Monday, February 18, 2008

Economic Woes Reveal a Long-Felt Unease & Denmark is the Happiest Place on Earth?

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This article is on the top of Yahoo Finance; I believe it articulates much of what I've been saying for a long time [Do the Bottom 80% of Americans Stand a Chance] - it is titled 'Economic Woes Reveal a Long-Felt Unease'. Again, for newer readers my theory is this economic adjustment is more structural than cyclical. While we are sure to rebound from this current downturn, and sure to have constant innovations and brilliant entrepreneurship in this country, there are very large structural global forces at work here, much of which we are powerless to "fix", even if we admitted the issues are there in the first place (which we refuse to do so). A simple parallel is the auto industry (and the textile industry before that, and the steel industry before that, et al)... in the 70s, 80s, and early 90s when a downturn happened it was cyclical - give it 2-3 years and things would bounce back, but now the auto industry is going through permanent structural changes and things are "not coming back" (due to a myriad of reasons, some of which are auto specific but many global in nature). I see a very similar parallel to the global economy in general in terms of "structural changes" are afoot. So within that structural change will still be economic cycles - good times and bad, but the difference is the backdrop; which I believe has changed permanently. And maybe the stock market is agreeing with me; on Jan 1, 2000 the S&P 500 was at a higher level than it is today. That's in dollar terms - if you look in stable currency terms (or gold) - it's an even worse situation.

(Warning semi-socialist rant ahead....)
While the nominal GDP in this country has been growing at a healthy pace, the dispersion of those gains has been more and more stark - the wealth inequality has been increasing at alarming rates and more and more wealth is being concentrated at the very top 1%. Some have argued it is the most concentrated since the 'gilded age' of the 1920s. I've argued that (a) since it is has been hurting those at the bottom of the food chain the most (who usually have little voice) it was not being heard and (b) many in the middle class/upper middle class have been able to mask it the past half decade (or longer) with their house ATM. (serial refinancers) In fact I think the housing situation both from creating jobs, to creating "paper wealth", will in historical retrospect, be shown to have hidden the first wave of this large scale downturn. In a service based economy the housing boom created an incredible multiplier effect of "prosperity".

But now we seem to be nearing a tipping point; it might not be this year or next but in the next 5-10 years it does appear if we continue down this path this situation will finally envelop the majority (>51%) of Americans in my opinion. There are many smaller imbalances that have been eating away at our ability to keep up, whether it be the move away from a pension system to "self saving" (401ks), 9-11% medical inflation, 7-10% university inflation, more recently (3-5 years) energy inflation, and now food inflation. Throw on top the 2 major entitlement programs which are eating over half the annual budget, and the steps we all know will need to be taken (push out retirement age longer, means testing, lower benefits) to keep these services solvent in 10-20 years, and it does not portray the best picture. This is why I harp on inflation almost daily - it is an ugly tax that hurts those who can least afford it the worst. Wages are just not keeping up with "life". As investors we cheer when companies keep costs "low"; cutting jobs, making workers take less (I am not just talking blue collar; look at the pilots of our major airlines) - so the stocks go up. But there is a real cost to that in the "real economy". Especially so in a service based economy, where we rely on each other. So after we see these cuts decade after decade, at some point you are the bone... the level where people begin to have trouble to simply subsist in a 1st world economy at current wages; a predicament I believe more and more people are facing.

