Category: education

A Labor-Output Ratio

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February 19, 2023

by Stephen Stofka

When analyzing the economies of some developing countries, economists refer to a “resource curse,” a commodity like oil or minerals that a country can sell on the global market. In a developing country, that commodity may become the main source of foreign currency, used to pay for imports of other goods. The extraction of that resource requires capital investment which usually comes from outside the country. If the production of that resource is not nationalized, most of the profits leave the country.

There are a few big winners and a lot of losers. This uneven ratio promotes economic and social inequality. Political instability arises as people within the country want to get a hold on those resources. Some politicians promise to use the profits from the resource to benefit everyone but those who seize power benefit the most. Political priorities determine economic decisions and the production of that resource becomes inefficient.

A key factor in the “resource curse” is that its contribution to GDP is usually far above its contribution to employment. If a mining sector accounts for 2% of employment but contributes 10% to GDP, the ratio of employment / GDP % equals 2%/10%, or 0.2. Ratios that are far below 1 do not promote a healthy economy. Industries that are closer to a 1-1 ratio will produce a more well rounded and vibrant economy because employed people spend their earnings in other sectors of the economy – a diffusion effect. Some economists might say that a low ratio means that capital is being used more efficiently and attracts capital investment. However, that efficiency comes at an undesirable social and economic cost.

 Let’s look at some examples in the U.S. The construction industry contributes 3.9% to GDP (blue line in the graph below) but accounts for 5.1% of employment (red line). Notice that this is the opposite of the example I gave above. The 1.31 ratio of employment/GDP is above 1, meaning that the industry employs more people for the direct value that it adds to the economy.  Construction spending includes remodels and building additions but does not include maintenance and repair (Census Bureau, n.d.). In the chart below, look at how closely GDP and employment move together. The divergence in the two series since the pandemic indicates the distortions in the housing market because of rising interest rates. Builders have put projects on hold but employment in the sector is still rising because of the tight labor market.

The finance sector’s share of the economy has grown since the financial crisis yet employment has remained steady – or stuck, depending on one’s perspective. The great financial crisis put stress on banks, big and small, but the government bailed out only the “systemically important” banks, leaving smaller regional banks to fend for themselves. The larger banks absorbed many smaller banks, leading to a consolidation in the industry. That consolidation and investments in technology helped the sector become more efficient. The ratio is about 0.75, above the 0.2 ratio in the example I gave earlier. I labeled the lines because the colors are reversed.

Retail employs a lot of people relative to its contribution to GDP. The ratio is about 1.65. Does that mean retail is an inefficient use of capital? Retail sales taxes pay for many of the city services we enjoy and take for granted. Retail is the glue that holds our communities together.

The manufacturing sector employs fewer people in relation to its GDP contribution. It’s ratio is 0.77, about the same as finance.

As I noted earlier, the mining sector is capital intensive with a high ratio of GDP to employment. This sector includes gas and oil extraction. In the U.S. that ratio averages about 0.33 but it is erratic global demand. Look at the effect during the pandemic. In our diversified economy, the mining sector contributes only a small amount, like 2%. In a developing country like Namibia in southern Africa, mining accounts for 10% of GDP. In the pandemic year, the demand for minerals declined and Namibia’s economy fell 8%.

Lastly, I will include the contribution of health care, education and social services, which contribute 7.5% to GDP but employ almost a quarter of all workers. Since the financial crisis and the passage of Obamacare, this composite sector contributes an additional 1% to GDP. These sectors include many public goods and services that form the backbone of our society. The 3.0 ratio is the inverse of the mining sector.

To summarize, the construction, retail, health care and education sectors have a ratio above 1. They employ more people for each percentage unit of output. The finance, manufacturing, mining, oil and gas sectors have ratios less than 1, employing fewer people per percentage unit of output. For readers interested in the GDP contribution of other industries, the Federal Reserve maintains a list of charts, linked here [https://fred.stlouisfed.org/release?rid=331].

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Photo by Camylla Battani on Unsplash

Census Bureau. (2019, April 15). Construction spending – definitions. United States Census Bureau. Retrieved February 16, 2023, from https://www.census.gov/construction/c30/definitions.html

U.S. Bureau of Economic Analysis, Value Added by Industry: Construction as a Percentage of GDP [VAPGDPC], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/VAPGDPC, February 12, 2023.

U.S. Bureau of Labor Statistics, All Employees, Construction [USCONS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/USCONS, February 12, 2023.

U.S. Bureau of Labor Statistics, All Employees, Total Nonfarm [PAYEMS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PAYEMS, February 12, 2023.

I will not do a complete reference for each series. Here’s the identifiers for each series: Finance Value Added – VAPGDPFI. Employment in finance – USFIRE. Construction employees – USCONS. Retail Value Added – VAPGDPR. Retail Employees – USTRADE. Manufacturing Value Added – VAPGDPMA. Manufacturing Employees – MANEMP. Education, Health Care, Social Services Value Added – VAPGDPHCSA. Employment is a composite of 4 series. Mining Value Added – VAPGDPM. Mining Employment – CES1021000001

The Change Changed

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November 13, 2022

by Stephen Stofka

October’s CPI report released this week indicated an annual inflation of 7.7%, down from the previous month. Investors took that as a sign that the economy is responding to higher interest rates. In the hope that the Fed can ease up on future rate increases, the market jumped 5.5% on Thursday. Last week I wrote about the change in the inflation rate. This week I’ll look at periods when the inflation rate of several key items abruptly reverses.

Food and energy purchases are fairly resistant to price changes. Economists at the Bureau of Labor Statistics (BLS) construct a separate “core” CPI index that includes only those spending categories that do respond to changing prices. It is odd that a core price index should exclude two categories, food and energy, that are core items of household budgets.

Ed Bennion and other researchers (2022) at the BLS just published an analysis of inflationary trends over several decades. Below is a chart of the annual change in energy prices. Except for the 1973-74 oil shock, a large change in energy prices led to a recession which caused a big negative change in energy prices.

