3 Popular Economic Warnings That Are So Much More Complicated Than They Look

The Federal Reserve began printing money with abandon almost seven years ago. From Day One, people warned that easy money was certain to lead to hyperinflation. The warnings came from cranks and Nobel laureates, goldbugs and billionaires.

All were wrong. By any credible measure, whether from the government or private sources, inflation has been well below average for the last five years. A gallon of gasoline -- the classic symbol of inflation's wrath -- costs less today than it did almost six years ago.

Einstein advised that "everything should be made as simple as possible, but not simpler." It's tempting to oversimplify things and assume the Fed printing money automatically means runaway inflation. But it's more complicated than that. Inflation is more about private banks lending than it is about the Fed printing money. If you missed that over the last seven years, you've been dead wrong.

Here are three other popular warnings prone to dangerous oversimplification.

Popular warning: "All of these students racking up $100,000 in student loans will cause the next financial crisis. Just look at the default rates!"

Why it's more complicated than that: Graduates racking up huge amounts of debt aren't the problem. It's the students who drop out of school with a small amount of debt you should worry about.

Americans owe more than $1 trillion in student loans. The default rates are high, and most student debt can't be discharged in bankruptcy. It's a dangerous statistic and will leave millions of Americans in terrible financial shape.

But there's a really important -- and counterintuitive -- fact to point out when people start shouting about the dangers of student loans: Data from the Department of Education shows that people with the highest student loan balances actually default the least. And people with the lowest amount of student debt default the most.

Why? Because people with a lot of student debt probably graduated and can now earn a higher income than a nongraduate. People with a small amount of student debt are more likely to have dropped out of college, leaving with, say, two years' worth of debt but no degree to show for it. They're no more employable than when they started, and they get crushed by even a small amount of debt. 

If everyone who started college actually graduated, total student debt would go way up, but default rates would likely go down.

Popular warning: "The labor force participation rate is falling. That's a sign of how weak the jobs market is."

Why it's more complicated than that: Most of the decline has nothing to do with the economy, but demographics and education.

Take the number of Americans either working or looking for work and divide it by the total number of working-age Americans, and you get a figure called the labor force participation rate.

It's been plunging lately. Sixty-seven percent of the working-age population took part in the labor force in 2000. That fell to 65% in 2009, and to 62.8% last month -- the lowest level since the Carter administration.

Pessimists have used this statistic to argue the jobs market is worse than it looks on the surface. One seemingly inconsolable analyst said if you ignore the falling participation rate, the "real" unemployment rate is nearly 40%, which is way worse than the Great Depression.

But our falling labor force participation rate isn't all about the economy being weak. It's mainly about demographics. We know this because demographers predicted the participation rate would drop to exactly where it is today nearly a decade ago, years before anyone mumbled the words "financial crisis."

As baby boomers age, a shrinking share of the population wants to work. They hit their late 50s and early 60s and retire. Eight years ago, economist Stephanie Aaronson and colleagues predicted demographics and other structural factors would cause the labor force participation rate to fall to 62.9% in 2014, nearly identical to the 62.8% registered last month. In November, economist Shigeru Fujita showed that "the decline in the participation rate since the first quarter of 2012 is entirely accounted for by increases in nonparticipation due to retirement."

And more young Americans are attending college, holding them back from the labor force. Among Americans ages 16 to 24, the entire decline in the labor force participation rate from 2002 to 2012 could be explained by the rise in the educational enrollment rate.

The jobs market is still bad. But you can't point to a falling labor force participation rate and say it's a sign of things getting worse. It'd probably be falling even if the economy were booming.

Popular warning: "When interest rates rise, the amount of interest we'll owe on the national debt will go through the roof and blow a hole in the federal budget."

Why it's more complicated than that: Interest rates don't rise in a vacuum. The forces that cause interest rates to rise could offset the rising cost of our national debt.

As I write this, the federal government has $17,276,126,988,070.62 of debt. It's borrowed a lot of that at record-low interest rates in recent years.

What happens when interest rates rise?

Well, our interest bill will rise.

But that doesn't have to be a big problem.

Interest rates will likely rise when either inflation or real economic growth increase. In either case, the amount of tax revenue the government takes in will go up, too. If we had 10% inflation, people's wages would be rising by about 10% (in aggregate), bringing in more tax revenue than the year before. Even as interest rates rise, the amount of interest we owe as a percentage of government revenue -- the number that really matters -- might not budge.

