The challenges with affordability
The new buzz word in domestic U.S. politics is affordability. The democrats used this successfully as they swept election in November and they are still hammering in this into the voters’ minds as we are heading towards the midterm elections in November and the democrats are ahead in the polls. Trump and the republicans are trying to deal with this but it is not easy as prices are high, unemployment is increasing and many are struggling financially. Trump had a recent idea for capping credit card interest rates at 10%. This had previously been suggested by far-left senator Bernie Sanders. Trump followed up with populist rhetoric saying that the credit card companies are “really abusing the public”.
It will likely not happen, but it does seem like a scam that credit card companies are charging 25% or more in interest rate and they are trying to lure customers by aligning credit cards to hotel and airline points and other offers. As the American system is build around a credit score system from zero to 850, the credit card companies are constantly coming out with new offers to make more profits and to make the customers consume more. It is up to each and every one to get a credit card, but the idea of capping the interest rate to 10% or even lower makes sense, but will most likely not happen as the banks and credit cards are powerful players in American politics.
Other trends related to credit are firms offering customers buy-now-pay-later arrangements like Affirms and Klarna and others and the growing business of short-term loans against future paychecks like Money Lion, Brigit, Albert and many more. People are desperate for money and to keep spending, but it is also a fact that it is difficult to keep up as basic necessities are getting more and more expenses, in particular housing and food.
Affordability problems usually boil down to a pretty painful gaps, prices rise faster than people’s ability to pay. Wages often grow slowly or not at all, while essentials like housing, food, healthcare, and education keep getting more expensive. When necessities eat up most of your income, there’s no room to breathe. Rent and home prices have jumped in many places due to limited supply, high demand, zoning issues, and investor activity. Housing ends up taking 30–50% or more of income, even though it is supposed to be closer to 20%-30%. This has also impacted younger people as they are no longer able to buy an affordable house. Two incomes are a necessity in order to make everything work and the American family of the 1950ies and 1960ies where the father worked, the mother stayed at home, they had a house and a car and they kids went to college, all on one income, is not happening any longer. It is basically a challenge to survive on two salaries and people are not happy.
The problems is also that it is not one or two areas that are getting more expensive, it is everywhere at once, from utilities, transportation, childcare, insurance premiums and deductibles and so on. Some colleges cost around $80,000 per year and should you require student loans, they have high interest rates that more or less make them impossible to repay. Many have paid more that the original loan amount and still owe more than the starting point due to high interest rates and that just seems wrong.
This has resulted in serious debt pressure for borrowers as student loans, credit cards, medical debt, and buy-now-pay-later plans temporarily fill the affordability gap, but with interest. That makes long-term affordability worse, not better.
Affordability hits lower- and middle-income households hardest, the majority of the people. People with assets such as homes, stocks often benefit from rising prices, leading to an asset-based society, while people without them fall further behind. When things are not affordable, people delay or skip basics such as healthcare visits, nutritious food, education, home repairs. That creates ripple effects that cost more later.
As Trump realizes affordability is a main concern by the voters, he is trying to come up with some ideas to address this. Trump has pushed for actions to drive mortgage interest rates down, including calls for the Federal Reserve to cut rates and proposed purchases of $200 billion in mortgage bonds to lower monthly payments. He is proposing to restrict large institutional investors from buying single-family homes, aiming to keep more homes available for individual buyers. Trump has suggested so called “Trump accounts” for newborns. New federal investment accounts seeded with $1,000 at birth, intended to grow tax-deferred for future education or other major life expenses, pitched as part of easing long-term cost pressures on families. The administration recently added more drugs to a Medicare price-negotiation program to lower costs for seniors.
At this point, these are only ideas and they are unlikely to come to fruition. The American system is built on making profit and increasing consumption and prices and it is beyond the president to fix this as the system is set up for this. The same goes for the taxation system, which is created to serve the asset owners and offer wealthy Americans many ways to have deductions and pay a low tax rate or no tax at all. This might lead to serious problems for Trump and the republicans in the midterm election, even though also the democrats would have the same struggles to cut costs for the American people.