Inflation vs. Imagination

While it is only in the past few months that Fed chairman Ben Bernanke has focused on inflation as a threat to our economic well being, it has been obvious for several years that it has been having a detrimental effect on American families. The consumer price index, the most broadly referenced statistic on inflation, has looked benign for a long, long time but the CPI doesn’t take into account costs like healthcare and higher education – both of which have been skyrocketing for more than a decade.

Ask the wage earners you know what they are concerned about and you’ll likely hear about health care costs, saving for retirement (which has a large health care component), and putting the kids through college. These fundamentals have been getting more and more expensive – and increasingly out of reach for even middle-class families. Layer that with the recent inflation in food and energy costs (likely to last five to ten years according to the experts I speak with) and you can see the storm clouds darkening.

Ask those same wage earners if they would trade our system for the European model with higher taxes but universal health care, college tuition, and generous government pension programs and they’ll likely shriek and label you a Commie sympathizer. Better to keep the money for yourself so that your fate is in your own hands.

But of course most people don’t save enough to take care of any of these needs. College is increasingly funded through loans (that’s debt, kids) and the national savings rate is at just about zero.

“US consumers’ savings rates are among the lowest in the OECD. They always have
been, but the wedge has widened in recent years. Back in the early 1990s, US
consumers saved about 7% of their disposable income. By the latter 1990s that
was down to the 4% level, and in the new millennium the rate sank to 2%. This
dropped further – close to zero – as booming growth continued. Americans spent
nearly all that they earned in the 2005-07 period.”

There are debates about how the savings rate is calculated but, in any event, basic building blocks of economic mobility are becoming less and less attainable for more and more people. The amount of debt being carried by the average family increasing. Half of all personal bankruptcies are caused by unexpected medical expenses.

The underlying issue that I see is that it is increasingly difficult for one to live what I call a “rich poor” life. A rich poor life is what your old English and Math teachers likely lived. They didn’t earn a ton of money but they could afford a house, healthcare came from the job and the deductions weren’t overly burdensome, and retirement was covered through a traditional pension plan. They managed to live interesting lives – traveled, went to the symphony, ate out now and again -- and could do it rather frugally.

That is increasingly difficult to do. First, as mentioned above some of the basics for long-term economic stability are harder to attain. Second, with the expansion of easy credit it has been easy for everything to go upscale. That quaint out of the way inn is now likely a quaint out of the way inn and spa with rooms at $500 a night rather than $50; the little Italian joint is now a fancy trattoria where the pasta is $20 a plate. A cup of coffee has morphed into a $4 latte.

It was in this context that I read about Berea College in today’s New York Times. This college in Kentucky charges no tuition, requires that its students work on campus, and handles almost as many students as prestigious Amherst College. Best of all, those graduates enter the world with no student loans to pay back. Wouldn’t it be wonderful if all graduates were as fortunate.

Wouldn’t it be a grand goal to set for ourselves to have every graduate from an accredited college or university leave campus with no financial debt to the institution? Imagine if instead of starting one's working life able to save and invest rather than pay back?

Berea is interesting because they have dared to think differently about how – and why – they provide an education. It is a pretty bare bones place but that is how they make their model work. Imagine if we could spread that imagination both to other educational institutions and also to other facets of our lives.

Imagine if we, as a society, put $2,000 into an interest-bearing retirement account for each child born in the U.S. The principal could be automatically repaid when the child turns 18 but the accrued interest could be the beginning of a retirement fund. Eighteen years of compounded interest can be significant.

Imagine if we thought about optimizing outcomes rather than spending so much time trying to ratify processes through ideological filters that worry about public vs. private.

Imagine.

Obama Rubin '08

I had the chance to spend time with a senior strategist from the Boston Consulting Group. Among the things he told me was that he believes we are entering a period of significant inflation that could last 10 - 15 years. The inflation will be driven by demand for basic commodities thanks to the growth of China, India, and other emerging economies as well as our own lust for consumption.

We've already begun to see it with rising prices for gasoline and many food products. What was interesting was his forecast that it could last for more than a dozen years. We haven't had an inflationary spell like that since the 1970's. I'm old enough to remember those days (and was getting my undergraduate degree in Economics at the time) but many business leaders have never been through these conditions. It's going to be a rough ride.

This got me thinking about the upcoming election and Barack Obama's options for vice president. I'd like to suggest that he consider Robert Rubin. In case you've forgotten, Rubin was a senior advisor and then Secretary of the Treasury in the Clinton administration. He's about the smartest people I've seen on economic matters, has a passion for building economic literacy, and has great credibility on Wall Street.

The next President is going to inherit an economic mess and, according to my BCG colleague, it isn't going to get better for quite awhile. S/he'll need solid financial advice from a trustworthy source. Rubin would also add a bit of gray hair that an Obama ticket could use.

Obama/Rubin '08. It has a ring to it.

Micro v. Macro

One of Boston's radio stations, WBOS, recently went to a DJ-free format. It is the second station in the market to do so (Mike 93.7 is the other). Both seem dedicated to "never two good songs in a row" but that's OK for me as I'm an NPR junkie.

The format move made me think, however, about job loss and the trend across industries to shed employees wherever possible. From a microeconomic perspective, each business wants to keep its costs as low as possible and employ no more workers than it needs to create the most profit. However, each business also needs enough employed customers to buy its products and services.

The problem, as I see it, is that we have largely abandoned macroeconomic policy as it relates to employment. Under both Republican and Democratic administrations of recent years, the only two policy tools that seemed to be available have been deregulation and tax cuts. The rationale seems to be to let "1,000 micro decisions bloom" in hopes that the wisdom of crowds will be an effective substitute for actual macroeconomic policy.

Now, neither deregulation nor tax cuts are necessarily bad but you can't play 18 holes well with only a 3 wood and a 5 iron. The recent subprime mortgage mess can be seen largely as an unintended consequence of deregulated financial markets. With no one at a macro level ensuring that the credit risks being taken were good, individual players were simply satisfied that they were good enough for them to take their little piece and pass them on the next player in the chain.

What does the subprime mortgage mess have to do with jobs policy? Look at the jobs that have been lost in the financial sector alone and the tens of thousands more that are being swept away in the riptide of that situation.

What, you may also ask, does this have to do with the format choices of radio stations? Simply that I posit that each job lost -- even a few djs -- create costs for society and that some of those costs should go back to the organizations that choose to replace people with technology. I don't advocate being so severe as to restrict innovation or create featherbedding, but I do think that we should have tax and other policies that reward job creation and penalize job elimination (unlike the current situation where there are significant tax benefits for investing in technology rather than people).

Microeconomic logic says to keep as few employees as possible; macroeconomic logic says that the closer we are to full employment we are, the better for all of us. I'm with the macroeconomists on this one.