The Wrongologist

What’s
Wrong Today:

The
Federal Reserve decided to keep on adding cash to the economy, despite most
economists thinking they would wind down the program.

One reason
was the labor participation rate, which is at a record low of 63.2% and which has dropped 0.3 percentage
points in the last year. The low labor participation rate implies people
are dropping out of the job market, not able to gain employment. The
unemployment rate can go down if people just drop out of the labor force. From
Mr. Bernanke:

Mr.
Bernanke again called on Congress to address income inequality, noting that those
policies that could really help the middle class are under the control of
Congress and the Administration. Needless
to say, Congress has abandoned helping the middle class.

While the unemployment rate
is down to 7.3%, the stock market has rallied to new highs. Home prices are
rebounding. Total GDP output has surpassed its pre recession peak. But the
recovery has left many young people behind.

According to the Wall
Street Journal, the official unemployment rate for Americans under age 25
was 15.6% in August, down from a peak of nearly 20% in 2010 but still more than 2½ times the rate for those 25
and older—a gap that has widened during the recovery.

Even those
under 25 who are lucky enough to be employed are often struggling. About 50% are working full time, compared with about 80% of the
population at large, and 12% earn minimum wage or less.

The median
weekly wage for young workers has fallen more than 5% since 2007, after
adjusting for  inflation; for those 25
and older, wages have stayed roughly flat:

There is some evidence that suggests today’s young people
will suffer life-long consequences. A
study by Yale University economist Lisa
Kahn found that after the 1980s recession, new college graduates lost 6% to 7% in initial wages for every one
percentage point increase in the unemployment rate. The effects shrank
over time, but even 15 years after graduation, those who finished college in
bad economic times earned less than similar people who graduated in better
times. Some never caught up at all.

But the
problem is worse when you dis-aggregate the Labor Participation Rate by age. Men,
and in particular, very young men, are bearing the brunt of a major change in their
life prospects due to unemployment. The chart below comes from Global
Economic Analysis blog:

The above
group represents about 25% of the US male population. While there is erosion of
participation in the labor market for all in this age cohort, the impact is
an existential crisis for 16-19 year olds. And there are signs
that the weak economy is leading to deep societal changes.

An entire
generation is putting off moving out of their parent’s home, getting married,
buying a home and having children. The marriage rate among young people, long
in decline, fell even faster during the recession, and the birthrate for women
in their early 20s fell to an all-time low in 2012. According to a recent Pew Research study, 56% of 18- to
24-year-olds lived with their parents in 2012, up from 51% in 2007—an increase
that looks particularly dramatic because the share had changed little in the previous
four decades.

Moreover,
many young people are losing hope of matching the prosperity of their parents’
generation. Just 11% of employed young people in a recent Pew survey said they
had a career as opposed to “just a job”; fewer than half said they
were even on track for one.

The costs
of a “lost generation” go beyond the impact on young people
themselves. A 2012 analysis commissioned by the Corporation for National and Community
Service, a federal agency, estimated that the 6.7 million American youth
who are disconnected from both school and work could ultimately cost taxpayers $1.6 trillion in lost tax receipts,
increased reliance on government benefits and other expenses. If we look at
broader economic and social effects such as lost earnings and increased
criminal activity, the impact tops $4.7 trillion, the researchers estimated.

Those in
this age group face an added challenge that was far less common in earlier
generations: student debt. Even as mortgage and consumer debt plunged in the
wake of the financial crisis, student loan balances nearly tripled from 2004 to
2012, to roughly $1 trillion, according to a recent study
by the Federal Reserve Bank of New York.

Around 39
million people in total have student debt, including more than 40% of
25-year-olds. The average borrower owes roughly $25,000. Each of these numbers
have increased 70% since 2004. According to the Fed study, 35% of borrowers
under the age of 30 are delinquent on their loans, up from about 25% in 2008!  

The rapidly rising level of student debt, combined with poor job opportunities,
is likely to have long-term consequences. An August 2013 study from the think tank Demos,
showed:

• The average student debt burden for
  a dual-headed household with bachelors’ degrees from
  4-year universities ($53,000) leads to a lifetime wealth loss of
  nearly $208,000 

• That nearly two-thirds of this
  loss ($134,000) comes from the lower retirement savings of the indebted
  household, while more than one-third ($70,000) comes from lower home
  equity

• They predict that today’s $1
  trillion in outstanding student loan debt could lead to total lifetime wealth loss of $4
  trillion for indebted households

They
concluded that the financial impact of student debt will be felt by more than the
39 million people who have student loans, that it will create a drag on the
entire US economy.

The trend
of no work for people between 16 and 19 years old probably forces many more of them
to think about higher education. Higher education today requires student loans.

When it is a prerequisite for people to pay
in advance to get a job, we need to call that what it is: “indentured servitude”. We need common
sense solutions to the twin crisis of no employment and growing student debt:

• Control
  the costs of higher education

• Don’t
  charge interest on student loans

• Create
  a paid internship program at every company with more than 100 employees, funded
  by the taxpayers–you need experience and a degree to get a job today
  

• Allow
  students to discharge unpayable loans through bankruptcy