Trickledown Whackonomics
Not surprisingly, when a person goes from making $750k as a bond trader, to $60k as a high school teacher, their spending habits change.
That is the obvious but nonetheless interesting point of a Bloomberg article on the impact of Wall Street’s meltdown beyond lost finance jobs. The net result is less business, revenue and jobs for everyone in NY from deli owners to dry cleaners to suburban lawn cutters.
“In New York City alone, bonuses fell to $18.4 billion last year from $32.9 billion in 2007, the largest absolute drop ever, according to the state comptroller’s office.
The consumer discretionary and industrial sectors — dependent on people who buy refrigerators, restaurant meals or cars — are the only areas that have shrunk more than finance, with 383,340 and 270,278 job losses, according to the data. For each finance post eliminated, 3.3 in other industries will vanish, the comptroller’s office estimated.”
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Source:
Bear Stearns to Algebra I Means Lost Dollars in Trickle-Down
Peter Robison
Bloomberg, May 22 2009
http://www.bloomberg.com/apps/news?pid=20601109&sid=aQJzd0DkdWuQ&
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May 23rd, 2009 at 10:17 am
Not refuting the trickle-down, but this was to be expected, right? It was a bubble. The bonuses weren’t deserved. Supply was unnecessarily inflated and now we’ve got to come back to reality. It is a Bi!ch.
May 23rd, 2009 at 10:23 am
the author of the a Bloomberg article misses the point that financial engineering, endless bubbles, consumer spending which makes up 70% of GDP can no longer be the driver for the debt laden US economy.
Simon Johnson’s in The Quiet Coup http://bit.ly/9QobY says this….
From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent.
one word – OUTRAGEOUS !
I now look at this every day http://www.usdebtclock.org/ for a reality check ;)
May 23rd, 2009 at 10:29 am
BR, check out Michael Shedlock’s post yesterday on a “lifestyle liquidation” in Florida which recently occurred.
May 23rd, 2009 at 1:17 pm
$60k for a high school teacher? That’s probably unsustainable.
May 23rd, 2009 at 1:22 pm
A few months ago the local realtors were saying that we were not going to get hurt as bad as everybody else. Except recent buyers might take a slight hit.
Two months ago they were saying a 10% hit, but we were still OK.
Yesterday, my realtor said a 30% hit by the end of the year, and admitted banks were stalling a lot of foreclosures or holding them off the market for reasons not well understood. He was doing numerous closings a week two months ago. He’s had two for all of May, and is doing open houses this weekend, which established realtors really hate doing. The only buyers seem to be ones doing the rent versus buy thingie.
What do you expect when the STATEWIDE unemployment rate is 12.9% and climbing, and probably higher here with all the local company bankruptcies and closings?
May 23rd, 2009 at 1:26 pm
This seems like the kind of thing that could get an enterprising professor tenured.
Working out a “job loss multiplier” similar to the money multiplier that quantifies how much spending is pulled out of the economy by losing a job of X salary.
It would also be nice to show all of the folks that whine about factory jobs leaving the country but want heads to roll on Wall Street.
Maybe this already exists and I am oblivious to it (if so, please link it), but if not it would be more interesting than your average PhD diatribe.
May 23rd, 2009 at 1:39 pm
OT: Someone posted on my blog that BofA was starting to put their REO inventory on the market. I checked the trustee firm owned by Countrywide and noticed they took more homes back yesterday than any day the previous month for my local area.
The population centers in CA currently have a lack of inventory because the foreclosure moratoriums have been keeping supply off market. With low rates, a large pool of renters and the tax credit the distressed inventory has been flying off market because the buyers don’t have any additional purchasing power to grab homes in the higher ranges. It is a good market to liquidate into here. If the REO machines start back up and get that inventory on the market sales could return to something approaching normal levels and it will be a very encouraging sign.
May 23rd, 2009 at 1:59 pm
The question is: what does society need more? Bond analysts or math teachers? In the short term, we will certainly miss the multiplier effect of that huge salary and all the chicken salads it can buy. In the long term, how much will the hundreds of students that the average teacher educates in their classroom over a year contribute to economic growth over the course of their lifetimes?
