Marginal Utility

by Tom Bozzo

Brad DeLong is very unhappy with Bob Herbert. Herbert's latest column says:

Bankruptcies and homelessness are on the rise. The job market has been weak for years. The auto industry is in trouble. The cost of food, gasoline and home heating oil are soaring at a time when millions of Americans are managing to make it from one month to another solely by the grace of their credit cards. The country has been in denial for years about the economic reality facing American families. That grim reality has been masked by the flimflammery of official statistics (job growth good, inflation low) and the muscular magic of the American way of debt: mortgages on top of mortgages, pyramiding student loans and an opiatelike addiction to credit cards at rates that used to get people locked up for loan-sharking...

DeLong's verdict:

This is at most one-quarter true.

I say:

Oh no, Good Brad DeLong has been transported beyond our workaday four to twenty-six ordinary dimensions to Earth-W [*], and an Evil Doppelganger has taken his place! (Note to Brad's colleagues: be on the lookout for unexplained facial hair and/or agitation over the need to "fix" the Social Security system.)

Let's take Herbert's claims one at a time:

Bankruptcies and homelessness are on the rise.

Check. Joe Stiglitz (h/t Felix Salmon) describes a "bankruptcy boom" in the new Vanity Fair. Stiglitz notes, "Between March 2006 and March 2007 personal-bankruptcy rates soared more than 60 percent." This is despite the 2005 bankruptcy "reform" legislation. Foreclosure rates likewise are soaring. (I suspect that this is what may be meant by "homelessness;" I won't argue with Brad that the NYT's copy-editing has gone to the dogs.) Actual homelessness statistics are hard to come by [PDF], but they appear to show increases in homelessness over the last 20 years or so. It would stand to reason that inability to pay one's mortgage is at least associated with an increased hazard of loss of housing of all sorts.

The job market has been weak for years.

Check. See again Stiglitz:

A young male in his 30s today has an income, adjusted for inflation, that is 12 percent less than what his father was making 30 years ago.

The labor market's generally lagging growth is a longstanding problem, as our Angry Bear friends have documented repeatedly.

The auto industry is in trouble.

Check. It's perhaps in less trouble per headline statistics than it might be, but the part of the industry associated with domestic union jobs certainly isn't helped by its reliance on manufacturing gas-guzzling trucks. Plus, it's only a few percent of the economy, even if it's a very visible few percent. The uncomfortable truth here is that the "macroeconomy" is an analytical fiction. This economy is composed of firms and individuals that may be grouped into somewhat less-fictional sectors, some of which are in or seemingly headed towards deep recessions (housing, housing-related finance), others that appear to be there (autos), and others that are hanging in or better. For now.

The cost of food, gasoline and home heating oil are soaring at a time when millions of Americans are managing to make it from one month to another solely by the grace of their credit cards.

Check. In non-elite world, putting a grand or two of extra expenses on plastic is a step towards the bankruptcy and/or foreclosure nightmares.

The country has been in denial for years about the economic reality facing American families.

This states a conclusion that may not require a response. It does, however, seem to be shared by a sizeable chunk of the non-elite country which has been expressing deep-rooted pessimism about the future of the economy.

That grim reality has been masked by the flimflammery of official statistics (job growth good, inflation low) and the muscular magic of the American way of debt: mortgages on top of mortgages, pyramiding student loans and an opiatelike addiction to credit cards at rates that used to get people locked up for loan-sharking.

Perhaps the reading that "flimflammery" implies that the official statistics are deliberately dishonest rankles. I think what Herbert is getting at is the spin on the official statistics, where flimflammery is plentiful. It's not like Herbert is alone here.

From the Center for American Progress:

In the second quarter of 2007, household debt amounted to 131.3% of disposable income, which is only slightly below the record high of 131.4% recorded in the fourth quarter of 2006. In the second quarter of 2007, families spent 14.3% of their disposable income to service their debt, up from 13.0% in the first quarter of 2001.

And Stiglitz:

The administration crows that the economy grew—by some 16 percent—during its first six years, but the growth helped mainly people who had no need of any help, and failed to help those who need plenty. A rising tide lifted all yachts. Inequality is now widening in America, and at a rate not seen in three-quarters of a century.

And the Federal Trade Commission:

A cash advance loan secured by a personal check - such as a payday loan - is very expensive credit. Let's say you write a personal check for $115 to borrow $100 for up to 14 days. The check casher or payday lender agrees to hold the check until your next payday. At that time, depending on the particular plan, the lender deposits the check, you redeem the check by paying the $115 in cash, or you roll-over the check by paying a fee to extend the loan for another two weeks. In this example, the cost of the initial loan is a $15 finance charge and 391 percent APR. If you roll-over the loan three times, the finance charge would climb to $60 to borrow $100.

And Elizabeth Warren (from 2005!):

Problems not even on the horizon when this bill was written are now front and center.

• Companies in Chapter 11 that cancel pension plans and health benefits, leaving thousands of families economically devastated
• Companies that continue to pay executives and insiders tens of millions of dollars, while they demand concessions from their creditors.
• Military families targeted for payday loans at 400% interest, insurance scams, and other forms of financial chicanery.
• Scandals have rocked the so-called non-profit credit counseling industry, exposing how tens of thousands of consumers struggling desperately to pay their bills and not file for bankruptcy were cheated.
• Sub-prime mortgage companies, financed by some of the best names in American banking, have unlawfully taken millions of dollars from homeowners, then fled to the bankruptcy courts to protect their insiders and bank lenders.

As I see it, Herbert has all of these things substantially right. Moreover, Herbert has been working a substantially thankless opinion beat, covering the plight of the non-elites. Brad owes him an apology.


[*] Earth-W is a hypothetical planet with mass, geography, concentration of atmospheric gases, flora, and fauna much like our own. However, on Earth-W, George W. Bush is a brilliant military tactician, World Scrabble Champion, and moral compass to the world. Also, at the Sermon on the Mount, the hypothetical Jesus-W said:

Cursèd are the uninsured, for their poor spending decisions unfairly burden the income taxpayer. Especially cursèd are middle-class uninsured children, for they should have chosen their parents better.

Where Max Sawicky and Greg Mankiw work on Earth-W is left as an exercise for the reader.

Labels: Brad DeLong, Economics, NYT