Amid declining household debt, rising student loans remain a drag on the economy

Total household debt continues to decline, but rise in student debt hampers economic recovery.

The total amount of debt held by Americans fell again in the first three months of the year and stood at the lowest level since the middle of 2006, the New York Federal Reserve said Tuesday….

The level of household debt in the first quarter fell by $110 billion, or 1%, to $11.23 trillion, mainly because consumers reduced mortgage balances and used their credit cards less.

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Auto and student loans rise.

The increase in the value of auto loans was the smallest in four quarters, suggesting that car companies might have cut prices to attract buyers as demand for new vehicles slackened. Still, auto loans rose $11 billion to $794 billion to mark the ninth straight quarterly gain.

Student loans have ‘surged 46% since the end of the recession’.

Student loans, which climbed $20 billion in the first quarter, have surged 46% since the end of the recession to an all-time high of $986 billion. More students are going to college or remaining in school longer to obtain graduate degrees to improve their chances of finding a job amid a slow economic recovery.

Yet the escalation in student loans is also leaving many young people saddled with large debts. Although the delinquency rate on student loans fell slightly in the first quarter to 11.19%, that’s still the second highest rate ever. Before the recession, delinquencies averaged around 7%.

The decline in household debt is good for a recovering economy, but economists believe growing student loans are ‘acting as a drag on growth’.

The anemic economy has left millions of younger working Americans struggling to get ahead. The added millstone of student loan debt, which recently exceeded $1 trillion in total, is making it even harder for many of them, delaying purchases of things like homes, cars and other big-ticket items and acting as a drag on growth, economists said.

There is little evidence that increased education spending drives economic growth

JONAH GOLDBERG: Education is important and necessary for a host of reasons. But there’s little evidence it drives growth.

Questioning whether increased education spending is really the key to “winning the future”

British scholar Alison Wolf writes in “Does Education Matter?”: “The simple one-way relationship … — education spending in, economic growth out — simply does not exist. Moreover, the larger and more complex the education sector, the less obvious any links to productivity.”

Nasim Taleb, author of “Antifragile: Things That Gain From Disorder,” argues that education pays real benefits at a micro level because it allows families to lock in their economic status. An entrepreneurial father can ensure his kids will do OK by paying for them to become doctors and lawyers. But what is true at the micro level is not always true at the macro level.

Think about it this way: Growing economies spend a lot on education, but that doesn’t necessarily mean that spending makes them grow. During the so-called Gilded Age, the U.S. economy roared faster and longer than ever before or since, while the illiteracy rate went down. But the rising literacy didn’t cause the growth. Similarly, in the 20th century, in places like China, South Korea and India, the economic boom — and the policies that create it — always come first while the investments in education come later.

Jarrett Skorup looks at higher education spending.

There is no link between higher education subsidies and economic growth, and none between college degrees and job creation.

Since 1980, Michigan has spent a much higher proportion of personal income on state government support for higher education than nearby states like Illinois and Ohio. According to Ohio University economist Richard Vedder, by the year 2000, the Mitten State was spending the sixth most in the country (2.34 percent of its personal income), double what Illinois was spending and much more than Ohio. This did not lead to higher growth as Michigan’s economy performed among the worst in the country during that time period.

And states with a higher proportion of college graduates do not necessarily grow by adding more college degrees. A comparison of the number of state residents with a college degree with per capital income growth from 2000-2008 yields no correlation.

James M. Hohman of the  Mackinac Center for Public Policy sees “no correlation between a state increasing its college graduate base and growing its economy”.

If the hypothesis promoted by Glazer and the lobbyists engaged by Michigan’s tax-supported public universities was correct, the various points on this chart would be clustered around an upward sloping line, as states with higher growth in the number of grads also enjoyed relative improvements in income. However, no such trend line exists.

Another chart that built in a lag time also showed no correlation.

… The chart below compares state grad growth between 2000 and 2005 and income growth in the three succeeding years; once again no pattern can be detected.

