Comments & Context

’flation

The late Ed Hart of the late Financial News Network used to refer to the set of topics around broad price changes as “’flation,” which neatly covers inflation, deflation, and disinflation in a single word.

Some analysts in the U.S. are getting worried about the “in-“ kind of ’flation. With core inflation hitting 2.2% for the year ending in January—though the headline figure, dragged down by the collapse in oil prices, was just 1.3%—hawks are fretting that the Fed has fallen behind the curve.

Maybe, but maybe this is better news than it seems. Graphed below are headline and core inflation for the U.S., the eurozone, and Japan. The latter two are in or near deflation, a sign of profound and extended economic weakness. The U.S., for all its troubles, is not suffering from those maladies. That 2.2% core reading is just slightly above the average since 2000; the 1.4% headline is 0.8 point below that average.
It might be a good idea to relax and give thanks that the U.S. is not caught in what our beloved if irascible John Liscio used to call “the tractor beam of deflation.” There’s plenty of time to get on top of this one if the rise persists.

 

Consumer price index all and core

by admin· · 0 comments · Comments & Context

Don’t make promises you can’t keep

Taking a page from Charles Kindleberger’s research on the increase in credit’s effect on asset prices, David O. Lucca, Taylor Nadauld, and Karen Shen, researchers at the New York Federal Reserve Bank, have posted a paper putting a price on what increased student loan availability has done to college tuition levels. (Link at foot of article.)

This is a careful paper: the authors lay out concerns about their methodology, stress areas where they see weakness, and balance the whole thing against the benefits to our workers and to our nation of an increase in the share of workers with college degrees. Nonetheless, it is a sobering piece of work that should force a number of deep questions, and, one hopes, policy changes.

In opening the discussion the authors note that much study has been devoted in recent years to the relationship between cheap credit and the 2002-6 housing bubble, and point out that although student loans fund a capital investment, whether delineated broadly as an educated work force, or on an individual level, while mortgages fund an asset, credit is crucial to both, and both enjoy the support of government-sponsored programs.

Federal student aid programs are governed by the 1965 Higher Education Act (HEA), which outlined 6 mandates, the fourth, Title IV, authorizing financial aid to support access to post-secondary education through the Federal Pell Grants program and the Federal Direct Loan Program. The researchers looked at three amendments to HEA: the increase in subsidized loan caps in 2007-8 school year; in unsubsidized caps in the 2008-9 school year, and the gradual increase in Pell Grants between 2207-8 and 2010-11 to link changes in tuition following increases access to loan and grant funding.

Although changes in caps theoretically apply to all institutions, the percentage of students who meet the requirement to gain access to those funds is not evenly distributed, and the students at program caps, say those with funding needs larger than the maximum loans available before cap increases, are the ones most likely to take the loans. As of 2012, about 60% of post-secondary students attended four-year public universities, 29% not-for-private private liberal art colleges and research universities, and 11%, Title IV “less-than-two-year” for-profit outfits, largely vocation and specializing in technology, business, photography, and fashion, including cosmetology and hair styling. That last 11% receives more than 77% of their funding through Title IV, with the largest share of near-the-cap students.

Between 2001 and 2012 yearly student-loan initiations increased from $53 billion to $120 billion, and in recent years 90% of those initiations came through federal student aid programs. Over the same stretch, the average tuition “sticker” price in constant 2012 dollars rose from $6,950 to $10,200, or 46%. (The authors focus on sticker rather than net tuition because it is more readily available, and because of the effects of institutional grants and the like.)

The authors found, not surprisingly, that the institutions with most aid exposure before the cap increases underwent “disproportionate” increases in tuition around those changes. For subsidized loans the authors found that 70 cents of each newly available dollar was captured as a tuition increase, and that approximately 55 cents of each Pell Grant dollar was so captured. Highest pass-throughs took place in the more expensive four-year private institutions with “relatively high-income students but average selectivity.”

Regarding this they conclude:

From a welfare perspective, these estimates suggest that, while one would expect a student aid expansion to benefit its recipients, the subsidized loan expansion could have been to their detriment, on net, because of the sizable and offsetting tuition effect.

But it was good for the stock market. On the for-profit front Lucca et al. found evidence of “large abnormal stock market responses for a portfolio of all publicly traded for-profit institutions,” following the passage of the aid increases that summed up to 10% across the segments. They also found that the average increase in the sticker price in these outfits averaged $180, but averaged $56 in the not-for-profit colleges and universities.

