THE YUAN AS A WORLD RESERVE CURRENCY: Much ado about very little.

Money doesn't mind if we say it's evil. It's a fiction, an addiction and a tacit conspiracy. ~ Martin Amis 

What do the Roman denari, Venetian ducato, Dutch guilder and US dollar have in common?

At one point in time they have each been a “world (or reserve) currency.” The denari was the world currency for more than 4 centuries during the Roman Empire’s prime, as was the Venetian ducato during much of the Renaissance. The Dutch guilder emerged as a de facto world currency in the 18th century due to unprecedented domination of trade by the Dutch East India Company during a previous age of globalization. After WWII, the US dollar assumed prominence – and continues to lead – in the world of international trade, finance, securities and foreign exchange reserves. The dollar has been the world’s most important reserve currency for over 50 years. That almost seems like forever, until you remember the span of the denari; they don’t make ‘em like they used to. The final reserve currency now is the euro, born on Jan 1, 1999. It is used in the world’s largest economic assembly of nations and has become a key reserve currency as well. In a large sense, these reserve currencies make international trade and finance happen.

The dollar and euro together account for 84.3% of the world’s foreign exchange reserves. These reserves, which total $11.6 trillion, are funds that nations’ central banks hold as assets to manage the value of their currencies. The dollar accounted for nearly 90% of the $5.3 trillion a day in foreign-exchange transactions last year.

Earlier this month, the International Monetary Fund (IMF) said it will be adding the Chinese yuan (also called the renminbi) to its special drawing rights (SDR) basket of reserve currencies, which already contains the dollar, euro, British pound, and Japanese yen. Adding the yuan will acknowledge China’s impressive growth and economic standing; its nominal GDP is the second-largest in the world.[1]

Nevertheless, the yuan is not a world reserve currency in any substantive way. To be considered for IMF reserve currency status, a currency must be freely useable in foreign commerce. The yuan is used in less than 1% of world’s foreign exchange trades and international debt securities (e.g., bonds). To date, the Chinese have seemingly created more island territory in the South China Sea than international bond sales. Thus, the IMFs SDR decision probably has more to do with geopolitics than economics. It also assuages the Chinese and other emerging nations’ interests at the IMF because the US Congress has yet to pass (after 5 years) legislation needed to change the fund’s governance structure giving these nations more authority.

If it wants it to become a genuine reserve currency, the Chinese government will have to make some very knotty decisions regarding availability and stability of the yuan. Fundamentally the government will have to relax its total control over Chinese domestic financial markets and the yuan – something that it has shown no interest in doing so far.

One needed modification will be to increase its availability outside China and begin issuing yuan-denominated bonds and ETFs for international purchase. This year only 0.6% of international debt securities outstanding were denominated in yuan (virtually all in Asia), compared with 43% in dollars and 39% in euros. The Chinese took a small step last week by opening an exchange in Germany to trade yuan-denominated financial instruments. Nevertheless, few financiers are booking flights to Frankfurt.

In addition, international investors won’t be that interested in buying yuan bonds or ETFs unless they believe the yuan will be relatively stable and orderly. Recent events regarding the yuan have increased transnational concerns about its steadiness. Stability was not enhanced when in mid-August the People’s Bank of China (PBoC, its central bank) devalued the yuan by over 3% without any warnings. The PBoC remains cloaked in opacity regarding its possible monetary plans. Perhaps Zhou Xiaochuan, the head of the PBoC, could benefit from Janet Yellen providing him with a few pointers about more transparent monetary policy. Furthermore, these changes may lead to a significant reduction in China’s current-account (trade) surplus because international demand for yuan bonds will increase the value of its currency. That’s hardly what the Chinese would look forward to, given its success in creating substantial export-led growth for its economy.

The yuan’s future as a reserve currency will take a marathon’s worth of changes on the part of the Chinese government. With changed policies and time, they may make it to yuan world. The Chinese are out of the starting blocks but at a trifling pace.  

---

[1] China’s GDP growth has indeed been impressive; however, the Chinese per capita GDP is US$12,900 (ranked 113^st in the world) and nearly $32,000 less than the US GDP/capita. 

THE FALLACY OF FREE HIGHER EDUCATION

Cauliflower is nothing but cabbage with a college education. ~ Mark Twain

Forget college football, we are now entering the peak of college applications season, when high-school seniors decide where they want to spend the next several years of their lives. The ever-rising cost of going to college is a prominent factor for many applicants. In May, Sen. Bernie Sanders introduced legislation to make 4-year public colleges and universities tuition free. He said, “We live in a highly competitive global economy. If our economy is to be strong, we need the best educated work force in the world. That will not happen if every year hundreds of thousands of bright young people cannot afford to go to college and if millions more leave school deeply in debt.”

His plan, reputed to cost $750 billion (B), would replace what public colleges and universities now charge in tuition and fees. It would also overhaul student loan programs to reduce their cost in part by eliminating any accrued federal profits on the loans. After Sen. Sanders’ noteworthy announcement, Hillary Clinton produced her own plan to reduce the cost of going to college by providing $350B in federal money to states over 10 years, so undergraduates would pay tuition at public colleges “without needing loans.” If Sen. Sanders’ or Hillary’s plans somehow become law (a very unlikely prospect with Republican majorities in Congress), far lower (“free”) college costs will dramatically increase the demand for higher education.

Both plans embrace the idea that a college degree is the new high school diploma. Although a growing number of people believe this, I think it’s exaggerated and not self-evident. Holders of BAs still receive a sizeable 60% premium in wages over high-school diploma holders. Sanders’ and Clinton’s proposals would essentially expand the long-established norm of free K-12 public education and offer free K-16 public education. To say that’s a big change in government educational policy is a PhD-level understatement. From a market perspective, the concept of lowering a service’s price a lot (a college education) in the face of notably escalating demand poses many challenges.

According to Dept. of Education statistics, 81% of high-school age students now graduate with a diploma, 34% of young adults now have a BA, and 44% of young adults have either an Associates or BA degree. Interestingly, 81 years ago, in 1934, 34% of adults had a high-school diploma, the same percentage that now holds a college degree.

