Yes, Inflation/Deflation is Hard to Measure

Posted by Jim Luke — February 6, 2012

One of the hardest concepts for ~~Principles students~~, ~~politicians and pundits~~, oh heck, just about everyone to fully grasp is inflation. A big part of the reason is because inflation is an abstract concept that is not directly measurable. We can conceive of it, but we can’t measure it. I’m no physicist (and open to correction) but it strikes me that it’s a bit on par with “momentum” or “latent energy” in physics. We don’t have direct-measuring energy-o-meters. We measure the effects and infer the energy. Inflation is similar. We can conceive of a generalized, across-the-economy, sustained trend pushing all/most prices upward such that the unit of money is losing real value in general terms. Inflation is the sustained push behind all prices. We can’t measure that directly. But we can measure the effect it has: rising prices. The problem comes in that not all prices will be rising at the same time or by the same amount. Further, during any time period, at least part of the change in price for any good is it’s change in real price relative to all other goods (supply and demand as taught in micro).

We try to deal with this measurement issue by creating a price index – an index that tracks the changes in shopping list of goods over time. But any price index is a just a subset of all the prices. Even the Billion Price Project index at MIT admittedly misses most services and lots of consumer goods that aren’t available online. Price indices are very imperfect beasts. They have many faults, not the least of them being that they often tend to be volatile in nature. Since we’re looking for an estimate of inflation which means sustained increases, we need to massage the data further by creating some kind of “core inflation” measure or “trimmed means” type price index. I’ll explain those some other time.

What prompted today’s post is an article in Bloomberg and a post by Krugman about it. Together they illustrate one of the reasons so many people want to believe we have greater inflation than we really do. Companies like to disguise price changes. They don’t want to be known that prices could be cut in response to demand. Example: auto company offers $2000 rebate on $20,000 car but won’t cut price by 10%, or a firm offers a “value meal”, or they offer a freebie bundled product. Similarly they often disguise price increases by reducing sizes or portions or by changing the financing. From Krugman:

Good article in Bloomberg:

Procter & Gamble Co.’s failure to raise the price of Cascade dishwashing soap shows why investors are buying Treasuries at the lowest yields in history, giving the Federal Reserve more scope to boost the economy.

The world’s largest consumer-products company rolled back prices after an 8 percent increase lost the firm 7 percentage points of market share. Kimberly-Clark Corp. (KMB) started offering coupons on Huggies after resistance to the diapers’ cost. Darden Restaurants Inc. (DRI) raised prices at less than the inflation rate as patrons order more of Olive Garden’s discounted stuffed rigatoni than it anticipated.

This is basic economics; prices tend to fall, or at least slow their rise, when there is vast excess capacity and weak demand.

As both the article and Krugman’s excerpt show, we’re closer to deflation than most people realize. They don’t see the failed attempts to raise prices. They don’t see the shifts in portions or increase in coupons that reduce effective prices. What they do see and remember is the $.50 increase in a loaf of bread or the $.70 increase in a gallon of gas. But even with the gas, they selectively remember the $.70 price increase in summer, but forget the $.75 price drop in autumn. Inflation and deflation are tricky things to measure.

David McWilliams Explains Why Austerity Is Doomed In Europe

Posted by Jim Luke — February 5, 2012

A very interesting video by an Irish economist explaining how the current reduce government spending (“austerity”) approach to the Eurozone debt and currency crisis is doomed to fail. It is doomed because cutting government spending in a recession only makes the recession worse, which in turn, reduces tax collections which then makes the government deficits worse not better. But not only is the austerity approach all wrong to solving the debt crisis, it carries very significant risk of social upheaval. (hat tip to Philip Pilkington and New Economic Perspectives).

Now I’ll offer one pre-emptive comment. Critics of the arguments McWilliams makes often claim that either government spending isn’t really effective, that somehow only private investment spending will stimulate an economy. Or, the critics claim that any resources the government puts into use through spending actually detract from the economy by denying those resources to some supposedly better, privately chosen use. Both of these criticism fail. We are clearly discussing a situation in which there are excess, unused economic resources in the economy. In plain language: there’s high unemployment and people are out of work. The criticisms are all based on an idea called “crowding out”. For crowding out to occur, the economy must be at full employment – the opposite of being in a recession.

Government and the Slow Jobs “Recovery”

Posted by Jim Luke — February 3, 2012

Government finally starts to get out of the way of recovery. In an earlier post today on the good news of the January 2012 employment report, I observed that one of the major factors resulting in an improved (but not good enough) jobs report was that government employment numbers stopped dragging down the total. I wanted to briefly expand on that idea here.

First, let’s make no mistake the “recovery” from this last recession has been very, very weak. Private sector growth has been anemic at best. In employment, the recovery has largely been missing in action. Today, 31 months after the supposed end of the recession, we have only recovered 1/3 of the jobs we lost during the 19 months of recession. As I’ve mentioned before, we are well on our way to a lost decade or more before we regain full employment. A huge part of the weak recovery has been slow and at times negative growth in private sector employment.

