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Back to Subjects - Economics

Unemployment in the US

Unemployment in the US I chose these indicators because all are something that ordinary people deal with every day. All of us have control over our own spending and how far into debt we go. If we are not making the salary we want then we are free to look for a new job or an additional job. There is also the possibility of going back to school to raise your educational level in order to get a better job. This may, of course, put us deeper into debt. We are in debt as a country, and as individuals, but with the economy as strong as it is people have no qualms about going deeper into debt. There are increases in delinquency rates on consumer loans, record numbers of bankruptcy filings, and an increasing share of income devoted to paying interest on debt. These are signs that some households are becoming overextended. In this paper I discuss bankruptcy, consumer credit, inherited wealth and the difference in the way some generations handle debt. Personal income, installment debt and unemployment are coincident or lagging economic indicators or both. By many measures the US economy is very healthy, but increasing consumer debt and personal bankruptcies raise concerns about the future. Credit card debt is higher than ever, and personal bankruptcies soared in 1995 and 1996 (Silverman 1997). Over 10% of Americans are expected to declare bankruptcy during the 1990s unless the trend changes, and there is no longer public scorn for those who file bankruptcy (Darlin 1997). Consumer credit remains readily available despite rising bankruptcies. This trend is attributed to a credit-friendly social policy which requires credit to be extended without discrimination. Furthermore, easy credit is needed to allow consumers to buy goods. The lending business also remains lucrative. To manage risks, financial institutions resort to diversification and risk shifting. The cost of bankruptcy is also incorporated in the cost of credit (Lykins and Plankenhorn 1996). The post baby-boom group known as Generation X is accumulating a great deal of debt, mostly through credit cards. The average credit card balance of households headed by someone under 25 nearly doubled from 1990 to 1995. There seems to be little desire among these people to live within their means (Shenk 1997). However, young people who can establish good credit will reap numerous benefits. A good credit record can provide young consumers with access to financing, thus enabling them to make purchases that they otherwise would not be able to make. In addition, good credit can enhance young people=s chances of getting good jobs. Borrowers who pay on time and in full may be able to convince potential employers that they are responsible and can manage their own finances (Shafer 1997). However, missed payments on bank credit card debt reached a new high of 2.13% of outstanding credit card debt in the 4th quarter of 1997. The American Bankers Association reported a decline in the percentage of accounts more than 30 days overdue during the quarter, although there was a rise in the percentage of loaned dollars delinquent. Consumer debt represents about 20.6% of disposable income (Kingson-Bloom 1998). The debt-service ratio can be used as an accurate predictor of future consumer spending growth or a source for explaining aggregate consumer spending. Furthermore, the ratio of debt service to income, if analyzed together with other economic indicators, will reveal future income growth. This ratio analysis is beneficial to financial service institutions as through this, they can determine debt payment capacities of clients (Murphy 1998). On the whole the Generation Xers have a gloom and doom attitude towards money, and maybe with good reason. Social security will probably be out of money by the time they reach retirement age and most feel that they will never be out of debt, so they live life as such. Money conflicts in relationships are reflective of society=s growing insecurity about its financial future. America is turning into a fatalistic culture. This negativity is based on economic conditions that contradict the once prevalent belief of never-ending prosperity. The United States= stalled economy, mind boggling national debt, and the prospect of the collapse of the Social Security system have left many Americans terrified about their ability to make ends meet. The American dream has become the American nightmare as citizens struggle for scarce financial resources. Small wonder, then, that economic issues are a deepening source of conflict in personal relationships in this country. Money has become the very center of life for many Americans. The preoccupation with money pervades society at the consumer, government, and corporate levels. At the consumer level, shopping has become a way of life for some. In past generations, incurring consumer debt had a negative connotation; debt was reserved for big ticket items such as housing, land, or automobiles. Today, debt is viewed as normal. America is now the number one consumer nation in the world (Boundy 1993). This frenzy for spending has naturally taken its toll on family relationships. The consumerism of the 1980s has caught up with 1990s recessionary conditions, creating a collapse of family finances due to laid off wage earners and a decrease in personal wealth caused by plummeting real estate values. Conflicts based on money are understandably commonplace in such families. Individuals are affected on a personal level by government fiscal mismanagement. The average citizen is aware that the nation=s debt will have an effect on their personal finances in some manner in the future. The closest analogy is the condemned waiting for the axe to fall. The income gap between the haves