Author Archives: Nate McCrumb

Colleges Need Required Classes to Market Students’ Degrees

Thesis: College’s need a required course that teaches students how to market their degree and network with recruiters.

The future of young adult’s with college educations has a very bleak future in the professional sector. They actually have a harder time finding a job than the total population as a whole. But how does this make sense, considering they have a college education? Well, the answer is probably not what they want to hear.

Matthew A. Winkler of Bloomberg View discusses the problem in his blog, “In New Millennium, No Jobs for Millennials.” He writes:

Economists say it is derived from the growing percentage of people older than 55 who aren’t retiring, the displacement of jobs caused by computers, limited mobility and a lack of the types of skills that employers are seeking.

In addition, Jeffery Sparshott of The Wall Street Journal documents how the Federal Reserve governor, Lael Brainard, views the dilemma:

 The Fed governor’s comments on younger Americans who graduated from high school and college during the last downturn highlighted major economic obstacles, including massive layoffs and high unemployment that pushed many into jobs for which they were overqualified or out of the workforce all together.

This means if recent graduates want to find a job they are actually qualified for, they will have to overcome many obstacles. The first two Winkler speak of are essentially out of student’s control. This means the only variable they can control would be their skill-sets.

The only way students can capitalize on new skillsets is through experience. This means young adults will have to spend a lot of time finding an internship that gives them the skills they need to land a job in their field. This means no more working at the golf course or burger stand for an easy summer job. In addition, I believe students miss out on the crucial networking opportunities at college. Every student should take a few minutes out of their busy day to speak with professors. They also need to learn how to network with companies and recruiters. However, many students may not understand the importance this plays in job search after college. The solution to reinforce this is quite simple.

Every college has a list of required distribution courses that helps students get a diversified degree. In addition, all colleges have a career center of some sort that assists students with job searches. These two great attributes need to be combined for an upper level course that is required by all students. The course will be taught by the career center and the departments to ensure students get the necessary tools they need for job hunting. One might argue that if students miss out on these resources, it is not the schools fault and the students should be held accountable. This may be true, but is it beneficial for the university to dish out degrees that students don’t know how to market?


Every major should have their own required course that assists the students with marketing their degree and landing a job in that field. The course should have guest lectures from students who were successful and unsuccessful with finding a job. It should also cover how to apply that job to other various fields in case they are really struggling with landing a job in that area of expertise.


Overall, I think it is ridiculous to have recent college graduates with a higher unemployment rate than the U.S. as a whole. They work too hard and have too much to offer. This is why there needs to be more classes that teach students real world application, rather than theory or random information they will never use again. Therefore, a career center sponsored class will offer the exact tools they need and reinforce the importance of networking, hopefully speaking to more people than would normally get the information. Otherwise, we are leaving students behind.

Revision #5: Life Insurance Companies Need Partnerships for Heath Rebates

Thesis: The “healthy living” life insurance rebates are necessary for the well-being of our nation but can be further enhanced with partnerships with affordable health companies, such as fitness centers and health food stores, in order to reach more people.

In an attempt to increase demand for life insurance policies, John Hancock is going to start handing out rebates for members living a healthy lifestyle. Leslie Scism of The Wall Street Journal documents the savings program:

“…Consumers can save 10% or more on insurance premiums and earn rewards with retailers for steps such as annual health screenings, gym workouts and other physical activity, weight loss, flu shots and online health courses.”

The savings also don’t just go to the 50 year olds who run marathons and have 6-pack abs. The policy will be considerate of your weight when you start your policy, and will track your progression, not simply your weight relative to benchmark standards.

Megan McArdle of Bloomberg View highlights the potential opposition people will have, mainly in regards to discrimination towards lower-income households. She writes:

“When this shakes out, we’re likely to find that the biggest discounts are disproportionately going to folks with higher incomes, who are educated and healthier.”

I am happy McArdle brings up this point because it is certainly one worth considering. Even if it true that lower-incomes could be disadvantaged to healthy living, the point of this rebate policy should be to overcome this assumption. This is why John Hancock needs to build partnerships with health food stores and fitness centers.

