Monday, July 12, 2010

It's More Than a Feeling

Robert Samuelson appears to believe that the biggest economic problem that our nation faces is that we're being too economically cautious, feeding a negative psychology that extends the recession. I think he's misinterpreting the data.
Not surprisingly, [a Pew survey and evaluation of economic data] confirms that Americans have become more frugal; 71 percent say they're buying less expensive brands, 57 percent say they've trimmed or eliminated vacations. Life plans have changed; 11 percent say they've postponed marriage or children, while 9 percent have moved back with parents.
Frugality is about avoiding unnecessary expenditure - it's volitional. The phenomenon at issue is better described as economic distress. People are delaying purchases and canceling vacations because they can't afford them. Adult children are moving in with their parents because they either can't find jobs or the jobs they find don't pay sufficient salaries to allow them to support independent households. People are postponing marriage and children for the same reason - economic stress. Samuelson writes:
Almost one-fifth of workers 16 to 24 were unemployed at the end of 2009, a near doubling since late 2007. Among those without a high school diploma, joblessness was 50 percent higher than the average....

First, the huge job loss: By most measures (length of unemployment, permanent firings vs. temporary layoffs), joblessness is the worst since World War II. Unemployment among college graduates roughly doubled, to about 5 percent....

Second, pay cuts: These have affected almost a quarter of workers, including nearly a fifth of those with family incomes exceeding $75,000. Some workers also have had to take unpaid leave or part-time work.
So he has data right in front of him indicating that economic choices are driven largely by circumstance. Nonetheless he suggests that "it's all in your head" - stating that as a result of reductions in house values and stock market wealth:
A reverse wealth effect has gripped the upper middle class. Feeling poorer, people have saved more and spent less.
It doesn't occur to him that the people who can't find jobs, who've taken involuntary leave, been reduced to part time hours, have taken pay cuts, who are borrowing money from friends and family just to get by, actually are poorer?

Samuelson should also take note that the one group he singles out as isolated from all of this pessimism is the group that is best protected by the social safety net:
One interesting finding is that the elderly have been relatively sheltered. Adults 65 and older, according to Pew, "are much less likely than younger age groups to have cut back on spending, loaned or borrowed money, had trouble paying for medical bills or housing, or had to increase their credit card debt." For example, 28 percent of Americans under 65 borrowed money from family or friends; only 5 percent of those 65 and older did. Confidence in retirement savings dropped most sharply for younger Americans (including those 50 to 64), not those 65 and over.
Somebody who is paying attention might infer that Social Security and Medicare are doing what they were designed to do - helping their beneficiaries weather tough economic times. Robert "How Fast Can We Cut Social Security and Medicare to Pay for Wars I Favor" Samuelson? He's surprised.

The Pew survey shows that the effects of the recession get smaller as income rises - no surprise there. Unfortunately the highest annual family income they examine is "$75,000+", but for people who self-describe as "upper class" the impact of the recession seems pretty modest with a third reporting an improvement in their financial circumstances and almost a third reporting no change.

My guess is that when you move into the rarified atmosphere of Samuelson's Bethesda neighborhood, for the well-established doctors, lawyers, bankers and media figures living there, the worst is over. Sure, a few people suffered serious setbacks and had to move - and apparently for somebody like Samuelson, "out of sight, out of mind". Life's pretty much back to normal, save perhaps for "losses on paper" resulting from the weakened housing market or reduced retirement savings.

There's nothing wrong with doing well in difficult financial times but, even if you don't have data that proves otherwise, there is a serious logical problem in assuming that everybody else is similarly situated. It seems that Samuelson believes that if he and his neighbors can go back to their prior affluent lifestyles, assuming their spending even slowed down, it's impossible that the "Great Recession" is more than a psychological phenomenon. But the optimism Samuelson sees as its cure is more likely to return not when "the Great Recession releases its stranglehold on the American psyche" but when it releases its stranglehold on the American pocketbook.

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