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10 Years After The Crash: What’s Better And What’s Worse?

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Rick Newman, Economy 2008

With Rick Newman, Senior Columnist for Yahoo Finance and author of Rebounders: How Winners Pivot from Setback to Success

Steve welcomed back Rick Newman, Senior Columnist for Yahoo Finance and author of the book, Rebounders: How Winners Pivot from Setback to Success, to talk about both the positive and the negative trends in the economy over this past decade that’s now drawing to a close. Rick recently published an article on the subject, titled, “5 Failures of the 2010s.

What’s Going Good

Steve asked Rick to first talk about what’s been going well for us over the past ten years. Rick reported the excellent current employment numbers, saying, “At the beginning of 2010, things were pretty bad. The unemployment rate back then was 9.8%; now it’s 3.5%.”

Another key area of improvement for the economy is the housing market, which has largely recovered from its collapse during the previous decade. Rick noted that 2010 showed the highest home foreclosure rate on record. How are we doing nine years later? According to Rick, home prices have risen steadily since bottoming out, but at a more reasonable rate, i.e., not the kind of rate that produced the housing bubble. “Prices are rising about 3% annually. That’s what you want because that’s sustainable.”

Total household net worth has risen, too. And finally, there’s the ongoing good news for investors, with the stock market seemingly hitting a new high every other week. Rick summed it up simply, stating, “We’ve had a bull market in stocks that is now in its 11th year.”

But What About Wage Growth?

Turning from the overall rosy picture of the current economy, Steve asked Rick about the lack of wage growth. He pointed out that despite low unemployment numbers, which usually puts upward pressure on wages, many employees don’t seem to be able to negotiate much in the way of raises.

While confessing that he doesn’t have a total explanation for the current wage situation, Rick agreed with Steve’s assessment. “You’re totally right that we should be seeing stronger wage growth, given the rate of unemployment being so low.” He suggested that one possibility is that the unemployment numbers may not be completely reliable. He explained what he meant by that, saying, “The unemployment rate only measures people who are defined as being in the labor force. There are a lot of people who just gave up looking for work during the recession. It may be that many of those people, who aren’t currently considered part of the labor force, have started looking for work again but haven’t found a job yet. That would mean the real unemployment rate is higher than the official rate, which might go toward explaining why wages aren’t going up.”

The Income Inequality Issue

In Rick’s view, “Income inequality and wealth inequality have been getting worse during the last 10 years. The top 1%, and especially the top 0.1%, their incomes and wealth skyrocketed during the last 10 years. But middle-income people have seen little gains in their income; they’re just barely keeping up with inflation.” Rick believes this is a major concern going forward. “There is a lot of simmering resentment out there among people who feel like they’re not getting their fair share.”

Steve offered an explanation for, at least, part of the disparity in wealth growth by pointing out, “Wealthier people own a lot of assets. They own assets like stocks and real estate and those things have appreciated in value quite dramatically.” He added that an article in the November 28th issue of “The Economist” actually challenged the popular assumption that “the rich are getting richer.” The article argued that, contrary to popular belief, the income share of the top 1% hasn’t really changed significantly since around 1960.

Rick admitted that it’s hard to know which statistics to believe, but reiterated his concern over the fact that, rightly or wrongly, a lot of people feel or think they’re not getting a fair deal. “Some people want to bring down the wealthy.” But he went on to point out the basic flaw in that kind of thinking, saying, “Bringing down the wealthy doesn’t necessarily do anything to raise up the middle class, and you can raise up the poor and middle class without bringing down the wealthy. That’s one of the virtues of capitalism, the fact that there’s not a fixed amount of wealth. We can actually create new, additional wealth in our economy.” The poor and middle class can get more without taking things away from the wealthy.

Nonetheless, Rick sees the perception of income inequality as continuing to be a big societal issue in the next 10 years.

