is it penalizes the efficient property managers with the inefficient and greedy ones. We suggest a more innovative approach to tax the behavior we don’t want and give incentives for the behavior we do want.  So if a landlord raises the rent above the normal cost of housing index by more than 1 % for a county then property taxes on the amount over would increase by 2x.  This takes away the benefit raising the rent too high, the money won’t go to the landlord it goes to the city.  If the apartment owner keeps the rent below the cost of living index by 2 %, they would receive a lower property tax by 4 % for that year, the money goes right to his pocket for running an efficient multi-unit business.  In terms of building new units, these models can be used to come up with reasonable profits to attract investors while placing the focus on high quality property management.

Purchasing a home is crucial to providing competition to landlords.  We have proposed in the past that the federal government provide incentives for builders to build less expensive homes with smaller square footage for the working class.  Cities need to set aside land for homes, not businesses and quit being so greedy about the tax revenue they would get from a potential business taking the land.  We need our leaders to make it a national priority for all families that want to own a home to be able to purchase a home on working class wages.  When people own homes, they improve the home and the yard, the neighborhoods look better and values go up.  People care more about their neighborhoods, schools and local services than when they rent an are likely to move somewhere else if the rent goes up.

Tariff Price Increases Hit Consumers

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On September 18, 2018

In Consumer Squeeze, Corporate Power, Tariffs, Trade

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab. Click on the Index Topic Name at the beginning of each post to see more posts on that topic on PC or Laptop.)

Image: powertime.co.za

The tariffs applied last year sheltered the U.S. appliance industry for washers and dryers. What happened is a case study for what is likely to happen in other sheltered industries.  Retailers rushed shipments of appliances prior to the tariffs going into effect. Prices were slashed sales went up, bringing demand forward in April. By July of this year sales are down almost 3%. While appliance sales falling can be partly explained by the slowdown in housing sales, this trend does not explain the price increases buyers in the market did experience.  Samsung and LG competing with U.S. manufacturers, GE and Whirlpool, increased prices from 4 – 8 % on their models due to the tariffs. U.S. manufacturers raised their prices as well, so consumers ended up paying more anyway. If anything, prices should have been going down with fewer buyers in the market, instead there was a distorted market.

Sources: Department of Commerce, The Wall Street Journal – 9/18/19

The South Korean manufacturers have already made permanent moves to end the price challenge with Samsung producing appliances in a plant near Newbury County, South Carolina beginning this past January.  LG is following suit, by opening a plant near Clarksville, Tennessee this fall.

So, what has happened is consumers will pay more for appliances, and jobs will come to the U.S. which the tariffs may have intended.  Consumers are paying the price of the switch and it is not clear if the consumer will be better off.

Next Steps:

With the U.S. manufacturers depending on tariff shelter protection, they may not be as competitive as they could be with their competition coming on shore to take them on from a U.S. staging point.  Certainly, with plants in the U.S. there is a level playing field for all the appliance companies.  Consumers are likely to pay to find out which manufacturer is best and will be around 5 years from now.

We don’t like to see the federal government picking winners and losers in the marketplace. Capitalism, entrepreneurship and innovation should take over providing the best products at the lowest price for consumers.  We prefer to see the government ensuring there is a level playing field and true competition.  Time will tell us if the tariff move was an good one for consumers and the economy.

Workers Facing High Prices, Stagnant Wages Are Taking On Debt

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On August 28, 2018

In Consumer Squeeze, Corporate Nation State, Corporate Power, Corporate Reform, Debt, Inflation, Low Income Finance, Social Responsibility, Wages

 

Image: guardiandebtrelief.com

Worker pay continues to stagnant. Yet, companies are raising prices.  The price increases are due to tariff based supplier cost increases and government tax credits juicing the economy.  The Federal Reserve survey for July in the Philadelphia area showed that manufacturers plan on raising prices by 3 % versus 2 % last year.

