The New York Times has started a small controversy by
suggesting student debt really ain’t all that bad. Debt has increased, but with the global decline in
interest rates and new payment terms, most students aren’t doing any worse than
they were in the early 90s.
More interesting, the MOST indebted students are actually
paying LESS than they were in the early 1990s. That means severely indebted
households (of which I am a member now :/) have really never been in so great
of shape.
Well…
Nuh-Uh. Gen Y is probably the most hobbled generation in
quite some time. Thought Leonhardt is correct that college debt is not the only
issue (and somewhat exaggerated), Gen Y is NOT in solid shape. Nor are young
households in general. In fact, post bubble, younger households (ones under 40
years old) are the only households to actually become less wealthy.
Mid-30s isn’t really so “young” to me (27). That includes a
lot of prime wage earners…the situation for younger people is even worse, whichis why we have record numbers of young people living at home (though, this is a
small increase. The number of young people living at home is always higher).
Let’s list problems one by one…
JOB MARKET
As we covered last time, the job market has not been healthy
in almost 15 years, and a college diploma is only insulation from the pain, not
body armor.
What I want to really hammer home is the young people dropping out of the labor market entirely. They're not just not getting raises....they have no money, at all, period.
We’re not just talking compositional effects or kids going
to college, by the way. In the 90s, the percentage of young high school grads
with a job was in the low 70s. By 2010, that had fallen to barely above half. These
aren’t kids that have gone on to college, these are kids with no further
education in the pipeline, who simply have no job prospects.
How do we know that? College attendance hasn't even increased that much. The proportion of young people in college has increased from
35% to 39%. That’s small, and doesn't account for the huge, huge drop in employed young people. (On a side note, that's not even economically helpful, if that 4% just drops out. )
This weak job market sets the tone for everything else wrong
in a Millenial’s life. It’s really, really hard to get ahead in the world when
earnings have actually fallen with time. And since 2000, yes, even the college
graduates have been hurting
Focusing on student debt loads obscures the picture. The job
market really is not producing the kind of outsized returns to education we
imagine it might. Even if it were true, the majority of young people do not
attend college. And among those that do, many do not graduate.
A more complete picture of the labor market shows that the
labor market has simply failed young people entirely. Most young people will
receive lower wages than young people even a decade ago.
Something that may make things even clearer, is the time it
takes to reach median earnings. While young people used to reach “average”
rather quickly, delayed career onset has resulted in them taking longer and
longer to reach “average,” which of course means a lot less buying power than
other households.
And, again, this isn’t a “lift all boats” thing, this is a
“young people don’t have increasing wages” thing.
Unfortunately, it is not the only one.
Rising Rent
While all ages and demographics rent, young people are
dramatically more likely to rent than other people. Why should be obvious: they
have lower incomes, weaker credit histories, less stable jobs, and less stable
lives in general (especially romantically, more on that later).
Over the next decade, 8 in 10 under-30 households will rent
at some point in the next decade. A full
fifth will rent the entire time.
However, despite the recession and lagging income, rents
have continued to rise throughout most American cities. And it’s not just major
cities like New York City. Throughout the US, renters as a whole are spending almost a fifth more on rent than they used to (as a percentage of their income), That includes even places like Cleveland, hardly
known for anything besides dashed hopes, Drew Carey, and a revolving Lebron
James door.
Again, this isn’t just low income. Rents are increasing
throughout the whole country.
And it’s most likely going to get worse. Rental demand has
increased strongly, and the US now has lower rental vacancies than during the
Bubble Period!
This is huge. Vacancy rates in the US have been rising for
decades. This represents a climatic shift in the US vacancy market, and no one
seems to be talking about!
Has there been any construction to keep pace with this?
Well, yes, but we’re still off from where we “need” to be. Especially given our
exceptionally low vacancy rate, and an especially low housing starts that are
sure to rise in the coming years.
This is a recipe for significant appreciation in rents, at a
time when more than half the population is considered “rent-burdened” in major
cities. As rent makes up the major expense of young people, this is an
especially difficult burden for them to carry, particularly at a young age when
they are working to reduce debt and build up initial equity, 401ks, etc.
I guess we will see more young people living at home?
According to Pew, we see an increase to 36% of young people living at home
(from 32%), which falls into “Deviation” range. This might even increase as the
decade continues.
Major policy changes to address rental housing short-falls
would probably go a long way towards helping out the younger generation. Until
then, we’re likely to see a rising proportion of young people living at home,
as well as more rent-burdened young households.
Damaged Housing Market
Housing disproportionately drags down young households. The
below graph extends our age range all the way to 40, but it’s a useful picture
of the real assets of young people. You can see that the collapse in housing
prices severely affected younger households, and has not yet staged a recovery.
Why this is? Well, I don’t really know. Young households
might be over-exposed to the Sand State bubbles that are only now staging minor
recoveries. If that’s the case, we might expect a recovery in the near future
for younger households, but right now they are balance sheet-impaired, and
housing represents the single largest asset of many young households.
In particular, this damages the balance sheets of the most
well-off young people. A majority of college educated households under 40 have
mortgage debt, even if they have student loan debt. Less educated young people and poorer young
people do not have households.
Another point is that while young households have, in
general, reduced their debt load, a major factor is that homeownership in this
group has fallen substantially.
The major factor here seems to be a lack of income, caused
by a lack of education. Even indebted households still hold significant housing
assets, while younger households without education don’t, even despite their
higher credit ratings (more on that later).
While certain figures might not show a major decline for younger
households, it’s important to note that younger households have eschewed
significant investments like housing and auto ownership. This is affecting
LOWER income people most, so it’s not a “lifestyle choice,” as much as a
concession to economic reality.
