NY Fed Chimes in on Collapsed Household Formation Rate

Following up on last week’s post, the Federal Reserve Bank of New York put up a post titled, “Household Formation within the ‘Boomerang Generation’,” asking, “Why might young people increasingly reside with their parents?”

Of the excellent charts the authors provide, I’ll only reprint the one I like best:

The write:

The chart also suggests, however, that the trend in parental co-residence has not substantially changed the fraction of individuals living with a single roommate, an arrangement that in many cases is likely to be a romantic partnership. (These patterns are similar for thirty-year-olds, where our analysis using the Current Population Survey indicates that co-residence with one adult is a highly accurate indicator of romantic partnership.)

So when exactly are the <50 percent of 25 year-olds supposed to form romantic partnerships and buy out their parents’ homes?

Answer: Never.

Our results demonstrate that local economic growth is a mixed blessing when it comes to building youth independence: Improvement in youth employment conditions enables young people to move away from their parents, but rising local house prices are estimated to have forced many young people to move back home. These two effects partially offset each other.

[W]hile local economic growth, reflected in rising youth employment and escalating house prices, has mixed consequences for youth independence, the increasing magnitude of student debt among college graduates appears to be driving young people home and keeping them there.

It’s astonishing that the NY Fed of all places is more willing to tell it like it is than the East Coast media elite, who think we need to send everyone to college and that student debt isn’t a problem.

It’s Official: I Am Your Sovereign.

Readers of The New York Times Magazine were undoubtedly disappointed when the June 20th article titled, “It’s Official: The Boomerang Kids Won’t Leave,” neglected to cite which duly constituted body in fact solemnly declared that the “boomerang kids” won’t leave. It also doesn’t tell us who the “boomerang kids” are (garage rock band?) or what they won’t be leaving. Reminiscent of last May when the much lesser-known PolicyMic proclaimed, “It’s official: The law school bubble has popped,” based merely on a paper by Moody’s, I think this idiotic trope deserves exploitation.

By the power vested in me by WordPress.com and abrogated editorial standards, I hereby decree that it’s official: I am your Sovereign. You may kiss my hand and remit your tax payments to…

You can read the rest of the Times Magazine article if you dare. To summarize: After a 197-word anecdote about what I guess is a “boomerang kid,” it tells us without reference to any sources that “One in five people in their 20s and early 30s is currently living with his or her parents,” even though the Census Bureau says that 31 percent of 18-to-34-year-olds are children of householders. (For the 25-34 bracket, it hit 14 percent in 2013. The trend began ticking upward in 2006, and it’s mainly driven by women.)

Figure AD-1b

The article then goes about treating the increase in young people living with their parents as equal parts bad luck and policy Rubik’s cube. (At least it didn’t say that “tough choices had to be made”.) It impliedly dismisses the notion that simple solutions could change things for the better, like abandoning the labor policy of mass unemployment. No comparisons to Japan are made. There’s a paragraph-long digression on the advent of childhood in the 19th century. Then the article substitutes careful analysis with grand philosophizing, e.g., “[W]e are living not simply in an unequal society but rather in two separate, side-by-side economies.”

Whoa. Think about that the next time you pay your rent.

Then the article torturously spends its final four of its fifteen paragraphs on yet another anecdotal individual who is “emblematic of a generation.” Really, I could’ve been much harder on this piece. Although, to its credit it doesn’t conclude with rabid college-for-all frothing.

The only question I’m left with is, “Has reporting on young adults ever not been infantilizing and uninformative?” Perhaps I’m setting the bar a bit high for an article that slaps “official” onto its title to trick its readers into thinking that it’s so. Maybe editors will stop pulling that the day you all send me, your official Sovereign, your tax bills.

The Unnatural End of American Social Reproduction

A theoretical sketch:

Young people are supposed to borrow money to buy houses, start business, and get educations that allow them to “buy out” the previous generation. Then they work, and as they age they save, often moving from home to home as their families grow. They eventually become the net creditors who are then bought out by the succeeding generation. They often downsize their homes. This is the generational lifecycle. It is the mechanism of social reproduction.

