November 9, 2012
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What Went Wrong (Or Right)
I just finished an article that said that Paul Ryan wanted to make part of the focus on this last election a “war on poverty”, but was shouted down.
His war would have included DEEP cuts in programs that keep the poor from starving…which sounds a lot more like a War On The Poor…than on Poverty. He was devout in his belief that if we stopped feeding them, the Poor would find their own way. (Of course, he never got over his teen aged crush on Ayn Rand…another story completely.)
Funny thing…with so many people having issues paying their bills, and working as hard as they can to keep heart and soul together, demonizing the poor starts to look like a bad idea. In the last four years, a lot of us have learned just how little you need to do wrong (including nothing) to end up in poverty. Taxes suck…no debating that…but the insane inflation of the last two decades is hurting us more than taxes…a tiny fact many ignore. I was not a huge fan of Nixon, but he was literally the last President who took inflation seriously, and tried to cope with it in a substantive way. Since he was in office, there has been an over reliance on stupid tricks, band-aids, and pure bunkum. When they sold the US on a “service economy”, people were persuaded that we didn’t need to make stuff…or even grow our own food. We were all going to get better paying jobs providing “services”. I recall asking back then how that would work if the economy tanked.
People STARED at me in horror.
Openly GAPED. What sort of nay saying commie bitch was I? How DARE I be negative? Didn’t I believe in AMERICA?
Actually…I did, and I do.But I also believe in gravity…what goes up, must come down.
During the Reagan years, they used the word “momentum” a lot. You pushed something to the top of the hill, and momentum would carry it down for you. Neat…until you had to push it back up again. I look back at the economy, and what they did, and it’s a bit chilling. People got rich “on paper”. The more money they “made”, the greater risk they were willing to take, to acquire more. It was all about business, golden parachutes, and “getting YOURS”. They talked glowingly about “family values”…but encouraged an entire generation of parents to abandon their kids to get more money. I’m not sure when it became subversive to disagree with the spin doctors…but it happened. The simple act of doing the math, and saying “But that can’t possibly work.” was an act of infidelity. Since Reagan, I counted three significant “housing booms”…but nothing like the last.
I know a few people who became realtors, and for decades, the mantra was “real estate is the only investment that long term, keeps its value.” They pointed to the figures since World War Two. A couple of things. That was an observation…a rule of thumb…not NATURAL law. There was no force of physics, science, or anything else remotely binding to it. But if you did the math—just looked at the numbers…you understood the flaw in the logic. Returning vets of World War Two did buy homes…using VA mortgages. (Yeah…socialism, but we never CALLED it that.) Affordable meant something you could cover with an NON-executive salary. Average Joe could work in a factory…and cover the mortgage. Hell…he could even afford a car…vacations…maybe even college if the kids were smart. He could pay his bills—even if someone got sick—and not lose his house in the process. Amazingly…they didn’t NEED health insurance. When they DID get health insurance, it covered the entire cost…no co-pays…no deductibles…and the insurance companies STILL made money.
And then…inflation. Our parents didn’t use credit, other then to buy a house…and MAYBE finance a car…they saved. If they couldn’t afford it, they skipped it. They budgeted, they cut corners…and when most of them retired, all the equity in their homes was intact. It hadn’t been chipped away, to pay for “disposables”. Twenty years ago, a friend of mine bought a home with her new husband. The base cost was 200K…a figure that made me dizzy. We had a town House that hadn’t run HALF that…but by then I’d been paying a mortgage for five years, so I knew how much money they would need, just to pay for their shiny new house. As they showed us their new place, she pointed out the “Upgrades”. Huh? “Better carpet”. A nicer mantle for the fireplace…ceramic tile in the kitchen. Each item was another 20K added to the price. “How did you afford that?” I asked.
“Oh they just rolled it into the mortgage.” she said. “They did that with the closing costs too.”