I think this general unease is in part what is driving the political races (change, any type of change is preferred to the status quo) and why people aside from the upper 20% (who probably make up much of this blog readership) feel constant unease even if "national statistics" tell a different story. Truth be told, I live in a state that has been hit harder than almost any other in the past half decade by the issues I see coming for much of the rest of the country, so I have location bias - while Michigan has some structural issues that most other states will not encounter, I do think many of the overlying issues in terms of loss of buying power, lack of job stability, and the like will pervade as we we only go deeper into this global economic competition. There are pros and cons to global competition - people want to paint it as "bad" or "good"; it is not black and white - but what it does cause is great short term (5-10-15-20 year) imbalances, and in the "dog eat dog" culture of the USA, I think the "let them eat cake" attitude towards fellow citizens is a bit disheartening. Because in a service based economy, we (again) all rely on each other, and as one group weakens, it will (maybe over many years) spread to other groups... but there are no easy solutions. But judging from the people yelling on cable TV it seems much of the country has devolved into "us" versus "them" ideology (Darwinism) instead of being open about problems, and not being dogmatic.
  • Even when experts were declaring the economy healthy, many Americans voiced a vague, but persistent dissatisfaction. True, jobs were relatively plentiful over the last few years. It was easy to borrow and very cheap. The sharp rise in the value of homes and plentiful credit cards encouraged a nation of consumers to get out and buy. But to many people, something didn't feel right, even if they couldn't quite explain why.
  • Take away the easy credit and consumers are left with paychecks that, for most, haven't nearly kept pace with their need and propensity to spend.
  • The frustration of $3 gas and $4 milk, the worries about health care costs that have risen four times the rate of pay, become much more real. The retirement security that is only as good as the increasingly volatile stock market seems much less certain.
  • Americans' declining confidence in their economy is triggered by a storm of very recent pressures, including plunging home prices, tightening credit, and heavy debt. But it is compounded by anxiety that was there all along, the result of a long, slow drip of worries and vulnerabilities.
  • "The economy is currently in recession or arguably close to recession and that's certainly weighing on the collective psyche," says Mark Zandi, chief economist of forecaster Moody's Economy.com. "But ... I do think there is an increasing level of angst that is more fundamental and is not going to go away even when the economy improves."
  • In Westminster, Colo., a Denver suburb, George Apodaca hears that uncertainty from the maintenance workers, drivers and others enrolled in the home budgeting class he teaches. Most have steady jobs, but are just getting by. They talk about challenges like the rising cost of getting to work or medical bills, not as new problems but as a continuing struggle.
  • A year ago -- months before economic alarms went off -- nearly two of three Americans polled by The Rockefeller Foundation said that they felt somewhat or a lot less economically secure then they did a decade ago. Half said they expected their children to face an economy even more shaky.
  • Other polls have registered similar unease in the past few years, showing large numbers of Americans dissatisfied with the economy, and worried about retirement security, health care costs, and a declining standard of living.
  • The surprising thing about many of these readings isn't that they've recently skyrocketed. It's that in recent years they've registered consistently high levels of worry without ever seeming to ease.
  • "This has just been a period of great disconnect between what the aggregate economic statistics show and what leading politicians talk about and what ordinary Americans are feeling," said Jacob Hacker, a Yale University professor and author of "The Great Risk Shift," which charts increased economic insecurity. "I think people are saying, where did the gains go? Where did the boom go? And now that it's gone, what are we going to do?"
  • Except for the late 1990s, pay has been stagnant for more than a generation, barely keeping pace with inflation. In 1973, the median male worker earned $16.88 an hour, adjusted for inflation. In 2007, he earned $16.85.
  • For many families, the stagnation has been moderated by the addition of a second paycheck as more women went to work, and their pay rose over the same period.
  • "Over the past decades, whether inflation was much higher or lower, or incomes grew faster or more slowly, there has never been such a wide divergence in the experiences" separating richer households from poorer ones, Richard Curtin, the director of the University of Michigan's consumer survey said in summing up the most recent figures.
  • Cutbacks and changes by employers also have pushed heavy responsibilities on to workers, many who find themselves unprepared. In the past decade, scores of companies have frozen or eliminated benefit plans providing a guaranteed pension. Many have replaced them with 401(k) plans whose future worth depends on workers' investment skill. Almost half of all households are at risk of coming up short in retirement, according to the Center for Retirement Research at Boston College. (One of my other "long term" theories is this will be among the biggest problems the country faces - we are financially illiterate in this country; and we've gone from a system where the company - and government - sponsors most of one's retirement to "self serve". I thought it would turn out bad, but after watching the mortgage debacle where people were left to their own devices, I am even more pessimistic of how this "self serve retirement" initiative will turn out - but since it won't show for another 10-15+ years, no one is talking about it- I think I've read the average 401k balance is $38K or so - that includes people in their 50s, and 60s mind you; scary stuff)
  • Worry also grew about the cost of health care, with good reason. Since 2001, the cost of health insurance has gone up 78 percent -- about $1,500 more per year for the average family, according to the Kaiser Family Foundation. Over the same period, wages rose about 19 percent, and inflation about 17 percent. (keep in mind, this is "official government inflation which we know is useless)
  • Even the consumption made possible by easy credit has helped turn up the financial pressure. The number of products -- from air conditioners to cell phones -- that Americans say they can't live without has grown substantially in recent years, according to the Pew Research Center. About 6 in 10 working Americans polled by the group say they don't earn enough to lead the life they want.
  • Maybe the downturn in optimism is temporary. Americans are voracious consumers and persistent optimists. But some believe a fundamental change in behavior and mind-set is taking place. Since the early 1980s, consumers' contribution to the economy has risen from 63 percent, near where it had long hovered, to 70 percent.
  • Over the next generation, that could drive consumers' contribution to the economy back down to the low-60 percent range, Zandi said. "There were tail winds behind" the growth in consumer spending over the last 25 years, he says. "Now there are headwinds."
Since this is a slow news day, here is a 12 minute piece I saw on 60 Minutes last night about the country in the world which persistently ranks highest in "happiness"; Denmark. The Scandanavian countries are constantly ridiculed by "free market capitalists" as "near communists", but it is an interesting piece; what struck me were the 4 young people in the piece - and most interesting was the young man who had studied in the US but said he would not want to raise his children there. Again, we are a very inward looking nation and confidence is always good but there seems to be a "our way or the highway" methodology. Anytime healthcare reform is brought up, people say "Canadians don't even like their own health care system" as if the Canadian system is the only alternative. But they don't mention due to cost some people are going to India to have major surgeries done. Etc. Further we pay double per capita what even the 2nd most expensive health care system in the world but don't rank even in the top 10 on most major "health" measures worldwide.

If you don't have time to watch the whole piece, it raises some interesting questions... here in the US we can strike great riches - the dreams of those great riches drive many of us but only a few truly attain it. But the carrot is always out there and hence why we think this system is the best. Many of us pay maybe 1/3rd of our salary to taxes - probably more when you take into account local taxes. In return there is very little social safety net; we work like dogs in return for little job security; 2 weeks vacation for most, and some people feel guilty for taking it for fear of looking like a slacker; many people don't get to see their kids for more than an hour or two an evening with their 50-60 hour work weeks; many of our kids are in huge debt when they exit college which puts them behind from day 1; to keep "up" most families need to have both parents working; etc. On the plus side our companies provide some of the greatest innovations in the world - great for the companies but how great for "people" here; and America provides the potential for ultra wealth. In these countries they pay another 15% or so more for taxes (50% of salary). In return they have
  • cradle to grave healthcare
  • university paid for
  • 37 hour work week on average
  • 6 weeks vacation
  • very little income inequality (or put in a negative light, a low chance for Ultra Wealth, which I'd argue is the same in this country)
Either way, it's an interesting question and probably the type of world view people who are America-centric should at least open their minds to at least mulling over for at least 5 minutes. :)



Ok back to cold hearted capitalism....

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