That’ll Cost You

Speaker 2

Phil Magnus, the economist.

Speaker 1

I love how ⁓ how your work plans are basically my dream vacation plans. The idea of going to Europe, going to Spain in in particular. Indeed. I don't have ⁓ vacation plans. ⁓ my me and my family, we kind of did our vacations throughout the year and partly they they were like part work v work and whatnot, but I gotta tell you, when it comes to the cost of travel, it there's such a difference. between traveling as a solo person versus traveling with an adult and two children. ⁓ so I if there's anybody out there who'd like to subsidize a dad who's a comedian who wants to take his wife and his kids on the road, I am open for it. But yeah, what wh why don't we talk about the cost of travel? What's happening with it? It seems like it's getting more expensive overall, but am I am I imagining things?

Speaker 2

There are a couple things going on in the cost of travel. one, which is probably the most immediate thing that we're all noticing, are prices of airline tickets are going up. And a big part of that is the sticker shock from the closure of the Straits of Hormuz caused by this war that we have with Iran right now. ⁓ what has that done? It's driven fuel prices up worldwide and ⁓ the fuel market, you know, it the effects of that closure. ⁓ filter through to other areas of energy consumption. And one of those is fuel, airline consumption. So as a response to the shortages that have come about from the closure of the Straits of Four Meuse, almost every airline in the world has ⁓ upped their ticket prices, saying, well, this is necessary based on the fuel that we have ⁓ fuel costs we've now incurred. ⁓ now there are some other factors that are more ⁓ predictable And one of those is the seasonal nature of travel. ⁓ so every year we know right around the beginning of summer, all the kids get out of school. Some jobs have a lighter load in the summer months. ⁓ that's when people vacation. And as a result, it's ⁓ there there's an increased consumer base that's actually looking to travel places. ⁓ that means that there's more ⁓ people seeking seats on airplanes, is basically what it comes down to. And we think about this, ⁓ there are other times in the year when we also have seasonal spikes. So the day before Thanksgiving is the other classic one. Everyone is flying somewhere to go be with their family over Thanksgiving. And ⁓ as a result, it's the busiest travel day of the year. So you get a ⁓ a sudden spike in airline prices around that. ⁓ the Christmas holidays is another one. The kids are out of school for a couple of weeks, and ⁓ it's time to go visit grandma and grandpa. ⁓ it's time to bring the family together. It's time to go on vacation sometimes as well over the the winter months. So you suddenly have a surge of interest in travel. And a result of that, as airlines respond, ⁓ they raise their prices as a rationing mechanism for a scarce number of seats during those weeks and months.

Speaker 1

All families have you know different setups, ⁓ you know, different schedules, ⁓ work schedules and all that. But something that I found just as a as a travel hack and also as a good time hack is if you take your kids out of school during the week, you can go to places that are open and there's no other kids there. ⁓ so so if you can do it, you know, ⁓ and also you don't have to lie, you don't even have to like make up a note like, ⁓ Sally was sick. You could just say, No, I'm taking my kids and we're Right. we're gonna go anywhere that that we want to go.

Speaker 2

They may even learn more on vacation that they're ⁓ picking up in the schools. ⁓ especially if you take ⁓ somewhere interesting and historical. Or

Speaker 1

Or you they want to buy something and you have to explain to them, no, we can't afford that. So then that's a really big lesson there, you know. Kids have magical thinking. They think every time mommy or daddy reaches into their pocket or purse, they could just get all the wonders of the world ⁓ purchased. regards to travel and airlines, Spirit Airlines went under. And I heard the commentary on it. There were, you know, some people who were pointing to Elizabeth Warren and saying, It's your fault, Elizabeth Warren. And then there are other people who were pointing to the conflict with with Iran and saying because of this conflict, fuel prices were so high and an airline like Spirit Airlines wasn't able to To adapt and whose fault is it that we we can no longer enjoy the spirit in the sky of spirit airlines? You

Speaker 2

Ever enjoy the spirit in the sky, get get a chance to fly in spirit.

Speaker 1

You know, I'm trying to think if I've ever flown spirit.

