Economy

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Who’s Borrowing Now? The Young and the Riskless!

Last week I mentioned that “Student Loans Account for 59.5% of the Consumer Credit Added in 2013”. This week the New York Fed explains in the post, Just Released: Who’s Borrowing Now? The Young and the Riskless!, that the credit card borrowing grew for folks with high credit scores. Since the total credit card debt barely grew in compared to 2012 the increased borrowing by those with high credit scores was offset by reduced borrowing by those folks with lower credit scores.  This data leads me to believe that in 2013 this consumer driven economy was stuck in stall mode. Hopefully 2014 will be better. Their site has been up and down today so here is a copy of their chart.

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Change in Debt by Credit Score

For those folks who want to play with the data more you should take a look at the Fed’s interactive graphic or download the spreadsheet.

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Student Loans Account for 59.5% of the Consumer Credit Added in 2013

The Federal Reserve recently published the G.19 and the 2013 results were pretty dismal for a consumer driven economy. Consumer credit increased a respectable $181.7 billion. This was a 6.2% gain from 2012.  Revolving credit growth increased a meager $16.1 billion for 1.9% gain compared to 2012. This number is very close to last year’s 1.5% inflation rate. Most of the consumer credit action occurred on the non-revolving credit side of the ledger which grew $165.6 billion or 8% compared to 2012. When we take out the portion issued by the Federal Government and educational institutions for student loans, we get $57.4 billion was spent on cars and other stuff. This amount is 2.8% higher than in 2012. By far the largest percentage of the consumer credit increase is attributable to student loans. It grew $108.2 billion or 5.2% compared to 2012. Student loans account for 59.5% of the total consumer credit added. At least for me this explains why our consumer driven economy is having trouble growing faster than 2% per year. The consumer is still hunkering down.

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What Would @planetmoney Say About The Job Losses Under The Affordable Care Act?

plantmoneyOne of the most contentious issues brought up by the Congressional Budget Office report on the Affordable Care Act is the job losses. It is by design that the Affordable Care Act allows people to choose to turn downsize their job and replace their employer sponsored health care plan with an equivalent one from the exchange. There are people who have valid medical or personal reasons who want to pursue this path. These are intentional job losses and probably desirable. The problem is keeping the people who really do not have a valid reason for downsizing their job from pursuing this strategy. As much as we might want to compassionately encourage the former group to downsize, we really want to discourage the slackers from going down this path. Unfortunately the Affordable Care Act does not really have a plan of disincentives for these prospective slackers. If we really believe we can grow out of our economic mess and pay for an expanded health care system then we must minimize the number of slackers.  Before the Affordable Care Act transforms our health care system in to a “Mini-Me” version of the European system, it may be a good time to revisit Planet Money’s podcast, Germany’s Painful Unemployment Fix, and Germany’s use of incentives and disincentives to bring down unemployment rates. It is ironic that the reforms that made Germany’s labor market look more like the labor market in the U.S. may eventually be adopted by us as our welfare state repeats the same mistakes Europe made. Oy vey!

For a more scholarly review of the impact of the ACA on employment you can read Rea Hederman’s article, ”Incentives Matter: Why Estimated Job Losses Under Obamacare Have Tripled” and University of Chicago economist Casey Mulligan’s paper, “Average Marginal Labor Income Tax Rates under the Affordable Care Act”.

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Amazon Raising Its Popular Prime Service By $40

Unique competitive strategies fascinate me so it goes without saying that Amazon’s business strategies fascinate me. They have always marched to the beat of a different drummer. One of their more unique competitive strategies has been free 2 day shipping via Amazon Prime. Two years ago I subscribed to Amazon Prime to see if I would break even on the shipping while enjoying some Netflix type video streaming. What I found surprised me. I purchased more incidental items through Amazon and rarely used the video streaming. I suspect this incidental shipping is killing Amazon’s bottom line. As an example I was repairing a computer and needed some thermal paste. Rather than going to the local computer store I ordered it I from Amazon because I had free shipping. The paste cost me $5 and was shipped to me using UPS. As a person who is real familiar with shipping costs, I am guessing that Amazon lost $5 on that transaction. I followed that up next week with a $10 purchase for a different repair. For high priced items I found that I could find lower prices that include free shipping outside of Amazon if I ran a simple internet search. Since free shipping is such a mixed blessing, I was debating whether to pull the plug on Amazon Prime this year. Now we hear this. It should be interesting to see how the Amazon’s competition respond.

