Old, And Still Working

America’s elderly are working at levels not seen in decades.  Is that a good thing, or a bad thing?

This year, the participation rate in the labor force of retirement-age workers — that is, workers aged 65 and older — has cracked the 20 percent mark.  That’s the highest participation rate in 57 years, and twice as high as the low mark participation rate in 1985.  Since 1985, the rate of participation has steadily moved upward, with a significant increase in recent years.

seniorsThe Bloomberg article linked above suggests that many of these working elderly are doing so because they have no choice:  “Rickety social safety nets, inadequate retirement savings plans and sky high health-care costs are all conspiring to make the concept of leaving the workforce something to be more feared than desired.”  But the statistics indicate that at least some of the people who are working longer are doing so by choice, rather than by desperate need.   The share of all employees age 65 or older with at least an undergraduate degree is now 53 percent, up from 25 percent in 1985, and the inflation-adjusted income of those workers has increased to an average of $78,000, 63 percent higher than the $48,000 older folks brought home in 1985.  The increase in wages of the working elderly is better than the increase for workers below 65 during that same time period.

So why are people working longer than they used to?  To be sure, some may be doing so because they’ve got no choice — America’s retirement savings statistics are dismal.  But if that is the root cause for some significant percentage of the working elderly, why is that a bad thing?  If people haven’t saved, working longer in order to build up your retirement nest egg, and cut down on the number of years in which you’ll be living on that nest egg, is just the responsible thing to do.  We shouldn’t feel sorry for them, we should be applauding them for recognizing that, when it comes to retirement planning and saving, it’s better late than never.

The more interesting and deeper trend is that the economy is welcoming these older workers and rewarding them with increasing salaries.   In short, it’s not like all of these older workers are serving as friendly, red-vested greeters at Wal-Mart.  The salary statistics indicate that the job creation in the current economy is strong, and that companies are holding on to experienced older workers rather than incentivizing them to retire.  They are recognizing that older workers have value, and still have something to contribute.  If you are an older person who likes working and wants to continue to work, that’s a very encouraging trend.

 

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The Perils Of “Dutch Uncle” Advice

A “Dutch uncle” is somebody who doesn’t sugarcoat things.  When you get “Dutch uncle” advice, you’re getting a firm expression of a person’s unvarnished, straight-from-the-shoulder views of what you should, and shouldn’t, do.

dutch-uncle-image-of-a-stern-uncleConsequently, true “Dutch uncle” advice is often unwelcome.  Some people don’t want a “Dutch uncle” telling them what to do — they want somebody to give them a sympathetic hug and a piece of chocolate and tell them they’ve just had some bad luck and things are bound to turn out for the better, eventually.  Rather than hearing from the “Dutch uncle,” they’d rather hear from, say, the “hippie aunt.”

JP Morgan Chase learned this recently when it gave some classic “Dutch uncle” advice on its Twitter feed.  The bank evidently offers a weekly “#MondayMotivation” tweet, and one of the recent tweets was framed as a conversation where the customer asks “Why is my balance so low?” and the customer’s bank account responds:  “make coffee at home…eat the food that’s already in the fridge…you don’t need a cab, it’s only three blocks.”  In short, if you want to have more money in your bank account, pay attention to what you’re spending your money on and consider whether you really need to buy that caramel-drizzled frappacino latte grande every day.

Not surprisingly, JP Morgan Chase’s “Dutch uncle” advice was met with a hail of dead cats.  Some elected officials responded that JP Morgan Chase should pay its workers more, and argued that the problem isn’t frivolous spending, it’s what workers are making in the first place.  Other people argued that it isn’t about individual personal responsibility, it’s about the “hollowing out of the middle class,” and that Chase’s unwanted advice shows “stunning tone-deafness about the economic realities facing ordinary Americans” — even though the economy seems to be doing pretty well right now.   Others used the tweet as a chance to point out that Chase charges its customers high fees, and that Chase got a bailout from taxpayers during the Great Recession because of its own financial misadventures.  Only a few people rose to the defense of Chase’s advice, and Chase deleted the tweet after a few hours.

These days, apparently, nobody wants to hear that they have some degree of control over their own lives, or that their personal decisions may have produced their current predicament, because it’s easier to just blame somebody or something else.  Politicians are happy to promote the notion of helpless victimhood, because it promotes the perception that only political leaders can actually create change that affect the lives of individual Americans.

In our current culture, “Dutch uncles” aren’t welcome.  Say hello to the hippie aunt.

Tipping, Up In The Air

Next week I’ll be taking my first flight ever on Frontier Airlines.  It’s branded as a low-cost airline that differs from other carriers in that it charges you separate fees for things like your carry-on bag and basic in-flight drink and snack options.  Frontier presents its approach as allowing it to keep base fares low and giving travelers “options that allow you to customize your flight to match both your wants and your wallet.”

flight-crewNow I’ve learned that Frontier differs from other airlines in another, more interesting way:  it’s the only airline that encourages travelers to tip its flight attendants.  Beginning January 1, 2019, individual Frontier flight attendants can accept tips, and if a traveler purchases in-flight food or beverages, they get a prompt from the Frontier payment system notifying them that they have the option to leave a tip — just like you get in many restaurants.  In the article linked above, Frontier explains:  “We appreciate the great work of our flight attendants and know that our customers do as well, so [the payment system] gives passengers the option to tip.”

