Must Consumption Be a Pillar of Our Economy?

This article was originally published by Newhouse News Service on Wednesday, January 23, 2008.

By Katherine Reynolds Lewis
c. 2008 Newhouse News Service

Economists are fretting that consumer spending might fall for the first time since 1991, pushing the United States into a recession.

Global stock markets are in turmoil, and with reason: American consumers account for about one-fifth of the world economy. The Federal Reserve Board's sudden interest rate cut and the stimulus package being debated in Washington both are aimed at keeping cash flowing from our pocketbooks.

But since when did consumption our willingness to buy food, clothes, cars, electronics, appliances and homes become our defense against economic collapse?

It wasn't always this way.

In the 19th century, the word "consumption" meant tuberculosis, notes Stuart Ewen, a historian at the City University of New York.

"The term consume ... meant to use up, to destroy, to lay waste. Consumption really was about destruction," Ewen said. "The idea of using things up in a world of scarcity was anathema. It was not celebrated."

Major Changes Needed in U.S. Spending Habits

This article was originally published by Newhouse News Service on Thursday, July 7, 2005.

By Katherine Reynolds Lewis
c.2005 Newhouse News Service

We, the people of the United States, spend nearly every dollar we make.

The national savings rate -- personal savings divided by disposable income -- routinely dips close to zero, while consumer and mortgage debt spiral ever upward. A majority of Americans have less than $25,000 stockpiled for retirement, while many experts say a healthy nest egg is more than $500,000.

Some say we're a country of spendthrifts, splurging on designer clothes, Starbucks coffee and cable TV. But we're also spending dramatically more on the essentials of living than a generation ago.

"It's not about lattes and sneakers; it's about health care and housing," said Elizabeth Warren, Harvard University law professor and co-author of "All Your Worth: The Ultimate Lifetime Money Plan."

"It's not about pennies; it's about the big dollars," Warren said. "That's what's blasting the hole in the American family budget."

To really save enough for old age, experts say, we will have to buy smaller homes, make our cars last longer, take public transportation and adopt other radical lifestyle changes. And it wouldn't hurt to brew that coffee at home.

Compared with a generation ago and in dollars adjusted for inflation, Warren said, the average family of four spends 69 percent more on a mortgage, 90 percent more on health care, 100 percent more on child care and 38 percent more on taxes. Families actually spend 21 percent less on clothing than in the 1970s, 22 percent less on food, 44 percent less on appliances and 30 percent less on furniture. Even though families spend 20 percent less per car, the need for a second vehicle has boosted overall car costs by 58 percent.

While family income has climbed nearly 75 percent -- thanks to the great increase in the number of working mothers -- people have more than spent the extra money and gone into debt besides, Warren said. The situation has worsened dramatically in the past five years as wages and job growth stagnated while housing costs soared.

"We have overconsumed, and we have not prioritized retirement savings for a generation," said Dan Houston, a senior vice president at the Principal Financial Group in Des Moines, Iowa. "By the time you really get the wake-up call, it may be too late."

Nicole DelBuono, 35, a computer technician New Jersey, knows she should be saving more for retirement.

But after paying for utilities, the mortgage on her new home, two car loans and food, there isn't much left at the end of the month. DelBuono once took a class on budgeting and found it overwhelming.

"I wrote everything down and I hated seeing it; it stressed me out," she said. "I worry a lot about Social Security ending like they talk about. I just want to be sure that my children aren't stuck taking care of me."

She and her husband, Dan, have about $40,000 between their two 401(k) plans and a couple of thousand in the bank for emergencies. They owe about $29,000 on their automobiles, $2,800 in student loans and $5,000 on four credit cards. A home equity loan last year boosted their mortgage to more than they paid for the house.

Houston advises setting aside the necessary retirement savings each month -- 15 percent of income is frequently recommended -- and only then seeing what's left for housing, transportation and other necessities. You may find it's not enough for the house you want, or the one the realtor thinks you can afford.

Seventy percent of Americans expect to work into retirement to make up the shortfall in their savings, according to a survey by Prudential Financial Inc. in Newark, N.J.

But an injury, illness or layoff can cut short a career and force drastic spending cuts. Four in 10 retirees surveyed by Prudential said they were forced to stop working. Nearly half of them were younger than 60.

