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Three Long Waves
Our economic slump is pushing four years now. The evidence is easy to find: huge deficits, slow growth, mortgage defaults, declining real estate prices, high unemployment and an economy that can’t produce enough jobs. There are less obvious consequences too. Here's a look at three changes that are taking place. None of them good.
A Bubble in Lawyers
An interesting article from the American Bar Association on the current status quo of lawyers coming out of law school, things stink for the new crop of lawyers. In 2008, when the skids were coming off the economy, what did many college graduates do? They thought, “The hell with getting a job in the middle of a recession.” They went to law school instead.
How did so many people get the money to get a law degree? They borrowed it from Uncle Sam of course. The (virtually) unlimited amount of federal dollars for graduate level education was part of the HERA stimulus bill. Now all those new lawyers are looking for a job in a crowded field, and they’re up to their eyeballs in debt. From the ABA article:
-In 2010, 85 percent of law graduates from ABA-accredited schools boasted an average debt load of $98,500.
-Assuming a total debt of $150,000 (the amount currently carried by several thousand law graduates), the total monthly payment is $1,743.46 a month for 10 years. The median starting salary for a lawyer who graduated from law school in 2010 is $63,000 (Debt=40% of take home pay).
-Heavy loans now threaten to consume the future earnings and livelihood of the nation’s young lawyers.
-The influx of so many law school graduates—44,258 in 2010 alone, according to the ABA—into a declining job market creates serious repercussions that will reverberate for decades to come.
-Direct federal loans have become the lifeblood of graduate education, and they shelter law schools financially from the structural changes affecting the profession.
-Given the likelihood of some form of curb in federal student lending, there are gut-wrenching times ahead for law schools.
-Bad things happen when lawyers and law professors stick their heads in the sand.
Rents on the Rise
It’s not surprising that rents are rising. Last year the increase was, on average, only 2.5%. This year it could be double that. People do need shelter, and are forced to rent because:
-Rents are still cheaper than buying
-There is no upside to ownership
-Few have the 20+% down payment required to buy
-Few can qualify for a mortgage given tighter lending standards (FICO scores)
Some data points from Bloomberg (Link).
-U.S. apartment vacancies dropped to a 10-year low in the fourth quarter, allowing for rent increases that are likely to continue this year.
-The vacancy rate was 5.6 percent in the previous three months and 6.6 percent a year earlier. The vacancy rate has fallen for seven straight quarters.
-For all of 2011, 37,678 rental units were completed, the lowest annual total in 31 years.
Rising rents could have a significant consequence on Fed policy this year. Ben Bernanke has sworn not to ignore his obligations regarding inflation. Ben looks at Core CPI and has said repeatedly that Core CPI above 2% would not be tolerated.
Bernanke faces the problem that core CPI has a 21% weight based on “Owners Equivalent Rent”. A 5% increase in this category would, by itself, cause a 1% increase in Core CPI.
Oddly, the lingering recession is the reason for the higher rents. One would expect that rents would be muted while the economy is weak. That was not the case in 2011. Additional upward pressure on rents will put a floor of 1%+ on CPI in 2012. As a result, there is very little wiggle room for all the other components that make up the index if it is to remain around 2%.
This must drive Bernanke crazy. In the end, it will force him to abandon his prior pledge on inflation.
Declining Labor Force Participation
Tomorrow, the Non-Farms Payroll numbers will be released. I think this data series is mostly noise. Monthly changes in employment can’t be accurately measured when the (non cell phone) sampling is done with only 0.01% of the workforce.
I will be looking at the Labor Force Participation Rate (LFP). This important number may have hit a new 30-year low in December. In November it stood at 64.0%.
It’s not surprising that the LFP is in decline. After three tough years, people are leaving the workforce. Some are retiring early and getting Disability Insurance/early Social Security benefits. Some just fall off the grid and work for cash in the black economy. Either way, they don’t show up in the survey data so the LFP falls.This is a terrible development for local, state and federal government tax receipts.
The following chart is from 2007, before the SHTF. This was forecast data for future LFP based on the thinking at the time. Needless to say, we missed the estimates. It’s interesting to note that the current LFP of 64% is about where we were expected to be in 2025. That four-year-old estimate got crushed by a four-year recession.
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If each lawyer removes from society the wealth created by 10 productive people, and only 10% of our population actually produces anything, you can see where we're going.
