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November 28, 2008

The finances of baby boomers

Baby boomers still dominate the economy, so any changes they make can have widespread impacts. Has there been anything different in the way baby boomers have handled their finances compared to previous generations?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Yes, a very, very big difference, and we now have evidence of this. Typically, each generation has hit its peak savings period roughly between the ages of 35 and 55. That's when most people are making their highest incomes. They have some of their debts paid off. They're able to save for their future, for their retirement, for their child's college education, etc., etc. Baby boomers have not done this. In fact, baby boomers have had very low savings rates relative to their previous generations during this time span of age 35 to 55. Instead, what baby boomers have done is allowed their assets to do the savings for them, first with big jumps in the stock market and then this decade with big jumps in the housing market. Now recently of course, both of those markets have plunged, and what this has done is put many baby boomers in a very precarious situation for their future. In fact, now it's estimated that two-thirds of baby boomers will not be prepared financially for their retirement."

Posted by Dave at 08:00 AM

November 27, 2008

The marginal tax rate debate

Taxes were a hotly debated issue during the presidential campaign. A big part of the debate was about tax rates paid by persons with different incomes. What were the issues?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"This was centered primarily on the federal income tax and the tax brackets in that federal income tax. Those tax brackets are also known as marginal tax rates. And here's the deal, the federal income tax is progressive, meaning that the higher your income, the higher the tax rate that you pay. But the question is always, Well, how progressive should it be? Right now, the top tax rate is somewhere between two and three times higher than the lowest tax rate. And one of the debates is, Well, should it be more than that? Should it be less than that? Another debate has to do with what will be the reaction of people in those top tax brackets if their tax rate is actually increased. There's some evidence that suggests that when people pay a higher tax rate, it actually discourages them from working more and investing more, and that revenue from them could actually go down or perhaps grow at a slower rate than anticipated. So you could argue that very, very high tax rates could be counterproductive for the economy. So these are the debates about tax rates, and I think we will probably see these debated even further with the new administration economists."

Posted by Dave at 08:00 AM

November 26, 2008

The GDP report

Some call it the nation's economic report card; this is the quarterly report on the output of all the nation's factories, farms and offices, technically known as the gross domestic product, or GDP for short. We just had the preliminary GDP report for the third quarter recently released. What did it tell us?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, it wasn't a good report. It showed that GDP fell for the three months of July, August and September. This means that the economy actually shrunk during those three months. To many people, this isn't a surprise because obviously we've been dealing with a challenging economy for several months. Now by some definitions, a recession only occurs when we have two straight quarters of economic shrinkage. So we've had one in the third quarter, and many economists are expecting that GDP will fall also in the fourth quarter, in fact by a much bigger amount. So, therefore, by that definition, we would certainly see a recession called, or we will have an economy, if you will, that qualifies for a recession. Now other economists take a broader view of a recession and say that we don't really need to have two quarters of economic decline. In fact, we didn't have that in the 2001 recession. They look at factors like job market and consumer spending. But regardless, it looks like we're going to have a recession by any way that you measure it."

Posted by Dave at 08:00 AM

November 25, 2008

Inflation or deflation?

Earlier this year, there was much concern about runaway inflation. Now we hear noises about a deflationary economy. What's the difference, and how can there be such a quick shift from inflation to deflation?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, first the difference. Inflation means that average prices in the economy are rising. Deflation's the opposite. It means average prices in the economy are falling. Earlier this year, there was a big concern about inflation. It was running on average about 4 percent. Of course, there were very large increases in some sectors, like energy and food. But now, energy prices are falling tremendously. Housing prices are falling, and this is actually putting downward pressure on all prices. And so we are actually seeing the inflation outlook brighten quite a bit. In fact, it's probably one of the brighter pieces of the economic puzzle right now. I think many economists don't believe we're going to go to outright deflation for all prices. That is, we're not going to see the average of prices go down, although we'll see those individual prices in some sectors go down. But what we're looking at is a slower inflation rate. So rather than the 4 percent inflation that we saw earlier this year, in 2009 we may be looking at a rate half that size at 2 percent."

