About the Author:
Making Sense of the Talking Heads:
Money Expert Eric Tyson Clears Up the Latest Economic Misinformation
Author : Eric Tyson
Between the political infighting and the many pundits providing their own, often misguided, input on what’s best for the nation’s finances, it can be difficult for Americans to know what to believe when it comes to the economy. That’s why level-headed personal finance author Eric Tyson offers his reasoned and practical insight on what the nation’s big issues really mean for the economy and your personal finances.
Hoboken, NJ (August 2011)—If you spend any time listening to talk show pundits and many of today’s politicians or reading opinion columns or political blogs, it doesn’t take long to pick up on a sense of impending doom for the nation’s economy. While many Americans struggle to find employment and to make the family budget’s ends meet, the “experts” are at each others’ throats. They spend more time arguing about why stock prices have dropped sharply and are so volatile, and whether or not to raise the debt ceiling, overturn healthcare reform, or curtail entitlement programs than they do actually finding solutions or making compromises on these issues.
Author and financial expert Eric Tyson says it’s time to clear the air. Known for his reasoned and objective advice, he says what the American people really need is someone to help cut through all the misinformation and fearmongering that is so prevalent among today’s politicians, pundits, and “experts.”
“I don’t think people need to be told anymore that the economy isn’t doing well,” says Tyson, author of the bestselling Personal Finance For Dummies® (Wiley, ISBN: 978- 0-470-50693-6, $21.99, www.erictyson.com) and several other financial books including Investing For Dummies® 6th Edition (Wiley, 2011, ISBN: 978-0-470-90545-6, $21.99). “Trust me, they get it. They know that companies are making huge layoffs because they live it every day. They understand what it’s like to be constantly worried that they won’t have a job next week or that they won’t be able to find a job in the near future.
“They know what it’s like to see a smaller investment portfolio and 401(k). They see that their paychecks don’t quite cover as much of their expenses as they did a couple of years ago. They don’t need any more doomsday predictions. They need and deserve clear-headed insight into what is going on with the government’s finances and how that affects them at home.”
Below, Tyson offers an overview of what’s being said about today’s biggest issues and provides his insight on what it all really means for individual Americans and the nation’s economy.
The Issue: Sagging (and Volatile) Stock Prices and Americans Supposedly Shunning Stocks. Bill O’Reilly, host of The O’Reilly Factor, the most popular cable news program on television, said recently that he has just 20 percent of his own money in the stock market. He
also proclaimed that “most Americans are out of the stock market” due to their having lost confidence because they think it’s a con game with all the day traders.
Tyson Says: These statements are wrong. Regular investors hold diversified portfolios with the majority of their retirement money in stocks and have held fairly steady allocations in recent years despite market volatility. I’ve seen no evidence that folks are shunning stocks due to day traders. (Successful day traders engage in rapid buys and sells of stocks to make small-profit, low-risk trades. Day traders don’t affect the market’s long-term direction and aren’t capable of market manipulation.)
This recent stock market correction has been sharp and quick. The major catalysts have been concerns about European government debt, an economic slowdown, and the U.S. government credit downgrade. Given the current level of corporate profits and reasonable expectations for profits over the next couple of years, stock prices appear to be undervalued now. Global stock markets seem to now be pricing in not just an economic slowdown but a new recession. If that doesn’t happen, stock prices should rebound nicely in the months ahead.
Investors who are piling into longer-term Treasury bonds could end up being disappointed but not for the reason that you might expect (default risk) from S&P’s downgrade. The bigger risk is that economies will do reasonably well and inflation may pick up, which would cause investors to demand higher yields from government bonds.
The Issue: The Debt Ceiling and the Deficit. What hasn’t been said recently about the debt ceiling? Democrats and Republicans both used it as a bargaining chip in their fight over whether cutting spending or increasing revenue (i.e., raising taxes) is the best way to get the economy back on track. Pundits and economic experts couldn’t emphasize enough that lagging on the debt-ceiling decision would lead to an implosion of the global financial system and would result in a parade of financial horrors for Americans.
Tyson Says: We’ve been here before—in 1995 to be exact. Late in that year, the debt ceiling wasn’t increased in time, and portions of the U.S. government were shut down and workers furloughed. Guess what happened? The government prioritized its bills and shut down some non-essential agencies. There was never any talk of or risk of default. Interest rates on government bonds didn’t jump higher.
So, any of the knuckleheads warning of default and economic Armageddon recently should know better. Not surprisingly, word is circulating that in recent days private calls were made to major U.S. banks by the administration assuring bankers that no default would happen and encouraging the banks to continue lending and conducting business as usual. This stands in contrast to dire warning by some officials to the public that if Congress doesn’t get its act together, an economic calamity is around the corner.
Interestingly, some of the most sensible and honest perspectives on the current state of affairs came from Secretary of State Hillary Clinton: “This is how an open and democratic society ultimately comes together to reach the right solution. So, I’m confident that Congress will do
the right thing and secure a deal on the debt ceiling and work with President Obama to take the steps necessary to improve our long-term fiscal outlook.”
The Issue: Taxes. The saying goes that the only things certain in life are death and taxes. Well, today you could add another certainty to the list—heated debates about taxes. The question of whether or not to raise taxes was a huge point of contention in the debt-ceiling discussions. With the rise of the Tea Party, the idea of raising taxes to increase revenue has become even less popular with Republicans. While, on the other side of the aisle, some Democrats are pushing to increase taxes for the nation’s top earners.
