From the WP - why GIGO matters.
The piece below is good pop analysis with one basic flaw -it presumes the stats have meaning.
IF the stats for population and personal income are correct then we have been on a credit splurge. However the same stats have said this since the 1980's. Few are willing to discuss the corrolary - if the personal consumption figures [which with increasing use of chain stores and credit cards] are progressively easier to capture are correct the figures for population and personal income are hogwash. Essentially more and more consumption is done into chain stores that report audited numbers. Now those numbers can be lies - ENRON, WORLDCOM...- but such lies happen much less often in retail sales figures where they have sales tax consequences and with chains with hundreds / thousands of stores where too many transient low wage employees would have to be in on the fraud. Also the credit card companies and Veriphone cross reference each other. So let us presume instead that the municipalities that howl they are undercounted by the census aren't all motivated by politics and stupidity. Things such as utility hookups seem to bear this out. This means our per capita figures are all overstated because there are noticeably more capitas - whether libertarians who don't answer the census,transients who just get missed or illegals with their own reasons to duck hard. Illegals sublets alone can generate many additional people. It also seems likely that the cash economy [not sin -just things done off the books to beat taxes, regulations, etc.] may be MUCH larger than anticipated. For example even by the book you only have to report payments to IC's over $600 a year. Even then small companies that send IRS paper 1099's tend not to get counted. A combination of cutting nondefense discretionary spending, a rising libertarian streak since the early 70's and a mass of hot cash that has been sloshing around the economy since the mid to late 70's are distorting the picture. Actions, consequnces
***********If you ask who saved the U.S. economy -- indeed, the world economy -- these past three years, the answer is plain. The tireless American consumer did the trick, buying ever-larger homes, stuffing them with furniture and mobbing shopping malls. Producers from Albuquerque to Amsterdam benefited. What's less plain is why. What caused average Americans to defy so much bad news (terrorism, falling stocks, rising joblessness)? The standard answers have been tax cuts, low interest rates and a deep streak of materialism. But to these should be added demographics and debt.
Susan Sterne of Economic Analysis Associates notes that the economic downturn coincided almost perfectly with baby boomer arriving at their peak earning and spending power. In 2002 the oldest baby boomers (born in 1946) were 56 and the youngest (born in 1964) were 38. Now, consider this: Consumers between 35 and 44 spend about 20 percent more than average consumers and those between 45 and 54 spend about 30 percent more. In 2001 these two age groups represented about 40 percent of U.S. households -- and half of spending.
To some extent the life cycle defeated the economic cycle, Sterne says. Families wanted bigger homes. Their children, flooding high schools and colleges, demanded computers, CDs and cars. From March 2001 to March 2003, says Sterne, several dozen product categories experienced "remarkable" double-digit increases, including cell phones, motorcycles, toys, jewelry and hardware.
One reason Americans could spend freely is that they went deeper into debt. Indeed, the democratization of debt is a great story of the late 20th century. In 1946, just after World War II, consumer debt amounted to 22 percent of household after-tax income, reports the Federal Reserve. (That is, for every $10,000 of income, there was $2,200 of debt.) Now debt is almost 110 percent of income. More families borrow, and debtors have more debt in relation to income.
Suburbanization explains much of the transformation. In 1940 only 44 percent of Americans were homeowners; now homeownership is edging toward 70 percent. Then, less than half (45 percent) of homeowners had mortgages; now two-thirds do. But other forms of credit also exploded: auto loans, charge accounts and credit cards. The first modern credit card, the Diners Club Card, appeared in 1950. (Before that, department stores and oil companies offered cards.) By 1998 three-quarters of families had credit cards.
This constituted a social as well as economic upheaval. Except at exorbitant rates, credit once bypassed most Americans. New laws and technologies changed that. The Fair Housing Act of 1968 and Equal Credit Opportunity Act of 1974 outlawed racial and sexual discrimination in lending. It became illegal to "redline" whole neighborhoods (that is, refuse them loans). Married women could more easily get their own credit and not just depend on their husbands'.
Lending decisions shifted from hunches and stereotypes to statistical models that, based on credit histories, revealed patterns of payment and nonpayment. The best known of these credit scoring systems is FICO. It rates consumers on a 300 to 850 scale, with two factors -- how promptly people pay ordinary bills and their total debts -- accounting for two-thirds of the score. (FICO is an abbreviation for the Fair Isaac Corp., which introduced the formula in 1989.) "The advent of statistical risk scoring gave lenders greater confidence. They started extending loans down the income spectrum," says Mike Staten, director of the Credit Research Center at Georgetown University. In the 1990s mortgages, credit cards and car loans were increasingly marketed to "subprime" groups. For many poorer families, paying their bills on time became a path to credit.
The good news is that all this bolstered the economy. At year-end 1999, household debt (including mortgages) totaled $6.5 trillion, 96 percent of disposable income; by March 2003, debt had jumped to almost $8.7 trillion, 108 percent of income. The extra $2 trillion, including money from "cash out" mortgage refinancings, stimulated shopping. Even better, falling interest rates meant that monthly interest and principal payments actually declined slightly, from a peak of 14.4 percent of after-tax income in 2001 to 14 percent now. People refinanced mortgages, switched high-rate credit-card debt into lower-rate mortgage debt or borrowed for less. Since 1998, average credit-card rates have dropped from 15.6 percent to 12.8 percent; rates on new auto loans have slipped from 6.3 percent to 3 percent.
The bad news is that all the good news won't last forever. Spending demographics will deteriorate slightly in the next decade, says Sterne. Younger households -- relatively poorer -- will grow rapidly. An aging baby boom will slowly lose purchasing power. The larger and iffier issue involves the inevitable, though undetermined, end of America's 60-year credit binge. Interest rates have risen from recent lows, and greater threats loom.
Household debt can't permanently grow faster than household income, though it has for decades. Sooner or later families will decide they've borrowed enough, or too much. Sooner or later baby boomers will pay down lifetime debts. Sooner or later lenders will exhaust good credit risks. Indeed, whether the aggressive lending of recent years has gone too far remains unsettled. Higher delinquency and personal bankruptcy rates are causes for concern.
The great credit binge exemplifies the American spirit -- an optimistic belief in the future and a constant craving for more. It has spurred the U.S. and global economies, but what happens when it fades? Although people worry about rising federal debt, the true debt bomb may be closer to home.
© 2003 The Washington Post Company
posted by scott 9:12 AM