The Consumer Debt Overhang in America is Getting Worse

Jobless claims rose in the week of August 11th from the prior week. But forecast risk is downward, as the economy accelerates and the labor market continues to tighten. This week on A Closer Look, Eugene Ludwig discusses GDP and employment numbers and how to assess the real economy for most people. 

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Episode Transcript

Speaker 1 (00:00):
This is a closer look with Arthur Levitt. Arthur Levitt
is a former chairman of the u S Securities and
Exchange Commission, a Bloomberg LP board member, a senior advisor
to the Promontory Financial Group, and a policy advisor to
Goldman Sachs. Eugene Ludwig was the Controller of the Currency

(00:21):
under President Clinton, where he also served as a member
of the Basil Committee on International Bank Supervision. In two
thousand and one, he founded the Promontory Financial Group, a
risk management and regulatory compliance and consulting firm focusing primarily

(00:44):
on the financial services industry. Recently, IBM acquired as firm
to train its artificial intelligence computer Watson, how to assist
banks and corporations with regulatory compliance. He joins me, Now
for a closer look, I should mention that I'm an

(01:05):
advisor to Promontory. Jane, You've been writing about the disconnect
you see between g d P, low unemployment and a
roaring stock market that supports the notion that times are good.
But you say a different picture emerges looking at the

(01:26):
homeless people gathered by the Federal Reserve Building in d C.
Or on visiting my hometown York Pennsylvania, where wages have
stagnated and factories have closed. In reality, most Americans are
poorer than they were before. So if measures like GDP

(01:50):
and unemployment are true, how can so many middle and
low income groups be struggling? Arthur H good question. The
fact of the matter is, Uh, in large part of
the result of technology change and globalization. Uh. You know,

(02:10):
many of the traditional jobs that supported good wages have
gone away, and the numbers that suggest GDP is growing
rapidly are homogenized numbers. And uh so, for example, of
Silicon Valley is growing tremendously, but another city the United

(02:30):
States is not growing at all, are going down. You
bring those together, uh, and it looks the picture looks
fairly good. It's kind of as if you went to, uh,
your local bar, and the average income was fifty dollars,
and then Bill Gates walked in and he's took the
average again and he said, my god, the average now

(02:50):
is eight million dollars. Some people would say, well, that's fantastic,
the average is up. Everybody must be really getting rich.
But in fact, uh, the average for everybody but Bill
Gates is still depressingly low. You say, we need the
FED and other government bodies to use new measures that

(03:11):
bring the economic reality facing our country into focus. Now,
if we need to revise our macro economic measurements, where
do we start, Arthur? I think they ought to be
The measurements ought to be disaggregated so that you can
give the headline aggregation number, which I think, by and
large and reality for most people is meaningless. But you

(03:32):
ought to disaggregate it so that it is first by
geography and then by income group, so that you can
get a more granular sense of who's being helped and
who's being hurt by the economic environment which we're living.
The St. Louis Fed reports that since two thousand, education

(03:53):
costs are up a hundred and thirty two, housing up
fifty nine, and healthcare up. Yet, over the same period,
real median wages for full time employed earners are up
only four point eight percent. Is costs versus wages an

(04:13):
area that should be included in measures of economic health? Absolutely, Arthur,
You've got it exactly right, um, Because if if I'm
if I earned a dollar and uh, you know, whatever
I really need to buy now costs me three dollars
not getting ahead, uh, And Uh. And that ought to
be measured, and it ought to be discussed, and it's

(04:37):
a huge national issue. It was reported recently that of
Americans don't have an extra four hundred dollars for emergencies.
Is this the kind of data that shows how the
economy is really doing? And should household savings in debt

(04:57):
become a more important measurement of economic health? Again, you're
you're dead on right, Arthur Uh. The consumer debt overhang
in America, which by the way, is getting worse, is
one of the things that worries me because it masks
actually difficulties that are inherent in the economy. And by

(05:18):
the way, we've been talking about median income. When one
talks about low and moderate income, the numbers are worse.
And when one looks at sections of the country that
have been perennially depressed, it's even worse, including areas like Appalachia, UM,
certain parts of rural America, and many big cities. So absolutely,