But a bigger problem has been government. Government has a three-fold impact on employment during a recovery. Government spending by itself will create employment in the private sector. For example, if the government chooses to react to a recession and high cyclical unemployment by increasing it’s spending it can create new private sector employment. This would be a classical stimulus program. The government could embark on highway, bridge, or school construction. The spending with construction contractors causes those contractors to hire employees. That’s direct private sector employment through government spending. As long as there are significant unemployed resources (workers), such government spending will increase employment. Arguments about crowding out do not apply when large unemployed resources exist.

The increased government spending then has a second effect, a “multiplier” effect. The multiplier effect reflects the idea that workers who got jobs in the initial round of spending themselves spend their incomes and create more demand for more goods. This increased demand for goods results in even more employment. In other words, the construction workers hired to build the new bridges or schools spend their paychecks. The firms selling those workers goods then have to hire in order to produce the goods/services the construction workers want. The exact size of the multiplier effect is uncertain and subject to dispute depending on the econometric methods used to measure it. However, it’s clear that as long there were substantial unemployed resources to begin with, there is a positive multiplier effect on private employment from increased government spending.

But what I want to draw attention to today is direct employment effect of government. One of the greatest reasons why we have had a very slow employment recovery is because government in the U.S. has been aggressively cutting jobs for the last 2-3 years. Conservative critics of government have been partially right. Government has been part of the problem – but not in the way they think. Let’s look at total government employment in recent years:

The data series can be a bit tough to read because government employment has a very seasonal pattern to it. That’s shows up by the regular up-and-down pattern each year. Let’s focus on the trend, smoothing out the ups-and-downs. There’s four patterns. Government employment was essentially flat in 2002 and 2003. Then a period of employment growth in government began running form 2004 through early 2008. During the recession itself government employment was essentially flat. Since 2009, though, government employment has been declining. Cutting government employment is contractionary. It directly reduces retail demand for goods and services by reducing the incomes of what were formerly government workers.

The pattern is a little clearer if we look at the data in a slightly different way. The following graph, courtesy of Menzie Chinn at Econbrowser.com, shows the a smoothed trend. It does this by plotting the 12-month change in government employment (000′s of jobs) by month.

While private employment continues to grow, government employment continues to fall; the decline is most pronounced at the state and local level (Wisconsin is a good example of the contractionary impact of such measures [1] [2]). However, civilian Federal government employment is also declining.

Figure 3: Twelve month change in government local employment (blue), in state employment (red), and government employment ex.-temporary Census workers (geen), 000’s, seasonally adjusted. NBER defined recession dates shaded gray. Source: BLS via FRED, NBER and

One thing I particularly like about this graph is that it shows the relative contribution of federal, state, and local governments. What this graph shows is that before the recession (the grey zone), government was net hiring approximately 250,000 additional jobs per year. Of that, most was at the local level and some at the state. Very little was federal hiring.

Since the end of the recession in June 2009, government has been firing more workers than it hires. It has been reducing employment. The federal government, contrary to popular belief, began shrinking (in employment terms). State governments were largely able to hold the line on employment until early 2011. Then state governments began reducing employment in rapidly increasing numbers. But the big impact again came from local governments. For the last 30 months, they have been laying off large numbers of workers. The reductions have slowed in 2011, but they are still cutting workers at nearly the same rate that they added them in 2007 – hundreds of thousands of lost jobs each year.

There is a temptation among politicians and commenters to think of government employees as representing largely just some bureaucrats mindlessly pushing paper in large bland office buildings. That is not true. At the federal level, most federal government employees are either soldiers or part of some security forces (TSA, FBI, ICE, etc). At the local level, the vast majority of local government employees are police, fire and emergency workers, and teachers. Reductions in local government employment directly translate into fewer services and less education for children.

Why are state and local governments cutting employment? Simple. It’s reduced taxes combined with balanced budget requirements. State and local governments, unlike a sovereign national government, must balance their budgets. They are budget constrained. The recession and weak recovery have hit income and sales taxes hard. Even more significant is that the collapse of home prices a few years ago has translated into lower property tax collections. Either way, state and local governments have been pinched. The response has been to reduce government employment – fire police, firefighters, and teachers.

Paul Krugman notes the how this reduction in state and local government revenue has translated into reduced spending, which in turn has translated into lower employment. Despite the federal government embarking on a stimulus spending program in early 2009, a program which is over and done with now, it was not large enough to offset the reduction in state and local spending.

if you look at what’s being cut, it’s heavily focused on investment:

That is, we’re sacrificing the future as well as the present. Oh, and the cuts that aren’t falling on investment in physical capital are largely falling on human capital, that is, education.

