Leveraging human capital doesn't always work out
Welcome Known Unknowns, a newsletter about the investments we make in ourselves—which can be risky, too, especially if someone will lend us money for it.
Fixing student loans starts with risk accounting
A few weeks ago, there was a story in the Wall Street Journal about people who got expensive MFAs at fancy schools and were subsequently burdened with lots of debt and low earnings. Ultimately, this may not have been the best investment decision. But I have lots of sympathy for the borrowers. We constantly hear that education is a great bet for our futures, especially from an Ivy League school. And it’s so easy to get a low interest loan for grad school. I don’t think there’s actually an education bubble, but it reminds me of the housing bubble, where we gave easy credit and told everyone that housing was always a good investment.
Just like with housing, I think that the solution lies in reforming the credit market. If you give everyone a low interest loan for any project, no matter the risks or merits of the project, you end up with a screwy market where people make bad decisions and don’t care about prices. Most people blame the schools, but this is what happens when you have insatiable demand from customers who don’t care about prices. We need to get lenders to internalize risk when they offer credit.
And this will be hard, because more than 90% of loans are provided directly from the government. By the way, I hadn’t realized that fact before. When I was a student, loans were private and guaranteed by the government. Apparently the government has been lending directly since 2010. That seems important, because it’s more expensive and riskier for the tax-payer, and we didn’t really hear much about it—but I digress.
I think fixing student debt/degree inflation starts with letting graduate students (undergrad is a different story) declare bankruptcy. This would provide debt relief to people who need it, rather than MBAs—unlike widespread forgiveness, because bankruptcy is something most people would like to avoid unless they really need it. But it also starts to put some accountability on lending practices, because it forces risk to be a consideration—especially if universities must bear some of the costs when a student declares bankruptcy and discharges their loan.
Fun fact: Ike Bannon shared with me the origin story of our current bankruptcy rules, directly from his father!
Buy America is still a bad idea
It’s finally infrastructure week—and then some. I’m still mulling the $3.5 trillion proposal, but if the $1 trillion bill that passed the Senate is executed well (a huge if), there are some good things in it: lots of bridges, roads, broadband, fancy airports, and clean drinking water. There are also railroad upgrades, a program to encourage more women in truck driving careers (?), and again, electric cars. I’m not an expert in this area, but if you read all of these bills, you’d think that electric cars are the most crucial element of saving our climate. But is that really true? Aren’t the batteries energy-intensive and maybe worse than fuel-efficient vehicles? Aren’t there bigger-bang-for-your-buck ways of cutting emissions, like nuclear energy? But again, I digress.
One big thing worries me about the bill, and that’s all the Buy America provisions. Now, these do tend to crop up whenever we do infrastructure, starting all the way back to the Depression, and they were never a good idea. But this time, they’re particularly terrible because of the scale of these projects, and in a more global, tech, and competitive world, they’re even more expensive, and they ultimately do domestic workers more harm in the long run. It was one thing in the 1960s when we had a huge manufacturing base and these projects were not so technical. But now it’s extra stupid.
We spend way more on subway construction than anyone else in the world. And it turns out that hiring a non-American can help. But with Buy America, that won’t happen, and I hope that when they estimated the $1 trillion price tag, they took that into account.
Inflation is still worrying me
As you know, I’m more in the permanent rather than transitory camp when it comes to inflation. I should be clear here: I’m not worried about hyper-inflation. But even persistent 3-4% inflation when our economy is built for sub 2% can be damaging, and there’s more room there for volatility, which poses costs to workers, pensioners, and businesses, and can also lower bond prices. And again, our economy is built for very low and predictable inflation. We’ve pulled back on indexing benefits and employers are comfortable with smaller wage increases, so even 4% can be disruptive.
I wrote in City Journal about why this moment is more like the 1970s than 2008. First, the recession we just had was caused by a supply shock (just like the 1970s). Negative supply shocks tend to cause inflation, unlike negative demand shocks, and that’s what we’re seeing now. A supply shock is not sufficient for persistent inflation, and whether it takes hold depends on expectations—and expectations come down to whether we think the Fed will fight inflation, and if it even can. I think in some ways the post-Volcker era credibility has passed. This may be more like the post-Bretton Woods days, when people doubted monetary policy’s commitment to inflation, as well as how good its tools were.
Again, I don’t think that this will mean we’ll see inflation well north of 5%. And perhaps inflations are well-anchored just because half of Americans have no experience with inflation and can’t even imagine it.
So, we’ll see. Just because you build a house on a fault line and an earthquake doesn’t happen, doesn’t mean that it was ever a good idea in the first place.
I always have a blast when I go on the Compound, Josh and Michael are among my favorite people to talk to. And Sam Ro, too!
My last two episodes of Planet Money University are up, including one on the lifecycle hypothesis, which is rarely covered in personal finance. But it really should be, because it’s why we save, invest, and borrow in the first place. Understanding the lifecycle hypothesis can help you know a good student loan from a bad one. Don’t take out a loan that probably won’t increase your human capital.
Finally, Cardiff Garcia’s new podcast is terrific. Peter Henry brings some of the best and most eloquent defense of growth (aka neoliberalism) that I’ve heard in a long time.
Until next time, Pension Geeks!