Shocking Common Financial Realities

Bill Cimbrelo directed me to a CNN Money story titled “Retirement Shocker: 60% of Workers Have Less Than $25,000 Saved.”  To my mind, the main question that this raises is for whom is this a “shocker”?  If the cited fact applies to more than half of the people concerned, isn’t it safe to assume that the majority of people should be unsurprised by the information?  The only reason that I see why a person would be surprised by statistics that affirm the day-to-day reality of his life is if he thinks his own experience is somehow anomalous, somehow out of keeping with the daily experience of other people like him.  Unfortunately, this is almost certainly the situation with most lower-middle class and poor individuals.

So here’s a breaking point that I’m looking forward to, and it’s one that’s on my mind often, and that I’ve brought up earlier and elsewhere.  The news media and society in general needs to stop presenting affluence as the default state of life in America.  It’s not correct, and more than that it can be damaging to policy and social discourse.  Our collective understanding of income disparity is distressingly skewed by a distinctly hopeful presentation of American life in most media, whether fiction or non-fiction.  As with all things, failure to accurately recognize the problem makes failure to craft solutions almost certain.

 People should never be shocked by information that’s right under their noses all the time.  If they are, then it’s pretty clear that something had been wildly misrepresented in the past.  You might object that it’s not as though people walk around with their total retirement savings tattooed on their heads.  Why should we have any idea what sort of figures apply to the majority.  You shouldn’t, of course.  And if you’re not a meteorologist you shouldn’t know exactly how much rain your area has gotten this month.  But when somebody tells you that figure would you be shocked?  If so, surely you’re either terrible at estimating rainfall or you haven’t been looking outside very much.  And if you weren’t paying attention, in order to be shocked you have to have made some groundless assumption about what the amount might be, which will then be contradicted by the facts.

There’s a lot of information that casual observers can’t be expected to know about people, about the economy, about the world.  But learning something new is not the same as learning something shocking.  Yet I don’t dispute that the headline for the given story was accurate and that a great many people were shocked by the revelation.  They wouldn’t have been if they hadn’t concluded on the basis of nothing whatsoever that the majority of Americans are well prepared for a comfortable retirement.  I put forth that this sort of thing reveals the entire perception of income demographics in America to be pure fantasy.

Such a fantasy promotes a victim-blaming mentality.  And it promotes that not just among the beneficiaries of income inequality but among the victims of it, too, as they may tend to be surprised by information that shows their experience to be firmly in the majority.  And yet even the recognition of that information is not in itself enough to move commentators towards the idea that financial difficulty is an endemic problem and not a personal one.  The language applied to stories about the plight of the masses still suggests that the simple fact of their being a part of the masses is in some measure attributable to their own negligence, sloth, or ignorance.

The CNN article takes pains to spin the subject in a certain direction that is at once optimistic about general patterns and unfair to individuals.  It points out, “While workers' lack of saving and confidence in their ability to retire comfortably is troubling, [Employee Benefit Research Institute director Jack] VanDerhei said it's good that people are becoming more realistic about their financial situations.”  Sure, maybe, but there’s an enormously significant dimension of this story that stretches beyond the personal responsibilities of the people who are negatively affected.  At the same time that those people exhibit realism about that, how about analysts, media, and society as a whole become more realistic about the financial situations of people other than themselves?

My Contribution to the Obama Campaign

Last night, I donated three dollars to the Barack Obama campaign.  I didn’t do it because I believe in the transformative potential of a second term for the current president, or because I expect good things to come of an emphasis on small-donor contributions to political causes.  I didn’t even do it because I can afford it, because there’s some legitimate doubt about that, even at the three dollar level.

In fact, my donation wasn’t in answer to my conscience; it was in violation of it.  And given what three dollars might otherwise have bought, it was an irrational violation of my conscience.  That is characteristic of playing the lottery.  Yes, I donated three dollars to the Barack Obama campaign last night because that was the minimum amount and the deadline that allowed donors to be entered for a chance to win a trip to Los Angeles to have dinner with Barack Obama and George Clooney.