Regardless of income, jobs with busy work hours make it harder to exercise. Although not everyone will have access to the best fitness equipment or safe roads to run on, it is fair to say that there are some alternatives at moderate costs. For example, a membership at Planet Fitness only costs $10 a month with over 900 locations across the U.S. This makes it very approachable for many people to get exercise if they feel their environment is not safe to run in. Of course, there will always be some exceptions, but they will low in numbers. This perhaps brings up a greater concern of McArdles point: low-income households rarely purchase life insurance.

This is a much larger problem to overcome the unfair distribution of these health plans. However, I feel this could be a changing point for life insurance companies. Since they are experiencing a decline in consumption, it would be an opportunity for companies to make lower cost plans in order to approach lower-income households. In turn, they can provide their services to encourage healthy living to a market that McAradle explains is less active and educated on healthy living.

The next big question would be how to sell it. Since lower-income households are less educated on long-term investment strategies, life insurance is probably the furthest thing from their mind. However, this is where companies can carefully advertise the benefits of their plans. More importantly, explain how these plans can earn them discounts BEYOND monetary savings.

This is where the partnerships with health companies come into play. Rather than simply give someone $500 for healthy living, provide her with something more. Give members free memberships to planet fitness (or a rebate if they prefer something else). In addition, provide a discount card that allows customers to get $25 worth of free healthy foods per week at participating store locations. According to Harvard’s School of Public Health, eating healthy amounts to an extra $1.50 per person per day ($550 per year). This shows how customers will need assistance with these healthy food options. However, if you provide the memberships and healthy foods for them, it will force them to live the healthy lifestyle rather than simply earn cash rewards. This, in turn, provides them with benefits money cannot measure and could help reduce their medical costs.

At the end of the day, the health of this nation cannot be saved by a life insurance rebate system. However, it is a start. The crucial part they need to solve is how to market and approach lower income households. Although it may not be as profitable, it will at least create profits. In the end, this will provide another mechanism to promote healthy lifestyles that this country is lacking.

College Grads Need to Start Retirement Planning Now

Thesis: Every young adult needs to open a Roth IRA today and take out loans only for necessities, not luxuries.

Young adults today are often missing out on tremendous long-term capital growth as a result of frivolous spending. This spending on useless items may have a slight marginal benefit on their present life, but it can take drastic tolls on their future income. This is simply because of the miracle of compound interest.

Karen Damato, Jason Zweig, and Jonathan Clements of The Wall Street Journal write an excellent blog detailing the top 10 things college grads need to do to benefit their financial future. I could go on about all 10, but I would like to highlight a few. The first one is utilizing Roth IRAs instead of regular IRAs because, “Contributions to a Roth retirement account are not tax-deductible, but withdrawals are generally tax-free.” They also explain how to prioritize one’s debt in order earn relative return after it is paid off.

Annamaria Lusardi of The Wall Street Journal also writes another personal finance article discussing 3 concepts every class should teach; understand compound interest, consider purchasing power over time, and gauge your risk tolerance. These two articles in conjunction with one another provide great insight for young individuals, but some of language can often get confusing and overwhelming. In addition, they fail to recognize one of my biggest personal beliefs: taking on debt benefits your present at the cost of your future. However, your future ends up taking a much larger hit than the benefit today because of compound interest.

Let’s view this in another way. Many college grads decide to purchase a new car (or even a slightly used one) when they graduate from school. Since they just started working, they are hard pressed when it comes to savings. As a result, they must take out a loan. However, this loan costs them $500 a month, with interest building up over time. This means a car they bought for $16,000 could end up costing way more. This leads to my point: someone buys a luxury item to benefit their present, but inadvertently hurt their future, specifically their retirement.

If young adults are spending money on loans, it makes it very difficult to invest money into their retirement. Therefore, people should learn not to take on debt unless it is for immensely large purchases, generally a mortgage on a house. This way, they can put more money into retirement and with the law of compound interest, have a very large amount of money in their Roth IRA by the time they retire.