Here’s some food for thought via a severe example of tax dollars gone astray. Surely some of the for-profit outfits meet their stated goals, but Corinthian Colleges Inc. (CCI), the largest such for-profit network, was not among them. In April 2015, under Federal criminal investigation, Corinthian closed down its operations, and filed for bankruptcy in May. Charges include misleading students on their career options and Corinthian’s ability to place them following graduation, the graduation rates themselves, and loan issues. California Attorney General alleges CCI targeted single parents close to the poverty level via aggressive marketing. So that’s one place our tax dollars earmarked to increase access to post-secondary education have been. Note to for-profit educators: Don’t make promises you can’t keep.

But we can end on an encouraging note. As is often the case, the action is at the margin. In working to ascertain whether student debt expansion increased access to post-secondary education over the short-haul, the NY Fed researchers found that only the availability of Pell grants increases access. These grants go directly to low-income students, who are most likely to be on the enrollment margin. And although they also push up tuition, they do so at a lower rate than the loan-based increases.

If we’re serious about increasing access to college for those who want to attend, we’d be wise to funnel funds into grant programs that advance that goal, and to do so at the expense of outfits like CCI.

Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs

by Philippa Dunne· · 0 comments · Comments & Context

What gas dividend?

Oil (and gasoline) prices have crept off their lows; they’re up about 25% this year, though they’re still well below year-ago prices. But many analysts have been scratching their heads wondering why the decline in energy prices hasn’t done more to goose up retail spending. It may be that's not really much of a conundrum. 

PCE

Here are several ways of making that point. First, there’s the graph above, showing the annual growth rate in nominal expenditures on energy and all other forms of consumption from the national income accounts. If energy prices could add to or subtract from other forms of consumption, you’d expect the two lines to look more like mirror images. In fact, they move more together than apart. The correlation coefficient between the two series is 0.43. Lag the non-energy spending a year, on the supposition that there might be a delayed reaction time, and the correlation coefficient actually falls to 0.28.

Moves in energy consumption are overwhelmingly dominated by price. The correlation coefficient between the annual change in the gasoline price and energy expenditures is 0.97. (That’s made even more remarkable by the fact that more than a third of energy spending is on services like electricity, which are not priced like gas.) While people may drive more or less, or raise or lower the thermostat, based on price movements, it appears they don’t change their behavior all that much. They just take the price—and it doesn’t seem to have much effect on other spending.

One gets similar results looking at the BLS’s Consumer Expenditure Survey (often abbreviated CEX, so as not to confuse it with Current Employment Statistics, the official name of the payroll survey). The CEX can be volatile, and dependent on the unreliable memories of the surveyed in describing their spending habits, but it’s still the best household-based measure of expenditures we have—and it allows for fairly detailed demographic analysis.

Ene-Nonene-CEX

As the first graph above shows, we don’t find the mirror image between energy and non-energy spending growth that you might expect in the aggregate. The correlation between energy and non-energy spending growth is 0.28—positive, not negative. And the story is similar when you look at poor (bottom quintile), middle-income (third quintile), and affluent (top quintile) households. The correlation weakens the higher you go up the income ladder (0.52 for the first, 0.42 for the third, and 0.14 for the fifth), but they remain positive for all five. 

Not surprisingly, there’s a tight relation between income growth and spending. A regression of the annual change in non-energy spending in the CEX on the annual change in household income yields an impressively high r2 of 0.53. So the “mystery” of why lower energy prices are not translating into higher retail spending may not be a mystery at all. The best explanation of tepid retail growth is tepid income growth.

Advanced industries

February 11, 2015

 The Brookings Institution just published a paper outlining the importance of our advanced industries (AI), and a call to do more to support its growth. To be classified as advanced  industries must spend more than $450 per worker on R&D, putting them in the 80th percentile, and the share of workers whose jobs demand a high degree of STEM (Science, Technology, Engineering and Math) knowledge must exceed the national average of 21%. Overall, industries so classed constitute our tech sector at its broadest: most manufacturing operations including aerospace, automotive, navigational instruments, medical equipment and supplies; energy including electric power, mining and extraction; and services, including architecture and engineering, data processing, satellite communication and scientific research. 

Between 1980 and 2013 such industries grew 30% faster than the rest of the economy, or 5.4% annually, but employment levels held basically steady, largely because of productivity advances. Since the Great Recession both activity and employment have been on the rise, the sector adding one million direct jobs between 2010 and 2013, with employment and output rates 1.9 and 2.3 times faster than the nation as a whole. And AI employment has a high multiplier: those 1 million direct jobs likely generated another 2.2 million outside the industry itself, which compares to about 6 million total jobs created nationally over the same stretch. Advanced services were responsible for 65% of the total AI jobs, with computer design by itself up 250,000. Industries building transportation equipment have been adding jobs, finally, after decades of losses. A lot of attention has been focused on contributions to national payroll gains made by AI subsector gas and oil extraction since the recession. 

