Working Class Blues

July 7, 2019

by Steve Stofka

This week I had a chance to watch two documentaries hosted by journalist Bill Moyers several years ago (Note #1). They featured the shifting fortunes of two blue-collar working-class families in Milwaukee. Each family had enjoyed the security and benefits of middle-class life – a house and dreams that they would send their kids to college one day. When each breadwinner lost their jobs in the manufacturing industry, they realized just how precarious their situation was.

With more education and skills, these blue-collar workers could have made a better transition. Higher education is certainly a solution for some but how will more education help the butcher, the baker and the candlestick maker? These professions play a part in our complex society and the marketplace has not found a viable solution for those workers and their families.

What is the middle class? The Census Bureau defines it as the middle three quintiles of income (Note #2). What does that mean? If incomes range from $0 to $100 the range of the middle class is from $20 to $80. Some economists use $25 and $75 as the upper and lower bounds of the middle class. A hundred years ago the middle class was a small sliver of the population in the middle. They were between the working class who relied almost entirely, if not exclusively, on work for their income, and the upper class whose major source of income was not work – profits, interest, dividends and rents.

When economists talk about the middle class, it is usually the lower middle-class or working class that they use to represent the fortunes of a wide range of people with far different circumstances, education and skills. Both videos focused on that working-class segment because the stories are poignant and the solutions difficult, if not intractable.

The Golden Age of the working class was after World War II when unions were strong and blue-collar incomes grew much faster than inflation. After the productive capacity of much of developed world had been destroyed during World War II, America was the factory for the world. The workers in those factories enjoyed strong bargaining power and could command a good benefit package and wage gains from employers.

Until the Roosevelt administration established housing and mortgage programs during the decade of the Great Depression, most families had to put a third to a half down on a house and pay off the mortgage in five to ten years. The FHA (1934) and FNMA (1938) lowered those requirements to as low as 10% (Note #3). The GI bill that was passed in 1944 promised returning GIs a home for little to nothing down and low-interest long-term mortgages.  Residential construction boomed.

As the European nations and Japan recovered in the 1960s and 70s American firms were challenged by low cost imported goods. As their pricing power eroded, they became more resistant to wage and benefit demands by working-class unions. Protectionist policies guarded against competition from foreign auto makers, but consumer buying power in America was a magnet for appliances and electronics from Japan and Germany, and foodstuffs from France, Spain, Italy and Mexico (Note #4).

The 1970s was beset by a series of bitter strikes in both private industry and in government service. The benefit and wage packages that union workers had negotiated in the 50s and 60s proved uncompetitive in the revived private international marketplace. Those who could afford the higher taxes to pay city workers began to move out of the cities to the suburbs. Cities like New York suffered under successive waves of strikes by fire, police, sanitation and transportation workers. If the firefighters got a 4% raise, other city workers wanted a similar wage package.

Rather than invest in refurbishing decades-old factories, manufacturers built new factories abroad, where labor costs were much cheaper. The savings more than offset the shipping costs of finished products back to America. Those shipping costs had been drastically reduced in 1955 when a transport owner and an engineer designed a shipping container that could be stacked and survive the rigors of an ocean voyage. They gave away the patent and the world adopted the new containers (Note #5).

As the manufacturing plants in the northern states, particularly the Rust Belt, began to shutter their doors, some families moved. Many families who had bought homes now found that the value of their homes had depreciated. Some with strong ties to the community and a lack of savings struggled on at lower paying jobs. Some lost their houses, their cars, their dreams. The two families that Bill Moyers interviewed exemplified this broad trend. 

For some journalists and economists, this short-lived post-War era became a benchmark for the way it should be. That benchmark may have been a historical anomaly, an aftermath of a global war.

What is to be done? Since the Johnson Administration ushered in the War on Poverty fifty years ago, the percentage of the population in poverty has not changed (Note #2). 42% of children born into poverty remain in poverty. Either the programs have been poorly designed, or the problems are complex and resist solutions.