Source: HIS Markit, Bloomberg – 8/28/18

How did companies get this pricing power?  Corporations have received a $1 trillion tax cut,  reduced regulations by the Trump administration, less oversight by the EPA, and less scrutiny on mergers.  Companies are at the zenith of their power allowing them to raise prices, keep wages low – below inflation, while increasing profits and executive compensation.

Source Bureau of Labor Statistics, Bloomberg – 8/24/18

Worker economic power continues to wane, as real wages actually turned negative this past month. Worker share of income as a percentage of non-farm business income is at a 70-year low even in a strong economy.

Source: Bureau of Labor Statistics, Bloomberg Businessweek, The Wall Street Journal, The Daily Shot – 8/27/18

How are consumers handling the budget shortfall?  By borrowing, the debt as a percentage of income of the bottom 80 %  is 4 times the debt of the top 20 %.

Most of this debt is in the form of credit card, auto loans and home equity lines of credit.  Home owners have done a better job keeping their first mortgages in line with incomes this year versus the housing bubble of 2008.

Next Steps:

Caught between high prices and flat real wages, consumers are filling the budget gap by piling on debt. Companies are getting even richer from both sides of making a profit – increasing income by raising prices and reduced costs by keeping worker wages low.

Why is this vise tightening on worker budgets?  Corporations are accumulating power every day at an ever increasing rate; buying other companies, issuing stock backs to hype stock price, increasing lobbying budgets to get the federal government to make rules that tip their way, consolidating supply channels, distributing manufacturing world-wide and automating every job they can conceive be done by a robot.  Prices are rising due to tariffs in many industries, the wide spread use of tariffs on some consumer goods, contagion of one product category to another (tit for tat) and shrinking channels of distribution reducing price competition.

Meantime, workers continue to lose power at even faster rate than corporations gain power.  Wages have been stagnant for 20 years for the bottom 80 % in income.  We have outlined in previous posts why wages have actually declined – rise of corporate power, fewer unions, automation, mergers in the same industry reduce the overall number of jobs, increased availability of candidates over the Internet, outsourcing, and the gig economy.  Workers are getting some relief in the gig economy with lawsuits to recognize Uber drivers as employees, but it is a tough long slog through the courts.  Overall, most court decisions are favoring companies in reducing union power, allowing companies to give millions to campaigns unchecked (Citizens United case) and overtime pay.

Eventually prices will rise too high for declining incomes causing consumer spending to fall. Consumer spending has been falling this year, with the most recent decline announced today, as a revised downward revision to 3.8 % in 2nd quarter.

Sources: BEA, Factset – 6/1/18

Remember, corporate executives are compensated handsomely for what?  Making more profit by increasing income and reducing costs.  Workers, after all the PR from executives are viewed as a cost when managers get into salary and compensation review meetings. Workers are being squeezed between low wages and increasing prices nationally to feed the ever increasing profit making systems of corporations. Until, we as a society start to see that workers need to be an equal partner in corporate management, sharing in profits and benefits things will not change.  Without workers receiving a fair share of the economic pie, the common good will suffer and will lead to civil unrest and a contracting economy when consumer spending evaporates. The economic reality is that the U.S. economy is not working for the bottom 80 % and until it does we are faced with major disruptions in our economic life.

Families Are the Place to Start Building the Common Good

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On August 17, 2018

In Common Good, Consumer Squeeze, Corporate Power, Corporate Reform, Families, Health insurance, Millennials, Public Interest, Stock Buybacks, Wages

Image: sleepingshouldbeeasy.com

We all have a mother and father, and may have brothers and sisters.  We come into the world born of our mother with a bonding to her, and if all goes well the father is there to raise us too.  We can all agree that families are a priority – when things get tough our families come first.

Bo Lotzoff, philosopher and counselor helping many prisoners and poor people turnaround their lives, observed about American society that we ‘love things and use people’. It should be the other way around, ‘love people and use things’. Think about this insight.  When we look objectively at what has happened to family life in the past 30 years, the slice of time devoted to family versus work has progressed in reality to not much time, or invested engagement by the working parent.