Speaker 2

I I don't think enjoyment's the word that we use.

Speaker 1

I try to stay as far away from Spirit Airlines as possible. I mean they they basically become known for having, I guess, the equivalent of waffle house fights. Yes. If you're looking for violence in an airline, Spirit Airlines was there for you.

Speaker 2

And sometimes the employees would even get in on those fights. Yeah. Which is it. I I flew Spirit maybe twice over the past twenty odd years. And the first time I was like, I'm never gonna do that again. And then then the second time it was the only flight between two cities that I needed to get to. And I like, All right, well I'll just kind of endure it. And then my reaction again was I'm never gonna do that again. ⁓ yeah, you know, the Spirit Airlines collapse ⁓ is interesting. I cause I think it is multifaceted. And yes, there is a grain of ⁓ truth to some of the explanations that people are saying. So the ⁓ the the immediate effect of the Iran war and the ⁓ fuel price shock is one of the final tipping points that pushed them under. ⁓ you know, they were operating on very thin margins apparently on fuel. And Spirit did what ⁓ Spirit does best or did best. And that was ⁓ they suddenly went into ⁓ liquidation of their assets and basically everyone that was on the flight system that had other scheduled flights for them was just stranded. And it's like, ⁓ good luck, get home. So yes, the ⁓ the oil price surge is probably the immediate instigator. There were deeper issues because if you remember a few years ago, Spirit Airlines ⁓ it wasn't in the best financial shape. And they had proposed a merger deal ⁓ with Jet Blue, which is another of these ⁓ discount carriers. And both of the companies seemed to be on board with it. Even their like their flight attendance unions and and things like that were also on board with it because they recognized, hey, this is a way to shore up the two companies together. They thought that the merger would be more efficient. And Elizabeth Warren, the senator from Massachusetts, starts sending all these letters and pressures of inquiry to ⁓ the Department of Transportation, which under U.S. antitrust law had some discretionary options to either ⁓ exempt or try to block the merger under antitrust. And Pete Boudigeg, ⁓ who was the ⁓ Secretary of Transportation at the time, says, Yeah, we side with Elizabeth Warren. We're ⁓ we're going to block this merger. And it becomes a an antitrust case that basically prevents it from going through. ⁓ now it's hard to do the the what if scenario, what would have happened since then had the merger gone through, but ⁓ you know, it's a reasonable expectation that maybe these two companies would have emerged stronger because they have a bigger market share now, they have more routes, they can be competitive with the ⁓ the major airlines, the United American, Delta, Southwest are considered kind of the you know, the big four of the nationwide airlines and this would have put a jet blue merger with spirit on ⁓ stronger competitive footing with them. But I think at the end of the day, the party that's responsible for Spirit going under is Spirit Airlines. And their worst asset was exactly what you alluded to, their reputation. The fact that it was the airline you go to where you have Fights breaking out among customers on the seats, fights breaking out in the terminals. ⁓ there are all these viral videos of the Spirit Airlines counteragent where you're dropping off your bag screaming at people. ⁓ there's another viral video of the ⁓ the bag ⁓ unloading process from a spirit plane, and it's like they open up the the cargo hold and there's this guy there just like chucking bags out the out the door onto the runway twenty feet below and And you see that right under the ⁓ the big spirit logo on the side of the airplane. You know, there are multiple incidents of this. One of my favorite ⁓ that I found the YouTube video of, there was a ⁓ a spirit airline check-in counter and someone had a video and suddenly the the the ceiling tile collapses and a raccoon falls out of it. I don't know what in this and I'm I'm seriously going, Google this. Google the Spirit Airlines counter raccoon incident. And and you know We we laugh and we joke at this, but this had become the reputation of the airline. And when you've got that type of reputational baggage, ⁓ you probably have some more serious problems. You know, if the question is, am I going to fly to a city and probably get there reasonably on time or or maybe even a a a couple hours delayed if I fly on Delta or United or something like that? ⁓ you know, they're not great as airlines, but they they generally get you there and they generally have reschedule options. Or I can fly spirit airlines where there's a chance of a fight breaking out, a raccoon falling through the ceiling, ⁓ another one they were duct taping parts of the lane together. There's a video of that. All this ⁓ reputational chaos. Well, you know, I'm gonna spend the extra fifty bucks to go on the place that I know at least is probably going to get me there or at least is going to have a backup option if they do have to cancel or delay for mechanical problems.