Both Sen. Sanders’ and Hillary’s ideas to remove the expense of tuition when going to a public college is a leftish shibboleth that will cost a ton of taxpayer money[1] and put the post-high-school education (PHISE) market in a precarious, unbalanced position. It will significantly increase the number of students demanding an Associate or BA degree without increasing PHISE capacity to actually educate them.

Beyond these consequences, tuition-free college isn’t likely help that many young adults because of subsequent greater “degree-inflated” job requirements imposed by employers and probably most important, insufficient incentives for colleges to produce graduates more effectively and efficiently.[2]

I doubt that highly-selective colleges will increase their educational capacity much, but other private and public colleges, 2-year and online colleges might expand to meet more demand. However, such expansion will only occur if additional public funding for more facilities and faculty is made available to public universities and community colleges – something that neither Sen. Sanders’ nor Hillary’s plans directly address. Increased funding also flies in the face of many states’ contracted fiscal support for their public universities and community colleges during the past decade. This is why low-overhead providers of online PHISE services (such as MOOCs) will see this policy change as a significant opportunity. The need for more bricks-and-mortar classrooms (and of course administrators) may be partially avoided via online means. Whether online college education is effective remains an open question.

At first blush a “tuition-free college education” sounds quite appealing; everyone likes “free” – especially if you’re a young adult or the parent of one contemplating college – but has as much veracity as a driverless car. This idea has some merit from a generationally-based subsidy perspective. More public subsidies for young adults might begin to balance the far more sizeable subsidies offered to old folks through Social Security and Medicare/Medicaid expenditures, but I’m not really sure it’s truly equitable. After all, a university education’s principal benefit goes to those who graduate with a degree that traditionally has been rewarded by getting a much better (higher-paying) job than young people who don’t have a BA. Such wage premiums might continue, although I have serious doubts as ever-more students enroll in (and hopefully graduate from) college.

The valuable collective, social benefit of having more college graduates accrues from having a better educated more knowledgeable and productive population. This social benefit explains why subsidies are available to college students via government-guaranteed and -subsidized student loans and education tax credits. These fiscal mechanisms reduce the cost of attending college and are among the few directly helping young people.

I’m all for having more young adults graduate from college. But the market for educated labor in the US, like every market, has two sides to it – supply and demand. If the supply of young adults with college degrees rises significantly, as Sen. Sanders hopes, their salary prospects may not. Unless employers’ demand for educated labor also increases a lot, the price of such labor (their wages) won’t increase, it could even decrease. Such reductions in the wage premium for college graduates won’t be greeted with enthusiasm. With a “free college tuition” policy in place, maintaining the college-educated workers’ wage premium will require increased macroeconomic growth to spur employers’ hiring of more such workers. And it probably will further degrade the wages of lower-skilled high-school graduates. Despite its virtues, designing and implementing policies to advance macroeconomic growth remains a quixotic quest for economists and politicians, especially when Republicans decrease publicly-funded research, infrastructure expenditures and investment incentives.

Also, a sustained, large increase in folks who have PHISE degrees is likely to reduce the marginal value of such degrees, as reflected in reduced expected wages, even with economic growth. The law of diminishing marginal returns applies to holders of 2- and 4-year college degrees with respect to salary prospects simply because having such a degree will become less distinguishing.

No one wants to consider this possibility – and certainly no politician will say it, especially during the unending election season. Because it’s contrary to our long-established, personal hopes that more education provides better economic prospects. Middle-class citizens’ “American Dream” is founded on this hope; they hold it as a keystone of their children’s brighter future.

This is the fallacy of espousing unsystematic policies that can change only one part (the supply) of the market for highly-educated people. Such policies will produce an imbalance for college-educated workers because policy-makers don’t consider about how employers (the demanders) of BA-holding people will react to the consequences of their policies.

Other nations have adopted policies which reduce the cost of higher education, usually involving significant public expenditures and subsidies. Of the 15 countries listed, the nation with the lowest 2010 college costs (tuition, books and fees) was Denmark – Bernie’s favorite? – with annual costs of only $530. I can’t even count that low. The US college costs were $24,700 (private) and $7,123 (public). As a percent of median household income Denmark’s college costs were 2.3%, the composite US cost was 51.3%. According to a recent OECD report, 15 of the 33 nations had higher college (tertiary-level) graduation rates than the US, including Denmark. How does Denmark achieve such low college costs and elevated graduation rates? In part by having its citizens pay higher income taxes – a 71% higher average income tax rate than the US.

Our nation has a long and pricey way to go if we want to significantly lower the expense of getting a college degree and increase our national college graduation rate. Lowering college expenses for students is only one part of a possible solution, which will only be effective and beneficial if college education policy is systematically implemented, covering both the supply and demand sides of the market.

---

[1] Actually a lot more than a ton. One billion George Washington $1 bills weigh about 1,100 tons. So Sen. Sanders’ free college plan would weigh 825,000 tons of Georges. That’s about the weight of 8 huge Nimitz-class aircraft carriers, the largest US Navy ship. And something that Sen. Saunders would no doubt be very happy to trade-in for more college students.  

[2] Effectiveness is doing the right thing; efficiency is doing a thing right (in economics, doing it with the least opportunity cost).

WITHER MY CRAFT IPA. Why are antitrust regulators asleep at the wheel?

Good people drink good beer. ~ Hunter S. Thompson

Beer is proof that God loves us and wants us to be happy. ~ Benjamin Franklin

I’m getting nervous, very nervous. Last week Anheuser-Busch InBev and SABMiller, the 2 largest beer producers in the world, announced their proposed $104.2 billion merger. How long will it be until the behemoth new Bud heavyweight will drown out wonderful craft brewers that offer tasty brews like Hop Head or 400 Pound Monkey IPA’s or Pliny the Elder ales? Why have we heard not a drop of concern from the 2 American regulators of antitrust law about this anti-competitive effort? After all, AB InBev sells over 200 individual brands of beer and is already the world’s largest brewer.