In Silicon Valley, the heart of technology innovation world-wide, it is the standard expectation for most workers at top companies to be at work until 8 or 9pm, just leaving barely enough time for fathers or mothers to read a story and tuck their children into bed.  Management expects knowledge workers to check for text messages at least 19 hours a day and email before coming into the office, responding to work requests on weekends too.  Even, on vacations, if project reviews are planned workers are expected to phone in for the key meetings and ‘stay on top’ of what is happening.  When global conference calls are involved, the calls may start at 6am to Germany and continue to 7 or 8 pm to Japan or China.  What all this connectedness means is that the company owns the mind and emotions of the worker 24 by 7. At one startup  ‘all hands’ meeting just prior to the Christmas holiday the CEO thanked everyone for their hard work over the past year and declared, “have a fun Christmas or holiday rest for a day, then let’s make our numbers!”  He made the statement kind of in just but half serious, the workers got his point, see your families and friends but stay connected 24 by 7.

Corporate life is destroying family life and our connectedness as a community.  Being totally connected to the corporation is more important if we want to maintain our standard of living is the message.  Corporations are using people and loving things (sounds like high tech).

Nourishing, sustaining and building stronger families would do a lot for solving our societal and economic issues.  Crime would go down as young men who are left to live on the streets would be learning skills, playing a team sport or having a family supporting his life, and where after school programs were funded and staffed well. Groups like Thread, in Baltimore actually use the family structure with Parents and Grandparent surrogates to support youth in poor parts of the city where there may be only one parent and that parent is not home much of the time working two or three jobs to support the family.  Today we are missing millions of our youth to crime, opioids and dead end jobs that could be active productive members of our labor force. Our labor force is declining with the aging of baby boomers, we need all the paycheck workers we can to support our aging population and for young workers to save for their futures.

So, let’s look at the policies of our federal government using the family yardstick which most people right or left, Republican or Democrat agree:

  1. Family Separation – recently we saw that there was consensus that children should be kept with their parents – even immigrant children
  2. Health Insurance – a Pew Research survey showed that 58 % of all Americans believed that every person should have affordable health insurance for which the government is responsible
  3. Childhood Health Insurance Program (CHIP) – most Senator and Congressmen agreed and renewed the CHIP bill to protect children caught between Medicaid and being too poor to afford an individual health insurance plan in this past December’s spending bill.
  4. Flexible Job Definition – more social and family counselors see a need for men and women to have flexible time jobs meaning that when a family emergency comes up like an illness or doctor appointment the worker can take time off and make the appointment without repercussions in job performance, salary or benefits.
  5. Parental Leave – Federal law of 1997 requires private employers to provide maternity leave up to 12 weeks of unpaid job-protected parental leave to bond with a new child within one year of birth, adoption, or foster care placement (parental leave).  The US is the only country in the developed world that does not have paid leave for parents.
  6. Wages – real wages (after inflation) for the 80 % of workers in the U.S. have basically been stagnant for the last 30 years. Instead, corporate executives use excess profits to juice their stock prices with stock buybacks instead of raising wages. They are wasting nearly $810 billion that Goldman Sachs estimates is being spent in 2018 on stock buy backs. That $810 billion could go a long way to providing decent wages for workers. Analysts estimate the S & P 500 index is at least 20 % higher from what the prices of company stocks would be without stock buybacks. The reality is that workers and their families suffer having to work two or three jobs because of the greed of executive management. 

We could add to the list, our point is made, when we have a consensus that families need to be placed as the first priority, not the second or third or thirty-fifth, then our legislative priorities are clear.  Other countries seem to make a thriving economy and support of families work. Germany has paid parental leave, a net export economy, good wages, employee councils and at least 4 weeks of paid vacation for most employees.  Most German families feel secure.  This author asked a co-worker from Germany if he considered working in the U.S., he noted,  “I would get sharper, get closer to engineering and innovation, yet, there is no real recognition of families, In Germany, I have paid leave for a new child, four weeks of vacation every year, a good guaranteed retirement program, health insurance and I participate in our employee council…I don’t want to live under constant stress in America.”

