22 April 2006

Colorado's Economic Squeeze

Times are tough in Colorado.

Gasoline prices are approaching $3 a gallon, a circumstance driven almost entirely by $75 a barrel oil prices in the international petroleum markets. For a typical Colorado family, this means $50 a month or so of unbudgeted expenses. National Public Radio captured the issue well yesterday in an interview with a payday loan company employee who noted that rather than looking for money for the weekend, customers are now looking for money for gas, and as the commentator noted, willing to pay the 300% plus per annum interest rate required to do that with a payday loan.

High prices for natural gas, meanwhile, are driving the fact that one in four families in Colorado are behind in paying their bills from Xcel energy. Rising natural gas prices have cost many households several hundred dollars through the winter heating season than last year.

And, Colorado has more foreclosures per household than any other state in the Union, a marked increase even from a year ago, and foreclosure rates within Colorado are far higher in the Denver metropolitan area than in the rest of the state, with Adams, Arapahoe and Denver counties all having foreclosure rates two to three times that of the next runner up, Weld County. Particularly hard hit have been families with variable rate mortgages because interest rates have increased significantly in the last year to four year highs. Another factor has been lax mortgage lending underwriting, because in an environment of rising real estate prices, even if a family does default on a mortgage, and there is little money down, the lenders is unlikely to take a big loss. The stress that rising energy prices have placed on family budgets is probably another important factor.

It also isn't encouraging that in the last five years:

[M]any of the state's bigger public companies moved right out of state, either picking a new headquarters city or selling to the highest bidder.

A Rocky Mountain News examination found 31 companies that have been acquired or moved since the beginning of 2001. Just 22 larger companies went public or moved to Colorado to replace them.

Colorado families are also feeling the squeeze of perpetually rising health care costs which have far outpaced inflation, which are forcing business owners to choose between cutting pay, dropping the benefit or cutting their own profits. The increased costs are driven primarily by increased billings from health care providers. Health insurance companies haven't been making consistently great profits in Colorado during this period of rising health insurance prices. Indeed, many companies have left the market entirely in the past several years, finding it to be unprofitable, and the only health insurance company that has really done well consistently during the health insurance rate surge has been Kaiser Permanente, which is both an insurer and a health care provider, unlike all of the other insurers in the Colorado market.

The cause to this quintessentially microeconomic issue of rising provider costs isn't entirely clear, but being a microeconomic issue, almost surely is a matter of the laws of supply and demand at work. The supply of providers apparently isn't increasing quickly enough, while demand for their services is apparently surging, I suspect, although I can't prove, because of an aging baby boomer population, and because of new developments in health care that make many more remedies for previously untreatable conditions available, for a price. Much of this, moreover, is paid for by government programs like Medicare, which is essentially a national single payer health care system for all people over the age of sixty-five in the United States. So, the supply of funds to pay for the needs of an older population with more cures available to it, is close to unlimited.

These pressures also need to be superimposed on a key long term trend that has been in place since the manufacturing industry started to fall apart in the 1970s, a trend that has accellerated dramatically during the Bush Administration. While the economy has grown dramatically in the last generation or so, almost all of the benefits of that growth have accrued to a college educated, managerial-professional-technical elite. In inflation adjusted terms, the pay of people who only have high school educations (about half of the population) is about the same now as it was in 1970. As one source puts it:

Most of the growth in real income since 1970 has gone to families in the top 60 percent of household incomes, while income (exclusive of welfare benefits) for those in the bottom 40 percent has barely budged.

This trend has been even more dramatic for African-Americans. While the income gap for comparably educated whites and blacks with less than a four year degree continues to loom as large as it did decades ago, the income gap for college educated blacks has come close to vanishing with college educated African-Americans earning 95% of what college educated whites do.

It isn't coincidental that this stagnant wage growth has coincided with record immigration which has had a particularly notable impact on the market for less skilled labor. For what its worth, the economic argument that immigration has helped suppress wage growth for less skilled workers, while not flawless, is considerably more solid than the more prominent economic argument that immigrants cost the economy more than they contribute to it, which is almost certainly false. But, immigration is not the only cause of this trend, or even the most important. For example, the collapse of the American manufacturing industry as increased technology has reduced the number of workers necessary to conduct the manufacturing operations that remain, and outsourcing has eliminated a large share of the manufacturing of the commodities that we consume from our economy entirely, has played at least as great a role.

The minimum wage, in inflation adjusted terms or other measures independent of nominal dollars (like ratios to mean hourly pay or the poverty line) is at a near record low.

The class that has seen a major growth in their real wealth in the last generation can afford to pay more for health insurance, gasoline and natural gas, and was also often prudent enough, and had enough ability to make some sacrifices now for long term benefits, to secure fixed rate mortgages when rates were low. But, further down the pay scale, the only way families can meet the same standard of living that a similar family could have on the first Earth day, a generation ago, is by working two or three jobs, instead of just one, and many families aren't able to find that additional work. Rising job insecurity, even at the top of the heap, caused by things like the endless tide of mergers, layoffs and reorganizations in big business, have also caused many families who could get by with a single income, or working more reasonable hours, to try to build up reserves while times are good and to have multiple jobs in a family as makeshift form of unemployment insurance.