The Department of Justice’s Antitrust Division (DOJ) and the Federal Trade Commission (FTC) have enforcement responsibilities to insure that businesses operating in the US adhere to the 1890 Sherman and 1914 Clayton Acts. These laws specify anti-competitive actions that are per se illegal, such as price-fixing, price-discrimination and mergers and acquisitions (M&A) that substantially reduce market competition. This last area remains especially relevant today as firms’ M&A activity proceeds apace. According to one source, there was $1.53 trillion in US announced M&A activity in 2014 that strongly contributed to an almost 50% increase in M&A activity worldwide. With proposed megamergers like last week’s AB InBev and SABMiller fusion, M&A activity in 2015 will end up being even larger. As corporate earnings are sliding companies are revving up their M&A activity to increase growth, a strategy that in the past hasn’t always worked.

The DOJ’s and FTC’s passive, unaggressive inaction seems to corroborate their mistaken idea that our economy’s economic structure no longer requires their active and critical review. They falsely liken the economy as a Google over-hyped “self-driving” car, where they placidly “drive” gazing at the scenery without having to view the actual roadway’s twists and turns. Besides tinkering with driverless cars, Google itself has acquired 185 firms during the past 14 years and controls 89% of the worldwide search market. These 2 agencies’ passivity during this age of alarming and expanding market power of an ever-smaller number of ever-larger firms is threatening consumers’ well-being.

Actions by the FTC or DOJ to break-up existing, giant oligopolies – let alone prohibit gargantuan proposed mergers – are now as frequent as sightings of Black Rhinos or Sumatran Tigers. [FYI, these magnificent animals are on the IUCN’s “critically endangered” list, just like US antitrust enforcement.] It wasn’t always like this.

In bygone eras antitrust law was actively enforced. Standard Oil (the trust headed by John D Rockefeller) was deemed an illegal monopoly in 1911 and split into several individual (but very large) companies, including what’s now Exxon/Mobil and Chevron. In 2000, Microsoft was found to violate antitrust law in its efforts to gain market share against Netscape’s Navigator, the first widely-available internet browser. A later court settlement and consent decree spared Microsoft from being dismantled.

Instead of the DOJ or FTC taking action, it’s the European Union’s Commissioner for Competition, Ms Margrethe Vestager. Her office has filed antitrust charges against several American firms including Google. We’ve apparently exported public review and enforcement of anti-competitive threats to the EU.

Many markets in the US beyond beer and online search are facing increased concentration of power exercised by the largest firms. According to the Wall Street Journal, almost two-thirds of all publicly-traded firms operate in more highly-concentrated markets in which the top 3 businesses unambiguously dominate than they did over 15 years ago. Examples include retail food/staples [Safeway, Rite Aid, Walmart], Internet software [Facebook, Twitter, Google], airlines [Southwest, United Continental, American] and media [Live Nation Entertainment, Clear Channel Outdoor, DreamWorks Automation].

Market concentration is commonly measured either by market share (the percent of a market that a firm controls) and/or the Herfindahl-Herschman Index (HHI). The higher this index’s value, the more concentrated is the market power in the industry. In 2010 the DOJ raised the threshold for what it considers a “highly concentrated” industry to 2500 from 1800 (the maximum value is 10000). The table below shows HHI’s for several fairly concentrated industries, whose HHI’s have been growing over the past several decades.

Industry	Herfindahl-Hershman Index
Food/Staples Retail	3047
Internet Software	2440
Airlines	2003
Media	2275

Source:  Wall Street Journal, Oct 18, 2015.

With higher concentration and more market power dominant firms can enjoy greater economies of scale and potentially more profit. The former benefit may help consumers if these scale economies trickle-down into lower product prices. If the larger firms realize these scale economies it may also make the remaining, and usually smaller, firms in the market less able to compete. This is what’s now happening in the retail food industry, where many minor “independent” grocers are struggling to stay open.

But greater market control often can create more pricing power, leading to higher consumer prices and obstructed competitors. This is the source of fear by distributors, pubs and consumers alike in the US beer market if AB InBev and SABMiller are allowed to merge. The merged behemoth can make imbibing beer even more costly, reduce the selection of beers in pubs and bars and create barriers to smaller breweries’ growth.

It has been suggested that as part of their merger AB InBev and SABMiller could sell off SABMiller’s 58% stake in MillerCoors to assuage the possible concerns of the DOJ and FTC. But MillerCoors accounts for just 26% of beer sold in the US, about equal to SABMiller’s 23% share and half of AB InBev’s 50% share. Furthermore, AB InBev’s and SABMiller’s beverage distributors already exercise strong control in many local markets throughout the US. This vertical control of distributors often creates significant problems for smaller brewers – including virtually all craft brewers – in their market expansion efforts.

The US craft beer “movement” has no definitive birthdate, but Fritz Maytag’s purchase and revival of Anchor Brewing Co. in San Francisco in 1965 together with President Carter’s deregulation of the beer market in 1979 serve as decisive early events. Craft breweries now account for 19% of all beer sold and 99% of all breweries in the US.[1] That’s right, 99% because they’re truly microbreweries, compared to the likes of Budweiser, Miller and Coors. Reflecting changed tastes of consumers in the US and elsewhere, Craft beer consumption grew 17.6% in 2014, compared with only 0.5% for overall beer sales growth. This hasn’t been good news for Bud, Miller and Coors.
 Allowing AB InBev and SABMiller to merge will create a monstrous giant that controls almost 75% of US beer sales (even if the new company spins off MillerCoors) and 36% of the global beer market. This colossal degree of market control should be enough to arouse the DOJ and FTC antitrust enforcers, or have they already been drinking the Kool-Aid let alone Bud? If so, where’s my next Pliny the Elder or Hop Head coming from?

May 2016 ADDENDUM:  Is This America for You?   

