Speaking of Grad PLUS Loans…

This weekend, the Times both accepted the Bennett hypothesis and chose not to condescend to us about the “paradox” of how underemployed law grads can refuse to work for people who can’t afford to pay them. That’s really remarkable. What more can I say?

Okay, one point, an emphasis. When I wrote that applying the gainful employment rule to all law schools would cause fifty to close in short order, I was clearly being conservative. $50,000 in discretionary income is a lot of money, even for law school graduates.

And since we’re on the topic of student lending, the Department of Education updated its student loan data through the 2014-2015 academic year. I’ve updated the Student Debt Data page accordingly.

The big findings are that (a) people are borrowing less money from the federal government:

Amount of Federal Loans Disbursed

…But (b), Grad PLUS borrowing hasn’t changed much in the last year.

In the last two years though, the number of Grad PLUS borrowers has grown (+2,540) while the total amount borrowed has fallen (-$140 million). It only amounts to about $500 per borrower, but who knows, maybe it’s due to fewer law students? I wouldn’t be surprised.

Finally, in the same week that I bought my first car I realized after years of listening that Galaxie 500’s “Blue Thunder” is about a man’s love for his car, and the Route 128 reference indicates it’s an homage to the Modern Lovers’ “Roadrunner.” (I’m terrible at discerning lyrics; it’s usually not what I listen for in music.) I really dig how “Blue Thunder” denies the listener the chorus until the very end.

I prefer the album version, but how could I not post an ’80s video?


Henry George 2015: TPP or Free Trade?

Last week, I ran across former Dallas Fed president Bob McTeer’s defense of the Trans-Pacific Partnership (TPP) on Forbes. Interestingly, McTeer opens with quotes by Henry George on international trade. In 1886 George wrote a book on the subject, titled, “Protection or Free Trade,” in which he attacked tariffs and protectionism. More than once I’ve seen trade advocates cite his position on the subject without reference to his analyses of production factors (which ineluctably leads to his advocacy for land-value taxation) or technological unemployment. It’s one of George’s other hats as an economist.

McTeer believes George would probably favor the TPP, which I think misreads George and the times in which he was writing. Throughout the 19th century the U.S. government’s primary source of revenue was tariffs. The persuasiveness of the Hamiltonian bases for them is debatable. I happen to think the U.S. prospered in the 1800s despite the tariffs, not thanks to them. Read an example here.

However, aside from the income tax that was enacted during the Civil War (and which was later found unconstitutional), the only alternatives for funding the federal government were asset sales and direct taxes, which the constitution requires to be apportioned among the states by population. Consequently, although the government wasn’t nearly as expansive as it became in the 20th century, George’s writings on free trade were inextricably connected to his demand for public recovery of land rents. He criticized income taxes as a tax on honesty, which they are.

So, to a large degree, George’s attack on tariffs wasn’t simply Ricardian comparative advantage. Additionally, there’s the problem of McTeer’s characterization of the TPP as the kind of free trade agreement George would probably support. George’s animating virtue was fairness, operationalized against monopoly power. He attacked Western Union for its control over the telegraphs just as he did landowners, for example.

I’m not going to put words in George’s zombified mouth, but there are two weaknesses with the TPP that anti-monopolists should be aware of that McTeer doesn’t specify. One, much of the TPP is concerned with protecting intellectual property rights, e.g., drug patents and Microsoft software copyrights. I forget George’s position on copyrights, patents, and trademarks, but those are monopolies, and these days they’re quite abused. Two, the TPP is not going to increase trade by much. It might reduce tariffs in other countries, but if we believe in free trade then that’s the other countries’ problem, not ours. I’ve heard other criticisms of the TPP as secretive and anti-democratic, which McTeer doesn’t discuss. Nor am I convinced it will somehow contain China as the Obama administration has maintained. Why would it?

McTeer’s argument is weak in other respects. He’s correct when he says that jobs lost to imports are substituted by jobs gained by exports, even though the former is more evident that the latter. What I haven’t seen is a discussion of how easily those who lose jobs find commensurate jobs in other fields. Are former coal miners easily retrained for jobs in coastal cities marketing American products overseas? Labor isn’t infinitely fungible, and I’ve never seen this point addressed.