I put off the donation all the way to the last half-hour before the FEC fundraising deadline, because this involved a complex economic and ethical calculation for me.  It took until after 11:30 to hit that breaking point, but ultimately, I decided that even in the faces of virtually infinitesimal chances and the certainty of being left with a bad taste in my mouth, three dollars was well-worth the long shot of being chosen to be able to have a conversation with the president.  (I wouldn’t really care about meeting Clooney – I’d shake his hand and tell him I admire his body of work, but I want to talk to policymakers.)

The economic calculation was significantly influenced by what I know about the president.  The current occupant of the highest office in the land has an admirable sense of empathy, to the extent that he has been responsible for some instances of helping private citizens to get jobs when they had spoken to him of their difficulties.  He has also been known to occasionally write personal checks in response to letters detailing hardships which the president felt he had no other way of addressing in the moment.

I wrote about those facts in the past, and though they still impress me with regards to the kind of man that citizen Barack Obama is, as I expressed then, I don’t like what it says about him as an occupant of the presidential office.  And to be perfectly frank about my own motivations, I want to have dinner with President Barack Obama so I can exploit the ear of the man and criticize the actions and policies of the president.

Donating money to his campaign for the sake of a shot at dinner in L.A. constituted an ethical compromise for me, because I recognized that I was contributing to an unfortunate trend in American politics.  We complain a great deal about the influence of big money in campaigns and policy making, the quid pro quo involved.  But as with everything else, the broader tendencies, the impulses among the powerful, have their groundwork in private, on-the-ground attitudes.

Regardless of whether it relies on three dollar donations from across the country or one terrifyingly wealthy Super PAC, no campaign and no political apparatus should be set up to encourage people to contribute their resources to it in hopes that they will be delivered some personal reward in return.  And that’s exactly what I’ve done.

I didn’t donate my three dollars to the Barack Obama campaign because I believe that he represents my views and can be trusted to carry out the policies that I think would be legitimately best for the country as a whole; I did it in hopes of gaining access to the president so that I could try to influence his policies.  And more than that, I gave my money to the campaign in the interest of trying to influence a private individual to help me personally.

I want to have dinner with the president so that I can raise questions about his education policy, about the flawed common wisdom that government cannot create jobs, and about the victim-blaming rhetoric that dominates political explanations of joblessness, poverty, and loss.  But I want to have dinner with a man with a vast network of high-level connections so that I can impress upon him the desperation of my need for a decent job, the reality of my qualifications and talents, and the fact that nothing I do on my own can connect those thing to actual employment.

I know that there have been a handful of other people who have been in similar situations, found themselves in circumstances that allowed them to bend the ear of the president, and acquired job leads by virtue of his influence.  I think it’s wrong that anyone gets that chance, but the fact is that so long as someone does, I hope it’s me.

For the time being, money in politics is a reality that we have to work with.  But the money should follow the political causes, and the system that is accepted now by both parties and at all levels encourages money to precede politics and to demand that weakly malleable views on policy answer to purchased influence.  I doubt, though, that my three dollars will buy sufficient influence to demand that that system be questioned.

Only Taxing the Rich is Bad, Says O'Driscoll

The Yahoo! Finance web series the Daily Ticker today consisted of an interview with Gerald O’Driscoll, former Vice President and economic advisor at the Dallas Federal Reserve, and a senior fellow at Cato Institute. He was asked whether there was anything that either the Fed or Washington could do to spur job creation, and naturally O’Driscoll quickly turned to criticizing President Obama’s tax policies, describing the raising of marginal tax rates on millionaires and billionaires as economically destructive.

The interviewer reminded O’Driscoll of the counter-arguments that would come from the presidential administration and its supporters, then asked: “Do you make a distinction between taxes whether they’re aimed at individuals or corporations, or is it – bottom line – raising taxes on anybody is bad for the economy?”