The cog in the generational lifecycle is the Georgist land cycle. Because the supply of land (especially urban locations) is fixed, its value is inevitably whipsawed by speculation. The more people buy land at the peak of the land cycle and lose out, the more land ends up in the hands of the wealthy (banks), who can afford to wait to sell the land when prices rise again. Everyone else must suffer.

If after several of these cycles, people lack the purchasing power to buy out the previous generation, they cease to reproduce—more so thanks to the contraception revolution—and existing landowners hoard land for longer, exacerbating the disruption of the generational lifecycle.

I believe this happened in Japan after its land bubble burst in 1990. I’m sure some moss-covered media outlet is overdue for an article on “herbivore” men and “parasite single” women.

Here’s evidence for the disruption in the United States. Behold the household formation rate.

Household Formation Rate

(Source: Table 13, 13(a), spikes due mainly to Census revisions)

Note that the conventional (blue) and revised (red) estimates were at a combined record low last year.

Now here are total households by age.

Total Households by Age

(Source: Table 12, 12(a))

…And declining homeownership rates.

Homeownership Rates by Age

(Source: Table 12, 12(a))

Undoubtedly, the relatively large boomer cohort is influencing what’s shown here, but eyeballing the charts shows that the 35-44 and <35 brackets are the ones that have been hampered the most. Also, the measure of new households isn’t a perfect measure of what we’re looking for. For instance, I have no idea how many people live in roommate-type arrangements or live alone. However, if you want more direct evidence of the disruption of the generational lifecycle, you can see here the percentage of 25- to 34-year-olds who are children of householders. For women, the percentage has pretty much doubled since 2004. You can also see that for men the typical low was about 10 percent before 1980.

Figure AD-1b

(Source: Table AD-1b)

Mass unemployment and low wages ensure that young people won’t be able to buy out the older generation. Somewhere along the chain of homeowners, people will be unable to (or believe they will be unable to) sell their homes to the next household in the sequence. This will create pessimism for homeownership, freeze growth, and further reduce the number of future households.

Without reform it could take many years for the negative feedback from the land cycle to stop disrupting social reproduction.

Census Bureau to America’s Youth: ‘Don’t Grow Up!’

In the famous original Star Trek episode “Miri,” the Enterprise happens upon a world that is exactly like Earth in the 1960s (boy that gimmick got old), except the only people alive are a handful of children. The grown-ups—”grumps”—all died due to a deadly disease that was supposed to make everyone immortal. “Miri”‘s children, however, were hundreds of years old because they only aged one month per year.

Wackiness ensued.

Worse than life imitating art, children in the United States of America could only dream of living on the pseudo-Earth in “Miri.” This week, the Census Bureau updated its “Income, Poverty and Health Insurance Coverage” page for 2012, and most of the focus has been on the cratered real median family incomes. Indeed, last year the median family income was less than what it was in 1989. Heckuva job.

But I’m not here to dumpster-dive into Census data to comment on families’ incomes; rather, the update’s relevance to me is the 2012 person income tables, which contains the ever-so-useful PINC-03: “Educational Attainment—People 25 Years and Older, by Total Money Earnings in 2012, Work Experience in 2012, Age, Race, Hispanic Origin, and Sex.” PINC-03 goes back in some form or another to 1994, and it gives us personal earnings data on Americans in the 25 to 34 age bracket by educational attainment, courtesy of the Household Survey. It is awesome.

To get things rolling, here’s a chart showing the dispersion of incomes by education (with medians drawn in) in 2012 and a blow-up version to better show the LSTB’s favorite category, professional degrees:

Dispersal of Earnings by Education (25 -34) (Thousands, 2012) Dispersal of Earnings by Education (25 -34) [Blow-Up]

The PINC-03 tables measure incomes in $2,500 brackets, stopping at $99,999. After that they lump all incomes above $99,999 that into one category. Here’s a comparison:

Percent 25-34 Earning 100,000 by Ed (2012)

So what does the 2012 update add to the time series data beginning in 1994? Why, mass unemployment and declining incomes for young Americans!

