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I wrote last month that the market for potential reverse mortgage borrowers is limited to high-income, highly educated people in stable neighborhoods with appreciating home values. Reverse mortgages may make sense for some, but decidedly not all. I aim to extend my analysis of the iffy reverse mortgage market to help the average person plan for retirement.

If you are like the many people I meet who think of their house as a hedge against unforeseen costs in their older, fragile years, I recommend scaling back your hope in reverse mortgages for four reasons:

1. Home prices may not appreciate—and they may even depreciate, as 2006-2011 taught us—so what you think is a sure thing in 20 years may not be worth what you forecasted.
2. If you have too much house in your 50s and 60s and you think you are going to downsize later, downsize now. There are two good reasons for downsizing now. One, when you are younger you can handle the enervation and fatigue of a move, as well as the financial hit everyone takes when moving. Selling and moving could cost thousands of dollars and over 10% of the home value. You can handle that cost in your 60s better than in your 80s. Two, people in their 80s are more likely to suffer bad mental and physical effects from relocating, made worse if you sell because you can’t get enough from a reverse mortgage.
3. Reverse mortgages are for those who want to age in place. Are you sure your home is a good place to age? Experts are concerned that the nation’s housing supply does not match the needs of an aging population. Nearly a fifth of housing in the U.S. is projected to have a disabled or infirm person living in it, yet only a fraction of housing is equipped. Homebuilders are blind to the need. Aging in place is not a good plan if the housing isn’t built right for your older self. The suburbs are lousy for isolated older women.
4. Reverse mortgages are unattractive if you can’t keep up with the property taxes and maintenance costs as you age and as health care costs take up more of your disposable income. Some of these reverse mortgage products count on defaults: the bank will take your home if you can’t keep up with the carrying costs.

The Consumer Financial Protection Bureau (CFPB) needs more funding to conduct research on reverse mortgages. I predict the results would come out negative for the reverse mortgage product. The CFPB would likely find the reverse mortgage is appropriate only for well-informed people who understand the product and its risks.

In closing, consider moving to appropriate housing in your “younger” older ages—your 50s and 60s—instead of planning to use a reverse mortgage in old age.

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A recent financial advice column for the Financial Times says don’t worry, there won’t be a recession by 2019—something about banks being sound. But as Financial Times economics editor Chris Giles writes, it turns out financial advisers are usually more cheerful than economists and both are confused. So who should we believe?

This month the International Monetary Fund forecasted slow growth, a gloomier prediction than last year’s, with an opaque sentence that says it all: “Risks to global growth tilt to the downside.” Looks to me like the IMF, blaming tariff uncertainties and slow growth in Asia and Europe, thinks there will be a worldwide slowdown by 2020. But the IMF didn’t use the word “recession."

Berkeley professor Brad DeLong is a good economist and aggregator of economic data, and he won’t be pinned down with a prediction. But he points out chillingly that the U.S. government shutdown—if it weren’t bad enough—made key data necessary for predicting recessions late and spotty. The data we do have aren't promising. China is key here and though they won’t admit to a slowdown, Chinese auto sales are down 6% year-over-year. Auto sales kind of predict everything. US auto sales? Basically flat.

For the record I believe we will have a significant slowdown in 2019 for reasons I’ve talked about before.

These conflicting opinions really mean nothing to ordinary people trying to plan their lives. With my economist hat on I say to investors that I don’t know when a recession might hit, but that you want to be in the position that you really don’t care when it happens.

The smart money investors don’t time the market. The reason I say the obvious is because it’s really hard to do nothing. So do something, just don’t time the market.

1. Do figure out about when you need your money and how much risk you can take. Do invest in stock index funds the further you are from needing the money. Follow really smart stock pickers like Jack Bogle, the recently deceased founder of Vanguard, who helped popularize the index fund. It takes a good stock picker to know that picking stock is a fool’s game and that the vast majority of people should use index funds—this clever insight comes from Chris Carosa.
2. Do discipline your portfolio. Pick how to allocate risky and less risky assets as you age. Stay the course. Do rebalance when the prices of stocks and bonds change, though I advise a disciplined rebalance done once a year. I pick February to rebalance, though I watch the market hour by hour. If you are about 45 with a portfolio of 60% stocks and 40% bonds and the stock market crashes, buy more stocks when you rebalance. You may have your fingers on the keys at the moment of the crash, but take them off and keep your discipline.
3. Do use non-conflicted advisers. Vanguard provides non-conflicted advice (although they advise you to invest in Vanguard funds) and charge about the lowest fees you can get. This is because they are a mutual company—the profits go to the account holders who are the shareholders. If you need to talk to someone about your finances because you have more than a house and a retirement account, then pay a fee. Never use an adviser who doesn’t charge you anything. Free advisers cost a lot.
4. Do fall in love with your stuff. Since a recession is probably coming, don’t buy or do anything with the expectation that your pay will rise or that it will be easy to find a job that pays a lot more. Don’t expect your house value to go up, and don’t expect that if you take on leverage to buy a house that it will pay itself back in appreciation. Don’t borrow to buy a consumer durable. Love your unremodeled kitchen, your vintage appliances, and your ten-year-old car.

