Over Price Education, Getting a Job and Wages

On December 21^st, Yahoo Finance had an article from Business Insider by Abby Jackson where a 35-year-old was suing his law school for his inability to get a job (1). The legal notion is that the school falsely advertised the resultants of what a college education will provide in income. In short its advertising created the illusion that he would get a great job earning a bunch of money upon graduation. Okay the article goes on to say he couldn’t pass the bar exam. A legal degree without passing the bar is sort of useless which makes one really question not the degree but the process of getting into the law field overall. Sort of begs the question, why even have a degree when the key thing is just passing the bar exam?

Meanwhile, back in 2011 a paper was published by Fastweb.com and FinAid.org that talked about the need for greater consumer protections where Private Education Loans are concerned through the new powers granted to the Consumer Financial Protection Bureau under Dodd-Frank (2). The paper suggests a series of to do lists most of which deal with providing loan education to students and families, but also the notion of restoring bankruptcy protections for borrowers of private loans (a really good idea and something that would probably help our law student) (2).

Okay the ideas in the 2011 paper are great, but this doesn’t help those who have went to the Bank of Ed (i.e. education loans provided by the Federal Government). These loans are basically what the Street would call junk bonds or penny stocks. They have no collateral under writing them and there is nothing ensuring that they can be paid except the premise that people with college education get more money.

While I do not disagree with the statistical fact that higher education has historically provided greater income then lower amounts of education these facts are based on observations mostly of the 20^th Century where the bulk of our populace shifted from lower amounts of education to higher amounts as society and technology shifted to the modern era. In my opinion most of what accounts for the higher incomes is the social wage construct that the work associated with higher education should earn more.

When we started the 20^th Century society we pretty much had a three tiered system of wages. The base wage which pretty much everyone got, the middle wage for managers and the like, and the top wage which was given to owners of businesses and socially elite. But once the minimum wage was legally created this created a new fourth and bottom tier. Since that point educational attainment has been imprinted greater on to these four tiers. The minimum wage tier is for the non-educated which has shifted to include now high school diploma holding individuals, the next tier is for bachelor degree holding people, the next tier is for masters and doctoral degree individuals, the highest tier is reserved pretty much for the socially elite or 1% as they have come to be known.

With our law student, he complains about being in the minimum wage tier and inability to support his college loans, which is a big duh since in the social construct of wage distribution he should be at least in the next tier up but he isn’t. Here we have the inherent problem of socially constructed wage distributions -- they are not guaranteed except for the lowest tier currently. There is nothing in the law to automatically provide for support of college loans based on educational attainment.

Currently there is a great focus and talk about raising the minimum wage, and no doubt some of it would be coming from those 20 and 30 somethings saddled with college debt and no way out. A lot of the talk these days is focused on how raising the minimum wage will kill jobs (3). While I do not doubt that on a micro-economic level raising the minimum wage will impact certain localities and particular businesses, overall all in the macro-economic sense this impact doesn’t seem to be as big. Below is chart I created from ALFRED showing two major industries typically where minimum wage work is found and the change in the Federal Minimum wage over the last 75 years or so (4-6).

What you will really note is the fact most declines in employment with these two industries appears to be more related to the up and downs of business cycles than increases in the minimum wage. If the Federal Minimum Wage was linked to a COLA adjustment then we might see a greater macro influence on these employment numbers, but it seems to me the raise in the minimum wage is more impacted by political pressure during tougher times economically. In fact, during periods of business expansion one tends to see the cost of goods and services rise since usually during these expansion periods inflation can occur eroding the value of income. This could explain some of the political pressure during certain periods of time. There also appears to be politically the idea of raising the minimum wage during declining business cycles will somehow improve the economy overall (note the changes during recession periods marked in grey). Although I think this is more politicians catering to a voting public than actual economic policy.

My point is we may be forced to raise the minimum wage politically to ensure the Federal Government is not saddled with a large amount of unpaid student debt. The minimum wage is the only tool the Federal Government has to ensure there is enough income to pay these loans off when the labor pool for higher education work is over crowded with too much supply. This is what one gets for years of promoting higher education will lead to economic prosperity, not unlike that early 20^th Century idea that owning a home will do the same thing and look where that got us in 2008.