Displaying chauvinism and perhaps crypto-desperation, the venerable beer behemoth Budweiser (which is a big cog in the Belgian-Brazilian beverage colossus AB InBev) has decided to rebrand its Budweiser beer to “America.” From now through Nov 8th (election day) you’ll no longer be able to buy a Bud, only an “America” beer. 
Because this Bud's for you is no longer, is this America for you? AB InBev hopes so. Nevertheless, not all people are happy with Bud’s new name. Bill Maher for one mentioned that this confirms in one more unneeded fashion that “America has no taste.”

Adding more incredulity to this effort, Donald Trump has taken credit for AB InBev making America beer and temporarily burying Bud. Is he hoping to brew a heretofore unexplored connection between leadership and lager?

It will be a very cold day when America shows up inside my refrigerator. AB InBev will have to wait much lager for many of us to believe its swill (or Donald’s) is great. I’ll continue to enjoy the craft beers mentioned in this blog.  

---

[1] I know, when you add up each of the market shares I’ve shown in this and the preceding paragraph you get a total of more than 100%, which doesn’t make any sense [19% (craft) + 50% (InBev) + 23% (SABMiller) + 26% (MillerCoors) = 118%]. My suspicion is each percentage market share is based on different total market values. BTW, after coiffing a few, it makes a bit more sense. 

THE MOOD OF THE TIMES

I can’t get no satisfaction… The Rolling Stones   

How satisfied are we with the way things are generally going? Our answer to this question underlies a broad spectrum of our behavior and action. Our public mood can vary a lot over time, depending on many personal, familial, local and broader events. I vividly remember my parents quickly creating an ad hoc air-raid shelter in the basement of our home in the fall of 1962, as the Cuban Missile Crisis became all too scary for me and my family. We were most definitely “not satisfied” at that point.

Is crime now on a giant bender with robberies and physical mayhem everyone’s every-day occurrence that’s freaking us out? You’d think so if you only received your news from local TV stations, given their news programming. This sense of predisposition isn’t new. The favoritism that lies behind media channels has been long recognized and discussed. It’s the principal reason I don’t watch local TV news, and only sparingly gaze at national news.

Fortunately, there are more expansive views of our general mood. Several polls attempt to measure the general pulse of the national public’s mood. The Gallup Organization has conducted a national monthly poll for over 35 years to assess the general satisfaction of Americans. The figure below illustrates this poll’s varying results from February 1979 to early September 2015, when just 29% of respondents said they were satisfied.

   Gallup National Satisfaction Survey, 1979 – 2015

Our current public mood is very different than it was in February 1999, when Gallup found that 71% of Americans were satisfied. 1999 contained many “good ol’ days.” In 1999, our real GDP grew at 4.7%, the unemployment rate was 4.2% (at that point the lowest in decades), the Consumer Price Index rose by a slight 2.7% and Bill Clinton was acquitted in the Republicans’ misguided impeachment efforts. Praise be.  

Low points in the Gallup satisfaction poll include a gloomy 14% in Jun 1992 and a dismal 7% in Oct 2008.

In 1992, the US economy was in fine shape: GDP grew 3.6%, inflation was 3%. However, foreign events in 1992 included several that were clearly dark. The civil war in Afghanistan unofficially began (was it really that long ago?). On May 5 Russian leaders in Crimea declared their separation from Ukraine as a new republic, proving that lightning can eventually strike in the same place twice. However, unlike 2014, the Russians withdrew the secession 5 days later. Finally, the Bosnian war began in 1992 and took until 1995 to end it in Dayton, Ohio of all places. Closer to home 2 unsettling, fairly large earthquakes (7.3 and 6.3) rocked Southern California in June.

In 2008, the US was in the very unsatisfying Great Recession; GDP declined by 0.3% and inflation was 3.8%. By October 2008, the “global financial crisis” – that germinated in the US via toxic sub-prime mortgage lending – was in full swing. Lehman Brothers collapsed in mid-September. As the survey was fielded, the International Monetary Fund warned of a global meltdown and offered to lend to countries if needed. We endured these unsettling times for quite a while. Only somnambulant cave-dwellers had any reason to be “satisfied.”

Rather than capturing our present mood of the times from a national poll, I explored an alternative and used the august New York Times as my source. For the past 5 weeks I’ve characterized each of the 86 articles published in the Times’ Sunday Review section[1]. In broad terms, this section provides the Times’ analytical and opinion overview of the previous week. I used these stories to depict what the “mood” of the Times has been on a weekly basis. The ultimate selection of articles in this section probably has to do with decisions of editorial page editor, Andrew Rosenthal. Nevertheless, I was particularly interested in whether my subjective categorization (just as subjective as any survey measurement of “satisfaction”) has any relation to what’s going on (or not) in the larger scheme of things.

I divided the stories into three segments: (1) stories that presented events or opinion that I characterized as “downbeat, or alarming.” I labelled them with an  L   unsmiling face. (2) Stories that focused on a topic that was fairly “neutral or indeterminate”) I labelled with a  K  straight face. And (3) stories that examined and discussed a topic that was “positive or uplifting” I labelled with a  J   smiling face, as shown in the table below.  

   Mood of the Times

An example of a positive article is this one, “The (fake) meat revolution;” here’s a neutral one, “Can a novelist be too productive?”; and a clearly downbeat one, “The next genocide.” As you can see, the first 2 issues (30-Aug and 6-Sep) contained predominantly downbeat articles. The percentage of positive articles rose – and the downbeat ones declined – after the initial issues during the 30-day period I examined and reached a high point in the 20-Sep Sunday Review when they accounted for 56% of the section’s articles. Except for the first Sunday, the “indeterminate” articles accounted for the smallest portion of the Sunday Review.

I also attempted to categorize news analysis and opinion articles from the Times during Jun 1995 and Oct 2008 (when the Gallup poll shows nadir-like dissatisfaction, as well as during Feb 1999, when 71% of the public said they were satisfied with the way things were going, an all-time high since 1979. Unfortunately, the nytimes.com search function doesn’t allow historical searches for articles found in The Week in Review section (the previous section title for commentary and opinion articles and editorials) of the Sunday Times.

