Friday, January 13, 2017

The $400 Catastrophe

“Financial impotence has many of the characteristics of sexual impotence, not least of which is the desperate need to mask it.” Neal Gabler

The United States, its very core of democratic principles, is supported in large part by its middle class. The ability of Americans to achieve their dreams, pursue their ambitions without reference to class and status, has underpinned our greatness for centuries. That middle class has grown, benefited from increasing access to solid education, infrastructure and an entrepreneurial spirit has made the United States the largest economy on earth. As the middle class has grown, so has the United States.
So as economic reports, year-after-recent-year, tell us that our middle class has reversed course, moved into a downward contraction, as statistics decimate our tradition of upward mobility, there are serious questions about this decline, the sustainability of our currently-structured nation and the resulting polarization that has ripped our body politic into shreds. What does it mean that in 1940, 92% of Americans expected to (and did) live as well as if not better than their parents, while in 2017, only 50% of Americans share those expectations?
Some call it the inevitable result of globalization, other claim it is testament to some moral decay, while others charge a callous society – mired in policies that continue to foster income inequality – that insists on living off the investments of past generations without any real thought of continuing such investments – in education, infrastructure and research – into the present. That working men and women face further income challenges where labor is replaced by overly intelligent machines, the owners of which are those at the top of the economic food chain, compounds the problem.
The razor thin margins – separating so many Americans from economic chaos – have been one of the driving statistical realities behind the pricing and policies of the Federal Reserve of late. Since 2013, the Fed has been delving into the down-and-dirty economics of average Americans, and what they have discovered, what their surveys have revealed, is simply terrifying for a nation built on those middle class assumptions:
“Most of the data in the latest survey, frankly, are less than earth-shattering: 49 percent of part-time workers would prefer to work more hours at their current wage; 29 percent of Americans expect to earn a higher income in the coming year; 43 percent of homeowners who have owned their home for at least a year believe its value has increased. But the answer to one question was astonishing. The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all. Four hundred dollars!” Neal Gabler, The Secret Shame of Middle-Class Americans, in the May 2016, The Atlantic.
Kick that surprise bill up a bit higher and the number contracts further, even though there has been a tiny recent improvement: “Nearly six in 10 Americans don't have enough savings to cover a $500 or $1,000 unplanned expense, according to a new [2015] report from Bankrate … But at least the number has improved. Last year, only 37% of Americans reported having enough savings to cover an expense of $500 or more. [See the Bankrate results from 2014 below.]
“Millennials were the most financially prepared to handle monetary headwinds with 47% of those aged 18-29 saying they could dip into savings to cover an unplanned expense, a substantial increase from 33% in 2014.” CNN Money, January 12th. Older Americans are the drag on that number? Think about how much more they will have to depend on Social Security and other forms of governmental support, programs in the crosshairs of benefit-cutting Republicans focused on tax cuts for the wealthy. But isn’t the economy getting better fast? Won’t that fix this anomaly?
We have lots of government numbers generated, numbers which suggest a rapidly improving economy. Rising GDP. Falling unemployment rates. But those numbers are inherently biased. GDP is determined by looking at averages – a few really successful folks at the top can tilt the numbers to “excellent” even as the middle class erodes – without reference to underlying, hard-dollar social costs (using up resources, pollution, criminal justice costs, natural disasters, etc.). The raw unemployment rate doesn’t challenge shifts to part-time or gig employment, measure those who have given up looking or the costs of underemployment.
“[E]conomists also didn’t know, or, at the very least, didn’t discuss it [the growing economic vulnerability of an increasing number of Americans]. They had unemployment statistics and income differentials and data on net worth, but none of these captured what was happening in households trying to make a go of it week to week, paycheck to paycheck, expense to expense. David Johnson, an economist who studies income and wealth inequality at the University of Michigan, says, ‘People studied savings and debt. But this concept that people aren’t making ends meet or the idea that if there was a shock, they wouldn’t have the money to pay, that’s definitely a new area of research’—one that’s taken off since the Great Recession. According to Johnson, economists have long theorized that people smooth their consumption over their lifetime, offsetting bad years with good ones—borrowing in the bad, saving in the good. But recent research indicates that when people get some money—a bonus, a tax refund, a small inheritance—they are, in fact, more likely to spend it than to save it. ‘It could be,’ Johnson says, ‘that people don’t have the money’ to save. Many of us, it turns out, are living in a more or less continual state of financial peril…