Citations

(1) Jackson, Abby. (Dec. 21, 2015). A guy with $170,000 in student loans who can’t find a job in the legal profession is suing his law school and working full time for Uber. By Business Insider published on YahooFinance. Retrieved from http://finance.yahoo.com/news/guy-170-000-law-school-204811509.html?soc_src=copy

(2) Kantrowitz, Mark. (2011). Education Lending Suggestions for the Consumer Financial Protection Bureau (CFPB). Published by Fastweb.com and FinAid.Org.

(3) Soergel, Andrew. (Dec. 22, 2015). Fight for $15 Not All It’s Cracked Up to Be- Research suggests a higher minimum wage could increase costs for consumers and weigh on job growth. U.S. News & World Report. Retrieved from http://www.usnews.com/news/articles/2015-12-22/minimum-wage-increase-comes-with-cadre-of-potential-complications

(4) US. Bureau of Labor Statistics, All Employees: Service-Providing Industries [SRVPRD], retrieved from FRED, Federal Reserve Bank of St. Louis https://alfred.stlouisfed.org/fred2/series/SRVPRD/, December 24, 2015.

(5) US. Bureau of Labor Statistics, All Employees: Retail Trade [USTRADE], retrieved from FRED, Federal Reserve Bank of St. Louis https://alfred.stlouisfed.org/fred2/series/USTRADE/, December 24, 2015.

(6) US. Department of Labor, Federal Minimum Hourly Wage for Nonfarm Workers for the United States [FEDMINNFRWG], retrieved from FRED, Federal Reserve Bank of St. Louis https://alfred.stlouisfed.org/fred2/series/FEDMINNFRWG/, December 24, 2015.

How is student debt a macro-economic tool?

Student debt is an excellent macro-economic tool just as much as housing debt is one as well. This is why it is considered by many as a good debt (1 & 2). Although, housing debt is subject to possible speculation and thus causing greater delta in prices, which is why student debt is more preferred as tool because a college degree is non-transferrable to another person and it really doesn’t appreciate or depreciate in value over time. It simply is a cost which is amortized over the life of loan.

From a macro-economic perspective debt like student loans simple eat up potential consumption and savings of individuals and unlike housing doesn’t create an initial increase in consumption caused by the first produced house, nor a potential asset bubble (2). Further it acts like a government tax since currently this debt is controlled by the Federal Government through the direct loan process of the Bank of Ed, or could be considered a form of transfer payment. So despite the interest reducing individuals’ personal income tax, the actual loan is not currently counted as either a tax or income to the person but inherently acts like such a thing and better than that it counts as a revenue offset to government net expenditures in effect lowering the governments expenditures overall (2 & 3). Any boost to the economy would show up through the expansion of the higher education markets which don’t impact the overall economy too much but would increase some amount of GDP through employment and any investment done by the employees and university/college. It is a great way of expanding the money supply without ever having to increase the national debt or print more cash through the Federal Reserve System and it’s only inflationary to the higher education market vs. the rest of the economy. It is just a perfect macro-economic mechanism.

The big problem with student debt as macro-economic tool is the interest rate which currently is controlled by Congress. But even this element is flexible since if the student debt is causing a problem economically Congress can simply add some debt forgiveness or lower the rate as means to free up cash in the macro-economy. Although I think it would be better if these rates were controlled more by the Federal Reserve than Congress.

Long term though this tool may prove to be difficult to manage because it is inherently dependent (like housing loans) on the future income of the individual which is unpredictable in nature (4). What is somewhat predictable is the number of jobs requiring a college education which the Bureau of Labor Statistics periodically produces (5). The current projections for 2022 show an increase mostly in work not requiring college education which presents an interesting problem with the current growth rate of college graduates (5). At the current growth rates there will be a major short fall by 2022 requiring those graduating at that time to have to wait 21 years for a bachelor degree job slot to be freed up through attrition (5 & 6). Basically there will be so many possible people with a 4 year degree older than them that any potential new slot will take longer to open up since the older generations are more than like not going to retire anytime soon depending upon their debt load, and retirement needs.

This problem of overcrowding the college job market with degreed individuals will continue to cause a crowding out of those jobs requiring less education pushing down the overall income potential of a college graduate bringing into question the whole issue of general value if current job creation trends continue as noted in a previous post concerning student loans and accepting lower income jobs. And no doubt as the crowding out continues there is even greater risk of default, which has been mitigated in part by current laws preventing bankruptcy and allowances of garnishments.