A boost? Certainly, but dwarfed by the mothership.

 Each worker in the sector generates about $210,000 in value added, in comparison to the $101,000 average overall, which helps offset the sharp increase in wages. In 2013 the average AI worker earned $90,000 annually, close to twice the overall average. Between 1975 and 2013 inflation-adjusted AI wages were up 63%, compared with 17% outside the sector. Total AI employment was about 12.3 million in 2013, about 9% of total overall employment, with another 27 million jobs riding AI's coattails. Together with the directly employed, that’s about one-fourth of US employment. Surprisingly, about half of the workers in the sector hold less than a bachelor’s degree, and Brookings ranks it as an accessible field. And one where more workers are needed.

Computer systems design owns the largest share of total AI employment, 13.8%, followed by architecture and engineering, 11.0% and management and technological consulting, 9.6%. Between 2010 and 2013 fastest rates of employment growth took place in information services, 10%; railroad rolling stock, 8.4%; automotive, 8.1%, and gas and oil extraction 7.6%.

Advanced industries tend to thrive in urban areas: San Jose is our most advanced hub, with 30% of the workforce laboring in the sector, followed by Seattle, 16%, Wichita, 15.5%, Detroit, 14.8%, and San Francisco, 14%. San Jose, Detroit and Seattle have the broadest array of advanced industry. (We’ll be presenting more data on this in coming months.)

 We are losing international share, and there are a host of serious problems we like to nag about, but even in its somewhat weakened state our AI sector a powerful thing. And if we’re worried about productivity, as we should be, it’s a great place to start.

 

Student Debt: Onerous, and a Drag

We have heard from a number of sources that researchers at the New York Federal Reserve Bank are worried that without some form of mortgage debt relief we may face a crisis in a couple of years that eclipses the one that took place in 2008. In line with such worries, the New York Fed has started collecting previously unavailable data on student debt, a form of indebtedness that’s a major burden on the young, and also more of a macroeconomic drag than many analysts realize. Here are some details on all that.

Runaway Inflation

The rise in college tuition has been relentless, far outpacing the famous rise in the cost of health care (see graph, below). Since 1980, the overall CPI is up 194%. Its medical care component is up 436%, more than twice as much. But its college tuition component is up 829%, more than four times as much.

CPI

It’s hard to put a finger on just what drives educational inflation. No particular category of spending is rising out of line with the averages, though contacts at a number of institutions point to a great fondness for building fancy new buildings, many of them financed with bonds secured by supposedly ever-rising student tuition and fees. This is how NYU, with its relatively small endowment, is financing its grand expansion plans in lower Manhattan. Faculties of both the business school and economics department have filed objections, citing a fearsome growth in leverage. Similar things are going on in public systems, like the University of California’s, despite continued reduction in state financing.

Instructional budgets have remained at a stable 33% of spending for the last decade, even as student/teacher ratios have fallen. The reason that those ratios could fall while the instructional share of budgets has been stable is that universities have squeezed on labor costs. To start with, the composition of faculties has changed markedly—from nearly 80% full-time in 1970 to about 50% today. Over the last decade, student enrollment is up 38%; full-time faculty is up 23%, and part-time is up 63%. But the full-time faculty haven’t been raking it in. Tuition and fees have risen 82% faster than the salaries of full-time faculty since the early 1990s at private institutions, and 149% faster at public ones.

Burdens Shifting to Individuals

At the same time costs have been rising, state governments have cut back their support of public universities and colleges. Some major state universities now get less than 10% of their income from state budgets. As the graph below shows, the personal share of higher ed spending surpassed the state and local share about ten years ago, and the two lines continue to get farther apart. (This data, drawn from the national income accounts, stops in 2010. Given budget cutbacks since then, the gap has undoubtedly gotten wider.) The feds have kicked up their share, but nowhere near enough to offset the decline in the state and local share.

Who-pays

Of course, because of aid, not everyone pays the full published prices. According to the College Board, net costs of public institutions in 2008 were around 44% of household income for the poorest quartile of the population, 26% for the next-poorest, 19% for the second-richest, and 10% for the best off. That’s a lot of money. And more of the aid, at least until very recently, has been coming in the form of loans rather than grants. In the 1970s, loans were 21% of aid; lately, the share has been 47%. Pell Grants, the major federal program, covered 45% of the average public university tuition bill in 1990; in 2011, it covered 32%.

