Posts Tagged ‘finances’


Special mention

191527_600 191591_600


Mainstream economics presents quite a spectacle these days. It has no real theory of the firm and, even now, more than nine years after the Great Recession began, its most cherished claim to relevance—the use of large-scale forecasting models of the economy that assume people always behave rationally—is still misleading policymakers.

As if that weren’t embarrassing enough, we now have a leading mainstream economist, Havard’s Martin Feldstein, claiming that the “official data on real growth substantially underestimates the rate of growth.”

Mr. Feldstein likes to illustrate his argument about G.D.P. by referring to the widespread use of statins, the cholesterol drugs that have reduced deaths from heart attacks. Between 2000 and 2007, he noted, the death rate from heart disease among those over 65 fell by one-third.

“This was a remarkable contribution to the public’s well-being over a relatively short number of years, and yet this part of the contribution of the new product is not reflected in real output or real growth of G.D.P.,” he said. He estimates — without hard evidence, he is careful to point out — that growth is understated by 2 percent or more a year.

This is not just a technical issue for Feldstein:

it is misleading measurements that are contributing to a public perception that real incomes — particularly for the middle class — aren’t rising very much. That, he said, “reduces people’s faith in the political and economic system.”

“I think it creates pessimism and a distrust of government,” leading Americans to worry that “their children are going to be stuck and won’t be able to enjoy upward mobility,” he said. “I think it’s important to understand this.”

Here’s what folks need to understand: mainstream economists like Feldstein, who celebrate an economic system based on private property and free markets, build and use models in which market prices capture all the relevant costs and benefits to society. And, since GDP is an accounting system based on adding up transactions of goods and services based on market prices, for mainstream economists it should represent an accurate measure of the “public’s well-being.”

Mainstream economists can’t have it both ways—either market prices do accurately reflect social costs and benefits or they don’t. If they do, then Feldstein & Co need to stick with the level and rate of growth of GDP as the appropriate measure of the wealth of the nation. And, if they don’t, all their claims about the wonders of free markets simply dissolve.

Notice also that, for Feldstein, the problem is always in one direction: GDP statistics only undercount social well-being. What he and other mainstream economists fail to consider is that whole sectors of the economy, like financial services (or, more generally, FIRE, finance, insurance, and real estate), are counted as adding to national income.

As Bruce Roberts has explained,

because “financial services” are deemed useful by those who pay for them, those services must be treated as generators in their own right of value and output (even though there is nothing there that can actually be measured as output at all). . .

the standard (neoclassical) approach embedded in GDP accounting means, in concrete terms, that profits in FIRE must be treated as a reflection of rising real output generated by FIRE activities, requiring a numerical “imputation” of greater GDP. And, worse, that *rising* profits in FIRE then go hand in hand with *rising* levels of imputed “output” and hence enhanced “productivity.”

If Wall Street doesn’t add to GDP—if FIRE activities just represent transfers of value from other economic sectors (both nationally and internationally)—then its resurgence in the years since the crash doesn’t contribute to output or growth.

The consequence is that GDP, as it is currently measured, actually overcounts national output and income. Actual growth during the so-called recovery is much less than mainstream economists and politicians would have us believe.

That’s the real reason many Americans are worried they and “their children are going to be stuck and won’t be able to enjoy upward mobility.”


American voters are clearly angry. At least it’s clear to me—for example, as reflected in the success of the Donald Trump and Bernie Sanders campaigns (and in the evident dissatisfaction with Hillary Clinton, Congress, and Wall Street).

But it’s not clear to many economists, who cite rising average incomes, a relatively low unemployment rate, and other aggregate indicators. For them, the economic situation is improving and there’s really no reason for Americans to be angry.*

And then there are the philosophers, like Martha Nussbaum, who think anger is itself morally bad.

You can be dignified, you can protest, you can say this is outrageous, but you don’t have to do it in a way that is angry or seeks payback.

But the fact is, even with slight improvements in the overall economic situation in recent years, many Americans remain financially stressed and are angry that most of the gains that have been achieved since 2009 have been captured not by them, but by a tiny group at the top.