Will raising taxes on the rich help? Most of the capital gains go to the upper class who pay lower taxes on those gains. Is that the solution? To fund their retirement, millions of seniors each year are selling some of their IRAs and 401Ks, and incurring capital gains when they do so. Will politicians change the rules in midstream on a generation of Boomers? Old people vote in high percentages. Probably not.

Some suggest that the government stop subsidizing rich people and give that money to people who need it. This would include means testing Social Security, but also include a plethora of “gimmes” that pass unnoticed to most of us from government to those who are well-off. Some farmers receive a check from the government to not grow crops in order to control the supply. “Dear Santa, do not give me money this year.” Who is going to write that note?

Some have suggested we implement a Universal Basic Income (UBI) program, a program which would give $1000, for example, to everyone. That would be a nice subsidy for Walmart and McDonald’s who could then pay their workers even less than they do now. Some economists argue that there are even more problems (Note #6).

What about a higher Federal minimum wage? $15 is a popular suggestion on the campaign trail. A $15 wage in Los Angeles has much less buying power than it does in Alamosa, CO. Why not implement something indexed to the median wage in each area? The BLS, the same agency that produces the employment report each month, has the data to implement such an idea. Why a one size fits all minimum wage? Those who prefer local solutions are not without compassion.

History tells us that large government solutions can exacerbate the very problems they were meant to solve. The housing assistance and student loan programs are examples of the bureaucratic bramble that characterizes active Federal programs. Given that caveat, I do think that a Job Guarantee program that operated at the state and local level but was funded by the Federal government would provide stability to the more vulnerable in our work force. It would reduce the cyclical and structural unemployment that corrodes our society (Note #7). There are several proposals to implement some trial programs in the states and I support those efforts. What do you think?

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Notes:

  1. Frontline’s Two American Families and Moyers & Co. Surviving the New American Economy
  2. A 2018 Census Bureau presentation (PPT) of income and poverty in the U.S.
  3. History of Government housing programs
  4. In 1964, the Johnson Administration enacted the “chicken tax,” a 25% import tax on imported autos
  5. History of Shipping Containers and the free of patent innovation that changed international commerce
  6. Economist Daron Acemoglu argues against a UBI program
  7. Search for Job Guarantee and choose the depth that you want to explore on this topic. On Twitter, #JG for many sources.

Green Goals

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

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

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.

 

Productivity And Labor Unions

February 5, 2017

About 10% of all workers, public and private, belong to a union. Today the percentage of private sector employees who are unionized is the same as in 1932, eighty years ago. (Wikipedia) The rise and fall of unon membership looks like the familiar bell curve, with the peak in the 1970s. The causes of the decline are debated but some attribute the erosion of union power as an important factor in wage stagnation.

The major factor is not declining union membership but declining productivity, and that persistent decline has economists and policymakers baffled.  Higher productivity should equal higher wage growth and, in the 30 year post-war period 1948-1977, multi-factor productivity (MFP) annual growth averaged 1.7%. MFP includes both labor and capital inputs. In the 40 year period from 1976-2015, MFP growth averaged about half that rate – .9%.

prodmfp1948-2015

In the debate over the causes of the decline, some contend that all the easy gains were made by 1980.  Productivity is now returning to a centuries long growth trend that is less than 1%. In an October 2016 Bloomberg article, Justin Fox picked apart BLS data to show that growth has been flat in some key manufacturing areas for the past three decades. The ten-fold surge in productivity growth in the tech sector is largely responsible for any growth during the past 30 years. OECD data indicates that other developed countries are experiencing a similar lack of growth (OECD Table) When no one can conclusively demonstrate what the causes are for the decline, policymakers face tough challenges and even tougher debate over the solutions.

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LoanGate

LoanGate may the next scandal. A few months ago, the Dept of Education (DoE) revealed that they had seriously undercounted student loan delinqencies because of a programming error. When the Wall St. Journal analyzed the revised data, they found that the majority of students at 25% of all colleges and trade schools in the U.S. had defaulted on their student loan or failed to make any repayment.  (WSJ article)

The Obama administration forced the closure of many private institutions whose students had low repayment rates. In 2015, Corinthian Colleges shuttered the last of its schools and filed for bankruptcy. The revised data show that many more institutions, both public and private, should be shut down.