I think that question presented O’Driscoll with a pretty clear choice: is the problem simply taxation in general within a weak economy, or is it taxation of businesses? Yet O’Driscoll appears to have avoided that simple choice and opted to advance an entirely different perspective.

He began, “Well I would say that raising taxes on the…” and then paused at length, searching for the right synonym for “wealthiest Americans.” I found that pause very telling. He knew about whom he was talking, but he needed to phrase it in a way that served his ends. Using the phrase “the rich” is perfectly clear to every viewer, but using the phrase “the source of savings and investment” obfuscates what we’re talking about and makes it harder to attach an image to the subject, but easier to affix it to a concept. So that was the phrase that O’Driscoll settled on, saying that raising taxes on the source of savings and investment is bad for the economy.

Now, did you notice how that avoids the simple one-or-the-other choice that he was given with the question? For simplicity, let’s drop the more pleasant synonym and just acknowledge that he’s talking about the rich. So when he’s asked whether it’s bad, in a weak economy, to raise taxes full-stop, O’Driscoll’s answer is really no, it’s bad to raise taxes on the rich in particular. Theoretically, his point of view leaves open the possibility of raising taxes on the poorest American’s without expectation of consequence. Of course, this is something that several Republicans have actually advocated, but it’s quite amazing to see that such callous initiatives have a theoretical underpinning.

O’Driscoll continues by rebuking the president for ostensibly failing to understand that most business are not C Corporations and thus are not taxed separately from their owners, “So when you raise taxes on individuals, you’re raising taxes on the business, and hence… you’re inhibiting job creation.”

I almost admire how the language of this quotation allows O’Driscoll to exclusively designate millionaire business owners as “individuals.” Raising taxes on lower or middle class workers doesn’t raise taxes on business. Even raising taxes on millionaires who primarily earn their income from things like investments in businesses they don’t own is not equivalent to raising taxes on businesses. Do neither of these groups count towards the discussion? That seems suspiciously convenient for O’Driscoll’s argument.

Essentially, that argument seems to be that it’s destructive to raise taxes on extremely wealthy individuals, because they might use some of their own wealth to invest in the businesses they own or from which they profit. Meanwhile, by this line of thinking, there is no particular problem with raising taxes on people who will definitely use a portion of their slight income to purchase things like food, clothing, and gas.

I admit that my understanding of economics is rather rudimentary, but it seems to me that a sure-fire way to create jobs is by raising demands for goods and services, thus increasing the size of the workforce required to supply that demand. Unless I’m wrong about that, it’s pretty asinine to suggest that allowing the wealthy to hoard their money while thinking nothing of depriving the poor of theirs is the best way to stimulate the economy. Sure, business owners need personal wealth to invest in their industries. But why on Earth would they do so if demand for what they’re offering remains flat.

By contrast, if a wealthy American is legitimately interested in earning the highest margins from his business, he would be a fool not to make investments to match growing demand, unless of course his wealth has been taxed out of existence. But I hardly think anybody’s proposing that, and I certainly don’t think that paying a thirty-five percent marginal rate would cripple a billionaire’s investment capabilities.

Shifting the Liability for Job Training

I think President Obama delivered a fine speech last night. I am particularly impressed with his remarks regarding higher education and unemployment. For the past three years, I have tried to be a particularly aggressive and passionate critic of the current administration’s policies and rhetoric regarding education policy. And more than that, for the past five years or so I’ve tried to direct that aggression towards certain common beliefs among American society as a whole. Maybe I haven’t been paying attention, but it seems to me that President Obama has changed course on the topic overnight, so that he is no longer peddling the easy answers that we’re used to or defending the status quo, but rather offering challenging and innovative alternatives.

After discussing the topics of renewed manufacturing and tax incentives to prevent outsourcing, the president changed direction slightly and said “I also hear from many business leaders who want to hire in the United States but can’t find workers with the right skills.”