Speaker 1

Yeah, that just makes me think of how important the price of admission is. It seems like you have to pay in order to have at this point even a modicum of civility. You know, I'm a big fan of of all those ⁓ videos that that you mentioned. I'm I'm I can't believe I haven't come across the the raccoon one, but some of the other videos that I that I watch a lot are people who are kicked off of airplanes or kicked out of airports and their refusal to leave, things just go really, really horribly for them. And I just wonder travel i it can can be a really stressful time and i under and i understand how you know people can be you know upset tired and anxious and they just want to get home or they just want to get to where where they're going but it would do our society very well if everyone would take a moment And breathe and just think ten seconds ahead and say, like, if I blow up right now and tear apart the computer that this ⁓ person at the desk is working on, it's not gonna go well for me. It's like instant it's it's almost ⁓ the culture, it's instant gratification and also like instant emotional degradation.

Speaker 2

⁓ yeah, is think things through. ⁓ especially once you get on the airplane, shoving the flight attendant, banging on the cockpit door, ⁓ that's never going to end well for you. that's gonna mean that ⁓ you're you're probably dragged off into a Department of Homeland Security cell for at least a little while. Yeah. It's just not a smart thing to do. And yet we see these viral videos of people losing their mind and going into an outburst. And yeah, and there's the joke. ⁓ but but you know, the I think the anecdotal evidence starts to add up that quite a bit of that was ⁓ reputationally connected to Spirit Airlines. So there's the what if story. Had they been allowed to merge with Jet Blue, it's almost certain that the Spirit brand would have been absorbed into Jet Blue or some other new brand for the airline. That was like a once in a lifetime chance to rid your reputation as the three AM Waffle House of the Sky.

Speaker 1

They missed an incredible opportunity to rebrand jet black and blue. You know what happens now? Because I you know, I was reading about Spirit Airlines losing just, you know, thousands of employees and then they obviously have their whole ⁓ all of the airplanes that they have. Are they like selling that off? I mean, is it possible for jet blue now to say like, hey, we'll buy your stuff? It is

Speaker 2

Right. Is, ⁓ but ⁓ you know, they've been on financial straights for a couple of years. So ⁓ you know, maybe five or ten years ago they owned a lot of the airplanes outright. ⁓ now they have creditors that already had existing cra claims against them. In other cases it seemed they were leasing ⁓ very c complex financial picture. But i again it's back to had they been allowed to merge a few years ago, it would have been a much more seamless transaction. that the newly constituted merged airlines would gain all of their assets, would gain the the gates that they have at airports. So ⁓ each airline, you know, they have reserved gates that are theirs. This is the United Gate. This is the Delta gate. This is the Spirit Gate. This is the ⁓ police pen next to the Spirit Gate for the fighting passengers. So I don't know if they if that transfers over, but ⁓ but you know that these are are actually valuable assets to have as space at airline ⁓ airline space in in in fixed airports, it's often often a valuable asset to have a ⁓ certain set of routine routes. ⁓ one of these discount carriers only fly to smaller regional airports that the big carriers don't go to. That's actually ⁓ valuable. There are ⁓ are people that need those routes. If you want to go to Bellingham, Washington or ⁓ Spartanburg, South Carolina, you don't have much in the way of options on the big airplane, ⁓ big airlines, but the you do have regional discount carriers that service those. These assets become less and less fungible when you're in like this sudden panic bankruptcy shutdown. Now it's like, well, what do we do with them? And there were even some reports. I think after Spirit closed, you know, it does it goes out of business very, very suddenly. ⁓ I think there was a report of ⁓ there was like a lost luggage room at some airport that was under Spirit's control, then the company shuts down, and then no one knew where the key was to this room. So people's baggage is just sitting stuck in this airport that no one really knows who owns the room anymore. ⁓ so it it just induces chaos. ⁓ now you have a liquidation sale where they're getting rid of their assets in a very haphazard, sudden, forced way to try to pay off ⁓ ⁓ what remains of their creditors. ⁓ so yes, other airlines eventually will get those planes. Other airlines will move in and take the ⁓ the space that they have in the terminal. But it's like the least efficient way possible to do it was this bankruptcy.