It could even go down. That's what happened starting in the mid-20th century, when the government exited World War II with an incomprehensible amount of debt, and interest rates spiked from 2% in the 1950s to nearly 20% by the 1980s. The amount of interest the government paid on our national debt each year jumped tenfold, from $4.8 billion in 1950 to $52 billion by 1980. But this wasn't a problem, because the size of the economy also grew tenfold, and the amount of tax revenue the government brought in grew 11-fold. Interest payments as a percentage of the economy were actually lower in 1980 than at the end of WWII.

The economy doesn't need to grow as fast as it did in the 1950s for this to occur. As long as the budget deficit is lower than GDP growth, debt as a percentage of GDP declines. That's already the case today. And as long as interest rates are lower than GDP growth, interest as a share of GDP will decline, too. Interest rates could rise substantially without really hurting the country's finances at all.

There are 315 million people in this country. Twenty million businesses. Thousands of lobbyists. Infinite irrationality. Nothing is ever as simple as you think it is. Good luck making sense of it all. 

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

 


Read/Post Comments (46) | Recommend This Article (63)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 24, 2014, at 2:07 PM, TXObjectivist75 wrote:

    Funny, I didn't even have to look at the byline to know which Fool wrote this. GDP just has to grow faster than the deficit huh? Isn't that a simple solution as well? Wave the magic GDP wand?

    Plus the fact that debt as a percentage of GDP in 1980 was around 35%. Today it's 90-110% depending on whose numbers you look at. Not apples to apples

    And part of the reason we haven't had inflation is that so much of the fed money went towards buying federal debt, plus banks buying debt instead of lending because of the beneficial rate spread.

  • Report this Comment On January 24, 2014, at 2:13 PM, TMFHousel wrote:

    <<debt as a percentage of GDP in 1980 was around 35%. Today it's 90-110% depending on whose numbers you look at. Not apples to apples>>

    And it was 122% in 1946. Way higher than today.

    <<And part of the reason we haven't had inflation is that so much of the fed money went towards buying federal debt>>

    100% of it, to be exact. That's how all monetary policy works.

    <<plus banks buying debt instead of lending because of the beneficial rate spread.>>

    Yep. Which is what the hyperinflationists missed, and caused them to be wrong.

    -Morgan

  • Report this Comment On January 24, 2014, at 2:15 PM, TMFHousel wrote:

    <<Isn't that a simple solution as well? Wave the magic GDP wand?>>

    It's more just simple arithmetic. You have debt in the numerator and GDP in the denominator. When the denominator grows faster than the numerator, the ratio goes down.

  • Report this Comment On January 24, 2014, at 5:30 PM, JamesBrown wrote:

    It would seem that if Baby Boomers are retiring en masse, then the following generation would be in a buyer's market. Someone has to take over the Baby Boomers' former duties, don't they?

    I remember reading 10 years ago that companies were fearful that their payroll expenses would skyrocket in the coming two decades as they scrambled to replace retired employees. Members of Generation X and Y would have their choice of jobs and salaries.

    Unless I'm missing something, that doesn't seem to have happened. Perhaps technology is eliminating jobs faster than retiring Baby Boomers can free them up.

  • Report this Comment On January 24, 2014, at 5:45 PM, Hookem2011 wrote:

    I retired in 2003 at 62 and did not have to take out hardly anything from my retirement/savings to live (using SS and fixed pension income). We have maintained the same standard of living and since about 2009 have had to increasingly withdraw from retirement/savings to maintain that standard. Don't tell me groceries. eating out, clothing, entertainment, services, medical costs, etc. have not gone up considerably more than the published inflation rate. I am in reasonable good health and most of my medical expenses are insurance.

    I don't know what goes into the inflation statistics, but for what it takes to live in the real world, the rate is more than 3%. Sounds like a bunch of theorists being isolated from the real world.

    Thank goodness for the MF and the advice I have followed.

    You state the debt is $17T, but what about the off the books unfunded liabilities of SS?

  • Report this Comment On January 24, 2014, at 5:53 PM, optimist wrote:

    Great article! What happened to your usual Friday article listing 8 interesting reads! I really enjoy reading it and look forward to it every Friday.