(05:41):
you're you're you're debt on right in terms of what
we ought to be looking at, Jane, you right that
fragmentation shouldn't be mistaken for diversity and about a declining
sense of shared vision and I'm reminded of the famous
GDP speech that Bobby Kennedy gave fifty years ago, in
which he said, too much, and for too long, we

(06:02):
seem to have surrendered personal excellence and community values in
the mere accumulation of material things. The GDP measures everything,
in short, except that which makes life worthwhile. What should
GDP measure and how do we get back to that
sense of shared citizenship? Well, Arthur, you're asking a profound

(06:28):
question because in addition to the economic measurements which we
traditionally used to look at the nation, I think I
agree with Bobby Kennedy that one ought to be looking
at other indicia of well being, for example, safe streets,
educational opportunity, upward mobility. They're they're a whole variety of

(06:52):
measures that measure I think, human well being. The health outcomes,
which by the way, have been going down in America
in some areas profoundly, are our real measures of human
well being, and and they ought to be as much
of a headline report as the GDP numbers. The New
York Fed reports that younger people are so cash constrained

(07:16):
and crippled by debt that they're forming households later delaying
investments in homes and neglecting other productive investments in their futures.
Is there anything that can be done about this? Well,
the plight of the middle class is something I've worried
a great deal about. The plight of younger America is

(07:39):
just as worrisome. Um. This overhang of educational debt which
young people are carrying is really pernicious. Um. It does
two things. One, uh, it doesn't give these people a
fair shake. It doesn't support the development of the economy.
And in addition, and it directs folks often from doing

(08:04):
tasks that we all would like to see done. For example,
a doctor in an emergency room at a hospital. It
may not earn a great deal of money, but produces
an enormous amount of social good. Instead, that doctor, if
he is a huge or shed overhang of debt from
college or or graduate school, is incentive to do other

(08:25):
things to earn more money to repay the debt, as
opposed to do things that are socially needed and useful
and maybe personally satisfying. You've also pointed out that young
people have been encouraged to get a college degree instead
of pursuing the skilled professions that involved more manual labor,

(08:46):
and that we need to explore new ways to find
a place for skilled crafts in America. You mentioned Germany
as an example. What do they do right that we
can learn from? Well, the the German economy does two
things I think that is that are admirable. First, there
is a genuine respect for people who uh may not

(09:09):
have gone to college, but are are superb parts of
the nation in terms of fulfilling other skill needed. Skill
areas that are are like any work noble in terms
of the way somebody does it. The second thing that
the German society does is produced an educational roadmap for

(09:33):
folks who don't go to college. So if they follow
the roadmap, they can increase those skills to a level
of high excellence, competing on a global basis in ways
that unfortunately the United States just doesn't do. You know,
in a new analysis of all fortune fanies brought out
to finding that only four point three percent of workers

(09:56):
were received a one time bonus or way age increase
tied to the business tax cuts. Now we have robust
growth occurring at full or near full employment, yet we
have falling wages. Why well, it's it really, Arthur, is

(10:17):
I think a result principally of the skills gap. We actually,
even today in a in a robust economy, have millions
of jobs going without takers. And uh they're high wage jobs,
high skill jobs, and and unfortunately too many people don't

(10:37):
have the skills to fill those jobs. Um. Instead, Uh,
they were educated at a time uh where skills training
wasn't really part of that educational background, where technology wasn't
part of that educational background, where stem subjects were not
as emphasized, and they're not ready to take those jobs.

(10:59):
That this connect is is really profound. It's something America
has to overcome for the welming of its people, and
and we're being hurt by it. As part of that.
Should we be looking at the federal minimum wage, which
is now seven dollars in twenty five cents and hasn't

(11:21):
been raised in nine years as an economic matter, Arthur,
there's a great deal of you know, toing and frowing
different points of view about minimum wage and whether if
you raise a minimum wage, people get put out of
work and more jobs go abroad. My personal view is
minimum wage is too low, um, dramatically too low and that. Uh.

