This is the lecture, please follow to answer all question in the picture below: FORCES, EVENTS, REASONS BEHIND THE DROP IN THE U.S. HOUSEHOLD SAVINGS RATE: earlier, we examined the potential harms of a 50% marginal tax on the average American household's next $1,000 pay raise. Another harm is tied to an alarming development over the past 25 years: the drop in the typical, or average, U.S. household's savings rate, and thus the total household savings rate. The actual amount of money that the average household saves varies from household to household, obviously, and it is notoriously difficult to measure, as many people are very secretive about financial matters. Even people 'in love' with one another may have secret bank accounts and other 'slush funds'---it happens. Yet, it is pretty clear that the savings rate has dropped by an incredible amount in the past 25 years. I would like to

model that suggests the average household in America did in fact save about 8% of their income 25 years ago, while saving only about 4% of their yearly income at present. You may have heard about the famous testimony of Janet Yellen, former Chair of the Federal Reserve, a few years ago, when she stated that roughly half of all Americans have less than $400 in liquid funds to pay for an emergency, such as a car repair. Now, any time we try to study the mass behavior of 330 million people over 25 years, we may run into problems. In any given year, (historical average) roughly four million babies are born in this country, roughly 1.1 million people move in to the U.S. legally, and perhaps .2 to .4 million people move in extralegally. These numbers may be quite different in 2020. Given that roughly 2.4 million people die every year, we have, over a 25 year period, a HUGE change in "the cast of characters" in this country. Thus, I would like you to visualize --- and study --- a family that was headed by a woman, age 30, 25 years ago, and the SAME family, headed by the SAME woman, age 55, today. This family, on average, has suffered a drop in its savings rate. This family will be placed in the 'middle' of the income spectrum. We will

model wherein this family generates a gross income (before taxes) of $61,000, pays $21,000 in total taxes, federal, state, and local, thus earns $40,000 in net income, and spends $38,500 (roughly 96% of its net income) and saves $1,5000 (roughly 4% of its net income). This family saved about $3,000 per year, in inflation adjusted dollars, 25 years ago. Every family in America makes more than this or less than this, spends and saves more than this or less than this, obviously. This is just a model. Many families save MORE money now than they did 25 years ago---but MORE families save LESS money. This "model" family had been saving 8% of its income 25 years ago. Now it saves about 4%. What happened? Let us examine the many reasons, or FORCES BEHIND THE DROP IN THE SAVINGS RATE: #1. A 3% pay raise does not equal a 3% rate of inflation, owing to the fact that a 3% pay raise AFTER TAXES will be only about 1 and 1/2%. Let's look at some numbers: Given the numbers I have put in our model, this family will earn $3,333 in net income in one month, let's say Jan. 2018, and it will spend one twelfth of $38,500, or $3,208 on the "basket" of products and services it buys in Jan. 2018. They are saving $125 per month. The basket consists of housing costs (rent or mortgage), food, both grocery store and restaurant, the PG&E bill, the water bill, a car payment, medical insurance and out-of-pocket expenses, a few credit card bills (online purchases) and a few other bills as well. THE RACE ANGAINST INFLATION does not go well for this family: a 3% inflation rate (historical average) will drive up the cost of this basket by about $96 per month over a 12 month period: Under our model, the basket rises in cost from $3,208 in Jan 2018, by $96 more, to $3,304 in Jan. 2019 to $3,400 in Jan. 2020 to $3,496 in Jan. 2021. NET INCOME AFTER TAXES will rise only $50 per month over the course of a year, as the family's $100 per month pay raise (about 3%) will have about $50 TAKEN OUT IN TAXES: FIT, FICA, SIT, SALES AND SPECIAL. The arithmetic progression on the net income side will be: $3,333 in Jan. 2018, $3,383 in Jan. 2019, $3,433 in Jan. 2020 and $3,483 in Jan. 2021. Under this model, in Jan. 2021 this family will be spending more money, $3,496, than they earn in net income, $3,483. This family went from saving $125 per month to "dissaving" -$13 per month, just three years later, as they "lose" the race against inflation. A 3% pay raise does not 'keep up' with 3% inflation---not after taxes. Many families may outperform inflation. One reason to earn a college degree is to obtain a job that is not only high paying, but also offers regular pay raises that outdistance inflation --- EVEN AFTER TAXES. Another way to 'beat' this trend is to buy a con

