What percent of Americans are insolvent and what makes data trustworthy.
In this episode you’ll learn:
- What is stakeholder theory when it comes to equities.
- Why we never really know anything.
- Why data can’t be separated from its context, history and source how it was produced.
- What percent of U.S. households are incentive
Hello Fresh use code MONEY30
Welcome to Money For the Rest of Us. This is a personal finance podcast, it’s on money – how it works, how to invest it and how to live without worrying about it.
I’m your host, David Stein. Today’s episode is episode #176, titled “Are most Americans insolvent?”
The Claim of Insolvency
I recently got an e-mail from Alexandra. She writes:
“I just got my MBA, and in my Ethics class we talked a lot about shareholder vs. stakeholder theory. I’d be curious to hear what you think about the claim in this article that the stock market has nothing to do with the economy?”
The article was from Quartz, it was written by Theodore Kinni, but he was profiling Peter Georgescu, who has a new book called “Capitalists, Arise! End Economic Inequality, Grow the Middle Class, Heal the Nation.” Now, I have an MBA and I actually was really kind of excited that she had got an MBA and they had an Ethics class. We did not have an ethics class when I got my MBA, and we didn’t really talk about different stakeholders in companies. We talked about that a stakeholder would be the employees, the community, certainly the owners, the management, and the shareholders.
The emphasis when I got my MBA was this – maximize shareholder wealth. It was all about the shareholder. We’re going to talk about that maybe a little bit in this episode, and potentially in a follow-up. But first, we want to talk about something that Georgescu claims in the article and in his book. Most Americans, 60%, are insolvent.
The article states that Georgescu writes in his book:
“For the past four decades, capitalism has been slowly committing suicide. The stock market has nothing to do with the economy per se; it has everything to do with only one thing – how much profits can companies squeeze out of the current crop of flowers in the garden. Pardon the metaphor, but what corporations do – they squeeze profits.”
Now, we’ve talked about that most recently in episode #165, “Why do we invest?”, how companies are choosing to buy back stocks and cut labor costs, versus investing in capital projects that could increase the company’s innovation and boost its long-term profits. They’re focused on the short-term benefit of boosting earnings per share simply by buying back stocks. That’s a theme we’ve covered in the show.
But then Georgescu goes on:
“Nearly 60% of American households are technically insolvent, and adding to their debt loads each year. In addition, income inequality in the U.S. is reaching new peaks. The top layer of earners now claim a larger portion of the nation’s income than ever before, more even than the peak in 1927, just two years before the onset of the Great Depression.”
After reading that, there really wasn’t any references to where the data was coming from, so I decided to buy the book and read it. The centerpiece of the book, its Exhibit One is chapter two, and it’s where he claims – he shows this chart, Exhibit One, the after-tax surplus of households by decile. So after they received their income, they received any type of government transfers, then they spend whatever they’re spending, what do they have left over? It shows six of the deciles are insolvent, and that they’re not getting enough income to offset what they’re spending.
Here’s what he writes:
“Let me restate what the chart shows – nearly 60% of the U.S. population, more than half of all American households, add thousands of dollars to their debt load every year. He says that he and his co-author, David Dorsey, were stunned when they saw that this was data put together by the economist Andrew Terrell; it says in the book that he was a former White House staffer. They had met and went through the charts that Terrell put together. I would have been stunned too, except Exhibit One didn’t have any footnotes, explanations, where the data came from, how it was compiled.
In the book, Georgescu mentions an article/editorial he had published in the New York Times, which had the same title: “Capitalists, Arise!” It was published in August 2015. In there, he states “40% are broke.” This is 40% of American households. Every year they spend more than they have. But it didn’t have any footnotes either. But he mentions that he submitted the piece to the New York Times, caught the eye of the editor, had a long back-and-forth of revisions, he was told it was going to appear in two days, and then he got a call from a fact checker. They wanted verification of what he was saying.
He sent back a quick e-mail with some of the income inequality charts, but he didn’t have an answer for Exhibit One. He says he hadn’t done the analysis himself, but it was this economist, Andrew Terrell. Later that evening, Terrell called Georgescu back and said a woman from the New York Times had contacted him directly and wanted to know the exact pages that he relied on from the Bureau of Labor Statistics for this quote, for this exhibit, to be able to say that 40% of U.S. households are insolvent.