It’s hard to overstate just how wrong all this is. We have a situation in which resources are sitting idle looking for uses — massive unemployment of workers, especially construction workers, capital so bereft of good investment opportunities that it’s available to the federal government at negative real interest rates. Never mind multipliers and all that (although they exist too); this is a time when government investment should be pushed very hard. Instead, it’s being slashed.

What an utter disaster.

On this point, I have to agree with Paul. Unless we reverse course and do it strongly, we are flirting with a long-term disaster. We are under-investing in our future.

A Journey of 100 Months Starts With the First Month

Posted by Jim Luke — February 3, 2012

Finally we are getting some good news. At least most people will consider it good news. Republican Presidential candidates hoping to run against Obama on “weak economy platform” might not happy with the news.

Today the Bureau of Labor Statistics (BLS) released the January 2012 employment data. The unemployment rate has declined again. It is now down to 8.3%. The number of net new jobs was pleasantly above the consensus expectations. Calculated Risk quotes the BLS for us:

From the BLS:

Total nonfarm payroll employment rose by 243,000 in January, and the unemployment rate decreased to 8.3 percent, the U.S. Bureau of Labor Statistics reported today. Job growth was widespread in the private sector, with large employment gains in professional and business services, leisure and hospitality, and manufacturing. Government employment changed little over the month. … Private-sector employment grew by 257,000 …

The change in total nonfarm payroll employment for November was revised from +100,000 to +157,000, and the change for December was revised from +200,000 to +203,000..

So what accounts for the increase? As the BLS states, large gains were widespread – services, hospitality/leisure, and manufacturing. But overall positive effect compared to what was expected and to what we’ve grown accustomed is strongly due to two factors we didn’t see. We didn’t see reductions in government employment dragging down the total numbers. I’ll have another post on that later today. The other effect is that the weather was nice – the exact opposite of last January (2011) when the weather adversely affected the numbers.

Nonetheless, a solid increase is a solid increase and something to feel good about. But in keeping with my skeptical self, it’s also very important to not declare victory yet. We’re not out of the woods by a long shot. I can think of four reasons right away.

First, we’ve been here before. As Calculated Risk explains,

Job growth started picking up early last year, but then the economy was hit by a series of shocks (oil price increase, tsunami in Japan, debt ceiling debate) – and now it appears job growth is picking up again.

Click on graph for larger image.

This is the third or fourth time in this “recovery” that it appeared employment would finally be accelerating into the kind of “V-shaped” recovery we really need. Each time before, something (often politics) interfered.

A second reason for caution involves both the employment-population ratio and the labor-force-participation rate. Both rates are at lows we haven’t seen for 30 some years. Both ratios indicate that large numbers of people have left the labor force and simply aren’t looking for work. If they change their minds and start to look for work, then the unemployment rate could easily begin rising again as the denominator of the unemployment rate rises faster than employment (the numerator).

A third reason is that there are still too many unknowns on the horizon and most of them carry downside risk. The UK and the Eurozone continue their self-inflicted austerity march into recession and flirtation with banking and default crises. House prices have continued to decline, threatening the ability of households to sustain increases in consumer spending. And there’s always the completely unknown. Twelve months ago nobody would have considered the risk to economic growth from an earthquake that created a nuclear disaster.

The fourth reason to be cautious is the mismatch between the positive increase in employment we’ve just seen and the size of the employment gap we are facing. This is the graph we need to keep in mind. Again from Calculated Risk:

… third graph shows the job losses from the start of the employment recession, in percentage terms. The dotted line is ex-Census hiring.

This shows the depth of the recent employment recession – much worst than any other post-war recession – and the relatively slow recovery due to the lingering effects of the housing bust and financial crisis.

We are far, far from leaving this employment depression behind. Dean Baker of the Center for Economic Policy and Research cautioned today that, while it appears that we are on stronger path, it is still too weak. January’s numbers seem strong only because we have grown accustomed to such abysmal recovery for the last 2-3 years. Even at the pace January showed, it will still be 2020 before we regain full employment. That’s 8 years away – 100 months. Government and central banks easily lose focus on growth in a period that long. Congress and the President, while returning to jobs now in this election season, have already shown that they couldn’t sustain a focus on job growth last year as they turned to imaginary concerns over government debt instead.

We have a long way to go. We should be running but we’re only walking. Nonetheless, at least we’re walking forward now instead of backwards they way we were in mid-2011.

Does Anybody Understand Debt?

Posted by Jim Luke — January 25, 2012

Does anybody understand debt? Some – but not many. Today’s post is less of my normal extended prose and more of an outline. I’ve been invited to speak at some writing classes here at the college and this is intended to serve as my speaking notes.

Background: What have you heard?

