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Who Will Be Helped in Federal Aid to the Automakers?

October 31st, 2008 . by economistmom

I’m the Ph.D. economist, but I learned something about economic policy this week from my “laid off” friend from Chrysler.  He’s not really “laid off”–not yet, at least.  What he is right now is an employee being “bought out.”  The distinction, in theory and on paper, is supposed to be this:  a “laid off” worker is one who has been involuntarily fired from his job; a “bought out” worker is one who is voluntarily quitting his job.  In practice, particularly in the case of the GM-Chrysler merger, there’s very little difference: the bottom line is that my friend will almost surely lose his Chrysler job within a couple of months, either way.  (This story on the Wall Street Journal’s economics blog says that “30,000 to 40,000 of Chrysler’s 67,000 employees would lose their jobs” if the GM-Chrysler merger goes through.)  And his losing his job will be far from “voluntary.”

Seeing so little practical difference between losing one’s job by being bought out versus laid off, I did not realize until yesterday that if my friend chooses to accept the buyout Chrysler has offered him, he would not be eligible for unemployment benefits.  That’s supposed to be OK, because he would be walking away with $50,000 (gross of tax, by the way), a $25,000 car voucher, and six months of health coverage.  But let’s face it:  that may be better than being pushed out with nothing, but it really amounts to hardly anything relative to what he’s “walking away” from.  Doing the math it’s easy to figure out he’ll be far from “held harmless.”  Like the vast majority of his colleagues at the truck plant, my friend has worked in the auto industry for most of his career and lived in the Detroit area for most (all) of his life.  He’s not just losing his job at Chrysler; he’s being displaced from his industry and his entire line of work.  For someone like him, being “bought out” doesn’t feel like a golden opportunity to take that better job offer that’s just waiting for him; it feels like being handed a tiny suitcase (the buyout package) wearing just the clothes on his back and being booted out the factory door.  That suitcase seems pathetically small when one has a long, uncertain path to travel.

(Here’s a couple years old AP story on the tough decisions autoworkers face when being offered a buyout package.  The only difference now: the buyout packages are less generous, and the job prospects for employees who choose to take the buyouts fewer.)

And here I sit inside the Beltway, working on federal fiscal policy issues, and suddenly my world collides with my friend’s as federal policymakers contemplate the terms of a possible $10 billion loan to GM and Chrysler for their possible merger–a loan and a merger which to me no longer seem just “possible” but more and more inevitable.  (We learned this morning that discussions about the federal loan are now on hold until after the election.)  And I keep hearing that if the federal government does decide to assist in the GM-Chrysler merger, they would want it to be under the condition that the auto companies “spare as many jobs as possible.”  But I don’t know if it’s possible, or desirable, for federal aid to reduce the number of jobs lost, if the goal is to “save” the Detroit auto industry.  The auto industry needs to pare down, consolidate, get more efficient in how they produce and what they’re producing, in order to ultimately survive.  They shouldn’t be encouraged to artificially keep up the number of workers who would just be producing more and more vehicles that aren’t being bought.

I’ve said before that I see a lot of promise in some of the ideas Senator Obama has to help Detroit “transform” into a vibrant, cutting-edge, center of manufacturing for energy-efficient vehicles and technologies.  I hope they will be pursued by the next Administration and Congress.  But the transformation will take time and involve a painful purging of sorts on the way there.  And that purging involves a massive loss of jobs from the Detroit area, and perhaps a substantial (at least temporary) loss of population to the extent that the displaced workers are fortunate enough to be able to move where jobs are more plentiful.

So if the federal government does decide to provide aid to the automakers, the first installment likely to assist the GM-Chrysler merger, I think all of us (since we’re paying for it) ought to be asking:  who exactly will be helped by this intervention?  Are we trying to help the owners, investors, and top executives of the auto industry, or are we trying to help the much broader class of people who work for the industry?  And if there’s a desire to help the workers, how best to do that?  Working out the “terms” of the federal agreement to minimize job losses is probably fruitless–those jobs will be gone no matter what.  Shouldn’t the federal government instead be doing more to help the displaced autoworkers themselves, who when you get right down to it are losing their jobs and really their entire livelihood involuntarily?

