Why the squeeze in living standards is very welcome

Austerity isn't all bad news (Picture: Howard McWilliam)

OK, so the headline was written to provoke, but from a macro-economic point of view, there is a sense in which the Institute for Fiscal Studies' finding of the longest slump in household finances on record is actually a quite positive development.

How come? It can surely never be a good thing for living standards to be falling in the way they are. Of course not, but if the relatively high level that living standards reaching in the run up to the crisis was unsustainable, then the present adjustment, painful though it undoubtedly is for many households, was both inevitable and necessary, the latter because it helps to make the UK a competitive economy once more.

This is how it works. If the cost of the things we buy – fuel, food, commodities, imported goods, and so on – is going up, then one way or another we will be forced to pay for it with a corresponding fall in real wages. This can happen in two ways, through inflation or through cuts in nominal wages. In the UK, the Bank of England has chosen the former route; in the eurozone, policymakers are enforcing the latter approach on uncompetitive periphery nations.

The Bank of England could have stopped the inflationary impact on living standards, but only by driving up unemployment to such a degree that workers would be prepared to accept no wage increases or even outright cuts in nominal earnings in order to stay in employment. The choice was between higher inflation, or a deeper rececession. The point is arguable, but the Bank's approach would seem to be the least worst from a social perspective. Certainly, it looks preferable to the depression economics being applied to the eurozone periphery.

In time, this external devaluation ought to make the UK more competitive again, so that companies choose to locate their production in the UK rather than overseas. So far, there's not much sign of this happening, but it takes time for businesses to absorb these relative shifts in competitiveness.

In any case, relative labour costs are improving quite markedly right now when compared with much of Europe and even some emerging markets. If the UK does the right things on supply side reform, ten years from now, it could actually be a model economy once more.

American Airlines to cut capacity and retire 11 planes

 

Responding to an unsteady economy and high fuel costs, American Airlines announced that it planned to cut overall capacity this year and retire 11 older Boeing jets next year.

The capacity cuts, made by canceling unpopular flights, among other changes, will reduce the number of seats available on planes by 3%, compared with projections made by the airline in January, the airline announced Monday.

The move was also in response to an unusually high number of pilots retiring in October.

"While our advance bookings are generally in line with last year, we are taking these additional steps in light of the uncertain economic environment, ongoing high fuel costs and to ensure we run a reliable schedule for our customers given additional pilot retirements we anticipate throughout the fourth quarter,” said Virasb Vahidi, American's chief commercial officer.

The Fort Worth, Texas-based airline also announced it planned to retire up to 11 Boeing 757 aircraft in 2012 to make way for some of the 460 newer, more fuel-efficient planes the airline ordered in July.

The capacity cut comes only a week after stocks for American's parent company, AMR, dropped 33% on rumors that the troubled airline might be considering filing for bankruptcy protection. The company's stock has since rebounded and recovered most of the losses.

Related:

Airlines protest fee increase plan

American Airlines changes its boarding process

Airline stocks drop, led by 33% decline of American parent AMR

Photo: An American Airlines jet at Los Angeles International Airport. Credit: Los Angeles Times

 

 

 

 

Household income fell more in recovery than in recession: study

Some recovery: Household income fell more after the official end of the recession than it did during the recession itself, according to a new report.

Between December 2007 and June 2009, median annual household income slumped 3.2% to $53,518, according to a report from two former Census Bureau officials.

From that point until June this year, incomes fell to $49,909 — a 6.7% decline, according to Gordon Green and John Code of Sentier Research.

So while the economy technically has been growing, the good news has yet to reach average Americans, who have been saddled with three straight months of 9.1% unemployment as well as a volatile stock market and high prices.

The recovery has been difficult for many, according to the report. Jobless household heads saw their income plunge 18.4% to $33,487 annually, compared to a 5.1% slide to $68,454 a year for full-time workers.

Single parents are making 7.3% less — just $36,465, the report found. Married households are pulling in $73,324, a 4.5% drop.

RELATED:

Economy adds 103,000 jobs but jobless rate remains at 9.1%

Americans cut college and retirement savings amid bad economy

 -- Tiffany Hsu

Photo: Job seekers wait in a line at a job fair in Southfield, Mich. Credit: Paul Sancya / Associated Press

Stocks close up sharply as optimism grows

 
U.S. stocks saw their biggest gains in over a month after European leaders signaled a willingness to tackle the financial crisis brewing there.

The Dow Jones industrial average ended Monday up 330.06 points, or 3%, to 11,433.18. The broader Standard & Poor's 500 index jumped 3.4%, or 39.43 points, to 1,194.89.