Tyson Says: Recently I was surprised to hear a statistic on a news network show that federal income tax payments were at a 60-year low. After doing some digging, I found that it’s not that personal income tax payments are at a 60-year low...it’s that personal income taxes paid as a percentage of the nation’s GDP are at a 60-year low. In fact, one-third of all filed federal income tax returns now have no tax liability or actually get money back from the government without having paid any federal income tax during the year.
For individuals and families, lots of tax breaks are directed to the non-wealthy and phase out at higher income levels. The federal income tax burden of the top 1 percent of taxpayers now exceeds that of the bottom 95 percent. Unfortunately, I don’t think we’ll make any real headway in addressing tax reform until after the November 2012 elections. This is bad news, because U.S. economic progress and hiring depend in part upon this happening.
The Issue: Unemployment and Job Creation. Austan Goolsbee, the President’s chief economic advisor, called the recent employment report, which showed a slight increase in the unemployment rate and the disappointing creation of only 54,000 jobs in May, a bump in the road of recovery. A recent Washington Post poll, however, shows that many of President Obama’s main supporters don’t seem to be buying the “bump in the road” theory. Approval of how the President has handled the job situation has dropped among his supporters from 53 to 31 percent since February. However, the poll shows that Republicans are viewed even more harshly when it comes to job creation with 65 percent of those polled saying they disapprove of how they’ve handled the issue.
Tyson Says: If the unemployment rate is slow to retreat and still elevated on Election Day, President Obama will be at an enormous disadvantage. The statute of limitations will have run out on blaming President Bush for continuing economic woes. The unemployment rate is currently at 9.2 percent. Obama should hope for a number below 7 percent by November 2012. To get there, what’s needed is for the rate to average a 0.15 percent decline monthly between now and then. Also, a tax reform bill that would lower the corporate income tax rate to a more internationally competitive level would be an important catalyst. And in fact, the Wyden-Gregg bill, named for Senators Ron Wyden (D-OR) and Judd Gregg (R-NH), addresses the high U.S. corporate income tax rate, which increasingly is putting U.S. companies at a disadvantage. There is a huge need to lower the U.S. corporate income tax rate and make the U.S. globally competitive again. The Wyden-Gregg bill could do just that while also creating jobs. In fact, a 2010 Heritage Foundation study projected that the bill could create more than two million jobs a year over the next decade. Unfortunately, too
many politicians oppose this either because they are economically clueless and/or they are being political and attempting to demonize those who support this move as being in the pocket of big corporations.
The Issue: Inflation. Plenty of pundits and prognosticators warn that rising inflation is around the corner due to current “easy-money” Federal Reserve policies.
Tyson Says: Over the past year, U.S. inflation as measured by the Consumer Price Index (CPI) has increased about 2 percent. (This is about where the Federal Reserve would like it to be.) Excluding food and energy costs—the so-called core inflation rate—it’s running at about 1 percent annually. Inflation worriers and alarmists tend to cherry pick items whose prices are rising at higher rates (e.g., motor fuel, education costs, medical care services, and food costs). Meanwhile, other components are showing quite low inflation rates, and some components have actually decreased in cost over the past year.
The Issue: Energy Costs. The triple-digit price per barrel and rising gasoline prices nearing $4 per gallon are getting lots of traction in the news media. For example, Bill O’Reilly blames oil companies for the current high prices. He has accused oil companies of price gouging and says that there’s a lack of price competition. O’Reilly recently said, “There are only five major oil companies, and they can sell their product for almost any price because consumers have to have it.”
Tyson Says: No one likes paying high energy prices, and for sure, oil company profit margins generally expand when market prices are surging for the simple reason that market prices are rising faster than costs. Market prices are set by market forces, not by a single company or group of companies.
The good news is that the rapid rise in oil prices in 2007 and early 2008 finally woke up enough folks to the amount of money we’re sending overseas, including to nations that don’t have our best interests at heart. I recommend Americans start doing the following in order to reduce their spending on energy and to not always be on the losing side when energy costs rise:
•Replace old cars with more fuel efficient versions.
•Invest in diversified stock funds. Many energy companies, such as major oil companies, have been excellent long-term investments. If you’re profiting with these companies, that won’t make you bitter about higher energy costs!
The Issue: The Federal Reserve. One of the Federal Reserve’s biggest opponents is Republican Congressman and member of the House Financial Services Committee Ron Paul. In a CNBC interview, Paul said that essentially there’s no need for the Federal Reserve to exist and that the Federal Reserve should butt out of getting involved with the economy since they are the source of so much of our economic problems (bubbles, recession, etc.). Recently, many pundits interviewed on financial cable television programs and website pontificators have used the Federal Reserve as a punching bag, blaming them for various
economic problems including the 2008 financial crisis.
Tyson Says: While I support Paul’s idea of doing a thorough review of the Federal Reserve, abolishing the Fed and believing in Paul’s other nutty assertions won’t help economically. Unfortunately, it’s becoming more popular and fashionable among politicians and pundits to bash the Fed. The reality is that if the Fed had been wrong about everything for the past 20 years and had never been right, our economy would be in a shambles, and our stock market would not have appreciated more than 500 percent over that period.
“There’s no denying that the past few years have been economically challenging, both for the nation as a whole and for Americans individually,” says Tyson.
“Unfortunately, too often the loudest, more extreme voices are the ones that have received the spotlight,” he concludes. “It’s time for the misinformation to stop and to put politics aside so that we can start moving toward a strong economy from which we’ll all benefit. The economy will recover, and it’s better to focus on what can be done to move the recovery along than to conjure up every possible worst-case scenario.”