Transcription:
Penny Crosman (00:04):
Welcome to the American Banker Podcast, I'm Penny Crosman. Former Comptroller of the Currency Eugene Ludwig has written a book called
Eugene Ludwig (00:28):
Penny. It's great to be with you today.
Penny Crosman (00:30):
Thanks for coming. So one thing that grabbed my attention very early in the book was this comparison of where we are today to the early days of the French Revolution. And if you don't mind, I'm just going to read this passage because I thought it was really interesting. "In the late 18th century, the oppressive economic situation facing the French people went unacknowledged for decades by the royal family, much as the monarchy's finance minister might have tried to maintain a reliable and accurate accounting of the public purse. The French ruling class considered the truth about the nation's fiscal crisis to be nefarious, a threat both to their power and to their freedom to spend tax dollars lavishly on themselves with eyes and heads in the proverbial sand. They refused to acknowledge the economic reality typified by Queen Marie Antoinette's likely apocryphal suggestion that if the peasants were starving for want of bread, let them eat cake. Of course, we know what happened not long thereafter. Marie Antoinette and many of her peers were guillotined and the chaos born of the French Revolution wrought untold horrors on French citizens of every rank and station." Do you think we all have our heads in the sand today? And do you think that if the people leading a government can't see the reality of how everyday citizens are living, they're almost doomed to make poor decisions that will lead to people being even more unhappy and in the end, perhaps revolting?
Eugene Ludwig (02:03):
In short, the answer is yes. That is to say that I was shocked when I actually got into this. I knew the headline statistics were off base because if you look at lived reality versus what the headline statistics are, you realize there was a big disconnect. But the more I got into the numbers, the more additionally shocked I became in the sense that they are so misleading that all our political figures, all our policy leaders are basically being shown a rosier picture for not just low income Americans, but really middle. It's actually 60% below in terms of income. It's even more than 50% are basically seeing their lives continually deteriorate.
Penny Crosman (02:57):
What are some of those most misleading statistics?
Eugene Ludwig (03:02):
Well, the ones we looked at most closely were the unemployment statistic, inflation and the cost of living, the wage data and GDP. And in each case, for a variety of reasons, they're vastly offbeat for middle and low income Americans.
Penny Crosman (03:31):
So for instance, with unemployment data, what is wrong with that today?
Eugene Ludwig (03:37):
Well, unemployment data as it's portrayed by the headline statistics, which they use something called the U-3, typically that's the lead headline, although they also report the U-6, which is a broader metric. It's today, say 4.4 I think is the latest government number, 4.4% unemployment. I think the normal person, when they say 4.4% by historic standards, that's not so bad. Historically it's been often higher, sometimes lower, but 4.4% doesn't look terrible. But then we dug into what does 4.4% mean? Well, it means that if you are employed for as little as an hour over the previous two weeks, and even if you live in a tent, which is in fact the case in some cases, or under a bridge, like here in Washington, you're counted as employed. Now, I don't think the average person or the policy leaders, for the most part who think of 4.4% say that includes as employed, those people who basically are living under bridges and tents and can't really afford food or housing or transportation or whatever.
(05:03):
So when we come up with our own number, what we've done is filter the U-3 for if you want a full-time job but you can't get it, we put you in a bucket called functionally unemployed. That is as a realistic matter, you're not really fully employed. In addition, the U-3 makes no differentiation between how much money you're earning or not. And if you take a very, very low number, say the poverty line, and you say, look, if you can't earn above a poverty wage, let's also count you as functionally unemployed. Now, recognize that you can define things such that employment means just having a one hour job and not earning enough money that you can get above the poverty line. But I don't think that's what most people think of when they look at that number. But if you use our functionally unemployed concept, what you find is that believe it or not, 25% of the American people are functionally unemployed. For African-Americans, women and Hispanics, the number is higher, closer to 30%. Now that's a sharp difference and a worrisome one.
Penny Crosman (06:25):
So a lot of those people are working part-time or they're just working jobs that don't pay enough to come anywhere near enough to pay their monthly bills,
Eugene Ludwig (06:34):
Right. Not near enough to put healthy food on the table or have a roof over their head. In many cases, most cases, and as I say, I don't think that's what people think of when they say a 4.4% unemployment. They think more in the nature of what was going on in the 1930s. You either had a full-time job working in a factory or wherever you worked or you didn't have a job. And so the one was decent enough living that you could have a roof over your head and good food on the table, and the other was not. That's not the way the world works today.
Penny Crosman (07:12):
And what's a better statistic? You mentioned functional unemployment.
Eugene Ludwig (07:19):
I think that is a better statistic, and I think that it would be useful in terms of policy makers to basically, if you want to have a minimal employed number as we have it today, that if you were going to report that you would report it alongside a functional unemployment number that gave you a richer picture of what reality is.
Penny Crosman (07:48):
And you mentioned earlier GDP is one of the misleading statistics. Can you kind of walk us through that?