Posted by Dave at 08:00 AM

November 24, 2008

More money

The government has tried all sort of tactics to contain the fallout from the financial crisis challenging the country. There's now another tool at work. What is it?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, it's the good old-fashioned printing press. Now, many people probably thought that the government has already been printing more money in order to stimulate the economy. Actually, it hasn't. The treasury has actually been borrowing money, and the Federal Reserve has been trading assets they have in their portfolio for bank assets. Now the printing of money is actually under the control of the Federal Reserve, and up to this point, they've been very careful to limit the size of the increase in money because they've been fearful of sparking higher inflation. And of course earlier this year, inflation was very much an issue. Now inflation looks like a non-issue. In fact, house prices, as most people know, are falling. Oil prices, gas prices are falling. So this is putting downward pressure on the overall inflation rate, therefore, the Federal Reserve feels it has the leeway to simply crank up that printing press and print more money. Now many economists, you may be surprised to know, are actually applauding this because this is a classic weapon that Federal Reserves in the past have used to fight a recession."

Posted by Dave at 08:00 AM

November 21, 2008

Long-term North Carolina job prospects

Although the immediate job future isn't bright, we do expect the economy eventually to rebound. When it does, what sectors will experience the greatest job growth in our state?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"This is really important because although people, I think, are down on the economy now with job prospects not very bright, the economy will come back. North Carolina's still projected to be one of the fastest growing states in the future, so we will generate jobs. In terms of where the biggest job-gainer sectors will be, health care tops the list. I think that's obvious because of an aging population. We're spending more on keeping ourselves healthy, so anything in health care will generate jobs. Professional services, everything from engineers to architects, CPAs. Construction. As we grow, we will need more buildings and houses and so forth. And tourism. North Carolina still is a state that has a very active tourism sector, and that is expected to continue to grow in the future. Other sectors that will generate jobs, perhaps not at the same pace, will be wholesale and retail trade, financial services and information technology. Now there will be a couple of sectors where jobs will decline, even though economic output from those sectors will increase. And those include manufacturing and natural resources."

Posted by Dave at 08:00 AM

November 20, 2008

Who's taking care of the home?

There have been many changes in our society over the decades, but certainly a big one is the increase in the percentage of women working outside the home. As a result, women may have less time to devote to chores around the home, like cleaning, cooking and child rearing. So, who’s taking care of the home today, if anyone?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, believe it or not, men have actually picked up most of the slack. It is true that women are spending less time at household tasks as the number of opportunities for women in paying employment outside the home has increased (i.e., more women have gone to work for pay outside the home). In fact, the average woman today spends 18 fewer hours on household work per week than her counterparts did 100 years ago. But men are actually spending 13 hours more per week on housework than those counterparts 100 years ago. So, 18 down for women, 13 up for men, that still leaves a gap of 5 hours per week, but the point is there has been adjustment in the household. Women are doing less because they're working outside the home more, but men are doing a little more at home also."

Posted by Dave at 08:00 AM

November 19, 2008

The future of manufacturing

Many people are pessimistic about manufacturing. They see manufacturing employment continuing to fall, entire sectors of manufacturing disappearing and foreign countries rapidly increasing their manufacturing activities. Is manufacturing in the U.S., therefore, doomed?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Not at all, and I would argue this is one of the bigger myths in our economy. Actually, the United States is still - still - number one in manufacturing output. That is, if you measure everything that we manufacture - that comes out of a factory door - we manufacture more than any other country, including China. And, indeed, our manufacturing output has actually been going up rather than down. We manufacture more today than we ever have in our history. Now, I think what confuses people is that manufacturing employment has been going down. Actually, it's been going down in most areas of the world, but that's due to the fact that manufacturing workers are becoming more productive. They can do more. They're responsible for more output. So, yes, there are fewer people in the factory, but each of those people is responsible for making much more factory output and, therefore, we're seeing total output going up. So I see big, long life for manufacturing, both in the U.S. as well as in North Carolina. But it will be a different kind of manufacturing, and it will be a manufacturing where the workers are very well trained and very productive."

Posted by Dave at 08:00 AM

November 18, 2008

Bear markets

We're hearing the term "bear market" applied to today's stock market. What are bear markets and how frequent are they?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"There are two categories of trends, if you will, in the stock market. One is the bull market, and that means stocks are moving consistently higher. The other is the bear market, which is the opposite, where stocks are moving lower. In the last 100 years, there have been three major bear markets: 1906 to 1921, 1929 to 1942, and 1966 to 1982 over all these years. In each of those categories, the stock market did decline. Now, some people - importantly - are saying that we may be in the middle right now of another bear market. Indeed, if you go back to 2000, the stock market has dropped an average of almost 4 percent each year, so pessimists about the stock market are saying, 'Yes, that's indicative of the fact that we're probably in for another several years of the stock market being very wobbly.' That would constitute the fourth major bear market of the last 100 plus years. Others are optimists and say, 'No, that we'll come out of this, the stock market will come out stronger.' So you get the classic conflict between the bears and the bulls."