(11:47):
You know, we have a really civic matter responsibility to
wage to raise these levels. But even at minimum wage levels, UH,
it's hard in America today to survive. UM. As you
pointed out earlier in the broadcast, healthcare is up dramatically,

(12:09):
food is up dramatically in terms of costs I'm saying,
and UH, and educational is up even more dramatically. At
a very minimum. You might say, we've got to raise
a minimum wage, but there's a lot more we need
to do. Gene, what are some examples of financial technology
businesses that would apply for the charter that you spoke about. Well, Arthur,

(12:36):
the the new national Charter of her UH fin techs
UH is a great thing because, UM, one of the
dangers we have in our society is you know, quite
a number and I think it's may even be the
majority of the financial system that is completely unregulated. UM.

(12:57):
For those folks who get a national charter, they will
be regulated, and that is a good thing from a
safety and soundest perspective. You can imagine, you know, quite
a variety of different companies, some that, through UH apps
and your telephone, lend money, some that manage wealth. Again
in the same kind of high technological way, some that

(13:20):
are engaged in the payment system, making payments when you
go to get a cup of coffee, and some that
actually provide technology services to more traditional institutions. All those institutions, um,
through the actions of the controller, have an opportunity now
to apply for a national charter. So how do you

(13:42):
feel then about New York state regulators saying that a
fintech charter is a regulatory train wreck in the making, Arthur,
I believe that the states in many cases offer a
charter for technology companies. Now, um, many of the companies

(14:03):
we have a we have a federal system, and many
of them are in fact licensed by the state. The
nature of the America's dual financial system is to have
a federal chartering opportunity and a state on giving this
federal charter. I think is that I mentioned a very
good thing because it allows companies to have the opportunity

(14:26):
to get the charter and a mouth America to actually
regulate them. So you think that New York is off
base in there atitude, Well, I think I have a
lot of respect for the states and the state regulation
and New York as as much as any or more
it's great UH state regulatory system. But I'm a big

(14:50):
believer in the dual banking system and the dual financial
system where you both have great state regulators and great
federal regulators. And in companies have a right to choose
which regulatory regime they want to be regulated by. So
if Amazon, for instance, got permitted to have a bank
charter and begin offering banking services, will that threaten community

(15:15):
smaller community banks? Well? Having final commercial firms, industrial firms,
or retail firms have a banking or other financial charter
sets off a whole bunch of different issues. It seems
to me, uh they're America has traditionally UM disliked the

(15:37):
notion that a commercial firms would be UH in the
banking business. And the reason is that there was a
worry there would be a tying, a sort of bias
that you'd, you know, you force financial services on people
who are buying another product at your store and not
give them a fair deal. That's been a historic view

(15:59):
in America, and before we cross the line and go
ahead and make any change in that area, it ought
to be studied with great care because there is a
danger that that that there's a conflict of interest and
inherent conflict of interest there that will disadvantage the consumer.
A Republican representative named Patrick mckenry said that the Republicans

(16:24):
should stop obsessing about cutting god Frank rules and instead
focus on legislation that will help prevent the next economic
crisis and on the technology that's changing banking. Do you
agree with that, yes, Arthur, as a matter of fact,
I do agree with that. Um. Uh. Dodd Frank isn't perfect,

(16:50):
but it was a step forward. UM. It's being refined
and we'll be refined over time. UM. On the other hand,
end Uh, one of the areas that really needs to
be addressed is it agree to which we have taken
away from our senior government officials. UM, the ability to

(17:14):
be flexible in a crisis. I think one of the
mistakes have been made over the last ten years is
actually rules that have tied the hands of the Secretary
of the Treasury. The Chairman has said in a crisis,
and in fact, it was the flexibility that they had
in the last crisis that kept the country from really
going into a tail span. Jean Mick mulvaney, the Budget

(17:37):
Director and ANYC Director Larry Cudlow and the biggest GOP donors,
the Koke Brothers, are all against the president's trade war,
and the pain for farmers and manufacturing is spreading. Are
you concerned about the effects of the trade war on growth? Well,