This latest programming error at the DoE follows other embarrassing episodes during the two Obama terms. In October 2013, the rollout of Obamacare was riddled with programming errors that blocked many applicants from enrolling in a plan with healthcare.gov.

In 2010, the IRS delayed many applications for 501(c)3 tax status from mostly conservative political groups. Lois Lerner, the head of the agency, first claimed that these had been innocent clerical mistakes by an overworked staff, but a series of hearings uncovered the fact that employees at the IRS had acted on their own political feelings and deliberately targeted these groups. (Mother Jones)

In yet another incident, the Office of Personnel and Managment (OPM), the HR dept for thousands of Federal employees, revealed in 2016 a data breach involving 22,000,000 personnel records, including Social Security numbers.  Unchecked programming errors and data breaches erode the public’s faith in public institutions.  That these mistakes happened under a Democratic administration favoring ever bigger public institutions to solve ever bigger social problems is especially embarrassing.

When Obama first took office in 2009, the inflation adjusted total of student debt had quadrupled in the 15 year period (DoE paper – page 1) since 1993. By the time he left office eight years later, student debt had grown ten-fold to $1.3 trillion. The delinquency rate on that debt is 11% but the repayment rate is considered a better predictor of future delinquencies. The revised data reduced the combined repayment rate to a little more than 50% (Inside Higher Ed), far lower than the 75% plus repayment rates of a few decades ago.

The defaults are coming and there will be an inevitable call for a taxpayer bailout.  A popular element of Bernie Sanders’ Presidential platform was that a college education should be free. In the real world, nothing is free, so somebody pays.  Who should pay and how much will further aggravate tensions in an already divided electorate.

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Five Year Rule

A few weeks ago I wrote about the 5-year rule, a backstop to any allocation rule. Any money needed in the next five years should be in stable assets like short to intermediate term bonds, CDs and cash. Why 5 years of income? Why not 2 years or 10 years? Answer: History.

Let’s look back at 80 years in 5 year slices, or what is called 5-year rolling periods. As an example, the years 2000 – 2004 would be a 5-year rolling period. 2001 – 2005 would be the next period, and so on.

Saving me the time and effort of running the data on stock market returns is a blogger at All Financial Matters who put together a table of this very data for the years 1926-2012. The table shows that the SP500 has held or increased its inflation adjusted value (very important that we look at the real value) almost 75% of the time. So the 5-year rule guards against a loss of value the other 25% of the time.

The 5-year rule can apply whenever there are anticipated income needs from our savings: retirement, college expenses, sickness or disability, and even a greater chance of losing our jobs. In a retirement span of 25 years, 6 of those years will fall into that 25% category. The 5-year rule minimum usually kicks in toward the end of retirement when a person’s reserves are lower and prudence is especially important.

 

GDP and Education

June 29, 2014

This week I’ll review some of this week’s headlines in GDP, personal income, spending and debt, housing and unemployment.  Then I’ll take a look at some trends in education, including state and local spending.

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Gross Domestic Product First Quarter 2014

The headline this week was the third and final estimate of GDP growth in the first quarter, revised downward from -1% to -2.9%.  This headline number is the quarterly growth rate, or the growth rate over the preceding quarter.  A year over year comparison, matching 2014 first quarter GDP with 2013 first quarter GDP, shows an annual real growth rate of 1.5%, below the 2.5 to 3.0% growth of the past fifty years.  The largest contributor to the sluggish GDP growth was an almost 5% drop in defense spending.  Simon Kuznets, the economist who developed the GDP concept, did not include defense spending in the GDP calculation.

Contributing to the quarterly drop was the 1.7% decline in inventories.  Businesses had built up inventories a bit much in the latter half of 2013 in anticipation of sales growth only to see those expectations dashed by the severe winter weather.  Final Sales of Domestic Product is a way of calculating current GDP growth and does not include changes in inventory.  Let’s look at a graph of the annual growth in Real (Inflation-Adjusted) GDP and Real Final Sales of Domestic Product to see the differences in the two series.