We spend less of our income on food than we did decades ago so higher food prices have a more gradual effect, squeezing budgets tight. Lower income families really feel the bite because they spend a higher proportion of their income on food. In the graph below a series of high food price inflation often precedes a recession. Unlike energy prices, there is rarely a fall in food prices. Following the 2008 financial crisis, food prices fell ½% in 2009. It is an indication of the economic shock of that time.

Let me put up a chart of the headline CPI (blue line) that includes food and energy and the core inflation index (red line) which does not. Just once in 75 years, during the high inflation of the 1970s, the two indexes closely matched each other. Following the 1982-83 recession, the core CPI has outrun the headline CPI.

A big component of both measures of inflation is housing. The Federal Reserve (2022) publishes a series of home listing prices calculated per square foot using Realtor.com data. You can click on the name of a city and see its graph of square foot prices for the past year. You can select several cities, then click the “Add to Graph” button below the page title and FRED will load the graph for you. Here’s a comparison of Denver and Portland. They have similar costs.

The pandemic touched off a sharp rise in house prices in both cities. Denver residents have attributed the big change to an influx of people from other areas. However, Census Bureau data shows that the Denver metro area lost a few thousand people from July 2020 to July 2021 (Denver Gazette, 2022). In the decade after the financial crisis, there simply wasn’t enough housing built for the adults that were already here.

The surge in home buying has not been in population but in demographics. As people approach the age of 30, they become more interested in and capable of buying a home. The pandemic helped boost home buying because interest rates plunged from 5% in 2018 to 2.6% in 2021.

Record low interest rates enabled Millennials in their 20s and 30s to buy a lot more home with their mortgage payment. That leverage caused housing prices to rise. A 30-year mortgage of $320K has a monthly mortgage payment of $1349 at 3%. At 5%, it is $1718 and at 7% it rises to $2129. Ouch!

Rising rental costs and home prices drive lower income families to less expensive areas in a metro area or entirely out of an area. Declining public school enrollment has forced two Denver area counties to announce the closing of 26 schools and transfer them to other schools (Seaman, 2022). As the number of students decreases, the schools infrastructure costs do not change, increasing the per student costs. Buses have to be maintained, drivers paid, schools staffed with guards, cafeteria staff, janitors and administrative personnel. Once schools are shuttered, the building may be sold and converted to other uses, either residential or commercial. The public schooling system is like a large ship that takes some time to change course.

During our lifetimes we experience many changes. They can happen quickly or emerge over time. The effects may be short lived or last decades. Families are still living with the consequences of the financial crisis fourteen years ago. Carelessly planned urban development isolates the residents of a community. The social and economic effects can last several generations. As we grow older, we learn to appreciate William Faulkner’s line, “The past is never dead. It’s not even past.”

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Photo by Davies Designs Studio on Unsplash

Bennion, E., Bergqvist, T., Camp, K. M., Kowal, J., & Mead, D. (2022, October). Why inflation matters. U.S. Bureau of Labor Statistics. Retrieved November 11, 2022, from https://www.bls.gov/opub/btn/volume-11/exploring-price-increases-in-2021-and-previous-periods-of-inflation.htm

Denver Gazette. (2022, March 25). Denver joins big city trend with pandemic population slip. Denver Gazette. Retrieved November 11, 2022, from https://denvergazette.com/news/local/denver-joins-big-city-trend-with-pandemic-population-slip/article_65c6393d-2a4d-5b91-837c-f8c3efce3778.html

Federal Reserve. (2022). Median listing price per square feet:Metropolitan Areas. FRED. Retrieved November 11, 2022, from https://fred.stlouisfed.org/release/tables?eid=1138280&rid=462

Seaman, J. (2022, November 10). Schools targeted for closure in Denver, Jeffco have disproportionately high numbers of students of color, data shows. The Denver Post. Retrieved November 11, 2022, from https://www.denverpost.com/2022/11/10/dps-jeffco-school-closures-students-of-color/

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A Public Sense of Duty

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Each New Year we renew our hope in the future, but have we lost our sense of duty to the future? Following World War 2, the U.S. and Russia engaged in a protracted Cold War of competing ideologies. We fought proxy wars in Vietnam and Indochina, South and Central America. Instrumental to the battle against Communism, America invested in our children’s education.

In 1978, the homeowners of California revolted against the rising property taxes that funded public schools. Since then, our per capita spending on children and young adults has steadily declined.

China’s spending on education has risen dramatically in the past two decades but it still lags the U.S. in spending as a percent of GDP. For how long? Do Americans have the “fire in the belly,” that focused desire to best the enemy, that we did seventy years ago?

In our technological society, the level of education of one’s parents has become a class distinction. The National Center for Children in Poverty (NCCP) reports that 80% of low-income families are headed by parents without a high school diploma. With a high school diploma, kids still have a 60% probability of being born into a low-income family (NCCP, 2021).

A child born in a middle-class suburb will receive a better education than one born in a poor neighborhood, where many residents are renters. Property taxes fund public schools, but landlords don’t live in those neighborhoods and want low property taxes. They have an influential voice in local politics.

Two years ago, I wrote about the post-war surge in college degrees (Stofka, 2018). Before WW2, only 5% of children earned college degrees; more than a third of children now earn college degrees (NCES, 1993). Is our society paying for that learning and experience? Despite their educational skills, teachers in charter schools make the same $53K average as all employees in private industry (NCES, 2020, Table 5). The pay in charter schools is 15% less than public schools (Table 5); that may explain the much higher ratio of black and Hispanic teachers in charter schools (Table 1).

An NCES survey in 2003-4 showed a national student teacher ratio of almost 15. The ratio in a 2018 survey was 21 students per teacher (NCES, 2020). Our educational system is asking our teachers to do more, to have a bigger and more expensive skill set, but does not pay them for their talent and hard work.

