It turns out that the digital infrastructure was far more ready for disaster than the health infrastructure. Led by Google, AT&T, and Amazon, the top ten American tech and broadband companies have spent over $300 billion in capital investment in the past two years (the rest of the top ten, in alphabetical order, includes Apple, Charter, Comcast, Facebook, Intel, Microsoft, and Verizon). These companies have been building data centers,expanding wired and wireless networks, constructing ecommerce fulfillment centers, and otherwise. And it’s a good thing they did, as the coronavirus crisis forces millions of Americans to move their entire lives online.
Note: These are the top ten tech and broadband providers in our latest Investment Heroes report. However, this number represents all capital expenditures by these companies, both U.S. and foreign. As such, it is not directly comparable to the domestic capital spending numbers presented in our Investment Heroes report.
The outbreak of COVID-19 (commonly known as coronavirus) has created a global market downturn and raised the prospect that the United States could enter its first recession since the 2008 financial crisis. Last night, President Donald Trump and U.S. House Speaker Nancy Pelosi offered two competing approaches for securing both the health and economic security of the American people. While the president’s proposals would arguably do more harm than good, Speaker Pelosi and House Democrats should be commended for swiftly developing a comprehensive and serious plan to effectively tackle the crisis.
During the last recession, Speaker Pelosi passed a stimulus bill that used a combination of deficit-financed tax cuts and government spending increases to boost the economy. With interest rates on government debt now below projected inflation, many are calling for her to now take similar action. The problem is that commerce is currently being constrained by proactive measures people are taking to limit the spread of a pandemic, not a lack of money in consumers’ pockets. Additionally, the coronavirus has disrupted global supply chains, which no amount of demand-side stimulus can alleviate in the short term. A unique economic problem requires a unique solution.
It’s the S-word–shortages. The greatest manufacturing nation in the world, but we can’t make enough masks and other protective gear for our frontline healthcare workers? The coronavirus crisis points out what many of us already knew–globalization is not enough to provide the flexibility and surge response that the U.S. needs. Apparently in medical emergencies, countries do what you would expect–cut off exports and keep supplies of critical medical equipment for their own people. And it’s not just China–France and Germany are also restricting exports of medical supplies.
Medical supplies are just the tip of the iceberg here. As has become clear, the U.S. needs a more flexible and diverse manufacturing sector, able to pivot when needed and quickly handle surges in demand and shortfalls in supply. Strategic inventories are all well and good, but you can never predict exactly what is going to happen, whether it’s an environmental disaster or the unfortunate specter of war.
As I wrote in a new column in Forbes, the coronavirus epidemic “has illustrated the fragility of global supply chains, and the potential problems with having too much global production concentrated in China. In February, for example, Coca-Cola, for example, warned of possible disruptions in the supply of sweeteners coming from China. Other industries, from steel to pharmaceuticals, face similar potential problems.”
But we don’t need investment in conventional factories, which in ordinary times can’t compete. What’s needed is a sustained push for digital manufacturing, which is potentially far more flexible than conventional manufacturing. It’s like the difference between a point-to-point telephone system and an Internet built on general purpose routers and processing node. The conventional telephone system, built on copper wires, worked very well for making voice calls, but was hard to reposition for other uses. The Internet can not only handle voice calls, but excels at all sorts of new tasks.
Luckily, here’s one case where good policy is good politics. PPI recently released a new poll conducted by Pete Brodnitz. The poll surveyed 1500 registered voters in Michigan, Pennsylvania and Wisconsin in early-to-mid February, three swing states that will be critical for the 2020 presidential election in November.
The poll showed that 73% of the respondents in these three states favored a federal role in promoting manufacturing-related jobs in the United States, an overwhelming majority. Moreover, the support was stronger among Republicans and independents than among Democrats. Such a program could be crucial in a tight race.
We’re not talking about a conventional industrial policy that picks winners and losers. Rather, progressives should support the development of a flexible digital manufacturing sector that can quickly adapt to changing circumstances, whether it’s a medical emergency, an unexpected growth in demand for electric vehicles, or political hostilities. The program would provide short-run demand stimulus to keep people working, medium-term incentives for digital investment (which we wrote about here), and a long-term research program for flexible digital manufacturing processes. Good policy–and good politics.
As economists who care about inequality, we cheer when Amazon and other ecommerce sellers open up new fulfillment centers in areas where job growth has been slow and opportunities limited. In fact, we have pointed out in the past that because these mammoth centers require large amounts of land and good road connections, they are well-suited for outlying areas that may have been left behind by the tech boom and the decline of American manufacturing.