Marilyn Brenden, 56, was diagnosed with breast cancer shortly after being laid off as director of a homeless program. Cancer treatment left her too weak to take a new full-time job, and she couldn't risk losing her health insurance if she missed a payment.

"I wasn't worried about whether I would survive the cancer," said Brenden, who lives with her mother in Silverton, Ore. "The big question was whether I was going to survive the financial crisis."

She eliminated hair perming, coloring and cutting -- that is, when chemotherapy ended and her hair started growing back. She stopped buying makeup and clothes, relying on freebies and hand-me-downs from friends. She wore pants to avoid purchasing pantyhose.

"You have to learn to distinguish between things that are true needs and things that you just want that you don't need," Brenden said. "What's just an ordinary decision for other people, for someone who's poor becomes a major, major decision."

Susan Hand suddenly became the breadwinner when her husband decided to retire early from Motorola Inc. rather than be transferred by the company to Texas from North Carolina, where his children live. It was daunting to be in charge of three mortgages -- two homes and a boat -- and to need to save enough for her own pending retirement.

"What we were told at the time was, it's possible but it's going to be a stretch," said Hand, 52, a senior project manager for IBM Corp.

So, the couple made some major changes: They sold their house in Raleigh, thanks to IBM letting Hand telecommute from their Outer Banks home. They plan to make do with their cars for a decade or more instead of replacing them every two years. Both are on a monthly allowance.

It's hard to predict what might change to bring more American budgets into balance. One thing is clear: The current situation is unsustainable.

"Consumption as a share of income will be much lower in five years, but when the break turns, and how abruptly, is anyone's guess," said Lee Price, research director at the Economic Policy Institute, a labor-backed Washington think tank.

One likely scenario is an increase in interest rates, which have been near record lows for years. Then, people with credit-card debt, or adjustable rate or interest-only mortgages, will have trouble making higher monthly payments and will start to default on their obligations.

Nicole Lowe, credit education specialist at, a subsidiary of the credit-reporting firm Trans Union LLC, said it would be smart to refinance to a fixed-rate mortgage now, and pay down as much credit card debt as possible. Focus on your net worth, making sure your assets exceed liabilities. A small savings account doesn't do much good if you have a huge credit-card balance.

An abrupt shift could be catastrophic, experts said.

People in their 30s and 40s, the prime spending years, haven't experienced a serious economic downturn, said Dennis Jacobe, chief economist for the Gallup Organization in Princeton, N.J. Only 41 percent of those surveyed in June have an emergency fund, and 31 percent of those said the money wouldn't last as long as three months.

"There are not a lot of Americans who could afford to be out of a job for a long time," Jacobe said. "If we do at some stage have a significant recession, the pain is going to be a lot greater."

So You Don't Read the Fine Print? Lose the Guilt

This article was originally published by Newhouse News Service on Tuesday, July 17, 2007.

By Katherine Reynolds Lewis
c.2007 Newhouse News Service

By reading this story, you agree that it is for information purposes only, and not a substitute for legal advice. If you are experiencing a medical emergency, put down the newspaper and dial 911.

Did you read that first paragraph closely?

Millions of Americans routinely enter into contracts without even attempting to figure out the financial and legal strings attached.

Think about the multi-page document you signed blindly before taking home your new wireless gizmo, or the Web sites where you clicked "I agree" without scrolling down. Or the 6-point-font credit card forms, the endless liability waivers at amusement parks, the tiny brochure glued to your new prescription bottle.

"Less than 20 percent of consumers make an effort to read the fine print," said Britt Beemer, chairman of America's Research Group, a Charleston, S.C., marketing firm that regularly surveys buyer behavior.

The main excuses: I won't understand the legalese. I don't have time. I can't change what the contract says, so what's the point?

This alarms consumer advocates, who say companies are using fine print to take away rights as vital as free speech and a jury trial.

But we're not going to scold. You can go home to mom for that. Instead, here's some praise: You're sensible to sign without reading at least most of the time.

Futures Trading Pit Is Birthplace of Oil Prices

This article was originally published by Newhouse News Service on Thursday, May 4, 2006.