Over the weekend, French President Nicolas Sarkozy and German Chancellor Angela Merkel announced in Berlin that they would come up with a plan to help stabilize and recapitalize struggling European banks. They gave few specifics but said a definite plan would be ready by a Nov. 3 meeting of the Group of 20.

In another sign of the willingness of European governments to act, the French and Belgian governments stepped in over the weekend to carry out an orderly breakup of Dexia, one of the banks that has encountered the most problems.

Leading indexes closed up 3% in Germany and 2.1% in France.

Last week, the S&P 500 rose on three consecutive days after almost falling into bear-market territory, 20% down from highs reached in spring. The market's latest gains have been helped by a series of U.S. economic indicators that have suggested that the economy is in better shape than many analysts expected.

Bank shares, which have been leading stocks down in recent weeks, helped lead the charge up Monday. One of the most beleaguered bank stocks, Morgan Stanley, ended the day up 5.1%.

Stocks rose sharply in the morning and, after trading in a narrow range all day, surged again near the close.

Trading volume was modest, however, with banks closed for the Columbus Day holiday.

The market's next big test: earnings reports. The season kicks off Tuesday with a report from aluminum giant Alcoa Inc.

RELATED:

Few places to hide as bear growls

European crisis tests investors' "go global" strategy

Businesses add jobs, but unemployment rate unchanged in September

-- Nathaniel Popper in New York

Photo: Traders work on the floor of the New York Stock Exchange. Credit: Spencer Platt / Getty Images

Fired Hotel Bel-Air workers ask Occupy L.A. to join their cause

Union workers who were laid off from the Hotel Bel-Air called on protesters from Occupy L.A. to join a protest of the famed five-star hotel.

The hotel laid off about 250 union workers when it closed for a two-year renovation project in 2009. It plans to reopen on Friday, having rehired only about a dozen former union workers.

The union representing the dismissed workers, Unite Here Local 11, claims the hotel used the renovation project to oust the union. It has called for a boycott of the hotel and plans to picket and march around the hotel Friday evening.

"We are asking everyone not to eat, sleep or meet here," Manuel Roman, an organizer for the union.

The union has invited Occupy L.A., the group that is camped out around Los Angeles City Hall to protest corporate greed, to join the demonstration at the hotel.

The union plans to send a bus to City Hall on Friday to take interested Occupy L.A. activists to the pink, Mission-styled hotel frequented by celebrities and presidents.

Occupy L.A. has no formal leader but protesters at City Hall said they recognize the situation at the hotel as another example of rich companies abusing poor workers.

"I'm going to join them," Ryan Rice, a participant at Occupy L.A. said of the protest at the Hotel Bel-Air.

Hotel officials have said they offered laid-off workers a severance package when they closed the hotel but could not promise to rehire them.

Related:

Hotel Bel-Air holds a garage sale

Hotel Bel-Air taking reservations for autumn reopening

Hotel Bel-Air to reopen without most of its old union staff

-- Hugo Martin

Photo: Laid-off Hotel Bel-Air workers talk to reporters after a news conference. Credit: Los Angeles Times

Behind a Surprising Income Trend

Anyone with detailed knowledge of the annual Census Bureau data on household income may be surprised by the new study Robert Pear describes in today’s Times. From the article:

In a grim sign of the enduring nature of the economic slump, household income declined more in the two years after the recession ended than it did during the recession itself, new research has found.

Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent.

DAVID LEONHARDT

Thoughts on the economic scene.

The annual Census data, which is better known than the monthly data that forms the basis of the study, presents a somewhat different picture. It shows that inflation-adjusted median income fell 3.6 percent from 2007 to 2008, more sharply than in any year since. From 2008 to 2010 — a two-year period — income fell 2.9 percent.

Thoughts on the economic scene.

What explains the difference between the two surveys?

For one thing, the monthly data (which goes through June of this year) is more current than the annual data (which ends in 2010) and reflects the economy’s continued weakness.

But there is also a second, more surprising reason for the difference: The annual data may be less reliable in some ways than the monthly data.

The authors of the study, Gordon W. Green Jr. and John F. Coder, point out that people are asked about their prior year’s income a few months into the next year. If the economy has weakened during the window between the end of the year and the survey date, some respondents may incorrectly describe their income from their previous year. Their answers will be affected by the economy’s deterioration, and they will tell the surveyor that they made less the previous year than they actually did.

A similar dynamic happens in surveys about health insurance. When people are asked about their insurance status from the previous year, they sometimes misunderstand and instead describe the coverage they have at the time of the survey.