Oddly enough, a coalition of labor unions disagree. In a new petition presented to the Federal Trade Commission (FTC), the coalition accuses Amazon, in particular, of choosing to “knowingly distance its warehouses from tighter local labor markets” and place them instead in looser labor markets where workers have a “paucity of options.” According to the petition, siting fulfillment centers in economically weak areas represents “anti-competitive” employment practices.
My reply: If I could, I would have all of corporate America follow the strategy of putting new job-creating operations in places where people actually need the jobs! Note that I am not talking about moving existing operations—that’s just a zero-sum game. Rather, expanding into new areas is an important way of closing the economic gap between the thriving cities and the left-behinds.
Looking at the petition in more detail, it argues that Amazon is driving down wages by expanding into what it calls “concentrated” labor markets. In particular, the petition focus on three counties: Mercer in New Jersey,; Lexington in South Carolina; and Chesterfield in Virginia. The petition claims that these examples show that Amazon is using its size to hold down wages.
But here’s the problem with that argument: in all three counties, warehousing jobs are only 3-4% of the local labor market, and Amazon is only a portion of those. For example, Mercer County is a huge and tremendously diverse labor market situated between, containing major employers such as Princeton University, Bristol-Myers-Squibb, and the state of New Jersey. In February 2020, job aggregator Indeed.com reported almost 3000 job postings for Mercer County. (Lexington County and Chesterfield County both had about 1000 job postings that month,). These are hardly “concentrated” markets where one company can have monopsony power hiring workers.
The petition cites BLS data on average weekly and annual pay in the warehousing industry as evidence that Amazon drives down wages. For example, in Lexington County weekly average wage and salaries in the warehousing industry fell from $849 in 2010 to $697 in 2012, after Amazon opened up its fulfillment center.
But in order to interpret this change, it’s important to understand the background. In 2010, there were only 147 workers employed in Lexington’s warehousing industry, down from 261 in 2007. That’s 147 with no zeroes at the end, including all the managers, and forklift drivers who had managed to outlast the deep recession.
This tiny warehousing employment was economically irrelevant for the Lexington county economy, which included 75,000 workers in 2010. And the shrinkage of the warehousing industry presumably meant that no young (and relatively cheap) managers and workers were being hired. To put it in economics terms, no warehousing jobs were available at the average wage in 2010.
Now there are more than 3000 warehousing jobs in the county. And to get there, a company like Amazon didn’t have to compete for workers with the existing warehousing operations in Lexington, which weren’t growing. Instead, the real competition was the broader labor market, and there the Lexington warehousing industry, led by Amazon, has been paying far better wages than retailers, and department stores and supercenters in particular. The same is true for Mercer and Chesterfield counties (Chart below based on averaging 2019 quarters 1 and 2. Data for quarter 3 will be released as of March 4).
To summarize: There’s precisely zero evidence that Mercer, Lexington and Chesterfield are concentrated labor markets. And the broader argument that companies engage in anti-competitive behavior by locating new operations in areas that need jobs is simply specious. For both political and economic reasons, we need more jobs spread across the country.
It’s too early to predict the fallout from the Houston Astros cheating scandal. But one thing is already clear: The players who participated and drove the signal-stealing scheme will not be fined or suspended. Following an internal investigation, Major League Baseball Commissioner Rob Manfredconcluded that with the wide scope of players involved, and the reality that many have now moved to other teams, taking disciplinary action against players would be “difficult and impractical.”
Meanwhile, Citigroup, a global banking behemoth, just suspended the head of its lucrative High Yield Bond division in London for repeatedly skipping out on his lunch bill.
Pushing the envelope to gain an edge has always been ingrained in baseball’s culture, from pine tar to spitballs. Now, with the advent of modern technology and exponentially larger revenue and payrolls, the pressure to cheat is stronger than ever. The same can be said (and quite often has been said by some leading presidential candidates) about Wall Street.
The failure of the app intended to collect results from the Democratic caucuses in Iowa wasn’t the best advertisement for the App Economy. But we have to remember that apps play a central role in the economy.
As part of a global project measuring the size of the App Economy, we estimated the U.S. App Economy to have 2.246 million App Economy jobs as of April 2019. That’s an increase of 30 percent from our December 2016 estimate of 1.729 million jobs.
Many of them are at large corporations in tech hubs like the Bay Area, New York City, or Austin. But App Economy jobs aren’t exclusive to the tech sector or major cities. In fact, a growing number have seeped into smaller metro to rural areas, the physical industries, as well as startups.