The Government Debt Problem

Steve turned the conversation in another direction, saying, “Let’s move on to another aspect of the economy that’s not really looking so hot—the growth of debt, especially on the government side of things.” Rick noted that: “Consumer debt is actually in good shape, but the government is in bad shape. The federal budget deficit is probably going to be over a trillion dollars this year. The increasing government debt means that some of our good economic growth is borrowed, and that’s worrisome.”

Steve asked about how tax cuts may be adding to the debt problem and about whether those tax cuts have achieved their goal. He reminded listeners, “The idea was to strengthen the economy by reducing taxes, with the belief that companies would reinvest their tax savings and that would help the economy.” He asked Rick if he thought things had actually worked out that way. Rick’s reply was, “Totally depends on who you ask. It’s a highly politicized issue. But we’re seeing a notable slowdown in business spending, which is exactly the opposite of what those tax cuts were supposed to do.”

Steve explained that a lot of companies, instead of investing their extra cash in growth, are putting the money into stock buybacks and paying dividends. Rick agreed and added, “Stock buybacks and dividend increases have been close to record levels. That’s not necessarily a bad thing, but that wasn’t the purpose of the tax cuts.” He went on to mention one other factor that may be making businesses cautious in their spending: the trade war with China. There’s still a lot of uncertainty about how that’s going to eventually shake out, and when there’s uncertainty, companies tend to hold off on making major capital expenditures.

To sum things up, the economy is certainly looking a lot better than it did 10 years ago. Stock market investors are definitely happy. But concerns about a lack of wage growth, government debt, and the still unsettled trade war with China represent issues that have yet to be resolved and that we will have to continue to grapple with in the next decade.

To find out more about how Rick views the current state of the economy, see his article at Yahoo Finance. And check out his website, rickjnewman.com.

Disclosure: The opinions expressed are those of the interviewee and not necessarily of the radio show. Interviewee is not a representative of the radio show. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by the radio show.

Read The Entire Transcript Here

Steve Pomeranz: I’m happy to welcome back Rick Newman. Rick is a columnist for Yahoo Finance, always offering insightful and provocative takes on many of the biggest stories of our time. He was previously Chief Business Correspondent and before that, Pentagon Correspondent for US News and World Report.

He’s also the author of four books, including Rebounders: How Winners Pivot from Setback to Success. Rick, I love having you on the show. Welcome back.

Rick Newman: Happy to be here.

Steve Pomeranz: You’ve been writing, you write a lot. You appear on Yahoo Finance a lot—to give you a little plug—and it’s always worth watching and reading. You wrote one article that peaked my attention. It described ways that we’re better off today since 2010 and some ways that we’re not.

Let’s talk about the good news first. In what ways are we better off today than in 2010, economically speaking?

Rick Newman: At the start of this decade, we were just departing from the great recession that ran from the end of 2007 until about the middle of 2009. Even at the beginning of 2010, things were pretty bad. The unemployment rate at the beginning of the decade was 9.8%; it’s 3.5% now.

It was almost three times higher 10 years ago. The foreclosure rate in 2010, the number of people who lost their homes to foreclosure that year, turned out to be the highest on record that came out of the giant housing bust that was a big part of the great recession.

It took a long time for us to get back to normal, for unemployment to come down, for people to get back to work. I think you can definitely say things did get back to normal for the most part. It was a very slow recovery from that very deep recession.

The unemployment rate is only 3.5% right now. There are some companies who say they can’t find all the workers they need. The housing bust is over. Home values have risen nicely since they bottomed out. We’ve had a bull market in stocks that is now in its 11th year.

All those things made the 2010s, the last decade, pretty good.

Steve Pomeranz: I think you’re absolutely right. What’s interesting, and this is off to the side a little bit, is that with all of these anecdotal stories of employers not being able to find workers, we’re not really seeing very much in wage growth.

You’d think if things were so tight that employees would be able to demand more money, why can’t they?