You can see how this would affect the Census income survey, given that the economy was weakening so much in 2009. When asked about their 2008 income, some instead may have described their 2009 income.

In an e-mail to Mr. Pear, the two researchers offered more detail:

In household surveys, respondents are often asked to report events retrospectively for some given time period. When a respondent forgets the exact dates for a sequence of events, this often results in a known survey bias called “telescoping” in which the reporting of the events is telescoped either forward or backward.

The reference periods between the Census Bureau’s annual estimates of income and our monthly estimates of income are quite different. The Census Bureau’s survey is conducted in February, March and April of a given year and respondents are asked to report their income during the previous calendar year. The reference period for the monthly estimates is the 12-month period immediately prior to when the question is asked. Thus, the Census Bureau’s approach requires people to recollect events over a longer reference period.

We think that a telescoping problem may explain the discrepancy between the Census Bureau’s reporting of annual changes in household income between 2007 and 2008 and our monthly estimates. The Census Bureau reports a sharp drop (3.6%) in the annual amount of median household income over this time period whereas the monthly estimates are relatively flat.

Between January 2007 and the Spring of 2009 (when the Census Bureau collected its annual income estimates for 2008), the unemployment rate (seasonally adjusted) increased dramatically. The unemployment rate was in Jan. ’07 was 4.6%, in Jan. ’08 was 5.0%, in Dec ’08 (the end of calendar year reference period) was 7.3%, and continued to rise into the Spring of 2009 when the Census Bureau conducted its survey: Feb ’09 (8.2%), Mar. ’09 (8.6%), and Apr. ’09 (8.9%)

Now, if some of the respondents to the Census Bureau’s survey in the Spring of 2009 erroneously “telescoped” their current unemployment experience back to the previous year’s calendar income, this could have resulted in a calendar year 2008 estimate for income that was too low, hence producing the 3.6% decline in household income between 2007 and 2008 in the Census Bureau’s estimates. The monthly estimates do not have this telescoping problem to the same degree because the reference period is the 12 months immediately prior to interview and the data are collected in real time. This could explain why the Census Bureau estimates are different than the monthly estimates over this time period.

Your Economic Outlook: Mixed Up

Contradictory data are nothing new in economics, but amid the slump in the United States and Europe, readers may find themselves paying increasing attention to indicators that seem to point every which way.

Corporate earnings in the United States grew in 2011 — but that growth has slowed. Household income has fallen farther since the recession officially ended in June 2009 than it did during the recession itself. The American economy gained 103,000 new jobs in September, according to figures released Friday, but unemployment remained high at 9.1 percent. And of course, all this information is available through more and more channels, media, devices and platforms.

With this in mind, The Times last week presented an interactive feature, “What’s Your Economic Outlook?” We asked readers to express their views on four topics: their job status, their upcoming spending plans, job prospects for the next generation and the state of the economy next year. Participants were asked to choose from a list of words to summarize their view, and to explain in a few words.

More than 5,600 completed submissions, and the results show a broad range of results. Some of the results were unsurprising: people who described themselves as unemployed were mostly more pessimistic than people with jobs. But the distinctions between groups were suggestive: respondents in their 60s seemed a bit more pessimistic about the next generation than did respondents in their 20s.

Even more notable, perhaps, were the comments that readers left to explain their views. Readers who seemed most optimistic often explained themselves with reference to plans they were following or had made. One wrote:

We scaled back our lifestyle years before the downturn, so this recession hasn’t affected us like people who are in debt.

Another:

We have budgeted well for upcoming expenses and I feel comfortable with our income streams.

Many comments from readers with a negative outlook described dire circumstances, and more than a few sounded a note of desperation:

Seven people used to do my job. Now there are only two of us. Nobody cares. Drowning.

And:

I have no money. Barely buying food. No help available for single men.

Many younger contributors saw their own opportunities as narrowing, with high levels of debt and few well-paying jobs:

Because previous generations have left my generation with crushing burdens and almost no safety net.

And:

There is nothing left for the next generation, only a small percentage will see the success of previous generations.

A few young contributors sounded an exuberant note about potential development:

There are so many incredible opportunities arising in new fields.

And:

Because my generation was raised to be innovative, and we will find a way to improve the current landscape.

In what could be interpreted as a sign of optimism, on the whole, contributors seemed to be slightly more hopeful about their own prospects — for work and for spending — than for the economy as a whole or for the next generation. That view jibes with some recent statistical evidence, suggesting that the disparity in outlooks reflects sentiments just as mixed as the other economic signals.

The full interactive feature will remain online.