For instance, as of February 2020, small IT firm Four Nodes was hiring a mobile application developer with experience in Android in Camden, Delaware. Kent Displays, which makes e-writing displays, was looking for a mobile app developer in Kent, Ohio. Federal Home Loan Bank of Des Moines was searching for a lead IT service desk analyst with knowledge of Android and iOS in Des Moines, Iowa. Television broadcasting company CBS was seeking a frontend engineer with experience in iOS and or Android development in Louisville, Kentucky.
In terms of App developing companies, Little Rock-based Apptegy is an education technology startup that allows administrators to tailor how they market their school. Leawood, Kansas-based Farmobile allows farmers to collect and share data with agronomists and other farmers. And Fargo, North Dakota-based WalkWise uses a walker attachment to track fitness data and send alerts using its mobile app.
Indeed, the ability to code from anywhere coupled with apps’ integration with the physical world (which accounts for roughly 80 percent of the economy) has democratized opportunity in these areas for businesses and consumers alike. And the Internet of Things, which will enable individuals and companies to use mobile apps to interact with physical objects and processes such as their home, cars, equipment, and warehouses, only promises to increase the interaction between apps and the physical world.
Here are some examples of App Economy jobs in the physical industries: as of February 2020, agricultural merchandiser Tractor Supply Company was hiring a mobile apps IT architect in Brentwood, Tennessee. Medical device company Medtronic was looking for a senior software quality engineer with experience in iOS and Android in Chanhassen, Minnesota. Manufacturing company IDEX was searching for a QA test engineer with knowledge of iOS or Android in Huntsville, Alabama. As of January 2020, ecommerce company SupplyHouse.com was seeking a senior Android developer in Melville, New York.
From this perspective, apps play a critical role in spreading the information revolution beyond the traditional metro hubs and tech sector. They serve as an important means to unlocking growth for smaller metro and rural areas, the physical industries, and startups.
After signing nearly $5 trillion of new debt into law since taking office, President Trump’s Fiscal Year 2021 budget proposal provides the clearest look yet at how he intends to govern if re-elected in November. The ironically titled “Budget for America’s Future” is anything but: it proposes to slash critical public investments that lay the foundation for long-term growth, double down on reckless tax cuts for the rich, undermine health-care and safety-net programs for millions of Americans, and leave the nation on a path of trillion-dollar deficits as far as the eye can see.
The Trump administration claims its proposals would put the federal budget on a path to balance by 2035, but this relies upon economic assumptions that are downright absurd. The Office of Management and Budget projects real gross domestic product will grow more than a full percentage point faster than does the non-partisan Congressional Budget Office every single year between 2020 and the end of the projection period. That annual difference may not sound like a lot, but it adds up: the Trump administration’s fiscal estimates depend on the U.S. economy producing nearly $25 trillion more in output over the next decade than CBO projected in its most recent budget and economic outlook.
These outlandish economic growth projections enable the Trump administration to claim that it will raise $3.1 trillion more in revenue over the next decade relative to CBO’s baseline, when in reality the administration is proposing tax cuts that would actually reduce revenue. Trump proposes to extend the individual income tax cuts created by the GOP’s 2017 tax law past their scheduled expiration in 2025. But interestingly, even as Trump proposes to extend tax cuts for wealthy individuals, his budget would not extend the few expiring business provisions that some economists believe could potentially increase domestic business investment. This omission is further evidence that Trump is underestimating the cost of his policies while overestimating the boost they would give to economic growth.
In a perfect example of unintended consequences, restaurant workers are pushing back against a nationwide campaign by labor advocates intended to raise their wages. They worry that the advocates’ push will cost them more in lost tips than they’ll gain in mandated wage increases – and cut their income overall.
These workers have found an ally in New York Governor Andrew Cuomo, who has come up with a sensible compromise that strikes a balance between overdue increases in the minimum wage and protecting workers who rely on tips.
Under federal law the minimum “cash wage” for tipped workers is $2.13 an hour, with tips making up the rest of workers’ pay. If tips don’t bring the worker up to the full federal or state minimum wage (whichever is higher), the employer is required by law to make up the rest. However, advocates’ “One Fair Wage” campaign aims to eliminate the tipped wage at the state level.
Seven states – California, Nevada, Alaska, Oregon, Washington, Montana, and Minnesota – have eliminated the tipped wage, requiring employers to pay the full minimum wage plus tips. This has drawn furious protests from both restaurant workers and owners, who say it means lower pay and lost jobs.
