Saturday, April 12, 2008

Pains of Slow Decline

The Pew foundation has released a new poll about middle class decline, and I've pasted in the wire service summary. Papers are cutting back, you know - no one's around to actually read the report live. Dismal.

Decaying infrastructure is a related topic, since public services and the middle-class decay in lockstep. It killed a firefighter in LA two weeks ago. And the amazing airline chaos of the past couple of weeks offers the private version of the same underinvestment, in the air services at prices that allowed the masses to go long distances for the first time. Jeff Bailey at the New York Times has a good overview of the long-term problem that led one carrier - American - to cancel 3000 flights during last week.

From the Los Angeles Times
Middle-class Americans say they're feeling pinched
From the Associated Press

April 10, 2008

WASHINGTON — More middle-class Americans say they aren't better off than they were five years ago, reflecting economic pressures amid growing personal debt, a study released Wednesday found.

Their short-term assessment of personal progress, according to the study, is the worst it's been in nearly half a century.

The survey by the Pew Research Center, a Washington-based organization, paints a mixed picture for the 53% of adults in the country who define themselves as "middle class," with household incomes ranging from below $40,000 to more than $100,000.

It found that a majority of all Americans said they hadn't progressed in the last five years.

One in four said their economic situation had not improved, while 31% said they had fallen backward. Those numbers together are the highest since the survey question was first asked in 1964. Among the middle class, 54% said they had made no progress (26%) or fallen back (28%).

Asked about their financial experiences in the last year, 53% of middle-class people said they had to cut spending because money was tight. Nearly 18% said they had trouble getting or paying for medical care, while 10% reported they had lost their jobs.

Looking ahead to the coming year, half of the middle class surveyed said they expected to have to further reduce personal spending. Among those employed, one in four, or 25%, expressed worries that they would be laid off, that their job would be outsourced or that their employer would relocate in the coming year, while 26% were concerned that they would see cuts in salary or health benefits.

Middle-class prosperity overall also lagged compared with richer Americans. From 1983 to 2004, the median net worth of upper-income families -- defined as households with annual incomes above 150% of the median -- grew by 123%, while the median net worth of middle-income families rose by just 29%.

At the same time, most middle-class people remained upbeat when asked to measure their progress over a longer time frame, although their level of optimism lagged behind their wealthier counterparts. Two-thirds, or 67%, of middle-class Americans say their standard of living is better than the one their parents enjoyed at the age they are now.

In contrast, 80% of the rich said they exceeded their parents' living standard. Among lower wage earners only 49% reported better conditions.

Sunday, April 06, 2008

Planet Boardroom

One of the pillars of the middle- class view is that we are not only the industrious but the represen- tative class. America R Us, and that means that elites with far more money and influence than your average teacher, accountant or internist nonetheless see things as we do.

This is a crippling delusion, since it allows the middle class to hand over its interests to whomever is in charge, e.g give up health care to HMOs, public universities to Republican state-funding cutters, tax policy to hedge-fund lobbyists. But if you still believe it then we have evidence you can use to retrain your senseless reflexes.

As the papers announced on Friday that the US economy has lost jobs for the third month in a row (80,000 more), and across a range of sectors, the NY Times published a poll showing that 81 percent of the public things the country is on the wrong track. 81 percent is an amazingly high number.

The same issue featured a business page story about all the CEOs who bought new penthouses in Manhattan while the banking system unwound.
In January, Lloyd C. Blankfein, chief executive of Goldman Sachs, closed on a $26 million duplex at 15 Central Park West, one of Manhattan’s hottest new buildings. Scott A. Bommer, a hedge fund manager, bought a Fifth Avenue co-op for $46 million. And Edgar Bronfman Jr., part of a private equity consortium that owns the Warner Music Group, spent $19.5 million for his own Fifth Avenue co-op.
This is as investment bank revenue fell 45 percent industrywide during the first quarter - or worse. "James E. Cayne’s $28 million purchase of two units in the Plaza was not the biggest deal, but it was among the most awkwardly timed. A few weeks after the second deal closed, the Wall Street firm where he is chairman, Bear Stearns, collapsed."

Investment moguls are not only out of touch with ordinary reality: they're out of touch with the strange world of their own industries.

More evidence of clueless leaders:

- as the economy went down down down, executive pay went up up up. ("According to the Congressional Research Service, average pay for chief executives stood at 179 times average worker pay in 2005, up from a multiple of 90 in 1994. Adjusted for inflation, average worker pay rose by a total of only 8 percent from 1995 to 2005; median pay for chief executives at the 350 largest companies rose 150 percent.")
- the executive compensation game shows the huge personal paydays that come from nepotism and insularity.
- details of the Bear Stearns deal
- coverage of Senate hearings, where Sen Christopher Dodd, recipient of great Bear Stearns largess, seemed especially interested in whether the government forced too low a price on the hapless victim investment bank.
-a column arguing that regulators still aren't admitting any mistakes in letting the banking system get so opaque and overleveraged that "a 'well-capitalized company' [Bear Stearns] could not find anyone willing to lend it money without government help."
- a piece on subprimes showing that most lenders weren't exactly defrauded by false claims by borrowers, because they didn't exactly check up on them. The author, Gretchen Morgenson, asks this question about our Head Geniuses In Charge:
Can investors stuck with losses on these loans sue to recover their investments based on this due-diligence failure? After all, mortgage originators made representations and warranties to investors that the quality of these loans was good when it clearly was not. And they made these representations knowing that they had not bothered to conduct quick and easy borrower-income checks.
Hey - maybe a national lawsuit will wake up the boss. Let's try it and see!

Meanwhile, check out the toxic buildup coast to coast.

Wednesday, April 02, 2008

The Great Shanking

The broad middle class is in bigger financial trouble all the time. For the short run - which raises the cost of borrowing to pay for that pillar of the American dream the family home - see an updated overview on the financial crisis after Swiss bank UBS announced another $19 billion in write-downs. If you're keeping score, see the chart at the left.

UBS's chairman stepped down, to be replaced by his former General Counsel. This looks a lot to me like replacing Tweedledum with Tweedledee. If it ain't, please explain.

Then there's the long run. The middle class these days is supposed to retire on its investment income. The private sector's defined-benefit pension system (where your income depended on a formula of age, years worked, final salary, etc. and not on market movements) has been almost converted to a defined-contribution system in about 25 years. Projections in the US and the UK suggest big retirement shortfalls coming up. Finance historian and practitioner Peter Bernstein offers a reason why. Though stocks are supposed to go up over 7% every year, in 1 of 5 years they go down, and "Nearly one in five of those 20-year spans produced real, or inflation-adjusted, total returns of less than 3 percent a year." So it's quite possible to have real returns of well below 7%. Add in the costs of buying and selling, normal management fee deductions, and bad timing, and your 401(k) rapidly becomes NOT like having a pension.

Bernstein talks about another detail that hugely matters.
Over the last 20 years, dividends have provided 39 percent of the total return.

But that was the past. Today, the dividend yield is only about 2 percent, compared with the long-run average of more than 4 percent since 1925. Achieving the long-run, inflation-adjusted annual return of 7 percent when starting with dividend yields of only 2 percent is a tough call, especially as earnings per share over that long run have grown more slowly than real gross domestic product, or only about 2 percent a year after inflation.

Wake up and check your pension! Whoops, never mind - you gave away pensions a decade or two ago. Wake up and sell the house! Well try to wait just five or ten more years, so prices can stop going down . . .