Now maybe I am the dolt here…but I think of mortgages LONG TERM. You know…as if you actually will HAVE to pay them off, over 25 years? I had recently acquired a healthy respect for “compound interest”…and as I looked around, I couldn’t imagine WHY they added literally Hundreds of thousands to their debt…for something they were going to have to replace in less than ten years. Even without interest…20K for CARPET? What was it…hand loomed Bakatari—made by blind virgins? No…just a better grade of Berber.
A year later, when we visited, I noticed there wasn’t a lot of furniture in the house. Yes, they had acquired a cherry dining room set…but the rooms were mostly empty. When it got cold, they were “careful” about turning on the heat. When it was hot, they used fans—not the central air. The BILLS, she whispered. She also missed an important point when they bought. Taxes would go up. She thought her “mortgage” payments would stay exactly the same. Technically yes. But they slammed them for more equity after two years—based on taxes, insurance, etc, all that had gotten higher. There used to be a rule of thumb for calculating what a mortgage would cost you, long term. Triple. So their price (with upgrades) of 260K was going to long term cost them…780K.
I mention this for a reason. The town she bought in? Brick NJ. Even if they had done everything “right”, a storm named Sandy could have just destroyed the house they paid a fortune for two decades ago. The insurance industry stopped selling “flood” and storm insurance all along the East Coast after Katrina—and they were on the wrong side of the Parkway. I was offered a bare bones policy through FEMA, but it only covered 25K in damage as a max…structure only. (And I lived 50 miles inland)
What went “wrong” with our economy did not start recently. It began when we thought we could spend more than we could afford, plunged ourselves into insane debt, and then started using credit cards so we could spend 130 percent a year when we were only MAKING a 100.
People are not stupid…not really. But they were told to ignore the math…that “prosperity” would pay for their every dream…they every whim. Want a new kitchen? Borrow against the house. Want a lavish trip? Tap the home equity! Don’t deprive yourself…max out that plastic…they’ll up your limit. And while all this was happening, the cost of a car shot up to what I remember people paying for homes. Homes went stellar…but hey…real estate ONLY goes up…and don’t BUY the car…LEASE it. Then in three years you can trade it in for a newer one. (Unless of course you put too many MILES on it…but that’s another tale.) I know people who pay half as much each month for their cell phones, as I do for my mortgage…with taxes and insurance.
We somehow became the RICHEST poor people in the world…and we never saw it coming.
So…time for a new start. We can get real about what we can afford…or we can lose it all. But as my generation struggles to keep their homes against the specter of foreclosures, the NEW generation is plunging into mortgage sized debt…to pay for college, so they can “make their own lives” someday. And I have to ask the question. HOW will they afford homes, and cars when they may spend 20 years paying that off? How are they going to “fuel the economy”, when they won’t have a dime to use to it? My generation sort of expected Mom and Dad to leave them money…but most of us will be lucky to die debt free.
Rules of thumb: Debt is bad.
Interest is evil.
Oh…and ANYONE can end up poor…no matter how “smart” they think they are.
So what Ryan missed is that the War on The Poor, was a war on us all.
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Comments (9)
Ryan’s “war on poverty” sounds like he wants to destroy all the poor people so there will be no more poor thus no more poverty!
“The richest poor people in the world.” It’s just not going to be a quick clean up and shouldn’t be (like Ryan wants). There is corruption on all sides, and our think tanks ought to be thinking how to find it and how to get rid of the behavior without getting rid of the tools. Computers aren’t bad, in and of themselves, but how people use them can be all together a different issue.
You explained it well and summed it up perfectly in the last 4 lines.
Many people lived within their means or what they believed to be within their means. It all hinged on the belief that the economy was stable and was going to continue humming along, that a 2%-5% raise would come at the end of each year and retirement funds were safe. What we hinged our stability all fell apart in October, 2008 and the causes for the collapse began decades earlier as you’ve pointed out.