Although it’s a bit fanciful, my weekly Mood of the Times “index” shows that over this 5-week period of Aug and Sep 40% of the articles were either positive or uplifting – registering a decent degree of smiley article “satisfaction;” and a much stronger level of satisfaction than presented in the Gallup national poll.

What does this comparison mean? I’m not suggesting that the Gallup Organization revise their methodology or that the Times alter its article selection. But characterizing the pulse of correspondents and commentators of the New York Times offers a complementary portrayal of the nation’s mood. Perhaps more folks should be reading the Sunday Times if they want a more positive and balanced characterization of our times. Who’d of guessed?

---

[1] I did not include editorials, only the news analysis and opinion articles. Unsurprisingly, the editorials are invariably and predominantly downbeat. I didn’t find any positive or uplifting editorials during the 5-week period. My examination of the Sunday Review section did include the often-insightful cartoon, “The Strip.” 

COPING WITH COLLEGE

Genius without education is like silver in a mine. ~ Benjamin Franklin 

School is in session! Every September, when I begin working with high-school seniors in 2 economics classes – AP Economics and IB (International Baccalaureate) Economics, I talk about using economic precepts to understand the market for college education that they are about to enter. You may have experienced as an applicant and/or a parent of an applicant the daunting prospect of dealing with the edu-industrial complex.  

As most of us realize, the need for and cost of getting an undergraduate college degree have increased enormously. The demand for a baccalaureate (BA or BS) degree has steadily risen, especially since 2009. This fall, some 20.2 million students are expected to attend American colleges and universities, a 32% increase since fall 2000. Acceptance rates at “selective” colleges have declined as more people apply for a fairly fixed supply of spaces; Stanford University’s was 5.7% in 2013 (the latest available), one of the lowest.

As college counsellors always mention, “There’s a college for everyone.” The US has greatly benefited from having at over 3,000 4-year colleges and universities. These schools reflect a noteworthy diversity of educational approaches to gaining an undergraduate degree. There are 4,612 post-high-school degree-granting institutions (that include 2-year schools as well). They range from the very small (Shimer College in Chicago, IL has 81 students) to the very large (Ohio State University in Columbus, has 40,201 undergrads). California has the largest number of colleges, 399.

More young people than ever have a BA, reflecting the increased demand for college education. In 2014 (the latest year available), 34% of Americans ages 25 to 29 had at least a BA, compared with 24.7% in 1995 and 16.4% in 1970, according to the National Center for Education Statistics (NCES). Interestingly, 37% of 25-29 year old females in 2014 have at least a BA and 31% of males. Between 2000 and 2013, the percentage of college students who were Black rose from 11.7% to 14.7%, and the percentage of students who were Hispanic rose from 9.9% to 15.8%. The NCES now projects that awarded BA’s will increase 14% between 2010 and 2021, up from 7.1% previously forecast. College-going has deepened and broadened in the US. This is a very good thing from multiple perspectives. The demand for college education has increased significantly, and will continue to. The growth of supply (or capacity) of colleges and universities to accommodate more students has lagged. When demand exceeds supply, prices rise. And college prices (tuition and fees) have indeed risen.

On the expense side, State funding of public colleges and universities has dramatically declined over the past decades. For the University of California (UC) system, state funding now accounts only for 13% of its total budget, down from 32% forty years ago. There are 2 inter-related consequences of these changes in demand and funding sources, tuition and fees have increased and the mix of students is changing.

Reflecting a national trend, tuition at UC/Berkeley is twice as expensive as 20 years ago, after adjusting for inflation. Out-of-state freshmen admitted to UC/B now embody 30% of first-year undergraduates, an all-time high. For the first time in 2011, student tuition exceeded state funding receipts. Tuition remains the largest single source of UC’s core operating funds. Non-resident (out-of-state) tuition at UC/B is $35,850 this fall; tuition for California residents is $12,972. Thus it’s no surprise that over 60% of UC/B’s undergraduates receive some form of financial aid, including grants, scholarships, work study and loans.

Having a BA confers many benefits. People with a 4-year college degree have a much lower unemployment rate, 2.6%, about half of the current overall rate. Is receiving a BA still worth the time, money and effort? Answering this key question depends on what your objective is. If the true value of education is not what you earn, but what you learn, then getting a BA is without doubt beneficial from a personal as well as societal perspective. If a BA’s worth is more narrowly viewed from a pecuniary perspective, it still is worthwhile. Young adults with a BA degree on average earn $48,500 in median income, more than twice as much as those without a high-school diploma or its equivalent and 62% more than young adult high-school completers. Paradoxically, folks with less than high-school completion have seen their real income rise slightly since 2009. Young adults’ median real income with either a BA or a HS diploma has declined somewhat since 2009.

Unsurprisingly, the selection of a specific academic field of study is a major decision, with lifetime implications. The Hamilton Project has examined lifetime incomes for college graduates and their chosen majors. Over their entire working life, the typical college graduate will earn $1.19 million dollars. This is more than twice as much as the lifetime earnings of a typical high school graduate ($580,000), and $335,000 more than that of a typical associate degree graduate. Lifetime earnings vary widely across majors. Over one’s entire career, the highest-earning majors will earn about two-and-a-half times what the lowest-earning majors will earn, a range from over $2 million for some engineering majors to about $800,000 for early childhood education. Chemical engineering represents the college major with the highest expected median lifetime income, $2.1 million. You can visit the Hamilton Project’s clever interactive portrayal of expected lifetime income to see what specific majors – including yours – can earn. As a reference point, if you choose to major in economics, the Hamilton Project says median expected income reaches a peak 19 years into your career ($85k in 2014$), and totals $7.07 million (in present discounted value) over your 47-year work lifetime. My, my.

