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Three Federal Reserve staff economists studied a nationally representative random sample of individuals' credit files and found that in nearly half of them, at least one credit-limit amount had been withheld by a creditor. Why is that significant? Say you finished school a couple of years ago, have a good job and are beginning to establish a solid credit history. You have one credit card with a $2,500 limit and run a modest monthly balance averaging $250. You've never been late or missed a payment. In short, you're an excellent customer. But unknown to you, this particular card issuer has a policy of not reporting fully the details of its customers' accounts. In your online national credit file, the monthly balances and payments are reported accurately. But the credit limit is left blank. Why would a card issuer do that? To stymie competitors who routinely troll through the databases of the national credit bureaus for new accounts by ordering up lists of consumers with specified characteristics. For instance, a competing card issuer might troll for consumers living within a specified ZIP Code who have credit scores above a given threshold. The company might also seek consumers with young-looking "thin files," with just a handful of existing credit accounts. Here's the problem: One of the heavily weighted factors in most credit scores - whether the FICO (Fair Isaac & Co.) score or the credit bureaus' own scores - is utilization of existing credit. Consumers making heavy use of credit accounts are considered at greater risk of future default. So their scores go down. To measure utilization, scoring systems look at the ratio of the highest balance to the credit limit. If you had a $2,400 high balance against a $2,500 limit, you'd have a very high (96%) utilization ratio. The scoring program would penalize you for being nearly maxed out. On the other hand, a $250 balance against a $2,500 limit would produce a low (10%) ratio - and the scoring system should reward you for prudent use of credit. Now for the score killer: When a creditor reports no credit limit on an account, calculation of a utilization ratio is impossible. According to Federal Reserve researchers, when confronted with missing credit limits, most credit scoring systems "substitute the highest balance for the missing credit limit." The typical result, according to the research, is higher credit utilization ratios than if the credit limits had been reported. Artificially inflated ratios, in turn, typically depress credit scores, sometimes by 50 points or more, according to credit industry experts. The effect can be even more pronounced when the loan applicant is young or relatively new to the world of credit. The Fed researchers did not identify the credit card issuers who intentionally withhold customers' limits. But for 46% of the consumers in a random sample of 301,000 credit files to be affected by this score-depressing policy, the creditors involved must be numerous, big or both. How much can nonreporting of limits cost on a mortgage? Potentially, hundreds of dollars a month and thousands of dollars a year. According to Fair Isaac, a 677 FICO score in today's market would qualify a borrower for a 6.23% 30-year fixed rate on a $150,000 home loan. A 30-point drop in that score because of nonreporting of credit limits would push the best rate available to 7.38%. Monthly payments for the applicant with the artificially depressed score would be $115 higher. How to battle nonreporting in a voluntary credit system? Easy. Ask credit card issuers whether they report credit limits. Or get a copy of your credit file online (typical cost: $9.95) and see if the limits are all there. Then consider canceling cards that intentionally depress credit scores.
A broad array of protections that families once depended on to shield them from economic turmoil - stable jobs, widely available health coverage, guaranteed pensions, short unemployment spells, long-lasting unemployment benefits and well-funded job training programs - have been scaled back or have vanished altogether. Nowhere is the risk shift of the last quarter century more apparent than in the widening swings in working families' incomes. Although average family income adjusted for inflation has risen in recent decades, the path that most households have followed has hardly been a steady line upward - the historical norm for most of the post-World War II era. Instead, a growing number of families have found themselves caught on a financial roller coaster ride, with their annual incomes taking increasingly wild leaps and plunges over time. In the early 1970s, the inflation-adjusted incomes of most families in the middle of the economic spectrum bobbed up and down no more than about $6,500 a year, according to statistics generated by the Los Angeles Times in cooperation with researchers at several major universities. These days, those fluctuations have nearly doubled to as much as $13,500. This growing volatility - and the rising risk it signals - has cut a wide swath. It has touched families from the working poor to those near the top of the earnings pyramid. The shifting of risk, in other words, is proving to be a democratic phenomenon. The Times' analysis is based on the Panel Study of Income Dynamics, which is underwritten by the National Science Foundation