In 1962 my parents bought a nice home in a nice Long Island neighborhood for just under $20,000. Imagine. My dad had 1 credit card, Diner’s Club which he only used to take clients out for lunch the cost of which his company paid.
Something about health insurance and credit cards. Forgive me if I’ve mentioned this before.
I often hear the argument that the way to lower health insurance cost is to allow insurance companies to sell insurance across State lines thus making it more competitive. I think people who believe this argument imagine a country in which you can shop 50 States and purchase from a company that offers the lowest price. I looked into it a few months ago and it was easy to find out why this argument is not viable for two reasons:
1) Different States have different insurance requirements. In California it is required your insurance covers lead poisoning. A California resident might find a cheaper plan from another State because it doesn’t include lead poisoning coverage but the insurance company will be required to add that for a California resident. There’s a good chance the out of State company will charge more for lead poisoning insurance because it is not part of its normal package.
2) Here is the larger reason. When credit card companies were given permission to offer their product across State lines they didn’t set up headquarters in every State and call all the 50 States home. Lawyers went to work finding the States with the most lax credit card regulations. Credit card companies set up shop in those States and went to work adding fees, penalties and larger rate hikes which could kick in at the drop of a hat. They put it all in legal language on pages of small print many customers don’t read and most who do don’t understand. The Obama administration put a stop to these practices but for years customers experienced all manner of rate hikes and unforeseen penalties. We know how health insurance companies were on that front before the affordable care act was passed and continues to kick in. Insurance companies, looking to be even more profitable would have set up shop in States that allowed them more freedom to kick people from their plans, deny doctor recommended procedures and raise rates and deductibles at a whim.
It is naive to think customer demands in a free market would keep costs down. Competitors talk to each other. They meet and make decisions they all agree to abide by. It happened and likely undoubtedly happens still on Wall Street. When competitors decide to raise rates together there is no place for customers to go. We open our mail and sigh that our rates have gone up again, pay the bill and go about the business of our busy lives. The hikes and rule changes don’t happen all at once. They sneak up on us over a decade or two. We find out the rules have changed when we need our insurance to work for us the most. Most families with children are not going to stop paying their premiums in protest if they can afford to pay them. Health Insurance and big Pharma have as their number one goal to show profit for their shareholders. This often means trimming services and raising rates. Thus the need for consumer protections.
I love this post. I don’t know how to go about it, but I wish young people had to take some kind of personal economy class before they start out on their own. I was thinking about the lady who added all the “upgrades,” and it reminded me of all the people I know and have read about who pay more for a wedding that our house cost! A wedding! Sure, it’s great to have a big party if you can afford it, but people will actually go into debt for it. Amazing.
The thing is I’d support republican candidates if what they said was true even half of the time. If getting rid of welfare would magically make there be no more poor people (without just making them all starve and freeze to death that is) I would support it. Who wouldn’t want to solve poverty? But it’s fucking insane. It’s like saying soup kitchens cause poverty or the police cause crime, just get rid of them and the problem will go away.
Of course they would never apply this logic to guns or prohibition of drugs.
@whyzat - I know, it’s unbelievable. Buying a set of clothes that costs as much as your entire wardrobe that you only wear once in your life – and that’s just the beginning.
excellent, excellent post!
The short attention span folks would probably not be the ones who read this blog but they are the ones who need to hear this message constantly.
The friends who buy starbucks coffee sort of force people who shouldn’t buy high priced coffee is part of the equation. Then they get nickled and dimed by buying an IPhone and pretty soon they have little to show each month.
Making less than a thousand dollars in Los Angeles basically puts you below the poverty line. However I think maybe someone in Texas would be well off if they got that kind of salary. Regional values also matter when it comes to economics.@whyzat - The wedding issue is pretty big among the Armenians. I think some of them celebrate not just one day but several days.If only the size of the wedding could guarantee more longer marriages.
@PPhilip - Not sure about a $1000 making you “well off” in Texas…but it might be close enough to survival…so long as you have no repairs ( auto) or medical bills…