Despite all this impressive lifetime earnings and income information, I continue to wonder whether the income premium that holders of a BA degree have enjoyed – and continue to enjoy – will be sustainable as more and more young people gain a college degree. If US yearly economic growth maintains its historically-unimpressive sub-4% level and college grads represent an ever-increasing proportion – say 35-38% ­– of people entering the workforce, having a BA will become less “distinctive” when they’re first on the job market. As we’ve already seen during the past 5 years, employers have adjusted their hiring practices and requirements. Some jobs that heretofore didn’t require a college degree now do. Also, many recent college graduates have found work only in lower-level jobs that may not require a degree, and thus are “underemployed.” The underemployment rate for persons 21-24 years old is currently 14.9%, more than double the 7.2% overall unemployment rate for this age-group.

Then there’s the ever-increasing cost of attending college that has propagated a college loan problem. The media often broadcasts several statistics to characterize this issue: student loan borrowers owe a total of $1.2 trillion and 7 million borrowers are in default. Notions of a student loan “crisis” are widespread.

Several politicians, including 3 running for President in 2016, Hillary Clinton and Marco Rubio, have offered plans to remedy this problem and help cut the cost of college. Shooting way beyond the moon, Bernie Sanders proposes making public higher education free, although his policy wouldn’t apply to private colleges, where 20% of students get a BA, nor cover students’ living expenses. Good luck Bernie.

In an insightful article Susan Dynarski, a professor at the University of Michigan, concludes that students with the largest loan debt aren’t usually the ones who are defaulting, it’s the students with relatively small loans who have dropped out and didn’t graduate or have low-paying jobs that provide insufficient income to pay off their loans. Surprisingly, the default rate steadily drops as borrowing increases. Over half of defaulters have borrowed less than $10k by the time they left college. In fact, 34% of students and ex-students whose debt totals $5k or less default on their loans. In contrast, the 3% of students with loans of $100k or more – usually students in law school, medical school, professional school or grad school – default only 18% of the time, principally because after they receive their degree their income more than covers their loan payments.

Possible solutions to the student debt issue include extending loans from the standard 10-year period to 25 years, which is the norm in other nations and basing payments on the student’s current income (often called pay-as-you-go plans). I’ve identified here policies that can remedy these and other difficulties young people have with the edu-industrial complex.

So when virtually every politician reasonably exhorts young people to get a college degree, there can be both positive and adverse consequences as more folks attend college (and hopefully graduate; only 59% of US college students graduate within 6 years[1]). The individual and societal benefits are substantial. But as ever more people receive their BA’s, expectations about what having this hard-earned degree will provide in terms of potential income may need to be revised unless these same politicians start legislating substantive policies that increase the demand for the nation’s goods and services, especially those that require hiring college-educated people. Unfortunately, I’m not holding my breath.

---

[1] As of September 2014, U.S. college graduation rates rank 19th out of 28 countries studied by the OECD.

GETTING TO YES AND NO

If you come to a negotiation table saying you have the final truth and that it is final, you will get nothing. ~ Ham Holken 

So here we are at the precipice of both the US’s 239th birthday and one of the most confused, potentially-calamitous votes in recent history, the Greek referendum.

Our 4th of July offers much cause for celebration. US unemployment is now as low as it has been – 5.3% - since 2008, although wage growth continues to lag for many people. The Supreme Court said “yes” to re-validating the Affordable Care Act with the Chief Justice’s strong support, and to making same-sex marriage legal throughout the US. Finally, the US women’s team said “yes we can” and will play in the World Cup championship game against Japan on Sunday.

Unfortunately, Greek citizens are worlds away from celebrating; they are confronting "no." And they are suffering in the midst of an on-going economic tragedy of the first-order. Why; because the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF) [aka, the “Troika”] and the Greek government are getting to “no” in their mystifying negotiations regarding Greece’s outsized debt. Greece’s total public debt is 173% of its GDP; ranked 2nd in the world, behind Japan.

As many now know, Greece is a small nation of 11 million people (roughly the size of Paris, France), its GDP is ranked 53rd largest, $284 billion (PPP; which is about the same size as Missouri’s GDP), and its per capita income is ranked 67th, $25,800 (PPP) – a bit less than one-half of the US. Last year its GDP shrank by 25%, unemployment is 25.9% due in part to the economic policies mandated by Greece’s creditors. Simply put, Greece is a “demerging” nation.

Understandably, the Greeks aren’t at all interested in suffering any more or any longer, especially because of mistakes and misdeeds done by past governments. This reasonable reluctance was magnified after the “radical leftist” Syriza political party won the Greek national “snap” election in January and promised to end the imposition of “unilateral austerity” on Greece.

Greece owes its international creditors a great deal of money. Confusingly, there is a fairly broad range of estimates for what Greece owes the Troika; from €243 billion (B) to €323B. I’ve talked before about Greece’s dire problems and the possibility of Greece’s leaving the euro-zone, called the “Grexit.” Over the past 6 months, nothing positive has happened for Greece and there haven’t been any “happy trails” for its citizens to travel. Grexit now seems as real as ever.

Since January, the Greek government and the Troika have held endless and unproductive meetings where they’ve basically continued to talk past each other in an attempt to score political points. Greece’s Prime Minister, Alexis Tsipras, has managed to alienate virtually everyone at the bargaining table with his inconsistent, disparaging tactics. At the same time, Europe’s de-facto majordomo, Angela Merkel, the empress of austerity, and her EU cohorts seems incapable of appreciating the actual pain being suffered by Greek citizens (and in the recent past, of Spain, Portugal and Ireland) in the name of balanced budgets and illusory growth. Austerity hasn’t worked in Greece. It’s only provided pain and despair, not recovery or growth. But the Troika refuses to consider any other economic approach.

Unfortunately, the Greeks have been ill-served so far by their Prime Minister and his Finance Minister in their failed efforts to change the Troika’s unequivocal bargaining position – that more austerity is the only answer for the spend-thrift Greeks.

At this point, with Greece not paying the IMF its $1.7 billion that was due on June 30, negotiations broken off, and Greek banks and stock markets closed until further notice, the Greeks are attempting to live without cash or money. Unsurprisingly, it’s going badly, and will get worse. And it’s 2 days before a public referendum called by Mr Tsipras whose purpose is unclear, no matter whether a “yes” or “no” vote prevails. As one Athenian voter said, “No one is telling us about what it [the referendum] means.” More concerning, no public figure among the dozens involved with the negotiations seems to know how to resolve this crisis. As they say, “mistakes have been made by everyone.”