I am not sure when a recession is coming. All economists are humbled by our track record. The Economist magazine reminded us in mid-December that economists do much better at predicting GDP growth only a few months ahead, and are much better at predicting expansions than recessions.

Financial advisers are a bit worse—they seem to think sunshine is just around the corner. I get that no one wants to jinx a good thing. I don’t want to be gloom and doom, but prepare for a recession by preparing not to react. Hunker down.

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Pay for the American worker is finally increasing, but slowly. Economists are zeroing in on why pay growth is so sluggish. In December 2018, average weekly pay grew to $948.06, up from around $750 in the first three months of 2009. But adjusted for inflation, the rate of increase is small – average weekly pay grew less than 1% per year for the decade. 

Wage growth is not only small but highly uneven. The big news from the Financial Times today is that the pay of the average bank employee rose 3% last year;,but the chief executives of the top six American banks rose much faster. For example, Morgan Stanley’s head got a 7% raise while his employees’ average pay fell by 2%. Why don’t the bank employees bargain for higher wages? What are American workers afraid of? What keeps wages low? 

When Employers Get Bigger, Wages Get Smaller: A Primer on Monopsony

Economists are offering up a theory called “monopsony” to explain low pay. Not an everyday word, monopsony – "monopoly" is similar and much more familiar. Monopsony refers to a single (big) buyer of labor; monopoly represents the power of a single seller. In monopsony markets, employers are supersized or make themselves the one and only employer relevant for their workers. As such, they can keep wage growth down. Think mining towns: When there’s only one big employer around (and no union to counterbalance them), they can hold wages below the “natural” level. Just as monopolies can keep prices too high, monopsonies keep wages too low. 

The theory of monopsony is old, but its renaissance is new. The last Council of Economics Report from the Obama Administration introduced monopsony as a major force suppressing wages to a larger community outside of academics. Using new data and methods, Temple University and University of Minnesota research found out what happens when a small number of employers come to dominate a local industry: paychecks get smaller. This is exactly what monopsony predicts. In the authors’ words: “higher labor-market concentration substantially reduces wages.” Owen Davis from The New School summarizes the study, which finds a significant jump in local employer concentration, all else equal, can lead to a decrease in wages of at least 15% and a decrease in employer-provided health insurance. Small businesses combining forces is one tool in the tool-box of a potential monopsonist. 

Employers gain power over worker pay when they begin to dominate the locality. Employers also gain power over workers with an employee contract called noncompetes. New research out of Universities of Maryland and Michigan reveal what most readers already know: that workers of high and low pay, high and low skill, sign noncompetes. What's more, many workers think they are enforceable even though many states won’t enforce them. I was stunned at the prevalence of noncompetes. Nearly 40% of workers had signed at least one noncompete promise. Despite the notion that noncompetes prevent workers from being trained by one employer and taking the skill elsewhere – which most economists believe to be a fair use – noncompetes are common in low-skill, low-paying jobs.

The suspicious use of noncompetes as a pure power play came to light when the fast food joint Jimmy Johns was discovered to have forced their sandwich makers to promise not to go to another fast food restaurant. It is not credible that they were taking JJ secrets to McDonalds. But the action froze JJ workers in searching for a better job. Surprisingly, the courts said it was legal, but JJ settled and stopped using them.

Bottom line: Noncompetes scare workers into inaction, which means not looking for a higher wage as well as turning down better job opportunities at competitors and not asking their boss for a counter offer when offered a higher wage. Non-competes are another tool in the toolbox of a would-be monopsonist.

Want more technical understanding that is clear and wonky? Go to Kate Bahn, economist at the Center for Equitable Growth. 