Note that Real GDP growth (dark red line) leads Final Sales (blue line) as businesses build and reduce their inventory levels in anticipation of future demand and in reaction to current and past demand.
  
The Big Pic: if we look at these two series since WW2, we see that ALL recessions, except one, are marked by a year over year percent decline in real GDP.  The 2001 recession was the exception.

Secondly, note that in half of the recessions, y-o-y growth in Final Sales, the blue line in the graph, does not dip below zero.  We can identify two trends to recession: 1) businesses are too optimistic and overbuild inventories in anticipation of demand, then correct to the downside, causing a reduction in employment and a lagging reduction in consumer spending; 2) consumers are too optimistic and take on too much debt – selling an inventory of future earnings to creditors, so to speak – then correct to the downside and reduce their consumption, causing businesses to cut back their growth plans.  In case #1, a decrease in consumer spending follows the cutbacks by businesses.  In case #2, businesses cut back following a downturn in consumer spending.

In this past quarter, employment was rising as businesses cut back inventory growth, indicating more of a rebalancing of resources by businesses rather than a correction.  Consumer spending may have weakened during the first quarter but, importantly, did not decline.  We have two hunting dogs and neither is pointing at a downturn.

For a succinct description of the various components of GDP, check out this article written for about.com by Kimberly Amadeo.  Probably written in the first quarter of 2014, her concerns about the inventory buildup in 2013 were proved accurate.

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Income and Spending

Personal Income rose almost 5% on an annualized basis in May but consumer spending rose at only half that pace,  2.4%.  The spending growth is only slightly more than the 1.8% inflation rate calculated by the Bureau of Economic Analysis, revealing that consumers are still cautious.

I heard recently a good example of how data can be presented out of context, leading a listener or reader to come to a wrong conclusion.  Data point: the dollar value of consumer loans outstanding has risen 45% since the start of the recession in late 2007. Consumer loans do not include mortgages or most student loan debt. If I were selling a book, physical gold, or a variable annuity with a minimum return guarantee, I could say:

My friends, this shows that many consumers have not learned any lessons from the recession.  They are living beyond their means, running up debts that they will not be able to pay. Soon, very soon, people will start defaulting on their debts and the economy will collapse.  This country will suffer a depression that will make the 1930s depression look tame.  Now is the time to protect yourself and your loved ones before the coming crash.

Data is little more than an opportunity to spread one’s political message.  Data should never lead us to reconsider our message, our point of view.  If I were penning a politically liberal message, I could write:

The families in our country are desperate.  Without enough income to satisfy their basic needs, they are forced to borrow, falling ever deeper into debt while the 1% get richer.  We need policies that will help families, not the financial fat cats on Wall Street.  We need a tax structure that will ensure that the 1% pay their fair share and not have the burden fall on the shoulders of most of the working Americans in this country.


Selling a political persuasion and selling a car brand often employ similar techniques.  Data should never lead us to question our loyalty to the brand.  If I were crafting a conservative message, I could write:


The misuse of credit indicates an immaturity fostered by cradle to grave social programs, which are eroding the very character of the American people, who come to rely less on their own resources and more on some agency in Washington to help them out.  People steadily lose their sense of personal responsibility, becoming more like children than self-reliant adults.

However, the facts behind the data point lead us to a different story. In the spring of 2010, consumer loans spiked, rising $382 billion in just two months.

That surge represents more than a $1000 in additional debt per person. Consumers did not suddenly go crazy.  Banks did not open their bank vaults in a spirit of generosity. Instead, banks implemented accounting rules FAS 166 and 167 that required them to show certain assets and liabilities on their books. $322 billion of the $382 billion increase in consumer loans during those two months in 2010 was the accounting change. If we subtract that accounting change from the current total, we find that real consumer loan debt increased only 5.5% in 6-1/2 years.  And that is the real story.  Never in the history of this series since WW2 have consumers restrained their borrowing habits as much as we have since December 2007.  We had to.  In the eight years before the financial crisis in 2008, real consumer debt rose 33%, an unsustainable pace.