It's nice to see that the salary of a starting lawyer is closer to that of a starting engineer, instead of double.
A million lawyers in the US, 1 out of 300 people ... hundreds of thousands of them now not employed as lawyers ... and yet it seems even the unemployed US lawyers just mostly want to kiss arse, they dream of being corporate stooges and tools themselves.
You don't find an army of USA lawyers rising up, like in Pakistan, taking to the streets to demand more justice in the system.
No wish to help The People among most of those American lawyers, even when out of work, they remain crass money-grubbers.
A big difference in Continental Europe, very different than in the Anglo countries, is that there are many fewer lawyers here, much less legal harassment or annoyance, and lawyers often make only modest incomes.
Having lots of lawyers is a sign of societal failure.
Go to the Yellow Pages and look at how many pages are advertizing Attorneys.
This is a litigious society because people here are always trying to find a way around what is right. They continually test the system and work the system. Too many scammers. Few want to do honest work. Lies lies everywhere. I can't stand to watch commercials now. Thank God for the Mute button.
More bureaucracy and more regulation will create more lawyers. As an accountant, I can tell You sarbanes oxley was boom for Accounting practices. Many even open sarbanes oxley departments to do compliance work. On the other side, companies also hire their accountant and lawyers to se how to "navigate" it.
An overabundance of lawyers should equate to lower salaries. But, that only happens in a capitalist society.
Bruce, I agree with your assessment of douche bags (I meant lawyers) and labor participation. As for rents rising, it will be limited. Unemployed people can only pay so much in rent. My guess the rise from last year in rent was temporary.
Not too sure about the increase in rent as been temporary. Boarding house have traditionally been the norm in high rent low employment situations. Don't You need a roommate in New York if You want a nice apartment?
Another thing that You might see is more people living at home. Ask any Italian, Indian, or Latin, traditionally people have big homes with 3 generation living under one roof.
I find it interesting that as the US became richer, granpa was sent to the home, and the kids told to get their own place.
Bruce thinks if he screams "inflation!!!" loud enough in the crowded theatre that people will rush to buy $10 box of Milk Duds, $20 bag of popcorn, and $16 box of Junior Mints. What Mr. Krasting doesn't realize is those people came to the theatre with just enough money for the tickets. You don't raise prices on stuff that ain't selling to begin with.
One side of his mouth Bruce says Housing Market will be shit 5+ years, then the other corner of his mouth Krasting says inflation will be out of control. I can only say Bruce has been screaming "inflation!!" for 3+ years now, and EVENTUALLY he's gotta be right. I also forecast that sometime in the next two weeks you'll wake up and the sky will be completely blue outside your door. Don't ask me which fucking day though. Useful info eh???
The politically correct term is transient, the rent increases were transient. Haven't seen those increases here but with home prices so low that you can go cash positive from day one I didn't expect even transient increases.
Transitory.
Hope you're not trying to get us to feel sorry for lawyers, BK. Cause I bet the unemployed ones think they can get a free bankruptcy (do it yourself with your great law degree) and then they learn that student loan debt isn't dischargable in bankruptcy. I can just hear 'em all now: "DAMN IT, WHY DID I HAVE TO BE HUNG OVER DURING THAT CLASS?!?!?!?!"
Too...many....jokes...must...mock....lawyers....
Perhaps one of these newly-minted Legal Eagles can find the loophole necessary to get out from under the Financing...
I can vouch for dark times ahead for my city. As a recently elected council member in my midwestern community of 90,000 with a municipal payroll that is 85% union, we are in dire straits. State and federal funding is shrinking and our property values continue to decline for the obvious reasons. We have doubled our fees and license costs along with an increase in water rates. I read zerohedge religiously and send my fellow colleagues many articles. I keep asking the city administration if I could sit at the table for the labor negotiations and I am told that is not possible because of state labor law. I ask them who will represent the interests of the taxpayer that foots the bill? Some union members are sympathetic because our only option to balance the budget is through layoffs. But, living in a community with a large amount of section 8 vouchers available and those are being filled with people from former Chicago high rises that are being torn down, how many policemen can we afford to layoff to balance the budget? Adding to that problem, our state does NOT allow conceal/carry. Illinois is falling into the abyss. At the height of the bubble my duplex(no mortgage) was valued at 275,000, today it is 145,000. I don't believe I will find any buyers when single family homes sit vacant at 30-45,000 in value. Being that I have more than 3 years left on my term and moving is not in the cards, I now prudently embrace the philosophy: I would rather be tried by 12 than carried by 6. I am not a quitter and I take my responsibilities for my residents seriously. The war is on Bitchezz
Hello Classical - I can offer you two possible new approaches to economic development for your community. First, if you have a Kindle, go to Amazon this weekend Jan 7-8 and download my free book "Who Cares? The Economic Value of Love and Care". You may find some new ideas in there. Second, does your community have any CAFOs (Confined Animal Feeding Operations) nearby. If so, I'll be happy to fill you in on a "Community Energy Island" strategy with numbers that will definitely catch your eye.