and the have-nots is widening, contributing to class conflict. Real incomes have plunged, as has the standard of living. Individuals have to work harder for what they earn, thus having less quality time to devote to personal and family relationships. Corporate greed has also had an effect on individual attitudes about money. During the 1970s and 1980s, corporations assumed massive amounts of debt to finance mergers, leveraged buyouts, etc. Junk bonds became a popular form of investment and a quick source of profits. Former junk bond multimillionaire Michael Milken became symbolic of the avaricious mindset of this era. A characteristic of the financing frenzy was a decline in spending on true wealth, for example, equipment, new plants, research and development, etc. As the economic bubble burst in the 1990s, corporations turned to austerity measures characterized by euphemisms such as downsizing, rightsizing and restructuring. These terms translated into loss of employment for the working public. Job security became a thing of the past as American workers at corporate giants like IBM, AT&T, General Motors, and Sears joined the legions of employees cut from company payrolls (Acs and Gerlowski 1996). Personal bankruptcy, divorce and even homelessness can be traced to corporate mismanagement, past and present. In general, money conflicts differ according to generation in American society. People who grew up in the 1930s during the Great Depression emerged with a fear of the loss of money. Thus they valued money highly and tended to be thrifty and savings oriented. After the 1930s, there was a tendency to encourage spending rather than saving because of the enormous natural resources with which the United States was endowed (Karpel 1995). Those who came of age during the economic prosperity of the post-World War II era found themselves with ample resources for both consumption and savings. The baby boomer generation, generally endowed with adequate financial resources, concentrated on spending as opposed to saving. The current Generation X finds itself in a financial bind, coming of age in the recessionary 1990s, when both savings and consumption are limited, and natural resources are increasingly scarce. In fact, some Generation Xers consider themselves the Ajanitors@ of previous generations, inheriting a host of problems that must be cleaned up, such as the national debt and the Social Security system. The longevity revolution in the United States is another cause of intergenerational money conflict. Life expectancy has gone up 28 years in the United States since 1900 (Karpel 1995). This means that society will have to be able to support an unprecedented number of older persons. By the year 2030, almost 22 percent of the population is expected to be sixty-five and older. This percentage will increase to almost 25 percent by the year 2080. The longevity revolution has caused a permanent shift in the ratio of elderly to younger persons. The insecurity of the younger generation in facing their financial future has led to a decline in ethical standards in the United States. A 1994 survey conducted by Money magazine revealed that more Americans were willing to cheat about money than ever before. The survey interviewed 2,250 adults nationwide, 24 percent of whom responded that they would not speak up if a restaurant waiter undercharged them, compared to 15 percent who would not do so in 1987. Nine percent of those surveyed in 1994 claimed that if they found a wallet with $100 in it they would keep the cash, compared with four percent who said they would do so seven years ago. People between 18 and 34 years old turned out to be much less ethical than older adults. Of the senior citizens, 65 and older, surveyed only 2 percent admitted they would keep a wallet with $1000 cash in it, compared with 21 percent of the younger generation (Topolnicki 1994). One explanation for the difference in ethics between young and old could be that society has failed to transmit traditional values from one generation to the next. The socialization process in America has become more complex with increasing influence in the value formation process emanating from the media and from peers than from family. Another point, however, is that young people are faced with the disheartening realization that their financial futures are anything but secure. This fear creates a tendency to hold on to monetary gains, even when they are obtained through less than ethical means. The financial future looks bleak for both Generation Xers and others who are unprepared for dire predictions by economists of economic conditions during the 21st century, which could be why consumer credit and bankruptcy are so prevalent today. Credit card debt is sky-rocketing to all-time highs, with over half of all U.S. households registering card debt, leaving retailers and bank lenders unsure of what strategies to assume next. Customers are extending themselves deeper than ever before. When more than a million households walked away from debt last year in bankruptcy filings, it cost the credit card industry $8 billion (Silverman 1997). Credit card debt has increased from less than $800 billion in 1989 to $1.20 trillion (Silverman 1997) in 1997. Credit cards are easy to use even though consumers may lack the ability to soundly manage their debt. These could be primary causes for the soaring debt. Consumers in their 20s and early 30s are racking up credit cards, often taking out additional accounts to pay off existing debt. Credit card companies do not help the situation with their increasing offers of special attractions. There are offers for frequent flyer miles, money towards cars, points toward gifts and money off phone and grocery bills, plus many more incentives. People feel they must use their credit cards for purchases to get these rewards. Credit cards are faster than checks and may be too convenient, as consumers have begun charging even food purchases. Credit card usage on college campuses has increased. Charging has become a way of life to students, making Generation X=s most defining characteristic debt. With education costs as high as they are most students are required to get student loans. They then seem to have no qualms about using credit to pay for comfort or even luxury. Living within one=s means seems as distant as the Great Depression. Between 1990 and 1995 the average outstanding credit card balance of households headed by someone under 25 grew from $885 to $1,721. Carrying plastic is the norm for young people. 