Families are the basic economic building block of our country.  When corporations take control of our government and run our families into oblivion we all are hurt as a country.  In the end corporate executives need to wake up and support family sustaining policies in their company, their management culture, wages and in Washington to build strong families. Otherwise, someday corporations will discover as is beginning to happen today, that young women having the fewest babies ever since WW II, the lowest level of family formations ever and lowest number of millennials buying homes will lead to shrinking markets, falling margins and reduced sales. We need to monitor what is happening to the health of our families to know if our societal values, economic values, government policies and corporate behavior are strengthening or weakening families.

Household Debt Continues to Mount – Students Staggered by Debt

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On August 15, 2018

In Consumer Squeeze, Household Debt, Student Debt

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

Photo: commondreams.org

U.S. household debt is up as families are caught between soaring debt and stagnant wages.  We have noted how wages have been wiped out by inflation in the latest Bureau of Labor Statistics report comparing July of 2017 to July of 2018. The Federal Reserve of New York and Equifax have tallied the last figures on household debt in the charts below.

Sources: Federal Reserve of New York, Equifax, The Wall Street Journal, The Daily Shot – 8/15/18

Student Loan debt continued to increase while credit card, auto and other debt held steady.  The reduction of financial support by state and federal government to higher education is appalling.  Before the Great Recession public funding for higher education was at 50 % still a drastically less then funding in the 1970s.  Now, public funding for higher education is at 35 % leaving universities with no choice but to raise tuition.

Source: kypolicy.org

Public college tuition and fees costs (in 2015 dollars) have almost tripled since 1975, so students needed to borrow money to complete their education.

The student loan predicament is a national disgrace.  It exemplifies how poorly we as a society have supported the higher education.  Our young people are looking to start families and looking to purchase homes yet, they are not moving ahead.  The birth rate is at the lowest level it has ever been in this nations’ history and the number of millennials purchasing homes is a the lowest level it has been since before the Great Recession. Without the younger generation purchasing homes the second stage economy supported by new household formation fades.  The markets for appliances, furniture, home repair and remodeling, carpeting and many other household product sales will fall.

Next Steps:

We said in our blog of May 29th the student debt problem is so great that it is hurting the formation of new households:

“In 2003, 42 % of people under age 35 owned a home now only 35 % own a home.  The dream of owning a home is slipping away as our society allows the rich continue to enjoy huge tax reductions in the most recent tax bill, with continuous lack of state funding for colleges and universities and then a paucity of forgiveness programs for graduates.”

Sources: Federal Reserve Bank of New York, US Census Bureau, New York Times – 5/29/18

Further we outlined some recognition of the student debt problem but much more needs to be done.

“As part of the spending bill that Congress passed last month, $350 million was allocated for a fix it forgiveness program for some types of student loans.  Senator Elizabeth Warren has been surveying the issue and individuals trying to take advantage of the provisions where she found that it was quite complex, answers were in complete from the Department of Education and work still needed to be done to setup the process. She found many firefighters and teachers having a difficult time getting into the program.  Prior to passage of the spending bill Senators Whitehouse and Kaine wrote a bill to setup a student debt forgiveness program and get it funded, their bill set the stage for Democrats to push for provisions of the bill to be included in the omnibus spending bill.

This solution is still not enough compared to the huge issue of $1.49 trillion outstanding placing an anchor of debt on our young people when they need to be investing in starting their families and careers and buying homes. In blog of February 16th in our archives, we review an idea to cancel all student debt.  We like the idea moving forward, yet recommend that forgiveness be done in stages, by reducing interest rates, offering Heartland Service, providing a universal national service option and corporate sponsorship of an internship by the student.”

It is unacceptable that our Congress and Executive branch are focused on how to give more money to Corporate Nation States and The Elite, they should be representing us and focusing on how to solve the student loan crisis and create opportunities for our young people and our country.