Speaker 1

Well, speaking of bankruptcy and debt, I heard that consumer debt increases in the summer. Is that is that true?

Speaker 2

Yeah, yeah. So it's a ⁓ you know, economists refer to this as a seasonal effect. And we know certain times of the year people put more on their credit cards. ⁓ the classic one is right before Christmas. Everybody charges the gifts that they're buying at the store. So so there's a huge spike in ⁓ credit card transactions in the weeks and months before Christmas. ⁓ kind of the Black Friday rush right after Thanksgiving through Christmas is a well-known seasonal spending effect. And then in January, it drops off ⁓ pretty rapidly to almost nothing. So ⁓ we know these on a predictable basis every every year. So that's why when ⁓ a lot of economic statistics are reported for spending, ⁓ they smooth it out over the course of the year and they do like a rolling average across all t all twelve months in what they report rather than here's December, and it suddenly shot up. So so the summer is another ⁓ well-known. Period of seasonality. It's ⁓ people are spending more on travel, they spend more doing things outside. ⁓ you know, your little league ⁓ is in season, so you buy your kids more sports equipment, it's the ticket to Disney World, it's the cruise ship, it's ⁓ you name it. ⁓ a lot more is going on that ⁓ requires certain types of expenditures. And as a result, you get a seasonal effect of people buying more on credit over the summer months. Then they go back to work in August. The kids go back to school and ⁓ things kind of level out. You pay off your credit card debt, then it spikes again after Thanksgiving for Christmas.

Speaker 1

Yeah, this is actually gonna be the first summer. since our kids started school. So they're not gonna be in school. We my my my wife and I kinda got used to them, you know, being in school full time. So now we're like, ⁓ what are we gonna do? ⁓ and now I'm looking at, ⁓ what do past summers look like? It's a lot of being out of the house, trying to enjoy when we have perfect weather, perfect weather. And obviously that that entails ⁓ spending ⁓ more money. My ice cream expenditures are gonna be up way high this summer. So I'm wondering what the implications are where you're increasing consumer debt. Right. Right. Spending up is good, but eventually that that credit card bill comes and people are like, ⁓ what have I done?

Speaker 2

It it's a mixed bag. ⁓ it's actually a good thing that l ⁓ especially lower income people have more access to credit today than they would in say nineteen fifty, and certainly than they did in say nineteen ten. ⁓ what this means is that luxury items, travel, things that were once the domain of the rich. ⁓ now almost everybody can have to some degree or another. So the expansion of credit across the economy is one of the major drivers of kind of an equalization in society of access to technology, access to ⁓ the comforts of life. now the double-edged sword here that also means you have to pay off your credit card bill every month. And if you don't do that, pretty soon you're in the territory of paying like 20% interest rates and ⁓ Racking up month after month after month of credit card debt. And then finally your credit itself becomes imperiled. ⁓ you take a ding on your credit score, and then you can't get loans. ⁓ so the double-edged sword is that the fact that credit is extended much more broadly in the economy today than it was even a couple decades ago is good for comfort consumption, ⁓ wealth being more widely available to society. But the downside is it also means there's a personal fiscal responsibility element.

Speaker 1

This isn't a show where we give financial advice, but I I do think it it is it is really important to know, you know, what you're what you're spending on. I mean there was a a recent, you know, kind of meme going around where ⁓ Kevin Leary from Shark Tank had you know some advice saying ⁓ you know if you're spending twenty-eight dollars on lunch every day it's probably not a good idea. And, you know, the online debate that ensued was just so stupid. Because, you know, obviously ⁓ the way to get around paying twenty-eight dollars for lunch is to make your own lunch. And there's a lot of very cheap options out there.

Speaker 2

Bring your peanut butter and jelly into the office.