Krugman in New York Times

Harvey in Forbes

Background Info on U.S. National Debt

Brazelton: The US CANNOT Go Broke

Numbers, Metaphors, and Stories

Get the terms right

Debt, Deficit, and tr/b/m-illions

$1,000,000,000,000

$1,000,000,000

$1,000,000

$1 trillion = 1 million times $1 million

Debt

Deficit

1984-present U.S. Federal Budget

Measuring the Debt

Counting Absolute Dollars of Debt Deceives. It's All Relative.

Three Bad Metaphors

Government is NOT a Household

Government is NOT like a Household!

Econproph: Once Again, Government is Not Like a Household

Govt Debt is NOT a Burden on future generations

Private Debt is NOT like Government Debt

Federal Reserve Breakdown of Household Debt

Foreigners Don’t Control

So…

A Sovereign Government Cannot “Go Broke”

Eurozone Countries Can “Go Broke”

Government Debt is Like Money that Pays Interest

But What About Inflation? Printing money?

Inflation involves real demand vs. real supply, not just $

Test on Debt: Interest Rates

Rates are historically low and staying low.

Are Gov. Deficits Necessary?

Yes, if you want to save money.

Forever? Yes.

Econproph: But What About National Debt-to-GDP Ratio? Not a Problem, Really

Are There Limits to Deficits?

Yes, but related to full employment and capacity.

In Practice, Nobody Understands Money.

Well they understand yesterday’s money, not modern money.

That’s why they don’t understand debt.

The Problem in One Graph

Posted by Jim Luke — January 8, 2012

Yesterday I said I was reluctant to get over-optimistic about the recent slight upturn in employment data. This year may truly be different from the last few, but there’s a nagging feeling that we’ve seen this movie before. I’m not alone in the feeling. As 2012 dawns, Tim Duy summarizes the problem in one graph (emphasis is mine):

I have been hesitant to embrace the recent positive data flow - once bitten, twice shy perhaps. Something about the current dynamics that seems a little too familiar. Indeed, I felt something of relief when FT Alphaville came to a similar conclusion in the waning days of 2011. Cardiff Garcia reports on a Nomura research note that details a new bias in the seasonal adjustment process, noting:

Up next, writes Nomura, you can expect exaggeratedly strong readings from the Chicago PMI later this month and the next ISM manufacturing survey at the start of January.

I imagine it is premature to call the readings “exaggerated,” but both did surprise on the upside, as much data has of late. Read the whole piece – it is worth the time.

Indeed, flirtations with either excessive optimism or excessive pessimism were not richly rewarded last year, as on average the economy simply edged upward in pretty unremarkable fashion:

It seems reasonable to expect the same in 2012, at least as a baseline – a slow “recovery” that is really more of an adjustment to what appears to be the economy’s new equilibrium path, one that is decisively subpar to the pre-recession trend. I don’t believe that such an adjustment is necessary, as in my view it simply reflects a shortfall of aggregate demand. That said, the longer the cyclical downturn grinds on, the more likely it is that we will indeed see a new equilibrium path. A greater percentage of the cyclical unemployment will become structural unemployment or permanent shifts in the labor force participation rate. In addition, investments will go unmade as firms hoard cash. And, increasingly, policymakers will manage policy along the new equilibrium path, forgetting entirely the pre-recession path.

The gap in the above graph, the gap between the green trend line of what we’re capable of doing and the blue-red trend from Jan 2009 onward of we’re actually doing is the challenge. We are slowly becoming an economy that simply cut-off 7% or so of our economy in 2008 and we aren’t recovering it. Instead it increasingly appears that the 90-93% of the economy that survived, those of us still with good jobs, are simply going on our way leaving behind those who lost out a few years ago.

There are over 13 million unemployed workers. Over 5.6 million of them have been searching fruitlessly for a new job for more than 6 months. These are the people who got kicked off the American economy bus some time ago. Unfortunately, even at the recently improved rate of 150-200,000 new jobs per month, there won’t be any room on the bus for them again. Instead, the bus is moving on and they are left behind.

This is new. This is not the normal pattern. In past recessions, public policy, both fiscal and monetary, was managed to restore full employment rapidly after a recession. It didn’t always succeed but the effort was made. Now it is not. Now we focus more on long-term debt issues and spending concerns. Politicians run on platforms of fear of some future default or financial crisis. This despite the fact that the government is able to borrow at record low rates of interest.

We are on path to a “new normal”, a “normal” that says it’s OK to have millions of long-term unemployed who have no hope. I don’t think I like the “new normal”.

Setting the Bar Very Low: The Unemployment Report for December 2011

Posted by Jim Luke — January 7, 2012

Well I’m back. Yes, it’s been a longer than expected break from blogging driven by work considerations, but contrary to the rumors, I have not been “doomed”. So it’s on to a new semester and a new resolution to post frequently. I hope 3-5 times per week.