I’m no expert on the unemployment compensation system, but it seems one place to start is to not be so cheap about whether “bought out” Chrysler autoworkers, the real victims of the federally-assisted GM-Chrysler merger, should be entitled to unemployment benefits.  The federal government is supposed to be getting involved in this in the name of “economic stimulus” or “emergency” spending.  That “fiscal stimulus” might lead to further job losses is certainly sad and ironic, yes.  So if federal intervention can’t really save the jobs, can we at least make sure we adequately help those who are losing them?

The Economist Endorses Obama

October 30th, 2008 . by economistmom

Today The Economist magazine endorsed Barack Obama for president.  From their “leader” in their print edition:

IT IS impossible to forecast how important any presidency will be. Back in 2000 America stood tall as the undisputed superpower, at peace with a generally admiring world. The main argument was over what to do with the federal government’s huge budget surplus. Nobody foresaw the seismic events of the next eight years. When Americans go to the polls next week the mood will be very different. The United States is unhappy, divided and foundering both at home and abroad. Its self-belief and values are under attack.

For all the shortcomings of the campaign, both John McCain and Barack Obama offer hope of national redemption. Now America has to choose between them. The Economist does not have a vote, but if it did, it would cast it for Mr Obama. We do so wholeheartedly: the Democratic candidate has clearly shown that he offers the better chance of restoring America’s self-confidence. But we acknowledge it is a gamble. Given Mr Obama’s inexperience, the lack of clarity about some of his beliefs and the prospect of a stridently Democratic Congress, voting for him is a risk. Yet it is one America should take, given the steep road ahead.

Why not McCain?  Some of their reasoning:

[T]he Candidate McCain of the past six months has too often seemed the victim of political sorcery, his good features magically inverted, his bad ones exaggerated. The fiscal conservative who once tackled Mr Bush over his unaffordable tax cuts now proposes not just to keep the cuts, but to deepen them. The man who denounced the religious right as “agents of intolerance” now embraces theocratic culture warriors. The campaigner against ethanol subsidies (who had a better record on global warming than most Democrats) came out in favour of a petrol-tax holiday. It has not all disappeared: his support for free trade has never wavered. Yet rather than heading towards the centre after he won the nomination, Mr McCain moved to the right.

Meanwhile his temperament, always perhaps his weak spot, has been found wanting… on the great issue of the campaign, the financial crisis, he has seemed all at sea, emitting panic and indecision. Mr McCain has never been particularly interested in economics, but, unlike Mr Obama, he has made little effort to catch up or to bring in good advisers (Doug Holtz-Eakin being the impressive exception).

The choice of Sarah Palin epitomised the sloppiness…

Ironically, given that he first won over so many independents by speaking his mind, the case for Mr McCain comes down to a piece of artifice: vote for him on the assumption that he does not believe a word of what he has been saying. Once he reaches the White House, runs this argument, he will put Mrs Palin back in her box, throw away his unrealistic tax plan and begin negotiations with the Democratic Congress. That is plausible; but it is a long way from the convincing case that Mr McCain could have made. Had he become president in 2000 instead of Mr Bush, the world might have had fewer problems. But this time it is beset by problems, and Mr McCain has not proved that he knows how to deal with them.

And why Obama, although they have their worries about him?:

Mr Obama’s star quality will be useful to him as president. But that alone is not enough to earn him the job. Charisma will not fix Medicare nor deal with Iran. Can he govern well?…

There is no getting around the fact that Mr Obama’s résumé is thin for the world’s biggest job. But the exceptionally assured way in which he has run his campaign is a considerable comfort. It is not just that he has more than held his own against Mr McCain in the debates. A man who started with no money and few supporters has out-thought, out-organised and out-fought the two mightiest machines in American politics—the Clintons and the conservative right.