Speaker 1

Yeah, yeah. And if you're not and and if you're not a peanut butter and jelly person, well there's ⁓ there's rice and vegetables and you get a crock pot, you can make meals for for days. ⁓ but I think more than anything it was just kind of ⁓ it was really telling and revealing how much spending people do on the daily without accounting for can I really afford this? Am I just putting this on my on my credit card because it is so easy to swipe.

Speaker 2

Just swipe or tap or or wave your phone even these days. I mean i yeah. I I mean th this is a real problem, I think, in the way of people are not connecting the actual dollars that they are spending with what they actually have in their bank account to pay it off. And the Kevin O'Leary, the twenty-eight dollar lunch, it it kind of lined up ⁓ the debate over it between as like this is boomers versus millennials, and the millennials now have to pay twenty-eight dollars ⁓ for lunch because nothing's affordable anymore. And then you have the older generation saying, well, well, wait a minute. No, I ate ramen noodle when I was your age. I ate peanut butter sandwiches. I didn't go out and get my avocado toast every day at lunch. so it's a price mechanism that's reflected in a change in consumer habits, ⁓ to where, you know, I I guess apparently if people that are living and working in in large urban areas, you already have higher expenses on things that you purchase at the store anyway. And going out to lunch every day is going to be a ⁓ a pretty expensive option if that's what you're doing. But again, it's so easy. It's a click a button on your phone to get Uber Eats or Grubhub or one of these ⁓ DoorDash type things delivered, or it's go into the ⁓ the restaurant and just tap your card and you have a twenty-eight dollar plus lunch. Well, yeah, that racks up. And ⁓ if you're not paying attention to your account online, you get a big bill at the end of the month. And if you've overspent, that bill will carry over and now you're incurring interest on it.

Speaker 1

I think it's similar to people who are, you know, looking to lose weight, where if you actually start counting your calories, yeah. Whoa, I am consuming a lot of excess calories. I am buying more calories than I am spending. ⁓ and it's a similar thing when it comes to taking on debt. ⁓ what does this mean for overall US spending? Like, does the government also spend more when the nation is on vacation?

Speaker 2

You know, it's there are parallels between our fiscal picture on the national scene and our fiscal picture on ⁓ as as our ⁓ as consumers. ⁓ because you know, the the biggest spending problem in existence right now is probably the United States government. ⁓ we're about to cross forty trillion dollars in accumulated debt. ⁓ or projecting that's gonna come up over the summer, ⁓ but that means we're already thirty-nine trillion in change ⁓ in accumulated national debt. And what this means is ⁓ you know, this is the accrued amount of a succession of decades of deficit spending. The government spends more than it takes in in tax revenue. And when you do that over time, you actually have to finance the debt. ⁓ there are a whole bunch of instruments that the government has to do this. They ⁓ they issue ⁓ treasuries and all sorts of securities and things like that. They also ⁓ interchange between the Treasury Department and the Federal Reserve. There are mechanisms that they can debt finance, but at the end of the day, you eventually have to pay interest on it. And now we're getting into a scenario where the interest payments on just financing and servicing the existing $39 trillion plus national debt are becoming one of the largest categories of annual spending in the United States government's budget. So paying interest on the debt just to just to maintain our fiscal solvency. Is now a a significant ⁓ financial burden. And that's a drawdown that you know that's money that's basically just wasted out of the tax ⁓ receipts that are coming in ⁓ in terms of ⁓ the Treasury every year. So your money when you're writing a check to the IRS or ⁓ it's taking out of your payroll, it's probably not being spent in a very fiscally prudent way to begin with, because it's the government. But now some of that is actually servicing the existing national debt because past government decisions have accrued. Massive, massive deficits that add up over the years and ⁓ leave us in a very bleak fiscal picture.

Speaker 1

Well, I hope that we didn't ruin anybody's summer, but I I do have good news. Happy Hour Econ will be with you throughout the entire season, and we are completely free. So you can listen to us for free. You're not gonna go into debt listening to us. If you manage to go into debt listening to Happy Hour Econ, well, there's no no hope for you. We'll see you next week.