To start things off, yesterday was the first Friday of the month which means, of course, the monthly report on employment, jobs, and the unemployment rate. I’ll let Calculated Risk report the news and graph first:

December Employment Report: 200,000 Jobs, 8.5% Unemployment Rate

There were 200,000 payroll jobs added in December. This included 212,000 private sector jobs added, and 12,000 government jobs lost.

The following graph shows the employment population ratio, the participation rate, and the unemployment rate.

Click on graph for larger image.

The unemployment rate declined to 8.5% (red line).

The Labor Force Participation Rate was unchanged 64.0% in December (blue line). This is the percentage of the working age population in the labor force.

The Employment-Population ratio was unchanged at 58.5% in December (black line).

The good news then is that trend indicates we are creating net more jobs in the last few months than we have been doing for several years. An unemployment rate of 8.5% is definitely a lot better than the 10% we had in 2009. And, the rate is coming down. But we shouldn’t get too excited nor should politicians think their work is done. First off, although this is the strongest 3 month improvement in the rate we’ve seen since the start of the recession back in 2007, we have seen similar short trends of improvement that fizzle out. It’s always possible as some analysts have observed that the November-December numbers were driven by a surge in temporary hiring in the online retailing sector. It’s possible that we’re only seeing a temporary strengthening and that January and February will see a return to same stagnation we saw last summer.

Second, it’s always possible that Congress will do something incredibly stupid that dramatically cuts employment and aggregate demand immediately. A third, very serious risk is that Europe will continue to slide into government austerity-induced recession and possibly trigger a global financial crisis with the Euro. A European slide will adversely affect our exports and depending on how severe it is, possibly reduce employment in U.S. exporting industries. A Euro financial crisis would likely ripple back to big U.S. banks who could in turn cause problems here.

But the biggest reason that we shouldn’t be satisfied with these numbers is simple. This isn’t enough! An improvement of 200,000 net new jobs might be acceptable if we were already at full employment, but we’re not. We need to grow faster so we can put the millions of unemployed back to work. Again back to Calculated Risk:

This graph shows the job losses from the start of the employment recession, in percentage terms aligned at maximum job losses.

This is the worst post WWII employment recession. However, as bad as this is, the Great Depression would be way off the chart. At the worst, employment fell a little over 6% during the recent employment recession – although the data is a little uncertain – employment probably fell by around 22% during the Great Depression.

Calculated Risk makes the point that the past few years haven’t been as severe as the Great Depression. That’s true in the sense of how deep or severe the crisis has been. But in terms of length, how long we go without full employment, we are clearly on a path to making this on par with the Great Depression. The Great Depression in employment was essentially 11 years long. Unemployment started rising in late 1929. It never fully recovered until the war spending took off in a big way in 1940-41. That’s eleven years. The current recession/depression/inadequate recovery started in late 2007. It’s at least 4 years old already. The current pace of jobs addition puts us another 3 or so years until we recover all the jobs we lost. So that’s a total of 7 plus years.

But as Paul Krugman points out, the population and labor force has been growing during the last 4 years. To really reach full employment we need even more.

Let me give two back-of-the-envelope ways to think about how inadequate 200,000 jobs a month is.

First, note that there are still about 6 million fewer jobs than there were at the end of 2007 — and that we would normally have expected to have added around 5 million jobs over a four-year period. So we’re 11 million jobs down — and we need at least 100,000 jobs a month just to keep up with working-age population growth. Do the math, and you’ll see that it would take 9 or 10 years of growth at this rate to restore full employment.

Alternatively, note that during the Clinton years — all 8 of them — the economy added around 230,000 jobs a month. As it did that, the unemployment rate fell about 3 1/2 percentage points — which is about what we’d need from here to get back to something that felt like full employment. Again, this suggests that we’re looking at something like a decade-long haul to have full recovery.

So yes, this is better news than we’ve been having. But it’s still vastly inadequate.

So, yes I’m encouraged by the recent employment reports, but not very much. I still hold to my position that when all is done and we look back on this period we’ll be referring to it as some sort of depression, not a “Great” one, but some sort of depression.

Student Debt + Stagnant Real Wages = Colleges Need to Focus On Student Success

Posted by Jim Luke — December 9, 2011

Today’s post is an excerpt of something I wrote for another site. This year, in addition to my teaching duties at the college, I’m leading a project to update our college strategic plan. As part of that project I’m writing and editing a series of “briefing papers” (long blog posts, actually) about issues of strategic importance to the college’s future. When those papers cover a topic that I think might be of interest to econproph readers I’ll cross-post them. Last week I wrote the following about the student debt explosion in the U.S., the stagnation in hourly wages for those for with less than college degrees/credentials, and the implications for those of us who work in higher education. The full original post is here.

America has a student debt problem.