  • Report this Comment On January 24, 2014, at 7:31 PM, TMFHousel wrote:

    ^ They'll come back. I've been working on some other projects and that series took a backseat for a while. In the meantime, here are some great links from this week:

    http://www.farnamstreetblog.com/2014/01/11-rules-for-critica...

    http://www.washingtonpost.com/blogs/wonkblog/wp/2014/01/21/b...

    http://www.nytimes.com/2014/01/19/opinion/sunday/for-the-lov...

  • Report this Comment On January 24, 2014, at 9:08 PM, Saintmark01 wrote:

    Nice article! I'm not smart enough to figure much out on my own. But one thing I did figure out a while back is that the prognosticators are nearly always wrong. We live in a complex world that cannot be reduced to simple, convenient slogans. Buy solid companies and have faith in the long-term upward bias of the market. Everything else is background noise.

  • Report this Comment On January 24, 2014, at 11:51 PM, famiglia112 wrote:

    For all of the talk of complexity, it's worth remembering that Warren Buffett insists on keeping his ideas simple and he has done pretty well for himself. I'll submit that Morgan's examples above aren't necessarily bad because they're simple, but more as a result of basing conclusions on noise rather than the signal. Both simple and complex ideas can be wrong. For example, just assuming that all the problems with student debt would disappear if everyone graduated is both too simple and off the signal.

  • Report this Comment On January 25, 2014, at 6:38 AM, Mathman6577 wrote:

    There are not enough equations available to try to predict what the economy will do, much like weather forecasting.

    I agree with Saintmark01 above.

  • Report this Comment On January 25, 2014, at 12:53 PM, bbell46356 wrote:

    You can make just about any argument if you cherry pick your dates. Sure, if inflation grows moderately and the economy grows moderately, the government will have more money to pay back debt. However I remember what happened when inflation rose to 18% - disaster for the economy. The post WWII economy has one huge difference with today's economy - namely the rest of the world was is shambles and unable to compete with the US. You could just as easily picked Britain's economy for post WWII comparison, not quite as rosy of a picture there. As far as student debt goes, just because a doctor or other professional can pay their enormous debt doesn't diminish the economic burden that debt is. New generations in previous years graduated with little or no debt and were able to put their money into houses, cars or other consumer spending that has been the main driver of the US economy for most of recent memory. Pollyanna thinking pure and simple.

  • Report this Comment On January 25, 2014, at 2:12 PM, kyleleeh wrote:

    <<You could just as easily picked Britain's economy for post WWII comparison, not quite as rosy of a picture there.>>

    looks about the same as ours

    http://upload.wikimedia.org/wikipedia/commons/4/4b/Annual_U....

  • Report this Comment On January 25, 2014, at 2:37 PM, bbell46356 wrote:

    kyleleeh - GDP looks better than I expected. Still, loss of empire and the dollar displacing the pound as the world currency have to be considered. One of the reasons the US gets away with a debt/gdp ratio higher than Greece is because the dollar is the world currency.

  • Report this Comment On January 25, 2014, at 2:46 PM, TMFHousel wrote:

    kylee and bbell,

    Real GDP per capita average annual growth, 1945-1980:

    U.K.: 1.88%

    USA: 1.67%

    UK growth after the war actually beat American pretty easily.

    http://www.measuringworth.com/usgdp/

  • Report this Comment On January 25, 2014, at 2:50 PM, TMFHousel wrote:

    <<New generations in previous years graduated with little or no debt and were able to put their money into houses, cars or other consumer spending that has been the main driver of the US economy for most of recent memory>>

    Household debt payments as a percent of income are currently the lowest they've been in more than 30 years.

    http://research.stlouisfed.org/fred2/series/TDSP

  • Report this Comment On January 25, 2014, at 3:08 PM, kyleleeh wrote:

    << loss of empire and the dollar displacing the pound as the world currency have to be considered>>

    Maintaining their empire was costing more then any benefits it received from it, and for as long as I've been alive the pound has been worth more then the dollar.

    Greece can't get away with it's debt levels because it surrendered control of it's currency to the EU. If they were still on the drachma they would have printed their way out of debt, and devalued their currency to a level that would make their workers more competitive with other nations. Albeit at the cost of price inflation.