At the end of the day, no one should spend all of his or her income. As much as I am against borrowing for luxury items, like vehicles, you should only do it if you can afford to save 10% of your income into a Roth IRA or other long-term investments, such as index funds. If everyone can learn to live off of 90% of their total income comfortably, then they will be able to accumulate enough to have their retirement income at the same level they had at during their working days. If you can achieve this with substantial loans, then go for it. However, always keep in mind the rule of 70. If you can invest and earn money with 7% returns, then your money will double every 10 years. For me, I would rather pile my money into investments and a Roth in order to see this money double more than the average person. After all, I think anyone would start saving 7 years sooner if they knew it meant having 10 million dollars instead of 5 million.

Online Certification Will Revolutionize Professional Skill Building

Thesis: LinkedIn has the ability to change the structure of higher education at a much lower cost, specifically aiding many college graduates who need an extra boost on their resume.

Professionals across the globe are always looking for something new to add to their skillsets. In a world of expanding technology and rigorous requirements for high-paying jobs, many people look to graduate programs to get the boost their resume. The only problem is the opportunity cost of schooling. It appears that LinkedIn could be on the verge of revolutionizing higher education as we know it.

Lauren Weber of The Wall Street Journal, LinkedIn purchased in hopes to assist candidates with acquiring the skills they lack, particularly with digital skills. With this, people can take online courses to get certified in a particular program or field, demonstrating to employers they are qualified for the job. Weber writes:

Such credentials “can serve as some level of market signaling that a candidate has at least some level of understanding,” of a topic, or at least has passed a test about it, said Richard Fye, the head of people operations for New York-based software company Fino Consulting. But “it really depends on whether the course is something that’s really of quality and depth,” he said, although he added that it helps to have some outside validation of a course’s rigor.

With the availability of these courses that can serve as “nanodegrees,” as the company Udacity calls them, people can now get skilled in a particular area that they have little experience in. This is important for two very big reasons.

First, people nowadays would have to go to grad school if they wanted to become skilled with digital skills. This comes at a very high cost with forgone time and income. This turns many away from pursuing something they are interested in.

Secondly, this allows people to gain skills for a job they want. If someone wants to go into a job that requires web developing, they would be hard pressed to get the job without extra schooling. With these new certificates they can obtain online, people can now snag a job they really want. In addition, if they decide to try something else, they are not stuck in their current position because they can simply get another certification. This completely revolutionizes the employment world.

This perhaps is more important for young adults. If a recent college graduate did not maximize one’s experience at college, which 25% of all college grads do according to Gallup, he/she will have a much harder time getting a job they want. In addition, even the best students could work two years in a field pertaining to their degree and find out they hate their career choice. Low cost online courses serve as a measure to allow graduates an opportunity to change careers at a low cost, or even give them extra skills that they missed from out on out-of-the-classroom learning during their undergraduate career.

One big concern is the extent to which employers will recognize these certifications. Since they are in early stages, employers may not hold them to high regards. However, with a large professional connection company like LinkedIn, as well as backing from the White House, these online education tools should gain significant traction in the years to come.

Overall, this will have significant impacts on how people can get their dream job. If they need a little extra education to fill the gaps in their resume, they can utilize this system at a much lower cost than pursuing a master’s level education. Further, they can learn with credibility, unlike learning by oneself without any real certification. In the end, many professionals will be able to become much more successful and expand their education in a whole new, more efficient, way.

Life-Insurance Fitness Rebates Need a Nutrition Focus

Thesis: The “healthy living” life insurance rebates are necessary for the well-being of our nation and can be utilized for other health purposes besides just fitness.






I am happy McArdle brings up this point because it is certainly one worth considering. Even if it true that lower-incomes could be disadvantaged to healthy living, the point of this rebate policy should be to overcome this assumption. This is why I would like to shift the focus from fitness to food.

Regardless of income, jobs with busy work hours make it harder to exercise. But is it really fair to blame one group over another just because of education or income level? The point of this system is to promote healthy living through exercise. And just about anyone can run outside for a few hours a week. After all, it is impossible to say you are busy for all 168 hours in each week. Therefore, I think it is completely unfair to use the “disadvantaged” excuse when it comes to exercise. However, food could be a real factor when discussing disadvantages because of the high costs of a nutritious diet.