The push to work the two or three jobs necessary to maintain a certain standard of living has also created economic insecurity. If a family needs 80 hours a week of compensation to make the mortgage payment, and many do, then they can't add a new part-time or full time job to their plate to respond to economic shocks like rising gasoline prices, increased heating bills, or a bigger employee contribution to health insurance costs. Two jobs is a form of unemployment insurance, if you live mostly on one income and devote the other income mostly to savings. But, two jobs is no help if you spend currently everything you have coming in, which a record low negative savings rate in the United States suggests that many people do. Admittedly, some of the savings rates issue is a product of how it is measured. The savings rate ignores the fact that many people save by reinvesting capital appreciation in real estate and retirement accounts which isn't counted. But, at the very least, Americans have fewer savings that can be accessed without taking dramatic steps like borrowing against a retirement fund or house, than they once did.

A newly severe bankruptcy law which took effect last October, while not actually doing banning lower income debtors from receiving a full discharge of their debts, has increased the costs of obtaining a bankruptcy, as the need to get a debtor education course and increased paperwork have increased the transaction costs involved, have made it harder to react at the last minute to a foreclosure or eviction, have made it harder to hold onto a car worth less than the loan, and have made a full discarge of debts virtually unavailable for employed members of the middle class. A national movement of credit card companies, under government pressure, to dramatically increase minimum payments on credit cards at about the same time, has also provided an economic shock for already strapped families. And, an increasing share of families without health insurance has made a medical emergency more likely to become a financial catastrophe than in the past.

Of course, every trend has an upside. Business is booming for health care providers, whose rising charges are the main factor driving the increased cost of health insurance. The job market for skilled nurses is very good right now. Colorado's oil and gas industry is also thriving. And, the foreclosure trend is helping to tame ridiculous Denver real estate bubble prices, particularly at the low end of the market. But, those facing increasing pressure from recent economic trends far outnumber those who have benefitted from them.

There aren't easy solutions to these problems, at least in the short term at the state level. While conservatives often argue that the cure for every manner of economic malaise is a tax cut, the reality is that Colorado's state level taxes are among the lowest in the nation, the federal income tax has withered away to the point that it has become a minor consideration for low and middle income families, and major cuts in payroll taxes would imperil already fragile Social Security and Medicare programs. Contrary to the Bush Administration's claims, Social Security is not about to go bankrupt. But, it isn't as flush as it once was (with the Social Security surplus once financing most of the federal budget deficit). Colorado is also known for its low property taxes. I pay about the same amount in property taxes on my home in Colorado, as I did on a small condo my wife and I lived in before we came here in Buffalo, New York, which had about a tenth of the fair market value of our Colorado residence.

Colorado, and the nation as a whole, is up against economic fundamentals. Oil and natural gas are scarce non-renewable commodities that have an almost inevitable tendency to go up in the long term. The baby boomers are going to get older and new treatments will almost certainly be more expensive before they even further advances in health care make them cheaper. While some people over twenty-five years of age will choose to go back to college and get additional educational qualifications, the vast majority will not.

There are steps that can be taken. One factor in rising oil prices is U.S. saber rattling directed at Iran. More fuel efficient vehicles and greater willingness to put more than one commuter in a single vehicle spurred by higher gasoline prices can reduce the associated economic pressure. The downside of relying too heavily on natural gas to generate electricity (which can be done in many other ways), are becoming apparant. Tighter underwriting standards can better reflect the risks of default associated with variable interest rate mortgage lending, and lending to economically insecure families. Bankruptcy laws can be tweaked. The increases in minimum payments on credit cards that have been such a shock in the short term to people who borrowed in reliance on lower payments, will also help prevent people from becoming overextended in the first place, going forward.

More fundamentally, our policy makers need to roll up their sleeves and think outside the box to find more productive (and hence higher paying in the long run) ways to use the labors of those in the bottom 40% of the workforce than our current economy that puts many people in this class to work mostly as glorified outsourced personal servants, cooking, cleaning and babysitting. We also, as a society, need to rethink the balance between monetary rewards and leisure. Adults in no country in the world have less leisure than those in the United States, and this is not a desirable distinction.

Until we fundamentally remake our economy, the pressures won't go away. We can do that, but it won't happen until it becomes painfully clear that this is necessary. It may not be clear yet, but it has certainly started to become painful, and pain can have a startling ability to focus people's recognition that change is necessary.

1 comment:

lazypig said...

There is mass exuberance in stock, commodity and real estate market. This mass Euphoria may end up in a bust. Money is flowing across the globe. Considering the growth of credit in last 2 year, bubble will bust in next 3 to 4 months. This is ups anddown of economics. You rightly captured same concept in your blog

Author wealth advisor. I suggest investment in Real-Estate and invest rental income in stock market.