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May 31, 2010

Defining a recession

Many economists are saying the recession is over, but how can they say that? We still have 8 million people nationwide who have lost their jobs in the last two years, and the unemployment rate is near double digits. Are economists just out of touch with the real world?

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

"Well, we don't think so. ... And this really gets at what we mean by a recession. Now I can say that economists are the ones who have defined a recession, so in some sense we can take ownership for this: A recession means the economy is going backwards.

"So think of you driving a car, and as long as you are driving that car and you are making forward progress, you are not in a recession. In fact, we would say you are in an economic expansion.

"But let's say your car stalls, and let's say you were going up a hill and you stall and the brakes don't work. You actually slide backward; you slide down the hill in your car. We'd say then you were in a recession. But once you got control of that car and you were able to stop the car -- and let's say you were able to restart the engine and able to resume your upward climb on the hill -- we'd actually say the recession is over, even though it may take you a while to get back to where you originally stopped and the car stalled.

"So as long as the economy is making forward progress, we say we don't have a recession. The recession is over. It has nothing to do with how long it takes to recover what we lost during a recession. That's a whole other matter. As long as we are moving forward economists, say we are not in a recession."

Posted by deeshore at 08:08 AM | Comments (0)

May 28, 2010

Banking on a bust

There has been a lot of talk and congressional testimony about investors who actually made money on the housing and mortgage crash. How can this happen, and is it improper?

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

"Well, here is how it can happen: When a bank or some other financial institution makes a home mortgage -- makes a loan to a home buyer -- they can actually buy insurance on that loan. That is to say, if the home buyer defaults, and they have to be foreclosed upon, the bank or lender -- if they have that insurance -- they would be paid the full amount of the loan, and they wouldn't suffer any losses. Obviously they have to pay premiums on that insurance.

"Now these insurance contracts can be bought or sold. And what happened three or four years ago -- before the recession, before the housing bust -- is people who thought there was a problem in the housing market (and they were very much in the minority, but people who thought there was a big looming problem in the housing market) went out and bought these insurance contracts on mortgages.

"Now while things were going well, they had to pay money out. They had to pay the premiums, but what they were counting on -- what they were expecting -- was for the housing market to collapse and for a lot of people to default on mortgages. And then those folks owning the insurance contract would get the rewards.

"And, indeed, there are people who have been well chronicled now in the media who made billions of dollars on this. So that is how it can happen.

"Now, whether it is improper: that is up to someone's subjective analysis. One positive out of this, you could say, is as more and more people did buy these insurance contracts and effectively were betting on a housing crash, that was a warning signal to the rest of us that, hey, there are smart people out there who think there is a problem in the housing market.

"So you can argue that allowing this process to go on does provide information to the market that there may be a problem."

Posted by deeshore at 09:21 AM | Comments (0)

May 27, 2010

Is North Carolina's economy improving?

With spring often comes hope, and we certainly need hope for our economy. There is no question that our North Carolina economy took a big battering during the recession. As we move toward the middle of the year, are we finally seeing some improvement?

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

"I think so. ... An index of factory output in our state shows that our factories are producing more. Home prices in our state actually moved a little higher in the last reporting period, whereas they moved lower at the national level.

"And very importantly for most people, we have seen, I think, a turnaround in the job market. One survey shows that employment in the job market is up for four straight months; another survey shows that it is up for four out of the last six months. I think that by this summer we should start to see significant reductions in the state unemployment rate.

"We have a long way to go. This was a devastating recession, but I do think we've seen a turn in our North Carolina economy for the better."

Posted by deeshore at 08:19 AM | Comments (0)

May 26, 2010

Housing prices and interest rates

Everyone knows the housing market imploded in the last couple of years, with average home prices nationwide falling almost 30 percent. This was after a big run up in prices during the early part of the 2000s decade. Can you point to any one economic factor that more than any other is correlated with those ups and downs of home prices?

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

"Well ... you are right: There are a lot of factors behind the boom in the housing market and then the consequent bust. But I think one clearly important factor is interest rates. We had a big run up in housing prices ... roughly from 1997 up through 2007. This was associated for the most part with a decline in interest rates, particularly those controlled by the Federal Reserve.