A 2018 survey by restaurant platform Upserve found that workers overwhelmingly – by 97 percent – prefer the tipped system to the full minimum wage. In Maine and Washington, D.C., restaurant workers led efforts to reverse laws passed under pressure from the One Fair Wage campaign.
Enter Governor Cuomo. In December, Cuomo’s Labor Department issued an order eliminating the tipped wage for some service sector occupations such as nail salon workers, hairdressers, and valet parking attendants, while retaining it for the restaurant industry. Cuomo’s rationale was to combat wage theft in those industries with the highest risk, while preserving the tipped wage system for restaurant workers who earn more than they would receiving the full minimum wage.
It’s been a popular move. Data from the Bureau of Labor Statistics show the annual median wage of waiters and waitresses, including tips, to be higher in New York than every state that has eliminated the tipped wage, and the annual median wage of bartenders to be higher in six of the seven states.
As PPI wrote in 2018, studies have shown that raising the tipped wage does not increase wages for restaurant workers because diners often end up tipping less. For instance, Census Bureau economist Maggie Jones found that raising the tipped minimum wage “increase[s] that portion of wages paid by employers, but decrease[s] tip income by a similar percentage.” Concern about declining tips and lower wages is why many restaurant workers have opposed an increase in the tipped minimum wage.
Restaurateurs also favor the tipped wage, as it enables owners to succeed in an industry with notoriously razor thin profit margins of 3 to 5 percent. Many owners cite having to close or cut hours (and thus wages) if faced with higher labor costs from raising or eliminating the tipped wage. When San Francisco increased its minimum wage from $13 an hour to $14 an hour in July 2017, bar owner Miles Palliser was forced to close after 5 years. “I think that the dramatic rise in minimum wage definitely affected us at the Corner Store and probably all three of our places in some fashion,” he told the San Francisco Chronicle at the time.
Governor Cuomo’s compromise is a win-win for both restaurant workers and owners. Other states should follow New York’s example.
Some are concerned that subprime auto loans – which offer higher interest loans to riskier borrowers – pose a threat to the stability of the global economy in much the same way that the subprime mortgage market contributed to the Great Recession. Democratic presidential candidate Elizabeth Warren, in particular, has raised the warning flags as part of her campaign. But these worries are ill-founded and based on misleading data and faulty analogies.
In particular:
Auto loans account for a relatively small percentage of the increase in nonfinancial debt over the past five years;
Americans are spending less of their budgets on car purchases today, including finance charges, than they were before the recession;
Low-income households saw motor vehicle purchases and finance charges fall from 8.5 percent of household budgets in 2000 to 4.9 percent in 2018;
Over the past five years, the share of new auto loans going to low-credit borrowers has remained relatively constant. There are no signs that low-credit borrowers are either being frozen out of the market or becoming too large a share of loans;
Newly delinquent auto loans, as a percentage of current balances, have been falling over the past two years; and
Subprime auto loans differ significantly from subprime mortgages in key respects that make them less likely to pose a serious threat to financial stability
Risk-based pricing of auto loans appears to be working so far, keeping low-income borrowers in the market without driving up delinquencies or to low-income consumers, while not posing the same risk that the subprime mortgage market.
Introduction
To purchase a vehicle, Americans with low or non-existent credit scores often use auto loans with higher interest rates than loans to prime borrowers. Some market watchers have indicated concern about “subprime” auto-loan trends and the potential for a crisis similar to the subprime mortgage crisis that heralded the last recession.
The subprime mortgages and the related mortgage-backed bonds remain the classic case of a poorly executed financial innovation. The initial impetus behind the idea was a good one. Housing is a key element of middle-class wealth, so expanding the system of mortgage finance to help lower-income households buy homes seemed like a positive. However, the subprime mortgages and bonds were designed in such a way that they assumed rising housing prices. When housing prices started to fall, the subprime mortgage system collapsed and contributed to the financial crisis.
Will subprime auto loans create the same problems? In a recent essay, Democratic presidential candidate Senator Elizabeth Warren raised the warning flag:
Auto loan debt is the highest it has ever been since we started tracking it nearly 20 years ago, and a record 7 million Americans are behind on their auto loans — many of which have similar abusive characteristics as pre-crash subprime mortgages1 .