Seniors Feeling Financial Crunch – Increased Bankruptcies and Pension Overpayment Collections

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On August 6, 2018

In Consumer Squeeze, Medicare, Public Interest, Retirement, Social Responsibility, Social Security, Wages

Image: debt.org

Researchers tracking the financial blight of seniors report that seniors over age 65 are 3 times more likely to file for bankruptcy. Seniors are caught by reduced pensions, co pays on their children’s student loans, spiraling medical costs and lost wealth from the Great Recession.

Sources: Consumer Bankruptcy Project, The New York Times – 8/3/18

The post – Baby Boomer generation is feeling squeezed too as their bankruptcy filings are up over 66 % for the 55 to 64 year old group. Many Baby Boomers just beginning their retirement or in the their last years of savings were hit hard by the Great Recession, wiping out 401k investments in stocks and losing home equity wealth too. In all households lost $14 trillion in wealth, most of the income and asset recovery of the past 10 years has gone to the top 10 % in income.

The Consumer Bankruptcy Project is an ongoing effort led by Professor Thorne, University of Idaho; Professor Lawless; Pamela Foohey, a law professor at Indiana University; and Katherine Porter, a law professor at the University of California, Irvine. Their universities fund the project as they review court documents and send out questionnaires to retirees.

Social Security has not been able to fill the gap.  Nor was Social Security designed to be the sole source of income for seniors – it was setup to supplement pensions and savings.  Over the past 30 years corporations have shifted from defined benefit (pension direct payment) plans to defined contribution plans like 401k where the worker makes the majority for the contributions and the employer is off the hook to make direct fixed payments. Yet, today for 33 % of retirees receiving Social Security it provides 90 % of their income.  Medicare and drug costs cut into their Social Security checks:

Sources: The Kaiser Family Foundation, The New York Times – 8/3/18

Health care spending for the average retiree is increasing every year beyond Social Security income and drugs become more expensive, some with standard prices of $70 per dose gauged up in price to $1700 per dose.

Adding insult to injury firms like  AT & T are contracting with collection agencies to claw back overpayments to pensioners.  The firms make up the calculation tables and send out the checks now they blame the pensioner, who has already spent the money.  It is important if the retiree receives a statement of planned disbursements to send back incorrect checks, however in most cases the checks were sent over some years until the error was found and the retiree had no idea that there was an overpayment.

Next Steps:

The perfect financial storm for retirees comes down to the basic fact that corporations shifted their responsibility for pensions onto workers helping the financial services industry sell more financial products to an naïve and financial challenged workers.  Professional financial managers were replaced by amateur workers doing their best to invest their 401k plans and save for the future.  For the bottom 80 % income the last 30 years their wages have been stagnant with increasing educational costs for their children and increasing medical costs for themselves. The federal government has been of little help, not indexing Social Security payments to the actual costs seniors incur for increasing medical and health services costs.

  1. Pension Claw backs – this makes no moral sense, many retirees have spent 20 or 30 years of their lives for the business, the business made the mistake they need to take care of it. In AT & T’s case they spend billions on stock buy backs to make their executives and shareholders rich, they could take a fraction those funds and take care of their seniors and fund their pension liabilities appropriately.
  2. Retirement Income – in previous posts we have recommended that instead of an incredible mess of 401k accounts, financial houses and amateur investment management by workers, a guaranteed retirement program be implemented starting at the time a person begins work and receives his Social Security card. Worker savings toward retirement would be transferred into this one account for a lifetime, with Social Security contributions by the federal government, and savings by the worker.  A portion would be guaranteed by the federal government and professionally managed as a defined benefit plan. Workers could opt for professional management of all their funds as well.
  3. Medical Costs – as we have recommended health insurance should be run by one entity the present Medicare operation for all Americans from the time of birth. Medicare already has a formulary for drugs, and should be authorized to negotiate drug costs for all patients. Standard compensation for procedures and quality of care implemented for Obamacare should be extended. Drug companies will no longer be able to buy back their stock, but instead will be required to spend those funds to bring drug costs down, or reduce costs in other ways.  Direct prescription drug advertising should be outlawed to save the over $1 billion spent a year in wasted advertising and spend the funds on price reductions.