The financial stress underlying the anger is evident in the latest Report on the Economic Well-Being of U.S. Households in 2015 issued by the Board of Governors of the Federal Reserve System (pdf).

The word cloud above is a good place to start. Each cloud includes the 75 most frequently observed words in the description of individuals’ challenges, with the size of the word reflecting its frequency. Thus, for example, among low-income respondents, “bills” and “money” are the most commonly reported words, while for those in the middle, the most common words are “insurance,” “health,” “money,” and “retirement.” For those earning more than $100,000, the emphasis shifts to worries about “retirement.”

The report offers plenty of additional evidence about the financial stress experienced by many Americans. For example, just under one-third of respondents report that they are either “finding it difficult to get by” (9 percent) or are “just getting by” (22 percent) financially. This represents approximately 76 million adults who are struggling to some degree to get by.


And while individuals are 9 percentage points more likely to say that their financial well-being improved during the prior year than to say that their situation worsened, it is still the case that 46 percent of adults reveal they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money.

That’s 46 percent! To cover a $400 expense!

So, although there’s been some improvement in recent years when looking at aggregate-level results for the U.S. population as a whole, the fact is most of the improvement has occurred at the top (especially for college-educated, white Americans). The rest of the population (black, white, Hispanic, without college degrees) continues to be financially squeezed. And it’s that difference—between improvement for a few and stress for everyone else—that means lots of Americans are angry right now. And, yes, they want payback.

The mainstream economists and politicians who say that people should not be angry, that they should be content with their lot, are wrong. So are the philosophers who argue that anger and the desire for payback are morally suspect.

As I see it, the American working-class is justifiably angry and they clearly want to see some kind of payback. The real questions are, who is standing in their way (and thus whom should they be angry at) and what kinds of fundamental changes in the economic system are necessary to improve their situation (and thus to achieve the appropriate payback)?


*To be fair, Jared Bernstein himself looks behind the aggregate numbers, which leads him to understand “why some people are unsatisfied with the economy and beyond. Growth hasn’t reached all corners by a long shot, and policymakers have too often been at best unresponsive to that reality and at worst, just plain awful.”


TOON_cjones05192016 clinton-foundation-scandal1

Donald Trump won’t reveal his income-tax returns. However, even as he claims he’s worth $10 billion, Fortune estimates his wealth at $4.5 billion and last year’s financial-disclosure report to the SEC reveals his assets more in the neighborhood of $1.5 billion. So, the scandal in this case may be that Trump is worth a great deal but he pays few taxes and may actually be worth much less than he claims.

Hillary Clinton, on the other hand, has made her income-tax returns public (so we know that she and her husband, former President Bill Clinton, made almost $28 million in 2014). But we have little information about the donations to and the activities of the key family enterprise, the Clinton Foundation.

However, that may soon change. Charles Ortel [ht: ra] has apparently set his sights on the “largest unprosecuted charity fraud ever attempted.”

According to Ortel, in his “Third Follow-up Letter to Donors, Charity Regulators, Investigative Journalists and Citizens Worldwide,”

The Clinton Foundation, directed by certain individuals and together with numerous affiliates, has been part of an international charity fraud network whose entire cumulative scale (counting inflows and outflows) approaches and may even exceed $100 billion, measured from 1997 forward.

Yet, state, federal, and foreign government authorities, that should be keenly aware of this massive set of criminal frauds, so far, move at a snail’s pace, perhaps waiting for the Federal Bureau of Investigation to reveal the scope of its work and the nature of any findings.

This presidential election campaign promises to have financial scandals burning on both ends.


More than 7 years into the current recovery and all the talk is about the number of jobs created, the falling unemployment rate, and the prospect that workers’ wages are set to finally increase on a sustained basis. Problem solved!

But what about the 1 in 6 American workers who were let go during the Great Recession, victims of the 40 million layoffs and other involuntary discharges during the official downturn that began in December 2007 and ended in June 2009? Not to mention the fact that nearly 14 million people are still searching for a job or stuck in part-time jobs because they can’t find full-time work.