and run by the University of Michigan. Unlike most economic measures, which involve taking snapshots of random samples of Americans at different times and comparing them, the panel study has followed the same 5,000 nationally representative families and their offshoots for nearly 40 years. As such, it is the most comprehensive publicly available record of family earnings and income in the world - and it goes a long way toward explaining why, even in the midst of a recovery such as the one underway, so many Americans feel so uncertain about their economic circumstances. In using income volatility to gauge risk, The Times is taking a page from the financial markets, where the chief measure of a stock's riskiness is how much its price bounces up and down compared with changes in a market measure such as the Standard & Poor's 500 index. And just as with the stock market, there can be a big payoff. The Good News / The Bad News Families in the economic middle saw their incomes, adjusted for inflation, climb by almost one-quarter to an average of nearly $50,000 between the early 1970s and the beginning of this decade. At the same time, middle-class families saw their average net worth grow 40% to $86,100 in the last decade alone, according to the Federal Reserve. The average income of families in the upper 10% of earners nearly doubled in the last generation to $130,400. Their average net worth nearly doubled to $833,000. Free-market advocates cite these pocketbook advances as proof that the economy has been overhauled in the right way. But there is another, less sanguine way to view what has unfolded. The more that a family's income fluctuates, the greater the chance it will be caught in a downdraft when a crisis - such as a layoff, divorce or illness - strikes. Then, it can be extremely tough to bounce back. Over the last three decades, working families have faced ever-changing - and, for the most part, increasingly more perilous - risk-reward bargains. Income Growth Shrinks - Income Volatility Rises During the 1970s, families in the economic middle enjoyed a comparatively favorable run. Although their incomes generally swung up or down as much as 16% a year, they ended each year an average of 2% ahead of where they began. The result by the decade's close was that the reward of extra annual income had more than covered the potential loss from a single year's sudden plunge. But the story during the 1980s and early 1990s was basically the reverse. The volatility of families' income nearly doubled to as much as 30% a year. But now, instead of growing amid all the ups and downs, average family income dropped at an annual rate of 0.3% in the 1980s and an even steeper 2.3% in the early '90s. The bottom line: more risk for less reward. Although volatility remained high in the late 1990s, with typical annual swings of as much as 27%, incomes finally began to grow again, improving families' odds of being able to get ahead. But the good times didn't last. Since 2000, incomes have reversed course and fallen about 1% a year, according to recently released census figures. In other words, things are back to the unattractive equation of more risk for less reward. A separate analysis by Jacob Hacker, a Yale political scientist, found even more dramatic changes in income swings. In a study published in May, Hacker and a colleague reported that income volatility among households in the University of Michigan database had more than doubled between 1973 and 1998. The pair concluded that at its peak in the mid-1990s, volatility was roughly five times greater than in the early 1970s. "The incomes of American families have grown more unstable over the last generation," said Johns Hopkins University economist Robert Moffitt, who along with Boston College economist Peter Gottschalk pioneered techniques for analyzing earnings volatility more than a decade ago. "All other things equal," added Moffitt, "rising income instability suggests that families from the working poor to those fairly far up the income distribution are bearing more economic risk." The Old Safety-Net: The Way it Was It was not always so. With workers' compensation, welfare, unemployment benefits, Social Security, Medicare, workplace rules, environmental regulations, product liability laws and more, government officials spent most of the 20th century adding to the economic protections that American workers, the elderly, consumers could count on - and reducing the risks they had to tackle alone. However, by the late 1970s and certainly by Ronald Reagan's election in 1980, new notions began to take hold, ones that turned many an established view about the needs of working Americans on its head. The sense that something had to change - and that the free market was the answer - was fed by a variety of factors: fear that American business was being overtaken by Japan; concerns that the 1970s bankruptcies of Lockheed, New York City and Chrysler betrayed some deep flaw in the U.S. economy; the influence of economist Milton Friedman and Reagan's sunny conservatism. "Government is not the solution to our problem," the new president famously declared. "Government is the problem." Safety nets that were designed to help people were now said to be ensnaring them. Economic upheaval that was long thought to hurt people was now praised for sifting winners from losers. Ordinary Americans