Eugene Ludwig (07:55):
Well, GDP actually has a lot of problems as a statistic. First of all, in a just linguistic way you think, gross domestic product. When I think about domestic product, I think if you ask most policymakers, they would think that it means things produced domestically produced here. But in fact, it doesn't mean that at all. It really is a measure of a proxy for wealth, how wealthy is our society, irrespective of whether we're really producing anything domestically. But that's not the real problem. The real problem is gross domestic product for whom and where, so GDP can be going up, but that doesn't give us any sense as to whether or not middle and low income Americans are actually benefiting by that increase. And in fact, one finds that in the last 25 years, this has been actually going on for some time, that increasingly the benefits from the GDP growth that is from increasing wealth go to the upper 10-20% and very little and increasingly less to the lower 60%.
Penny Crosman (09:23):
Now, in your book, you also took issue with the way the consumer price index is calculated. What is, again, wrong with that and what are some of the consequences of that?
Eugene Ludwig (09:33):
Well, this is really quite worrisome and it has real practical implications day to day. So the CPI is a basket of 80,000 goods and services and including yachts, gold watches, lots of things. Most Americans buy a very small percentage of that basket of 80,000 goods and services, they buy principally maybe as much as a couple hundred. But even that's being generous. Mostly what matters to them is food, housing, healthcare, even education, educational opportunities for themselves of their children and transportation to work. If you look at the things that really are bought by the 60% of Americans and below, as I say, it's a much smaller basket. And that over the last 25 years has inflated more rapidly. That has increased in cost more rapidly than the CPI. So that when we see reports of how wages are keeping up with A CPI, the wages in fact are not keeping up with the actual costs that middle and low income Americans have to face.
(11:00):
There actually has been a decline in real terms in wages over the last 25 years. That is, people today are worse off economically, 60% and below on average, than they were 25 years ago. Now, there may be somebody in that basket in the upper 10% of the 60% that are doing a bit better, but on average they've been declining. And that trend has continued for a very long period of time. That's why I make this analogy to the America in the late 1920s and early 1930s and to the French Revolution, that in fact, things are getting increasingly worse and we can see it in the disconnect or the discontent, I should say, of Americans in our cities and towns, what is often called the heartland of the United States. Now, when it comes to practical implication, here's something that I think a lot of people don't recognize, Social Security and a lot of military benefits are meant to increase with inflation. The word that's used is inflation. In fact, if you use the CPI as a practical matter, the increase in those benefits is going up slower than the lived reality of the people receiving those benefits. So what's meant as a law to keep people even in fact is not keeping them even simply because what's being used as an inflation measure is CPI, not a more realistic measure.
Penny Crosman (12:42):
So you've developed some metrics at your organization. One of them is true weekly earnings. Can you explain that?
Eugene Ludwig (12:53):
Well, the weekly earnings is interesting. I always laugh. If you look at the unemployment number, and then you look at the earnings number that's reported, it's a little bit like Alice in Wonderland. And one time you eat the mushroom and you get very large. And the other time you eat the mushroom, you get very small. When you're talking about unemployment statistics, people are included even if they work one hour a week, as I've said. But in fact, one hour over the past two weeks, if you're looking at the wage data, it's only counted when they report wages for full-time employment. Now, that probably didn't matter as much in the 1930s when these definitions were put in place, but it sure does today because an increasing percentage of Americans are gig workers or part-time workers, however you define it, so that they're not full-time and therefore it paints the wage data paints a prettier picture than in fact is the case for middle and low income Americans.
Penny Crosman (14:07):
So how do you calculate it? How do you get the right data?
Eugene Ludwig (14:11):
Well, we calculate everybody who's working in that two week period. And that's how we get the number in terms of what wages are. And then if you look at that and then you try to get a real number over time and use a proper inflation measure, you actually find that real wages have been declining over the last 25 years for middle income Americans, as I mentioned.
Penny Crosman (14:43):
And you've also got a metric that you call the true living cost. How do you arrive at that?
Eugene Ludwig (14:48):
Well, the true living cost is our effort to demonstrate that. In fact, the inflation number is not properly stated when you use CPI. And what we do is we created a basket of goods and services that are sort of minimal in terms of what you need to live, food, lodging, et cetera, live a minimal, very minimal existence and see how that basket of goods and services has increased in cost or declined. It's always increasing as a matter of fact or virtually always increasing. And as I say, that true living cost has gone up faster than the CPI. Now, after having done that, which is being very, very cautious and trying to do the most conservative approach to these numbers, we later looked at a basket we call the minimum quality of life. MQL, which is a basket, includes things that even at the low end, you would hope people would be able to afford a night out for dinner at a fast food restaurant, ability to have your family over for Thanksgiving dinner or Christmas dinner, and ability to go to the movies every couple of weeks or once a month. I think we have it that minimum quality of life MQL has actually, when you look at that, because that's really what I would call the first rung or getting near the first rung of living an American dream existence, you find that you're materially worse off today than you were 25 years ago. In other words, in fact, the picture looks worse. If you're trying to live a minimum quality of life, that is a real quality of life as opposed to just getting buy-in and being able to feed yourself.