Posted by Dave at 08:30 AM

November 17, 2008

Has the housing bubble burst everywhere?

The plunge in housing prices in the U.S. has been cited as the main cause of the financial crisis that now confronts the nation. Is our country the only one to experience this drop in housing prices?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Actually, we're not. We have seen this decline in housing prices worldwide, which leads some economists so say that the reason for this is probably some worldwide issue, which we'll get to in a moment. But in fact, we've actually seen housing prices go down at a much greater rate in many countries other than the U.S. Denmark, New Zealand, the United Kingdom, Spain and Canada, they've all had recently bigger declines in housing prices than has the U.S. Now again, what this indicates is there may be something worldwide going on unrelated to a country's particular institutions and regulations and so forth. One fact that economists point to is the worldwide savings glut that occurred this decade, primarily due to savings coming out of developing countries like China. Much of that money eventually went into housing, bid up the prices of houses to unsustainable levels, and we're now on the downside of that. The housing bubble has burst. So this has been a worldwide phenomenon where you see housing prices pulling back virtually everywhere in the world."

Posted by Dave at 08:00 AM

November 14, 2008

Tried and true investment principles

With today's situation in the financial markets, investors are looking for some guidance for making their savings grow. Can you offer any suggestions?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"I would remind our listeners about two very tried and true investment principles: diversification and age. Diversification, of course, is very simple. It means not putting all your investment eggs in one basket but spreading them around. Now the logic of this is that although some of those eggs won't do well at a particular point in time, others will. So at any point in time, if you're diversified, you tend to have a balance; some investments doing well; other investments not doing as well. But on average, you'll get a modest, consistent rate of return. That's what you're striving for with diversification. So this would be a good time to review that principle and think about, perhaps in the future, having some money in very safe CDs and bonds. On the other hand, having some money in more risky stocks. Have a little gold. Have a little real estate. Mix it up so that you are never caught in a situation where all of your money is going down at the same time. The other principle is age, and what I mean here is the age of the investor. That is, your age is often going to dictate how much risk you want to take in your investing. When you're young, you have many decades ahead of you; time can correct investment mistakes. When you're older, you have a limited time to live, and therefore, you need that money. You probably want to err toward safety. So consider your age in determining where to put your investment money."

Posted by Dave at 08:00 AM

November 13, 2008

Do you know your investments?

The financial crisis of the past couple of weeks has prompted many people to reconsider their investments. People are questioning whether they should keep money in their 401K accounts and mutual funds. Have these investments suffered during the financial downturn?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, you really can't say because 401Ks and mutual funds are not types of investments. They're ways of investing, and I think that this has perhaps come as a big shock to people. In fact, you hear a lot of people talk about, as you said, 'Well, my 401K is going down, mutual funds are going down.' Well, not all of them are because they can invest their money in a different way. So I think one of the lessons that people ought to take out of this financial turmoil that we've had over the past couple of weeks is, for example, to look at their 401K and ask, 'Where's that money being invested?' Is it going into safe things like CDs or is it going into more risky things like stocks? And most people have some control over that. You're given options in your 401k of where you want to put your money, so this is an excellent time to review that for the future and decide where you want to put that 401K money. Same thing with mutual funds. There are thousand and thousands of different kinds of mutual funds. They're not all in the stock market. Some are in very safe investments. So find out where your money is going in these two crucial ways of investing money, track that, make decisions so that you won't be unaware in the future about how your money is doing."

Posted by Dave at 08:00 AM

November 12, 2008

Why is banking special?

The federal government has been engaged in a major effort over the last few months to rescue the banking system of the country. But why would the government do this when it wouldn’t necessarily rescue other industries.

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Over the last couple of months, I've been asked this many, many times. Someone will come up to me and say, 'Hey, I have a little shop, and if I get into trouble - financial trouble - and I have to go belly up - declare bankruptcy - the government's not going to come in and bail me out.' And that's true. Therefore, why should banks get special treatment? Well, I think the answer is because the banking sector is special. Let me give you an analogy. Think of the heart in our body. What does the heart do? Well, it pumps blood throughout the body. We need blood being pumped throughout the body to, actually, keep us alive, keep all the cells nourished. Well, think of the banking system as the heart of the economy. It pumps the blood of the economy, which is money and credit throughout the economic system. So if the banking system fails, if the banking system stops, you don't get that blood pumped throughout the economy, and the entire economy stops. We saw this in the 19th century, when we didn't have the government as a backstop to the banking system. So I think the banking system is, indeed, special because it's crucial for the rest of the economy. And that's why in most countries, there is a backstop - there is a government backstop - so that when the banking system does have problems, the government does step in to try to revive it."