nd PAY IT OFF over 30 years. The housing cost component of the "basket" can drop a great deal when that last mortgage payment is made. This was called 'The American Dream". Yet, tens of millions of families in America are being "squeezed' by inflation, as their pay raises do not keep up. FORCE #2: A 1% pay raise does not keep up with 3% inflation. There is no law that says as a worker in America will earn a 3% pay raise from my employer simply owing to the fact that inflation is running at 3%. Many tens of millions of workers earned no pay raise at all from Feb. 2019 to Feb. 2020---and THAT WAS BEFORE THE RECESSION! TENS OF MILLIONS of American workers will suffer a DROP in income from 2019 to 2020, and that is true even if the economy recovers later in the year! We will look at this later. Imagine this hypothetical household earning pay raises of $33 a month---and the five major taxes STILL WANT THEIR CUT---THEIR HALF! A monthly pay raise of $17 after taxes, over a 12 month time frame, clearly cannot match a rise in the cost of the basket of $96 a month, over 12 months, given our model. Let' say that this model represents the lives of tens of millions of American families. FORCE #3: Over the last 25 years, new technology has made it 'easier' to spend money: 25 years ago, there was no internet---well, there WAS, but it was not 'monetized' - Amazon got started in 1994 as a small company. Even before the internet, there was the Home Shopping Network, which is still popular: all of a sudden, YOU DID NOT HAVE TO LEAVE YOUR HOUSE IN ORDER TO SPEND MONEY----YOU COULD DO IT LYING IN BED! In the old days, you would have to get out of bed, get dressed, get into some mode of transportation and GO TO A STORE in order to spend money---the EFFORT ALONE placed a curb on spending! Now, I can buy an item at 2am while drunk, or stoned, or both.... and it may arrive the next day! In the old days, bad weather would cause a dip in household spending. Now, that is not as great a barrier. FORCE #4: WHAT ABOUT IRA PLANS AND 401 (k) PLANS? Here I am, discussing the drop in the savings rate over the past 25 years, among the lower 80% of all income earning households in America, yet over the same 25 year period, these employee savings plans have flourished. How? Why the disconnect? Well, many workers do not have access to a 401 (k) type plan at work---their employers do not participate. Other workers have access to a plan, but choose not to participate. Perhaps they know they will not be staying at that job forever. When they leave, they'd have to worry about moving the money - this may be called a "portability" problem. Perhaps the employer is not 'advertising' the plan properly. There may be other reasons. An employer may offer a savings plan to employees in order to ATTRACT AND RETAIN high quality workers, especially if the practice is standard in the industry. Yet, a 401 (k) plan is NOT a pension plan. If I am part of a pension plan at work, my employer may take 8% of my salary from my paycheck. I do not have to act affirmatively to save money---I do not have to

nything---except, of course, not get fired! In theory, a 401 (k) plan can work as follows: IF I CHOOSE TO PARTICIPATE---IF I CHOOSE TO SAVE $1,000... THEN MY EMPLOYER MAY "MATCH" it with another $1,000--- or more. This combined $2,000 may be put in a savings account, a bond fund, a stock fund, a REIT, or some other vehicle. It will grow on a tax-delayed basis. When the worker takes the money out, starting at age 72, or earlier, she will be taxed on that amount AT THAT TIME. In the recession of 2008-2009, and again in 2020, some employers STOPPED OFFERING THE MATCHING AMOUNT. This does not help the national savings rate! A clever worker may 'fully fund' her 401 (k) savings plan, saving $1,000 with her RIGHT hand.... but at the same time this person may be 'overspending' with her sneaky LEFT hand by charging purchases on credit cards in excess of her wage income. This is why it is misleading to look only at a worker's 401 (k) activity. This person may "look like" she is saving $1,000 per year, yet if we look at BOTH hands, she may be 'dissaving' $1,000 a year--- or more. Yes, 401 (k) participation rates are higher now, compared to 25 years ago, ESPECIALLY AMONG HIGHER INCOME WORKERS. Yet for the "lower 80%" of income earning households, the savings rate has dropped. FORCES #5 and #6: INTEREST RATES ARE LOW FOR SAVERS, AND INTEREST INCOME IS TAXED--- FIT and SIT--- (usually). Interest rates for savers are at or near all-time lows. Let's say someone saves $100,000. If she places this money into a bank account, the bank may offer her an interest rate of 1 or 2%---more likely, 1%. Thus, she may report interest income of $1,000 for the year. This does not sound like a very good reward for her noble behavior. To add insult to injury, this low $1,000 in theory will be subject to the FIT and the SIT. If she is single, with