Amazon also said it is considering raising the price of its popular Prime service by as much as $40 a year due to higher fuel and other shipping costs.

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Things That Make Me Go Hmm… The Continuing Bull Market

I have been unwilling to invest more money into the stock market for the last couple of years because the stock market has this uneasy, codependent relationship with the expansion of the Fed’s balance sheet. Every time the Fed threatened to cut off the purchases the stock market had a temper tantrum. I hate this market psychology. As an old school MBA type I am much more comfortable with a market that goes up when the unit sales goes up. As a result I missed out on the stock market gains in 2013. Jeff Sauts makes a very good argument on BussinessInsider that the stock prices will continue to go up for the same reason it has since 2009.

…there has been a very tight correlation (R2) between the expansion of the Fed’s balance sheet and stock prices since 2009. If the Fed expands its balance sheet by another 12% over the coming year, it is conceivable the SPX could increase by another 12%

His argument is solid so despite my qualms I will probably test the investment waters in 2014. I would be much more optimistic about investing in the stock market if our government was reducing the policy risk on small and medium sized businesses. This is MBA advice you would have gotten in the 1980s. The government needs to get out of way so businesses can get back to their running their business. The Affordable Care Act and the increased regulations are a distraction that has increased the risks to small businesses. It is hard to grow your business with all of these meaningless distractions. I have said it before. If we want to grow middle class wealth we have to focus on making things bigger, better, faster, or cheaper.

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The First Law of Growing Middle Class Wealth

To grow middle class wealth you must be making things bigger, better, faster, or cheaper.

This law is an acknowledgement that financial stimulus, bubbles, and wealth redistribution schemes create a temporary sense of wealth and aggravate the problems with income inequality. The crux of the problem is that financial stimulus, bubbles, and “bad” wealth redistribution schemes increase the risk of bad and delayed investment decisions on products that have the potential to create middle class wealth. Unless we are able to perpetuate a cycle of stimulus, bubbles, and new “bad” redistribution schemes, this temporary wealth is not sustainable and eventually the bad decisions have to be paid for. The key to growing middle class wealth is making good decisions that reduce risk and encourage the investment in products that can grow middle class wealth.

The background for making this statement is that history has shown that gains from productivity increases are sustainable. The best examples of these gains are the Industrial Revolution in the 1800’s, the innovative products at the beginning at the 20th century(e.g. automobiles, telephones, steel, oil, farming, etc.), and more recently the productivity gains from computers and computerization in the 1980’s. Arguably the increased risk felt by businesses in the 1930’s with the increased regulations and wealth redistribution schemes reduced capital investment and prolonged the depression. This was an argument put forth by Amity Schlaes in her book, The Forgotten Man. A similar argument can be made about the last thirteen years. With the real estate, financial, and health care sectors leading the way income inequality has gotten worse and we have not invested in products that grow middle class wealth. Instead we created a system that perpetuates decision making that results in temporary wealth and stagnant middle class growth. At the beginning of this century it was real estate and now its stocks and health care. Arguably the biggest beneficiary to the Federal Reserve quantitative easing policy is stocks. Eventually the Federal Reserve will taper off its quantitative easing policy and our health care expenses will reduce to the rates paid by the rest of the world. We have gone from one bubble to the next and gotten more separated from the policies that help the middle class grow their wealth. Until we get back to making things bigger, better, faster, or cheaper we will be caught in a zero sum game with emerging economies we cannot win.

The first corollary to the law is:

Growing middle class wealth is the only economic tide that lifts all ships.

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What Explains the Slowdown in Health Care Spending?

John Goodman wrote a post, What Explains the Slowdown in Health Care Spending?, and included the following quote from a NYT article by Uwe Reinhardt.