A good teacher is the ultimate money multiplier.
May 23rd, 2009 at 2:16 pm
@franklin: come on frankie. Give it a rest.
A strong family with a decent income is the best money multiplier. We can’t all be teachers. And without a strong family, teachers at school don’t count for crap. I know well paid teachers that are little more than classroom monitors while their students are uncontrollably gaming and texting with their teeny little toys Dad bought them.
The smart people I know have gone to home schooling and their kids are knocking the cover off the ball while local school students are on their way to becoming homies.
May 23rd, 2009 at 2:20 pm
CC_in_Georgia,
know that s**** like this: “Maybe this already exists and I am oblivious to it (if so, please link it)…”, besmirches the reputation of “The Peach State”.
see: http://scholar.google.com/scholar?hl=en&q=job%20loss%20multiplier&um=1&ie=UTF-8&sa=N&tab=ws
there is thing, called the internet…
past that, GOOG Scholar is a helluva resource..
May 23rd, 2009 at 2:39 pm
I can’t wait until the compensation consultants get ahold of this story. Clearly large increases in executive pay are needed as a countercyclical measure.
May 23rd, 2009 at 2:47 pm
MEH,
Appreciate the link, but no need to be a jerk about it.
If I wasn’t 2 weeks out on a CFA level I would have searched for it myself.
My job involves very little economic theory so I am not current on what is out there and what isn’t.
May 23rd, 2009 at 2:48 pm
$750K a year? Either he didn’t works at it long or he didn’t save much. What a whiner. 60K to teach is damn good. Still a whiner. And the double whiners who imply we as a society are going to suffer because their generosity as uber consumers is gone. Screw them.
May 23rd, 2009 at 2:51 pm
dead hobo @ 2:48
“$750K a year?”
That doesn’t go very far when spent on cocaine, hookers, and Ferraris.
May 23rd, 2009 at 3:02 pm
Well since those bonuses they were spending was mostly
based on fraud and stolen from honest citizens from across
the US and around the world….
who gives a crap.
Too effing bad for you New York
May 23rd, 2009 at 3:04 pm
CC_in_Georgia,
I, really, wasn’t trying to be a ‘jerk’ about it. I was meaning to reinforce the idea that you, already, saw the Keyword, there are Search Engines, and you would have had the result in the same amount of Time it took you to type that Sentence..
May 23rd, 2009 at 3:18 pm
hey a little levity- here’s a great father’s day gift
https://store.theonion.com/img/uploads/1403
if we can a lot of these sold I’ll know the economy is on the rebound
May 23rd, 2009 at 3:21 pm
“Either he didn’t works at it long or he didn’t save much.”
None of the people in the article sounded like they saved much. A few less trips, a few more bagged lunches and mowing your own lawn would mean those people would be a much stronger financial position. So many people want to believe the good times will go on forever. That incomes, stocks and home prices will only go up.
I think the real frustration for the savers and planners of the world is that the reckoning is being put off and not only that the savers money is being taken and given to the spenders to spend more. Its a double kick in the nuts. You have to watch these people overconsuming during the boom and then during the bust you have to bail them out. I would say it doesn’t pay to be a saver but I certainly want to trade spots with the spenders of the world right now.
May 23rd, 2009 at 3:36 pm
Effective Demand-
“Its a double kick in the nuts.”
f*ucking ouch- LOL
I’ll second your sentiments- and frustration- as you succinctly put:
“You have to watch these people overconsuming during the boom and then during the bust you have to bail them out. I would say it doesn’t pay to be a saver but I certainly want to trade spots with the spenders of the world right now.”
but did you mean “don’t want to trade spots”
May 23rd, 2009 at 3:43 pm
Franklin,
Seriously? Teachers and small farmers think they are God’s gift to the world. Without them, life simply would not go on. They need to get over themselves.
One system I hope to see destroyed during this downturn is the public education system. Education is very important, but the current system is crap.