no kids, earning $61,000 in wage income, this 'extra" $1,000 could be considered to be traveling in the 22% FIT bracket and the 8% SIT bracket. Thus, this paltry $1,000 is taxed at a combined rate of 30%---she sees a tiny $700 reward for her noble behavior. What if the bank would pay her 7% interest, and there was no tax on that $7,000 in yearly interest income? Would more Americans save more money each year? What is a household's motivation to save money? We will examine this in greater detail later. FORCES #7 and 8: The number one reason to SAVE money for many young Americans 25 years ago becomes the #1 reason to SPEND money 25 years later: by that I mean that, 25 years ago, a young person, or a young couple, just out of college and starting a career, may have been in a position where they may have been saving up to buy their first condo or home. In the old days, they may save up to 50% of their wage income to put together a down payment, sacrificing, even living with relatives, when otherwise they would not. Now, that is still possible today, but less likely. Now, many young people are delaying getting married, having babies, and buying a condo. That may be a good thing. Part of this may be caused by the fact that the cost of a condo has been rising faster than the rise in income for many households, particularly in our area. Imagine a house in San Jose that may have been purchased in 1983 for about $140,000. Let's say that the price of this house rises about 7% per year, on average, for many of the past 40 years. Moreover, let's say that the income of the average U.S. household may be rising about 3% per year. The price of a home may double roughly every ten years under this model: $140,000 in 1983, $280,000 in 1993, $560,000 in 2003 (this is just a model).. and on track to hit roughly $1.1 million in 2013 except for the fact that the 2008-2009 recession knocks down con

nd home prices by up to 30 % or more. Yet, this home's price may rise from $450,000 in 2010 to $900,000 in early 2020. We covered this already in FORCE #1, to a certain extent. Yet, the fact that housing costs have been rising faster than the average income of the "lower 80%" of all income earning households---in many popular metro areas --- is a huge factor contributing to this drop in the savings rate. Many people in their late 20s and early 30s DO NOT EVEN THINK ABOUT SAVING FOR A CONDO OR HOME. NO ONE in their social circle is saving up for a condo. Instead, owing to a change in our culture, many of these same people desire, and buy, LUXURY cars. Let's define a luxury car --- or SUV or truck ---as a car with a price tag in excess of $50,000. Forty years ago, these cars were called 'head-turners'----if you saw one on the road, it was a big deal---they were rare. YOU WOULD NOT EVEN CONSIDER BUYING A $60,00 CAR UNLESS YOU HAD $60,000!! Car loans were much more difficult to obtain, true, but much of it was in the minds of the buyers---people did not even entertain THE IDEA of buying a luxury car. In the old days, THE car in this segment was the Mercedes Benz automobile. Now, the segment is crowded with brands such as Lexus, BMW, and many others. The rise in sales volume of these cars greatly exceeds the rise in population and income over the same time period. If I am driving up 101 north, I may see a luxury car to my left, and another to my right. Did everybody get rich, except me? The answer is no: luxury car companies have lowered the down payment requirement and extended the terms of the loan?the average car loan is now 69 months---it was 48 months several years ago. They also changed the way these vehicles were marketed. I recall ads for Mercedes Benz automobiles that tout how affordable they are. People who had no business buying these cars were buying them in record number?up until March 2020. The 90 day delinquency rate on ALL car loans reached a modern-day high in early 2020 --- AND THIS WAS BEFORE THE RECESSION! IMAGINE HOW MANY CAR LOANS WILL NOT BE PAID BACK THIS YEAR!! Banks are setting aside reserves in anticipation of all of these 'nonperforming' loans. If a family buys a luxury car?more likely an SUV or a big truck---for $60,000, let's say, the monthly payments on the vehicle can approach $700 per month. Also, insurance is higher, and maintenance is also quite high: to maintain the warranty, often even an oil change must be performed by the dealership---for well over $100 or even $150. All told, this vehicle may cost $1,000 per month to own and maintain?more than double your car or my car in many cases. So: imagine a high-income family: they earn a gross income of, say, $150,000 and a net income after taxes of about $100,000. They should not go bankrupt. Yet many do. We

little research, and we find TWO luxury vehicles in the driveway. Together, they cost $2,000 a month, or $24,000 per year, to own and maintain. This family ends up spending $110,000 per year... more than their net income. In theory, they cannot