Warren is not alone in her worries. In late 2016, for example, the Office of the Comptroller of the Currency warned that auto-lending risk was increasing and that banks (and other investors in securitized assets) did not have sufficient risk-management policies in place. Fed Governor Lael Brainard pointed to subprime auto lending as an area of concern in a May 2017 speech, while analysts worried about “deep subprime” auto loans2. Some groups used the term “predatory” auto lending.3
But these concerns are misplaced. As we will show later in this paper, the statistic cited by Senator Warren does not reflect the current state of the auto loan market, as it includes old loans from much weaker economic times. Perhaps most fundamental to understanding the problem with drawing a parallel between the mortgage crisis and today is the fact that subprime mortgages and subprime auto loans are very different products.
Naturally, lower-income households with low credit scores or limited credit history may have fewer financial resources and be inherently riskier borrowers. Moreover, the fact that motor vehicles depreciate over time means that the collateral for the loan becomes less valuable.
Nevertheless, the ability to own a car and, therefore, access credit is crucial for this population. Risk-based pricing charges low- rated borrowers higher interest rates, but in return, offers them the opportunity to borrow money to buy a vehicle that might otherwise be financially inaccessible.
For many lower-income households, their vehicle is the single biggest asset they own.
While vehicles do not appreciate in value as homes do, vehicles are income-producing assets in the sense that they are often essential for commuting to work, especially in non-urban areas. As one report noted, “Owning a car is the price of admission to the economy and society in much of America.”4
In this paper, we analyze the auto loan market, paying particular attention to auto loans made to low-income Americans and to people with bad credit. We find that:
Auto loans account for a relatively small percentage of the increase in nonfinancial debt over the past five years;
Americans are spending less of their budgets on car purchases today, including finance charges, than they were before the recession;
Low-income households saw motor vehicle purchases and finance charges fall from 8.5 percent of household budgets in 2000 to 4.9 percent in 2018;
Over the past five years, the share of new auto loans going to low-credit borrowers has remained relatively constant. There are no signs that low-credit borrowers are either being frozen out of the market or becoming too large a share of loans;
Newly delinquent auto loans, as a percentage of current balances, have been falling over the past two years; and
Subprime auto loans differ significantly from subprime mortgages in key respects that make them less likely to pose a serious threat to financial stability.
Risk-based pricing of auto loans appears to be working so far, keeping low-income borrowers in the market without driving up delinquencies or threatening the financial system. We conclude that the subprime auto loan market is beneficial to low-income consumers, while not posing the same risk that the subprime mortgage market did before the financial crisis. While it will be instructive to observe subprime auto loan trends going forward, current trends do not indicate significant instability concerns in this market.
Recent Patterns in Debt Accumulation
Recent patterns in debt accumulation are very different from those that preceded the financial crisis and Great Recession. Non-mortgage consumer credit – including auto loans, credit cards, and student debt – has risen by $900 billion over the past five years, according to Federal Reserve data. While that figure sounds substantial, that increase amounts to less than 9 percent of the total increase in domestic nonfinancial debt – that is, all debt except borrowing by financial institutions. The rise in consumer borrowing is dwarfed by the increase in business debt ($4.1 trillion) and federal debt ($4.2 trillion) over the same period. Those two categories together account for 82 percent of the increase in domestic nonfinancial debt (Table 1). The leading contributors to business debt growth are mortgages and corporate bonds.
Indeed, businesses have taken the greatest advantage of low-interest rates. Nonfinancial corporations have almost doubled their outstanding corporate bonds since the end of 2007 when the last recession started. Meanwhile, household debt has risen by only 10 percent.
Taking home mortgages into account, households have only accounted for 19 percent of the increase in domestic nonfinancial debt since 2014. By contrast, in the five years leading up to the Great Recession, households accounted for 48 percent of the debt increase. In other words, the financial boom in the pre-recession years was heavily driven by household borrowing, while households have only contributed a small portion to the current debt increase.
A skeptic could argue that, given derivatives and financial engineering, it’s possible for a relatively small portion of the debt market to drive an outsize increase in risk for the whole system. Indeed, that’s what happened ahead of the 2008 financial crisis. In May 2007, then-Chairman of the Federal Reserve Ben Bernanke famously said, “We believe the effect of the troubles in the subprime sector on the broader housing market will be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”5 At the time, the value of subprime mortgages was about $1.3 trillion, which was only 10 percent of the mortgage market and an even smaller share of total borrowing. Bernanke and other policymakers figured that the problems in subprime mortgages could be easily contained.
What Bernanke and others failed to reckon with, however, was how the subprime mortgages had been designed to make sense only in a rising real estate market. Subprime mortgages were constructed effectively to subsidize interest rates with the possibility of appreciation. These financial instruments would offer low upfront rates that enabled lower-income borrowers to qualify. When the teaser rates eventually reset to much higher levels, the assumption was that the borrower could refinance into a new mortgage.