Terrell’s quote is “She wanted to see the actual sheets of paper, I think.” I didn’t know newspapers did this. Georgescu hadn’t even given the fact-checker Terrell’s contact information. But the New York Times wanted to verify it. I wanted to verify it. I’m looking at this – this is the key of this book, the key of the argument, that 40% of Americans are insolvent, and I couldn’t find the data certainly in the book; I’ll talk about what I could find later in the show, but I don’t see data that says that many every year are spending that much more than they receive in income, so every year they’re going into debt… Not close to half of the U.S. population.
The story of Georgescu’s life is absolutely amazing. He writes in the New York Times editorial:
“This country has given me remarkable opportunities. I’m an off the boat immigrant, having arrived in the United States as a teenager from Romania, in 1954. I’ve been separated from my parents when I was seven because I traveled to the United States, could not return to Romania when it was taken over by the Soviet Union.
When I was about ten, I was placed in a hard labor camp along with my 15-year-old brother. With the help of the American people and the intervention of president Dwight D. Eisenhower, we were reunited with our parents after five years in the camp. Through kindness and compassion I was invited by the headmaster of the Phillips Exeter Academy to attend his school. From there, I went to Princeton and to Stanford Business School.”
He joined an advertising firm as a Young associate, Young & Rubicam (Y&R). He later became their CFO, and in the latter half of the ’90s he led them through a global expansion, and initial public offering, and he has served on the board of eight public companies: Levi Strauss, Toys”R”Us and International Flavors and Fragrances.
The novelist Cynthia Ozick wrote: “Data is memory without history.” We need context. This chart, Exhibit One – no footnote, no explanation where the data came from; the chart that says 40% of the U.S. population essentially is insolvent – that’s the data. The memory, the history we have is the history of Georgescu. There’s nothing in his history to suggest that he’s misleading us, he just didn’t put the explanation. I believe him, it was compiled by the economist Andrew Terrell, and he just didn’t have it. He should have presented it better, but I believe the intentions of Georgescu.
The Importance of Data
Later in this show I’ll share with you what I was able to find. I couldn’t find exactly the replication — I don’t believe it’s quite that extreme. Income inequality is real, and those in the lower deciles are increasing their debt load, and I have some data I’ll share with you on that. But this importance of data – I got an e-mail in August from Steve, and he writes:
“Hello, David. I began listening to your podcast earlier this year and I’ve found it to be very interesting and insightful. I appreciate what you do. I started with the first episode, and I’m now up to episode #140. I have a differing opinion on anthropogenic climate change, and that is why I’m writing. I prefer to differentiate between climate change, which has been occurring since the Earth was formed, and anthropogenic climate change, which is the issue we are currently facing.
I’m not an anthropogenic climate change denier, but I am a skeptic. I believe that my skepticism is justified, because much of the recent climate research is funded by powerful public and private institutions that stand to benefit from a population’s embrace of anthropogenic climate change. There are many instances in which this profit-influenced research has been manipulated to give a desired result.
Several comments you made in episode #140 are misleading and untrue. For example, you tie the periodic flooding in Venice, Italy to anthropogenic climate change. Like you, I’ve been to Venice and I’ve walked on the raised platforms to stay out of the water, but it is well established that Venice is flooding because it is sinking. I’m not accusing you of intentionally misleading your listeners, and I do not believe you would do that, but I’m concerned that one of your episode #140 sponsors was Wunder Capital, a solar energy investment company.
Your listening audience is growing larger. I hope that trend continues. I also hope that in future episodes you will avoid complicated issues that may lead to inaccurate statements.”
He’s correct. Venice is sinking. I wrote him back; thanks for writing. Frankly, I completely forgot Venice was sinking, so that was clearly a lousy example of rising sea levels… Although the North Adriatic Sea is rising, and I have studies on that. But I go on – I’m a skeptic about most things, which is one of the points of the episode; nobody really knows anything. All we have are probabilities and hypotheses that we then aim to disprove, so I agree with you that science is never settled, and it is never an absolute fact. That’s why I gave an example of gravity, that even a concept as gravity is up for debate.
We will never know for sure whether anthropogenic climate change is real or it is just a natural phenomenon. The time scales are too great, so we have to make our best judgment and decide if the cost to address the issue is worth the potential benefits and savings. I have no doubt there are compromised scientists on both sides of the anthropogenic climate change issue who are backed by big money. I’d like to think on balance most scientists are honest and seeking to do real science, which means developing hypotheses and then seeking to disprove it. That’s what science is.