And it’s growing. According to the statistics assembled by the New York Federal Reserve Bank, theU.S. Dept. of Education, and other sources, total student loan debt outstanding is nearing $1 trillion, easily exceeding the $791 billion in total credit card debt. As disturbing as the total might seem, the growth rate of student debt is even more distressing. This graph, first published by The Atlantic last summer from NY Federal Reserve Bank statistics shows the relative growth (not amounts) of outstanding student debt since 1999 compared to total household debt including mortgages. FromThe Atlantic:

The red line shows the cumulative growth in student loans since 1999. The blue line shows the growth of all other household debt except for student loans over the same period.

This chart looks like a mistake, but it’s correct. Student loan debt has grown by 511% over this period. In the first quarter of 1999, just $90 billion in student loans were outstanding. As of the second quarter of 2011, that balance had ballooned to $550 billion.

The chart is striking for another reason. See that blue line for all other debt but student loans? This wasn’t just any average period in history for household debt. This period included the inflation of a housing bubble so gigantic that it caused the financial sector to collapse and led to the worst recession since the Great Depression. But that other debt growth? It’s dwarfed by student loan growth.

Roots of the Problem

The student loan debt problem has many roots, most of which [colleges] cannot change or directly affect. Causes of the explosion in student debt include:

A long-term shift in U.S. political opinion away from thinking of higher education as a public good with direct funding support from government toward thinking that students should pay for their own educations with loans guaranteed by the government.

Tuition and fee increases in higher education (particularly at 4 year schools and especially at private schools) have outpaced inflation for at least 3 decades, driven by cost increases, stagnant productivity, and reduced government direct funding.

Middle class real incomes have been largely stagnant or only modestly increasing for those same 3 decades, limiting the ability of families to pay dependent students’ tuitions.

The collapse of the housing price and mortgage bubble in 2006-07 which limited the ability of many middle- and working-class families to finance college education through home equity loans.

High unemployment rates since 2008 have limited the ability of students to work while in college and have also sent increased numbers of unemployed back to college.

… most community colleges can be a partial solution to the nation’s growing student loan burden. After all, [community colleges are] one of the most cost-effective providers of the first 2 years of a college education. Indeed, students can graduate with a bachelors’ degree with less total indebtedness if they take their first two years at community college and then transfer.

But the growing student loan problem when combined with another trend has even more significant implications the community college mission.

The Long Term Trend on Real Incomes – A Closing Middle Class

Long term trends in incomes in the U.S. including increasing income inequality have become a news headline topic in recent months. … As this graph from the Congressional Budget Office (via Paul Krugman) shows, over the past 30 years the clear trend in hourly wages for workers with less than high school or only high school education has been negative. A high school graduate now earns 10% less per hour in inflation-adjusted dollars than they did 30 years ago. Even workers who only have some college but haven’t completed a formal degree or credential are either negative or at best, even with 30 years ago. The data in the graph is from 2009 and labor market conditions have not improved since then. Indeed, most labor market economists, myself included, expect little to no improvement in wages or employment rates for many years to come.

So what does this mean? It’s clear that for young and middle-aged people, the route to a rising income and participation in the middle class requires either a college credential or advanced degree. Yes, anecdotal exceptions are always possible such as the stellar young person who becomes a big success in sports or entertainment. But the numbers are clear – for virtually all, membership in the middle class in the future requires succeeding at college not just attempting college.

Implications for LCC and It’s Mission

The mission of LCC and community colleges in general since they were created has been to provide access. The great post-World War II expansion of community colleges in the U.S., of which LCC was a part, was based on the idea that broad, democratic access to higher education was important. Community colleges provided access to college for millions who otherwise couldn’t attend, either because of costs, lack of family support, family/work obligations, location, lack of preparation, grades, or other circumstances. Over time community colleges have expanded programs to help increase access to even more individuals. Indeed, this open-door, democratic access mission is a large part of the motivation for many who work at LCC. Providing access is something we could feel good about.

But let’s consider how access has traditionally worked. LCC, like most community colleges, has focused on providing the same basic instruction and learning that was available at 4 year institutions. The difference was we had an open-door. We provided access. We provided a chance at college and greater income and success in life. But it was always considered up to the student to succeed. The historical model is the college provides the student a chance at success. If they didn’t succeed that was their problem. We measured our success by our enrolments as an indicator of the number of people to whom we had provided access. Thirty years ago, if a student attempted college and didn’t succeed it didn’t carry the consequences it does today. Thirty and forty years ago, a student who failed at college or simply didn’t complete could always get a job in a factory or a trade. They could still make a middle-class life despite not succeeding at college.

Now the trends tell a different outcome. If a student doesn’t attempt college at all, they are likely not going to stay in the middle class at all and will likely experience declining real incomes. The big change is if the student does attempt college but simply doesn’t succeed or complete, today their prospects for staying in the middle class are slim. Successful completion of a college degree or credential has become a requirement now for a middle class future. It’s necessary for young people in particular to attempt and succeed at college now.