What is worse is the fact that as more students apply for college, and seek more loans for college, this causes a runaway flooding of cash into the higher educational system causing localized market inflation or possible hyperinflation depending upon levels. This flood of cash is only limited by the size of the federal deficit since student loans are budgetary offset for the federal government (3).

So while as an excellent macro tool to control consumption once graduated, the problem is controlling the inflationary effects of the front end in since it would seem to require increased government loaning and thus inflationary pressures on micro market of post-secondary education.

These facts seem to be sort of counter-productive to the original purpose of the Higher Educational Act of 1965 (7). The idea was to allow for a greater number of people to achieve a higher education with the goal of building a better society overall. But it seems to me that with the use of student debt it is building instead a culture of a basic educational tax to obtain that society, with no guarantees of having a secured future. The reason is the job market is not keeping in pace with the production of an educated workforce, and it seems that no one really cares about this fact.

Since a majority of U.S. higher education degrees continue to be in business vs. any other possible field by little over 4 to 1, very clearly we need to increase work opportunities in the business markets overall (8). Or we need to encourage that entrepreneurial spirit of America through increased small business loans to allow all that education to mature (maybe a bit of a debt swap—educational loan folded into a small business loan).

So overall college debt is a great macro-economic tool and is very versatile, provided you don’t mind the fact the future supporting income is unknown and not guaranteed currently, and there is the potential of hyperinflation with the costs of college overall requiring a spiraling need for more cash to flow into the system as more people pile into the system.

Citations 

(1) Supiano, Beckie (2012). What Does $1-Trillion in Student Debt Really Mean? Maybe Not That Much. The Chronicle of Higher Education. Retrieved on 5/27/14 from http://chronicle.com/article/What-Does-1-Trillion-Mean-/131900/

(1)Wolber, Thomas K. (2012). Student-Loan Debt is Real Threat to Economy. Letters to the Editor. The Chronicle of Higher Education. Retrieved on 5/27/14 from http://chronicle.com/article/Student-Loan-Debt-Is-Real/132655

(2) Bureau of Economic Analysis (u.d.). A Guide to NIPAs. PDF. Retrieved on 5/27/14 from http://www.bea.gov/national/pdf/nipaguid.pdf

(3) Bureau of the Fiscal Service (2013). Combined Statement of Receipts, Outlays, and Balances- Current Report. Retrieved on 4/29/14 from http://fms.treas.gov/annualreport/cs2013/sc1.pdf%20on%204/29/14

(3) U.S. Government Accountability Office (u.d.). Capital Assets. Retrieved on 4/29/14 from http://www.gao.gov/fiscal_outlook/measuring_the_federal_deficit/interactive_graphic/capital_assets

(4) Executive Summary (2006). Dealing With Debt: 1992-93 Bachelor's Degree Recipients 10 Years Later, 1. NCES 2006156. Retrieved on 5/27/14 from http://nces.ed.gov/pubsearch/pubsinfo.asp?pubid=2006156

(5) Bureau of Labor (2013). Employment Projections: 2012-2022 Summary. Retrieved on 5/27/14 from http://www.bls.gov/news.release/ecopro.nr0.htm

(6) United States Census Bureau, Population Division (2012). PEPSYASEXN-Geography-United States: Annual Estimates of the Resident Population by Single Year of Age and Sex for the United States: April 1, 2010 to July 1, 2012. Data. Retrieved on 5/27/14 from http://factfinder2.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk

(7) Cervantes, A., Creusere, M., McMillion, R., McQueen, C., Short, M., Steiner, M., & ... Texas Guaranteed Student Loan, C. (2005). Opening the Doors to Higher Education: Perspectives on the Higher Education Act 40 Years Later. TG (Texas Guaranteed Student Loan Corporation).

(8) U.S. Department of Education, National Center for Education Statistics, Higher Education General Information Survey (HEGIS) (2012). "Degrees and Other Formal Awards Conferred" surveys, 1970-71 through 1985-86; Integrated Postsecondary Education Data System (IPEDS), "Completions Survey" (IPEDS-C:91-99); and IPEDS Fall 2000 through Fall 2011, Completions component. Retrieved on 5/27/14 from http://nces.ed.gov/programs/digest/d12/tables/dt12_313.asp