The union that represents Frontier flight attendants, the Association of Flight Attendants International, isn’t happy about Frontier’s tipping policy and says that the airline should be paying flight attendants more instead.  The union and Frontier have been trying to negotiate a new contract, and one union official has said that “[m]anagement moved forward with a tipping option for passengers in hopes it would dissuade flight attendants from standing together for a fair contract — and in an effort to shift additional costs to passengers.”

I’m not quite sure how I come out on the issue of tipping flight attendants.  Obviously, their job involves a lot more than donning a little apron and serving drinks and snacks, so there’s a bit of a disconnect between the tipping option — apparently presented only when food or drink is ordered — and the actual contours of the flight attendant’s job.  At the same time, many airlines are nickel-and-diming passengers with fees, so perhaps tip income for flight attendants is the wave of the future.  And I’m all for airlines adopting different models — like Frontier’s low-cost approach — as they compete for passengers, and letting the passengers themselves decide which approach they like best.

I’m thinking my flight on Frontier next week is going to be a bit of an adventure.

The Coming College Collapse

Some pretty alarming predictions are being made about American institutions of higher education these days.  Clayton Christensen, a professor at the Harvard Business School, predicts that half of all colleges and universities will close or go bankrupt in the next decade.  That’s upping the ante on a prediction Christensen and Michael Horn made in the New York Times in 2013:  that the bottom 25 percent of every tier of colleges and universities will close or merge out of existence in the next 10 to 15 years.

Abandoned HospitalWhy the dire forecasts?  Because colleges have been struggling for a while now, their business models aren’t sustainable, and demographics and economics indicate that things are going to get worse very soon.

Here’s an interesting point made in the first article linked above:  “Many colleges and universities are increasingly unable to bring in enough revenue to cover their costs. Indeed, the average tuition discount rate was a whopping 49.9% for first-time, full-time freshmen in 2017–18, according to the National Association of College and University Business Officers. That means that students are paying roughly only half of what colleges and universities say they charge. A tuition discount rate above 35% puts a college in a danger zone, particularly when it is heavily dependent on tuition. Many institutions have discount rates far above that now.”

The fact that the average tuition discount rate is nearly 50 percent indicates that it’s high times if you’re somebody whose child is getting ready to go to college.  College tuitions may be like hospital prices lists for different procedures — that is, they are quoted amounts that almost no one really pays — but an average discount of 50 percent is staggering.  Clearly it’s a buyer’s market out there, and buyer’s markets are bad news for sellers, who get caught in price wars that do nothing except cut into their bottom line.  And, in the case of colleges and universities, the fight for students not only involves cutting tuition, but also building new, high-end dormitories, workout facilities, student centers, and other facilities that might appeal to high school kids who are trying to decide where to spend the next four years.

Statistics also show that about 25 percent of private colleges are operating at deficits, and that expenses have exceeded revenues at public colleges over the past three years.  And demographics aren’t helping, either:  the number of American 18-year-olds who are going to college is declining, and the decline is supposed to get worse within a few years.  Combine fewer applicants with tuition price wars and high fixed costs to pay expenses like tenured faculty salaries and building maintenance costs and you start to see the obvious challenges.  Throw in the possibility that some kids who have grown up sitting in front of their computers might decide to opt instead for the on-line learning options that are making increasing inroads, and the picture becomes even bleaker.

Often, predictions turn out to be wrong, of course, but there is no doubt that these are tough times for American institutions of higher education.  Don’t be surprised if, in a few years, you hear that your alma mater is closing its doors.

 

Oil Independence

Last week the United States passed a milestone that is almost unimaginable for those of us who have lived through the “oil crises” of the past.  For the first time in 75 years, America ended its dependence on foreign oil and became a net oil exporter.

shutterstock_360583700-0The transition of America to a state of energy independence has largely occurred because of the huge surge in production of oil and natural gas from shale formations that have been found throughout the country, in Texas, and North Dakota, and Pennsylvania, and even here in Ohio.  Last week there was a sharp drop in imports and a sharp increase in exports that nudged the U.S. into energy independence territory.  And while the production of oil will vary, the amount of oil-producing shale formations will likely keep America in positive net production territory for some time.

What does America’s status as a net oil exporter mean?  The oil boom has obviously produced a lot of new wealth and jobs in the U.S., but more broadly it means that the role of OPEC as a major world player, capable of affecting the economies of oil-using countries with a few pricing decisions — or even worse, embargoes — has been greatly diminished.  In fact, the production from the United States has effectively flipped the power equation, because many of our producing wells are profitable at oil prices as low as $30 a barrel, which is a lower price than is profitable for many OPEC countries.