"For example, they moved their interest rates very much lower after the 2001 recession and after 9/11. Then beginning in 2004, it is my opinion that the Fed became very nervous about the big boom in the housing market. They wanted to cool it off, and so they increased interest rates beginning that year. And over the next two years they increased their key rate from .5 percent to 6 percent.

"Now this had a delayed effect, but clearly one of the things it did is it made buying a home more expensive. And it also hurt those folks who had taken out adjustable rate mortgages. They had to adjust to a higher rate.

"So, I'm not saying this was the only factor behind both the boom and the bust in the housing market, but clearly you can see a strong association."

Posted by deeshore at 07:58 AM | Comments (0)

May 25, 2010

Energy reserves

There is a desire in our country to become more energy independent. This could involve developing conventional sources like oil and gas as well as non-conventional fuels like solar and wind power. Regarding oil and gas, do the experts say we have significant quantities?

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

"We just had a new report published from the National Association of Regulatory Commissioners, and they did a study of energy resources in the U.S. and it was a very upbeat study. They found that we have in the U.S. -- as well as in offshore U.S. waters -- 200 billion barrels of oil waiting to be used and 2,000 trillion cubic feet of natural gas.

"Now to put that in perspective, if we were to access both of those fuels that would mean we would have more resources than most OPEC countries, and it could virtually eliminate our need for imported oil. So we do have a lot of resources.

"Getting to them is one issue, and in fact as we have seen with the leak in the gulf -- the oil leak in the gulf -- one of the big issues there is environmental.

"What I suspect will happen is that this is where technology will come to the rescue. We will develop better and safer and more cost effective ways of accessing these resources. But the bottom line is they are there."

Posted by deeshore at 09:12 AM | Comments (0)

May 24, 2010

North Carolina's research edge

Technology is a major part of today's economy, but to both maintain and expand that technology, cutting-edge research -- including university research -- needs to be done. In looking at centers of academic research around the country, how does North Carolina stack up?

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

"As you might expect, a lot of this research at universities is taking place at major population centers in the country. So, for example, if you look at the top five regions in the country for academic research and development they are in New York City, Boston, Washington, Los Angeles and San Francisco.

"But guess who is number six? The Raleigh-Durham metro area. In fact, we had $1.5 billion of academic research spending in 2006 that puts us just behind Boston. And we are the only smaller metropolitan area in the top ten.

"So I think this tells us how important ... research and development in our universities is to the economic development of both the Triangle and of North Carolina."

Posted by deeshore at 10:02 AM | Comments (0)

May 21, 2010

The largest debt?

When people look at today's national debt of $11 trillion, most of us can only gasp. Is this the largest national debt we've ever had?

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

"Well in dollar terms, you are absolutely right. I mean who of us can conceive what $11 trillion is? But that is actually not the best way to measure the size of the debt. Just like if someone came to you and said they had a $100,000 worth of debt, you wouldn't know if that was big or small because it would be based how much income or how many assets they had. Same way with the national debt.

"What we have to do is put in comparison -- put it in relative terms. And what we typically do as economists is look at our national debt as a percent of our total annual income -- something we call gross domestic product.

"And when we do that, we see today's debt is around 80 percent. It has actually been higher. During World War II and immediately after World War II, we had the national debt as a percentage of GDP of over 100 percent.

"The national debt as a percentage of GDP usually goes up during wars and recessions, and of course we've had both recently.

"The big issue -- the big issue -- is will we follow the path of the past; that is, after wars and recessions we've seen the national debt as a percentage of GDP go down. That, I think, is going to be the challenge today."

Posted by deeshore at 10:23 AM | Comments (0)

May 20, 2010

Can we grow out of the deficit

Reducing $1 trillion federal budget deficit is one goal that most everyone has. The hard part is how. One viewpoint says, 'Don't worry; the deficit will drop as the economy grows.' Can we count on this happening?

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

"Partly. ... The deficit is now about 11 percent of the economy -- 11 percent of what economists call GDP. And actually the goal of policymakers is not necessarily get that deficit to 0, but to get it to 3 percent of GDP. And what that means is that if the economy on average is growing at 3 percent, you can afford, if you will, to have your deficit to be 3 percent of GDP. You don't want it to actually be more than that.