65% of college students have cards and they are more prone than those in other age groups to get in over their heads (Shenk 1997). Fees for school have increased by more than half. Congress has reacted to this by expanding the student loan program, while scrimping on the no-strings-attached grants. Students have had to take over more of the debt as their parents have been bearing less of the burden. Part of this is because the parents themselves are in trouble, financially. Many students begin their descent in their freshman year, when the new found freedom begins. The lure of technology, the convenience of eating out instead of cooking and partying can cost more than many students have. What pays for this? Plastic. Generation X is not alone. The boomers, who spend and borrow at a great rate, are becoming increasingly unable to pay the bills. Card companies, such as Advanta, are feeling the loss. The number of card holders jumped from 2 million to 6 million in five years, with offers of large credit lines and teaser rates as low as 5.9%. The company announced a $20 million loss in the first quarter of 1997. Credit card delinquencies rose to a record in first quarter 1997 with 3.72% of borrowers falling behind in payments. Many are seeking relief in bankruptcy (Time 1997). Debtors who filed for bankruptcy increased in a 12 month period ending March 31, 1997 by a record 1.19 million. Outstanding credit card balances hit $484.6 billion at the end of April 1997 and delinquencies increased to nearly 5.5% of all outstanding dollars. Economists believe that the much-touted U.S. economic expansion may be waning, and a recession looming (Koprowski 1997). Personal bankruptcy is relatively easy for getting out of debt so being thrifty is no longer a virtue in American society. Sometimes, people will continue spending even when they know they will not be able to pay. While the bill collectors are calling they are steadily charging until the threat of repossession comes up and then they head for the bankruptcy court. The courts will be more crowded because of the acceptance of bankruptcy as just another lifestyle choice. Credit card companies are lobbying for limits on who can file for Chapter 7, in which one=s debts disappear, wanting instead to force debtors to use Chapter 13. Chapter 13 is designed to have people pay back their debts out of future income. Card issuers are also aggressively challenging filers= pre-bankruptcy purchases (McGinn 1997). The only way to prevent the equivalent of an economic meltdown due to the aging of the baby boomers is to increase the level of personal savings in the United States. Americans lag far behind their counterparts in the industrial world in terms of their savings rate. It is not easy for Americans to save more money given the psychology of the current economic climate. When people feel positive about the future, they are more likely to invest in thinking about it and preparing for it financially. The current fatalism in American culture is exhibited most clearly in the rise in popularity of casinos. America is experiencing a proliferation of these establishments. Not only do they offer a means of escape from reality, one psychologist contends that casinos give otherwise intelligent people the psychological mechanism to allow themselves to lose and thus express their feelings of fatalism about the future (Ventura 1995). When people have money they have an overwhelming urge to spend it. Advertisers know this and shamelessly pander to the public=s lack of self control where money is concerned. The only way most people can save is by never seeing the money. Examples of this are pension plans and savings plans that are automatically withheld from paychecks. Others allocate their income between various Amental accounts@ some for saving, others for spending, as another form of self-discipline. Sociologist Viviana Zelizer dubs the latter form of savings discipline, the process of personalizing currency. This personalization can become quite idiosyncratic in some individuals. For instance, some people save the difference between the regular price and the sale price for purchases. Parents often contribute to the personalization of currency by their offspring. Children are indoctrinated by their parents= overt and subtle money messages. Parents use money to control, to punish, or to deprive children and the children learn to look to money for various kinds of emotional fulfillment that it can=t supply. The disruptive effect of money on family relationships is clearly illustrated in cases of inherited wealth, the primary source of household wealth in America. Far from solving problems in families of great wealth, money often contributes to conflict and alienation. Children of rich parents often grow up with the discomfort of living in their parents shadows, particularly those who fail to Ameasure up.