Now, Wunder Capital – they did sponsor the podcast; that was a coincidence. I have complete editorial control of this show, and I do the episode on whatever I’m interested in that particular week, and Wunder Capital just happened to be the sponsor that week, and actually they happened to be, if you’re listening to the — they’re a sponsor this week, too. It’s a coincidence. They sponsor the episode, and I’m appreciative of that.
I will not shy away from complicated topics – and I told him that – because that’s how we learn. And I do make mistakes… That was probably one of my most dumb mistakes that I’ve made. Not the dumbest… The dumbest was when I said the Hajj Stampede – which is in Mecca in Saudi Arabia – is in India. I knew Mecca wasn’t in India, but somehow when I said stampede — I don’t even remember what episode that was. It’s in Saudi Arabia.
I also mispronounced Richard Feynman, premier physicist; I mispronounced his name. And I’ve done other things. So when I make a mistake, I’ll try to correct it. If it’s something like this, Venice is sinking – not the best example of climate change.
Seth Godin had a powerful post the other day about data. He says:
“Real breakthroughs are sometimes accompanied by new data, by new metrics, by new ways of measurement. But unless we agree in advance on what’s happening, it’s difficult to accomplish much. If you don’t like what’s happening, an easy way out appears to be to blame the messenger. After all, if the data (whether it’s an event, a result, or a law of physics) isn’t true, you’re off the hook. The argument is pretty easy to make: if the data has ever been wrong before, if there’s even been a bias or a mistake or a theory that’s been improved, well, then who’s to say it’s right this time? “Throw it all out” That’s the cowardly, selfish thing to do. Don’t believe anything that makes you look bad. All video is suspect, as is anything that is reported, journaled or computed.
“The problem is becoming more and more clear: once we begin to doubt the messenger, we stop having a clear way to see reality. The conspiracy theories begin to multiply. If everyone is entitled to their own facts and their own narrative, then what exists other than direct emotional experience?”
Emotion and Data
We need emotion, and we need data, and we need to understand the context of the data, and the authority of the person delivering the data. We need to understand how it’s compiled. I saw this clearly the other day with that tragic massacre in Las Vegas. 58 people died from one shooter… Yet within the next day I saw on Facebook from somebody I know, he wrote:
“Yes, this doesn’t add up. I listened to 20 minutes of police scanner recording, and they mention more than once there were two confirmed shooters. This was in the midst of this massacre, this scanner, and there was a lot of confusion.”
He later linked to an article from a website – I’ll put the link in the show notes; I don’t have it here. I don’t think it was a credible source, but he says:
“I believe it’s possible that the truth of the Las Vegas false flag operation might actually resist the complete obfuscation by the mainstream media seen in previous similar events, due to the ubiquity of cell phones and social media.”
He’s saying this massacre was a false flag event. And what is that? Wikipedia says it describes covert operations that are designed to deceive in such a way that activities appear as though they’re being carried out by individual entities, groups or nations other than those who actually planned and executed them.
He’s saying it was a front, that there was not one lone shooter. And it gets down to who you’re going to trust. Subsequent investigation has shown that it was indeed one shooter, but if our default response is to doubt everything… I was amazed – one of the common photos shown about this incident was taken by David Becker, a photo of two audience members that were at the concert, running, and they’re crouched down. He wrote in the Washington Post:
“After capturing photographs of the final acts of Route 91, I headed back to the media tent to start filing my photographs. After about 5-10 minutes I heard very loud popping sounds, and I went outside to see what was happening. The security guy said it was just firecrackers, so I went back to work.
The second time I heard the popping sounds, somebody said to me “It was just speakers, or sounds equipment”, and again I went back to the media tent. Then the noises went again, and that’s when the crowd started to flee. I went outside and saw a lot of people panic and running for the exit. That was right by the media tent.
I grabbed my camera and went back outside and found a place where I could see what was happening, and also where I would be in the way of people. So I stood on a table and started to shoot, thinking to myself still that this isn’t really happening. It’s just the speakers popping. It was so dark. I couldn’t really see what was happening.
There were a lot of people crying, speaking on cell phones and ducking for cover. As the crowd thinned out, I was able to get a little closer to try to see what was going on and take some pictures, and I’m still thinking to myself “It’s just the speakers. There’s nothing going on.”
There were groups of people helping each other everywhere, and a real sense of people running for cover. People were fleeing, they were panicking. The gunfire was sporadic; it would stop, and then more shots, then a lull, and then more shots. I could hear people yelling at them to shot off the lights, to be quiet. People were cowering, they were very fearful for their lives.