Big companies can dominate consumers. Everyone with cable service knows the frustration of a monopoly. Fewer people understand that big companies can also hold down wages below what they could be when workers do not have countervailing power.

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I am unsure the reverse mortgage industry is sound. It is regulated by various different agencies including the embattled Consumer Financial Protection Bureau, which if the CFPB was allowed to function at full speed, would investigate consumer complaints about reverse mortgages and conduct studies about how well reverse mortgages are serving consumers.

But I do know that a quick check of the numbers suggest reverse mortgages probably won’t help most American seniors close the gap between what they need and what they have for a comfortable retirement. Over 50% of seniors aging into their retirement years do not have enough financial assets to combine with Social Security to maintain their living standards according to the Center for Retirement Research at Boston College.

My team’s research at The New School also shows that even if middle-class older workers convert their home equity into a stream of income for their rest of their lives 40% will still be downwardly mobile, descending from a middle-class lifetime to defacto poverty in old age.

Reverse mortgages will NOT prevent the retirement crises because the average value of an older person's home equity is less than $80,000. Credit card debt and car loan debt does not, surprisingly vary by age or sex. It seems credit card companies and car dealers have about everyone owning $3000 on their credit cards and $12,000 on their car. See the handy table below that displays the surprising high average value of student debt held by older people - - between $12,00 and $16,000 depending on age and sex -- and the surprising low average value of home equity and retirement accounts -- $75,100 and $58,800.

New research from Ohio University and Jinan University show, using a unique dataset of more than 14,000 senior homeowners in the U.S that seniors, probably like us all, think their home is worth more than the appraiser does. On average, seniors think their home is worth 18.9% more than it is. Lower-income households, and black households regardless of income, tend to overestimate their home’s value more than others, probably because their neighborhoods were not appreciating at the average rate.  Therefore seniors who applied for a reverse mortgage and learned they overvalued their home were likely to not bother taking a reverse mortgage even though they started the application.

I conclude that reverse mortgages may help high-income, highly-educated people in stable neighborhoods with appreciating homes solve their particular problem, which is unrelated to America's retirement crisis problem. But, reverse mortgages will not help most Americans finance retirement, and if reverse mortgage lenders are not well-regulated or scrupulous, complicated reverse mortgage contracts could actually hurt older Americans.

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Saturday, we broke the record for the longest government shutdown in history--now 23 days and counting -- which was set in 1995-96 when President Bill Clinton refused to accept Medicare premium hikes and program cuts proposed by a Republican-majority House and Senate, and the government shut down for 21 days. What are the chances of a settlement? You need a little bargaining theory to predict a deal. Deals are made when both sides are hurting and the "costs" of settling are less than the costs of a stalemate. If the President, for instance, feels the shutdown helps him, the shutdown will continue. Same thing about the Democrats. If there is significant gain from the shutdown to at least one party, the shutdown will drag on.

The shutdown's economic harm to us all may not be apparent but it is real. On Friday, 800,000 federal workers did not receive paychecks, even though many must keep working as a condition of their employment. Many federal contractors and their employees (including small businesses) also are not being paid.  Consumers are losing. Planning to travel?  Avoid Miami International Airport, where the shutdown-induced shortage of TSA workers caused a partial closing of a terminal.  Expect these air-travel problems to spread.  Last week I was coming back from the American Economics Association convention in Atlanta, and the unpaid TSA workers looked beleaguered or stoic or a mixture of both.  Two days ago they were angry and organized a protest against the shutdown. Will militancy spread?

So the largest and most direct losses from the shutdown are borne by lower-income and middle class federal workers, many of whom live paycheck to paycheck. The TSA militancy was clearly predictable.  The protest contradicts the claim of President Trump's economic adviser's,  Kevin Hassett, that furloughed workers are "better off" due to the shutdown because they didn't have to use up vacation days in December.  Next on the scale of intensity of losers are communities and businesses who depend on federal workers.

But the costs are beginning to add up as the shutdown supresses aggregate demand and increase input costs--we all are losing.  Government shutdowns can hurt the economy just like recessions. The Office of Management and Budget estimated the cost of 2013’s 16-day shutdown at between $2-6 billion of lost output (their mid-range estimate is .02% of GDP overall). Based on those estimates, a shutdown lasting into February could cause up to a .07% loss of GDP, similar to losses in a significant downturn. And as SP Global already noted last week, a  shutdown running into late January would cost the economy $6 billion in lost output--greater than the $5.7 billion Trump wants for the wall.

