Anecdotes from the Downturn

CNN Money is running a series a short stories from those who are struggling financially.  In total there are 26 articles that cover a diverse mix of Americans.  The common theme is that broad swaths of our population have been hit by hard economic times.  However, all of these stories remind me how important it is to recognize the difference between a collection of anecdotes about individuals economic hardship and statistically important analysis of the whole economy.

After reading through all of the anecdotes, the most common hardships are job loss, health problems, and single parent households.   What struck me is that even in good economic times these problems are very real and likely to hurt the prosperity of ANY household.  As it turns out, unemployment is still at solid levels historically speaking, less than 5%.  A net loss of 63,000 jobs in February may significantly impact individual families, but it has almost no effect on the broader economy.   The past nine months of the credit crunch have not made it any harder to be a single parent or any more likely for health to prevent someone for working. 

There also seems to be a big difference in the outcomes for those who have prepared themselves and those who are oblivious to the basics of personal finance.  Simply having an emergency fund and a college degree can insulate most people from the threat of unemployment.  Those who have a degree are less than half as likely as the general population to become unemployed and with a graduate degree or beyond it is less than a 2% chance of becoming unemployed. Finally, if you have little or no debt, there is almost no risk of having significant hardship during a downturn.  Even part time work can put food on your table as long as you don't have debt payments getting in the way.

Another observation I have made recently is that the media, in all of its forms, is fixated on the bad news rather than the reality of the situation.  By reporting on the misfortune of a tiny subset of the population, it skews our confidence in both the system and our own prospects.  We empathize with those who are struggling and worry that we may be next.  By reporting the monthly job data with a headline of 63,000 Jobs Lost in February rather than Unemployment Remains Virtually Unchanged at Historic Lows a reporter gets more attention but also puts a huge spin on the "news."  While the spin may sell more papers and drum up more readers, it is not a good basis for making financial decisions.

Another observation I made is that not everyone on the series was actually struggling.  One profile is about a middle class family with a self employed bread winner.  They bought a house they could afford with a 30 year fixed mortgage and have taken personal responsibility for their financial future.  Future tax increases are their biggest financial worry.  Another profile covers a couple who are nearing retirement.  They have saved diligently and lived a life within their means.  Their biggest financial concern is not about today, but rather the impact of loose fiscal policy and Wall Street shenanigans which may eat into their buying power.  These people are responsible with their money and are in a position to prosper in the future.  Their worries about politics and economic policy are ones that I share, but because of their good financial choices they are far ahead of the game.  Even in tough times they are likely to have a roof over their heads and food on the table.  It is simply a question of whether they will live "the dream" or "just get by."  That is a good problem to have.

The point of this post is to point out that there are reasons that some people are struggling and others are not, and very little of it has to do with what is found in newspaper headlines.  Rather than worrying about national or global economic conditions we should instead focus on the things we can control: living within our means and making good life choices.  If we do that individually then there is little need for pessimism or doubt about the future.