Moreover, the subprime mortgages were then securitized and used to build complicated financial derivative products. And when the subprime mortgages failed because of declining home prices, so did the derivatives. In other words, problems in a relatively small financial sector could be amplified and have a much larger effect on the rest of the economy.
Despite this concern, there is evidence to suggest that subprime auto lending is not a substantial risk to the broader economy. Auto loans are only 7.4% of household debt, which is the 40-year historical average.6 Moreover, the auto asset-backed securities (ABS) market is likewise dwarfed by the mortgage-backed securities (MBS) market. As of the second quarter of 2019, there was a mere $264 billion in auto-related securities, which included only $55 billion in subprime auto securities. By comparison, the amount of outstanding mortgage-related securities came to almost $10 trillion.7
Further, subprime auto loans don’t work the same way that subprime mortgage loans did in the pre-crisis era. Cars and trucks depreciate steadily over time, so the value of the collateral diminishes. That means lenders can’t afford to offer teaser rates, or excessive levels of negative equity, to buyers with low credit scores. They must charge higher rates, properly pricing risk. As one article put it, “the very nature of a real estate loan is very different from an auto loan. Real estate is an investment that typically appreciates over time. During the bubble years, consumers and lenders falsely believed appreciation would bail them out from poor judgment. Vehicles, on the other hand, depreciate. There is no false hope of higher values in the future to bail out a borrower or a lender.”8
The Auto Market
Despite the relatively small role that consumer debt is playing in the current debt expansion, some people can’t shake the idea that Americans are over-spending and over-borrowing to maintain a particular lifestyle. Consider this quote from an April 2019 piece from Business Insider:
The fact that America’s top-selling vehicle — a Ford truck with a price starting at nearly $30,000 – and many like it cost nearly half the median household income hasn’t stopped people from buying them and hasn’t stopped lenders from facilitating loans.9
Over the past five years, the price of new motor vehicles has risen by only 1.1 percent, according to estimates by the Bureau of Economic Analysis (BEA).10 By contrast, the overall price level of consumer goods and services have risen by 6.7 percent over the same stretch.11 In other words, the relative price of new motor vehicles has fallen over this period.
Not surprisingly, the share of consumer spending on new and used vehicles has fallen as well. In 2000, 5.4 percent of consumer spending went to purchases and leases of new and used vehicles. Today, that share is down to 3.6 percent (Figure 1).12
The BLS Consumer Expenditure Survey tells the same story. In 2000, motor vehicle purchases and finance charges amounted to 9.7 percent of household outlays. As of 2018, the last year for which full data is available, the share of vehicle purchases and finance charges fell to only 6.7 percent of household outlays.13 In part, this decline may represent a lengthening of the term of auto loans.14 (These figures would not be changed much by including automobile lease-related payments, which amount to about 10 percent of automobile purchase-related payments in 2018.)
The State of the Low-Income Auto Market
It’s not surprising that lower-rated borrowers pay more for their auto loans. Table 2 below shows interest rates for a 36-month new car loan at different credit rates for December 2015, which was close to the bottom of the credit cycle, and August 2019 (Table 2).
We can see that rates have risen for all credit-rating levels, but more so for the low-rated borrowers.
This risk-based pricing means that low-rated borrowers are not frozen out of the auto loan market. That’s good news, since, in many parts of the country, a car or truck is a necessity, even for low-income households. There is little or no public transit outside of densely populated urban areas, and ride-sharing services are not viable alternatives in many places. So, it is unsurprising that the share of low-income (the bottom quintile) households with a vehicle hold steady at 66 percent in both 2000 and 2018.
At the same time, low-income households saw motor-vehicle purchase and finance taking a smaller share of their budgets. In the bottom quintile of pre-tax income, motor vehicle purchases and finance charges fell from 8.5 percent of household budgets in 2000 to 4.9 percent in 2018 (Figure 2), a drop of almost four percentage points.15
Similar data from the New York Fed’s Household Debt and Credit Report confirm that low-income households are not being uniquely stressed financially by automobile borrowing. Figure 3 shows the share of all auto loan originations that are going to low-rated borrowers (with a Riskscore of less than 620). Before the financial crisis, about 30 percent of new auto loans were going to low-rate borrowers, a startlingly high percentage. That share fell to 20 percent after the crisis and shows no signs of rising (Figure 3).16
The biggest piece of negative news has come from the New York Federal Reserve’s well-publicized finding in February 2019:
…(T)here were over 7 million Americans with auto loans that were 90 or more days delinquent at the end of 2018. That is more than a million more troubled borrowers than there had been at the end of 2010 when the overall delinquency rates were at their worst since auto loans are now more prevalent.18
This startling number, while impressive, simply doesn’t mean what it seems to suggest. This figure includes anyone who still has an old, bad auto loan on their credit record, even if the loan was made and written off years earlier.19 In fact, even after the lender writes off the loan, the loan servicer could continue to report the account to the credit bureaus.