@ Being the recipients of unearned wealth, they doubt their own abilities and may develop a fear that others will be critical of their Aeasy@ way of life. Inheritances are often used as a source of manipulation, with parents threatening to cut off their offspring if they do not live up to certain expectations. Children of wealthy parents sometimes lack the incentive for personal achievement that comes from having to make one=s own way in the world (Boundy 1993). Being a student, in debt and employed by a company that is threatening managerial layoffs all of the subjects of this paper are near and dear to my heart. Unfortunately, I was not born into wealth, so I can=t prove how well I could handle it. I have a nephew who is going the traditional route of school straight out of high school and a sister who filed for personal bankruptcy last year. All around me are indicators of young people with extremely expensive clothes, cars, computers, cell phones and no jobs. It amazes me that credit is so readily available to all people. There are laws against discrimination for credit, but the credit card companies, in my opinion, should be a little more selective in who they offer credit to. People who have filed for bankruptcy can still get credit cards, probably because the card companies know they can=t file for bankruptcy again for 7 years. Bankruptcy and credit card losses cost all of us money. The card companies make up their money by higher interest rates and charges for services like transferring balances or cash advances. Merchants make up their losses by raising prices. The consumer pays for theft, for breakage and for people who have not paid and been excused from paying by the court. I am with the credit card companies that want to make it harder for people to file for bankruptcy. I think the stigma that used to be attached to filing should be brought back and that society as a whole should not just accept bankruptcy as a way out. Bankruptcy should not be a way of life. I believe that America has become a country that is irresponsible with debt and that somehow people are being rewarded for this irresponsibility. I do not think this is right and I think it is high time something be done about it. Of course, the government is not setting a great example with the deficit as high as it is, but they are bringing it down. With personal spending, credit card use and bankruptcy at an all time high the public at large will be in trouble if a recession comes. America seems to be gearing up for a big fall and maybe the Generation Xers are correct in assuming they will never be out of debt. America is the number one consumer nation and everybody is trying to Akeep up with the Joneses.@ Unfortunately, a salary of $25,000 a year does not go as far as a salary of $60,000. The baby boomers were a spoiled group who had parents that wanted to do better for their children. To this end, the children got what they wanted although they still had values. The baby boomers have not conveyed those values to the Generation Xers, who have been able to get what they want through the use of personal credit, but do not have any restraint. The Federal Reserve Board did a study that showed that card balances during the past three years were being paid off before the interest accrued. This was so-called Aconvenience use@ of the cards. MasterCard International, however, unveiled data that showed that banks are earning interest on 91% of credit card balances (Seiberg 1997). This is good for lenders, but may not be so good for the public. Borrowing should be on the rise since the Census Bureau predicts the percentage of people in their prime borrowing years will peak in 2000. The strong economy can be credited for the rise in debt levels, showing the confidence Americans have in the economy. The problems will come when the economy begins to weaken. As for the future, Alan Greenspan of the Federal Reserve Board has mentioned, casually, that he will be lowering interest rates. This will make people spend even more. With unemployment at a low people feel more secure, which also contributes to spending. The employment picture may change, though, with the problems in the economy of certain Asian countries. An influx of immigrants may change the employment picture. Bibliography: Bibliography Acs, Zoltan J. and Daniel A. Gerlowski. Managerial Economics and Organization. New Jersey: Prentice-Hall Inc, 1996. Boundy, Donna. When Money is the Drug. New York : HarperSan Francisco , 1993. Darlin, Damon. AThe newest American entitlement,@ Forbes, 8 Sept 1997 v160 n5 p113. Karpel, Craig. The Retirement Myth. New York: HarperCollins, 1995. Kingson-Bloom, Jennifer. AEyes on credit: 4Q Bank Card Delinquencies Set Record,@ American Banker, 30 March 1998 v163 n60 p20. Koprowski, Gene. AAs Americans sink into debt, economists fear recession,@ Insight on the News, 6 October 1997 v13 n37 p40. Lykins, Gregory B., and Robert L. Plankenhorn. AEven with personal bankruptcies at record levels, easy consumer credit is here to stay,@ Illinois Business Review, Winter 1996 v53 n4 pg32. McGinn, Daniel. ADeadbeat nation: why are so many people in bankruptcy court?,@ Newsweek, 14 April 1997 v129 n15 p50. Murphy, Robert G. AHousehold debt and consumer spending,@ Business Economics, July 1998 v33 n3 p38. Seiberg, Jaret. AFed card study finds surprisingly little pure convenience use,@ American Banker, 19 June 1997, v162 p4. Shafer, Tim. ASailing over the fence: the rewards of good credit,@ Credit World, July-August 1997 v85 n6 p38. Shrenk, Joshua Wolf. AIn debt all the way up to their nose rings,@ U.S. News & World Report, 9 June 1997 v122 n22 p38. Silverman, Dick. AConsumer debt builds a house of cards,@ Daily News Record, 1 August 1997, v27 n92 p10. Time. AWhen boomers become busted,@ Time 31 March, 1997 v149 n13 p64. Topolnicki, Denise. AYou=d be surprised what folks will do for money today,@ Money August 1994, v23 n8 p12. Ventura, Michael. AThe psychology of money,@ Psychology Today, March-April 1995, v28 n2 p50.

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