Call me jaded, but I’ve never been particularly persuaded by that argument. It seems to me that if a business leader wants to hire within the United States, he can do so. If that is his earnest desire, but his prospective employees lack the necessary skills, it is at least theoretically possible for the business to take it upon itself to provide Americans with the requisite training. To my surprise, that was precisely what the president went on to propose.

He first presented the anecdote of a worker who was laid off, but at a time when a local community college and a new manufacturing plant had formed a partnership whereby the company helped to design the curriculum that would lead directly to the jobs that were now needed, and then paid the tuition for the laid off worker and hired her to operate the plant.

The president continued: “I want every American looking for work to have the same opportunity as Jackie did. Join me in a national commitment to train two million Americans with skills that will lead directly to a job.”

What an extraordinary, and yet extraordinarily simple concept! Prior to this, the only recommendations I’ve ever heard from the administration have been, give students more Pell grants, more Stafford loans, keep down the interests rates – all so that people who have not yet entered the job market have to take on a little bit less of a financial burden before they ever have a shot at being decently employed.

Could this new initiative actually signal the beginning of the end of this current climate, in which training is accepted as exclusively the responsibility of the worker and not the employer? Could this mean that in the near future, young people and laid off laborers won’t be asked to pick a vocation, pay hand over fist for the skills associated with it, and then simply gamble on the possibility that it will be available to them after two-to-four years?

Now, I’m sure I may seem glib in that I seem to be advocating for saving workers from the fruitless sacrifice of money and time by asking employers to do exactly the same. Some manufacturers can afford the risk, but not all can. In the latest issue of the Atlantic, Adam Davidson writes an article on American manufacturing, using Standard Motor Products in Greenville, S.C. as a case study. He explains that industrial profit margins in general, and Standard’s in particular, are remarkably slim, meaning that hiring more unskilled workers or paying them higher wages can put the entire business at legitimate risk. Furthermore, in order to be a Level 2 worker at a Standard plant, one needs to know programming languages and high-level mathematics. Consequently, “the gap between Level 1 and Level 2 is so wide that it doesn’t make financial sense for Standard to spend years training someone who might not be able to pick up the skills or might take that training to a competing factory.”

Given that reality, it certainly seems unfair to ask a company to bite the bullet and risk its own survival on doing the right thing for American workers. But it’s no less unfair to demand an untenable investment from a company than it is to demand if from an individual worker. They too risk their economic survival in taking out loans or removing themselves from the workforce for a period of years in order to acquire skills that, while necessary, may or may not actually lead to employment. No matter how lean its profit margins are, a company with stock valued at $400 million has more financial resources than a twenty-two year-old single mother working as an unskilled laborer.

There are ways around the sever risk involved in both providing and acquiring high-level training. Companies must first recognize that as their operations become more complex, training costs escalate as an element of initial overhead. It is unreasonable to expect that with greater automation and output, workers will be more and more capable to perform their functions before they even arrive at your door. Worker skills are an investment in the future of the company and the industry. Of course, they are also an investment in the future of the worker, but no man should be asked to make a substantial financial investment before he has even held a job.

So how about treating collegiate level training as an initial expense by the company, and a retroactive financial obligation for the worker? That is, a company can promise to hire from a pool of young applicants, then send pay their tuition upfront to the associated university, and subsequently deduct the cost of the education from each such worker’s pay over the course of their employment. Some might be averse to such an arrangement because it sounds like indentured servitude. But that’s the system that we already have; the only difference would be that the worker would be indentured to an employer rather than a bank. Also, for some there would be the added difference of actually being employed under the proposed system, as opposed to highly trained and still out of work.

The interests of both employer and employee can be protected. If a worker wishes to take their new skills to another plant, they can remain under contract to repay the cost of their training to their initial employer. By contrast, if a company fires the employee without cause, it wouldn’t be unreasonable to necessitate that they release the worker from that financial obligation in whole or in part.