The recent economic history of the United States helps to explain this figure. The number of nonfarm jobs did not return to pre-recession levels until 2014, while the employment-population ratio for Americans with a high school diploma but no college did not bottom out until 2015. As a result, today’s subprime borrowers are carrying around bad loans from the days when the labor market for less-educated workers was still struggling.
Indeed, in an August 2019 blog item, New York Fed economists recommend that anyone interested in the current performance of debt should look at the transition into delinquency- that is, a chart such as Figure 4.20 And by that measure, auto loans are doing far better than in the pre-recession years.
Conclusion
In the event of a recession or a significant economic slowdown, auto loan delinquencies will predictably rise. Subprime auto borrowers, who are more likely to have fewer resources, will be likely to fall behind in their payments when times turn bad.
Nevertheless, a careful look at the data does not suggest that either the origination of subprime auto loans or the exposure of the broader macroeconomy to the auto loan market is a cause for concern. In particular, the subprime auto-loan market looks nothing like the mortgage market before the Great Recession.
Newly delinquent auto loans, as a percentage of current balances, have been falling over the past two years, and the fact that a record number of Americans have a bad auto loan on their credit record is a testimony to economic history more than current loan practices and economic conditions, particularly given the rapid rise in total car sales during this period.
Indeed, risk-based pricing in the auto loan market appears to be supplying a steady flow of credit to low-rated borrowers without imposing excess stress on the financial system.
About the Authors
Michael Mandel is Chief Economic Strategist of the Progressive Policy Institute.
Douglas Holtz-Eakin is President of the American Action Forum.
Thomas Wade is Director of Financial Services Policy of the American Action Forum.
With partisan divisions as deep as ever, both sides can agree on one thing: Everybody wants to avoid another financial crisis. And forecasters have recently identified subprime auto loans as an existential threat to the economy.
Worries about subprime auto loans — which offer higher interest loans to riskier borrowers — are ill-founded and based on misleading data and faulty analogies, our new research finds.
It’s official: the Trump administration spent $1 trillion more in 2019 than it raised in revenue. That deficit is 50% larger than the deficit in 2017, which was President Trump’s first year in office, and represents the first calendar-year deficit to top $1 trillion since 2012. Annual deficits will only grow worse in the coming decade, in large part thanks to the $2 trillion tax cut Trump signed into law in 2017 and a similarly-sized tax and spending deal he signed at the end of last year (over a quarter of which was added to the national debt).
With trillion-dollar annual deficits stretching into the future indefinitely, will Democrats address this generational challenge in their Presidential debate? There sure is an appetite for it: when I had the privilege of speaking with students at the New England College Convention in New Hampshire last week, they expressed deep concern about the rising national debt they’re poised to inherit and how the Democratic candidates would pay for their proposals.
Unfortunately, these issues haven’t been raised in any of the more than 500 questions asked throughout the last six presidential debates. The seventh debate on Tuesday night presents one last opportunity to change this dynamic before the Iowa Caucus.
Here is how tonight’s Democratic debate should begin:
The American economy has always been driven by entrepreneurial energy — the creation and growth of new businesses. Today, however, entrepreneurship in the United States is in trouble. Business creation has stalled; overall economic dynamism is faltering. We are experiencing what some researchers call a “startup deficit.”
How would your administration address this?
Most of the seven debate participants would be speechless, at least momentarily, before quickly running through a litany of actions they would take — some of which are tangential to entrepreneurship. A few of them would talk about the virtues of small business before bashing the evils of big business. A few might actually say the word “entrepreneurship.” At least a couple of them would be able to talk coherently about how they would tackle the startup deficit.
In all likelihood, of course, this question won’t be asked and entrepreneurship will barely be mentioned. More attention will be paid to the labor issues that almost derailed the debate. Yes: unions and the minimum wage should be topics of discussion. But, without the businesses to employ union workers and pay higher wages, those issues are moot.