About two years ago, loan balances stopped declining and since then consumers have added $80 billion, much of it to finance car purchases. $25 billion of that $80 billion increase has come only since the beginning of this year.  On a per capita, inflation adjusted basis, consumer loan balances are still rather flat.

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Housing

New home sales in May were up almost 20% over April’s total, and over 6% on an annual basis.  Existing homes rose 5% above April’s pace but are down 5% on an annual basis.  Each year we hope that housing will finally contribute something to economic growth.  Like Cubs fans, we can hope that maybe this year….

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Unemployment Claims

New unemployment claims continue to drift downward and the 4 week moving average is just below 315,000.  Our attention spans are rather short so it is important to keep in mind that the current level of claims is the same as what is was last September.

It has taken this economy six months to recover from the upward spike in claims last October.  The patient is recovering but still not healthy.

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Minimum Wage

The number of workers directly affected by changes in the minimum wage are small.  We sympathize with those minimum wage workers who try to support a family.  The Good Samaritan impulse in many of us prompts us to say hey, come on, give these people a break and raise the minimum wage.  What we may forget are the implications of any minimum wage increase.  Older readers, stretch your imagination and remember those years gone by when you were younger. Workers in their early working years often see the minimum as a benchmark for comparison.  The much larger pool of younger workers who make above minimum wage may push for higher wages in response to increases in the minimum wage.

Fifty years ago, Congress could have made the minimum wage rise with inflation, ensuring that workers in low paid jobs would get at least a subsistence wage and that increases would be incremental.  Of course, there are some good arguments against any nationally set minimum wage.  $10 in Los Angeles buys far less than $10 in Grand Junction, Colorado.  Ikea recently announced that they will begin paying a minimum wage that is based on the livable wage in each area using the MIT living wage calculator .  Several cities have enacted minimum wage increases that will be phased in over several years but none that I know of are indexed to inflation as the MIT model does.

Congress could enact legislation that respects the differences in living costs across the nation.  For too long, Congress has chosen to use the minimum wage as a political football.  Social Security payments are indexed to inflation because older people put pressure on politicians to stop the nonsense.  There are not enough minimum wage workers to exert a similar amount of coordinated pressure on the folks in Washington so workers must rely on the fairness instinct of the larger pool of voters if any national legislation will be passed.

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Education

Demos, a liberal think tank, recently published a report recounting the impact of rising tuition costs on students and families.  Student debt has almost quadrupled from 2004 – 2012.  Wow, I thought.  State spending per student has declined 27%.  More wows.  How much has enrollment increased, I wondered?  Hmmm, not mentioned in the report.  Why not?

The National Center for Education Statistics, a division of the Dept. of Education, reports that full time college enrollment increased a whopping 38% in the decade from 2001-2011.  Part-time enrollment increased 23% during that time.  Together, they average a 32% increase in enrollment. Again, wow!  Ok, I thought, the states have been overwhelmed with the increase in enrollment, declining revenues because of the recession, etc.  Well, that’s part of the story.  Spending on education, including K-12, is at the same levels as it was a decade ago.

From 2002-2012, states have increased their spending on higher ed by 42%.  Some argue that the Federal government should step up and contribute more.  In 2010, total Federal spending on education at all levels was less than 1% ($8.5B out of $879B).  Others argue that the heavily subsidized educational system is bloated and inefficient.  As much cultural as they are educational institutions, colleges and universities have never been examples of efficiency.  Old buildings on college campuses that are expensive to heat and cool are largely empty at 4 P.M.  Legacy pension agreements, generously agreed to in earlier decades, further strain state budgets.  We may need to rethink how we can deliver a quality education but these are particularly thorny issues which ignite passions in state and local budget negotations.

Although state and local governments have increased spending on higher ed by 42% in the decade from 2002-2012, the base year used to calculate that percentage increase was particularly low, coming after 9-11 and the implosion of the dot-com boom.  Nor does it reflect the economic realities that students must get more education to compete for many jobs at the median level and above.