It’s a fantasy that politics won’t overwhelm economics here, but from an economic perspective several realities need to be acknowledged and addressed in order to get from “no” to “hopefully yes.” Both sides of the negotiations will need to modify their current truculent positions; they both need to blink when they come back to negotiating.

First, it’s practically impossible to imagine how Greece could effectively leave the euro and switch back to the lamented-but-not-really-missed drachma. The highly-devalued, new drachma would only increase the debt costs that Greece will be facing. The EC took more than 3 years to create and implement the euro in 1999. If Greece exits the euro, the government will have the nearly-impractical task of re-introducing the drachma as their currency ASAP, certainly within a month or so, and plunge into fiscal never-neverland. The EC knows this, as does Greece. This is a very pragmatic motivation for why Mr Tsipras hasn’t openly called for withdrawal from the euro-zone.

Second, Greece will not be able to pay off the entire €283B (splitting the sizeable difference between €243B and €323B) debt it now owes. Only the IMF seems to understand this now. The Troika will need to restructure their Greek debt, probably taking a “haircut,” as international financial institutions have done before – like in Argentina (2001), Greece (2012) and Cyprus (2013). I’d propose as much as a 25% haircut, where creditors eventually receive only 75% of what they’re owed – together with a 33% time extension for the reduced payments.

Third, in return for having the EU, ECB and IMF restructure its debts (say “thank you” Mr Tsipras), Greece must bite the structural reform bullets it’s been avoiding for too long and provide an explicit and unalterable implementation schedule.

Public sector employment should be cut 10% within the next 6 months, by privatizing publicly-owned businesses and reducing Greece’s notoriously-inefficient and distended bureaucracy. Greece has a somewhat high percentage of public workers in their total labor force; between 23% and 28% depending on who’s counting. But, according to some calculations Greece’s percentage is not as high as Italy’s, Germany’s or France’s; oh well. Pensions must be reduced 10%, except for those being provided to the lowest quintile of income recipients; the retirement age should be raised. Tax revenues must increase by 20% over the next 12 months by nabbing tax avoiders, drastically improving the porous tax collection system and raising taxes on the top 50% of income-earners. According to The Economist, 2 out of 3 Greek workers either understate their earnings or fail to disclose them. The “shadow/black economy” in Greece represents 24% of its GDP, the highest in Europe. This must change. If the agreed-to implementation reform schedule is missed by Greece, the debt restructuring is voided.

That’s my plan for having the Troika and Greece both blink to get past their deadlocked discussions, and I’m sticking to it until I hear from Alexis and Angela. This plan can provide a better chance for Greece’s economic improvement and keep it using the euro, no matter how its citizenry votes this Sunday. 

7/5/15 Postscript. Today the Greek polls are open and much of Europe and beyond is anxiously awaiting the results. Yesterday, the Greek finance minister was quoted as saying, “Europe won’t let Greece go under,” continuing Syriza’s unbending – and probably fictitious – expectation that Greece actually has quite a bit of leverage in its now-ended discussions with the Troika. Provocative to the core, he called the people supporting a Yes vote “terrorists.” A Greek citizen echoed this feeling by saying that today’s referendum vote is actually about “dignity,” not economics. If only. How much dignity, and IOUs, will buy your next plate of souvlaki in Athens? The polls quoted in this article say that the Yes vote holds a small (but not statistically significant) lead over the No vote being pushed by the government. Don’t believe any of these polls, given their recently dreadful predictive performance. Wait until tomorrow to find out what Greek voters actually decided in this ill-inspired referendum. 

7/6/15 Post-vote postscript.  What a difference a day or 2 might make.

The Greeks have decisively voted No in the July 5 referendum regarding their interest in accepting the European Commission’s (EC’s) now-withdrawn proposal to provide more austerity-based funding for Greece, in concert with the European Central Bank (ECB) and the International Monetary Fund (IMF). Greek voters followed Prime Minister Alexis Tsipras’s endorsement of the No vote. This result wasn’t a surprise, despite media stories – probably planted by more conservative Greek or European organizations – about pre-vote polls showing the Yes vote was growing. It didn’t.

What will happen next is anyone’s guess.

Greece is barely keeping afloat in unknown financial seas. No Euro-zone nation has been in this situation before where its banks have no reserves or cash (it’s far worse than the 2013 Cyprus situation). So far, there have been no rescue offers from the ECB and there is barely any trust between the Mr Tsipras and his EC, ECB or IMF counterparts. Today’s announcement that Greek finance minister, Yanis Varoufakis, has resigned is a potentially-positive sign at least in terms of how future negotiations can proceed. No more snide remarks about fiscal ‘terrorists” are expected now from the anxious Greek side of the table.  

But when the new, post-vote negotiations actually begin is an open and vital question. If they start after Wednesday July 8, the austerians remain firmly in control.

The more conservative, austerity-minded EC negotiators – including Germany and Finland – could simply decide to not meet with Greece until next week under the guise of having to formulate a new, unified, revised plan by the Troika after they receive a revised proposal from Greece. This would put huge, additional pressure on Greece and the ECB because it’s been the ECB that’s allowed the Greek banking system to stay in business, even with fairly stringent capital controls on customer withdraws and deposit transfers. The Greek banks said they would not open today – as they previously promised – and will remain closed through Wednesday. Without immediate new emergency funding from the ECB, Greek banks will be high and dry without cash. Bankruptcy would soon follow. More conciliatory members of the EC, like France, are urging negotiations to start tout suite, probably Tuesday.

Thus, the Troika’s announcement of when actual negotiations will again start will be a clear indicator of how serious it is in keeping Greece in the euro-zone. Mr Tsipras now has 61% of his citizens’ votes to back up his new proposals, but no money to keep Greece afloat. The Troika has this desperately-needed money. Hence the start date for the negotiations is critically important, both economically and politically.