"Experts think that economic growth will cut that 11 percent deficit of GDP in half to about 5.5 percent. And so then if you say, '5.5 percent and our goal is to get to 3 percent -- that leaves us with 2.5 percent of GDP to cut.' And in dollars, that amounts to $350 billion.

"So what many in Washington think is we really don't have to worry about reducing the deficit by $1 trillion; we really have to worry about reducing it by $350 billion.

"Now that is still a big number, and the guessing game in Washington right now is what combination of potentially new taxes and spending reductions will politicians be able to agree upon to get $350 billion dollars a year."

Posted by deeshore at 02:30 PM | Comments (0)

May 19, 2010

Education and crime

One of the longstanding recommendations for reducing the likelihood that an individual will engage in crime is to make sure that person receives a good education. Is there a relationship between education and crime? And if so why?

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

"There is. Studies -- many studies -- have shown that there is what we call an inverse relationship between education and crime. That is, the more education a person has, the less likelihood they will engage in crime.

"And two reasons are given for this and really have been found in the literature: One is economic. That is to say that if you have more education, on average that is going to lead to a better job, higher wages. And so there is less economic incentive to engage in crime where engaging in that crime might be to get money to get property. If you are earning a good living, and you have a good job and good pay, there is no reason to do that.

"The other reason comes from the social side, which says that more education may teach individuals to better relate to others. Also to be more patient; that is, to be willing to put off buying something until tomorrow. And these are characteristics that have been found to deter someone from crime.

"So I guess the bottom line here is when we look at spending on education, when we look at spending on schools, we should view that in part as also fighting crime."

Posted by deeshore at 08:03 AM | Comments (0)

May 18, 2010

Debt and the recession

It seems obvious, but is it true that areas of the country that had a big build up of debt before the recession have also had the biggest fall during the recession?

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

"We have a just published study that looked at the severity of the recession within U.S. counties -- so these are small areas of the country. And what the researchers did was very simple. They looked at each county, and they looked at the build up of household debt in those counties in the years prior to the recession, specifically 2002 to 2006. And then they related that build up in debt along with other economic factors that would affect the severity of a recession to indicators that suggested how bad the recession was -- like bankruptcies, unemployment, and reduced spending. And lo and behold, ... they found what we think they would find but would make sense, and that is that counties that had the biggest build up in household debt actually had the biggest drop during the recession.

"That is to say, they had the biggest increase in bankruptcies, the biggest increase in unemployment and the biggest reduction in spending.

"And again this make sense: If you have high debt and you have a recession coming, you are going to have to cut back more than households that have low debt.

"So again this is what we expect. It's confirmation, but it is still good to know."

Posted by deeshore at 08:16 AM | Comments (0)

May 17, 2010

Must interest rates rise?

There seems to be general agreement that interest rates will rise over the next year because the economy is recovering and the Federal Reserve's efforts are keeping a lid on inflation. But does everyone accept this forecast?

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

"Not really. ... The conventional wisdom is that interest rates will rise, and ... they will rise because loan demand will come back as the economy improves. And also because the Federal Reserve wants to head off higher inflation, they have kept their interest rates very, very low and so they will push their benchmark rates up.

"But although that is the majority opinion, there is a minority opinion that says, 'No, interest rates either will stay as they are or they may actually go down.' And this opinion is pinned on something called consumer de-leveraging. Translated: On what we've seen over the last couple of years, ... consumers have actually been paying down their debt. I know that is hard to believe, but they have been doing it. Because of the recession, because of the change, (the) situation in personal finances, consumer debt is actually going down.

"And the thought is that consumer debt is going to have to continue to go down. Because this recession has so devastated household finances, people are not going to be able to borrow like they used to. And they are actually going to have to pay down on debt.

"If that happens, then what we are going to see is consumer borrowing potentially go down, which could potentially negate any increase (in) the federal government or business borrowing. And that we would not have the demand there for new loans and that would put downward pressure on interest rates. Or at the worst hold interest rates where they are.

"So this is a very interesting battle between forecasters of where interest rates are going to go."

Posted by deeshore at 08:14 AM | Comments (0)

May 14, 2010

What are asset bubbles?

