Debits and Credits

Business Week pushes parents' anxiety buttons; Ruth Simon on subprime, etc.

In a special section called “The Cost of Kids,” tries to quantify the cost of bringing a baby to adulthood today. It contains some interesting information, although the magazine could use some help with its Nebraska geography.

The real problem, though, is that the section pushes that most reliable of hot buttons—middle-class financial anxiety—and provides little help to all these newly anxious prospective parents it helps to create. Instead, it provides the usual, unrealistic solutions, like suggesting that they move to Arapahoe, Nebraska.

In a précis for a slide show about the cost of children, the magazine suggests:

From adoption to auto insurance, health care to housing, raising children can cost parents more than $700,000 per child from birth through the age of 21. Take a look at the breakdown of the individual costs—and where you could save money.

The number is meant to shock, but closer examination reveals how it is jacked up by things most parents won’t need to worry about, like adoption, in vitro fertilization, and private school. How much it would cost for an in vitro adoption? A fortune, we bet.

The accompanying article offers a more pared-down tally:

A child is priceless—but raising one can break the bank. Children born in the U.S. today will cost their parents more than $338,000, on average, by the time they graduate from a public college. That’s according to, based on College Board and Agriculture Dept. data.

These forecasts make for sexy reading because we tend not to think in cumulative terms about something we invest in over twenty-one years - even less so when the investment is our progeny. Getting numbers that actually mean something is difficult because of regional differences in the cost of health care and housing, and wide-ranging variables in what a family and child might need, but might have done more to narrow its cost range of $338,00 to $700,00.

Another article in the package, “Great Places to Raise Kids—for Less,” addresses the task of finding “family-oriented neighborhoods with the most affordable homes and the best schools.” With OnBoard, a New York-city based real estate research company, it ranks the top fifty towns.

The results spanned the country: 11 places in Nebraska, 7 in both Illinois and Ohio; 6 in New York; 4 in Tennessee; 3 in Michigan; 2 apiece in Georgia, Kentucky, and Texas; and 1 each in Alabama, Mississippi, and Oregon. And on a semirural patch of land seven miles northwest of Cincinnati, we found the clear winner: Groesbeck, an unincorporated suburb that shares its government, law enforcement, and school system with the Colerain Township.

Groesbeck wasn’t first in any of the five categories we judged, but a close look at the town and its people shows a community that provides a good measure of all the things a child needs to grow and prosper. It’s not the largest suburb of Cincinnati (it’s home to about 7,200 people) or the wealthiest (the median household income is $49,235, according to the most recent Census Bureau data). Pay Groesbeck a visit and you’ll find one-floor ranch houses and multifamily condo units lining the streets, with the occasional patch of farmland dotted with cows, chickens, and barrels of hay.

Yuck. Sounds like a nightmare to us, but there’s no accounting for taste.

The results are presented in a slide show called “Best Places to Raise Children, 2007,”

Now, we think Nebraska is a perfectly idyllic place. But the presence of eleven towns in Nebraska (Arapahoe, Waverly, Lawrence, Bartlett, Petersburg, Newcastle, Diller, Oakland, Loomis, Arlington, and Davenport) on this list of fifty towns from the entire country seems to be a sure sign that Business Week is reaching.

Geographical errors don’t help. Arlington, Nebraska, is about thirty miles north of Omaha, not fifty, and the plot on the map is in the bottom-center of the state, when it should point to where the town is, in the middle of the eastern side. Newcastle is in the northeast of the state, and the plot shows it in the southeast. The photo for Davenport and Waverly is the same, which cannot be, unless Nebraska is home to a parallel universe, as people in Oklahoma have long insisted.

These errors may be the fault of OnBoard, but still, if Nebraska is such a great place, where everyone should move, a bit more care is in order.

More importantly, the whole thing is framed in a way that makes it seem like people should actually move there. But everyone knows there’s a reason housing is so cheap—because people are leaving. People are leaving because they can’t get jobs.

Listen, we don’t mind these kinds of features. But with the time and energy that obviously goes into them, why not put some of Business Week’s intellectual muscle behind the topic and think beyond the obvious: like suggesting readers start saving early or move to Nebraska because it is cheaper than, say, New York.

Why not ask, for instance, why birth rates in countries like France, have been growing for more than a decade (1), while U.S. birth rates have been in decline for the same period?