McTeer then dismisses the trade deficit claiming its only been around for several years and is “fairly stable.” The U.S. has had a net trade deficit for just about my entire life with only a small break in the early 1990s. A lot of it is due to foreign oil imports that are wasted on commuting, which again is a land use problem. (It’s amazing how shortsighted people are about energy.) Another chunk of it is due to chronic currency manipulation by trading partners, notably China in recent years. China “sterilized” dollars flowing into it to keep them away from its people—like the Social Security trust fund without the Social Security part. Free trade for us, not China.

McTeer then waves these concerns away by explaining that the surplus in the U.S. capital account compensates for losses in trade. (Technically, the trade deficit and the current account deficit aren’t identical.) In other words, the paper or electronic money we export comes back as investment. There are reasons to be dubious. As I would hope George would have recognized, foreign investment is just as likely to go to fixed factors as productive ones. If foreigners gobble up real estate, and we don’t tax it, that just transfers our productivity to them. Secondly, if foreign governments buy up our public debt, our interest rates fall, which might contribute to land bubbles. It also doesn’t help our developing trade partners when they’re exporting their capital to us. The flow should go the other way.

[UPDATE: An intriguing article on VoxEU discusses excessive capital inflows that accompany current account deficits, leading to production shifts from manufacturing to non-tradable sectors, i.e. construction. The authors refer to the phenomenon as the “financial resource curse.”]

For these reasons, I doubt the TPP is as much of a test of Americans’ economic literacy as McTeer claims it to be. It isn’t an obvious conflict between domestic monopolies and foreign competition.

Everything I Ever Needed to Know: The Middle School Premium

I recently wrote on the Census Bureau’s awaited annual update to its “Income, Poverty and Health Insurance Coverage” data for 2014. I editorialized on the decline in median earnings for 25-34 year-olds since the turn of the century. Today, I thought that rather than emphasize the negative, as I often do, I would point to the positive: For two decades, things have been getting better for people who don’t even finish the ninth grade. Way better.

Don’t laugh. This is serious social science.

Consider: If you think education increases earnings then you’d look at aggregate earnings of all persons (for the youth bracket, in this case) by education. You’d expect to see the aggregate earnings grow with an increasing proportion of the gains going to educated people. Instead you get this:

Aggregate Personal Earnings by Education (25-34, Both Sexes)

…Increasing proportions of the total going to the educated but no aggregate growth. This means average productivity isn’t improving; maybe the unenlightened are getting dumber or maybe educated workers aren’t really benefiting from more schooling.

How do you separate these factors when productivity and population (by education) are multiplied together and then added up to illustrate the aggregate above? In an unlikely parallel, Paul Krugman leads the way when trashing Jeb! Bush’s economic record as governor of Florida: Just compare the average aggregate growth rate to the average per capita growth rate. If the average per capita growth rate is higher than the average aggregate growth rate, then you’re looking at improving productivity rather than positive population shifts, which is bad.

We can do the same thing with education: average growth in aggregate earnings and average growth in per capita earnings.

Get ready…

Earnings Growth Rates by Education for 25-34 Year Olds (1991-, 2014 $)

Boom. Since 1991, the cumulative per capita growth rate for middle schoolers’ incomes has been 28 percent but for college grads (and above!) it’s been a scant 9 percent. In 42 years, both categories’ earnings will be identical.

Presumably, in about twenty-five years, young people will begin retarding their educations to avoid wasting their time learning ancillary subjects like geometry, science, literature, history, and—ungh—drama.

And if you thought law school scamblogs were bad, wait until you see Third Tier High School. Many a commode will be flushed that day, that’s for sure!

But aside from that massive finding, I direct your attention to the blue bars in the chart. As with Krugman’s argument on Jeb!’s governorship, they show exactly what we’ve feared all along: Any growth in college graduates’ productivity is overwhelmingly swamped by population shifts. In other words, more people are getting degrees, but overall they aren’t earning much more.

I wouldn’t read too much into the fact that dropping out of college is worse than not going in the first place. The stagnation of associate’s degree candidates, by contrast, is disturbing.

In truth, though, much of the growth in per capita earnings is probably attributable to college grads, so I wouldn’t completely discount them. However, most of that occurred in the 1990s. We’re in a very different place today.

Ponder that when your kids start the square-dancing unit in P.E.


Mellow is the Bubble

It’s been a few months since I’ve done one of these, and thanks to some overtime this weekend I haven’t had time to write, so here’s Japandroids’ “Adrenaline Nightshift.”