By Katherine Reynolds Lewis
c.2006 Newhouse News Service

Raymond Carbone blinked in wonder at the electronic display ringing the New York Mercantile Exchange's stadium-like trading floor.

Crude oil futures were closing at a record $75.17 per barrel, up a whopping $3 in just a matter of hours.

As a trader for Paramount Options, he is getting used to the feeling. It has become common for oil prices to climb on Friday afternoons before the markets close for the weekend.

On this day, April 21, traders on the Nymex floor were worried Nigerian rebels would attack an oil field or worse, the U.S. would bomb Iran. That would mean a jolt to the world's petroleum supply and mind-boggling run-ups in oil prices.

They know the key to trading is staying ahead of the curve, so they furiously bought futures that would mean big bucks if prices rose which had the self-fulfilling effect of driving up prices. Barring an international crisis over the weekend, they'd sell when they returned to work.

A fellow trader leaned over to Carbone. "If Iran is not a smoldering heap by Monday, we're going lower," he predicted.

Any economics student knows prices are determined by supply and demand. When more oil is extracted from the ground or refined into gasoline, prices fall. When millions of Chinese workers start trading in their bicycles for automobiles, prices rise.

But lately, the energy markets have become defined by something more powerful: fear.

With oil supply stretched drum-tight, any little disruption can make prices swell or collapse. Futures traders live in the heart of the beast, risking hundreds of thousands of dollars on a comment by a Saudi Arabian oil minister or a meteorologist's prediction about the path of a storm.

As a result, the impact of people like Carbone on the lives of average Americans has never been greater. More so than big oil companies, filling stations and world leaders, it's the guys making cryptic hand gestures in the trading pit who tell the world what oil should cost.

As Enron Trial Begins, Houston Has Moved On

This article was originally published by Newhouse News Service on Thursday, January 26, 2006.

By Katherine Reynolds Lewis
c.2006 Newhouse News Service

HOUSTON -- Nobody ever said Houstonians dream small.

The city of 2 million is the nation's fourth-largest, home to the world's biggest medical center and a theater district with more seats than any in the U.S. outside New York. Its port ranks first in the country in international commerce.

A strategic plan developed by a local booster group names 10 "world cities" led by London, Paris, New York and Tokyo. "Houston must be on this list by 2015," the Greater Houston Partnership proclaims.

These days, it's almost hard to recall or maybe people here just prefer to forget that a company named Enron once crystallized all the giant, go-go dreams of a city on the rise.

Amid the Internet mania of the late 1990s, Enron was touted as a new breed of energy company, one that understood technology and trading and could transcend the physical limitations of natural resources. The buzz was that Enron would reinvent Houston as the world energy capital for the 21st century, immune from rising and falling fortunes tied to the price of crude oil.

Then Enron became a symbol of something bigger: the accounting scandals that would rip through Corporate America, prompting one of the largest bankruptcies ever in 2001, along with a revolution in oversight and the sight of chief executives in handcuffs.

Investors across the country lost billions as the value of Enron stock plummeted to zero. Wherever Enron had operations, customers and workers were affected, from India to Oregon, where the company owned Portland General Electric.

Starting Monday, Kenneth Lay and Jeffrey Skilling, the two executives prosecutors say were ultimately responsible for the fraud at Enron, go on trial in a nondescript federal courthouse just six blocks from their former office tower. The trial, which could last four months, is sure to reopen old wounds, titillate the curious and perhaps provide some closure at long last.

"Ken Lay was one of the genuine heroes of Houston, and Enron was one of the shining beacons of the city," said Stephen Klineberg, a sociology professor at Rice University here. "There is still a residual of deep anger, betrayal, a sense of outrage over Enron, which is stronger in Houston than anywhere in the country."

There's Primitive Psychology at Work in That Shopping Spree

By Katherine Reynolds Lewis
c. 2004 Newhouse News Service

Welcome to the season of the impulse purchase and heavily trafficked parking lots. While battling the crowds at your local mall, and laden with packages, you may find yourself asking, "Why do we shop, anyway?"

It's more complex than simply meeting our needs.

Shopping taps into a part of our nature shared with the wolf stalking prey or a bird searching out fluffy scraps to line its nest.

"What you or I do at the mall is really not a lot different from what our furry and feathered friends do outside; it's foraging," explained Don Hantula, a psychology professor at Temple University in Philadelphia.