Some have said that the development of an asset bubble in the real estate market was the recession's real cause. What are asset bubbles? And can they really trigger recessions?

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

"Of course assets are investments -- ... anything from stocks to bonds to gold to homes. And economists believe that the value of any asset is anchored by that asset's fundamentals. So if you are talking about a stock, ultimately what determines the value of a stock is whether that company is making a profit and how profitable it is.

"If you are talking about homes, a value of a home is going to be determined by the supply of homes, the demand for homes and the number of people and the income of those people wanting to buy homes. That is going to determine home values.

"We say that asset bubbles exist when the asset values become detached from those fundamentals -- that is to say, you can't explain the value of the asset by these economic fundamentals -- particularly, they have gotten too high.

"And we saw that, for example, with technology stocks in the late '90s where they didn't have any association with the underlying profitability of the company. And we also saw it with housing values earlier in the 2000 decade.

"And the problem with asset bubbles, of course, is they can be pricked. They can come down. And we saw that also with the tech bust, and we saw that with the housing bust.

"However ... it is very difficult at the time -- at the time -- to know if you have an asset bubble. This is something the government is now struggling with, particularly the Federal Reserve."

Posted by deeshore at 07:59 AM | Comments (0)

May 13, 2010

Will higher gas prices break the economy?

Just when we are getting some positive news on the economy, gas prices start to rise again. Why? And will their increase derail the recovery from the recession?

"Gas prices are rising because of the economy, especially world-wise, is recovering. We see a very close path between economic activity and the use of energy especially oil energy. When the economy goes down, when it is in a recession, people (and) businesses use less energy. People drive less. Oil usage goes down. That puts downward pressure on prices. The reverse (happens) when the economy comes back, and the world economy is coming back and that is putting upward pressure on oil and gas prices.

"In terms of whether that will cripple the economy, I don't think so, but I am going to put an asterisk on the side of that. First of all, people, I think, tend to overestimate how much out of their budget goes to gas. It is under 7 percent of your total spending goes to gas. About every dollar increase in gas prices send about $7 billion of consumer spending out of the country, but that is less than 1 percent of total spending. So the economy is hurt by higher gas prices, but again it is a relative term, not that much.

"Researchers have found -- economic researchers have found -- that we can actually absorb higher gas prices if they go up in drips and drabs. If they go up a little bit that allows us time to adjust, maybe to adjust our driving habits, maybe to buy more fuel efficient cars.

"The gas price to really watch right now is $4 a gallon. That was the last peak, and that is when we really saw a change in behavior and we really saw adverse effects on the economy. So $3 a gallon, we will probably whiz through that without looking twice. Four dollars a gallon, I think, is where it could really hit the economy."

Posted by deeshore at 08:39 AM | Comments (0)

May 12, 2010

Is Social Security progressive or repressive?

Social Security is a program where individuals pay in money while they are working and then receive money when they are retired. But does everyone get back the money they put in, or is there some shuffling around of the funds?

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

"This is not well understood. There is actually a lot of shuffling around of the funds. The money that a worker puts in does not go in with their name on it, tagged, and that is the only money they get back. Some people may get back a lot more; some people may actually get back less.

"And indeed if you look at the entire Social Security system, actually it is what we call a progressive system. That is, low-income people actually get back more than they pay in; higher-income get back less than they pay in.

"Let me give you some statistics: A researcher calculated something called the net tax rate on Social Security, meaning that that takes account not only what you pay in but what you pay back. For the lowest income households in the country, Social Security has a net tax rate of minus 27 percent. Meaning effectively, they get back 27 percent back -- more back -- than they pay in. Middle-income households, a net tax rates of about minus 5 percent. Upper-income households, a net tax rate of plus 3 percent.

"So there is redistribution, if you will, within Social Security from higher-income households to lower-income households."

Posted by deeshore at 08:15 AM | Comments (0)

May 11, 2010

Not paying taxes

Is it true that almost half of U.S. households will not legally owe any federal income taxes this year?

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

"The key here is it is income taxes. I have heard some commentators say just 'taxes,' and that is not the case. We are just talking about federal -- in fact, federal income taxes. ...