forever, and in reality, they do not. Many car loans have been made to families who somehow obtain the loan, but cannot and do not make the payments. The entity that generated the car loan must ask for the car to be returned---or repo (repossess) the car. If you are ever at a party, and you meet some guy who 'repo's' cars for a living, sit down next to him and ask him for his favorite stories. You will not be disappointed. I have met two people in my life who 'repo'd' cars--- but they did not stay in the business for very long. Thus, a 'change in our culture' allows for the societal 'pressure' to influence many young people with good incomes to SPEND MUCH MORE money on luxury cars, rather than "save" the money to put down on a new condo. They choose instead to live with family members in much larger percentages than the same cohort did a generation ago. FORCE #9: Great Depression survivors are decreasing in number. People who lived through the Great Depression (1929 to 1941), by definition, must have been VERY young back then and must be VERY VERY old now. Many were on track to go to college, but did not, as their family finances were wiped out. A person born in 1935 may have seen her parents age 30 years in those 12 years. Many banks were wiped out, so many savings accounts were wiped out, thus ushering in FDIC protections, social security, and other social programs. Unemployment hit 25% AND STAYED THERE FOR MANY YEARS, unlike what is happening in 2020. If a person survived this, often her attitude toward spending money was altered forever. Combine this with the fact that a house was very inexpensive at the time: a house in the Sunset district in S.F. sold for $17,000 in 1955. A person often could secure a good job AND KEEP IT FOR 30 YEARS: Same job, same spouse, same house, from 1955 to 1985---this is a formula for wealth creation. This person retires in 2000 at age 65, her house is paid off... and she ends up spending only 70% or 60% OR EVEN ONLY 50% of her net income! This person is a super saver! Yet, when she dies of old age, our country loses that STEADY STREAM OF NEW, EXTRA SAVINGS EACH YEAR. Her wealth is inherited, but her children do not save "new" money every year. I want you to think of yearly household savings as a stream of water being pumped into a backyard swimming pool---the loan pool, let's call it. When this old person dies, the flow of savings?of water going into the pool?is diminished. There is no force in the universe to change this. This is also true with many people who were born in another country, and move here. They often save more money than the national average---but their children do not. When these people die of old age, the yearly savings rate in our country drops. FORCE #10: "Home Equity" loans: from 1994 to 2007, and from 2010 to early 2020, Americans were inundated with ads trying to get them to borrow money "against" the equity in their homes. Home equity loans really did not exist 40 years ago. Let's say we are looking at a person who purchased a condo or home in San Jose several years ago?they were in the 'right place' at the 'right time' so to speak. In theory, this person could borrow, say, $60,000, spend it, and thus appear to an economist as generating a net income of $40,000 and a consumption (spending) level of $100,000 for the same year. This person is 'dipping into' the loan pool at a rate of $60,000. What did this person spend the money on? Maybe a luxury car. Maybe tuition for their 20 year-old daughter at Stanford or some other private college. Some Stanford students have protested the high tuition for the 2020 year. They do not believe they --- and their families -- should pay full price for an online format. You must form your own opinion on this matter. If 40 people walk in to a room, and they each save $1500 on average, the entire room is saving $60,000 for the year. Visualize some guy walking in --- late--- and he just INHALES the entire $60,000 by borrowing and spending it ---dissaving it--- the entire room now saves $0 total for the year. We need only 3 or 4 or 5 people per 1000 people to