Political fire, far from rattling Mr Obama, seems to bring out the best in him: the furore about his (admittedly ghastly) preacher prompted one of the most thoughtful speeches of the campaign. On the financial crisis his performance has been as assured as Mr McCain’s has been febrile. He seems a quick learner and has built up an impressive team of advisers, drawing in seasoned hands like Paul Volcker, Robert Rubin and Larry Summers. Of course, Mr Obama will make mistakes; but this is a man who listens, learns and manages well…

Our main doubts about Mr Obama have to do with the damage a muddle-headed Democratic Congress might try to do to the economy…Worryingly, he has a poor record of defying his party’s baronies, especially the unions… His advisers insist that Mr Obama is too clever to usher in a new age of over-regulation, that he will stop such nonsense getting out of Congress, that he is a political chameleon who would move to the centre in Washington. But the risk remains that on economic matters the centre that Mr Obama moves to would be that of his party, not that of the country as a whole…

[T]his cannot be another election where the choice is based merely on fear. In terms of painting a brighter future for America and the world, Mr Obama has produced the more compelling and detailed portrait. He has campaigned with more style, intelligence and discipline than his opponent. Whether he can fulfil his immense potential remains to be seen. But Mr Obama deserves the presidency.

Oh, and “The EconomistMom” endorses Obama, too–speaking only for herself, of course.  But you readers have surely figured that out by now.

You Know It’s Bad When Even Feldstein Says We Need More Government Spending

October 30th, 2008 . by economistmom

In today’s GDP report we learned that the economy contracted in the 3rd quarter–its weakest performance in seven years (CNN-Money story here).  It’s another sign–as if we hadn’t had enough of these already–that the economy is in a recession.

How bad is it?

So bad that even supply-sider Martin Feldstein is acknowledging (in today’s Washington Post) what the GDP report shows: were it not for the strength of federal government spending –which increased by 13.8 percent (annualized rate) in the third quarter–the economy would be in much worse shape.  So Marty’s now calling for more deficit-financed, demand-side government spending–and get this, on infrastructure projects:

The only way to prevent a deepening recession will be a temporary program of increased government spending. Previous attempts to use government spending to stimulate an economic recovery, particularly spending on infrastructure, have not been successful because of long legislative lags that delayed the spending until a recovery was well underway. But while past recessions lasted an average of only about 12 months, this downturn is likely to last much longer, providing the scope for successful countercyclical spending…

The increased government spending should include not only money for infrastructure such as bridges and roads but also for a wide range of equipment. Rebuilding some of the military capacity that has been depleted by the wars in Iraq and Afghanistan could be done relatively quickly and should be part of the overall package…

I wonder how quickly these infrastructure projects could create new jobs, which is what we really need to be doing triage on right now.  Might they have a job for my laid-off friend from Chrysler?…

And how much new government spending?  Marty suggests probably a lot more than last time:

A fiscal package of $100 billion is not likely to be large enough to revive the economy. The fall in household wealth resulting from the collapse of the stock market and the decline of home prices may cut aggregate spending by $300 billion a year or more.

…and no more tax rebates, even though Marty had recommended them in the last round of stimulus, because Marty understands that if we were disappointed by the stimulative effect on consumer spending the last time, we’re bound to be only more disappointed this time:

Another round of one-time tax rebates won’t do the job. The rebates that Congress enacted this spring failed to stimulate consumer spending: More than 80 percent of tax rebate dollars were saved or used to pay down existing debt.

(Not that any of us have a problem with households using at least some of their extra income to pay down debt/save more, for their own longer-run sustainability.)