"Over the last couple of decades really there has been an effort to reduce the tax burden -- federal income tax burden. Let me correct that: on low-income taxpayers. And we have reached the point where about half of taxpayers do not pay federal income taxes.

"Now it still means those folks pay other taxes -- lots of other taxes. They pay federal payroll taxes, Social Security. They certainly pay state and local income taxes. They pay sales taxes, gasoline taxes and property taxes.

"And indeed if you look at all federal taxes, primarily the income tax and the payroll tax combined, only 10 percent of households pay no federal taxes.

"So you have to listen carefully to what is being said here, but it is true that there has been this effort to reduce the burden of the federal income tax on certain taxpayers, and that is why we get that 50 percent number."

Posted by deeshore at 09:13 AM | Comments (0)

May 10, 2010

Would a state jobs tax credit work for NC?

With North Carolina's unemployment rate in double digits, everyone is eager to see jobs come back. One idea is to have a jobs tax credit similar to the federal credit. A business would receive a credit toward state taxes paid if it hired an unemployed worker in North Carolina. Would such an idea work?

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 issues here: One, how many unemployed folks would be hired due to this credit? And, second, how much would it cost the state and would the state come out ahead or behind?

"Now one idea has been to perhaps have a $1,000 tax credit, meaning if you hired someone who was unemployed, that company would get a $1,000 tax credit, meaning their taxes to the state would go down by $1,000. My analysis and others suggest that this would increase the hiring of the unemployed, but not by a lot -- maybe 5 percent -- because actually when you look at $1,000 in the scope of the total cost of an employee, not just their salaries but also their benefits, vacations, etc., that is a rather modest amount -- so maybe 5 percent increase in hiring of the unemployed.

"The issue, though, is that it is hard for the state to know, in fact impossible to know, would that unemployed person have been hired anyway? The economy is actually getting better. We are seeing hiring going up, and so some unemployed people are going to be hired anyway. And if you have a $1,000 tax credit, you are going to give that tax credit to any business whether they would have hired that person anyway or whether they would have hired them only due to the tax credit.

"And, yes, the state would save some expenditures -- maybe Medicaid and unemployment compensation. But since you have to give that tax credit to every unemployed person hired, my analysis shows the state would actually lose money. And the federal government can do this because of course they can borrow money; they don't have to balance their budget. North Carolina has to balance their budget, so this is always a concern when you come up with these ideas."

Posted by deeshore at 08:27 AM | Comments (0)

May 07, 2010

Is the recession over?

A group of prominent economists gathered recently to talk about the recession. One of their goals was to decide if enough information was available to declare the recession over. What did they decide?

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

"This is a group of economists that work for a private think-tank called the National Review of Economic Research. They are actually charged with making decisions about when recessions begin and end. And they did not come to a conclusion ... at the recent meeting.

"What they said is they saw many indicators up, but they are not ready to say that this recovery that appears to be here is sustained.

"They look at things like income, jobs, retail sales, factory production, and, again, most of those have been rising especially since last summer.

"The smallest gains we have had is in employment. But they were worried that well things could perhaps dip back down. And so they were going to delay making a decision, which is not uncommon.

"And one thing that I think comes out of this is many people listening to this may say, 'Well the recession, over; gee, we still have 11 percent unemployment rate in this state. We still have people out of work. Profits are not back. How can economists say the recession is over?'

"Again, you have to pay attention to what we mean by recession being over.

"What we simply mean is a recession suggests that the economy is actually falling -- things are getting worse. Once things stop getting worse and begin to get a little bit better, we say the recession is over. It does not mean that we are back to where we were pre-recessionary levels, but it does that we are headed up."

Posted by deeshore at 08:00 AM | Comments (0)

May 06, 2010

Trends in the mortgage interest rate

Home loan interest rates are one of the key factors determining whether a household can afford a home. What are the trends in mortgage interest rates?

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 year we have seen a big drop in mortgage interest rates. So that has actually helped people buy homes. So, for example, 30-year fixed rate (is) down from the mid-6s -- 6 percent range -- to about 5 percent today. One-year adjustable rate mortgage a year ago was a little bit over 6 percent now it is down to 3 percent today.

"So we have had big drops. That has actually helped people both buy new homes and has actually motivated people to be able to refinance homes. Now of course big question is, Fine, that's history; what's the future? Where are interest rates going?