Healthy food costs more money. According to Harvard’s School of Public Health, it amounts to an extra $1.50 per person per day ($550 per year). For that reason alone, I think it would be more justified when describing potential discriminations in this policy. But we have to view the policy for what it really is, a rebate for healthy living. In addition, it doesn’t matter if you are overweight when you enter the program as long as you make small steps of progress. After all, Rome was not built in a day. Therefore, people have all of the power in the world to earn the rebate. With this money, a person earning lower income will now have more disposable income. In this manner, he/she can use the extra income strictly on healthy food. With healthy eating comes good results. If education is necessary, these insurance policies can provide what is necessary to its members. Finally, if someone truly has a disability or injury, they can use healthy foods as a way to still lose weight.

Ultimately, I feel the focus should also highlight healthy eating and educate people on how to eat right. Since eating right costs more, John Hancock needs to illustrate how to allocate the rebate towards healthy living, rather than buying a new jet ski or planning a trip to Vegas. Further, this policy should not focus so much on fitness if people are opposed to fitness as a “luxury” activity. I firmly believe that healthy life styles can and should be available to everyone, as long as they are willing to put in the effort to achieve the benefits. Through Hancock’s rebate program, I think they can successfully help households of all incomes to afford a healthy lifestyle.

Manufacturing Jobs Could See More Wage Growth

Thesis: Although factory manufacturing jobs wages are growing slower than other industries, the shift in labor to these other industries could result in better wage increases for factory workers in the long run.

Blue-collar manufacturing jobs have had a struggle ever since the U.S. has begun importing many manufactured goods from other countries, particularly China. As a result, people now assume the days of high earnings in the field are over. Although they may never return to large salaries they once were, particularly in the 70s and 80s, I think we will see wages rise substantially relative to other sectors in the long run.

There are two main factors that would provoke this: the shift of labor into other sectors and the large amount of college graduates on the market.

Justin Fox of Bloomberg View discusses how the wage premium of durable good manufacturing jobs has decreased, but has been making a comeback over the past 5 years. He concludes by stating the following:

 “The decades-long decline in durable-goods manufacturing employment seems to have finally ended. The factory job is back — or has at least stopped disappearing. It just doesn’t pay very well.”

Eric Morath of The Wall Street Journal also examines wage growth of different sectors in his blog “Why Are Wages Growing Slowly, Despite McDonald’s, Wal-Mart Raises?”, finding that hospitality jobs (such as restaurant workers) and professional jobs are seeing much greater wage increases than manufacturing. Below is the chart he uses:

Screen Shot 2015-04-08 at 3.51.51 PM

This demonstrates how a rational individual seeking employment would find a position that pays well, but also has the largest opportunity for wage growth. Wages would increase to incentivize workers to work harder and stay in the industry. It also creates an incentive for people to enter the industry. Therefore, people today would be hesitant to enter a field like manufacturing where wages increase at only 1.4%.

If more people were flocking to industries that require college degrees or have high potential for wage growth, such as waiting on tables in restaurants, then more and more people would enter these sectors. However, this would simultaneously create an abundance of labor in the market for these sectors. In order to correct itself, these wages would begin to rise at a slower rate because employers can just go to the next candidate who is willing to accept lower wage growth. As a result, the low number of people in manufacturing would now make these positions more of a premium, driving up the wage raises each year.

Finally, the increasing number of college degrees on the market will further drive down wage growth in the professional sector. If people with these degrees did not utilize their resources in college (i.e. study well, talk to professors, seek career advice, etc.) According to Gallup, this pertains to 25% of all college graduates. Therefore, there would be more college grads that are spending too much money on school and not earning the returns on their investment.

In summary, wages in manufacturing positions currently are much more stagnant than other sectors of the labor force. This will push people into other sectors or potentially attending college. With an abundance of college grads, there will begin to be more stagnant wages in the professional sector because there will be more people willing to accept less growth. This will provide an opportunity for the manufacturing sector to grow because there will be less people in the sector, thus forcing firms to reward their employees in order to keep them in the position. This would be good news for manufacturing and would lead less motivated people to re-evaluate a college education.