Rick Newman: That’s a mystery. I don’t have a good answer for that. You’re totally right that we should be seeing stronger wage growth than we are seeing given that the rate of unemployment is so low. Economists are not sure, but one possibility is that the unemployment rate really does not tell us as much about the labor market as it used to.

It’s possible that … The unemployment rate only measures people who are in what is defined as the labor force, which means that if you don’t have a job and you’re not looking for a job, you are not counted in the unemployment rate.

You are technically not a member of the labor force. One thing that’s possible is there are a lot of people who just gave up looking for work. As they look around and see everybody getting a job and they hear that companies are hiring, maybe they start to look for work all over again.

Steve Pomeranz: Yeah.

Rick Newman: That could be one way in which there’s more slack in the labor force than these official metrics tell us, which might go part of the way toward explaining why wages aren’t going up. I think, real briefly, I think we’ve also seen a real disparity in who’s earning more and who’s not.

We know that during the last decade wages have gone up a lot for the workers who have the best skills that are in most demand. That almost always involves some technical skill, coding, what have you. Whereas workers at the lower skill end of the spectrum are having a hard time getting wage increases.

Steve Pomeranz: Let’s review the things that got better in the 2010s, household net worth has risen, right?

Rick Newman: Yeah. That’s a combination of two things that the Federal Reserve measures, that is home equity or the value of your home and stock values. We’re talking about what’s called residential, so this is non-corporate. That recovered, I mean, we are now over $100 trillion in household net worth.

I mean, that’s a number so large nobody even knows what $100 trillion is. It’s important that home values, home values are a big part of that. It’s important that that has recovered because for a lot of people, their home is their most valuable asset. They are likely to have more value in their home than they are in their stock portfolio or their investing portfolio.

That has recovered, and we’re now seeing gains in home prices that are very manageable. It’s around 3% per year and a lot of areas. That’s what you want.

Steve Pomeranz: Yeah.

Rick Newman: What we had in the housing bust, well, there was a bubble that proceeded the bust, and we were seeing home prices going up by 10% per year or even 20% per year. That turned out to be unsustainable. That was a giant bubble, which has contributed to that terrible recession.

To see home values going up a couple percent per year, that is about right. That’s what you want because that’s sustainable.

Steve Pomeranz: Yeah, it’s interesting because many years ago in 2006 or so, I got a call from the local paper, the Palm Beach Post. They wanted me to do the math and tell them what the rate of appreciation on residential homes were.

We really took an in-depth look at it. We said 3%, we said the rate of inflation. They wouldn’t run that number. This was right during the boom, and on the cover of the article, they had this man with a picture with his family. He was making $40,000 a year and he owned $3 million worth of houses and he was flipping them. That’s what they ran with. There was some mention of us in the back of the article, but they didn’t really want to deal with this 3% number or this inflation number and it is a real number, so I agree.

It’s very healthy that the real estate market is growing on average at a very healthy rate. I will say though that-

Rick Newman: South Florida in 2006 was about as boomy as it got in the housing bubble.

Steve Pomeranz: Yeah, it was insane.

Rick Newman: That was about the peak right there.

Steve Pomeranz: Yeah, yeah. Yeah, so we have seen home values rise. That’s very positive. We’re seeing most people, many people, especially if they work, they’ve thrown some money into a 401k or something, hopefully. If they’re self-employed, they have set some retirement fund.

A lot of that money is in the stock market. Maybe it’s mutual funds or index funds. They’re seeing a rise in their values too. That’s got to make them more confident. Also, consumers seem to be driving this economy almost on their own today.

Rick Newman: That’s all true, and here at Yahoo Finance, we seem to ask every day, “How much longer can this last?” We now have the longest expansion on record. Consumers continue to spend money. They feel comfortable spending money. We just had a jobs report that showed 226,000 new jobs, or excuse me, 263,000 new jobs in November.

Economists couldn’t believe it.

Steve Pomeranz: Stunning.

Rick Newman: They didn’t even think there were 263,000 people to hire. Yet, I mean, so enjoy it while it’s here.