Construction workers average $63K per year, higher than public school teachers (BLS Series CES2000000011). 50% of teachers in traditional public schools have a master’s degree, in charter schools it is 39% (Table 4). Do half of all construction workers have a master’s degree? No, of course not. Why does our society value a painter or a carpenter more than a public-school teacher?

Construction workers provide mostly private goods, where private parties benefit from their work. Teachers provide public goods; the immediate benefit is only to the parents of the children in school. The provisioning of public goods and the caretaking of natural resources are only possible when a community has a sense of public duty. Has it declined in the past few decades?

Americans once built a sense of community in opposition to the common enemy of Communism. Covid-19 might have been that common enemy; it has highlighted just how fractured our society is. The common enemy is us, our neighbors, our professionals, and institutions.

The erosion of trust began in the 1960s but culminated in the financial crisis a decade ago. We learned that our institutions were run by pirates, whose duty was chiefly to other pirates, the elites who knew how to work the system. Under President Obama, Attorney-General Eric Holder did not want to waste public money on prosecuting financial crimes when there was a small chance of conviction. Neither he nor Mr. Obama understood the damage of that policy. The American people watched as the pirates were let off with a slap on the hand. Washington was awash with scoundrels.

In 2016, Americans elected an outsider, a pirate in the real estate industry who pledged to rid Washington of pirates. The Trump administration proved to be little more than a carousel of pirates. The Senate, in a shambles under the leadership of Mitch McConnell, held few confirmation hearings for department chiefs. Why bother? Most had temporary titles as acting heads of departments and agencies for a few months before another Twitter outrage from the pirate in chief tossed them overboard.

President-elect Joe Biden can avoid the policies of the Trump administration that so undermined the trust of the American people, but can he avoid those policies of the Obama administration which caused many Americans to abandon any hope for fairness in Federal policy? When public trust and public duty are so greatly diminished, the country declines – its spirit, its institutions and its infrastructure. Will we – can we – recapture that sense of public duty?

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Photo by Dan Russo on Unsplash

NCCP. (2021). United States Demographics of Low-Income Children. Retrieved January 02, 2021, from https://www.nccp.org/demographic/?state=US

NCES. (1993, January). 120 Years of American Education: A Statistical Portrait. Retrieved January 02, 2021, from https://nces.ed.gov/pubs93/93442.pdf#page=17

NCES. (2020, September). Characteristics of Public and Private Elementary and Secondary School Teachers in the United States. Retrieved January 02, 2021, from https://nces.ed.gov/pubs2020/2020142rev.pdf

Stofka, S. (2018, June 12). Study Dollars. Retrieved January 02, 2021, from https://innocentinvestor.com/2018/06/10/study-dollars/

Bridge the Gap?

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Photo by Ragnar Vorel on Unsplash

September 6, 2020

by Steve Stofka

What issues are your priorities this election? For more than thirty years Pew Research has surveyed people about their priorities. For the first time in 2019 a majority of 765 respondents answered that there is a “great deal” of difference in where each party stands, up from 25% in 1987 (Pew Research, 2020). I’ve included the full list at the end.

In January 2019, soon after the midterm elections Pew surveyed 1500 adults (Jones, 2020). I don’t know why the abortion/free choice debate is not on the issue list since that single issue may decide some voters. I’m particularly interested in the large gaps in those priorities among those who lean Democrat or Republican. I’ll start with gaps of 25%. For instance, terrorism is a concern for 80% of Republicans but only 55% of Democrats. Other Republican priorities are Immigration, the Military and Crime.

As you can see, these are fear issues. Should a person in a town of 2000 be more concerned about terrorism than a resident of NYC? Of course not, but it is what it is. People vote out of fear and hope, but fear probably wins the wrestling match, especially among Republican voters who are not hopey, changey voters, as former VP candidate Sarah Palin noted (Gonyea, 2010).

The issue of crime illustrates the conflicting complexities of these issues. It is a 60% priority for Republicans, who are in suburban and rural areas where there is less crime, and a 40% priority for Democrats, who are in dense urban areas where there is a higher incidence of crime. Because crime is much lower than in past decades, this issue has slipped as a priority for Democrats (FBI, n.d.).  

Two of the highest Democrat priorites – Cimate Change and the Environment – have a huge gap of 50% with Republican voters. Democrat politicians have not been able to make these two fear issues personal for Republicans. If they could, they would draw more voters to their side on this issue. 25% gaps exist on issues of the Poor and Needy, Health Care, Education and Race Relations. Rural Republican voters are more likely to be poor and needy, but this is not a fear issue for them (USDA, n.d.).

What strategy would a politician or political consultant advise? Run toward the base? If so, one would emphasize these issues where there are large gaps between the two primary factions in this country. The President has largely adopted this strategy. Republican voters are more inclined to fall in line and the President is relying on this party loyalty even if they don’t like him personally.

Some issues where there is a smaller gap between factions are the economy, the budget deficit, jobs, global trade, drug addiction, transportation, Social Security and Medicare.

A politician reaching out to voters on the fence in this election would focus on these issues. Joe Biden hits the jobs theme, the budget deficit, and protecting Social Security and Medicare to appeal to voters who have had their fill of the President’s divisiveness.

In the coming two months, candidates may adjust their strategies. In the 2016 election, Hillary Clinton may not have addressed these shared concerns as well and it cost her the election.  Governing comes after winning an election. In politics, winning is packaging the concerns and identities of voters into an appealing, if not attractive, box that will get them to come out and vote.

What are your priorities this election season? Are you a multi-issue voter, a single issue voter, a party voter regardless of the issues? Here’s the Pew survey list of 18 issues: terrorism, immigration, military, crime, climate change, environment, poor and needy, race relations, health care, education, economy, Social Security, Medicare, jobs, drug addiction, transportation, global trade, and the budget deficit.