(18:00):
I'm a big believer in and I know it's a
well used phrase fair trade and and and I tie
that to boast free trade. I think globalized trade and
the opportunity to cross boundaries, uh is a really good thing.
And it has an opportunity to lift the well being

(18:21):
and historically the numbers show it the well being of
all global citizens. Having said that, UM, we've got to
be careful that we do it on a fair and
equitable basis. And and that does deserve a great deal
of focus. And that's real. But cutting back on free

(18:41):
trade in a vigorous fashion with a meat axe is
enormously dangerous and um, it can mean a you know,
serious declines in everybody's well being. Uh. It's what we
did in the nineteen twenties. Uh and it uh it
really in that case brought on the Great Depression. So

(19:05):
we've got to be very very careful about the restricting
trade in a in a you know, thoughtless way are
we heading in that direction in your judgment, Well, there's
certainly storm clouds on the horizon and um uh and
I'm quite worried. Uh. You know, the major tariff changes

(19:30):
affect individual populations very significantly. As we've seen in the Midwest,
our farm good situation has been affected negatively by tariff changes.
And that's they're real people trying to earn a real living, um,
and people who lose their ability to earn a fair
way to get pretty angry. I would too. Uh. So

(19:52):
these changes can be enormously disruptive on a personal basis.
And uh, this is an area dealing with international trade.
In my view, we want to push for as much
free trade as we can and it's an area where
their changes need to be made. They need to be
made with the scalpel, not a meat axe. What signal

(20:13):
would you look for, Gene, in terms of step that
the government should not be taking that might suggests that
we're going headlong into the wrong direction. Well, you read
it every day in the papers. Uh, you know, hear
it on the news. Uh. You know, you know, huge

(20:37):
both threats and actions that increase tariffs markedly UM and
UM and that's you know, highly worrisome. It's human nature
country to country when somebody takes a big, high headline
point of view that people in the other nation get angry,
it affects them economically, and then they take a retalent

(21:00):
horry of view. And that kind of vicious cycle is
something that is highly dangerous. Um. We want to create
virtuous cycles that open things up, that create more opportunity.
We don't want to be in a position to be
in a combative vicious cycle. I fear we may be

(21:20):
heading in that direction. Again. To the economy, every elected
official that I speak to says that we need infrastructure
investments for jobs with better wages. Yet nothing ever gets done.
They talk about projects which have zero funding. What's going on?

(21:46):
Is this just the way politics works? Are we ever
going to see any movement at all with respect to infrastructure. Well,
we've got to have courage and and we, uh, you know,
unfortunately not been as aggressive as we ought to be
in terms of infrastructure spending other needed expenditures with a

(22:10):
vision towards the future, like education. You know, it's interesting, Uh,
after World War Two, we had the highest GDP debt
per capita in the history of the United States, I believe,
but certainly in a hundred years. And what Eisenhower did
during that time was to decide that within this country
needed was highways, good highways going coast to coast into

(22:31):
many of our cities. And he created the Highway Trust Fund,
and he began to build a great, the greatest of
that time highway system in the world. It was a
vote for the future, a vote for the people's future.
It was a bold move at a time when we had,
you know, too much debt. Uh. We need that kind
of visionary view towards our infrastructure today. Um. And uh

(22:56):
you know it's essential we have crumbling infrastructure. Uh you know, uh,
we we just need that kind of focus for the
future and for our young people. Uh. People have confused
in America the difference between wasting money and spending it
an investment. Nobody can have a company that advances, Nobody

(23:19):
can have a city of the advances that doesn't invest
in the future. And what we need to be doing
in this country is invest in the future. And if
we don't do that. Katie Barthador, what a thoughtful and
articulate observation. He's a thought leader and expert on banking regulation,
risk management, and fiscal policy. Former Controller of the Currency

(23:43):
he founded the global financial services advisory firm Promontory Financial Group,
now in IBM company. Gen Ludwig thanks for joining us and,
by the way, if any and the audience have comments
about the program, email me at a Closer Look at
blumberg dot net and follow me on Twitter at ARTHA Levin.

(24:07):
If you miss the first part of this interview, the
podcast is available at blumberg dot com. This is a
Closer Look with Arthur Levit