As the Wall Street Journal reports,

Even for the millions of Americans back at work, the effects of losing a job will linger. . .They will earn less for years to come. They will be less likely to own a home. Many will struggle with psychological problems. Their children will perform worse in school and may earn less in their own jobs. . .

Only about one in four displaced workers gets back to pre-layoff earning levels after five years. . .A pay gap persists, even decades later, between workers who experienced a period of unemployment and similar workers who avoided a layoff. Estimates vary, but by one analysis, people who lost a job during recessions made 15% to 20% less than their nondisplaced peers after 10 to 20 years.

And that’s just the tip of the iceberg. Workers who lost their incomes or received lower incomes if and when they found a new job have found it difficult to save and make purchases (and, in many cases, had to dip into what savings they had), own a home, send their children to college, and pay for healthcare.

Losing a job, of course, has more than just financial consequences for workers and their families.

Unemployment often is an isolating experience. A layoff can strip people of their identity as workers in a chosen field and their workplace-based social network of co-workers and other contacts. Researchers have linked job loss to stress, depression and feelings of distrust, anxiety and shame.

Alarming trends that emerged after the end of the 1990s economic boom may have been amplified by the latest recession. The death rate for middle-aged whites has been rising as a result of suicides, substance abuse and liver diseases, all potentially products of economic distress, according to research by economists Anne Case and Angus Deaton.

Data spanning the recession years show a link between high unemployment and increased abuse of painkillers and hallucinogens. The U.S. suicide rate climbed 24% between 1999 and 2014, a rise that accelerated after 2006, according to the Centers for Disease Control and Prevention. One study of Pennsylvania men who lost long-held jobs during the early 1980s found a spike in mortality following a layoff, with middle-aged men set to lose a year to 18 months off their lifespans.

Researchers have found that the children of people who lose their jobs perform worse on school tests and are more likely to repeat a grade. A father’s layoff is linked with a substantially higher likelihood of anxiety and depression in his children. In one study, the sons of men who were displaced from their jobs earned salaries that were 9% lower compared with otherwise similar children whose fathers had stayed employed.

And the list goes on.

What no one in charge seems to want to talk about is the fact that the economic trauma of the Second Great Depression “has left financial and psychic scars on many Americans, and that those marks are likely to endure for decades”—thus scarring not just millions of individuals and their families, but all of American society.


No doubt, author Neal Gabler [ht: ja] has a pretty nice pot to piss in. But he doesn’t have enough money to pay for a $400 emergency.

That puts him in the same situation as 47 percent of Americans who, according to the most recent Board of Governors of the Federal Reserve System’s “Report on the Economic Well-Being of U.S. Households” (pdf), “say they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money.”

And there’s more:

  • Thirty-one percent of respondents report going without some form of medical care in the 12 months before the survey because they could not afford it.
  • Just under one-quarter of respondents indicate that they or a family member living with them experienced some form of financial hardship in the year prior to the survey.

It’s not that Gabler and almost half of all Americans are poor. But they’re stretched to (and, for many, beyond) the limit and find themselves in a situation of financial fragility.

They wouldn’t be able to cover an emergency expense costing $400! That’s a car repair, a new appliance, or a minor medical procedure. Or a trip to see an ailing relative.

In fact, according to a recent study by Payoff [ht: db], a financial wellness company, 23 percent of Americans—and 36 percent of Millennials—have experienced “a debilitating degree of stress surrounding their finances, resulting in pathological effects on their thoughts, feelings and behaviors that are most commonly associated with post-traumatic stress disorder.”

What the hell is going on?

Mainstream economists aren’t going to be a lot of help since, as Gabler notes, they’ve mostly ignored the situation.

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.

What about psychologists? Here’s the best Brad Klontz, a financial psychologist (whatever that is) can come up with: “If you want to have financial security, it is 100 percent on you.”*

So, we’re back to real people like Gabler:

Life happens, and it happens to cost a lot—sometimes more than we can pay.