But now let’s add the student loan issue. Suppose a person attempts college today but doesn’t succeed. Not only are they faced with the prospect of flat to declining real income, they have a significant burden – their student debt. Under current law there are really only two ways to discharge student debt – either pay it or die. Student loans cannot be discharged in bankruptcy. There’s no asset to sell or foreclose. So today’s student is facing a higher risk environment than their predecessors did in previous generations. Instead of access to college being a chance at a better life, it’s now a high-risk necessity. So it’s not just access; it’s success that matters.

…The governments, both state and federal, are paying increasing attention to success rates. As mentioned in the first briefing paper, state governments, including Michigan, are increasingly looking at funding for higher education in terms of how many successful credentials or degrees does it produce, not just how many seats in classes were offered.

Beyond what the government is requiring, the success issues pose a challenge to our understanding of our core mission and how we measure our institutional success. In today’s environment, providing access to large numbers of students without regard for their success is playing a cruel joke on them. It’s teasing them with dreams of a future many of them won’t achieve and then punishing them with a burden of debt. For those of us in the institution, that’s not the motivator that the original access mission was. We need to adjust our sense of the mission. Yes, access is important, but it needs to be successful access. Successful access as a mission changes many things.

It changes our most basic metric of institutional success. Instead of simply enrollment growth showing institutional success at providing access, we now need to consider whether that access was successful. …But measuring success and access are one thing. Improving them is another. The shift to successful access calls for many changes in the organization, it’s processes, systems, the curriculum, teaching methods, support services, and attitudes. It is not easy or simple. It is very challenging.

Rick Snyder Advocates Government Planning to Fix the Labor Market

Posted by Jim Luke — December 8, 2011

In recent posts here, here, and here, I’ve been discussing structural vs. cyclical unemployment. In particular I’ve observed how those who are opposed to government stimulus efforts, either broad-based tax cuts or spending, are desperate to assert that our unemployment is a structural problem and not cyclical. Yesterday’s post about a story in the Wall Street Journal was one example. But here in my home state of Michigan, our Governor Rick Snyder has been saying much the same thing. Since Governor Snyder’s previous claims that the magic jobs genie would create jobs from budget cuts have not worked, he really wants to join the “it’s all structural” brigade. So last week Snyder announced:

Michigan needs to do better training people for in-demand jobs, and matching skilled workers with potential employers, Gov. Rick Snyder said…

“Today, too few workers have the skills needed to meet the demands of employers in the new economy,” Snyder said, according to an advance copy of his message. “Despite an unemployment rate of 10.6 percent, thousands of jobs remain unfilled in Michigan.”

Snyder said state companies say there is a “talent disconnect,” with baby boomer retirements leading to a loss of skilled workers and increasingly technology-driven economy requires advanced skills that many of our workers do not have.

“Today, talent has surpassed other resources as the driver of economic growth,” he said. “Times have been tough in Michigan. We have failed to think strategically about the relationship between economic development and talent. Job creators are finding it challenging to grow and develop without the right talent and job seekers are struggling to connect with the right opportunities that leverage their skills.”

Among the proposals is a new website, Pure Michigan Talent Connect – MiTalent.org – will feature tools for job-seekers and employers to identify labor trends and help people assess their skills, look for the training they need and connect with mentors.

The site is being launched in phases through June 2012. The first phase, features the “Career Matchmaker” and the “Career Investment Calculator.”

Partnering with public colleges and universities to provide a post-secondary education that is marketable and transferable. Snyder noted that the Center for Michigan concluded that colleges graduated 20 percent too few computer and math professionals, 14 percent too few health care professionals, and 3 percent too few engineers in 2009-2010.

“We need to stop overproducing in areas where there is little or no occupational demand and encourage students and educational institutions to invest in programs where the market is demanding a greater investment in talent,” Snyder said. “The current imbalance creates a population of young talent that cannot find work in Michigan, is saddled with debt and is ultimately forced to leave the state. This is an outcome we cannot afford.”…

“The simple truth is that tomorrow’s opportunities cannot be realized with yesterday’s skills,” he said. “The challenge we face is to align the aptitudes and career passions of job seekers with the current and evolving needs of employers. The solution is to reinvent the way in which we prepare our children for successful, fulfilling careers; reshape the manner in which Michiganders look for work; and redesign the way in which employers obtain the skills they need.”

Basically, Snyder is now asserting that Michigan’s high unemployment rate is primarily structural – it has nothing to do with Snyder’s jobs cuts and spending cuts in the state or with the present contractionary federal fiscal policy. Instead he blames the unemployed – they have the wrong skills and the wrong education. What’s particularly interesting here is that normally Snyder, like most Republican governors, is very pro “free market” and “private sector”. But apparently the free market and the private sector haven’t performed well in the labor market according to Snyder. Snyder seems to be saying we need government planning and direction to tell people what skills and education to get. Apparently Snyder also doesn’t think private employment agencies or employers do a very good job of identifying trends or make connections.