Steve Pomeranz: I agree. All right, so that’s the positive side of the coin. Let’s move to some of the deepening fissures in the U.S economy. A lot of talk about worsening class divides.

Rick Newman: Yes, and this is income inequality and wealth inequality. This has been getting worse for about 40 years, but it got considerably worse during the last 10 years. You see this in data that breaks out income gains by percentile.

The top 1% and especially the top 0.1%, their incomes and their wealth skyrocketed during the last 10 years. For people who are in the 90% and below, so you can break this out into different 10% brackets, but from the 50 percentile to the 90 percentile, you might call that middle-income people, wee little gains in income, I mean barely keeping up with inflation.

Then when you go to the bottom 50%, it’s the same story. There’s a lot of new wealth being created in the United States. Almost all of it is just being captured by the top 1%. There’s nothing wrong with people getting rich, but there is a problem when so much of the gains are being enjoyed by such a tiny portion of the population.

This affects economic growth, it affects productivity. It affects living standards for the majority of people. It has political repercussions and people start to get angry and they want something to change. I think people are starting to get angry, even though the economy is doing pretty well.

There is a lot of simmering resentment about there are people who feel like they’re not getting their fair share.

Steve Pomeranz: Yeah, a couple of things on that. First of all, I think wealthy people own a lot of assets. They own equity assets like stocks, they own real estate assets. Those things have appreciated quite dramatically. Now, I’m not really talking about the income side of things, but in terms of the net worth, I mean, the more assets you have, the more they go up.

We’ve seen this huge rise in the stock market over these past 10 years. That’s going to be reflected in the value of people’s net worth, especially those who have had excess savings and have been able to invest those in the stock market.

Also, I want to bring your attention to the November 28th issue of Economist Magazine. They took a look at some of the new research out there. I hope you take a look at this, Rick, maybe you’ll do a piece on it, that suggests that the income share of the top 1% of America may have been little changed since as long ago as 1960.

I’m actually quoting the article. They argue that earlier researchers mishandled the tax return data that yield estimates of inequality. Just want to throw that out there as maybe people are taking a new look at these numbers.

These big numbers are really hard to calculate because there’s so many little variables that can throw off the numbers. A small variable can throw off the numbers by a wide margin.

Rick Newman: I’m familiar with some of that research. Yes, there definitely are some measurement challenges here. The same is true of lower-income people. There’s a question at the lower end, should you count government transfers as income and wealth or should you not count them?

You get different results based on your methodology, obviously. In general, I think there’s basically overwhelming evidence that income and wealth inequality is worsening. I think you can argue how much is it worsening? It’s hard to know.

You also have to ask the question. I mean, we’re hearing this play out in the 2020 presidential campaign. What’s the solution? I mean, the solutions to this are not simple. Some people feel you should basically bring down the wealthy.

Bringing down the wealthy does not necessarily do anything to raise up the middle. You can probably raise up the middle without necessarily bringing down the wealthy. That’s one of the virtues of capitalism is we’re not arguing about a fixed amount of wealth here.

We can actually create wealth in our economy.

Steve Pomeranz: Right.

Rick Newman: I think this is going to be a very important question for the 2020 presidential campaign and for the next 10 or 20 years. I think this is a big societal issue.

Steve Pomeranz: Let’s move on to another aspect of the economy that’s not really looking so hot. That is the growth of debt, especially on the government side of things. What do you have to say for that?

Rick Newman: Well, there’s good news about debt, which is consumer debt is actually in good shape. It was not in good shape leading into the recession that began in 2007. I mean, mostly mortgage debt that was not securitized correctly. That’s part of why we had that recession. Consumers are in good shape, but the government is in bad shape. We have an economy that’s growing around 2%, the highest economic growth we’ve had since the recession ended in 2009, it was 2.9%.

We had that once under President Obama and once under President Trump. In general, it’s been between 2% and 2.5%, that’s not great. At the same time, we now have deficits that have been going up for the federal budget deficits that have been going up for the last three years and are going to probably be over a $1 trillion this year.