Banks Squeeze Consumers on Savings, Credit Card Rates

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On August 1, 2018

In Big Five Banks, Consumer Squeeze, Corporate Power, Economy

 

Image: thinkinnovation

The biggest banks are enjoying high profit margins at the expense of consumers. Today, the rates on savings accounts are the lowest as a percentage of the Federal Funds rate and credit card rates are the highest in proportion to the respective Federal Funds rate. The Federal Funds rate is the rate the Federal Reserve charges banks to borrow money.

Sources: Federal Reserve St. Louis, The Wall Street Journal, The Daily Shot – 8/1/18

Sources: Federal Reserve St. Louis, The Wall Street Journal, The Daily Shot – 7/31/18

The divergence on both charts shows how the consumer is squeezed on both sides of the financial ledger – receiving less for their savings than they should historically and getting charged much more on credit cards than is fair.

Today, the top five banks control 50 % of all banking system assets in our $15.3 trillion dollar system.  In 1990 the five largest banks held just 10 % of all bank assets.  The assets that Wells Fargo holds by itself equal all the assets of the top five banks in 1990.  As a result of the consolidation during the Great Recession our banking system is highly concentrated in just a few banks.

Next Steps:

The lack of competition is clearly hurting consumers in both financial directions, paying higher interest rates than are fair and not receiving the interest income they should. The key point is that present regulators are not doing their job requiring banks to pay higher interest and keep credit card interest charges in check.  Next, from our post on bank concentration we recommended a break-up of the big five banks:

“Experts like Neil Kashkari who led the Bush Administration’s $700 billion bank bailout effort the Troubled Asset Relief Program, thinks these mega banks should be broken up. Now Kashkari is the Federal Reserve Governor for Minneapolis and has called for reducing the size of the big banks and distributing their power and control to provide a better shock absorber in the event of another banking crisis. He even calls for a 25 % capital reserve requirement many times the present capital reserve requirements the Federal Reserve has maintained in its stress test program.  We have seen with the failure of Wells to protect its customers from 3.5 million fake checking accounts created by its sales staff how poorly bank management performs.  Now, the bank is being investigated for improper referrals and transferring of funds in the wealth management division.

Enough is enough, our present financial system is too concentrated to effectively manage; distributing wealth, power and control back into regions is one way to ensure reasonable oversight and management can prevail.  In addition, we support calls for a modern day Glass-Steagall Act to separate investment banking (were sub–prime derivatives of the Great Recession were created) and commercial banking for retail customers.  We need to protect our citizens financial assets from the financial engineering and schemes of Wall Street. It is not a coincidence that today 90 % of all wealth is held by the fewest number of people since 1929.”

The Elite Makes U.S. A Land of Renters

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On July 24, 2018

In Consumer Squeeze, Corporate Power, Housing, Labor, Low Income Finance, The Elite, Wages

(Editor Note: Insight Bytes focus on key economic issues and solutions for all of us, on Thursdays we spotlight in more depth Solutions to issues we have identified. Fridays we focus on how to build the Common Good. Please right click on images to see them larger in a separate tab.)

Photo: marketplace.org

Household formations have been trending down over the past 30 years from its peak reached after a continual increase since 1955.  More than a quarter of possible home buyers are unemployed, underemployed, saddled with student debt or living at home with their parents making home buying a challenge. The other possible household formation group is making such low income they are forced into renting as the only budgetary alternative.

Source: Real Investment Advice – 7/13/18

The housing market has shifted drastically toward high end homes for the wealthy, not first time buyers, and multi-unit rental units for investment.  As investors look outside the stock market for high returns rental units have been an excellent income stream with income streams totaling $800 billion per year.

So, while wages for the 80% in income, non – supervisory workers have been stagnant; profits, stock buybacks, executive salaries and other financial gimmicks have provided the top 10 % with 90 % of national income since 2008.  In effect, we have become a nation of renters due to two factors: wages being held down, and inflated assets benefiting the rich.