If Ms Merkel and her fellow austerity-advocates refuse to revise their strategy, and not offer at least some sort of debt restructuring (that includes at least a “trim” if not a real haircut, as I suggested above), then they can simply have this happen by postponing the negotiations and telling the ECB not to provide any new financial support. Delaying the start of these negotiations and/or stringing them out will put Greece in the fiscal morgue outside of the euro-zone and possibly the EU.

I expect Ms Merkel’s being labeled the perpetrator of a Grexit is sufficiently ignominious for her that she’ll offer a small blink with a financial trim for Greece and propose to start new negotiations on Thursday, without providing new ECB funding until then. Mr Tsipras will also blink – he has every incentive to do so – and accept the fiscal trim (that he could claim as a small victory for being less than the Troika’s previous “haircut” offers) along with the provision of convincing, inviolable dates for needed reforms. Here’s hoping… 

HUNDREDTHS OF A GOAL AND FAR-OUT FORECASTING

Fast is fine, but accuracy is everything. ~ Wyatt Earp 

Here are 2 examples of published numbers that for me cross an important line of credulity (in the mental sand of my mind). These examples illustrate a bothersome and unfounded inflation of perceived accuracy in printed statistics.

Hundredths of a Goal.  First, I’ve enjoyed watching the Women’s World Cup soccer matches being played in Canada, and remain hopeful that the US team will again capture the Cup. There’s been much to enjoy as favorites like the US and Germany, as well as “Cinderella” teams like Canada, have navigated FIFA’s very strangely-composed brackets towards the July 5 championship game. One thing that’s distressed me, however, is related to one of my eccentric pet peeves, unwarranted and misplaced accuracy.

Throughout this tournament, the media has highlighted the lack of goals scored in the games. This isn’t surprising because the US has scored a total of just 7 goals through its first 5 winning games. So much for being an offensive powerhouse (so far). The latest example is the US 1-0 victory over China on June 26.

However, media stories about this lack of scoring have routinely transgressed my trust. A piece in The Guardian said, “The average goals per game at the end of the group stage was 2.97…” A New York Times article stated, “The tournament was averaging 3.08 goals a game entering Monday (June 15)… The first-round scoring average was only 2.24 goals a game entering Monday. The 2011 event finished with an average of 2.69 goals a game.”

Let’s take a minute of stoppage time to think about these stated averages. Soccer goals only come in whole numbers e.g., 1, 2, (or 10 if you’re Germany). Thus there’s only 1 or at most 2 significant digits in a soccer team’s goal total for a game. To display the average number of goals in hundredths of a goal with 3 digits (e.g., 3.08) is absurd and actually no more accurate than stating the average in tenths of a goal (e.g., 3.1). Come on; can Abby Wambauch score a hundredth of a goal? Never; so why add 2 decimal places to this average? It’s done so these averages appear to be more precise and accurate than simply saying “about 3” or “3.1.” But they’re not more accurate. With only 1 or at most 2 significant digits as inputs, the quotient’s average cannot meaningfully include more than 1 or 2 numbers. This escalation of false “precision” is readily-obtainable to anyone – including a reporter – who has a calculator in their smartphone; where you are shown 1.66666667 as the result of dividing 5 by 3.

Will this trend continue; so the average number of goals scored in the 2016 Olympic soccer tournament be presented with 3 decimal places – 3.141? I hope not.  False precision is more widespread than just reporting soccer scores.But the next time you read any news article that offers numerical results, see if the number of decimals printed exceed the number of significant digits being referred to. My bet is the resultant’s decimals will exceed the relevant input digits, illustrating unfounded accuracy. That’s bad numerical form.

Bridges to the Future.  Second, precision is an issue that forecasters constantly face. It’s the unstated underpinning for the apocryphal quote, “if you have to forecast, forecast often.” The longer the forecast period, the more likely the prediction is going to be erroneous. We economists have difficulty accurately forecasting economic changes over the next 12 months, let alone several years. Weather forecasters feel lucky when they get their 5-day forecasts right.

In The Signal and the Noise, Nate Silver states that despite the challenges, short-term weather forecasts are overall more reliable than other types of predictions, including economic and financial forecasts. Yet complex environmental models are being used to somehow predict impacts during the next 85 years. That’s right, forecasts over 85-years.

A recent New York Times story cited an EPA report that provides long-term quantitative measures of the consequences of not abating fossil-fuel consumption. The report states that by 2100 (85 years in the future), there will be 12,000 deaths from extreme heat and cold, and 720 to 2,200 bridges would become structural vulnerable and cost $1.1 billion (B) to $1.6B to fix. Forecasting deaths, bridge collapses and costs 85 years in the future? Really?

As many people do, I believe global climate change (né global warming) has been underway for a considerable time increasingly due to humanity’s actions. These induced and detrimental effects need to be mitigated now by a series of specific public policies, such as imposing a meaningful tax on all carbon use.

Ironically, justification for implementing such policies does not require forecasting at all. Environmental policies can be rationalized based on measured changes in what’s already happened to our environment, and continues to happen. Nevertheless, I find it highly doubtful that predicted really long-term effects of climate change have much quantitative credence. Yet I haven’t seen much discussion about these far-out forecasts’ precision. I consider these multi-decade predicted deaths and costs to be decent examples of imaginary numbers.

Think about it; who in 1930 (85 years ago) could have foreseen key details of our present economy such as its size, the composition of our economic output, let alone the number of bridges that are now in operation, and how many may now need repair. For some perspective, the US real GDP last year was more than 16 times as large as it was in 1930. In 1930, 21% of our labor force worked on farms (10 times what it is now).

The use of such far-out forecasts to substantiate needed environmental policies unfortunately gives climate change deniers an opportunity to be listened to. I don’t understand how any scientist – environmentalist, climatologist, economist or engineer – can place much credibility in such truly long-term forecasts. And yet, these far-out forecasts are presented and discussed as if they accurately represent what will actually be happening nearly 100 years in the future. It’s all quite puzzling, and unfortunate.