So, Marty Feldstein appears to have come a long way from his old supply-sider claims that permanent extension of the Bush tax cuts would be the most effective “stimulus” for the economy.  His current recommendation is clearly for good ol’ demand-side, Keynesian government spending.  Yet he can’t resist getting in a last dig at Obama and any tax increases–including those that might be used to even later offset the cost of today’s stimulus initiatives (emphasis added):

The president-elect should focus on developing a mechanism for identifying and funding spending initiatives that can occur quickly and that would otherwise not be done. While it would be good if some of the increased spending also contributed to long-term productivity, the key is to stimulate demand. Any plan to finance this spending by raising taxes, even if postponed, as Sen. Barack Obama has suggested, would hurt the recovery by causing affected taxpayers to cut their spending now.

Wait a minute now, Marty:  let’s not abandon all of your neo-classical growth principles just because we’re a little freaked out right now about the current state of the economy.  Over the longer run, I think you’d agree that we have to start looking at ways to increase, not decrease, national saving, because as you hint above in mentioning ”long-term productivity”, it would be good to not just “flail about” throwing money at the current crisis, but act swiftly yet thoughtfully–with a wise eye to the future.  What matters for the health of our economy is not just what the government decides to spend money on today, but on how the government expects to be able to pay for such spending going forward.  Eventually, we’ll still have to get back to ”living within our means.”

Forrest and Me

October 29th, 2008 . by economistmom

I’m still not a movie star like my boss, Bob Bixby, and the Peterson Foundation’s Dave Walker, but today I just did my first-ever documentary, interviewed by Forrest Sawyer (no less!) for a PBS Frontline documentary to air in February.  (Thanks to producers Thomas Beckner and David Schisgall for snapping some photos for me after the two-hour interview, which I thoroughly enjoyed!)  The Frontline show will focus on the economy, the fiscal legacies (good and bad) left by the Clinton and Bush (43) Administrations, and the economic policy challenges facing the next President.

How great is that?!!  :)

Living Within Our Means: GM & Chrysler Edition

October 28th, 2008 . by economistmom

If you haven’t heard, the Treasury Department is currently considering a plan to provide $5 billion to $10 billion in aid, ASAP, to GM to help finance its possible merger with Chrysler.  And yesterday, my high school sweetheart was offered $50,000, a car, and 6 months health coverage, to leave Chrysler and his management position at the Detroit-area (Warren) truck assembly plant.  (That would be some of his colleagues pictured above.)

Liz Wolgemuth on the U.S. News and World Report blog (”The Inside Job”), insightfully asks:  doesn’t this mean we’re using “tax dollars to fund layoffs?”

Well, being someone who’s constantly got the “fiscal responsibility” angle on things, I’d edit that slightly to say yes, we’re using future taxpayer dollars to fund layoffs–because we’re talking about another deficit-financed rescue, after all.

There’s something quite ironic and sad about “rescuing” an industry by providing it the cash flow that’s needed to shrink it–for the federal government to effectively say they’ll help these companies eliminate jobs, in the name of “fiscal stimulus” and for the cause of keeping the economy “alive.”

This is an auto industry being forced to “live within its means”–with a little help from the government–by consolidating, downsizing, reprioritizing.  Because the industry for too long catered to our entire nation’s living-beyond-our-means mentality, the “transformation” Detroit needs to survive in the longer run (and grow again) will come too late for many thousands of workers who are now losing their jobs.

A Wall Street Journal article by Jeffrey McCracken and John Stoll describes the ironically devastating “human toll” of this ”rescue” and how the auto companies got so cash constrained–leaving the federal government as the only lender willing to fund a merger and the associated layoffs:

GM and Chrysler estimate that a combined entity would need $10 billion in new equity to lay off workers, close plants, integrate the two companies and provide liquidity, according to several people involved in the talks or briefed on them.