…And since I’m seeing a performance of Big Star’s Third this week, here’s “For You.”

Finally, here’s the best photo I took of the lunar eclipse last night.

2015-09-27 Lunar Eclipse



GAO Report: RIP High-Income IBR Deadbeats

We are alerted to the U.S. Government Accountability Office’s latest report, “Education [Department] Could Do More to Help Ensure Borrowers Are Aware of Repayment and Forgiveness Options” (here). The report asks one of the questions I’ve always had of income-based repayment plans: How much are people on them earning?

The answer, as of September 2014, is squat—even less than I would’ve guessed.

(I suspect the GAO chose September because it’s the end of the fiscal year.)

GAO Report--Figure 4 (Income)

Out of 11.2 million borrowers in repayment, 13 percent were in IBR and 2 percent were in PAYE (1.46 million plus 0.22 million). If you play with the numbers right that means about 2 percent of all IBR-plus-PAYE borrowers earned more than $80,000 annually. That’s about 30,000 people. By contrast 72 percent (1.2 million) earned $20,000 or less.

Other fun facts: One, about two-thirds of all IBR/PAYE borrowers are women, so we can predict that the REPAYE plan of the future, which will essentially require debtors’ spouses to pay their debts, will be an anti-dowry. Two, within the IBR group, 13 percent were paying the equivalent of a 10-year repayment plan, and for the PAYE people, it was only 5 percent, implying that perhaps some high-income debtors are not going to require loan forgiveness anyway. Three, only one-third of IBR borrowers went to grad school; for PAYE it was only a fifth.

The low-income finding is important because there have been some articles about how IBR and the changes to it confer vastly unfair benefits to high-income deadbeats who could repay their loans if loopholes were closed. For example, earlier in September, The Wall Street Journal shrieked about studies showing how IBR and PAYE are sops to doctors and lawyers (not M.D.s and J.D.s apparently), and my personal favorite occurred last February when The Washington Post ran an op-ed by the New America Foundation’s Jason Delisle and Alexander Holt, who argued against PAYE based on a lopsided hypothetical of a law grad who made $70,000. Thanks to the GAO study, this person was not only lucky as law grads go but also totally unrepresentative of IBR/PAYE borrowers.

So going forward, I fully expect media outlets and the NAF to report on how the changes to IBR broadly favor low-income debtors, and that there aren’t so many high-income debtors taking advantage of the system.

But what did the NAF actually say about the study? It appears to be shifting its focus away from IBR deadbeats to graduate debtors on PSLF specifically. That’s not really a topic I’m interested in exploring today, but those hoping the authors would apologize for wasting so much of our public-policy mental bandwidth up until now will have to wait. The IBR deadbeat might be dead, but I’m sure they’ll resurrect it fairly soon.

In the meantime, the NAF attacks IBR by blaming students for earning too little money. I’m not kidding. Consider their closing line:

Given that borrowers in IBR and PAYE have such low incomes and high debt levels, the plans look much more like very long-term programs for borrowers, not sources of temporary relief.

What does the NAF expect? The economy is still depressed. It won’t really recover without fiscal, trade, and labor reforms. It’s not the borrowers’ faults they don’t have high-paying jobs, nor is it IBR/PAYE’s. So what’s the solution? Making them pay more? It’s unclear where the NAF will go from here, but more debt, more education, and tougher repayment plans aren’t going to work. Given that the NAF took a wide swing and missed over the IBR deadbeats, I discourage optimism.

Speaking of pessimism for college grads, the Census Bureau has updated its “Income, Poverty and Health Insurance Coverage” data for 2014. As with last year, I won’t delve too deeply into the analysis, but here are median earnings by education level for the 25-34 bracket.

Median Earnings by Education (25 - 34)

Okay, the median college grad earned $1,000 more in 2014, but it’s still way below the peak in 2000.

Meanwhile, the percent of college grads who weren’t working is still 3 points higher than in 2008, and 6 points higher than 1997. That amounts to more than half a million college grads who could be working. Moreover, it’s noisier, but there’s been an upward trend since the 1990s in professional-degree holders who don’t work.

Percent of 25-to-34-Year-Olds With Zero Earnings by Education

The best we can say is that things didn’t get worse last year, but it’s much too soon to say things are getting better.

