The Meltdown Lowdown, No. 11

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Dean Baker
The American Prospect Online, June 27, 2008

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This week in economic news: Airline CEOs have some odd ideas about customer service, Exxon gets a break from the Supreme Court, and many middle aged families have very little savings.

Do Airline CEOs Suffer from Baggage on the Brain?

The U.S. economy suffers from a plethora of really bad ideas coming from the top echelons of corporate management. For example, last spring Circuit City thought it would be clever to fire most of their experienced salespeople and replace them with new hires making $9 an hour. It apparently never occurred to the folks on top that one of the main reasons people shop at a store like Circuit City, rather than buying over the Internet, is so that they can talk to a salesperson who knows something about the product.

Circuit City sales and profits plummeted. Later in the year they tried to rehire many of the salespeople who they had earlier fired. The company is now hoping for a takeover by Blockbuster.

I could talk about the super-rich Wall Street clowns, but let's just get right to the airlines. American Airlines and United, two of the country's three biggest carriers, have decided to charge passengers for even one checked bag.

Here's the problem. As regular flyers know, the airplanes don't have enough space in their luggage bins for one carry on bag from each passenger, especially if they're large. However, these airlines have now given their passengers a strong incentive to avoid the checked baggage fee by to carrying on as big a bag as they can get away with.

So, everyone comes on board a plane with their big bags. The last group of passengers finds that there is not enough room for their bags. The flight attendants then take them from the passengers, telling them that they will be checked, and in some cases they will be charged (where the airline determines that the baggage was over their size limit).

This makes the passengers angry, possibly causing them to get belligerent with the flight attendants. This will also make the planes late, since there will have to be a rush to check the extra luggage at the last minute. It is also likely to cause the airlines to lose flight attendants, who don't get paid very much to begin with, and really are not going to enjoy having to deal with angry passengers.

My prediction is that American and United change the policy before Thanksgiving. The executives who made the dumb call, of course, will do just fine.


Another Good Day for Exxon

Exxon, which already has been suffering with record profits due to soaring oil prices, just got handed another $2 billion by the Supreme Court. The Court reduced Exxon's punitive damages from the Exxon-Valdez oil spill in Alaska from $2.5 billion to $500 million. This is the second reduction -- the trial court's original $5 billion award was halved by an appellate court.

In case anyone had forgotten, the basis for the punitive damages was the fact that Exxon had allowed a lapsed alcoholic to captain its tanker. The tanker had to make a difficult passage through an environmentally sensitive area. At the time of the accident, the captain had turned over control of the ship to an inexperienced junior crew member. He had gone below deck after having consumed 5 stiff drinks.

The Supreme Court's limit on punitive damages might cause people to reflect on the care we can anticipate from the oil industry in the event they get their dream and President McCain lets them drill everywhere.


Bursting Housing Bubble Sinks Baby Boomers and Granny Bashers

What happens when families do not save in their peak saving years, and their home, their major financial asset, plummets in value? That's right, they get to retirement with no money.

The Center for Economic and Policy Research, which I am co-director of, projects that the median family between 45 and 54 in 2009 will have just $98,400 in wealth in 2009, including the equity in their home.

Of course half of the baby boomers will have less than the median wealth. This means that most of the late baby boomers are likely to reach retirement having the equivalent of half of their home paid off, and nothing else other than Social Security to support them in retirement.

These numbers provide an interesting juxtaposition to the latest drive by the Peter Peterson crew to cut Social Security and Medicare. You may recall Peter Peterson as the wealthy equity fund manager who has been going around the country saying that he doesn't need his Social Security because of the millions of dollars he has made off the fund mangers' tax break. (Actually, he only talks about the first part of that sentence.)

Anyhow, his gang was out in force testifying before Congress on Tuesday about the need to cut Social Security and Medicare. Given that the near retirees for whom they propose to make these cuts don't have any money, it would be interesting to know what the Peterson crew expects them to live on.

If there is any sanity in Washington, the crash of the housing bubble should send these granny bashers packing.


And the Bubble Keeps on Bursting

The new Case-Shiller housing data showed that prices kept plummeting in April. Real house prices in the 20-city index were falling at close to a 26 percent annual rate over the months from January to April. Since their peak in the summer of 2006, real house prices have dropped by more than 23 percent. This means that we're probably a bit more than halfway to the bottom of the bubble.

Prices in the most rapidly deflating markets are dropping much faster. In the last three months, real house prices in Phoenix, San Francisco and Miami have all fallen at close to a 40 percent annual rate. The implications of this rate of price decline are incredible.

Imagine you had paid off 20 percent of a mid-priced home in the San Francisco area as of January. This would have given you approximately $136,000 in equity on a $680,000 home. Three months later, that home is $597,000 and your equity stake is down to $53,000. In three more months at this rate, you will be underwater. Such are the joys of home ownership in a collapsing bubble.

Of course, it is not gloomy for everyone. Imagine that you are a wise renter who was thinking of buying a mid-priced home in the SF area. You are now $83,000 richer as a result of your decision to wait. That's not bad -- you get almost $28,000 a month for not buying.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.