Oh No! Economic Growth!

We here at Ask Edgeworth will be making a regular feature out of silly and one-sided news stories on the economy. We'll be calling it "The One-Armed Columnist Award". To glimpse our first winner, check out this gem in Monday's New York Times: "Families, Deep in Debt, Facing Pain of Growing Interest Rates."

The uncontroversial facts, never clearly expressed in the article, are as follows:

1) Interest rates have been very low because the Fed wanted to stimulate the economy to ease the recent recession.
2) The U.S. economy is now improving.
3) When the economy grows quickly, the Fed begins to worry about inflation.
4) The Fed will raise interest rates to help stave off inflation.

This is the same business-cycle tune we've been dancing to for decades. When the economy is good, interest rates go up.

So the basic underlying story here is good news! The economy seems to be recovering. Let's look for some small sign of that good news in the article:

With the Federal Reserve about to raise interest rates for the first time in four years, Joyce Diffenderfer is beginning to wonder how she and her husband, Curtis, will deflect the growing cost of their $16,000 in credit card debt.

Not that her concern is a pressing issue yet; it is more like a fire drill in anticipation of a fire that she is still not convinced will occur. The Diffenderfers figure that a modest rate increase would initially add only $35 to their monthly card payments, which now total more than $600. Still, they have run out of ways to sidestep the cost of borrowing, and if the rates keep rising, as the Fed's leaders suggest they will, then the only alternative, Mrs. Diffenderfer said, will be to seriously cut family spending.

The Diffenderfers are among the millions of American families who rode the recent wave of low interest rates to home ownership and the rapid accumulation of debt, and now they must cope as rates begin to swing upward.

The challenge--to spin the good news of economic recovery as a "bad news" story--has been met in a wonderfully creative way. An ordinary middle class family--millions of American families, we're told--must somehow "cope" with the potentially devastating effects of an improving economy. The poor Diffenderfers (even their name has a splendidly sit-com "everyman" ring to it) must cope with the encroaching dangers of... oh no... not that... an improving economy.

The bottom line: If you borrow up to your eyeballs, and the interest rate on your loans is not fixed, then you do in fact lose out when rates climb. This is what it means to have bet that the economy will get worse and to have been wrong. There will always be people who bet wrong. It is unfortunate. But why restrict one's reporting to people who bet wrong?

If we were to rebuild Iraq decisively, if a glorious democracy were to take root there, if former Islamic extremists were to offer bouquets of flowers to the provisional government, if everything in the Middle East turned to sweetness and light, if Palestinians and Israelis were hugging each other and singing "cumbaya", you could still report it as bad news. How? All you would have to do is find some poor schmo who happened to bet against it. Find the guy who sold short on Iraqi government bonds.

Furthermore, if one wanted to be balanced about this kind of reporting, one would have had to report as "winners" all those families who bet correctly on a worsening economy just a few years ago. Variable-rate loans were great when interest rates were falling! But this, of course, is not "news." News about the economy consists of stories of worry and suffering, as personified by someone who bet wrong--by the Diffenderfer-du-jour.

Another angle is underemphasized in the story: Rising interest rates are great for those who lend. What about little old ladies trying to get by on the meager earnings of their CDs and savings accounts? When interest rates rise with the prime, these little old ladies have opportunities to earn more from their savings. Were any of these people interviewed? Or how about those who got the new jobs that have been created? Were they interviewed?

One fact bears repeating: This is a good news story masquerading as a bad news story. I've already described the first step in turning it into a bad news story. Find someone who bet wrong. The second step: Acknowledge that some people benefit from an improving economy but insist that it is probably the wrong people who benefit:

Upper income families, on the other hand - that is, families with more than $80,000 in annual income - are more likely to have fixed rate debt, particularly mortgages, and to owe relatively little on their credit cards. What variable rate debt they do have is usually at lower interest rates than lower income people. Lower income people, as a result, are 10 times more likely than upper income people to be devoting 40 percent or more of their income to debt repayment, the Economic Policy Institute reports. In addition, upper income people are the nation's biggest savers, and a rate increase raises the return on their interest-bearing securities.

Ah, so an improving economy is fine and dandy, but it benefits "upper income families" primarily. The irony here is that the Times and other papers always assert that a recession brings more pain and suffering to the middle and lower classes than to the upper class. This is by far the more plausible argument: Recessions wreak havoc on families who are just getting by. Families with greater resources often have a cushion they can use to tide them over during short-run shocks. So if recessions are particularly bad for the poor, then the poor benefit disproportionately when the country recovers from recession. Not so! according to the Times. The poor are like Bill Cosby's father: He had to walk to and from school, ten miles in the snow, everyday--and it was uphill, both ways.

One antidote to rising interest rates could be the recent surge in employment, and all the new income that will accompany the one million jobs created since February - but that remains to be seen. "The question really is, are the people who are leveraged with debt, are they the ones getting the jobs and income?" said Richard Berner, chief domestic economist at Morgan Stanley. Employment growth has been fairly robust in Lancaster, but even so, Mr. Smith is seeing fewer customers as they react to rising prices and interest rates.

Across town, in a rundown neighborhood, the working poor are just starting to show up in greater numbers at Tabor Community Services, a Lancaster agency that counsels those deeply in debt, said Michael Weaver, president of Tabor.

OK. Now it is the working poor who are suffering from the devastating effects of... economic recovery. So Which is it? Do recessions help the poor and does recovery hurt the poor? Or is it the other way around? Or, as seems to be implied here, does everything under the sun hurt the poor?

The last statement is true, but vacuously. You can always find some subgroup of the "poor" or "the working poor" that is made worse off by any given change in the economy. And you can always imply (by ommiting any report of those who benefited) that the poor, as a whole, have been made worse off. And this is always profoundly misleading. We never hear a word about the possible existence of other subpopulations within the working poor who may be benefiting from this, the direst of catastrophes: an improved economy.

There is a history to this sort of nonsense, to the perverse refusal to acknowledge any hint of economic good news. The last time we emerged from a recession, the popular press argued ceaselessly that though new jobs were being created, the poor were not being helped because the new jobs were all hamburger-flipping service jobs. It turned out to be a faulty assesment, and anyone who had their eye on the real economy could have intuited at the time that the spin was misleading, that something very interesting was happening in the service sector.

I do not mean to imply the economy is booming at present or even that the recovery will continue unabated. It remains to be seen. But recovery will go hand-in-hand with increasing interest rates. And interest rates will rise only if the economy continues to recover.

The Times article here seems to be arguing that economic recovery--or this particular economic recovery--is bad for the poor. If the Times is correct in its analysis, it is indeed a worrisome development! What on earth can be done? Is there any hope on the horizon?

We can only hope and pray for another recession.

-P.S.Babcock

Comments

[Vinai]

to owe credit card $16000 is not wise at all

[chester white]

25 basis points (one-quarter of one precent) on $16,000 is NOT $35 a month, for God's sake.

It's $40 a year, or $3.25 a month,

Can NOBODY do trivial math anymore?

[chester white]

OK, yeah, I'm off a few cents.