Recycling Companies Need Assistance Now

Thesis: Recycling companies are going out of business due to low oil prices and a strong U.S. dollar, demonstrating a call to action for the U.S. government to intervene in order to prevent the recycling process from going extinct.

When we hear about the U.S. with a strong dollar and low oil prices, we tend to think about how this will impact consumption and inflation. However, these two factors have a very detrimental impact on a particular industry most American’s wouldn’t expect: recycling.

Stacey Vanek Smith of NPR had an in-depth discussion with Tom Outerbridge regarding the current recycling crisis. Smith explains:

“But these days, China is buying less of our paper and this time the culprit is not oil prices, but the strength of the U.S. dollar. China can buy used newspaper from anywhere in the world. The dollar’s been getting stronger; the euro’s been getting weaker. So an old copy of Le Monde is a much better deal for the Chinese than a crumpled up New York Times.”

She also explains how companies are now only getting $75 for a ton brick of old papers, which used to be worth $150. As a result, recycling companies are going out of business “left and right.”

Plastic is another form of recycling taking a major hit, not because of the strong dollar, but rather the low price of oil. Georgi Kantchev and Serena Ng of the Wall Street Journal explain how the price of recycled plastic is almost $300 more per ton than virgin plastic (plastic made from scratch). They also document that some cities will forgo recycling if the cost of dumping in a landfill is less. Further, they reveal how large companies are going under, such as ECO Plastics Ltd, the “world’s largest plastics processing facility.”

This should be a wake up call for the U.S. and other countries around the world: we need to save recycling. It is completely rational for companies to choose virgin plastic and ditch U.S. recycled paper from a pricing perspective. However, the U.S. government cannot allow this to continue at the risk of losing so much progress on the recycling initiative.

Without recycling, we will put more and more products into the landfills that are already overcrowded. This is material that could be reused for other purposes! In addition, it further harms the environment by continuing to fill the earth with unnatural products. Therefore, the government needs to find a way to help save these companies before we lose them and have to start over.

The most effective measure would be to enact a temporary subsidy to companies who purchase recycled goods. The subsidy would only cover the gap between virgin plastic and recycled plastic, therefore making the price indifferent and incentivize companies to purchase the more ethical product. In regards to the strong dollar and foreign purchasers, the subsidy credit could be used to help lower the relative costs of U.S. goods to other foreign products.

The key word in the proposal is temporary. The low price of oil will not last forever and the strong dollar will go once other countries pick up economic momentum. Therefore, the subsidy credit only needs to last for the next few fiscal years, only until recycled good prices go back to a price below virgin goods. This will make it much easier to fund because it is short term.

The simple fact is there are a million things in the country that need to be fixed and everyone wants a piece of the pie to fix them. However, there is not enough pie to go around. This is why we need to focus on the dangers we face immediately, one of them being the current recycling crisis. If we let this go, it will be yet another environmental issue we brush off. However, this one affects many people’s jobs and also can easily be fixed if we apply subsidy credits for the short run. Ultimately, letting the issue go unfixed will eliminate much of recycling as we know it, further harming the environment and eliminating all the progress we have made thus far. Therefore, we must be proactive in assisting the recycling industry.

Revised Post #4: German Utility Companies Need Government Assistance

Thesis: German utility companies will lose their major revenue source of nuclear energy, which means the government should help them facilitate the adoption of new sources of renewable energy in order to avoid insolvency.

The utility companies in Germany appear to be on the brink of extinction. According to Natalia Drozdiak of the Wall Street Journal, “the country’s energy companies can’t shoulder the cost of a government plan to close the country’s nuclear-power plants.” This not only is bad for employees of these companies, but also could provide many potential costs to taxpayers.

This shock to the companies comes from the government’s decision to close all nuclear power plants by 2022. Drozdiak writes:


In his article “The creeping death of Germany’s energy giants” on DW, Henrik Böhme does a great job explain why this is such a big issue for these companies:

“…German utilities’ age-old business models don’t seem to be working anymore. All they know is big and heavy – they’re used to nuclear and coal power stations guaranteeing billions in profit, year-in year-out, and they seemed to secure their earnings without any trouble. And then they grew fat and began making mistakes.”