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Notes:

FBI. (n.d.). Crime rates in the United States, 2008 – 2018. Retrieved September 05, 2020, from https://crime-data-explorer.fr.cloud.gov/explorer/national/united-states/crime

Gonyea, D. (2010, February 07). ‘How’s That Hopey, Changey Stuff?’ Palin Asks. Retrieved September 05, 2020, from https://www.npr.org/templates/story/story.php?storyId=123462728

Jones, B. (2020, August 26). Republicans and Democrats have grown further apart on what the nation’s top priorities should be. Retrieved September 05, 2020, from https://www.pewresearch.org/fact-tank/2019/02/05/republicans-and-democrats-have-grown-further-apart-on-what-the-nations-top-priorities-should-be/

Pew Research Center. (2020, August 21). Public’s 2019 Priorities: Economy, Health Care, Education and Security All Near Top of List. Retrieved September 05, 2020, from https://www.pewresearch.org/politics/2019/01/24/publics-2019-priorities-economy-health-care-education-and-security-all-near-top-of-list/

U.S.D.A. (n.d.). Rural Poverty & Well-Being. Retrieved September 05, 2020, from https://www.ers.usda.gov/topics/rural-economy-population/rural-poverty-well-being/

A Nation of Farm Kids

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June 30, 2019

by Steve Stofka

This week the Supreme Court ruled that the administration had not provided an adequate reason to include a proposed citizenship question on the 1920 census. Here’s a snapshot of that section of the census form (Note #1).

This week I’ll look at past census questions through the lens of personal family history – completed copies of census pages. In 1850, the Census first asked people their place of birth and naturalization status. For a hundred years, the census asked the question until the topic was dropped for the 1960 census (Note #2).

In 1860, just before the Civil War, some of my family ancestors were farmers in Mississippi. All forty people listed on that census page had been born in a southern state, most from Mississippi or Alabama.  The Education section of the census did not yet ask whether a person could read and write; only whether each person had attended school in the past year. Fourteen out of forty people listed on that census page had gone to school. There was only one child of school age who had not attended school. A rural farming community in the deep south with limited resources made sure that their children could read and write. That was an essential part of the American project.

In drafting the 14th and 15th Amendments after the Civil War, there was some discussion about adding an English language requirement for voting. At that time, German was the second language of America and was the most taught foreign language in schools. Considering the industriousness and good character of German men, lawmakers decided against such an exclusion. Fifty years later, in the midst of the WW1, Americans would excoriate the hated “Hun” and demean the character of many German immigrants. War changes attitudes.

Let’s skip ahead to the 1900 census taken in a Texas county east of Dallas. The question can you read and write had been added to the census. In a rural farming community, only four out of fifty people listed on that census page could not read and write. All were adults. One was over fifty. All the children aged eight and above were literate.

Let’s travel in time and space to an environment that couldn’t be more unlike rural Texas – the lower east side of Manhattan for the 1930 census. Of the fifty people listed, all adults were immigrants, most of them from eastern Europe. The earliest on that page had arrived in 1890; the latest was just a year earlier, in 1929. All except four people from Russia could read and write. The census asked the language spoken in the home before they came to America. Most people on that page answered Yiddish, except my grandparents, who spoke Slovak. My grandmother, a woman from a rural farming community, could read three languages. It was all part of growing up in the Austro-Hungarian Empire. By the time she died, she had added English to that list. I imagine that the Yiddish speakers had some familiarity with German and Hebrew. How many of us today can read several languages?

The farmers from western Europe had spilled out into the farms of America during the 19th century. In a second wave near the turn of the century, many farmers from eastern and southern Europe found work in the rural communities of the northern states. Many, like my grandparents, crowded into the dense streets of New York City when they first arrived. They worked hard because farm kids learn about hard work as they grow up.

A new generation of farm kids is arriving, but not by ship. They are coming from areas to the south that have been hit hard with drought, violence and political corruption. They come from hard work for little pay (Note #3). They have not waited in line for years to come into this country. Instead, they are showing up at the southern border just as many of our ancestors showed up at Ellis Island and other eastern ports.

Most of us in this country are the descendants of farmers who made sure their kids could read and write. That is the heart of the American spirit: character, hard work and education. Maybe the Congress needs to rewrite the laws so that they conform with the rules that we carry in our hearts and our guts from our parents and their parents and their parents…

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Notes:

  1. Some background on the 2020 census question from Pew Research
  2. Short history of census questions and index of past census questions
  3. See the six part series “Borderland” ( https://www.imdb.com/title/tt3300988/ for info). Six Americans follow the routes of migrants from Central America. An Idaho farmer experiences grueling work for little pay and understands the attraction of his farm to these migrants where they can make 5x as much or more harvesting crops.

Green Goals

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March 3, 2019

by Steve Stofka

Last week I reviewed the infrastructure goals of the Green New Deal (Note #1). In Part Two this week, let’s look at the resolution’s re-commitment to justice and education, time honored themes of American life. Next week, I’ll review the income and health care proposals of the Green New Deal.

“Promote justice for all people.”
What Lincoln and the Reconstruction Republicans began in the 19th Century, President Lyndon Johnson (LBJ) hoped to fulfill in the 20th Century. President and Mrs. Johnson started the LBJ foundation in 1971, three years after he left office. In an ongoing commitment to the goal of justice for all, the foundation honors individuals who have demonstrated a dedicated pursuit of those values. Last year’s recipient of the foundation’s Liberty and Justice For All award was former Arizona Senator John McCain. (Note #2).

During his life growing up in Texas, LBJ witnessed the class/race warfare that many white Southerners took for granted. The un-Christian racism apparent for all to see in the southern states was almost as prevalent in northern states but cleverly disguised by implicit understandings among white Northerners. Urban housing maps were “redlined” to confine blacks to small sections of a city where they could purchase or rent housing. During his presidency, LBJ signed the Fair Housing Act to outlaw, if not stop, the practice (Note #3). Many Northerners who had adopted the moral high ground in their criticism of white Southerners continued to flee toward the suburbs (Note #4).