"Most economists think ... mortgage interest rates are headed up. Maybe not very fast, but we think they are headed up. In fact, we have already seen some upward movement in the 30-year fixed rate recently. And this is because of two things: Number one, we think the Federal Reserve, which does have some control over short-term interest rates, will move their key rates up probably within a year. And then also we worry about the effects of the massive borrowing by the federal government on the credit markets. Will that cause interest rates to go up?

"So we maybe at a bottom here -- meaning that if you are ready to buy a house, just in terms of the financing, now is probably the time."

Posted by deeshore at 09:59 AM | Comments (0)

May 05, 2010

What are derivatives and why are they under scrutiny?

One of the investment vehicles that seems to have acquired a bad name during the financial crisis is the derivative. What exactly are derivatives and why have they come under scrutiny?

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

"They are an investment that has actually been around for centuries. It is simply an investment where you are betting on the change in some underlying investment -- particularly the change in the value of some underlying investment -- so it is your return in derived (therefore derivative) from another investment.

"So you are betting on price movements, and you can bet that the underlying investment goes up in price or goes down in price -- doesn't matter, you can take either bet. And if you bet right you win; if you bet wrong, then you lose.

"Businesses use these all the time to what's called hedge against big price fluctuations. For example, an airline might buy a derivative that will pay off if jet fuel rises. Therefore they will make money from the derivative and use that money to compensate for the increase in cost of jet fuel.

"Also economists think that derivatives are helpful in giving a sense to the market of where investors think prices will go. So if you see a lot of buying of derivative that is betting that, for example, oil prices are going up, that may be that's a good indication that, hey, the market thinks that oil prices are going up.

"The problem that we ran into with derivatives is that many of them were bought with very low margins that ... didn't have a lot of cash involved. And so when those derivatives actually lost money, the investors lost big, big, big money."

Posted by deeshore at 08:30 AM | Comments (0)

May 04, 2010

Stock market crashes and retirement

The recession's big stock market decline has affected many people, including those just getting ready to retire. With such a significant loss in wealth nationally, will these individuals choose to postpone their retirement?

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

"We have a new study that actually looks exactly at this question, and the answer is not much: That is to say, ...the study found that those folks who are just getting ready to retire, as a result of what's happened in the economy in the last couple of years, they are telling the surveyors that they are going to postpone their retirement by an average of only one and a half months -- one and a half months. Now why is that?

"Well, one reason is that those folks actually did what investment advisers have told people to do: As you age, you put your money in less risky investments. You move away, for example, from the stock market. This survey found that those near retirees have only 15 percent of their wealth in stocks.

"Much more important to them in terms of their retirement benefits are Social Security and their defined pension plans. Both of those have not been adversely impacted by changes in the stock market.

"Now, another reason factoring into this is that less than 2 percent of these upcoming retirees have negative equity -- that is, they actually owe more than their house is worth. They have negative equity in their homes.

"So all in all, people who are just getting ready to retire seem to have been largely not impacted by the changes in the investment world of the last couple of years."

Posted by deeshore at 09:12 AM | Comments (0)

May 03, 2010

What happens with tax rebates?

Whenever tax rebates go to households, there is a debate about what will be done with the money: Will it be spent, or will it be saved? What happened with the most recent tax rebate?

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

"To put this in context in 2008, it was clear we were in a recession and so one of the things the government did then in the summer actually of 2008 is they said, 'Hey, we are going to give people a tax cut. We are going to rebate some of your income taxes. It is going to be temporary, but we are going to give you some money and we hope you go out and spend it to help the economy.'

"Well, we now have the results in, and we find that actually people overwhelmingly saved those rebates: They saved two-thirds of the rebates; they spent only one-third.

"Economists think this is because of the temporary nature. People understand they are not going to have this money forever, and we are primarily going to put it in the bank or pay down on our credit cards and other bills.

"Also, there is some interesting results based on income. Economists -- economic theory -- would expect that lower-income people would actually spend a higher percentage of their rebates than higher income people. From the results of the 2008 survey, just the opposite was found. Spending rates were actually higher for higher-income households."

Posted by deeshore at 08:29 AM | Comments (0)