The Great Recession had a major effect on college choice and financing. According to a Sallie Mae/Ipsos survey, college costs—actually paid, not sticker prices—came down in the 2010–2011 school year, especially for higher-income families. (It rose for the poorest quartile, though.) Students traded down, looking for cheaper options (many—at all income levels—shifted from four-year public to two-year public institutions), and grants and scholarships increased (led by increases in Pell Grants from the federal government). More middle-income families applied for financial aid—the product, no doubt, of the recession’s lingering hit to income and balance sheets. Middle- and high-income families increased their use of grants and scholarships, with both dollar levels and shares of costs paid rising over the last couple of years. More middle-income families are applying for aid, and they’re still plenty worried about rising costs.

But a lot of college funds have to be borrowed. According to Sallie Mae/Ipsos, poor families paid 25% of expenses with borrowed funds in the 2010–2011 year. The share declines as you go up the ladder, but not as much as you might think: 22% for the middle ranks, and 17% for the best off. And the trend is towards increasing reliance on loans. In 1992, 32% of undergrads borrowed; in 2007, 53% did.

Heavy Debt Loads

The result has been a relentless increase in education debt. (See graph, below, for a yearly flow picture.) We don’t know exactly how much it’s risen, since there are no official sources of the stock of loans outstanding. A private researcher, Mark Kantrowitz, proprietor of a website called finaid.org, estimates that total student debt has risen from about $200 billion in 2000 to $1 trillion today, but he’s stingy about disclosing his sources and techniques. While the trajectory is probably more or less right, we don’t know for sure.

Loans

More recently, the New York Fed, using data gathered from the credit rating agency Equifax, has been publishing estimates of student debt, which are the closest to definitive we now have. The numbers are staggering. They estimate that as of the third quarter of 2011, total student debt was about $870 billion—more than credit card balances ($693 billion) and auto loans ($730 billion).

Just over 15% of adults have student debt balances. The mean balance is $23,300—but that is pulled up, as most debt aggregates are, but a minority who are deep in debt. The median is only about half the mean: $12,800. A quarter owe more than $28,000, and 10% owe more than 54%.

Although almost all age groups owe student debt, the profile skews young: 40% of people in their 20s are on the hook, compared with just 7% of those over 40. But the numbers don’t go to 0 with age: 5% of over-60s owe student debt.

And since the young have relatively low incomes—on which more in a moment—there’s a lot of distress among the indebted. On the surface, about 10% of those with student debts are in arrears, roughly in line with credit card debt. But since many borrowers are still in school or just out, they’re not yet expected to begin servicing their debts. Adjusting for that, the New York Fed estimates that more than a quarter—27%—of borrowers have past-due balances.

That level of distress, combined with a still-lousy job market, means that today’s young are having a hard time getting on their feet. A just-released survey of recent grads by the Heldrich Center for Workforce Development at Rutgers shows unrelated to their fields of study, and having a hard time making ends meet. Median student debt of recent grads is $20,000—higher than the New York Fed’s figure, no doubt because of the increasing prominence of debt finance. And it’s pinching their spending sharply: 40% have delayed the purchase of a house or car, 28% have put off additional education, 27% have moved back in with their parents, and 14% have delayed marriage. And they have generally gloomy views of their future—personally and especially for their generation as a whole.

A Nonflattering Profile

One of the more established facts in economics is that people’s incomes tend to rise with age to a peak around their early 50s, then decline into retirement and beyond. As with many established facts, recent economic history is challenging this pattern.

Graphed below is average household income in constant dollars by age of household head. In 2010, households headed by someone aged 15–24 had an income of $28,322, 15% less than their counterparts in 1970. All other age groups were better off than their predecessors 40 years earlier, though in general, the younger the cohort, the lesser the advantage. The 65+ set, though, was almost 80% better off than their 1970s counterparts. Today’s young are about 20% worse off than those of 2000. Most other groups are 10–15% worse off than their counterparts at the century’s turn.

Income-age-profiles

That’s not to say that older households are doing swimmingly. In fact, the 35–44s and 45–54s are also worse off than their 1990s ancestors. And economic progress over time is looking to have stalled for the middle ranks. While the 25–34 set in 2010 had incomes 42% above the 15–24 group ten years earlier (presumably, that is, mostly the same people), the 45–54 group was 8% worse off than that cohort was when they were 35–44, and the 55–64 group was worse off.

Only the elderly have been exempt from this stagnation/downward mobility. They’re the only group whose incomes have risen consistently. But before one concludes that they’re rolling in it, the average income of this cohort was $31,408 in 2010, 36% below the national average.

Amid shifting trends and uncertainty, one thing doesn’t change: our young adults are our country’s future. It’s a good thing the NY Fed is paying attention to the burdens are best hopes are carrying.