“Without external intervention, from consolidation or government assistance, we expect GM to reach its minimum cash position in under 12 months,” Deutsche Bank auto analyst Rod Lache wrote last week. In an interview, Mr. Lache added that Chrysler is also running dangerously low on funds. “We believe Chrysler is in the same position. It’s either August 2009 or December 2009 they run out. Both have a limited runway.”…

The human toll of such a move could be high. The companies would slash duplicated functions from engineering to marketing. One internal estimate predicts at least 40,000 jobs could be cut from the roughly 166,000 people employed by the two companies in the U.S., Canada and Mexico.

GM’s cash cushion has been eroding for some time. Each month, the company spends $1 billion more than it brings in. At that burn rate, GM could effectively run short of cash next summer, without even taking into account further sales declines.

The 100-year-old company has about $20 billion on hand today, but needs at least $11 billion to $14 billion of working capital at all times so it can keep paying its bills, GM has said. The company has been trying for months, without success, to raise at least $5 billion by selling assets, such as its Hummer brand, and by pledging unencumbered assets…

But lenders are reluctant to invest. GM debt, once considered the highest investment grade, has tumbled to low-rated, junk status. Many lenders approached to invest in a combined GM-Chrysler have also balked…

When Cerberus purchased Chrysler in the spring of 2007, the capital markets were at full throttle. The firm basically bought Chrysler for free, in exchange for taking on its considerable debt. Cerberus expected that once Chrysler was private, the fund could build a smaller, stronger company with the ready help of debt investors.

It hasn’t turned out that way. In two years, Chrysler has fallen from third to fifth in U.S. auto sales. J.P. Morgan estimates it has $11 billion on hand. It uses $3 billion to $5 billion of that as working capital to meet payroll, pay vendors and pay other bills. Its monthly cash burn is estimated at $300 million to $400 million. That figure may grow as vehicle sales slow, suggesting that it could run out of money by late 2009. To conserve cash, Chrysler has halted certain new-product plans, a sign that it sees a deal with GM as the only path out.

The auto makers’ huge obligations, meanwhile, are only growing as revenues and profits shrink. For decades, Detroit’s Big Three have funded generous programs to take care of former workers and surviving spouses…

Obligations growing and revenues shrinking, needs rising and means falling…In this way the auto industry’s woes are just another manifestation of the overextension of the entire U.S. economy.

And thus it is “depressing” (pun inadvertant) to think that if the federal government goes through with this “rescue,” that it will immediately result in more lost jobs, not saved jobs (contrary to what we think short-term “fiscal stimulus” ought to do), and that at the same time being deficit financed, it will also shrink national saving (contrary as well to what we think we should do to encourage longer-term economic growth).

And how will we stimulate the economy in the short term this time around?  More “depressing” news today: consumer sentiment is at an “all-time” (in 41-year history) low.  We’re no longer talking about encouraging folks to shop; that sounds almost ridiculous.  We’re now talking about keeping folks from drowning by helping them hold onto their jobs.  How to keep up that short-term economic activity is a lot tougher to figure out, now juxtaposed with the longer-term economic forces that seem to be telling us–all over the place in our economy–to downsize rather than up-size.

Patrick Creadon (DirectorDad) Responds to Dean Baker’s Critique of “I.O.U.S.A.”

October 27th, 2008 . by economistmom

Here is a post by DirectorDad in response to a Dean Baker critique of the movie “I.O.U.S.A.” that recently appeared on Huffington Post:

After reading Dean Baker’s critique of our documentary “I.O.U.S.A.”, I am left pondering one important question:  How could Mr. Baker have possibly come to the conclusion that our film is “one-sided”?
 
When we started making the film in December of 2006 we set out to find people who are highly knowledgeable and respected in their fields and also who have had a “front-row seat” on matters regarding our federal government and national economy.  The true hero — or “star” — of our film is David Walker, the former Comptroller General of the United States.  Mr. Walker is a registered independent and has been called “the most respected man in Washington”.  As Comptroller General Walker arguably knew more about the financial health of our federal government than any other person in the country. 
 