Let’s then go back to what was presumably a good year, 2000, the height of the dot-com boom.  State coffers were full.  In 2000, state and local governments spent 5.14% of GDP (Source).  By 2010, that share had grown to 5.82% of GDP (Source). That represents a 13% gain in resources devoted to education.  But that is barely above population growth, without accounting for the rush of enrollment in higher education during the decade.

Let’s take a broader view of educational spending, comparing the total of all spending on education, including K-12, to all the revenue that Federal, state and local governments bring in.  This includes social security taxes, property taxes, sales taxes, etc.  As a percent of all receipts, spending on education has declined from 30% to under 18%.

Many on the political left paint conservatives as being either against education or not supportive of education.  Census data shows that Republican dominated state legislatures, in general, devote more of their budget to education than Democratic legislatures.  W. Virginia, Mississippi, Michigan, S. Carolina, Alabama and Arkansas devote more than 7% of GDP to education, according to U.S. Census data compiled by U.S.GovernmentSpending.com.  Only two states with predominantly Democrat legislatures, Vermont and New Mexico, join the plus-7% club (Wikipedia Party Strength for party control of state legislatures).

In the early part of the twentieth century, a high school education was higher education.  In the early part of this century, college may be the new high school, a minimum requirement for a job applicant seeking a mid level career.  What are our priorities?  In any discussion of priorities, the subject of taxes arises like Godzilla out of the watery depths.  People scramble in terror as Taxzilla devours the city. Older people on fixed incomes and wealthy house owners resist property tax increases.  Just about everyone resists sales tax increases.  Proposals to raise income taxes are difficult to incorporate in a campaign strategy for state and local politicians running for election.

Let’s disregard for a moment the ideological argument over Federal funding or control of education.  Let’s ask ourselves one question:  does this declining level of total revenues reflect our priorities or acknowledge the geopolitical realities of today’s economy?

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Takeaways

Reductions in defense spending, inventory reductions and a severe winter that curtailed consumer spending accounts for much of the sluggishness in first quarter GDP growth.

A surge in new home sales is a sign of both rising incomes and greater confidence in the future.

Consumer spending growth is about half of healthy income gains.

Spending on education has grown a bit more than population growth and is not keeping up with surging enrollment in higher education.

Spring Fever

April 27th, 2014

Existing Home Sales

Sales of existing homes in March were disappointing, dropping 7.5% year over year.  Some analysts use the 5 million mark as an indication of a healthy housing market.

As a percent of the population, the change in existing home sales is rather small, yet the change of ownership prompts remodeling projects and home furnishing purchases after the sale, spiff ups before the sale, and commissions and fees for real estate professionals at the time of the sale.

As a percent of the total stock of homes, sales are likewise small yet determine the valuation of everyone’s home.  There are concrete consequences: a lowered evaluation of a home’s value might mean that a person cannot get a home equity loan to help start a new business.  As we discovered in this last recession, lowered valuations of a  home can mean that homeowners are upside down on their mortgages.  Low valuations “box in” a homeowner’s choices so that they may feel that they can not move to a nearby town to be closer to a new job.  These cumulative effects can promote a defeatist attitude among homeowners.  In the past several years, many of us recently found that we were worth less – $50K, $100K, $200K – because the value of our homes had dropped.  Even though many of us had no intention of moving, we felt poorer.

The methodology underlying the calculation of the Consumer Price Index (CPI) involves the concept of Owner Equivalent Rent (OER).  The CPI treats home ownership as though the family who owns the home is renting the home to themselves.  In this sense, owning a home is like a owning a U.S. Treasury bond that pays regular interest payments, or coupons.  Until the recent recession, many regarded home ownership as though it were a Treasury bond, unlikely to ever lose value.  Even better than a Treasury bond, a house was likely to gain in value.

