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What We Read Today 30 March 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number included.

  • The Next Problem: Too Much Profit (Justin Lahart, The Wall Street Journal) Too much profit a problem? It is when it derives from failing to invest. Eventually failure to invest hits the end of a runway and profits can crash.

There are 9 articles discussed 'behind the wall'. One of them is an article all by itself discussing a Manhattan Institute paper featured by John Mauldin this week in Thoughts from the Frontline.


There was a letter in the Financial Times yesterday saying the "national debt" might as well be called "national savings". Kenneth Rogoff will be baffled. (Ralph Musgrave)

Money is a promise. Promise that government will collect taxes.. (Kai Risberg)

If humanity is this stupid, it deserves to go extinct. (Tom Hickey)

  • The Left stages a two minute hate on Nate Silver, Roger Pielke Jr (& me) (Fabius Maximus) Fabius Maximus has contributed to Global Economic Intersection. Better article than the title might lead you to believe. An explanation of how the political left damages credibility through exaggeration. Of course, most political partisans of all persuasions systematically practice the art of distortion to sell their specific 'product'. Econintersect would suggest that political persuasion is 90% brainwashing, 10% fact and logic. Politics is the attempted practice of certainty in an uncertain world. (Econintersect platitude.)


Diana Furchtgott-Roth (F-R) argues that personal expenditures are a better measure of income disparity than trying to measure income directly. F-R correctly points out that there are distortions in the income numbers over the time span because of changes in the tax law that have encouraged movement of income from corporate returns to individual income returns and that has occurred predominately at higher income levels.

But there are distortions in the personal consumption expenditure numbers as well and F-R has not included them. One huge distortion that should be apparent comes from the level of personal debt which has exploded more than 4-fold over the 25 years studied. Adjusted for inflation (CPI) the increase is more than 1.6X.


The debt above includes mortgage debt, which was about $7.9 trillion for households at the beginning of 2012. See graph below from the New York Fed. Econintersect does not have an estimate for what portion of mortgage debt ended up adding to personal consumption expenditure (PCE), but some part certainly did. In what follows we will not consider any mortgage debt interaction with personal consumption.

Click on graph for larger image.


The per captita household debt 01 January 2012 was more than $43,000, up from an inflation adjusted $26,500 in 1987. If we averaged the increase uniformly over the 25 years (obviously not a good estimate because the last 5 years have seen a decline) the increase in debt each year would have been near 4%, adjusted for inflation. But that includes mortgage debt and we must exclude some unknown portion of mortgage debt from our consideration of PCE. To repeat, in what we do here we are excluding all of it.

From the Fred data base we obtain a value for real disposable personal income at the beginning of 1987 of $5.7 trillion (2009 chained dollars), or adjusted to 2012 dollars, $6.3 trillion. From a 1987 New York Fed report (page 37) the ratio of consumer debt to disposable income was almost exactly 0.20 from 1966 through 1985; we will use that ratio for 1987.

This produces a 1987 consumer debt (mortgages excluded) of $1.3 trillion in 2012 dollars.

We have made the preceding calculations because we want to compare to the same analysis for personal expenditures. The data from the table above produces an average increase per year (calculated) of 0.4% (top quintile) and 0.5% (bottom). These amount to increases that would average in the range of $60-$70 a year for the bottom quintile and around $120-$130 for the top.

Now personal debt (sans mortgages) has grown from about $1.3 trillion to $3.4 trillion over the 25 years, which is from approximately $5,500 per capita in 1985 to about $11,000 in 2012, adjusted for inflation. That amounts to an average increase per year near 3% or about $240 ($160 in the first year increasing to $330 in the last*).

So the F-R paper has done a determination of income inequality by ignoring the elephant in the room: growth of debt. Household credit (without mortgages) increased between $200 and $500 most years from 1985 through 2012, an average around $240 a year.*

Increase in debt had a much greater impact on consumption than increase in income. The ratio is somewhere between 2x and 6x depending on how debt was acquired over the income quintiles and what year is examined.

* Of course there were five years where households were deleveraging (2008-2012) so the analysis will be considerably more complicated than just looking at 25-year averages.

Econintersect has not discovered a source of allocation of personal debt across the five income quintiles. Obviously that is needed to segregate effects of debt from income on consumption.

Readers: Please comment on this discussion before I talk with John Mauldin about it. If you see any errors I would like to know about them sooner rather than later. :-)

  • This couple owes $380,000 (Jennifer Liberto, CNN Money) This article is most notable for what it doesn't explain: How does an individual have today $300,000 in student loan debt for a degree that cost significantly less than $80,000 in tuition and fees to obtain. Books are expensive but $220,000+ doesn't sound quite right. The website for the institution involved estimates that average costs for room, board, books, supplies, transportation and miscellaneous for four years in (based on 2011-2012 costs, long after this individual graduated) is approximately $74,000. So that total for 2004-2008 was probably significantly less than $70,000. So if the student borrowed every last penny the accumulated debt would be about $150,000. The real story here was not pursued; How did the debt get to be $300,000?
  • Graduate student loans are ballooning (Jennifer Liberto, CNN Money) Hat tip to John O'Donnell. The median indebtedness for graduate school education rose by 43% from 2004 to 2012. Even more concerning in the observation that much of the debt is taken on for degrees with limited job demand. While graduate students constitute17% of all student loan borrowers, they are taking much bigger hits with 41% of student loan debt in the fall semester 2012.


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