May 23rd, 2009 at 3:47 pm
KM4,
That debt clock should be retooled to reflect the debt / taxpayer rather than debt / citizen.
May 23rd, 2009 at 5:12 pm
@ahab
but did you mean “don’t want to trade spots”
Yes, my english skills are clearly lacking.
May 23rd, 2009 at 6:23 pm
I have a great idea…
The gov’t should create a GI bill for doctors/nurses. Gov’t pays for the education and the doctors agree to give x number of years of service to a hospital for a fair wage. These hospitals will be able to keep costs down. Whaddya think?
May 23rd, 2009 at 6:29 pm
So what’s better for the economy/country, twelve teachers @60,000 or one trader @750,000?
May 23rd, 2009 at 6:47 pm
@ Effective Demand 3:21
You’ve hit on where this is going. We have massive overcapacity. Too many quick serve restuarants, fast food restaurants, nail salons, etc. The Age of the Brown Bag is upon us. You’d better trade mark that before Leftback gets a hold to it.
May 23rd, 2009 at 7:44 pm
There’s that word again; “surprisingly”. Why should their life style change? BB and bunch are working overtime to get the consumer…well, consuming. So it’s only a matter of time. Notice that 3 mo LIBOR recently? Is that like at an all time low??
May 23rd, 2009 at 8:33 pm
Cursive http://www.ritholtz.com/blog/2009/05/trickledown-whackonomics/#comment-175110
Exactly! It was all fake money during the finance bubble. We’ve got to get back to some kind of fundamentally productive economy or we’re doomed. And not by propping up industries producing far more than we need; e.g. housing, autos.
May 23rd, 2009 at 8:45 pm
Effective Demand http://www.ritholtz.com/blog/2009/05/trickledown-whackonomics/comment-page-1/#comment-175199
Yes indeed. I could rant all day on this theme, as I’m sure you could. Added to that is “esteemed” economists like Mankiw and Rogoff advocating that the Fed should target inflation rates of 6% or so to bail out the debtors; private and public. Screw the prudent savers, they’re not worth even mentioning. The immorality of having stolen so much wealth from future generations is not enough. They also want to punch us who didn’t participate in this madness right in the gut.
I get so infuriated when reading this crap that I can’t think straight.
May 23rd, 2009 at 9:25 pm
I will reiterate my call to offshore finance jobs to India and China. We’re not talking rocket science here. Anyone who has studied finance knows it’s mostly adding and multiplying numbers. I’d love to see one of those clowns solve partial differential equations or model complex electromagnetic systems on a computer. Hell, a large portion of the financial system infrastructure software is written by Indians. Why are the finance jobs protected from offshoring?
$750,000? You could hire an army of extremely capable financiers in China to do trade bonds (and believe me, they are churning out tens of thousands of finance students in China right now). Start offshoring some of those jobs and maybe the politicians will wake up.
May 23rd, 2009 at 11:30 pm
@Onlooker
“I get so infuriated when reading this crap that I can’t think straight.”
I know the feeling. I was commiserating with ahab last night that soon all there will be left to do is to cuss. It’s like trying to resolve a complaint with a call center that has been outsourced to India…
May 24th, 2009 at 12:12 am
Isn’t it weird that the most heavily ponzied states have been staunchly blue for years.
May 24th, 2009 at 9:07 am
Someone wrote that 60k is good money for a teacher. I don’t know, garbage men in NYC make more than that without overtime. I think teachers should make a little more than garbage men
May 24th, 2009 at 9:48 am
@mikaeel
I’m not sure about “garbage men”, but based on declining test scores it sounds like the best “pay scale” comparison for teachers should be to that of “babysitters”…
May 24th, 2009 at 2:02 pm
@thetanman: “Isn’t it weird that the most heavily ponzied states have been staunchly blue for years.”
not really. the republican party has capitalized on religious fear, elder paranoia and class resentment for two decades. the book “what’s wrong with kansas?” describes very clearly how the republican campaign promises draw votes from exactly the social strata that benefit least from republican policies. those policies produce the most economic productivity in blue states. while it lasted, it worked well: suck votes from the poor, and give power to the rich.