Median Earnings by Education (25 - 34) (2012 $)

One of the neat tricks the government uses to buoy median incomes is to exclude people who have $0 earnings from the population (the denominator), figuring that we can’t tell whether people choose to leave the workforce or are involuntarily unemployed (because, you know, unemployment is voluntary). Excluding zero-earners makes less and less sense as we go up the education scale. Like, come on Census, you really expect us to believe that 12 percent of the people with professional degrees took on all that education debt and sacrificed prime working years just to earn nothing last year?

Percent 25-34 With Zero Earnings

As you can see in these last two charts, the professional degree-holder data are much noisier than the other categories, the reason being that they only comprise 1 percent of the 25 to 34 bracket. Small sample sizes bedevil us. The remaining categories I’ve depicted are all greater than 10 percent, so they’re likely more precise.

Now you might be asking, “Hey LSTB, how many college graduates are earning less than the median high school graduate?” and you would be clever for doing so, for the answer indicates that for many young Americans college does not provide a “premium,” unless you think being less unemployed than a high school graduate is an accomplishment. Because the PINC-03 tables provide the number of people by $2,500 earnings bracket, the next chart shows the floors and ceilings for how many people are above or below the median.

Percent Range College Grads Earning Less Than HS (25 - 34)


Now, another brief digression on professional degree-holders in the 25 to 34 bracket. Probably a substantial majority of them are law school graduates. I suspect that because according to the Digest of Education Statistics law grads dominate the 10-year degrees-conferred rate for professional school graduates.

10-Year Rate of Professional Degrees Conferred

(Source: Table 322, author’s calculations)

One thing to note is that while the 10-year degrees rate for the last couple of years has been nearly 900,000, the number of 25- to 34-year-olds in the PINC-03 tables with such degrees is usually half that. Either the Household Survey is consistently imprecise, wantonly excluding many professionals, or non-law school professionals don’t obtain their degrees until much later than 25. If the latter is true, then the “professional degrees” category in the 25 to 34 bracket is even more law grad-heavy than the rest of the population, justifying my hunch that “professional school grads” in these charts means law degree-holders and a handful of doctors.

So, here’s the percentage of professional school grads who earn less than bachelor’s degree-holders and high school graduates, aka The End of All Things.

Percent Profesisonal School Grads With Below-Median Earnings (25-34)

Three in twenty professional school graduates who have earnings at all earn less than the median high school graduate of the same age bracket, and one in eight of the total earns nothing. That’s a quarter of the total making less than the median high school graduate who has earnings. I’m not the first person to point this out, but no one goes to a professional school program to drop out of the workforce or be severely underemployed. If they do, then we’re way into credential inflation territory. And no, these people are not all in low-paying non-profit gigs, and if you say they’re going back to school to get better degrees, you get a grade-inflation immune “F”.

One more pair of charts, the percent of 25- to 34-year-olds with earnings greater than $100,000, adjusted for inflation.

Percent BA's With 100000 Earnings (25-34, 2012) Percent Pros With 100000 Earnings (25-34, 2012)

NALP, eat your heart out.

The collapsed earnings for young people depicted in these charts are among the most discouraging things I’ve ever seen since I started this blog. It’s as if the Grumps’ ultimatum to young Americans is: Either acquiesce to your stolen futures or don’t grow up at all. “Planet ‘Miri’ or Bust!”

Gene Roddenberry would roll in his grave if his ashes hadn’t been dumped into space.

The Census Bureau Strips Speculation From the Housing Vacancy Rate

I went to a lecture at the Henry George School in late June, given by an Episcopalian minister who spearheaded the squatting movement in New York City in the 1970s and 1980s (and, I guess, today). It was really inspirational stuff. He said—and I’m not going to verify this—that there were 120,000 vacant housing units in New York City and 40,000 homeless people in 2012. The reason for the mismatch is exactly what you’d expect: Private landowners are holding their property off the market. Georgist economist Mason Gaffney argues this occurs because landowners behave as a cartel, refusing to supply land to those who need it to increase the price.