LBJ had to overcome opposition in his own Democratic Party to pass the Civil Rights Act of 1964 (Note #5). The Act struck down employment, credit and some housing discrimination prevalent throughout the country at the time. This point in the resolution is a reaffirmation of last century’s aspirations and legislation.

“Providing resources training and high-quality education to all people of the United States.”
This goal, first stated in the middle of the 19th century, led to the adoption of public education by all states shortly after the Civil War. By the end of World War 1 in 1918, all states had adopted compulsory education laws. During the first half of the 20th century, the country began Ed 2.0 as many states built secondary schools. When America declared war on Japan after Pearl Harbor in 1941, half of all young people had high school diplomas (Note #6).

After the war, the Federal government’s G.I. bill expanded access to college for veterans. This marked a new phase Ed 3.0 in American education, in which the Federal government took a greater role. During the post-war thirty-year period, the federal government and states expanded funding to traditional four-year colleges and universities.

In the last forty years, Ed 4.0 has been marked by the growth of community colleges within the states. This allowed more students affordable entry to a college education and promoted two-year degrees in applied training.

In Germany, where the government provides low cost or free higher learning, one third of high school students attend college. In Britain, the rate is one-half (Note #7). In the U.S., 2/3rds of high school students attend college (Note #8).

This goal in the Green New Deal marks a new phase in American Education: Ed 5.0. In the first two stages, the states were responsible for the development and funding of K-12 schools. The growing role of the Federal government in phases Ed 3.0 and 4. 0 worry those who have a well-grounded suspicion of the Federal government. In most areas, it is inefficient, slow to respond to a changing environment and dismissive of local concerns and standards.

These concerns should inform, not impede, this new phase of American education. Most states do not have the resources to build and maintain educational institutions that are global leaders. The Federal government must take the lead because the need is urgent. Mechanical Automation has replaced many blue-collar jobs but many of these jobs are still not cost effective to automate. Artificial Intelligence, or Intellectual Automation, is the greater threat and it affects low to medium skilled white-collar jobs.

Trends in Financial Sector employment illustrate the growing threat. A steady increase in employment from the end of World War 2 through the middle of the 1980s hit a ceiling as affordable computing became more available. Since that time, the percent of jobs in the financial sector has declined.

FinEmpPctTotEmp

A sharp mind, attention to detail and a knack for customer service are no longer a path into this sector. Programming jobs that paid the equivalent of $70,000 twenty years ago have been replaced by jobs paying $50,000. Common programming tasks have been automated. White collar employees will compete against AI systems that can be situated in any country. To compete against other industrialized nations, the white-collar workers of tomorrow will need to develop the magical talents of the human brain that are difficult to automate. That will require a large national re-commitment to education.

The high unemployment that characterized the Great Recession and Financial Crisis of 2007-2009 made it apparent to many job seekers that they needed some post-secondary education. Millions signed up for classes in community colleges, private colleges and public universities. Many took advantage of federally insured loans. Since 2006, student loan debt has almost quadrupled to its current level of approximately $1.6 trillion (Note #9). More than 11% of loans are delinquent (Note #10). Current law prevents the discharge of student debt in bankruptcy. Payments in default can be withheld from federal benefits like Social Security.

As the nation enters Ed 5.0, there will be much discussion and dissension over student loan forgiveness. Is it right that one person should receive an advantage over another person in the job market at taxpayer expense? These involve questions of moral hazard and fairness that provoke instinctual reactions in all of us. Compromises may include a debtor paying an additional percentage in taxes on wages above a certain threshold. We must not sacrifice the pragmatic concerns of a nation competing in the global workforce on the altar of our righteousness toward the actions of others.

By re-committing to traditional American values and ideals, this resolution can engage the public in a lively debate. What are our values? How do we attain our ideals in a practical and equitable manner? Do Americans need the passage of a resolution to spark argument? Heck no. This country was founded on argument and a consensus over how we should argue. The Civil War was our one horrible failure to argue with words. Thousands died in an argument using guns and cannons, not debate. Let’s hope that was our last failure to debate.

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Notes:

1. Politifact article on Green New Deal
2. Liberty and Justice For All award
3. Fair Housing Act 
4. White Flight to the suburbs
5. Civil Rights Act of 1964 
6. Education in the U.S.
7. 49% of British high school students attend college – Guardian article
8. 2/3rds of American high school students attend college – BLS data
9. Student loan debt series at FRED database
10. Student debt delinquency – Minneapolis Fed Reserve article

The Sense and Cents of a College Education

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October 21, 2018

by Steve Stofka

Should a young person invest money in a college education? Let’s look at the question from a financial perspective. Building a higher educational degree is as much an asset as building a house. Let me begin with the hard numbers.

Employment: A person is more likely to be employed. Here is a comparison of those with a four-year degree or higher and those with a high school diploma. The difference in rates is 2% – 3% during good times and as much as 6% during bad times.

UnemployRateCollVsHS

Is the unemployment rate enough to justify an investment of $50K or more in a four-year degree? Maybe not. During the worst part of the financial crisis, ninety percent of HS graduates were working. Why should a diligent person with good work skills spend time in college? Most college students take six years to complete a four-year degree. They must spend four to six years of study in addition to the loss of work experience and earnings in those years. The unemployment rate is not a decision closer.

Earnings: In 1980, when those of the Boomer generation were taking their place in the workforce, college grads earned 41% more than HS grads. Today, college grads earn 80% more. That gap of $567 per week totals almost $30,000 in a year and is less than the monthly payment on a $50,000 loan (Note #1). Can a person expect to earn that much additional when they first graduate? No, and that’s why many students struggle with their loan payments in the decade after they graduate.