Try Massachusetts.
Here, the pensions alone are still expecting 8.25% ROI's. Unions? CBA's are iron clad, with a Beacon Hill State Legislature that is "all-in" in support of CBA's.
Here's the kicker: "By Law" we have built-in property tax increases of 2.5%, every year, the maximum allowed short of an override.While property values are still decreasing, abet more slowly here than the rest of the country. Boston is still way overpriced, but when you have the amount and KIND of universities and colleges that we do, there's plenty of mommy & daddy's footing ridiculous bills for places to live. Throw in a few tech and medical institutions with great tax breaks, guess who pays?
Try and bring this up with anyone on Beacon Hill and you are either summarily dismissed or ignored.
*As of yesterday, our States Highest Court ruled that legal aliens are entitled to jump on the state subsidized healthcare train to the tune of $150 million per year (today's costs). All these programs sound great, but we are way past the ability to pay for them. The financial shell games will continue I guess, as no one here appears to want to do anything seriously about it.
I work in a city like yours and appreciate the candor of your statement and intentions. I've been doing what I can for the econdev officer to reduce waste costs and increase revenues. Hard to stem the loss in property values. When do you expect the force of the economy to overcome the political rules, invite you in to those talks and make real change?
CB, I think the zerohedge articles are having an effect on my elected colleagues but I lose faith when our mayor makes statements that the economy will pick up in two years at our council meetings. I am going to begin doing police ridealongs, captive audience and all that, to slowly inject the dreariness of our economic situation in their minds that hopefully will spread among the rank and file. I have also requested an invitation to come speak at their union meeting, which is not a problem because their labor contract is not now up for renewal. Once again, if I hadn't started reading zerohedge almost 2 years ago I would be of the same mindset as everyone else who has their head in the sand. This site is truly a godsend.
http://victorhanson.com/articles/hanson122211.html
This article, recommended by a reader, details the decline of California. Very sad. When the farms are looted, the food stops flowing. Might be good to pass around Illinois. Best of luck.
Yeah, it sucks, but at least the guy's property taxes stayed low all those years.
I remember back in 2008-09, when the calls for $2000+ gold were being slung around the internet. An anti-gold commentator said something to the tune of: we don't want to see $2000+ gold, because in that America, people will be going to the Wal-Mart to scavange scrap metal, thus, gold will never go that high.
Well, its here, and gold is only at $1600.
G'luck to all.
Good reading for those who think they can "escape" the coming turmoil of the cities. Nobody will be immune nor protected by being out in the boonies, a mile or more from neighbors. Those "networks" will be useless when it takes 20 minutes for an ally to come to the aid of the invaded compound.
That is an extremely powerful article you linked there, small-town and semi-rural America, on the edge of a Mad Max type situation ... Quite unsettling to think of living like that, vulnerable to roaming gangs ... 'A Vandalized Valley' by Victor Davis Hanson in National Review Online.
The joke will probably be on us sooner or later. I’m sure it’s Obama’s fondest wish to put most of them to work in one of his shiny new bureaucracies but damn it, setting up the apparatus of central planning is a little behind schedule.
Maybe some of the lawyers will form feral packs or roam the countryside in Lincoln Town Cars looking for action. There’ll be an app for that – see! American innovation. You’ll be able to draw your iPhone and lawyer-up in the hallway like a gunslinger of old, striking fear into the heart of your opponent (now defendant) when the screech of tires is heard outside…
I can picture this. What is the term to describe laughing and crying at the same time?
reading zerohedge.
Ding! Ding! Ding! Ding! +100. :D
hysteria?
childbirth?
Voting?