Friday, April 3, 2009

David Rosnick #116

Bruce Norris is joined this week by David Rosnick, Economist at the Center for Economic and Policy Research.

Bruce talks about reading several years back that the Baby Boom generation was worth trillions and in great position to retire. David says the Baby Boomers have a fair amount of wealth and every generation typical has grown in wealth over the years. Baby Boomers, however, have been recently hit by the stock market and housing bubble that has caused some great losses.

In a recent report written by David and his team on this very issue, it says the Baby Boom situation looks much bleaker than 8 months ago. Bruce asks how they are coping with this fact. David says the Baby Boom generation has been witnessing the trend for two years. Last summer the savings rate started to increase and consumption has really slowed. The full effects of this contraction in spending and consumption has yet to fully hit the market. David says he’d like to see the government continue the money stimulus and look into subsidizing shorter work weeks, vacation, and sick leave.

Bruce asks if the wealth members of the Baby Boom generation would be harder hit by stock prices and the poorer be more affected by the real estate declines. David says the wealthiest are indeed more likely to own stock but are also more likely to be home owners. The bottom 1/5 of households could get completely wiped out with foreclosure.

Bruce asks David how he feels about recent solutions presented by the government such as the cramdown. David says he’s not so concerned but would like to see the homes go back to the bank and perhaps the individuals getting to stay in their homes and pay market rent. David says the bank doesn’t want to try to take it over and sell the property in this market. By keeping the homeowner in the home, it’s a win-win situation. Bruce brings up that the prices are very skewed in California. David says the bank just needs to decide how they want to take the loss. By not making this mandatory the banks would not participate as they are being a stubborn. Bruce asks how the lenders would react if this was made mandatory. How much would then be available for lending? David says there will always be solid prospects and that it wouldn’t really matter.

Bruce asks David about people stating their income and if they should be held responsible for that. David says that lenders were more responsible for that as he understands it. When real estate was headed up, it didn’t matter and no one cared. This is an example of an unsustainable home bubble that people refused to acknowledge.

David created a housing cost calculator which compares owning vs. renting the same home. Bruce asks if the price to own is much more than renting. David says historically it hasn’t been that different. David says when it went way out of whack that it was almost guaranteed that there would be loss.

Bruce asks if bubbles ultimately benefit people. David says bubbles that are uncontrolled is a problem. Bruce says many were refinancing and spending the money. There must have been a short-term streak of wealth. David says people thought they were very wealthy and savings rates went way down.

Bruce asks if there should be some acceptance of risk when any investment is made. David says experts gave people a lot of bad advice and since there was a lack of an alternative voice, it wasn’t very fair. People were told that real estate was the way to wealth. Bruce asks if people should absorb that risk or if there is a backstop to save them. David says Social Security and defined benefit plans act as that backstop. Personal savings is only one alternative. David explains the difference between defined benefit plans versus defined contribution plan. Bruce says that guarantees of payout were as good as investments made. David says the bubble market really hurt these potential retirement funds. When things get so out of line, people make bad planning decision.

Bruce asks if defined benefit plans for cities like Vallejo that just declared bankruptcy will ever see that money. David says in California he’s not sure who is getting what. Bruce says that defined benefit programs typically have a projected return rate and almost all have seen losses. David says that those promises will most likely not be able to be upheld because of the economy.

Bruce asks David is he is afraid for seniors as they retire. The Baby Boomers encompasses the 45-64 age range. The older baby boomers are about to retire so there’s a little more concern there. The younger Baby Boomers have a little more time to get back on track. Overall, they aren’t looking good so far. He says the lower 1/5 could be completely wiped out because of foreclosure.

Bruce asks if we should be worried about the Social Security Program since the baby Boomers will have less population paying for benefits as they retire. He says it’s nothing urgent but today the health care costs are getting worse and are more of an issue as Medicare and Medicaid need to be helped. David says socialized medicine might be a possibility since it’s worked in other countries. We have the best medicine but the worst delivery system.

In David’s report entitled “The Wealth of the Baby Boom Cohorts After the Collapse of the Housing Bubble,” David says the net worth of Baby Boomers that owned a home was less than those that were renters in 2009 which is surprising. David says wealth isn’t just in equity and the housing and stock bubble real caused a problem.

More on this report at the Center for Economic and Policy Research at Next week join us as we welcome back Tommy Williams, co-founder of Williams and Williams auction company.

David Rosnick is an Economist at the Center for Economic and Policy Research in Washington, DC. He has a Ph.D. in Computer Science from North Carolina State University and an M.A. in Economics from George Washington University. He has written numerous policy papers including "The Burden of Social Security Taxes and the Burden of Excessive Health Care Costs" with Dean Baker, March 2005; "Poor Numbers: The Impact of Trade Liberalization on World Poverty", with Mark Weisbrot and Dean Baker, November 2004; “NAFTA at Ten: The Recount,� with Mark Weisbrot and Dean Baker, March 2004; and "Black Swans, Conspiracy Theories, and the Quixotic Search for Fraud: A Look at Hausmann and Rigobon's Analysis of Venezuela's Referendum Vote" with Mark Weisbrot and Todd Tucker, September 2004; and "The Forty-Four Trillion Dollar Deficit Scare," with Dean Baker, September 2003.

He is the architect of a growing number of calculators including CEPR's Accurate Benefits Calculator which compares current-law Social Security benefits to the Bush Plan based on "Progressive Indexing." He also created the Housing Cost Calculator, which compares the cost of owning a home relative to renting for a potential new homeowner. It gives homebuyers a sense of how the current bubble in the housing market might affect them. Prior to joining CEPR, he worked as a Research Associate (postdoc) at the North Carolina State University at Raleigh Department of Computer Science.

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