MedWklyEarnCollVsHS

Maybe that earnings difference is a temporary trend. The debt is permanent. Should a young person take on a lot of debt only to find out the earnings difference between college and high school graduates was temporary? Unfortunately, that’s not the case. The big shift came in the 1980s when the gap in earnings grew from 41% to 72% in twelve years.

EarnDiffPctCollVsHS

There were several reasons for the explosive growth in that earnuings gap. Many Boomers had gone to college to avoid the Vietnam War draft. As they crowded into the workforce in the late 1970s and 1980s, they wanted more money for that education.

During the 1980s, the composition of jobs changed. Steel manufacturing went overseas to smaller and more nimble plants which could adjust their outputs more economically than the behemoth steel plants that dominated the U.S.

Automobile companies in Michigan closed their old plants. Chrysler needed a government bailout. The manufacturing capacity of Asia and Europe that had been crippled by World War 2 took several decades to recover. The U.S. began to import these cheaper products from overseas. As high-paying blue-collar jobs diminished, the advantage of white-collar workers grew.

As more companies turned to computers and the processing of information, they wanted a more educated workforce that could understand and execute the growing complexity of information. Manufacturing today relies on computer programs that require a set of skills that are more technical than the manufacturing jobs of the past.

A oft-repeated story is that the signing of NAFTA in 1993 and the admittance of China into the World Trade Organization were chiefly responsible for the growing gap between white collar and blue collar workers. I have told that story as well, but it is incorrect and incomplete. As the graph above shows, that gap has grown modestly in the past twenty-five years. The big shift happened in the 1980s when the first of today’s Millennials were in diapers and grade school.

When we adjust weekly earnings for inflation, we can better understand the evolution of this earnings gap. In the past forty years, high school graduates have seen no change in median weekly earnings. From 1980 to 2000, their earnings declined. The 25% growth in the earnings of college graduates came in two spurts: in the mid to late 1980s, and during the dot-com boom of the late 1990s.

EarnInflAdjCollVsHS

Since this trend has been in place for decades, college students can assume that it will likely stay in place for the following few decades. Like the mortgage on a home, the balance on a student loan doesn’t increase every year with inflation, but the earnings from that education do and they have increased more than inflation. The payoff to a four-year degree is the difference in earnings. That is the decision closer.

Notes:

  1. Using $50,000 loan for ten years at 6% interest rate at Bank Rate.

Study Dollars

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June 10, 2018

by Steve Stofka

In the past forty years, inflation-adjusted per student spending on higher education has increased by 40%. Despite this, the number of tenured professors has fallen by half. Two-thirds of instruction is now carried out by adjunct faculty with no job security and few benefits. State and federal dollars subsidize workers training for the banking and insurance industries, but not those entering the construction and manufacturing industries. No wonder people express their grievances at government for a lack of funding (Alternet article) . Where is the money going? Maybe the question is: who is the money going to?

In 1940, just 5% of Americans had a four-year college degree (NCES, Dept. of Ed).  In 2015, 75 years later, a third of Americans reported having a college degree.

CollegeDegreePct

A few years after WW2 and the enactment of the GI Bill’s education benefits, 2.7 million were enrolled in a two or four-year degree granting institution. By 1959, enrollment had grown 33% to 3.6 million students (NCES). About 60% were enrolled in a public institution. According to the Bureau of Economic Analysis (BEA), total Federal, State and Local spending in 1959 was $12.4B, about $3400 per student in 2016 dollars.

In 2016, there were 20.2 million students enrolled in college, a third of them in two-year programs. They were sharing a pot of $241B federal and state dollars, about $12,000 per student. That’s inflation-adjusted dollars: apples to apples. Here is a chart covering the past 50 years.

EdSpendPerStudentReal

Confronted by escalating Medicaid costs and uncooperative taxpayers, the state portion of higher education spending has fallen over the past two decades.

StateLocalEdSpendPerStudent2016$

In Colorado, the taxpayer rebellion started in the 1990s when the Denver Post reported that a University of Colorado (UC) faculty member was retiring with an annual pension almost eight times the average yearly income in Colorado. The abuse has not stopped. Last year, the L.A. Times reported that UC continued to hand out generous pensions to faculty members.

In the 1990s, UC and other public and private universities planned that the future annual investment returns on their endowment funds would continue to be generous. They stopped making contributions to meet the future obligations of the equally generous pensions they promised to faculty. “Our accountants told us we would be all right,” was the lament of one city official in California. After a decade of rock bottom interest rates and single digit returns for college endowments, students, parents and taxpayers must now pick up the tab for the Polyanna thinking of politicians and college administrators.

In 1959, state and local governments spent 98% of higher education funding. In 2016, they spent less than 60%. Because public and private institutions are tax-exempt, state and local governments provide billions in forgone tax revenue that is not counted.

StateLocalPctEdSpend

About 9% of total spending goes to private for-profit institutions (NCES). Because the for-profit institutions grab headlines, some might think that they receive a greater percentage of education dollars than they do. I did.

Inflation-adjusted per student spending has risen 27% in the past twenty years. Where is all that money going? Not to today’s instructors. Less than a third of spending goes to instruction (NCES). About 40% goes to administration and student support.

Public and private non-profit institutions do not detail the expenses for maintenance and operation of their buildings and grounds, nor their interest and depreciation expenses. This gap is about 28-30% of spending, so we can conservatively estimate that they spend at least 25% of their budget on these items. As buildings continue to age, operations expenses will grow faster than the rate of inflation and eat up more education dollars. Each year, colleges and universities spend more time and dollars in their outreach to a growing cohort of “non-traditional” students.

An educational system designed for the children of the landed elite in the 19th century is trying to catch up to the needs of a diverse student population in the 21st century. That earlier system wasn’t much good to start with. That’s a topic for another time.  Entrenched political and financial interests now hinder any substantive changes in these institutions as they prepare the students of today for the world of tomorrow.