But we also wanted to speak to people from the business community, the Treasury Department, Congress, and the Federal Reserve.  We were very fortunate to get the following people to participate:  Warren Buffett and Peter G. Peterson are both interviewed in the film (a Democrat and a Republican, respectively), as are former Treasury Secretaries Robert Rubin and Paul O’Neill (a Democrat and a Republican), the two heads of the Senate Budget Committee Chairman Kent Conrad and Ranking Member Judd Gregg (one from each party, both of whom have called the film “excellent” and have commented that if more people saw this film it would make fixing our nation’s fiscal problems a lot easier), and former Federal Reserve Chairmen Paul Volcker and Alan Greenspan (a Democrat and a Republican).  Congressman Ron Paul also appears offering his unique viewpoints.  Though these individuals often disagree on different issues, every single one of them agrees that our country — both our individual citizens and our federal government — is living a lifestyle we cannot afford and that doing so will create serious problems for future generations.  If we choose to continue to live our lives this way we are going see a financial crisis in the not-too-distant future that will make today’s economic crisis seem small by comparison.
 
We had three main goals when we started making “I.O.U.S.A.” almost two years ago:  we wanted it to be accurate, educational and most importantly non-partisan.  When our film opened nationally in August of 2008 it was praised by dozens of film critics for being balanced.  The New York Times called our film “resolutely non-partisan.” 
 
In my opinion, the only thing that’s been one-sided about “I.O.U.S.A.” is Dean Baker’s analysis of it.
 
Patrick Creadon is the director and co-screenwriter of “I.O.U.S.A.”  The film has been called “the most important film of 2008″ by more than a dozen critics from across the country and was invited to be screened at both the Democratic and Republican national conventions.  For more information about where you can see “I.O.U.S.A.” please visit the film’s website at www.iousathemovie.com and click on “Events” to find a screening in your community.  You can also set up a free screening of “I.O.U.S.A.” at your school or community group by writing to press@pgpf.org.

GOP Counting on Democratic Fiscal Irresponsibility for Their Comeback

October 26th, 2008 . by economistmom

In a front-of-Opinion-page column in today’s Washington Post, David Frum (author of the book “Comeback: Conservatism That Can Win Again”) first bemoans what he concedes is McCain’s demise (that’s today’s Tom Toles cartoon above), brought about by the McCain campaign’s own bad judgment:

There are many ways to lose a presidential election. John McCain is losing in a way that threatens to take the entire Republican Party down with him.

A year ago, the Arizona senator’s team made a crucial strategic decision. McCain would run on his (impressive) personal biography. On policy, he’d hew mostly to conservative orthodoxy, with a few deviations — most notably, his support for legalization for illegal immigrants. But this strategy wasn’t yielding results in the general election. So in August, McCain tried a bold new gambit: He would reach out to independents and women with an exciting and unexpected vice presidential choice.

That didn’t work out so well either. Gov. Sarah Palin connected with neither independents nor women. She did, however, ignite the Republican base, which has come to support her passionately. And so, in this last month, the McCain campaign has Palinized itself to make the most of its last asset. To fire up the Republican base, the McCain team has hit at Barack Obama as an alien, a radical and a socialist…

Then Frum tries to stop sulking and look ahead to where he thinks a Democratically-controlled White House and Congress will lead us, and he comes up with a ray of hope and a recommended messaging strategy for his Republican Party:

…[W]ith the financial meltdown, the federal government is now acquiring a huge ownership stake in the nation’s financial system. It will be immensely tempting to officeholders in Washington to use that stake for political ends — to reward friends and punish enemies. One-party government, of course, will intensify those temptations. And as the federal government succumbs, officeholders will become more and more comfortable holding that stake. The current urgency to liquidate the government’s position will subside. The United States needs Republicans and conservatives to monitor the way Democrats wield this extraordinary and dangerous new power — and to pressure them to surrender it as rapidly as feasible…

…We need a message change that frankly acknowledges that the Democrats are probably going to win the White House — and that warns of the dangers of one-party, left-wing government. There’s a lot of poll evidence that voters prefer divided government. By some estimates, perhaps as many as 8 percent of voters consciously cast strategic votes in favor of division. These are the voters we need to be talking to now.