A woman tripped right in front of me. A man shielded a woman with his body before I saw them both get up and run away. A man in a wheelchair was helped to an exit. I was trying to capture anything that was moving that had good lighting. That was critical. It was so dark, and there was limited lighting. It was really hard to get a sense of what was happening.
At this stage, I still just thought it was a speaker popping, so I was trying to capture people’s emotions and a sense of the panic that was around me.
I went back into the media tent and called my colleague to see if he could find out what was happening, and I still didn’t know what was going on. He said that he had found that the police had called a code red and set up a perimeter. It was then I started looking at my photographs, and what I was seeing was just unbelievable. It had been so dark outside I couldn’t see the details. I just saw a lot of people laying on the ground, thinking they were playing possum. But now I could see people covered in blood, and I thought this is real.”
In the moment he didn’t know. People in the scanners didn’t know. It’s only afterward that we start getting data and doing investigation that we know… But we have to believe, we have to understand the context, the history of who’s presenting the information, which is why in understanding of Georgescu’s book it was so important to actually put sources and how the data was compiled… Because I did find a source.
Finding a Source
The Congressional Budget Office – they’re a federal agency within the legislative branch of the U.S. government. They provide budget and economic information to Congress, they have a history of being and they are non-partisan, and they are a credible source. They put together a study in 2016 – Trends in Family Wealth From 1989 to 2013. They have five pages of explanations of where they got the data. Most of it came from the survey of consumer finances. This is a survey, so it’s families filling in information on what they are spending, how they’re spending their money, how their debt levels have changed… But it’s based on survey data, and it’s data to figure out the income equality and looking at debt and assets level. It’s not clear-cut, so they actually ended up pooling together from two different data sources… But it’s a fascinating study, and I’ll link to it in the show notes, which you can get at moneyfortherestofus.com. While you’re there, go ahead and sign up for my Insider’s Guide and I’ll e-mail those show notes to you weekly. Also, I include an essay that only goes to people on my Insider’s Guide, so you can sign up for that at moneyfortherestofus.com. Or if you’re a U.S.-based listener, just text the word “insider” to the number 44222.
But let me share some of what they’ve found in this study. Here’s a quote from it:
“Unlike families in other parts of the wealth distribution, those at or below the 25th percentiles in the years between 1989 and 2013 held more in debt than they had in assets on average. In 1989, families in that group were about $1,000 in debt. By 2007, on average, the group was about $2,000 in debt. But by 2013, they were about $13,000 in debt on average. So that lower quartile, their debt is increasing.
The share of families in debt, those whose total debt exceeds their total assets, so technically insolvent, remain almost unchanged between 1989 and 2007, and then increase 50% between 2007 and 2013. In 2013, those families were more in debt than their counterparts had been either in 1989 or 2007.”
Then it goes into detail, how the debt is increasing, and much of it is student loans. So by that study, it’s not 50% or 60% — and in this episode I’ve said it was 40%, because that 40% is what the New York Times editorial said was insolvent. 60% is what the book said, and that’s what the table was.
The Congressional Budget Office is suggesting it’s 25%, but the bottom line is a large percentage of the U.S. population is not making their ends meet, and they’re having to take on more and more debt, and that’s unsustainable. So the question is why? That is what we’re going to have to talk about in another episode, most likely the next episode – episode #177. I’m leaving for a trip to Japan, I’m planning on recording it there, but if something comes up… But we need to look at it.
So this book that Georgescu put together is really powerful in terms of some of the concepts and the reasons why — he blames corporations, businesses for causing, being a source for much of the income inequality that we’re seeing. It’s not that simple though, and that’s why we need a full episode to look at income inequality and what are some of the reasons for it, because like climate change, it’s not clear-cut.
We have some hypotheses, we aim to disprove them, but the bottom line is we need to look at any data, put it into context, understand the authority and the credibility, the history of who’s providing that data. Sure, they’ve made mistakes in the past, but that doesn’t mean we ignore everything that they produce.
So that’s episode #176. Show notes are at moneyfortherestofus.com. Also on Money For the Rest of Us is Money For The Rest of Us Plus. This is a trusted guide for those who manage their own money. We have over 850 members, we help each other in navigating the complexity of investing. You can find the tools there and learn more at moneyfortherestofus.com.
Everything I’ve shared with you in this episode has been for general educated. I’ve not considered your specific risk profile. I’ve not provided investment advice. It’s simply general education on money, investing and the economy. Have a great week!