My thought? This is skeptical, but younger households might
hold down other expenses that do not show up in debt figures. Maybe they’re
only eating Ramen and mystery meat. Maybe they forego routine medical and
dental care. Maybe they’re even wearing torn up clothing and turning down the
thermostat to dangerous temperatures in the Winter weather.
Delayed Marriage
This is a less a policy issue, and more a land-mark social
change. The US right now is riding a “a marriage is dead” wave that drives up
average marriage ages and lowers the overall marriage rate. This is not a US
trend, but a trend affecting most nations in the world. See, for instance, this
graph of marriage decline across various OECD nations.
Millennials are drastically less married to be than other
generations, even adjusting for age.
Most young Millenials would like to be married, but the
major problem is that they believe they require a solid economic foundation to
become married. The days of my parents, getting married and barely eking out a
3 cent surplus per month? Those days are over. Instead, marriages these days
are more likely to resemble my current marriage: mergers of successful
independent adults, who have established 401ks, decently high incomes, and set
for a future with relatively little concern about money.
Perhaps it’s a good thing to delay marriage, especially when
money concerns count for such a huge fraction of divorces. And looking at this
graph, just having a higher marriage rate and a low divorce rate clearly does
not mean economic prosperity, unless Mexico and Mauritania are now considered
bastions of wealth.
However, this delayed marriage rate is significant for two
reasons:
1.
It reveals economic stress on young households
2.
It causes economic stress on young households
On the first, marriage is now something for wealthy people,
a dramatic shift in the way we think about marriage. Indeed, while marriage
rates have been declining across all age groups, marriage is still holding up
among college-educated folk, high-income folk, etc. And these people aren’t
exactly running off to get divorces either. They get married, and stay married.
However, if a huge cause of delayed marriage is economic
stress, what does it tell you when young people are putting off marriage? Hint:
it means they don’t feel wealthy enough to marry. At this point, it means they
don’t even feel financially secure enough to start life.
Obviously, this is a social choice, but if our young people
do not feel financially secure enough to marry and start children until they
are almost 30 (and even then only the rich kids!), we have a big problem.
An additional problem is that the lower marriage rates (and
subsequent high divorce rates) decrease economic fortunes for young people even
more, particularly young men. In particular, it forestalls home purchase
(exposing our young people to those nasty rent markets longer), and results in
increased uncertainty regarding expenses. Socially speaking, single people are
far more adventurous, and drop a lot of money on daily social activities.
A full treatment would be reserved for later, but a delayed
marriage does impact the finances of young people somewhat.
Who is Hurting?
You can absolutely see that young homeowners and young college
debtors have some struggles.
However, debt burden isn’t really bad(though rent burden is
much higher, as previously mentioned). This would suggest that the college debt
in particular is not the key problem
hurting young people.
Most revealing, actually, would be this graph of asset
ownership. If the mark of economic uncertainty is not owning a house or a car,
college graduates with student debt are still performing a lot better than
people who don’t go to college, and have no debt at all. And indeed, the
presence of debt barely seems to make a dent on daily lives.
Student debt definitely impacts net worth, but on a monthly
basis (am I severely burdened by debt) and daily basis (do I have a car), it’s
not as big of a deal.
So who is actually hurting?
Again, you’re looking at the less educated people. In
particular, high school grads or less, who have no rising wages, a difficult
time finding a job (especially in this recession), and therefore show much
lower ownership of assets like houses and cars.
However, as we discussed before, just because college
graduates are doing better, does not mean we should send more people to
college. Young college graduates have also seen flat wages, which is not what
we would expect from a New Renaissance, or a true return to education. It
suggests a shrinking pie, which people are struggling to get a slice of.
That might suggest why higher-income people are now loading on debt. It’s a rat race
just to stay even, with the losers tossed into a dying macroeconomic pit.
This, I think, is a more useful view of how young people
perform in the modern economy. Thus, it’s not informative to look at those with
student debt, specifically, because they are still the “winners” in this
economy (especially if they managed to graduate from a formal, 4 year
institution).
Instead you’re looking at people who never had a shot at the
big-time, or gambled and lost and now have this debt burden with no degree.
How Bad Can It get
I’d like to say we are at a local minimum, but that’s not
necessarily the case. Things can certainly get much worse for our young people.
Many European nations, despite their social safety nets, offer difficult
economic prospects for their young people
These reflect long-standing structural problems in these
economies, and not merely poor economic conditions. But, of course, that’s no
news the readers here. What matters to us is the suggestion that the US might
now generate some structural issues of its own. The difference being that,
while Europe has a highly restrictive labor market that naturally creates
unemployment among marginal groups, the US would have a tight labor market due
to the fundamental methods of production.
I am making that second part up. I don’t know how to describe
US economic fortunes. The important part is that we KNOW what causes European
unemployment: bad policy. Bad policy can be reversed.
In the US case, the poor fortunes reflect something deeper,
and might be much harder to fix.
Okay. That being said, let’s look at the numbers.
Youth unemployment is going down, along with the rest of the
economy:
July 2013 Male 20-24 unemployment: 14%
July 2014 Male 20-24 unemployment: 12.5%
July 2013 Female 20-24 Unemployment: 10.9%
July 2014 Female 20-24 Unemployment: 9.8%
So at least the economic recovery is catching up the lower
rung of the age ladder. Thank the Lord, the recession didn’t permanently knock
the whole damn class off-kilter. Without anything else to go again, that would
make me think the current crop of college-educated young folk should completely
recover their positions.
But that doesn’t mean we don’t have problems. Remember, this
is a decade-old trend….and our young people might be recovering, but they are
in anemic shape right now.