Source: Real Investment Advice – 7/13/18

Corporate executives do not make their stock price and profit targets by raising wages resulting in reduced profits.  Wages as a cost cut immediately into profits, which a CEO wants to stay clear of having to explain to the Board or shareholders.  Does it really make sense that workers are not getting wage increases in a job market with the lowest unemployment rate in 10 years? Until workers get enough countervailing power in wage negotiations worker wages are likely to stay stagnant. No, executives are allocating profits, offshore and tax cut funds to benefit themselves and shareholders while workers are left out of the economic feast.

Next steps:

We have outlined multiple reasons for lack of wage increases in earlier posts, the bottom line is executives don’t want to give raises beyond inflation.  Proposals like Senator Cory Booker’s Worker’s Dividend Act to share stock buyback dollars with workers is a good start, yet the sustainable solution lies in corporate governance, where activities shareholders required management to give workers their fair share of profits; for example if executives receive a 5 % cut of the profits workers should receive the same 5 % as well.

To give first time home buyers a boost, we need to reduce student loan debt by re financing their rates to the rates that the Federal Reserve offers bank.  After all we are ‘banking in the future’ of our young people.  Where possible student debt could be forgiven for domestic service corps work or working with corporations who hire graduates to reduce their loans as part of the offer package.  Government mortgage  agencies need to support first time buyers with reduced down payment requirements and other incentives.  To incentivize home builders set asides of homes for first time buyers need to be established to create inventory from which a first time buyer can select their home.

Increasing household formations should be a top priority for policy makers and the wealthy alike.  When household formations are moving ahead, furniture, appliances, home improvement hardware, and thousands of product and services are purchased. Plus, when people own a home they have a piece in the future of their neighborhood, schools and community which will increase property values for all.

15 Million Retiring Americans Face A Declining Standard of Living

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On June 25, 2018

In Consumer Squeeze, Low Income Finance, Retirement, Standard of Living

Photo: pbs.org

The grand plan by financial services companies thirty years ago was to have Baby Boomers invest in 401k matching plans offered by their employer to build a secure retirement nest egg.  The 401k plan funds would be invested in the stock market. Companies would eliminate their defined benefit pension plans thereby reducing their retiree costs and transfer the savings responsibility onto the worker. The reality is that worker saving just never happened.  Since 1970, 90 % of pensions have been replaced by 401k or IRA plans. Unfortunately, many Americans raided these plans to pay for living expenses during the Great Recession

A Wall Street Journal analysis showed that 40 % of all households headed by people aged 59 -70 lack sufficient financial resources to maintain their standard of living during retirement. The situation is due in part to lack of saving in 401k plans and general savings.

Sources: Center for Retirement Research at Boston College, The Wall Street Journal – 6/22/18

Adding to the savings challenge, over the past 10 years incomes have stagnated making it extremely difficult for workers to put away more money into their 401k or savings plans.

Sources: Urban Institute analysis of Census Bureau data, The Wall Street Journal – 6/22/18

Consumer debt has soared for auto and student loans, further squeezing their ability to save. The combination of being left on their own to manage their retirement savings, limited matching from corporations not matching pension income streams and debt means that households are not saving enough to maintain their standard of living.

Sources: Center for Retirement Research at Boston College, The Wall Street Journal – 6/22/18

The situation defaults to retirees relying on government sources completely for retirement income, working longer than they had planned or gaining assistance from children.  While, funding help from children may work for temporary bridge loans, ongoing assistance will hurt their children’s ability to save as well, causing a snowballing effect on future saving.

Next Steps:

 From our previous analysis on the retirement crisis:

 “Our politicians have designed a failure prone retirement system allowing corporations off the hook providing full defined benefit pension programs with professional management. Instead, 401k employee and employer match defined contribution programs were created where the individual is responsible for investing retirement funds safely. The present retirement program is a patchwork of 401ks, IRAs, Roth IRAs and SEP programs for small business. “

We continue to see many retirees at or below the poverty level:

“Today, Social Security only provides a $12,000 a year benefit to the average retiree. Yet, Social Security provides 80 % of the benefits that 40 % all retired people depend on.  A Retirement Savings Account would have as a core principle that the combination of Social Security and worker’s savings provide at least a guaranteed income at the poverty level at age 65.”