Most of us, however, do not think in  terms of OER.  We feel poorer when the value of our home drops by 20%. Likewise, a stock market drop of 20% has a significant effect on the value of our retirement funds.  Even if we do not need that money for 10 years or more, we are poorer on paper and this affects many other buying decisions.

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Spring Fever

Other economic reports this week offset the negative news on home sales.  The flash, or preliminary, index of manufacturing activity indicates a positive report next week on the sector.  Durable goods orders were strong, reinforcing the signs that manufacturing is on a spring upswing.  New claims for unemployment were a bit above expectations but nothing significant and the 4 week moving average of claims indicates a much improved labor market.

Although UPS and 3M had disappointing earnings or forecasts, industrial giants GM and Caterpillar surprised to the upside, as did tech giants Microsoft and Apple.  Expectations for this earnings season were rather lukewarm but the aggregate earnings growth of the SP500 may come in below 1%.  Some attribute Friday’s drop in the market to accelerating tensions in Ukraine but the market was essentially flat this past week, reflecting a general lack of enthusiasm or worry.

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Buffet Investing Advice

In mid March Warren Buffet got the attention of many when he made a surprising recommendation:

Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. I suggest Vanguard’s. (VFINX) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions, or individuals – who employ high-fee managers.

Doughroller presented some good observations on Buffet’s recommendation.  Also at the same site Rob Berger offers a fresh perspective on the stock – bond allocation mix.

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Consumer Price Index and College Tuition

In a recent analysis of trends in the various components of the Consumer Price Index, Doug Short presented several graphs of the annualized growth rates of the different components.  It comes as no surprise that medical care costs have risen 70% in the past 13 years.  The real surprise to me was that college tuition costs have shot up almost twice that – 130% in the same period.  Average tuition and fees for an in state student at a public four year college are currently almost $9K per year.

The growth in costs should worry parents with a son or daughter six years away from entering college.  Perhaps they may have planned on $10K – $12K a year.  However, if these growth trends remain as constant in the coming years as they have in the past, tuition and fees will be more like $15K per year when their child begins college.  By the time they graduate – if they graduate within four years – the cost could be $20K per year.  Remember, this doesn’t include any housing costs.  Higher education receives heavy subsidies from each state and the Federal government. So why the skyrocketing tuition costs?  Heavy lobbying, influence in the state capitols in the nation, inefficient and bloated administrative structures, protectionism – these are just a few of the reasons for the escalation in costs.  A spokesman for higher education won’t give those reasons, of course.  She will cite the need to attract quality teachers, investments in new technologies, aging infrastructure that is costly to maintain, and those certainly do contribute to increasing costs.  Higher education is still largely built on a framework that was suited for the sons of the landed gentry in the 18th and early 19th centuries.  As Obama and voters discovered after the 2008 elections, change comes slowly.  Like the tax system, higher education will continue to receive incremental changes, a hodgepodge of patches to fix this and that, to pad the pockets of this interest group or ameliorate a select slice of voters.

Readin’, Writin’ and Arithmetic

April 21, 2013

In any lively discussion of public education – its effectiveness, the spending and taxes required – some people bring out their swords, others their shields, and some are armed with both.  Armed only with a crayon, I will examine some of these trends.

Let’s look first at higher education spending.  The National Center for Education Statistics (NCES) at the U.S. Dept of Education reported that real – that is, inflation adjusted – spending per pupil had increased 233% in the past 31 years, an annual growth rate in real dollars of 2.8%.

NCES reports a slower spending growth in K-12 education – 185% in 28 years, or an annual growth rate of 2.2%.

But the annual growth rate during the past decade, 1999 – 2009,  has slowed to just under 2%.

 

When we zoom in on the spending growth during the 1960s and 1970s, we see a real growth rate of 3.6%

What we see in the per pupil data is a gradual slowing down of the real growth rate of spending.  Those who claim that there have been spending cuts in education have not looked at the data.  There have been no cuts in real spending, only reductions in the rate of growth. 