Yet even that is not the whole story. Life happens, yes, but shit happens, too—those unexpected expenses that are an unavoidable feature of life. Four-hundred-dollar emergencies are not mere hypotheticals, nor are $2,000 emergencies, nor are … well, pick a number. The fact is that emergencies always arise; they are an intrinsic part of our existence. Financial advisers suggest that we save at least 10 to 15 percent of our income for retirement and against such eventualities. But the primary reason many of us can’t save for a rainy day is that we live in an ongoing storm. Every day, it seems, there is some new, unanticipated expense—a stove that won’t light, a car that won’t start, a dog that limps, a faucet that leaks. And those are only the small things.

And when those financial emergencies arise, many of us don’t have the wherewithal to cover them.

As we know, those at the top are doing just fine. They continue to get their cut of the surplus—and to spend it on luxury cars and boats, apartments and houses, baubles and art. And put the rest in offshore accounts.

But many of the rest of are stretched by a combination of stagnant wages and salaries (going back decades now), escalating expenses (especially for healthcare and education), and barely regulated debt mechanisms (like credit cards). So, we live paycheck to paycheck, with barely any savings for eventualities (much less retirement), trying our best to keep it all together. . .

And then shit happens.


*Kontz is “co-founder of Your Mental Wealth™ and the Financial Psychology Institute, and a Partner of Occidental Asset Management, LLC.”



This semester, we’re once again teaching A Tale of Two Depressions. And, as in previous offerings of the course, we often touch on and return to the theme of the American Dream.

The students in the course get the clear sense that the definition of the American Dream changed during the 1920s (during the transition from small-town rural life to factories in the big cities) and that the First Great Depression turned that dream into a nightmare for most Americans. A new American Dream was, of course, created during the New Deals and the postwar period but began to unravel from the mid-1970s onward (as wages stagnated and the distribution of income and wealth became increasingly unequal).

What about now, six years into the Second Great Depression?

Well, a new report from the Pew Charitable Trusts [pdf, ht: ja] documents the fragile financial situation of many U.S. households outside the top 1 percent—and thus how far American workers are from even imagining, let alone achieving, the American Dream.

Consider the following facts:

Household incomes are dramatically volatile: in 2011, about the same percentage of Americans (a bit more than 20 percent) had to endure a 25-percent decrease in income over a two-year period as a similar increase in income. (One of the consequences is that a large percentage—a third, according to one study—who suffered a loss in income still not recovered financially when their income was measured 10 years later.)

Household spending has declined and stayed down: since the start of the recession in 2007, American households have tightened their purse strings, reducing spending by almost 9 percent. Further, the typical rebound in expenditures following recessionary periods has not occurred since the end of the latest recession. (In contrast, during the 22 years before the start of the downturn, household expenditures grew 16 percent, with 69 percent of that growth [11 percent] occurring between 1990 and 2006.)

Household spending is extremely unequal: in 2013, the top quintile’s annual spending on housing alone ($30,901) outpaced what the middle quintile spent on housing, food, and transportation combined. (In turn, the middle quintile spent nearly as much on housing as those at the bottom spent in total across these categories.)

Most households are in a precarious financial situation: Almost 55 percent of households are savings-limited, meaning they cannot replace even one month of their income through liquid savings (money in cash, checking accounts, and savings accounts). Just under half of households are income-constrained, meaning they perceive that their household spending is greater than or equal to their household income. And 8 percent are debt-challenged, which means they report debt-payment obligations that are 41 percent or more of their gross monthly income. As it turns out, seventy percent of U.S. households face at least one of these three challenges, and more than a third face two or even all three at the same time.

Clearly, the current recovery has represented a reversal of fortunes, after a short but dramatic dip, for a small minority at the top. But, for the American working-class, there has been no recovery. They find themselves as far—many of them, even farther—from the American Dream as they were before the crash of 2007-08.


*The title is a bit of a private joke. Many years ago, before email existed, I told someone by telephone the title of my upcoming talk at American University on the role of mathematics in economics. I planned to begin my presentation with a discussion of Descartes’ dream. As I walked across campus and saw the posters announcing my talk, I realized the wording of my title had been transformed. So, as we walked into the seminar room, one graduate student turned to me and asked: “Professor, what does Dr. Who have to do with the mathematization of economics?”