About 3 million students are graduating high school this year. Two thirds of those graduates are enrolled in a two or four-year college (BLS), and the majority are female. Out of every 100 college students, 56 are female (NCES). There are not enough state or federal educational programs to meet the skills training for the million students who will not go on to college this year, or the million who may drop out before getting a degree.

Discrimination – Education policy in this country subsidizes the training of workers employed by a large bank like J.P. Morgan Chase, but has little support for the workers in the construction and manufacturing industries. The subsidized workers at Chase are more likely to lose their jobs to automation than the unsubsidized workers at a large homebuilder like Pulte.

Fifteen percent of all employees are in the BLS category of Professional and Business Services. This percentage has grown from 8% of the work force in 1980. Employees work for private companies and government, enjoy lower unemployment rates and much higher incomes. (BLS profile ) The great majority have college degrees. College enrollees are attracted by these numbers, but the numbers are changing. The growth of this category in the 1990s lessened during the 2000s and has lessened again since the Great Recession. I’ve highlighted the trend changes in the graph above.

ProfBusSvcPctPayems

In the past year growth is relatively flat. The number of institutions with job growth has offset those with declining job growth.

ProfBusSvcEstablish
The world is changing rapidly, and for some the changes are too much and too quick. That reaction against change underlies the support for Donald Trump in the rust belt states.

Current college enrollees and graduates may find that they have prepared for a world that existed a decade ago, and will be materially changed a decade hence. The college debt is permanent but not the state of the job market. Be versatile, be flexible, be prepared.

 

Border Adjustment Tax

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March 5, 2017

Gary Cohn,  President Trump’s Chief Economic Advisor, says that the Border Adjustment Tax (BAT) is off the table. This is a key revenue raiser, a hidden tax, in the Republican scheme to lower corporate taxes. We will continue to hear about BAT as the fight over tax reform heats up. What is it and how will it affect American families?

First, a bit of context. Most other developed countries have a VAT, or Value Added Tax, on purchased goods and services. In the EU most VAT taxes range from 20-25%. In America, we have state and local sales taxes that might add as much as 8 – 10% to the cost of a good. A VAT is like a Federal sales tax of 20%.

Unlike a VAT tax that affects most goods and services, the BAT will affect only imported goods. Here’s an example of the BAT tax using Big-Box as an example of a large merchandiser similar to Wal-Mart.

Big-Box imports a DVD Player for $80 (Cost of Goods Sold) and sells it for $100, making $20 gross profit. It has $5 other costs which are deducted from gross profit to reach a taxable profit of $15. Let’s say that Big-Box’s effective Federal tax rate is 30% (27.1% per Congressional Research Service). $15 taxable profit x 30% = $5 (rounded) Federal Tax.  Big-Box has a net after-tax profit of $10, or 10% of the retail price.  Remember that.  Current law = 10%.

Under the BAT proposal, Big-Box could not deduct the $80 it paid for the good because it is an import. Big-Box’s gross profit is now $100. Subtracting the $5 other costs, the taxable profit is $95. Multiply that by a lower 20% corporate tax rate and the Federal tax is now  about $19, far more than the $5 using the current tax system. Big-Box paid $80 cost + $19 in tax = $99, leaving them a gain of $1, or 1%.  Current law = 10% profit.  Proposed law = 1% profit.

For Big-Box to make the $10 after-tax profit it has under the current tax system, it would  need to raise the price of the DVD player about $15.  After paying a 20% tax ($3) on the additional revenue, it will net an additional $12. So the customer now pays $115 for a DVD player that used to be $100.  No change in quality.  Just an extra $15 out of the consumer’s pocket for an imported CD player.

What if Big-Box buys the DVD player from an American supplier for $100?  Under BAT, the $100 direct cost of the DVD player would be deducted from the sale amount, giving Big-Box a tax CREDIT of $20 ($20%).  The after-tax cost of the player is now $80 direct and the same $5 indirect cost = $85. To make a $12 net profit as under the current system, Big-Box could sell the DVD player for $97 and undercut another vendor selling the same DVD player for $115.

In theory, customers would rush to the vendor selling American DVD players. BUT, there is only one DVD manufacturer in the U.S. (Ayre Acoustics) and we don’t know how many parts of their product are imported.  The transition could take years and consumers will pay more for many household goods during that time.

Some products can only be imported.  Most of the lumber used to build homes is imported from Canada.  This hidden tax will be added onto the prices of homes and remodels.  Most diamonds are imported and will bear this hidden tax.  Businesses will lobby to have their product excluded where there is no alternative to an import.  This will be a boon for lobbying firms.

Businesses, particularly durable goods manufacturers, anticipate a complexity in this new tax. Planes, cars, boats, sporting goods and appliances are made with parts from a variety of countries, including the United States. Assessing the component value of imports and exports may require a judgment call by the company, and that is subject to dispute with the IRS. This is sure to become a headache.

Should the BAT become law, customers who have benefitted from the lower prices of imported goods are sure to complain loudly at the higher prices. Retailers have opposed the scheme. Republicans are promising tax cuts for middle class households but the tax reduction won’t offset the extra cost of many household goods.

Republicans have long resisted tax increases in their effort to shrink the size of the government yoke on American families. Many have signed a pledge not to raise taxes. To avoid any appearance of raising taxes, Republican lawmakers had to hide the tax and this was the best they could do.

Side Note: Why not just add the extra $20 as an import tax, or duty? Import taxes are paid to the government by the importing company of record when the goods are received in the country. Even if an item sits in a warehouse as inventory, the import duty has been paid, creating a cash flow problem for companies. With both VAT and BAT taxes, the tax is not charged until the good or service is sold.

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IRA Contributions

Did you put off making your IRA contribution for 2016? In May 2011, I compared several “timing” scenarios of investing in an IRA for the years 1993-2009.The choices were making a contribution on:
1) July 1st, the middle of the tax year;
2) January 31st following the tax year;
3) April 15th following the tax year

The 1st option had a 2.5% advantage over the 2nd option because of the longer time frame invested. An even greater advantage was an option not on this list. Contributing an equal amount every month produced a 4% greater gain over the first option.