The American oil boom thus presents OPEC with a serious challenge:  if it tries to enforce higher prices, buyers will turn to American oil and OPEC countries will lose market share — but because Saudi Arabia and other OPEC countries need higher prices to be profitable, OPEC can’t afford to let profits fall.  Last week in Vienna, OPEC and Russia announced an agreement to cut production in order to keep prices up.  It remains to be seen whether that agreement will work, given American production, or whether OPEC members will begin trying to recapture market share by selling at lower prices than OPEC is trying to enforce.  In fact, there are signs that the oil cartel is fraying around the edges.  Last week, for example, Qatar announced that it is leaving OPEC.

Imagine:  an American foreign policy that no longer needs to focus obsessively on the Middle East in order to ensure that the oil spigot remains turned on.  That’s just one of the interesting consequences of our surging domestic production.

 

Aftermath Of The GM Bailout

General Motors — the company that American taxpayers bailed out less than a decade ago, rescuing the company from near-certain bankruptcy after years of mismanagement — continues to struggle, and the dominoes that were toppled by the bailout decision continue to fall.

636198172298775780-lsjbrd-04-17-2016-gli-1-a001-2016-04-14-img-gm-shutdown-jpg-1-1-fhe0e7gq-l792930015-img-gm-shutdown-jpg-1-1-fhe0e7gqYesterday the company announced that it is engaging in a massive restructuring that will close assembly plants in Ohio, Michigan, and Ontario, Canada, eliminate thousands of jobs, and end some car lines.  One of the vehicles  being discontinued is the Chevy Volt, the electric hybrid GM rolled out to great fanfare.  The company said that “GM is continuing to take proactive steps to improve overall business performance, including the reorganization of its global product development staffs, the realignment of its manufacturing capacity and a reduction of salaried workforce.”  GM’s CEO, Mary Barra, said “GM wants to stay in front of changing market conditions and customer preferences for its long-term success.”  One of the “changing market conditions” is the declining public demand for passenger cars like the Volt and the Chevy Impala, which also is being discontinued.

President Trump and the United Auto Workers are both unhappy at the GM move.  Trump said he didn’t like GM’s decision and reports that he told Barra “You know, this country has done a lot for General Motors. You better get back in there soon. That’s Ohio, and you better get back in there soon.”  The UAW, which will see the loss of lots of blue collar jobs held by its members, said:  “This callous decision by GM to reduce or cease operations in American plants, while opening or increasing production in Mexico and China plants for sales to American consumers, is, in its implementation, profoundly damaging to our American workforce.”  The UAW news release added that “GM’s production decisions, in light of employee concessions during the economic downturn and a taxpayer bailout from bankruptcy, puts profits before the working families of this country whose personal sacrifices stood with GM during those dark days.”

GM’s decision will no doubt be devastating to those employees who lose their jobs and the communities where the plants will close.  But it also makes me wonder how even the advocates for the taxpayer bailout of GM less than 10 years ago feel about their decision to prop up GM now.  The underlying question raised by the UAW and President Trump is legitimate:  Was the bailout worth it, in view of these kinds of decisions?  GM remains a public company, and it gets to make decisions that it considers to be in its own competitive interest.  And if changing market conditions really do require GM to cut thousands of jobs that the bailout advocates expected would continue indefinitely, that may just tells you something about the wisdom of taxpayer bailouts generally.

Blue Chip Gone Bad

In the not too distant past, General Electric was one of the most valuable companies in the world.  GE was the bluest of the blue chips, the maker of light bulbs and everyday appliances, a company so solid and trusted and reliable that it was a standard holding for retirees who bought it because it paid an old-fashioned quarterly dividend.

ge-led-bulbs-led11da19-870-h-64_1000Now, GE’s stock price has plummeted to less than $10 per share, its its renowned quarterly dividend has been reduced to a penny per share, and there’s actually talk on Wall Street that GE debt — which is now rated at BBB — could be reduced to junk bond status.

What happened? Many things have contributed to GE’s abrupt fall.  The company has a lot of debt, some of it generated back when GE had a AAA rating.  The debt has put GE into an increasingly leveraged position as the company’s stock price has fallen, which in turn has put pressure on the trading price of GE bonds.  The company’s lines of business have experienced some down years, and prior management was viewed as too slow to respond to the challenges facing the company.  To address the problem, GE has shifted to new management, which is trying to sell off assets to improve the company’s capital structure, boost the stock price, and keep the company off the junk heap.  And, as GE sheds assets, new management will have to figure out what the company is and where it is going, long term.  GE can no longer get by on its reputation.

GE’s current plight is another example of how the American economy moves quickly, and if companies don’t move with it they can be left behind.  As recently as 2005, GE’s stock market price made it the most valuable company in America.  Now, it’s fighting for survival.  And in boardrooms throughout the corporate world, CEOs should considering this cautionary tale and asking themselves:  “What should I do to keep my company from becoming the next GE?”