Posted by Dave at 08:00 AM

November 11, 2008

Where will the jobs be?

Every couple of years the government makes projections of what kinds of jobs will be created during the next decade. The latest report was just released. Give us a summary of what was said.

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"The U.S. government does these reports every couple of years, and they're looking, really, for fast employment growth in about five economic sectors. One, of course, is going to be health care. Health care is growing because of changing demographics, because people are more interested in health. So jobs in health care, that's going to go everywhere from hospitals to doctors and practitioners in doctor's offices. That's going to be a big job creator. Another cluster is going to be in what I would call construction, real estate, engineering, architecture, jobs relating to building things. It's projected after we get rid of this housing glut, we're going to go back to a situation of building more homes. We need a lot of rebuilding, for example, of our infrastructure in the country. So that should be a growing sector. Technology, clearly that's a growing job sector; technology, everywhere from biotech to computers to now, I think, energy technology. That will generate a lot of jobs. Finance management and consulting. Again, finance doesn't look so good now. Once we get over this rough patch, though, that area should grow. And finally, retail and wholesale sales. That's always a big sector in term of jobs. Simply, as the population grows, which it is expected to do, we will see jobs there grow. Now, overall manufacturing. I haven't mentioned manufacturing. Manufacturing jobs will dip, but in selected areas, there will be increases in jobs in manufacturing, particularly in metals manufacturing, aerospace manufacturing and very important to North Carolina, boat building."

Posted by Dave at 08:00 AM

November 10, 2008

How bad of a recession?

With most economists now saying the economy is in a recession, the question becomes how severe the recession will be. So, are we looking at a mild, average or bad recession?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"In judging recessions, we look at two characteristics, length and depth. In terms of length, many economists now think this recession may have started in the fall of 2007, may last about 2 years, until the fall of 2009. That would make it one of the longest recessions since World War II. In contrast, for example, the recession of 2001 was less than a year. This recession is also expected to be deeper. For example, during the 2001 recession, unemployment went up to only 6 percent. We're already at 6 percent, and many think that we could go to perhaps 8 or 9 percent. That would still be short, however, of the 11 percent unemployment rate we saw in the early 1980s recession. Now, in terms of value of production - what the economy produces - many economists are looking to this recession to see a reduction in the value of economic production of about 3 or 4 percent, which again would make it one of the biggest declines since World War II."

Posted by Dave at 08:00 AM

November 07, 2008

What's a recession?

More and more, economists are now saying the economy is in a recession. Many of us use the word "recession," but what exactly does it mean?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, it actually means the economy recedes, contracts, gets smaller. And there are two parts to what economists call the business cycle; there's the part where the economy is growing, expanding, usually incomes are going up, jobs are increasing. And then there’s the part where we take a step backward. That's a recession. All those good things we saw during the expansion tend to go in the opposite direction. Recessions are actually quite common. If, indeed, we are in a recession now, this would be the 12th recession since World War II. The good news is that the growth periods - the expansion part of the economic cycle - are much longer than recessions, so the economy does make progress over time. Another way to think about this is during expansions, we maybe take four steps forward, and during recessions, we take one step back. But recessions aren't fun. As I said, unemployment goes up, profits and income go down, stocks go down, and in the public sector, government revenues tend to slow, maybe even go down. That makes it even harder for our public decision makers."

Posted by Dave at 08:27 AM

November 06, 2008

Is a change in consumer culture coming?

Some observers of the economic and financial scene think we may be in the middle of a major change in how consumers view their income and spending. What changes are expected?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, I think it would be fair to say that for the last several years, we've been a borrowing culture. Now, this was not based on, really, throwing thrift out the window. It was simply based on incentives. When you have low interest rates like we had earlier this decade and when the value of your assets - like your home, your stock portfolio - is rising, then borrowing makes sense, and saving doesn't make sense. And of course, as a nation, we did a lot of borrowing, and we did very little saving. Now, those economic fundamentals have changed. Interest rates are higher, and of course, most people know, unfortunately, that asset values, many asset values, are going down. Housing values are going down in many places. The stock market's going down. And so what this environment does is make borrowing more expensive and makes saving more likely and more of a normal thing to do. So if these conditions are maintained, I would expect to see a whole change in our culture of how we view borrowing and saving. People are still going to borrow, but I don't think they're going to go on the borrowing sprees that they were. And I think savings will be much more in, because people will think, well, if I want to buy that house or buy that car down the road, I can't really rely on going into my home equity because my home equity is much smaller, interest rates are much higher. I'm just going to have to save money. I'm going to have to do it the old-fashioned way. So this would obviously mean a total change in how we view personal finance. Some would say it's for the best. Some would say, well, it's just reacting to changing conditions."