who were once simply seen as workers were now regarded as entrepreneurs and investors as well. The Old Safety-Net: What the Government Provided Government used to provide substantial help in coping with joblessness. In the mid-1970s, jobless workers could collect up to 15 months of unemployment compensation. By last December, Congress had pared the program to just six months. Additionally, federal legislation in 1978 and 1986 effectively reduced the value of benefits by making them taxable. And state eligibility restrictions imposed in the late 1970s and early '80s shrank the fraction of the workforce entitled to collect benefits from about one-half to a little more than one-third. Of the 8 million people who were unemployed last month, only 2.9 million were collecting benefits. The minimum wage was once the government's chief means of ensuring that "work pays" - that those willing to head to a job each day would make enough to live on. For decades, the minimum wage was paegged at about half of average hourly earnings in the U.S. But starting in the early 1980s, the minimum wage was allowed to slip. At $5.15, it is now only one-third of average hourly earnings, its lowest level in 50 years. Washington once sought to help people adjust to global competition, industrial restructuring and technological change by offering job training. Twenty-five years ago, the federal government spent $27.3 billion annually (in 2003 dollars) through the Comprehensive Employment and Training Act, or CETA. Even if one doesn't count CETA's "public service" jobs, which were widely criticized as boondoggles, it was still spending $17.1 billion. By contrast, the government now spends about $4.4 billion on CETA's successor, the Workforce Investment Act. Welfare was created to protect poor women and children, but starting in the late 1970s a growing chorus of analysts complained that the system had backfired by fostering a culture of dependency. In 1996, the "work first" law that has cut welfare rolls by one-half and reduced inflation-adjusted welfare spending by at least one-third, or about $10 billion a year. On balance, the changes appear to have benefited people who can find jobs and hold them. But those who can't work or have lost their jobs can often find themselves in far worse shape. Twenty-five years ago in California, a mother of two who depended on welfare collected about $15,000 in cash assistance and food stamps. By last year, a woman in the same circumstances brought in $3,300 less, in inflation-adjusted terms. The Old Safety-Net: What Employers Provided For most of the post-World War II era, Washington had a partner in helping to shield working families from risk: corporate America. Businesses considered themselves duty-bound to provide stable jobs and strong ties to employees, cushioning workers against the vicissitudes of the economy. For decades, employers delivered on the promise of job security. Beyond that, businesses erected a bulwark against the risk of illness by raising the number of workers with employer-provided health insurance from 1.5 million before World War II to more than 150 million. They helped families deal with the economic costs of death by giving life insurance to 160 million of their employees, up from 9 million. And they offered seemingly ironclad protection against the insecurity of old age by boosting the number of workers with pensions from 4 million to 44 million. But like the government's safety net, corporate America's began to fall apart in the late 1970s - shifting still more risk onto working families. Twenty-five years ago, almost 40% of the nation's private full-time workforce was covered by traditional pensions, under which the employer bears the risks and pays the benefits. That number has fallen to 20%. In the place of pensions have come defined-contribution plans such as 401(k)s, under which an employer may kick in some funds - typically about half what would have been spent previously - but employees alone bear the burden of ensuring that they have enough money to retire on. A similar shift is underway in health insurance. As recently as 1987, employers provided health coverage for 70% of the nation's working-age population, according to the Employee Benefit Research Institute in Washington. By last year, that had dropped to 63%. The change translates into nearly 18 million people who would have been covered under the old system scrambling to make their own arrangements. Even when employers continue coverage, they increasingly push more of the costs onto employees. Since 2000 alone, employers have raised the premiums their workers must pay by an average of 50%, or about $1,000 a family, according to a recently released study by the Kaiser Family Foundation and the Health Research and Educational Trust. The End of Life Time Employment When it comes to job security, employers have largely broken the bond they had with workers. A late 1980s study by the Conference Board, found that 56% of major corporations surveyed agreed that "employees who are loyal to the company and further its business goals deserve an assurance of continued employment." A decade later, that number dropped to just 6%. As a result, people are increasingly likely to be bounced from their jobs, with ever more severe financial consequences. In 1978, middle-aged men could expect to be with the same employer for 11 