Penny Crosman (16:59):
It seems like home buying, home ownership is out of reach for many, many people as well. I don't know if you look at that, but
Eugene Ludwig (17:06):
Oh yeah, home ownership. I think we've been using most recently the cost of renting, which has gone up similarly with home buying a little slower, but it's a huge increase in cost for most people as has healthcare increased dramatically, as has education increased dramatically.
Penny Crosman (17:37):
So overall, your numbers and your book paint a picture of, I guess around 60% of Americans kind of hanging on by their fingernails, living on the financial edge. If you could rule over the federal government, what are some things you would want the government to be doing?
Eugene Ludwig (17:58):
Well, hopefully there will be a third book, and I've been scribbling around that called Pathways Out of the Swamp. In other words, what would you do? And I think the first thing you want to do is get the numbers right so that we're reporting to our policymakers what reality is in terms of lived experience, A, so they see it because I think they will respond more vigorously and in different ways than they've been responding. And the second thing I think you want to do is have a more careful measurement of the policies people put in place, often put in place in a good hearted way to improve life for middle and low income Americans, but policies that may not work. Now, there are things that I think we really have to do and think through hard. For me, number one, I think we have to really enliven American business in a way that really helps America's businesses stay on top globally.
(19:12):
And similarly, we ought to be doing that with regard to housing in a variety of other areas. The rules and regulations around housing starts, particularly when you get into larger, even middle income and lower income rental properties, are tremendously complex as everybody knows, and delay the things getting started and making things cost more, getting a handle on that both in the housing area and in the business area, so that we help give businesses an opportunity to enhance what they're doing and grow is critically important. So that's one thing you would do. And let the private sector do what it can to support the economy. It's interesting in that regard. When you ask people do they want a handout, what if the government gave you more of this, that and the other thing? It's not what they really want. What they want is a living wage job and we're not going to be able to produce enough living wage jobs unless we have the private sector really active, as active as it possibly can be.
(20:33):
Now on the government side, there are things I think we can do too, personally. One of the things I want to explore that for some time I felt rather strongly about is I think we ought be getting rid of the payroll tax. The payroll tax is a tax on work, and it's a tax that is regressive. It falls most heavily on middle and low income Americans who are working. It has actually a cutoff. I think the cutoff is $170,000 a year, where above that you don't pay more payroll tax, you only pay payroll tax for the wages you earn below that. And so it's a regressive tax on work. And I think if we got rid of that tax, we'd do two things. One, it would make it easier for employers to hire people because they pay part of this tax, too. And secondly, it would have a more proportionate tax structure for middle and low income Americans.
Penny Crosman (21:35):
That makes sense. And for the bankers in our audience, is there anything you would like to see banks or fintechs doing to help people who are underemployed or struggling to pay bills?
Eugene Ludwig (21:49):
Well, our banking system is critically important to being able to dig out of the hole we're in. And that includes banks and non-banks. It includes the whole financial system, but banks in particular play a critical role in ensuring that there's a safe place for people to put their money. Even homeless people have banking needs. I was a quite surprised when I was Comptroller and I was in Los Angeles and I was taken to a homeless bank, which the city ran because obviously you're not going to make a lot of money banking the homeless. And so they made sure there was at least a safe place for homeless people to put their funds because otherwise a lot of the money that they earn is stolen. And so banks are incredibly important in stimulating the economy. Just think about how banks do it in a variety of ways.
(22:49):
Most of our banks in America, particularly the big regionals, small regionals, community banks, really are the backbone of small business lending and small businesses. Lending and small business growth is where the jobs are. Secondly, in terms of basically giving people advice in terms of how safely to deal with their money, banks have been a repository for support. Third, banks have been disproportionately contributing and supporting things in the lower income brackets through the Community Reinvestment Act and through their supportive community development. Financial institutions and indeed community development financial institutions play a big part in helping Americans get moving up and a chance to earn the right to be on the ladder for the American dream. So banks are absolutely critical to solutions here and there I think making sure that we do not have rules and regulations that stymie things and that just create more paperwork, but making sure there are rules and regulations and we need decent regulation is the minimum we need, not the maximum we need to ensure safety and soundness.
Penny Crosman (24:18):
Well, I know bankers will like to hear that. Well, Eugene Ludwig, thank you so much for joining us today and to all of you, thank you for listening to the American Banker Podcast. I produced this episode with audio production by Adnan Khan. Special thanks this week to Eugene Ludwig of LISEP. Rate us, review us and subscribe to our content at www.americanbanker.com/subscribe. For American Banker, I'm Penny Crosman and thanks for listening.