I think the problem is not that Michiganders don’t know the right way to look for work. There simply aren’t enough jobs at reasonable wages when they look. It seems strange to hear calls for such fancy government economic planning coming from a so-called advocate of free markets and the private sector. But when you’re desperate to justify spending cuts instead of stimulus, I guess that’s what you say.

Below Market Wages Belies Claims of Structural Unemployment

Posted by Jim Luke — December 7, 2011

Continuing what has turned into a short series on unemployment and structural unemployment in particular (see Monday and yesterday’s posts), let us look at some of the claims that structural unemployment.

First up, Brad Delong points us to Kevin Drum who tells the following story:

Kevin Drum:

Skilled Jobs Go Begging? Not Quite: The Wall Street Journal has a piece up this weekend about the difficulty that many companies are having hiring skilled workers in certain areas…. Here’s a description of some skilled job openings at Union Pacific railroad:

When the railroad had openings for diesel electricians earlier this year, it took [Ferrie] Bailey 10 hiring sessions to fill 24 jobs….Known as “installation technicians,” the workers are responsible for putting in and maintaining a sprawling network of cable, microwave relays and related equipment that enables the railroad to monitor 850 trains running daily along its 32,000 miles of track.

This doesn’t require a bachelor’s degree but demands technical skills gained either through an associates’ degree or four years of experience in electronics. And it is grueling work. Technicians have to climb 50-foot communications towers, clamber up utility poles and work outdoors through Wyoming winters and Kansas summers. They put in 10-hour days, in clusters of eight or ten days, and are routinely away from home more than half of each month.

….Standing at the front of the room, Ms. Bailey described the deal. As installation technicians, they would earn $21.64 an hour, or close to $48,000 a year for the railroad’s regular work schedule.

Then there’s this:

After a website job posting, Ms. Bailey initially drew 58 applicants. Of them, she deemed about two dozen sufficiently qualified so that she invited them to take a $25 aptitude test, at their own expense.

Let me get this straight. Union Pacific is supposedly desperate for candidates and can barely fill all their open positions. And yet, when they identify 24 qualified applicants, they aren’t even willing to maximize their hiring pool by ponying up $600 to make sure they all take the aptitude test. Then, later in the story, there’s this:

Ms. Bailey faced more stiff competition at a job fair the next day, because then she was up against several other employers looking for the same sort skilled people as she was. “Make $70,000 – $80,000 the first year with FULL BENEFITS,” read a sign at a booth right across from Ms. Bailey’s at the job fair, put on by the U.S. Army in Fort Carson, Colo., largely to help departing soldiers ease back to civilian life.

So here’s the story. Union Pacific is offering $48,000 per year for skilled, highly specialized, journeyman work that’s physically grueling and requires workers to be away from home about half of each month. The competition is offering 50% more, but not only is UP not willing to increase their starting wage, they’re so certain they can fill all their positions that they make qualified candidates pay for their own aptitude test. And despite all this, they filled all 24 of their positions in ten hiring sessions.

It doesn’t sound to me like there’s a huge shortage of qualified workers here. It sounds to me like Union Pacific is whining about the fact that it took them all of ten hiring sessions to fill their quota even though this is a really tough job and they aren’t paying market rates for workers. It’s as if they think that actually having to make a modest effort to attract job candidates is an inversion of the natural order or something. Speaking for myself, I think I’ll hold off on breaking out the violins.

Kevin has done an excellent job of taking the structural claims apart, but I’ll pile on anyway. The claim that unemployment is structural is a claim that the labor market is segmented into different labor markets for jobs with different skills. Further it asserts that there is no elasticity of supply between these different labor markets – in other words, if either have the skills or you don’t, there’s no on-the-job training or adaptable skills possible. Finally, if unemployment is structural then we are saying that there’s a shortage (lack of supply) of workers in that skill category in that geographic area. The Wall Street Journal is claiming that because Union Pacific cannot find enough willing sellers (workers) at the price (wage) Union Pacific is offering then there must be a shortage of qualified sellers. Umm, how do I put this? No. Rather it’s evidence that the Union Pacific simply wants to pay below-market prices to labor. That’s all. Saying this is evidence of structural unemployment is like me claiming there’s a structural supply shortage of new automobiles because no dealer will sell me a new Porsche for $15,000.

Background: What have you heard?

Numbers, Metaphors, and Stories

Get the terms right

Debt, Deficit, and tr/b/m-illions

Debt

Deficit

Measuring the Debt

Three Bad Metaphors

Government is NOT a Household

Govt Debt is NOT a Burden on future generations

Private Debt is NOT like Government Debt