years, according to BLS data. That's now down to about 7.5 years. Since the 1970s, the average length of an unemployment spell has risen by 50% to almost 20 weeks. The economic damage done when someone is laid off and his or her job is eliminated also has grown. Princeton University economist Henry Farber recently found that college graduates laid off in the early 1980s suffered a 10% decline in income through a combination of forgone pay hikes from the old job and lower wages once back to work. In the last few years, laid-off college grads were taking a far bigger hit of 30%. "For almost a century, business and government worked in tandem to expand the economic protections afforded working Americans through social insurance programs and career employment," said University of Pennsylvania economist Peter Cappelli. "In the last 25 years, we've stripped most of these away." For a growing number of people, Cappelli said, the result is unmistakable: "You're on your own." Policymakers have been quick to say that the one element of the nation's unemployment compensation system that has remained unchanged over the years has been the so-called replacement rate, the fraction of a person's pre-unemployment wages covered by the benefits. That has stayed rock-solid at about 50%. But what they usually fail to mention is that the 50% figure applies to the median worker - the one in the middle of the economic spectrum. For the half of American workers who've made above the median, the replacement rate is much lower. The maximum weekly benefit in Pennsylvania in 2002, was $442 a week. The Ride Grows Smoother for Business and the Economy If most people don't have much occasion to dwell on economic risk, save for when they pay their auto or homeowner's insurance, the same cannot be said for the wizards of Wall Street and the chiefs of American business. As part of their effort to harness the power of the market, they have plowed tremendous energy - and money - into understanding risk. Their mathematical equations have let them predict the odds of bad outcomes with growing precision. Their financial inventions have let them shape, share and limit their risk with ever-greater sophistication. "All of finance - not just insurance, but banking, venture capital, even the stock and bond markets that are so often held out as the very models of what a competitive economy should be - is about managing risk," said Yale economist and financial theorist Robert Shiller. Risk management tools help health insurers tailor coverage so that they avoid people apt to file lots of claims - or charge them more. Credit card issuers have figured out how to target those most likely to carry large balances and yet still manage to pay. Consultants devise variable pay schemes and flexible work schedules that let companies increase output while minimizing their risk of being stuck with unneeded employees. In these ways, the economy has been reshaped much as government and business leaders envisioned 25 years ago, and with the very result they sought. After bouts of instability in the 1970s and early '80s, the economy as a whole has begun operating in a smoother, less calamity-prone fashion. The amount that the GDP jumps around from quarter to quarter has been cut in half since 1984. Scholars have dubbed this decline in economic volatility "The Great Moderation." They have praised the trend for significantly reducing the risks that businesses face in making investments and that policymakers must juggle in guiding growth. Working families have also reaped substantial benefits, with inflation held mostly in check for more than 20 years. And yet - with the new tools of high finance largely unavailable to them - there has been a huge downside for families as well. Although the overall economy has become steadier - the incomes of working people have been beset by ever-larger fluctuations. Looked at in this way, "we haven't reduced economic risks" at all, said Harvard economist Martin Weitzman. "We've simply redistributed them from the economy as a whole to individual households." Two-Income Families and Debt Millions of Americans have relied on two factors to help them handle the heightened risks of the last 25 years: the entry of women into the paid workforce and borrowing. Today, more than 70% of mothers work outside the home, compared with less than 40% in the 1970s. Although women's arrival in the full-time workforce has been driven by forces as disparate as feminism and the triumph of brain jobs over brawn, their influx could hardly have come at a better time for millions of working families. It has provided households with the insurance of a second wage earner in case anything happens to the first. Yet women's employment also has meant new costs - for day care, extra cars, more meals out. And most families have treated the additional income not as savings to be set aside in case of emergency but as a means of raising living standards. An analysis of two decades of the government's Consumer Expenditure Survey, Washington's tally of what Americans buy, shows that the fraction of spending going toward big-ticket items such as houses, cars and schools has increased to more than 50% as the number of earners within families has grown. The situation "puts families in a bind," said Raj Chetty, a UC Berkeley economist who specializes in studying risk. "It means that if