“Financial impotence goes by other names: financial fragility, financial insecurity, financial distress. But whatever you call it, the evidence strongly indicates that either a sizable minority or a slim majority of Americans are on thin ice financially. How thin? A 2014 Bankrate survey, echoing the Fed’s data, found that only 38 percent of Americans would cover a $1,000 emergency-room visit or $500 car repair with money they’d saved. Two reports published last year by the Pew Charitable Trusts found, respectively, that 55 percent of households didn’t have enough liquid savings to replace a month’s worth of lost income, and that of the 56 percent of people who said they’d worried about their finances in the previous year, 71 percent were concerned about having enough money to cover everyday expenses. A similar study conducted by Annamaria Lusardi of George Washington University, Peter Tufano of Oxford, and Daniel Schneider, then of Princeton, asked individuals whether they could ‘come up with $2,000 within 30 days for an unanticipated expense. They found that slightly more than one-quarter could not, and another 19 percent could do so only if they pawned possessions or took out payday loans. The conclusion: Nearly half of American adults are ‘financially fragile and ‘living very close to the financial edge.’ Yet another analysis, this one led by Jacob Hacker of Yale, measured the number of households that had lost a quarter or more of their ‘available income’ in a given year—income minus medical expenses and interest on debt—and found that in each year from 2001 to 2012, at least one in five had suffered such a loss and couldn’t compensate by digging into savings.
“You could think of this as a liquidity problem: Maybe people just don’t have enough ready cash in their checking or savings accounts to meet an unexpected expense. In that case, you might reckon you’d find greater stability by looking at net worth—the sum of people’s assets, including their retirement accounts and their home equity. That is precisely what Edward Wolff, an economist at New York University and the author of a forthcoming book on the history of wealth in America, did. Here’s what he found: There isn’t much net worth to draw on. Median net worth has declined steeply in the past generation—down 85.3 percent from 1983 to 2013 for the bottom income quintile, down 63.5 percent for the second-lowest quintile, and down 25.8 percent for the third, or middle, quintile. According to research funded by the Russell Sage Foundation, the inflation-adjusted net worth of the typical household, one at the median point of wealth distribution, was $87,992 in 2003. By 2013, it had declined to $54,500, a 38 percent drop. And though the bursting of the housing bubble in 2008 certainly contributed to the drop, the decline for the lower quintiles began long before the recession—as early as the mid-1980s, Wolff says.
“Wolff also examined the number of months that a family headed by someone of ‘prime working age,’ between 24 and 55 years old, could continue to self-fund its current consumption, presuming the liquidation of all financial assets except home equity, if the family were to lose its income—a different way of looking at the emergency question. He found that in 2013, prime-working-age families in the bottom two income quintiles had no net worth at all and thus nothing to spend. A family in the middle quintile, with an average income of roughly $50,000, could continue its spending for … six days. Even in the second-highest quintile, a family could maintain its normal consumption for only 5.3 months. Granted, those numbers do not include home equity. But, as Wolff says, ‘it’s much harder now to get a second mortgage or a home-equity loan or to refinance.’ So remove that home equity, which in any case plummeted during the Great Recession, and a lot of people are basically wiped out. ‘Families have been using their savings to finance their consumption,’ Wolff notes. In his assessment, the typical American family is in ‘desperate straits.’” The Atlantic.
So here are some hard realities. First, we become what we measure. If our political policies are focused on GDP and raw unemployment statistics, then getting folks a job – even really terrible, low-paying jobs – makes unemployment woes seem to go away, and if lots of rich folks get richer while most of us suffer a declining standard of living, GDP still rises. Oh. Second, and as a result, Nothing in either the Democratic or Republican Platform platform seriously addresses this accelerating grass-roots economic malaise.
There are no shortcuts, no easy fixes. Massive tax cuts for the wealthiest segments of society have not, historically, trickled down much of anything for average workers. Not more jobs. Not better paying jobs. Nothing. Deregulation may have some very minor economic benefits, but against what detriments? Unbreathable air, undrinkable water, unending climate change? At what cost? Hard dollar or to us as human beings? We need to invest in our future directly and stop this stupid attempt to “incentivize” rich people to fix what ails us by giving them more discretionary income. We need to do what really did make us great: invest massively in education, infrastructure and scientific research. We need to base our policies on hard facts, not post-truths and empty slogans. Now!
I’m Peter Dekom, and why is an entertainment lawyer in Los Angeles California presenting facts – that if ignored will decimate our future – that aren’t even being looked at by those we have elected to represent us and make those policy decisions to give us that future?

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