If you want to verify whether land speculation causes higher prices throughout the United States, you’ll be disappointed to find that the housing vacancy rate in the U.S. is dropping, though it’s still higher than it was in the late 1990s. In an era of concentrated wealth, one would expect landowners’ land-hoarding to cause the vacancy rate to rise, based on all the foreclosures we hear about.

Annual Rental and Homeowner Vacancy Rates

Yet, Dean Baker tells us that residential construction is depressed because of the high vacancy rate. Who’s right?

Here’s how the Census Bureau calculates the vacancy rate.

If you look for the data in Historical Table 8 that Baker links to, though, you’ll find that the vacancy rate’s denominator is not the entire housing inventory. It excludes “seasonally vacant units” and units that are “held off the market.” In other words, if speculation is going on, the vacancy rate deliberately excludes it.

Here’s the total vacancy rate, the held-off-the-market rate, and the composite vacancy rate (it’s the weighted average vacancy rate for owner-occupied units and rentals because Census doesn’t separate “rented but awaiting occupancy” and “sold but awaiting occupancy).

Actual Vacancy Rate, 4-Qtr Moving Average

What’s obvious here is that since about 2010, the Census Bureaus’ vacancy rate has dropped while the held-off-the market rate has not. Meanwhile, total vacancies are down slightly from their peak over 14 percent during the housing bubble, but it’s still well above the 11-12 percent range from the 1990s.

Now, you ask, how is “held off the market” defined? You get three answers:

(1)  Occasional Use

(2)  Usual Residence Elsewhere (URE)

(3)  Other

There is but a slim difference between “occasional use” and URE, if any. “Other,” has a more nuanced *cough* definition:

Other vacant. Included in this category are year-round units which were vacant for reasons other than those mentioned above: For example, held for settlement of an estate, held for personal reasons, or held for repairs. Below are the definitions for the other vacant categories presented in Historical Table 18.

  • Foreclosure – [Q1, 2013 = 10.8%]
  • Personal/Family Reasons – [19.6%]
  • Legal Proceedings – [6.0%]
  • Preparing to Rent/Sell – [6.2%]
  • Held for Storage of Household Furniture – [7.8%]
  • Needs Repairs – [15.3%]
  • Currently Being Repaired/Renovated – [8.5%]
  • Specific Use Housing – [1.4%]
  • Extended Absence – [6.0%]
  • Abandoned/Possibly to be Demolished/Possibly Condemned – [5.9%]
  • Other Write-in/Don’t Know – [12.5.%]

Table 18 would be enormously useful, except it only goes back to … 2012. Heckuva job Census.

Held-Off-the-Market Rates

Importantly, though, “Foreclosure” includes units that are “bank owned,” meaning if banks want to hold them off the market, then they’re in “foreclosure,” even if it’s actually for naked real estate speculation.

You might ask “Why is this important?” I’ll tell you: Think about all those times you read about how student loan debt “delays important milestones like marriage, family formation, and home ownership.” If the banks were forced to put their housing inventory up for sale or rent, then there’d be a large wealth transfer from the hyper-wealthy banks to real-life human beings. The long-run problem of student loan debt, even with IBR, is a generation of Americans that will lack the earning power to buy homes from aging boomers.

I was going to stop there, but if you want more evidence, take this super-downer article from The Japan Times, “Pity the Generation That Can’t Retire Before 80,” July 6, 2013. Here’s a taste:

“Mr. B” is a 56-year-old junior high school teacher. His son studied hard, was a good student, got into a good university and graduated with distinction. He sent out 50 job applications and was invited to 30 interviews. But the expected offers didn’t materialize — not a single one. The young man grew seriously depressed. He hinted at suicide. His parents had to watch him constantly. The strain was too much for Mr. B’s wife. It wore her down. Though far from elderly, she showed symptoms of Alzheimer’s. They got worse. She had to be institutionalized. Her son blamed himself. His depression deepened. And so it goes.

At least in Japan, 40 percent of people under 30 don’t have student loan debt. The Japanese government is trying to reflate the economy, and it’s not championing credential inflation. The U.S. isn’t so lucky.

Now you understand why I think young Americans should all be Georgists.