Some Industries Encourage Workers to Use Pseudonyms

This article was originally published by Newhouse News Service on Wednesday, November 17, 2004.

By Katherine Reynolds Lewis
c.2004 Newhouse News Service

The next time you call an 800 number for customer service and hear a friendly greeting from Jane Drew, think about whether her real name is Nancy Doe.

In industries as varied as telemarketing, debt collecting, retail sales and hotels, some workers on the front lines of customer contact use pseudonyms to protect their privacy and avoid harassment outside the job.

"There's some psycho people out there," said Jennifer Espada, a radio disc jockey in Olympia, Wash., who uses an alias on the air. "It's uncomfortable when people know my real name."

Those who adopt a pseudonym say it helps them deal with stressful situations at work for instance, remaining professional in the face of customer abuse. And for entrepreneurs with businesses in their homes given how easy computer databases make it to find people the tactic may be the only way to keep strangers from showing up on their doorsteps.

Banks Find Mortgage Clientele in Undocumented Immigrants

This article was originally published by Newhouse News Service on Monday, March 14, 2005.

By Katherine Reynolds Lewis
c.2005 Newhouse News Service

Dalila and William Timal look like any other couple signing a home mortgage. They've picked out paint colors for their new four-bedroom house in Indianapolis and can't wait for their 18-month-old son to play in the yard.

But they differ in one way from many others you'd see at a loan officer's desk: Neither is a U.S. citizen or legal resident. The Timals came to this country from Guatemala in the late '90s and illegally overstayed their visas.

They're the beneficiaries of a new program by Cincinnati-based Fifth Third Bank, basing mortgages on an individual taxpayer identification number, or ITIN.

Nationwide, increasing numbers of financial institutions offer such loans. They view customers like the Timals as part of their communities, not to mention a critical business opportunity. Just among the nation's roughly 6 million undocumented Latinos is a potential $44 billion market for homes, according to the National Association of Hispanic Real Estate Professionals.

"People need somewhere to live," said Ann Baddour, senior policy analyst with Texas Appleseed in Austin, a nonprofit group that uses volunteer professionals to solve social problems. "It's not new that people are buying homes; what's new is that banks are financing it."

Do Immigrants Really Take Jobs Americans Won't Do?

This article was originally published by Newhouse News Service on Wednesday, January 21, 2004.

By Katherine Reynolds Lewis

True or false: Many foreign-born workers come to the United States for jobs that Americans don't want.

The argument surfaces again and again in the immigration debate, most recently in President Bush's new plan to allow more temporary foreign workers. Without immigrants, it goes, there would be nobody to slaughter cattle, work in the fields, put up drywall or clean bathrooms.

"It's a misleading and false myth," said Harvard University economics professor George Borjas.

In fact, under standard economic theory, there's no such thing as a labor shortage, merely a shortage at the wage being offered, said Jeffrey Passel, a demographer at the Urban Institute, a Washington think tank. Without immigrants, American companies would have to offer higher pay to attract prospective employees.

Appraisers Cite Pressure to Inflate Home Values

This article was originally published by Newhouse News Service on Monday, June 23, 2003.

By Katherine Reynolds Lewis
c.2003 Newhouse News Service

Real estate appraisers -- the professionals who certify what a house is worth -- say they are pressured more and more to exaggerate values in order to smooth the way for a refinancing or sale.

Yielding to such pressure not only contributes to an artificial bubble in real estate prices, but it can leave homeowners in the lurch when they discover their appraisal was inflated. Consumers have lost homes and been forced into bankruptcy due to faulty appraisals.

But with interest rates at 40-year lows, the demand for soaring appraisals is at a fever pitch, experts say.

"It's putting a squeeze on the professionals in the appraisal business who truly do conduct themselves with integrity and professional standards," said Anne Petit, superintendent of Ohio's Division of Real Estate and Professional Licensing.
Appraisers worry that they'll be blamed if the booming property market collapses and their lofty valuations suddenly look as worthless as all those "buy" ratings on stocks in the late 1990s.