Sacrifice is often necessary if one is to make it in this world, but there is no cause for one person or one organization to have to take on unbearable strain for the mere privilege of being employed or employing another. That has been the situation for too long – with people at every level of society, from government, to business, to private citizenry insisting that each new job seeker simply get an education whatever the expense and then hope for the best. It is high time that we rediscover what it means to share the burden. For the first time that I can remember, I think that with regard to education there may actually be some support within the government for that noble idea.

Zombie Debts

According to the Wall Street Journal, there is an increasing trend among collection agencies and U.S. banks, of pairing credit card offers with debt repayment agreements as a way of re-aging debts that have passed the statute of limitations. Some of these offers are becoming subject to legal scrutiny either because they do not make it clear that the subject of the offer is agreeing to enter a loan repayment program, or because they deceive the consumer into believing that the debt in question is still current.

Nevertheless, some subjects of these offers report being pleased at receiving them, and indicate that they would accept another of the same, because it provides them an opportunity to reestablish credit when most lenders would not deal with them. I’m not so sure that the warm embrace of these practices by certain consumers means that the trend is a good one. Quite the contrary, I think it says something terrible about the banks involved.

I’m not especially bothered by the allegedly deceptive practices. I know it’s a little unsympathetic of me, but I suppose that if a person is eager to sign up for a credit card in the shadow of persistent and disastrous financial difficulties, they damned well ought to be repaying defaulted loans no matter how they were finagled into the agreement. I can understand undertaking and gradually paying on debt, and I can understand letting it lapse and then living without it altogether, but failing to manage it and yet still accepting it as a part of your life just seems like harmfully inconsistent decision-making.

What bothers me about the practice, then, is something that the WSJ article points to, itself:

“[Some lenders] are leery about subprime borrowers. But the debt-driven credit cards show some banks tiptoeing back into subprime lending after suffering big losses during the financial crisis.”

I’m no economist, but trends like this make me almost convinced that financial bailouts and the like from Washington have served to avert disaster in the short term, but have actually made the underlying problems worse. Money lenders are evidently viewed as so fundamentally important to the structure of American prosperity that their failure is unconscionable, which means that from a slightly different perspective, their failure is simply impossible. The money will always be there in one form or another, so no matter how risky a lending practice is, the institution will be covered against catastrophic losses.

In this sort of situation, the only things an investment bank has to fear are public outcry and government scrutiny, not a failure of their own investments. If that’s the case, the rational thing to do is to maximize profits with little regard for long-term risk, and just be careful not to get caught. Banks can’t really be blamed for that attitude; their self-interest is best served by such practices, and it’s not their fault that there are no consequences to mitigate their desire to pursue them.

So it seems natural to me that lenders would “tiptoe back into subprime lending.” The short-term profits were so tremendous in the past and the long-term consequences so comparatively small. That is, long-term consequences were small for the lending institutions themselves, though not for the rest of the country. If those institutions continue to resurrect debts that have been shown to be worthless, as well as lending more money to the people who couldn’t support those debts, I can only assume that recent history will repeat itself with greater clarity, complete with marvelous benefits for a small minority and disastrous consequences for the rest.

Breaking points don’t come from those who reap the benefits of existing trends; they come from the people who stand to lose from the same. Political will can stop the rational reversion to perilous bookkeeping and lending practices by pushing for a situation in which both risk and reward are again shared by the same institutions. Alternatively, some of the lower class people who are the objects of subprime lending could interrupt these trends themselves by sloughing off the illusory promises of a lifestyle beyond their means, and learning to save instead of spending, and to live without anything they can’t buy in cash. For that change, I’m waiting for the breaking point whereby people start to realize that massive debt is existentially worse than subsistence.

The trouble with the former possibility is that I’m not sure that political institutions actually having any power over, or even independent of financial institutions anymore. The trouble with the latter is that the same rational imperatives of self-interest that lead banks towards subprime lending also lead individuals to accept the terms of any loan that they can ultimately survive.