In Which I Attempt to Match the Times’ Non-Reporting

Annie Lowrey, “Student Debt Slows Growth as Young Spend Less,” New York Times.

Do yourself a favor and don’t bother reading the piece. No that’s not reverse psychology; it really just rehashes stuff you already know, especially once you get to the bit of propaganda in the fourth-to-the-last paragraph:

On the other side of the equation, many college graduates now in their 20s and early 30s should eventually be able to make up for lost ground. Students who take on debt to pay for higher education commit themselves to paying off huge sums, but they usually lift their lifetime earnings by substantial amounts. And they are in a better position to insulate themselves against economic bad times, given the profound rewards the job market provides to the college-educated.

Four paragraphs earlier, the article states that the average (I think, the article doesn’t say) debt-to-income ratio for households under 35 has grown from 1:1 to 1.5:1 between 2001 and 2010. How lifetime earnings can rise while the young—which, I interject, are people whom society treated as full adults a few decades ago—are spending more on debt service is unexplained.

Okay, I can’t match the Times‘ non-reporting; here’s some value-added:

(1) More Americans have college educations than the past, so logically it’s harder to say that it provides an earnings premium. It could just be credential inflation.

Percent Workers by Education (25 – 34)

(Source CPS)

(2) Young(ish) college-educated Americans make less money than they used to.

Earnings by Education (25-34 Years, 2012 $)

(Source CPS)

I included professional degrees, but the sample’s pretty small. It’s accurate but imprecise. Do not take it for the value of a juris doctor; those probably pull down professional degrees’ values.

To be fair, though, I’m going to give a little credit to the Times because people’s incomes would be higher if the economy were at full employment, and it’s not. In other words, it’s unlikely structural degree oversupply is the primary force depressing college graduates’ earnings. Thus, the 1.5:1 debt-to-income ratio should be lower than it is. But just when exactly will college graduates in their 20s and early 30s “make up for lost ground” after their prime earning years? The Times doesn’t say. You’re supposed to have faith that *it* can’t happen here, *it* being rule by the future-present aristocracy in a democracy-lite.

Liberal Law Professors Shielded by Hostility Towards Lawyers

I read Brian Tamanaha’s “The Failure of Crits and Leftist Law Professors to Defend Progressive Causes,” which castigates politically liberal law professors for participating in institutions that encourage both the class schism in the legal profession and law students to borrow unpayable debts. How could they not know what was going on? Tamanaha writes:

Seduced by the allure of prestige of material comforts, Crits and progressive law professors have become a part of the system they set out to reform. Watching market-thinking become pervasive and the gap between rich and poor in America steadily increase, knowing that on broader economic issues we had lost, we succumbed to the temptation to grab what we could for ourselves and our families. (35)

Ouch. It occurred to me while reading this passage that of all the topics I think or write about, legal education is the one where I think we need more “market-thinking,” so I end up sounding like a perfidious neoliberal. I’m not. Instead I think that what passes for “market-thinking” has largely shielded liberal law professors: Lawyers are regularly perceived as playing outside market rules. They chronically overcharge their clients—a belief that’s readily reinforced by actual instances of file-churning, etc.—and they don’t do enough for the poor given their awesome privilege. For the more conspiratorially minded, they file frivolous lawsuits against one another to drive up business, or they use their dominance in legislatures to enact laws that create yet more work for themselves. Even corporate America is powerless to negotiate lower rates against the almighty leveraged, billable hour.

The public’s uncharitable perceptions aren’t helped by economists who misunderstand the effects of professional licensing. Anyone who reads Dean Baker’s Beat the Press will regularly find the author complaining that free trade advocates are willing to subject manufacturing workers to competition with cheap foreign labor, but they hypocritically use professional licensing regulations as trade protectionism. Never mind that professional services aren’t as fungible as precision-made goods; that lawyers’ contributions to legal matters are usually more valuable than assembly line workers’ to their products; or that most states, including California, New York, D.C., Texas, Illinois, and Florida, allow foreign-trained lawyers to take their bar exams (subject to various other requirements, admittedly) with no evidence of lower lawyer incomes there as a result. For some inexplicable reason, foreign lawyers will be able to topple biglaw in a way that tens of thousands of unranked law school grads cannot.