I’m not suggesting that the RNC throw up its hands. But down-ballot Republicans need to give up on the happy talk about how McCain has Obama just where he wants him, take off their game faces and say something like this:

“We’re almost certainly looking at a Democratic White House. I can work with a Democratic president to help this state. But we need balance in Washington.

“The government now owns a big stake in the nation’s banking system. Trillions of dollars are now under direct government control. It’s not wise to put that money under one-party control. It’s just too tempting. You need a second set of eyes on that cash. You need oversight and accountability. Otherwise, you’re going to wake up two years from now and find out that a Democratic president, a Democratic Senate and a Democratic House have been funneling a ton of that money to their friends and allies. It’ll be a big scandal — but it will be too late. The money will be gone. Divided government is the best precaution you can have.”

It’s the only argument we have left. And, as the old Washington saying goes, it has the additional merit of being true.

There is indeed a lot of historical evidence suggesting that one-party government tends toward fiscal irresponsibility–our most recent evidence of course being most of the past eight years during the George W. Bush Administration.  As a Democrat, I’m hoping an Obama Administration would buck history on this–that even in working with a Democratically-controlled Congress, President Obama would show leadership and bipartisanship in developing policies that are fiscally responsible.  If the Democrats do as well in this election as the pundits are now predicting, it’ll be up to the Democrats to see that the Obama Administration does business in that new, “post-partisan” way, in order to blunt what would be a successful GOP strategy the next time around.

Living Within Our Means: Suze Orman Edition

October 25th, 2008 . by economistmom

A recent comment by one “Susie Orman” reminded me that I wanted to mention the real Suze Orman’s “living within our means” advice she’s been giving on TV these days.  (The comment was deleted after I realized it was just an advertising scam for some Susie Orman “be debt free” website.)  Of course, the real Suze’s always given such advice; it’s just that since the financial crisis and credit crunch, there’s been an especially “I told you so” tone to her advice.

From a CNN/Oprah.com interview with Suze on “how to recession-proof your family”:

“A lot of you have built your personal financial foundation on deceit and lies. You bought a home that you couldn’t afford … You spent money like it was going out of style and it wasn’t your money to spend, because why? They were borrowing it,” Suze says. “When you borrow money, you leverage yourself. The United States of America leveraged itself so high that when it started to come down, the whole thing now has fallen down.”…

In terms of investments, Suze says people close to retirement may need to reconsider. “Many people now have seen their 401(k) either cut in half [or] down 40 percent,” Suze says. “[People] may have to work a lot longer than they planned, may not have enough money to generate income to send their kids to school.”…

With all of these economic puzzle pieces in play, Suze says she wouldn’t be surprised if we switched to a cash economy — which means buying only what you can afford now.

“Banks aren’t going to want to give you money where they’re afraid that you might not pay them back,” Suze says. “I personally think that’s a great thing.”

So what can you do to protect yourself? “People, stop living the financial lies that you have been living,” Suze says. “If you don’t have the money to pay for something, can you just not buy it? Can you wait? Can we start looking at keeping our cars for 10 years rather than getting a new one every three?”

And even better than listening to the real Suze’s advice is watching Saturday Night Live’s (SNL’s) fake version (done impeccably by Kristin Wiig earlier this month), which I can’t seem to find a clip of on either SNL’s site or YouTube… I mean the one from last week’s (October 18th) show.  Did any of you see it?  Do any of you know where online we can find the video clip?