they are hit with an economic shock, they have to adjust to it by making bigger changes in the part of their budget that is still not locked in." In other words, people have ended up leading lives that are both more prosperous and more precarious. To help cope, many Americans have borrowed. Arguably, borrowing has become for this generation what unemployment compensation, the GI Bill and government-guaranteed mortgages were for a previous one - a way to tide over one's family during bad times and reach for a better life. The traditional measure of household debt - calculated as a percentage of a family's after-tax income - has climbed from 62% a quarter century ago to almost 120%, according to Federal Reserve statistics. Much of that increase is from the rush of mortgage lending during the last decade. But non-mortgage debt, including credit cards and auto loans, also has risen, from 15% to almost 24% of after-tax income. Economists and policymakers have generally applauded the growth of borrowing as a boon to the economy and a blessing for average Americans. They have portrayed the extension of credit to families further and further down the income scale as part of a sweeping democratization of finance. But even upbeat commentators such as Dean Maki, a former Fed economist now with J.P. Morgan Chase, acknowledge that families' growing reliance on debt exposes them to new risks, especially if interest rates rise. Maki estimates that the interest cost on about one-quarter of household debt is now variable and prone to swell if overall rates go up. The borrowing boom has already produced one disturbing trend - a sixfold increase in personal bankruptcies since 1980. Bankruptcy filings reached a record 1.625 million last year and were up again through March of this year. Two decades ago, they totaled 288,000. Last year more people filed for bankruptcy than filed for divorce or were diagnosed with cancer or graduated from college. You may be asking why I would included a long off-topic article like this in an investment update. Well, the changing financial risks of non-investment conditions in the American family will influence how the it will accept or reject investment risks. Below I list more data from two related stories. Middle-Class Tightrope Jacob Hacker, Washington Post 8-10-04 Middle-class earnings are up, but this is mostly because women have moved into the workforce. Without the huge one-shot boost of a second breadwinner, according to Jared Bernstein of the Economic Policy Institute, most families would barely have moved upward since 1980. And that might have been fine -- if the cost of a middle-class lifestyle had remained stable. Two-earner families need to spend more, not less, than the "Leave It to Beaver" set. They need child care, help when kids are sick, a second car. Plus, they pay more in taxes. Two-earner families are the ones hit by the "marriage penalty". Above all, the things that Americans value most -- health care, housing, college -- have simply gotten much more expensive. These higher costs often bring major benefits. But they mean that being middle class is a lot more costly than it used to be. My own recent analyses of income statistics suggest that family incomes have become two to three times more unstable in the past three decades, even for well-educated workers and two-earner families. The causes are multiple: Jobs are less secure, wages are more volatile, government programs and employment-based benefits have been cut, and families with two earners in the workforce are more exposed to job instability than one-earner families. Dynamics of Economic Well-Being: Movements in the U.S. Income Distribution U.S. Census Bureau Of U.S.households, 13 million (13%) experienced changes in their annual income between 1996 and 1999 that resulted in their moving either up or down two or more quintiles in the income distribution. A quintile represents a 20% group of data from a frequency distribution. Overall, 52% of households (52 million )remained in the same quintile from 1996 through 1999. Householders with lower levels of education were more likely to remain in or move into a lower quintile compared with householders with higher levels of education. Householders under age 45 were more likely to move into a higher quintile than older householders, while householders age 55 and over were more likely to move into a lower quintile than younger householders. Out of 100 million U.S.households, those in the top and the bottom quintiles of the income distribution experienced the most stability from 1996 through 1999. Sixty-six percent of households (13 million) starting in the top quintile and 62% of households (12 million) starting in the bottom quintile in 1996 remained in these respective quintiles in 1999. In comparison, more than half of the households that started in the second, middle, and fourth quintiles experienced considerable movement across the income distribution by 1999, with only 41% to 47% remaining in their original quintile. From 1996 through 1999, 34% of households (6.6 million) that started in the second income quintile moved up to a higher quintile, while 19% experienced a drop to a lower quintile. From the middle quintile, 32% of households (6.4 million) moved up and 27% of households (5.3 million) moved down. For households that started in the fourth quintile in 1996, 23% (4.6 