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Stand up or Sit Down

The Bureau of Labor Statistics published a study  of  the time workers spend standing/walking or sitting. The average worker spends 3/5th of their time standing or walking.

timestudy
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Education in the 21st Century

“Education technology is like teenage sex: everyone talks about it, nobody really knows how to do it, everyone thinks everyone else is doing it, so everyone claims they are doing it…”

That’s just one quote from this TechCrunch article on the investments needed in K-12 and higher education. The author feels that the appointment of Betsy DeVos as Secretary of Education will break up a coalition of interests that has stymied the adoption of technology in classrooms.

Readers who do not support Ms. DeVos may still find themselves in agreement with the author’s comment that “in both K-12 and higher education, technology remains supplemental to chalk-and-talk practices as old as the hills, and not much more effective from a pedagogical standpoint.”

Those who are sympathetic to teacher’s unions will bristle at this comment: “In K-12, the most promising applications of technology have been found most consistently in private and charter schools — freed from the strictures of teachers unions.”

The author discusses a new “10/90” proposal to give higher education institutions some “skin in the game.” Under an Income Share Agreement (ISA), higher education schools would contribute 10% of the amount of every federal loan. After graduation, students would make loan payments based on a fixed percentage of their income for a fixed number of years, with a clear cap on the total amount paid. The schools would recap their money ONLY if students graduated and would thus be more invested in the future of their students.

Political Promises

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February 28, 2016

Heaven on Earth

The tax and spending policies proposed by Presidential contender Bernie Sanders were “vetted” by economist Gerald Friedman.  David and Christina Romer review Friedman’s assumptions and methodology,  finding the former unrealistic and the latter flawed. Christina Romer was former chair of the Council of Ecomic Advisors during the Obama administration.

Friedman assumes that Sanders’ income redistribution policies will spur a lot of demand in the next decade, 37% more than the Congressional Budget forecasts.  Real GDP will grow by 5.3% per year (page 7), erasing the effects of the 2008 financial crisis. Friedman also thinks that the productive capacity of this country is far below its optimum.  Therefore, all that extra demand will not lead to increased inflation, which would naturally put a brake on economic growth.  Employment will increase by 26% from the 2007 peak and, magically, all that extra demand for workers will not cause an increase in wages and inflation.

On page 8, the authors provide some historical context:  “Growth above 5% has certainly happened for a few years, such as coming out of the severe 1982 recession. But what Friedman is predicting is 5.3% growth for 10 years straight. The only time in our history when growth averaged over 5% for a decade was during the recovery from the Great Depression and the years of World War II.”

While GDP growth averaged over 5% during the decade after WW2, it was erratic growth spurred on by the inability of many families to buy many household items during the war.  It included one recession as well as phenomenal growth of 13% in 1950, and is unlikely to be replicated.

But we want to believe, don’t we?

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Labor Force Health Report

Yes, we’re busy so who has time to look at a lot of data to understand whether the world will implode tomorrow?  As an indicator, the health of the labor market is pretty good.  To take the temperature of the labor market we can look at the ratio of active job seekers to job openings.  At an ideal level of 100%, seekers = openings.  In the real world, there are always more job seekers than job openings.  When the percentage of seekers to openings is 200%, it is almost certainly a recession.  The economy rarely produces levels below 150%, which means that there are 3 job seekers for every 2 job openings.

Looks pretty good on a historical basis, doesn’t it?

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Women in the Workforce

Fact Check: Women make less than men.  In 2013, the BLS published a survey comparing the full time wages of men and women in the general population and by race.  In 2012, median weekly earnings for women were 81% of men’s.  Black and Hispanic women were higher, at 90% and 88%, but this may be due to the fact that Black and Hispanic men make less than white men.

Education levels have changed dramatically.  In 1970, only 11% of women had a college degree.  In 2012, 38% did, just slightly below the 40% average for the U.S.  A 2010 BLS study found that, in 2009, median weekly earnings of workers with bachelor’s degrees were 1.8 times the average amount earned by those with a high school diploma.  (They are comparing a median to an average to reduce the effect of especially high incomes).

What the BLS notes is that “the comparisons of earnings in this report are on a broad level and do not control for many factors that may be important in explaining earnings differences.”  We will never hear that on the campaign trail.  Academic caveats do not get voters fired up to go out and vote.  If a candidate is running on a platform of fixing income disparity (Democrats), we will hear quoted the report with the most disparity.  Candidates running who claim little disparity (Republicans) will quote a paper whose statistical assumptions minimize income differences.

A more distressing trend is that older women are having to work longer.  8% of women worked beyond retirement age in 1992.  The percentage has almost doubled to 14%.  The BLS estimates that, in ten years, 20% of women will be working past retirement age.

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Oil Rig Count

Almost half of the oil and gas rigs in the U.S. are located in Texas.  The 60% reduction in Texas rigs reflects the decline in total rigs throughout the U.S., according to Baker Hughes.  Rigs pumping oil account for 3/4 of the rigs shut down.

The oil “glut” is only about 1.5 million barrels of oil per day, less than 2% of the 2016 daily demand of 96 million gallons barrels estimated by the IEA.  Fewer rigs reduce downward price pressures and lately we have seen crude prices rise into the mid-$30s. With a long time horizon of several years or more, a diversified mutual fund or ETF like XLE, VDE or VGENX would likely provide an investor with some dividend income and capital gains. Could prices go lower?  Of course. After falling more than 40% in 2008, the SP500 stood at 900 at the end of December.   Investors who bought at those depressed levels might have felt foolish when the index dropped another 25% in the following months.  Those “fools” have more than doubled their investment in the past 7 years, averaging annual gains greater than 12%.