Social Security income is particularly difficult for women who made less income working. In 2014 women received on average $4,500 less per year than men in retirement.

Our recommendation is for a single Retirement Savings Account:

“Funds deposited by workers into their Retirement Savings Account would be tax deferred up to $40,000 per year until age 65 similar to a traditional 401k today.  Most workers will see a lower tax rate at retirement as this provision allows for lowering the cost of saving for retirement during high salary tax years. Corporations contributing to a workers’ Retirement Savings Account would be allowed up to a 50 % corporate tax deduction on the matching dollar amount to incent companies to contribute.

There would be no cap on total funds added to the Retirement Account by a worker.  Workers would be allowed to obtain a medical or education loan with their retirement account as collateral but only up to 10 % of the value, which if defaulted and not paid back, would be paid back on a pro-rated basis by a Social Security deduction beginning at age 65.

This Retirement Savings Account proposal meets 12 core principle requirements by the Retirement USA, a Washington D.C retirement advocacy group including: universal coverage, secure retirement, adequate income, shared responsibility, required contributions, pooled assets, payouts at retirement, lifetime payouts, portable benefits, voluntary savings, efficient and transparent administration and effective oversight.”

The crisis for our retirees continues to worsen as Congress does nothing to look at the root causes of the income challenge. We need to develop innovative solutions to make the golden years for our senior citizens secure now.

Tariffs Drive Price Increase of 17 % for Washers – Dryers As Predicted

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On June 18, 2018

In Consumer Squeeze, Inflation, Tariffs, Trump Trade War

 

Photo: wikipedia.org

When the GOP Administration decided to protect the US appliance industry by awarding tariffs of 20 % on imported washers and dryers we predicted that the price of washers and dryers would rise.  These appliances are basic to every household, with price rises hurting workers the most as they have seen their wages stagnant since the last recession. The three-month price increased for washing machines and dryers by 17 %. Ouuucch.

Sources: The Wall Street Journal, The Daily Shot – 6/18/18

From our blog on January 24 of this year:

“with a 20 % penalty on the first 1.2 million machines imported and a 50 % rate for any imports above that level.  A 50 % tariff was awarded on all washing machine parts imported – all penalties are for a three year period.  The administration is protecting Whirlpools’ market share of 43 %.  LG responded by announcing price increases up to $50 per machine or more.”

Since January, Whirlpool responded to LG price increases raising their prices as well. We observed then too:

“These tariff actions will hurt consumers by first raising prices on imported machines then Whirlpool will raise prices by virtue of increased market strength with competitors losing share.”

So, what happened, prices have zoomed up by 17 % on all laundry appliances. The highest prices since 2006, actually durable goods prices have been good news on the inflation front declining over the past 10 years since the recession.

Consumer Reports notes that both LG and Samsung are starting up plants in the US to build washers and dryers, with possible volumes to move shipments below the 1.2 million volume level where the tariff kicks in.  It remains to be seen how Whirlpool and the industry responds to prices on US built machines or will just keep prices high as long as the tariffs are in place.

Next Steps:

The Administration has had its time to perform an economic experiment on the American consumer, maybe it worked forcing Samsung and LG to startup plants in the US.  However, it may just act as a catalyst for all manufacturers to keep prices high while the tariffs are in place.   It’s time to examine in depth, understanding why US manufacturers are concerned about imports to answer the question if Whirlpool has 43 % market share why is it doing poorly?  Economic analysis is required by experts, not shoot from the hip policies to satisfy a minority political segment that will actually get hurt hardest when the layoffs in the Midwest start happening as sales fall.  The basic economic principle is that when prices rise demand falls – eventually.  This administration can’t defy this principle all it tries. Let’s understand what is really happening and develop a win-win plan for consumers, manufacturers and importers.

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