Dean Baker Gambles on Real Estate, Claims Land Prices Aren’t a Problem

It’s a little more complex than that, but Baker is known for provocative blog post titles, so it’s fair: On Thursday he put one up titled, “The Crisis of Too Little Land,” which is a response to Noah Smith’s Bloomberg View article, “The Threat Coming by Land.” Baker is well known for predicting the real estate bubble as far back as 2002, but notably, he used his insight to his personal advantage—which is totally justified: Ignore economists who get things right at your own peril.

In his excellent free book Plunder and Blunder (pdf), Baker writes that in 1996 he and his wife paid $160,000 for a condominium in D.C. and then sold it for $445,000 in 2004, a 158 percent increase once inflation is included. They only painted a few rooms. Consequently, Baker knows full well that Smith is referring to “land” as a production factor, not a physical quantity. (In equal rebuke, Smith refers to “land” as “capital,” which makes me want to bang my head against a wall.)

However, Baker goes on to correctly characterize Smith’s argument as “too much money going to owners of land,” but he disagrees as to the causes and implications. For one, higher land prices are a response to lower interest rates, and those have been falling since the 1980s. Two, dying cities with cheap land offer alternatives to employers (and workers) hoping to set up shop. Three, he dislikes smith’s use of the term “landlord,” when most of them are really “homeowners.” Finally, with stagnating or declining populations, the industrialized world will see lower land prices.

I’m mostly fine with the interest rate point, but I question whether significant changes in fiscal policies, especially property taxes beginning in the 1970s, are also responsible. Proposition 13 in California and S7000A in New York have done enormous damage to poorer households in those states. I’m sure the Reagan tax cuts didn’t help either, so I wouldn’t lay as much blame on interest rates.

The same goes for Smith’s use of “landlords” rather than “landowners,” which is a mannerism I see among land-value taxation advocates. I prefer “landowners” as well, but Baker’s preferred “homeowners” confuses quantity of owners with quality of ownership. Large corporations (think McDonald’s) own the most valuable land in the country, so taxing land values as Smith supports would hit the wealthiest landowners first and foremost. To the extent taxes would be shifted away from incomes (especially the regressive payroll tax), the harm to suburban homeowners wouldn’t be as pronounced. (They also can’t invert themselves overseas.) There’s also the problem of the sensitivity of land consumption to income and wealth: Wealthy people use more space than what they simply own, e.g. private golf courses, yacht clubs, etc. Thus, I’m dissatisfied with Baker’s terminology too.

Baker’s second and fourth points discuss the same effect somewhat: Populations leaving cities (or dying off) reduce land prices, but no one wants to set up shop in areas that are declining. There’s a post hoc quality to Baker’s argument here: If urban sites outside of New York, San Francisco, Silicon Valley, etc., are cheaper options, why haven’t industries moved to them already? The reason is clear: There is no good alternative to a good location, so when the government subsidizes location owners and taxes producers, our economy seizes up. This is why Smith writes, “It doesn’t matter how much empty land is out there — who wants to live on the Kansas prairie? What matters for the value of modern land is the incentive to locate close to other people.” It’s also why Baker’s title appears to miss the point in contrast to his usually innocuous tongue-in-cheek blog posts: It matters quite a bit if land-market failures have cost the U.S. 13 percent of its GDP since the 1960s.

I have two points of my own to add: One, Baker is often concerned with the U.S. trade deficit, particularly with China, but a lot of it is due to oil consumption caused by urban sprawl. Our energy policy contributes to other problems, so it’s unfortunate Baker doesn’t draw the relationship.

Two, Baker regularly touts financial transaction taxes and even taxes on vacant homes. It’s bizarre that he’s unwilling to endorse land value taxes notwithstanding his arguments against Smith. LVT is better than both.

Ultimately, Baker understands land prices in a bubble context, but he doesn’t understand land as a production factor, even though he an recite “land, labor, and capital” as a mantra (see the comments). Frankly, I’m not sure if this is worse than Smith’s land-as-capital model, but it’s highly problematic. For example, Japan has a declining population, and with it low expectations of future land rents, which in turn leads to lower inflation, low interest rates, and low growth. By Baker’s reasoning these forces should also lead to higher land prices. The virtue of LVT is taking the speculative element out of investment. It’s disappointing that Baker sees land pricing only in its excesses but not in its general effects on factor distribution and growth.