We’d love if the piece explored some of the new thinking on the social safety net, such Jacob Hacker’s The Great Risk Shift, who describes the shift in economic risk in recent decades from institutional arrangements onto the fragile balance sheets of American families.

This work has become widely disseminated, mainstream thinking and is challenging the stale nothing-can-be-done, the-market-must-decide paradigms about such issues as health, unemployment and other forms of insurance, and other risk-mitigation mechanisms. These mechanisms actually encourage entrepreneurial risk-taking in a market economy.

It’s time for the mainstream business press to start challenging long-held taboos about shared risk, instead of resorting to tried—and tired journalistic—formulas.

We liked Ruth Simon’s page-one story in The Wall Street Journal that says $362 billion in subprime mortgages are due to “reset,”’ i.e., “go up,” next year. Funny how they do that, no matter what the Fed does with interest rates. Higher interest rates mean the rate of foreclosures will only pick up from here.

We learn new things: about 150,000 mortgages are resetting every month. About 1.35 million homes will enter foreclosure in 2007, and another 1.44 million next year, according to our friends at the Mortgage Bankers Association.

And get this:

The projected supply of foreclosed homes is equal to about 45% of existing home sales and could add four months to the supply of existing homes, says Dale Westhoff, a senior managing director at Bear Stearns.

So, roughly speaking, half the homes on the market could be in foreclosure? Wow.

We learn a new term: the “2-28” loan. What’s that? A loan with a fixed rate for two whole years that then “adjusts,” (yet another word for “go up”) every year, for twenty-eight years! Are they kidding? Listen to this, from a Fed governor:

In a speech earlier this month, Federal Reserve Governor Randall Kroszner explained how a typical 2-28 subprime loan issued in early 2007 might work. He said the interest rate on the loan would start at 7%, then jump to 9.5% after two years. For a typical borrower, that would add $350 to the monthly payment.

Thanks for that explanation, governor. We see that economics Ph.D. is serving you well.

Good job, Ruth Simon.

Still, are we the only ones who sense a piece of the banking story is missing? Stay tuned.

We also liked a column by Martin Wolf in last Wednesday’s Financial Times because it questions the very definition of a recession and helps address the widespread economic concerns that exist despite reasonably good macroeconomic statistics. He focuses instead on the idea of a “growth recession.”

Is the US going to experience a recession? Two answers must be given to this question: nobody can be sure; and it does not matter. A much more important question is whether the US economy continues to experience a “growth recession”, by which is meant a lengthy period of sub-trend growth. The answer is that it will.

The standard US definition of a recession is two quarters of negative economic growth. This demands both too much and too little: too much because it requires an absolute fall in output, which is an infrequent event in a growing economy; too little, because it is consistent with rising unemployment and declining capacity utilization. But a lengthy growth recession is likely to be far more disturbing even than a sharp recession, provided the latter ends swiftly.

He points out that the economists say the trend rate of growth of the U.S. economy is around 3 percent a year. Anything less would be a growth recession, even if it’s still growth.

Wolf takes in various indicators that have become a litany: housing prices have fallen, write-offs from bad mortgage lending is expected to be about $150 billion, credit remains tight, oil is near record prices, and the dollar still tumbles.

But what’s helpful is his focus on an important driver of the U.S. and world economy: the degree to which weakening U.S. domestic demand is offset by growing exports.

What happens now depends on two things: how weak domestic demand turns out to be, and the extent to which any shortfall is offset by a stimulus from net exports. The latter is “the great unwinding”: the re-import by the US of the stimulus it imparted to the rest of the world between 1996 and 2004, when its domestic purchases grew faster than GDP and the current account deficit exploded upwards.

Wolf cites a new study
by Wynne Godley of Cambridge University that says an improvement in net trade will offset at least part of any lack in demand.

A plausible view of the future, then, is that the US will experience a lengthy period of sluggish growth in domestic private demand, partially offset by fiscal expansion and an improvement in net exports. It is via the latter effect, moreover, that monetary policy should have its principal impact, since households are unlikely to borrow much more while their houses decline in value.

This is the great unwinding. So what does it mean for the rest of the world? It means that the rest of the world will adjust either by increasing demand, relative to potential supply, or by reducing its supply relative to demand. The former adjustment is clearly the more desirable.

This is a helpful look at the big picture.

1. France touts rising fertility rate, bucking trend of graying Europe
Associated Press
16 January 2007

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Anna Bahney is a Fellow and staff writer for The Audit