in order to bring down the overall savings rate. FORCE #11 CREDIT CARDS! The credit card explosion over the last 25 years has been extraordinary. Now, in 2020, banks have cut back on issuing new credit cards, and thus they have cut back on extending more loan money to American households, and this is to be expected. Yet, over the past 25 years, our economy has seen: more credit cards per person, higher limits per card, credit cards are now accepted by more merchants (sellers), and a change in our culture where maybe 40 years ago it might have been 'unusual' for a person to HAVE a credit card, whereas now it would be quite unusual for a person to NOT have a credit card--- or four or five. Unlike a debit card, or an electronic transfer of funds, which usually require a 'compensating balance' in a bank account, the use of a credit card represents a LOAN made by a lender to a borrower---thus enabling the household, the borrower, to SPEND MORE MONEY PER YEAR THAN THAT HOUSEHOLD GENERATES IN NET INCOME FOR THAT YEAR. Credit cards facilitate online purchases. Almost every merchant (seller) accepts credit cards. Credit cards may be necessary to pay for a business trip: a worker may charge her plane ticket (in the old days), her rental car or Uber ride, her food, and her hotel room with a credit card, and get reimbursed by her employer based on the bill. In the old days, a business traveler may purchase all these services and products with a COMPANY credit card. At one point it became difficult to obtain and maintain certain jobs WITHOUT having and using a credit card. The use of credit cards may help 'build up' a person's 'credit history' so that a person may qualify for a car loan, home loan, or business loan later in life. Credit cards offer 'rewards' programs that can mean real money for the customer. Yet, tens of millions of people in our country do NOT own any credit cards---or have a traditional bank account. We will discuss this model of 'two Americas' later in the course. While many people pay their credit card bill off THE MOMENT it is due, tens of millions of families 'float the balance' and borrow the bulk of the money, at a very high interest rate?perhaps 18% or more on an annual basis. I want you to visualize a downward slope--- a ski slope if you will--- where tens of millions of families are at various stages, sliding down the slope. These families earn $41,000 in net income per year, yet on a yearly basis, they spend $42,000, or $43,000, or $44,000---for various reasons. 40 years ago THEY SIMPLY COULD NOT

. Some families owe $5,000 on their credit cards for over 30 days... millions of others owe $10,000 for over 30 days, still millions more owe $15,000, millions more owe $20,000, $25,000, $30,000, even $40,000 in credit card debt for over 30 days. We may call this 'the slippery slope of consumer installment debt", and it has exploded in the past 25 years or so. At some point, this family will, more likely than not, file for bankruptcy protection---they cannot pay this debt back. I cannot spend $4,000 per year MORE than my net income, for 60 years in a row, then die of old age owing $240,000 in combined credit card debt. Not usually, anyway. In other words, there is a 'limit' to my overspending. A family that wakes up with a combined credit card bill of $15,000 will pay almost $3,000 per year in 'interest-only' payments---just to finance the debt. This family must pay about $250 per month just to make the minimum payments on the loan. $250 per month will finance a decent car?it is real money. We now have credit card debt that rivals total student loan debt: roughly $1.5 trillion for our nation. Clearly, our country has a problem with families that are spending more money than they are bringing in in net income, and this was before the recession and pandemic of 2020. This combined debt will only grow in the next 12 months. FORCE #13: BANKRUPTCIES: Studying bankruptcies is like studying a plane crash---AFTER the plane has crashed. Over the past 25 years, we have seen a rise?more than a doubling--- in the volume of bankruptcies, both personal and business, that has outpaced the rise in population AND the rise in income over the same time period. Before the recession of 2020, we would see roughly one million bankruptcies per year in this country. 40 years ago, declaring bankruptcy was a lot more rare---and maybe this was good, maybe not. We live in a country that ENCOURAGES RISK TAKING---we encourage the creation of new businesses---and we will continue to do so. Our government has taken unprecedented steps --- both in the fields of Fiscal Policy and Monetary Policy---to alleviate the human misery generated by the pandemic and the recession of 2020. We will have much more on this later in the course. There will be a record number of bankruptcies this year, obviously. Many of the 30.2 million small businesses that existed in the U.S. in Feb. 2020 will not be around in Feb. 2021. If we focus on personal bankruptcies, we must do it from a historical perspective. NO ONE is suggesting that we 'punish' the American household for declaring bankruptcy if it is necessary to do so. I am merely reporting that there has been an evolution in this field, and that the number of bankruptcy filings has risen at a dramatic rate over the past 25 years. FORCES # 14, 15 and 16: visualize a person, age 40, who has two parents, both age 66. He has recently helped them sign up for both Social Security benefits and Medicare benefits. He is close to his parents. He knows that they saved $0 per year for the past 40 years. Let's say they own a house 'free and clear'---no mortgage