"It's coming quickly, the day of reckoning," said appraiser Robert Ipock, owner of Bob Ipock & Associates in Gastonia, N.C. "If the economy does not get going pretty damn fast, we're going to breach the bubble and prices are going to start dropping. I fear that the same thing will happen to real estate that happened to the stock market, where people lost faith in it. That would be devastating to the whole country."

Menopause at Work: Is It Hot in This Conference Room, Or Is It Just Me?

By Katherine Reynolds Lewis
c.2008 Newhouse News Service
Photo of Hester Sonder by Jane Therese

Terri Bell knew menopause was hurting her work performance. She couldn't sleep at night and spent the whole day irritable, dying for a nap.

When a new medicine finally gave her relief from menopause symptoms, she could function again. Her attention span and productivity improved drastically and she even got a raise at her medical billing job.

"I was able to speak to clients in a friendlier way," said Bell, 52, of Yardley, Pa. "To have those symptoms go away makes a whole change in your life."

The average age of menopause is 51, according to the National Institute on Aging. Symptoms can begin several years before a woman's last menstrual period, a transition known as perimenopause.

There are 17 million women between 45 and 54 years old in the U.S. work force, according to the Bureau of Labor Statistics. For those in the midst of what their grandmothers called "the change of life," managing the workday brings a host of challenges. How do you cope when your short-term memory flakes out? What do you do when a hot flash hits in the middle of a presentation?

Their mothers had to grin and bear it. But today's women are finding ways to work around menopause symptoms, or just gracefully explaining the situation to colleagues and supervisors.

Wire Hangers Caught in Twists of Trade Dispute

By Katherine Reynolds Lewis
c.2008 Newhouse News Service
Photo by Joe Epstein

In Westfield, N.J., Suho Chae urges customers to return used hangers to his dry cleaning shop. He's paying $50 for a box of 500 pants hangers, up from $24 six months ago. "Every time I order a new supply," Chae said, "the price goes up."

In Leeds, Ala., M&B Hangers, the only major hanger maker left in the U.S., has doubled its work force and still can't keep up with demand.

And in Monticello, Wis., a hanger factory once shuttered because of cheap foreign competition has reopened an about-face worthy of Alice in Wonderland.

Welcome to the latest chapter in the trade tug of war with China: the wire hanger. The twists and turns of this humble piece of steel illustrate how disputes between trade officials thousands of miles apart can ripple through the global economy all the way to your closet.

You Can't Just Call People Interns to Avoid Paying Them

By Katherine Reynolds Lewis
c.2008 Newhouse News Service
Photo of Thom Schoenborn by Kraig Scattarella

Summer interns are ripe for exploitation.

They're desperate for real-life experience to help them land a permanent job, at a time when the economy is slowing and positions are scarce. Many are willing to work for free or below market rates, just to get a foot in the door.

But that doesn't mean employers should take them up on the offer.

"It's very tempting to try to come up with unique ways to get more out of your company, but the way to do it is not to bring in people who are unpaid," said Jay Zweig, a labor lawyer at Bryan Cave in Phoenix. "An internship, to be unpaid and legal, needs primarily to be a learning experience for the intern and not something where the intern is expected to produce work product that is going to benefit the employer."

Financial Optimism Linked to Consistency of Savings

By Katherine Reynolds Lewis
c.2008 Newhouse News Service
Photo of Stacy Clark-Warren by Roadell Hickman

You don't need a big bank account to feel financially secure.

Rather, it's the ability to save regularly even a little that makes you feel optimistic about your financial future, research shows.

"Even people that didn't have a large balance in their savings and investments the fact that they were putting away money every month had a huge impact in how secure they felt," said Marty Durbin, president of First Command Financial Services in Fort Worth, Texas, which released a two-year study of over 9,300 families' savings habits and beliefs.

"When they have that feeling of financial security, it's a positive feedback mechanism that psychologically encourages them to do more," Durbin said.

In the last decade, the U.S. savings rate already low compared with most other developed countries has plummeted further. Americans saved 0.5 percent of their disposable income last year, down from 4.3 percent in 1998, according to data from the federal Bureau of Economic Analysis. The savings rate even dipped below zero in the third quarter of 2005, meaning people spent more than they earned.

Smart Money Moves Are Easier in Hindsight

By Katherine Reynolds Lewis
c.2008 Newhouse News Service

Ready to scream if you hear one more can't-lose stock tip or secret for making a fortune in real estate? Who can truly say whether popular investment advice will leave you richer or poorer a year from now?