With a decision like this, it is important to evaluate both the costs and benefits. The government’s decision to close the power plants by 2022 has the benefits of reducing pollution and potentially saving thousands of lives from a catastrophic event (such as Japan’s Fukushima). However, there are many costs, mainly the fact that these energy companies will have to spend upwards of 50 billion euro to safely deconstruct the plants and dispose of 600,000 cubic meters of radioactive waste. The waste alone could also cause many environmental issues if they are not disposed properly.

The cost of a human life is immeasurable, so it was the right decision to close the plants. However, the monetary costs of shutting the plants down are huge. So what is the best course of action? Many, including Böhme believe the energy companies are going to crumble. This means that taxpayers will be responsible for paying for the process of shutting the plants down.

Perhaps the best solution for Germany would be to use a government intervention program to facilitate the transition from nuclear energy into renewable energy. Since nuclear energy is better than fossil fuels, it would be foolish to simply transform these companies into coal burning firms. Therefore, there needs to be a program of action to transition these large nuclear firms into renewable energy conglomerates.

With a subsidy from the government, the nuclear firms could invest in projects that promote renewable energy, such as wind and solar, while also help deconstruct the nuclear plants. Since many people are concerned that these companies are going to go bankrupt, it would be proactive of both the government and the citizens to assist these companies for the next 7 years. Therefore, there should be a small increase in taxes to invest in renewable energy, which would be used to spend at these companies.

At first citizens could be opposed because they feel it is unfair to pay more when they already have energy in their house. In this scenario, it would be necessary to relay the harmful effects of fossil fuels AND the dangers of nuclear power plants. This would surely improve moral. In addition, it would be smarter to begin taxing citizens at a low rate today, instead of waiting until it is too late and the companies go bankrupt (which would result in the same outcome minus the benefits of renewable energy).

The firms would also benefit because they stay in business and employees keep their jobs. However, the subsidy they receive is for the environment and for their employees, not for the executives trying to retain their large paychecks. This will have to be continuously reinforced to ensure the program works as intended. Overall, this tax increase would help alleviate the pressures of a very severe situation without the firms going bankrupt and losing their energy businesses.

$20K Bonus For Teachers May Not be the Fix for Education

Thesis: New York’s proposal for $20,000 yearly bonuses for exceptional teachers is intriguing, but the focus on only improving statewide scores is the wrong incentive and will add little benefit for such a drastic cost.

Earlier this morning, New York approved a whopping $142 billion budget. Among the many improvements this budget hopes to bring to society, education is perhaps the most prominent. The Associated Press of the Wall Street Journal explain the budget, “increases funding for schools, revises teacher evaluations and enacts new legislative disclosure rules intended to address Albany corruption.”

Leslie Brody of the Wall Street Journal highlights the major changes in education in her piece, “Deal Included Bonuses for Top Teachers.” The budget deal would allow for “highly effective” teachers to receive $20,000 yearly bonuses in hopes to “help attract and retain talent.” To determine who earns the bonus, the Cuomo administration (New York’s Governor) will create a guideline matrix, “based partly on student growth on state tests (and a second test if a district chooses) and partly on observations.”

Could this proposal be the boost the U.S. education system needs? According to Pearson’s Global Education Index, the United States is ranked as number 14. This is far from where we should be since we have been on a steady decline over the past few decades. The New York bonus concept is certainly one to consider as a method to increase our rankings, but ultimately I fear it is too vulnerable to benefiting the teachers without helping the students.

Brody discusses how Unions dislike the proposed bonus incentive:

 “Teacher unions have long argued against such individual merit pay, saying it undermines collegiality and fails to recognize that students’ success depends on a team of teachers.”

This is certainly a concern. Teacher’s main focus should be on helping the students succeed, not to get a bonus. In order to help them succeed, they need to collaborate with one another, not fight in a free-for-all.

I think a greater concern would be a decline in diverse learning environments. Cuomo says the bonus will be based on how students perform on state tests. This means teachers could spend an entire year focusing on test prep materials, helping students get the good test score. However, this will also take away from applied learning, which would help students apply their knowledge to real life.