Posted by Dave at 08:00 AM

November 05, 2008

Confronting Social Security

We've heard only a little bit about Social Security during this year's presidential campaign. Yet this very important program has serious issues in the future, mainly that payouts are expected to exceed revenues, thus producing a big deficit. Are there some simple ideas that could be used to cut this projected deficit?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, we had one idea that was floated about 4 years ago called private accounts. It was very controversial. Essentially, it would turn Social Security into a 401K plan. It would allow people to invest their Social Security taxes into, for example, the stock market. That didn't fly, so I don't think we're going to revisit that any time soon. Instead, I think there are actually some fairly simple things that could be done to at least contain the deficit - projected deficit - in Social Security. One would be to raise the retirement age at which you can receive full Social Security. This is based on the fact that people are living longer. When Social Security was started, and the retirement age was set at 65, that was because 65 was actually older than the life expectancy. Most people wouldn't live to collect Social Security. Now, of course, life expectancy is in the 70s, so one suggestion would be to raise that age for full receipt of Social Security up to maybe 70 or 72. Another idea would change how Social Security payments are indexed to inflation. Right now, they're indexed to increases in wages. Wages tend to increase more than prices, so if we went to a price indexing mechanism that would save money. And then a third idea would be to means test receipt of Social Security. What that means is the higher your income - where, perhaps, you're not in as much need of Social Security - higher income people would see what they receive in Social Security cut back. This would make Social Security much more progressive in terms of its payments. These three ideas would actually go a long way toward making Social Security solvent for many, many more years."

Posted by Dave at 08:00 AM

November 04, 2008

Unfunded liabilities

The just-passed rescue plan for the banking system will add to the national debt at least temporarily. The national debt is now approaching $10 trillion. But is this amount all we have to worry about?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"No, there's a whole other part called unfunded liabilities that you may want to add to that $10 trillion. Unfunded liabilities are primarily related to Social Security and Medicare. What economists do is they sit down and say, 'Alright, let's try to project how much we're going to spend over the next x years, say 40 years, on Social Security and Medicare.' And we can do that by looking at demographics and numbers of people, etc., etc. Then let's calculate how much in tax revenues are going to be raised for those two programs, and if they match, then we don't have a problem. But if there's a gap - that is, if the expected amount of spending is going to be greater than the expected amount of revenue, then we do have a gap, and we actually call that gap unfunded liabilities. Well, the economists who have done this, unfortunately, find there's a gap. And the gap is a big one. It's in the range of $30 to $50 trillion. And of course, this is related to the fact that we are an aging society - the fastest-growing demographic group is over 65, a lot of medical expenses there. So yes, it's certainly right to worry about that $10 trillion, but an even bigger problem is this unfunded liability part of $30 to $50 trillion and how that gap might be filled."

Posted by Dave at 08:00 AM

November 03, 2008

Can higher prices ever be useful?

Most of us, unless we're on the receiving end, don't like to pay higher prices for products or services we want. Yet sometimes we see prices soar, as happened after Hurricane Ike created shortages of gasoline. Do these higher prices just benefit the seller or is there also a plus for the buyer?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Economists look at prices in a somewhat different way than non-economists. We look at prices as signals. So to the buyer they indicate the value of the product and how much of your resources you have to give up to get that product. Now we're all going to value products differently, so when a shortage of a product occurs, the problem is, How are we going to ration that limited supply among all the possible users? And for example, if the prices stays the same, and people know there's a shortage, people are going to rush to buy that product, and quickly, it's going to disappear from the shelves or from the gas pumps. Now you could have the government come in and issue ration coupons. In fact, we did that during World War II. The government, however, would have to come up with some means of doing that, have to decide who is going to get the limited product. And it takes time, of course, to issue ration coupons. So an alternative is simply to let the price of a product that's in short supply rise. What that's going to do is signal to buyers that this is a more valuable product right now because it's in short supply, and only those people who put a very high value on it will get it. And what this, again, does is it says to someone, look, if I really need, for example, a flashlight and for some reason flashlight supplies are limited, I know the flashlight is going to be more expensive, but I can go to that store, and it will probably be there because people who don't need a flashlight are going to say, 'Hey, I'm going to wait.' So it preserves the limited supply for folks who really want and need it. That's the value of higher prices during shortages."

Posted by Dave at 08:00 AM