million) saw their income rise to the top quintile, while 32% (6.5 million) experienced a decline in their quintile position. The 1.5 million households (7.4%) that started in the middle quintile of the income distribution in 1996 ended in the top quintile. On average, they had a $60,156 increase in income by 1999. The 1.8 million households (8.9%) that started in the middle quintile in 1996 ended in the bottom quintile in 1999 experienced a drop in income of $32,896. Of households in the fourth [those earning between $45,364 and $68,648] and the top quintiles [those earning more than $68,649] of the income distribution in 1996, 14% experienced a decline in income that resulted in moving down two or more quintiles between 1996 and 1999. On average, the 2.5 million households (12%) that started in the fourth quintile in 1996 [and fell two or more quintiles] experienced a $41,423 decline in income by 1999. Similarly,the 2.9 million households (15%) that started in the top quintile in 1996 [and fell two or more quintiles], on average experienced an $83,820 drop in income by 1999. Nearly 5% of householders who moved down at least two quintiles in income from the top, fourth, or middle quintiles were married in 1996 and divorced or separated by 1999, while 2.1% were married in 1996 and widowed by 1999. Changes expected to increase household income include movement from having some college education or an associate ’s degree to earning a bachelor’s degree, as well as going from having a bachelor’s degree to earning a postgraduate degree. Householders (8.9%) who moved up two or more quintiles from the bottom, second, or middle quintiles experienced a change in educational level from 1996 through 1999. Tech Tips, Stats & Information MobilTrak is Spying on You Dina ElBoghdady, Washington Post 10-25 A device, by owned by MobilTrak Inc, the size of a shoe box, is tough to spot unless you make a habit of looking skyward to inspect utility poles while driving. But in 14 locations around the Washington area, the devices are there, sensing which radio stations drivers are listening to by picking up faint electronic signals emitted from car antennas as they drive by. The monitoring aims to help retailers choose where to advertise by giving them a snapshot of which stations consumers tune into as they drive by their businesses. The most enthusiastic MobilTrak adopters: auto dealers, who generally believe that 80 percent of their business is with people who live or work within 10 miles of a given dealership. MobilTrak captures only radio listening in cars, which accounts for 33% of all radio listening. Another third of radio listening takes place at work and the rest is done at home. MobilTrak captures only FM stations. MobilTrak also operates in Seattle, Los Angeles, New Jersey and Charlotte. Within 36 months, they hope to have a presence in 100 markets. One California company, Smart Sign Media, uses MobilTrak's sensors and changes the advertising on digital billboards, depending on which radio station people are listening to as they approach. LCDs vs CRTs Mike Musgrove, Washington Post 10-10 This was supposed to be the year that bulky cathode-ray tube monitors for desktop computers disappeared, replaced by the slick and affordable liquid-crystal displays. But according to the research firm IDC, sales of LCD monitors did finally nudge past those of CRT displays, but with only 50.2% of the market. It turns out people are more price-sensitive than expected. For example, a 19-inch CRT display typically costs $250, while a similarly sized LCD runs about twice that price. Robert Thompson, product manager of displays at Dell, says that "99% of our customers want to buy flat panel, it's just that the price isn't there." The remaining 1 percent of CRT loyalists seems to be mostly hardcore computer gamers. Craig Levine, manager of Team3D, a professional computer game-playing team sponsored by Nvidia and HP, figures that today's LCD screens can refresh each picture element about 80 times per second. But cutting-edge new video graphics cards can generate 125 such images per second -- meaning that the computer may be generating images faster than that LCD monitor can actually display them. Can the human eye actually tell the difference? Maybe, maybe not. Google By Cellphone Leslie Walker, Washington Post 10-10 Google rolled out a trial service last week -- Google SMS, a free service that lets people use cell phones to send quick search queries via Short Message Service (SMS) to Google and get back Web search results on their phones' screens. Among other items, Google SMS can deliver product prices, dictionary definitions and phone numbers. Although it's free, people may have to pay their carriers extra for messaging. News from Gallop Leslie Walker, Washington Post 10-10 The Gallup Poll (www.gallup.com) has launched a free daily Web newscast, an eight-minute video featuring pollster-in-chief Frank Newport as a stand-up anchor talking about the firm's latest polling data and what it reveals about current events. The Webcast goes online at 6 a.m. Monday through Friday. Last Friday's Webcast tackled such topics as the "gender gap" in presidential politics, how teens view the Iraq war, public ratings for the vice presidential candidates and workaholism. Home Page Previous Factoid Too Top Sites
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