Some decry “austerity” policies recently undertaken in some European countries – the U.K. is an example – claiming that a country pursuing these policies has cut spending.  When we look at the spending data, we find that there have been no decreases in real spending, only in the growth of spending.  This misconception is common and results from a comparison of what we expect and what happens

If we have usually received a wage or salary increase of 3% each year, we come to expect a 3% increase.  If we get a 2% increase this year, it is 33% less than our expections and feels like a cut.  A retiree who has become accustomed to an annual 8% return on her investments, may feel that she has lost money if her investments only gain 5% this year.  It does no good to mention that she has really not lost anything.

Let’s get up in our hot air balloons and travel to California, where the size of its economy puts the state above many  countries.  California has often been the leading edge of trends that spread to the other states.  Ed-Data reports that per pupil spending has flattened since the recession started in 2008.  In real dollars, there has been NO GROWTH in per pupil spending in the past ten years.

Another complaint from teachers is that money is increasingly being spent on administrative costs, not teaching.  In California, teachers still command the lion’s share of spending  – more than 60%.

The proportion of teacher spending has remained relatively constant – above 60% – in the past ten years.

What has been growing?  On a per pupil basis, “Services and Other Operating Expenses” have grown 4% per year, or 1.8% real annual growth,  above the 2.2% annual growth in inflation.  Administration expenses have grown at the same rate of inflation so that real growth has been flat.  However, spending on teacher salaries has declined in real money at an annual rate of .7%.  However, their benefits expenses have grown 1.4% annually in real dollars.  Again, most people do not “feel” the cost of a benefit increase.  The bottom line to most of us is what we bring home.  It does not pay to tell a K-12 teacher that they are actually receiving a slight increase in real total compensation.

In California, as in many states, property taxes are a major component of revenues for K-12 education.  Over the past nine years, revenues from property taxes for education have declined 3% annually in real money.  For each student, there is $500 less money available from property taxes than it would have been if property tax revenues had kept up with inflation.  As a percent of total revenue for K-12 education, property taxes make up a little over 60%.

In 2011-2012, property tax revenues essentially paid teacher salaries.  Ten years ago, the percentage of revenues from property taxes was about 6% higher.

Other State revenues have had to make up for the shortfall in property taxes; the gap is about $1000 per student.  The problem would be even worse if it were not for the slight decline in students for the past 8 years.

While California faces challenges from declining property tax revenues, what about the rest of the country?  Let’s climb back in our data balloon and look at student enrollment throughout the country.  The NCES reports the same slight decline in K-12 enrollment.  However, they estimate a total 6% growth in K-12 enrollment in this decade.

As K-12 enrollment grew by a little more than 1 million in the 2000s, post secondary education enrollment grew by 6 million, or 37%, to over 21 million. (Source http://nces.ed.gov/fastfacts/display.asp?id=98).  The growth rate in older students, those aged 25+ is even faster, rising 42%. In this decade, “NCES projects a rise of 11 percent in enrollments of students under 25, and a rise of 20 percent in enrollments of students 25 and over.”

 The ratio of K-12 students to post-12 students was 28% in 2000; a decade later, it was 38%.  While K-12 enrollment is projected to increase for the rest of the decade, post-12 enrollment is estimated to be much faster.  How do these students pay for college?  The most recent data from NCES is at the start of the recession; I would guess that the need for aid has grown mightily since then. 

Put all of this in the blender: a declining work force (see my blog two weeks ago), a generational swelling of older people retiring, recovering but not robust state and local revenues, and more demand for K-12 AND post secondary education services.  How will politicians react in the midst of so many competing demands for money?

The increasing pressures for money from different segments of the population puts us in the precarious position that we can not afford to go into a recession, an impossible situation since the normal business cycle includes a recession every 7 – 10 years.  Europe is already in recession; China’s growth is still robust but slowing; on Friday, India announced a growth rate below 5%, the weakest in four years; in a hopeful sign, Brazil, the economic powerhouse of South America, is projecting GDP growth over 3%, rising up from an anemic 2.7% growth of the past 5 years.  (World Bank source)

Slackening demand around the world presents challenges for the U.S. economy, problems that a spastic Congress will only worsen. Y’all be careful out there…