Finally, I think incentivizing the teachers can easily be unfair. For example, one teacher may have a class full of students eager to learn, while another teacher has a class that is very unmotivated. This means the luck of the draw determines who gets the bonus. Teachers need to help one another in order to bring the best out of all students, which would certainly not occur of one teacher has a good class and simply wants to cash in his/her bonus. Therefore, the bonus should not favor or punish teachers based on some factors out of their control.

Now there are some perceived benefits, the main one being improved test scores. However, if this policy was applied nationwide, I fear the costs to fund such a proposal would be far greater than a marginal increase in test scores. In addition, it would take away from student’s ability to receive a diverse education.

Ultimately, I think this proposal does not fix the U.S. education decline. Rather, I think it provides incentives in the wrong places. The teachers can only do so much when it comes to test scores, and encouraging competition between them could be harmful. I think we need to focus more on how to improve environments at home that could impede a student’s ability to learn. In order to do this, use the funding to encourage after school activities and incentivize the students, rather than the teachers. This would allow for an educational system that is much more student focused and could help the future leaders of this nation.

Households Need to Hold Off On Saving

Thesis: The Fed should help household’s hold off saving until interest rates rise in order to encourage spending and accurately approach economic decisions in the future.

The increase in the U.S. savings rate is now another economic confusion in our current era of low interest rates. According to Jeffery Sparshott of the Wall Street Journal, “The personal saving rate rose to 5.8% in February, the highest level in more than two years.” This news is somewhat confusing, considering that interest rates are at an all time low in order to encourage spending. As a result, this could throw off the Fed’s economic speculations.

The People’s Pundit Daily staff also discuss how spending is dropping below the Fed’s target:

“Economists polled by Reuters forecast consumer spending, which accounts for more than two-thirds of U.S. economic activity, to increase 0.2 percent last month. However, when adjusted for inflation, consumer spending actually fell 0.1 percent last month, which is the weakest reading since April of last year.”

Consumers have pushed the savings rate up to 5.8%, which means they are decreasing the amount of money they can use for spending. As a result, spending has decreased. This may not necessarily seem like a bad thing, since consumers are appearing to be forward thinking and saving more for their future. However, I believe this timing is unfortunate because it is hurting spending at a time when the economy needs spending to push prices up.

If the Fed pushes up interest rates in the near future, then it would further incentivize consumers to increase savings since they will earn more money each year due to higher interest. However, this means spending would further decrease, inhibiting the ability for the economy to stabilize inflation at 2%.

Perhaps the more perplexing question the Fed needs to look at is WHY consumers are behaving like this. In a model where households are rational, we would not see a phenomenon like this because consumers would spend now and save when rates rise. However, I think there are external factors that are driving households to save regardless of what interest rates are. This makes the Fed’s ability to incentivize spending very difficult.

The most obvious factor that encourages saving would be fear. Many people are still fearful of the hard times suffered during the last recession, which is reducing spending and increasing savings. This means the Fed has to implement policies that encourage safety and not fear. Therefore, the Fed needs to reach out to consumers and help them understand how the economy is succeeding at a level that is easy to understand.

I believe another factor that is encouraging saving now is low unemployment. Since many people have jobs, I believe the increase allows for more income to be saved. However, it is hurting spending because wages have yet to increase. Jeanna Smialek of Bloomberg Business describes the phenomenon in her piece “Data-Driven Danger in Fed’s Shifting Natural Jobless Rate.”

“Millions of workers on the sidelines and shifting demographics make it harder to tell just how low the jobless rate can sink before labor supply gets tight enough to stoke wage and price pressures.”

The major issue is the fact that households are saving in a time when they shouldn’t. Now this certainly is beneficial on a person-to-person basis, but it does not help the Fed’s case to increase rates. The Fed needs to do a better job of informing the general population on their economic decisions in order to instill rational decisions in times of low interest rates. In addition, they need to wait for wages to increase before hiking rates because it will allow for larger income that could increase spending even if savings is held constant. Otherwise, the high savings rate will just be another reason the economy is still not stable enough to increase interest rates.