One concludes from this analysis that both year-to-year fluctuations in national health spending and the longer-term trend in that growth rate are driven primarily by current and prior-year changes in macroeconomic conditions.

I was curious about how he reached his conclusions since it reminded me of the John McDonough’s macroeconomic premise in the article, “Does Massachusetts Have the Nation’s Highest Health Insurance Premiums? It Depends.” In that article Mr. McDonough speculated that the reason Massachusetts has the highest health insurance premiums in the country is because they have the highest median income. In other words health insurance premiums migrated to the highest price the Massachusetts market would bare. In Mr. Reinhardt’s article, Controlling Health Care Spending, Revisited, I found a fascinating graph of the year to year growth in real per capita health care spending. My immediate question is what happened to real per capita income over the same time frame? Since I know how to get income data from FRED here is my version of the two indicators on the same graph. For those who are curious I estimated the year to year growth in real per capita health care spending from the NYT graph so I could put it into an Excel spreadsheet. It sure looks like the year to year increases are trending down to the increase in real disposable income. This would be a logical result in an environment where out of pocket costs are increasing and the country is increasingly sensitive to health care spending increases that exceed the general inflation level. If the large businesses and government entities that sponsor large group health insurance plans are unwilling to expand their contribution to health care spending, you have to wonder how we can expand our health care spending without a major increase in GDP and real per capita disposable income. If the predictions of slow GDP growth are correct then it looks like we are playing a game of musical chairs and the music is winding down. Even if there is no health care inflation then “someone” is being set up for a cost squeeze as we expand the health care system and its not likely to be the consumer. They look like they are tapped out. This reminds me of the typical problems faced by out of control entitlement systems. We have seen the future of health care and it looks a lot like Detroit.

RealDPIvsHealthSpending1

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Will Immigration Reform Make Americans Poorer?

It looks like the folks over at Powerline blog are asking the same question I have been pondering about immigration reform, “Will Immigration Reform Make Americans Poorer?” Last month I wondered out loud, “How Does The Economy Grow with Immigration Reform?” Below is a comment I wrote on the Powerline blog that brought up an aspect no one seems to want to talk about.

I am still confused how the economy can grow if we do not make any progress employing the existing citizens who have low education, low job experience, and low job skills. This employment problem has not gone away. Unfortunately I do not see the businesses that hire low income workers growing. Adding more immigrants into this employment sector will necessarily make this situation more competitive and provide an incentive for the illegal immigrant to maintain their tax free status. At its best immigration reform displaces one disadvantaged group with another disadvantaged group.

About the only way I can see the economy growing under a scenario involving  adding 40 to 60 million new low skill immigrants is if we have a boom in low tech industries that absorbs not only the new immigrants but also the unemployed/under employed. A low tech boom like that has not occurred in the US economy in a very long time and if one was to occur in North America, Mexico would be the more likely choice.

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How Does The Economy Grow with Immigration Reform?

I just don’t get this dynamic scoring that Cato is so enthusiastic about. I have a particular problem understanding how it will grow the economy. Back in 2006 before the immigration system got really screwed up we hired a guest worker, Pedro, from Mexico. Since I was somewhat familiar with the tradeoff of illegal immigrants to guest workers for small businesses, I went through the calculations again. We hired Pedro to replace two and a half teenage girls on our payroll. From an efficiency standpoint this worked out for our farm since Pedro could easily do the work the girls were doing. Since he wanted his wages to competitive with the prevailing wages of local illegal immigrants, we raised his salary to cover his portion of the taxes. Using today’s numbers the total tax burden with unemployment and workers compensation insurance would amount to $3,213 or additional 23% burden over an illegal immigrant. So if we assume that the 8.6+ million immigrants are not paying payroll taxes now, when we convert them into quasi-guest workers the employees and employers will transfer some of their spending power to the country in the form of payroll taxes. Whether the extra burden is paid by the employer or the employee, consumer spending is going down. The only winner is the government. The logical conclusion is that if we reduce consumer spending and increase taxes, it will grow the economy. Huh!? This dynamic scoring idea is more political than pragmatic. It sure sounds like they borrowed the idea from Obamacare and global warming.