An even better example is Clifford Winston’s, Robert W. Crandall’s, and Vikram Maheshri’s 2011 book, First Thing We Do, Let’s Deregulate All the Lawyers. The authors calculated that lawyers earned 50 percent more than people who had the same amount of education. They also found that over time lawyers’ incomes increased even though their GPA and LSAT scores did not, and that the number of lawyer jobs created each year is significantly less than the number of people who apply to law schools. Therefore lawyers must be creating a huge deadweight loss to society.

No one pointed out to them that (a) demand for legal services is income elastic, which means rich people and corporations spend more money on brand-name firms as they become wealthier (and they have become wealthier); (b) the wages of lawyers are determined by their marginal product, not their education; and it might just be the case that lawyers are more productive than people who drop out of English PhD programs; (c) incomes for high-test-scoring people have increased generally over the last few decades as credentials from elite universities have led to higher-paying jobs; and (d) demand for legal education is not the same thing as demand for legal services.

One need only read First Thing We Do‘s introduction (PDF) to understand the methodological problems with the authors’ argument:

As regulatory economists, we find it natural to reason that occupational licensing, like other regulations that restrict entry, benefits existing suppliers by limiting competition. Thus its primary effect is to generate earnings premiums to practitioners in a particular profession such as law—earnings premiums that could be inefficient.

In short, it’s an argument from incredulity nestled in a begging-the-question fallacy: We can’t believe the legal profession would allow more people to purchase legal education than there are jobs available for them because that would mean lawyers are bad at creating licensing restrictions, and they would be callously dumping over-indebted, underemployed law graduates onto the labor market and tolerating a massive wealth transfer to law professors that doesn’t directly benefit lawyers. Therefore, the licensing requirements must be restricting supply and raising incomes.

However, the fact is, applicants’ willingness to risk rejection, which indicates they would pay full freight if accepted, increases with tuition. Behold the number of rejected full-time applicants at private law schools (ex. Puerto Rico’s and Brigham Young) and public law schools whose tuition is higher than the average private law school’s.

Adjusted Full-Time Private Law School Tuition by Full-Time Rejections

Those of you who wanted an upward-sloping demand curve, here is your upward-sloping demand curve.

Even in my private life, I’ve encountered two economists (whom I respect) who thought “licensing = labor cartel” applied to lawyers ipso facto. In fairness, it’s not self-evidently untrue, but it shows the heuristics that go into analyzing who’s cheating society and who isn’t.

Okay, I didn’t write this post to rehash First Thing We Do—not that I didn’t savor the empty calories and hope you did too—rather, I brought it up to show that “positions, not interests” explain conventional views about lawyers and law schools:

  • Lawyers = cheaters, thieves
  • Law students = greedy turds who refuse to serve the poor at lower pay and are whining because they’re bitter they didn’t get to be cheating thieves
  • Law professors = tragic figures because despite their liberal agendas, their students still refuse to serve the poor and aspire to be cheating thieves
  • Student debt for education = good because education = “upward mobility” = good

Once this framework for the law school debate sets in, it’s no wonder that Tamanaha’s peers call him an outrageous elitist conservative. It takes the ideological equivalent of a spontaneous reversal in the earth’s magnetic field to recognize that law schools have more in common with Bain Capital than they do with Legal Services NYC, which has been working without a contract since July 2012 and might go on strike soon. The dominant liberal story over the last thirty years is that rich conservatives and neoliberals (including cheating thieving lawyers) captured the government to crush labor and redirect incomes from the poor to themselves. Thus, liberal law professors are the types of people we’d least expect to support too-big-to-failist institutions. The fact that conservatives tend to hold anti-higher education and anti-student lending views further warps the discussion along ideological lines.

That law schools were caught fighting on the wrong side of the class war at the same time the banksters wrecked the economy is only a coincidence, but it doesn’t appear that way to the students, who are increasingly seeing a generational war between entrenched, entitled boomers and themselves. Law schools’ legacy will be a severely cynical generation—not something supposedly labor-loving liberal academics see themselves as promoting.


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