Hindsight is an easier game, and it can sometimes inform your future decisions. Let's look back over the past year at the financial moves that turned out to be brilliant.

20% of U.S. Employers Violate Leave Act, Study Says

By Katherine Reynolds Lewis
c.2008 Newhouse News Service

WASHINGTON -- One in five U.S. employers violates federal law by offering workers less than the required unpaid leave to care for a sick family member, new child or their own serious illness, according to a new report by the Families and Work Institute.

About 18 percent of large employers and 21 percent of smaller employers surveyed said they provide fewer than 12 weeks, the report said.

"There are so many reasons you could imagine an employer not complying," said Kate Kahan, director of work and family programs for the National Partnership for Women and Families. "The bottom line is the same, which is the employee loses out. This is such basic protection that it's horrible."

But the U.S. Labor Department questioned the report's conclusion.

"We know of no independent verification of their number," spokeswoman Dolline Hatchett said. "Compliance rates are hard to verify without sophisticated sampling techniques, and there is insufficient data in their analysis to allow one to assess an employer's compliance with the law."

Reverse Mortgages Should Be Last Resort

By Katherine Reynolds Lewis
c.2008 Newhouse News Service
Photo by B.K. Angeletti

Diane and Peter Carrara moved into their dream house in Chepachet, R.I., in 1958. It was an unfinished shell — no doors, bathtub, heat, or even finished flooring — but it was near a lake and nestled in the woods, just like they wanted.

They talked the owner into accepting $50 a month the first year, while Peter finished enough of the house to qualify for a mortgage. They pinned blankets across the kitchen doorway to keep in the stove's heat, and slept on the floor "with all the clothes we owned on our back" and their 2-year old son between them, Diane said.

Over the next half-century, they finished the basement and the walls, added a deck, and landscaped the property, with Peter doing most of the work.

So when the medical bills started piling up a few years ago, they weren't about to sell their home. They signed up for a reverse mortgage that gave them $20,000 up-front, a line of credit, and $400 a month for as long as one of them lives in the house.

"I've been here 50 years, sweetheart," said Diane Carrara, 72. "If I have to take an ambulance out of the hospital to die here, that's what I'll do."

This determination to leave your home feet first, or not at all, is part of what prompted 107,367 government-insured reverse mortgages in 2007 — a 41 percent jump from the previous year, according to the National Reverse Mortgage Lending Association.

European-Style Covered Bonds Eyed for U.S. Mortgages

By Katherine Reynolds Lewis
c.2008 Newhouse News Service

WASHINGTON -- This week's government seizure of Fannie Mae and Freddie Mac leaves a big question unanswered: What will replace or supplement the two mortgage giants in supporting a healthy and active housing market?

In announcing the takeover, Treasury Secretary Henry Paulson said the companies could increase their mortgage holdings to about $850 billion each by the end of next year, and then he wanted the portfolios cut by 10 percent a year until they're $250 billion each.

Some financial experts say instruments known as covered bonds could fill the void, and develop into a flourishing market that would grease the wheels of U.S. real estate.

Covered bonds are sold by financial institutions and backed by a pool of mortgages that the institution holds separate from its other assets. They've grown to a $3 trillion market in Europe, which has no equivalent of Fannie or Freddie.

"Covered bonds could become a very effective solution to the housing finance system in the United States," said Peter Wallison, a fellow at the American Enterprise Institute, a free market think tank in Washington.

Charity Malls Allow Painless Online Donations

By Katherine Reynolds Lewis
c.2008 Newhouse News Service

Debating whether to send flowers or make a donation to Mom's favorite charity for Mother's Day?

Now you can do both.

Web sites with names like Benevolink and BuyforCharity use your online shopping to benefit philanthropic organizations, without costing you a cent more.

Here's how it works: You sign up with the site and designate a charity to receive cash. Most sites, known as charity malls, will let you enroll a new organization if your favorite isn't already listed.

Then you visit the charity mall when you shop online, clicking through to your favorite retailer. The merchant gives a percentage of your purchase to the mall, as a referral fee. The charity mall passes on a portion of that fee to the group you designate.