Will political parties stop the shutdown? The answer is not while Republicans benefit from the public's frustration with government. 

There is good historical and on-the-record evidence on how the President and Republicans may be perceiving gains and losses from the shutdown.  The government shutdown could be part of their long-term government slowdown. Government dysfunction causes the public to lose faith in government. And, the Republicans are on record as the anti-government party.

Exhibit A: President Trump  took ownership of  the looming shutdown  saying “I am proud to shut down the government for border security” suggesting he perceives the stalement is to his advantage.  Just like Bill Clinton held fast to preventing Medicare cuts.

Yet the wall remains Trump's bottom line while public support for it falls. A new NPR/Ipsos poll reports  70% of Americans think the shutdown will hurt the economy, and 71% want Congress to reopen the government while negotiations keep going.  Trump sees the same polls we do. So his holding fast suggests he gains something else besides the wall by not settling. He and the Senate Republicans who are backing the President might be gaining a long-term advantage as the shutdown becomes an extension of historic pressure by Republicans to, in their own words and actions, weaken support for government.  

Exhibit B: In 1990, the then-leader of the Republican party Newt Gingrich urged Republicans in Congress to be "divisive, combative, and disruptive."  Political scientist Thomas Mann describes the Gringrich-led process:  “Gradually, it went from legislating, to the weaponization of legislating, to the permanent campaign, to the permanent war." 

The Trump Administration is the logical heir to this double-decade effort by his party to weaken government's effectiveness.  The administration has not nominated senior-level staff for government agencies to go through normal Congressional confirmation processes.  Trump often prefers to put temporary appointees into the jobs or leave key offices unfilled.

Bottom line: A lasting effect of this government shutdown and the ongoing government slowdown is further eroding respect for the federal government’s reliability. For example, the Republican party has always sought to weaken Social Security. Last year the administration accelerated shuttering Social Security offices (just when demographics mean service demand is up), reducing service and responsiveness. Mark Miller summarizes the historical erosion of Social Security services in a November New York Times article.  And the erosion continues--when SSA workers come back to work they won't get any raises.

The President and Republican leaders in the Senate may perceive the shutdown helps them win the long game against government and the destabilizing and shrinking of the economy is worth it.  But we all are paying a recession - like cost from the shutdown.

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Employers may be saying one thing and doing another, the consulting firm Willis Towers Watson found in a new survey of employers. Over 80% of employers say that managing their employees’ retirements is an important business issue, but only 25% say they do it effectively. This contradiction means to me that firms are not doing much about retirement security. Everyone knows good pensions and retiree healthcare induce orderly retirements, but 35% of workers nearing retirement (aged 55 to 64) have no retirement plan other than Social Security and most have no retiree health plans.

Being pushed out of employment might soon be on the rise for older workers. A new Prudential Insurance study reveals to employers that if they don't push older workers who may be past their time to leave, lingering could be expensive. Every year an older worker stays on the job, the higher is the risk that seniority-based salaries and health benefits will cost more than the value-added of the older employee. The Prudential study reckons that an average older worker hanging onto their job could be a deadweight of over $50,000 loss to a firm.

There is also evidence that older workers staying on the job could clog up promotion pipelines for younger workers. The Willis Towers Watson survey reveals employers are noticing: 37% of employers say lingering older workers could clog up promotion ladders and hurt younger workers. And 40% of employers are worried that older workers take a large bite out of their company’s salary and healthcare budget because older workers cost more than younger workers.

If employers feel that older workers are too expensive—and are also hurting the younger workers firms might be grooming—these feelings are bad news for older workers who not only want to keep their jobs but also hope their jobs will improve. According to an AARP study, older workers want to transition to part-time work (73% want that) and 44% want to work in a new field with interesting and challenging work in such popular areas as sports, hospitality and education. But according to the Willis Towers Watson survey, only 30% of employers are letting workers change positions, like moving down from management to consultant. Only 27% of employers are allowing part-time work.

I am sorry to say that, despite what older workers want, it doesn’t look promising that they will find employers welcoming them with open arms and ready to accommodate.

Bottom line: Evidence shows that businesses may not prefer older workers and, worryingly, employers are not doing much to smooth their employees’ transition to retirement. This asymmetry spells trouble for older workers. When business gets lean—Verizon, AT&T, GM, BlackRock, Sears and J.C. Penney are all laying off workers—evidence suggests that older workers may be the first to be laid off without the glide path they wanted.