So many factors enter into economic growth, making it believable that education spending would not be a driving factor.

Related:

• Federal ‘investments’ can’t guarantee growth (kansascity.com)
• Phil Power: Michigan politicians starve the engines of economic growth: universities (mlive.com)

Quick Links – fewer men want to marry; record average net worth

»»»  Women finding scarcity of men who want to get married

The battle of the sexes is alive and well. According to Pew Research Center, the share of women ages eighteen to thirty-four that say having a successful marriage is one of the most important things in their lives rose nine percentage points since 1997 – from 28 percent to 37 percent. For men, the opposite occurred. The share voicing this opinion dropped, from 35 percent to 29 percent.

Believe it or not, modern women want to get married. Trouble is, men don’t.

Women are the losers.

It’s the women who lose. Not only are they saddled with the consequences of sex, by dismissing male nature they’re forever seeking a balanced life. The fact is, women need men’s linear career goals – they need men to pick up the slack at the office – in order to live the balanced life they seek.

Suzanne Venker says women are to blame

So if men today are slackers, and if they’re retreating from marriage en masse, women should look in the mirror and ask themselves what role they’ve played to bring about this transformation.

The war on men (Fox News)

……

»»»  ‘American Households Hit 43-Year Low In Net Worth’

WASHINGTON (CBS DC) – The median net worth of American households has dropped to a 43-year low as the lower and middle classes appear poorer and less stable than they have been since 1969.

According to a recent study by New York University economics professor Edward N. Wolff, median net worth is at the decades-low figure of $57,000 (in 2010 dollars). And as the numbers in his study reflect, the situation only appears worse when all the statistics are taken as a whole.

Who’s to blame?

An August Pew Research Center study found that many in the middle-class are divided on how they believe this gap widened.

Fully 85 percent of self-described middle-class adults say it is more difficult now than it was a decade ago for middle-class people to maintain their standard of living. Of those who feel this way, 62 percent say “a lot” of the blame lies with Congress, while 54 percent say the same about banks and financial institutions, 47 percent about large corporations, 44 percent about the Bush administration, 39 percent about foreign competition and 34 percent about the Obama administration.

Just 8 percent put “a lot” of blame on the middle class itself.

An ominous sign for future prosperity

Wolff’s focus on total wealth not only measures how much money a household brings in, but also the amount it accumulates. This latter number is very significant — economically secure households are generally more comfortable spending their disposable income, and are less likely to become a drag on the social safety net.

Student loans are a reason young people not buying homes

Student loans are a reason many young people are not buying homes and “will be a drag on the economy for the foreseeable future”.

According to a recent Federal Reserve study, only 9 percent of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011, compared with 17 percent 10 years earlier. “First-time home buyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly,” Fed Chairman Ben Bernanke said at a homebuilders’ conference in Orlando on Feb. 10.

Recent college graduates carry an average debt load of more than $25,000, limiting their ability to qualify for mortgages even if they’re able to land a job in a market with an unemployment rate of 9 percent for 25- to 34-year-olds. Dubbing it a “student loan debt bomb,” the National Association of Consumer Bankruptcy Attorneys (NACBA) warned on Feb. 7 about the effects of rising student debt on recent graduates, parents who co-signed their loans, and older Americans who’ve gone back to school for job training.

“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” John Rao, vice president of the NACBA, said on a conference call.

A silver lining for rental construction, but will that be the next bubble?

Although housing prices have fallen by about one-third from their 2006 peak, young adults who are starting to move out of their parents’ houses want to rent, not buy. While single-family housing starts posted their worst year since 1963 last year, multifamily housing construction has surged as more Americans rent.

I would not urge most young people to buy a home today unless they find themselves in an unusually favorable situation.  It’s just too risky.

The NY Times has a nifty calculator that helps determine Is It Better to Buy or Rent?

Related:

• The End of Ownership: Why Aren’t Young People Buying More Houses? – The Atlantic, 2/28/12 
• Record student loan amounts creating ‘a generation of wage slavery’