Living Within Our Means: Economist Magazine Edition

October 24th, 2008 . by economistmom

Thanks to reader Brooks for pointing out this Economist magazine column to me.  (I’m on the road and my (husband’s) Economist magazine is sitting at home somewhere.)  Some excerpts (emphasis added):

…the financial bust is almost certain to crush the government’s tax take. It has already started: the budget deficit for fiscal 2008 (which ended on September 30th) was $455 billion, or 3.2% of GDP, much more than the $389 billion projected in July. Much of the shortfall appears due to lower taxes on profits and the wealthy…

Then there’s the prospect of additional fiscal stimulus, which won support on October 20th from Ben Bernanke, the Federal Reserve chairman. The Democrats in Congress, who already have a $61 billion package in the works, are now suggesting $150 billion. Barack Obama has proposed up to $190 billion over two years, and would merge that proposal with Congress’s one should he become president…

The $700 billion Troubled Asset Relief Programme (TARP) will also add to the deficit, though less than might appear…Since [Treasury] plans to invest $250 billion in bank equity, the addition to the deficit this year will be at least that much.

This all threatens to add up to a deficit of at least $1 trillion, or nearly 7% of GDP, this fiscal year, a figure that is likely to force the next president to postpone some of his more ambitious proposals. Still, even fiscal hawks concede a higher short-term deficit is a tolerable price for avoiding a potential depression—though a 7% deficit is probably testing their tolerance. And at present the American government can borrow at absurdly low interest rates…

Yet it cannot take its lenders for granted. This year, the Treasury may have to raise more than $1.4 trillion in debt, according to Morgan Stanley, to finance not just the deficit but the TARP and the Federal Deposit Insurance Corporation…

America has long borrowed without fear of a backlash, thanks to lenders’ lack of attractive alternatives. And it may for a while yet: much of the private sector either can’t borrow or doesn’t want to, and other countries also face yawning deficits, making them far from attractive. The national debt, at 38% of GDP, is well below its 1990s peak of 49%. But much of the deficit is still financed by foreigners, and global capital flows are now being rocked by the financial crisis. The next president will no doubt find deficits at 7% or more of GDP sobering enough. Without a plan for cutting that high figure back once the financial crisis and the recession pass—and with the inexorable climb in Medicare and Social Security costs as the baby-boomers retire now under way—investors may need to be compensated much more than they are now to keep on buying America’s debt.

Compare with the issue brief the Concord Coalition released on Wed. (10/22)–and my blog post on it–and you should notice a lot of overlap.

Living Within Our Means: Sarah Palin Edition

October 23rd, 2008 . by economistmom

(So how much would you be willing to pay for these accessories?  Apparently these three items alone cost nearly $4000 at Neiman Marcus.)

I know, I know… why am I so late with the story on this, you know, $150,000 thing?  I’ve been on the road all day today and will have to backdate this a bit so it still counts as “today”… it’s still today here in Chicago, after all…

Anyway, old (Wednesday) news, but fits into my “living within our means” theme (my home edition here).  Sarah Palin’s living within her new-found, VP-candidate, RNC-sponsored means:

More than $130,000 of the charges used to outfit Ms. Palin and her family were initially footed by Jeff Larson, a prominent Republican consultant in St. Paul whose firm has been tied to the onslaught of negative robocalls about Mr. Obama from Mr. McCain’s campaign. Mr. Larson was also the chief executive of the local host committee for the Republican National Convention, in Minneapolis-St. Paul.

Federal Election Commission records showed Mr. Larson was reimbursed by the Republican National Committee for charges at Saks Fifth Avenue, Neiman Marcus, Macy’s, Barneys New York and Atelier New York, a men’s clothing store…

Hmmm…  What does that suggest about how “mavericky” Palin would be with the federal budget?

The Washington Post’s Reliable Source (Roxanne Roberts and Amy Argetsinger) knows how most of us working moms do our best to be “mavericky fashion plates.”  (My personal wardrobe secrets:  Filene’s Basement, Marshalls, and ebay… yes!)  I bet a lot of working moms are like me:  I never pay retail at the mall for my own clothes–only for my kids’ clothes.

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