That means some of the growth is borrowed.

Steve Pomeranz: Yeah.

Rick Newman: Just as a basis for comparison, the last time we had employment that looked this good was in the late 1990s. Back then, we had four years in which the government actually ran a surplus. The economy was working then the way it’s supposed to work in a surplus, which is you have more people working, you have more people earning income, you have more people paying tax, and therefore, the government debt improves. We had four years of surplus. It’s almost impossible to believe from ’98 to 2001, all years of surplus.

We’re going in the opposite direction right now.

Steve Pomeranz: Especially during a boom.

Rick Newman: Economic growth, but with budget deficits that are going up. Part of economic growth is government spending, and the government is spending borrowed money and that’s worrisome.

Steve Pomeranz: All right, so the Congress put in corporate tax reductions. That I think has fueled a lot of this debt, this growth in debt. The idea was to get this economy stronger and stronger by reducing taxes, so those corporations would reinvest and do some good other things that would help the economy.

Has the economy really shown any new benefit from this reduction in taxes and therefore, this increase in the deficit?

Rick Newman: Totally depends who you ask. This is a highly politicized issue. In my effort to just understand this purely from the economics, we have economic growth of around … The economy’s growing at around 2% right now.

By the way, economic growth peaked in the second quarter of 2018, so that was half a year after companies began to enjoy the lower tax rate from the tax cuts. Growth has kind of slowed since then. I mean, I should correct it, it hasn’t kind of slowed, it has slowed.

We’ve also seen a notable slowdown in business spending, which is exactly the thing that those tax cuts were supposed to stimulate. Those were supposed to give companies more money left over so that they would spend more of it. They’re doing the opposite; they’re actually spending less.

Steve Pomeranz: They’re putting that money back in their own stock. They’re paying out higher dividends, buying back stock too [crosstalk 00:16:03]

Rick Newman: Yes, and there’s data that shows all of this. Stock buybacks have been close to record levels and so have dividend increases. I mean, that’s not necessarily a bad thing, but that was definitely not the stated purpose of the tax cut to give shareholders more money because shareholders didn’t need more money.

Steve Pomeranz: Right.

Rick Newman: Part of the reason businesses are probably spending less is the Trump trade war with China. There’s a lot of uncertainty. Businesses really don’t know what to expect. They’re very reluctant to commit any money they don’t have to because they don’t know where this trade war is going.

In a way that’s something that might actually clear up, but will it clear up in time for a boom in business spending? I don’t know. The last thing you pointed out is also important, which is that corporate tax receipts at the U.S Treasury have actually gone down significantly, which is one of the reasons, it’s not the only one, but it’s one of the reasons that we’re seeing the federal deficit spike.

Steve Pomeranz: Well, I know my taxes are rising, so that’s a different story. Rick Newman-

Rick Newman: Talk to your member of Congress.

Steve Pomeranz: What’d you say?

Rick Newman: Talk to your member of Congress about that.

Steve Pomeranz: Yeah, well, okay, I’m going to do that. In the meantime, I’m going to just stroke a huge check and continue to do that. My guest, Rick Newman, columnist for Yahoo Finance. Good topics of discussion today. These are the big stories of our time.

There is no clear answer to these, but it’s important to get this stuff communicated and out there and to spark conversation. Rick, thank you for joining us so much.

Rick Newman: Thank you for having me on, Steve. Always enjoy it.

Steve Pomeranz: Folks, as you know, my mission is always to educate my listeners and to remind you week after week and segment after segment, that we love your questions because we do. These are complicated times, which makes for complicated topics and I’m always here to answer them.

If you have questions about your portfolio or your kids or your kids’ kids, your retirement, your 401k, how to better take care of your family, anything financial on your mind, I’m here with many years of experience. I’d love to help you. Go to stevepomeranz.com. Go to the contact section and let me know how we can help. That’s stevepomeranz.com.