The federal government is ending 2019 with a national debt of over $17 trillion for the first time in U.S. history – and if one includes intragovernmental debt, such as that held by the Social Security trust funds, this figure rises to $23 trillion. Beginning in 2020, the government is projected to add more than $1 trillion to the debt every year in perpetuity. Amid this rising tide of red ink, is anyone willing to fight for fiscal responsibility?
Certainly not President Donald Trump. Since taking office three years ago, Trump earned his crown as the self-proclaimed king of debt by signing into law a $2 trillion tax cut and shattering spending caps created under President Obama. Congressional Republicans – the same folks who demanded these caps be imposed in the first place – had no qualms about charging these costs to the national credit card. After eight years of lambasting deficits under President Obama, most Republican deficit hawks have revealed themselves to be nothing more than peacocks.
Thankfully, there is some leadership on the other side of the aisle. When Democrats retook control of the U.S. House of Representatives earlier this year, Speaker Nancy Pelosi reinstated pay-as-you-go (PAYGO) rules requiring legislation that cuts taxes or increases automatic spending to be fully offset. Although not all of her caucus supports PAYGO, the moderate House Blue Dog Coalition – which spearheaded the push to bring back the rule after it was repealed by Republicans in 2011 – has rebuffed efforts to waive PAYGO, sending a clear signal that at least some Democrats oppose digging the nation’s fiscal hole deeper.
Congress must pass a comprehensive funding bill by the end of next week to avoid a repeat of last year’s government shutdown. Such a must-pass bill at the end of the year often becomes a “Christmas tree” decorated with various policy riders and pet projects for members of both parties in Congress. But under this year’s tree, a fiscally irresponsible Santa Claus Congress might leave wealthy Americans three gifts that together could cost up to $1 trillion over the next ten years – all put on the nation’s credit card for young Americans to pay off for generations to come.
Despite all his bluster, the “Trump Trade Deficit” widened to a new record in the third quarter of 2019. The non-oil merchandise trade deficit hit $1.047 trillion in the third quarter of 2019, in 2012 dollars (annual rate). That’s according to PPI calculations based on new data released by the Bureau of Economic Analysis on November 27. The latest trade deficit beat the previous record set in the fourth quarter of 2018, also under Trump.
These widening trade deficits claw right at the heart of the middle of the country, where farmers and factory workers are suffering under Trump’s misguided policies. Factory closings just keep coming: Sparta, Wisconsin; Atlanta, Ga; West Plains, Missouri.
Trump’s trade failures give progressive presidential candidates an opportunity to run a pro-manufacturing, pro-growth campaign. They should be advocating policies that jumpstart a new generation of manufacturing entrepreneurs across the country. They should support local distributed manufacturing, which both creates jobs and helps the environment. Most of all, progressives should come out squarely in favor of a Production Economy that supports America’s core values as a producer rather than a consumer.
This is the second in our series of posts on “The Next Ten Million Jobs,” the types of jobs being created between now and 2030, based on the latest BLS employment projections. In our first post we looked at the importance of healthcare and social assistance jobs for driving employment growth between now and 2030. In this post we consider the future of retail, ecommerce and related jobs. More particularly, is there a coming “retail apocalypse”? And can we expect a big loss of jobs in the “consumer distribution sector”–wholesale, retail, trucking, couriers and messengers, and warehousing?
The short answer: Not according to the Bureau of Labor Statistics. Based on our extension of the BLS projections, the number of jobs in retail drop by 1.2% between now and 2030, a net loss of 184K jobs. Wholesale jobs are anticipated to drop as well, by 118K between now and 2030.
On the other hand, our extension of the BLS projections show a gain of 294K in the total of warehousing (fulfillment centers), couriers and messengers (local delivery) and trucking. These projected job gains, focused on ecommerce, compensate almost completely for the projected job declines in retail and wholesale. The net projected change for the “consumer distribution” sector between now and 2030? -8K job, practically nothing. So while consumer distribution is not a big contribution to the next ten million jobs, it’s not a big drag either.
It’s worth noting that these projections are somewhat more pessimistic than recent reality. Based on 12-month moving averages, retail employment fell by 40K over the past year. But employment in wholesale, trucking, couriers and messengers, and warehousing rose by 234K, for a net gain of 195K consumer distribution jobs over the past year (on a 12-month moving average basis).
That’s extraordinary. Despite all the claims of job loss, the consumer distribution sector–including retail and ecommerce–is still one of the largest job creators in the economy.
Take a look at the chart below, which shows the 12-month moving average for employment in consumer distribution.