payments. They both worked at Ford Motor Company, and both have earned pension benefits (one may call their pension a form of 'forced savings'). He sees that they are okay financially. He is at the point where he may want to consider his own financial situation. Yet, he says to himself: "Why should I save any money? My parents didn't. Social security, Medicare, and a pension will take care of me in my old age---just as my parents are being taken care of". Let's examine why he may be wrong: we will look at Social Security (SS) benefits in greater detail later in the course. Roughly 70 million people receive roughly $1,500 per month (on average) in SS benefits, including his parents. In 1983, our government, under president Reagan, cut future SS benefits (and raised FICA taxes a LOT) for everyone born after 1955, in a very clever way: they raised the age of eligibility for full SS benefits from age 65 to age 67. A person turning 65 this year, in 2020, is set up to receive "full" SS benefits (they will earn more if they wait to collect until age 70). Yet, this guy will not receive 'full' benefits until age 67. Here is what this means for me and you: If I die at age 75, in theory, I will receive benefits for 8 years instead of 10 years. This represents about a 20% cut in my lifetime benefits---after working for 50 years and paying FICA taxes for 50 years. This means that I had better SAVE MORE MONEY THAN MY PARENTS DID. Medicare is more complicated: Medicare is our government-run health insurance program for over 50 million seniors. For about $150 per month, a person 65 or older receives health insurance from our government. My sister is on Medicare. Yet she finds it necessary to spend $300 a month for 'supplemental' insurance. She was informed that there are gaps in Medicare coverage: a visit to the hospital that may result in $100,000 in medical bills may result in her having to pay $20.000---or more---'out of pocket'. Medicare is not perfect. Contrary to this movement in our country that may be called 'Medicare for all', it may be necessary for our government to raise the age of eligibility for Medicare from age 65 to age 67 --- just like with Social Security benefits. Once the pandemic and the recession are in the 'rear-view mirror', our government will be faced with a huge rise in the Debt (it was 23 trillion dollars in late 2019 and may hit 27 trillion dollars by late 2020 or early 2021). MUCH more on this later in the course. If our government finds it more difficult to borrow money from financial and capital markets down the road, it may be faced with some tough decisions?including cutting future Medicare benefits. This is a possibility. I would advise this 40 year-old man to save more money than his parent did, in order to pay for medical bills that his parents did not have to pay for. Clearly, a person who is 66 years old right now, in 2020, is being 'treated better' by our government and our society, than a person who will be 66 years old in 26 years---or in 46 years. Finally, if this person thinks he is in line for a pension, he is probably mistaken. VERY FEW NEW JOBS OFFER A PENSION. Most new jobs --up until March 2020?are, or were, created by small businesses, which had accounted for about half of all jobs in our country---until March 2020. If these businesses 'bounce back' later in the year, and start hiring again, very few of those jobs will have a pension. While it is possible for this 40 year-old man to obtain a job with pension benefits, it is less likely every year. It is more likely that while his parents earn pension benefits, he most likely will not. Also, if he thinks he is going to inherit "all" of his parents' wealth, he may be wrong: if either parent ends up in an elder care facility, the monthly bills may exceed $7,000 per month, thus 'eating away' at 'his inheritance'---it is probably a good idea for him to NOT count on inheriting any money. We need to investigate proposals to raise the savings rate for this person, and for all Americans. The drop in the average savings rate from 8% to 4% causes MANY more harms to our economy that any good.

1. Please list and discuss ten of the events causing the drop in the average U.S. household's savings rate over the past 25 years. Which three events may be the most powerful, in your opinion? Why? 2. "A person who is 66 years old right now, in 2020, may be 'treated better' by our government and our society, compared to a person who will be 66 years old 46 years from now." Please discuss three reasons why this statement may be true. How do you feel about this fact? Why? 3. In the past 25 years, for many families, the down payment requirement on cars has been lowered, and the payment period on a typical car loan has been extended from 48 months to an average of 69 months. In your opinion, is this development "good" for our economy and our society? Or bad? Why? How to Submit