  • Report this Comment On January 25, 2014, at 3:59 PM, SkepikI wrote:

    <If we had 10% inflation, people's wages would be rising by about 10% (in aggregate), bringing in more tax revenue than the year before.>

    Morgan, there is a good deal of merit to your article and its "meat and potato" food for thought. BUT I have a real bone to pick with you about the above statement. Besides the fact that it doesn't necessarily follow in theory, we have practical experience from the late 70's and early 80s to prove that it is not actually true either. I know, I lived it. It was quite the failure filled time of angst- stagflation, when inflation was double digit and wage/salary increases were quite the oppressed item.

    And this is in fact one area where you could not convince me other wise with aggregate statistics. The oppression of payrolls was pronounced, selective and geographic. I know this as well from experience, having moved from Oregon to CA to escape to a good job and increased pay while my associates stayed to remain oppressed for oh about 5 or 6 more years.

    Interestingly, one thing that DID happen is that Capital gains and interest income went up almost immediately, creating a nice bump for the good ole federal government tax collections because at that time both were taxed at higher than today's rates. Bond interest of 10,12,even 15% creates quite the unexpected jump in your non wage income if you are a saver (I was).

    So back to your one line. I think you mislead your readers here. IT MIGHT. But it might not also. OR, it might eventually catch up, delayed in time rather dramatically and be geographically spotty.

    The generic idea that wage inflation follows from price inflation with immediacy is primarily what I observe to be disproved by history. In fact, you might be amused to find out that a common practice in the late 70's and early 80's was to oppress and oppose wage increases as "inflationary" allowing the powers that be to squeeze the most desperate and least mobile. A fate I only avoided near the end of the inflation train in 86.

  • Report this Comment On January 25, 2014, at 4:29 PM, TMFHousel wrote:

    <<Besides the fact that it doesn't necessarily follow in theory, we have practical experience from the late 70's and early 80s to prove that it is not actually true either.>>

    It absolutely is true.

    What was average annual inflation from 1975 to 1980? 9.1%

    What was average annual aggregate wage growth from 1975 to 1980? 10.1%.

    It may not have been true in your personal situation, which is where the word "aggregate" becomes really important.

    <<<<The generic idea that wage inflation follows from price inflation with immediacy is primarily what I observe to be disproved by history>>

    You can't have sustained inflation without aggregate nominal wage growth. Economist Noah Smith makes this point when talking about Wiemar Germany. Have you seen those pictures of people with wheelbarrows full of cash? Where do you think they got all that cash? From massive nominal wage increases.

  • Report this Comment On January 25, 2014, at 7:33 PM, SkepikI wrote:

    <It may not have been true in your personal situation, which is where the word "aggregate" becomes really important.>

    AND if you cherry pick the statistics to carve off the years of really high inflation from 1980- 1984, as well as the times when wages were most activly suppressed from 1978 - 1983 you come up with a number series that ignores the worst inflation and the worst wage suppression.

    You also need to believe the collected stats for average annual inflation from 1975-1980 which I dont - because I was part of the survey group BLS used for statistics then and most participants just guessed.

    <You can't have sustained inflation without aggregate nominal wage growth.>

    I agree, but you CAN have isolated and limited periods of really high inflation and wage suppression simultaneously, which we did from about 1979- 1984 regardless of what the aggregate suspect stats say. And thats not just MY personal experience. Yes it was spotty- particularly in 1980-1985 we experienced what was popularly called the "rolling recession" - something aggregate stats wont pick up either.

    But Im not really interested in chewing you out over the possibility of "sustained inflation" not leading to "sustained wage growth". The real determinate of the chances of inflation driving wage growth would seem to be the competition for labor/skills and the lack of substitution of capital for labor/skills. I'm not at all sure what might occur when we exit a low demand and low cost of capital period, experience inflation and then see what wages do. Maybe after a delay they follow, maybe they dont....which from a thought experiment perspective makes your primary argument just as well...conventional wisdom in our peculiar situation just may not apply, if it ever does.

    Finally, I would simply caution you and your readers that aggregate statistics, long term macro economic theory and conventional wisdom are all cut from the same bolt of cloth, and yes this IS a personal situation sort of comment. Its just like the old saw about all of us being dead in the "long run"......knowing what happens in the aggregate with firm macro economic theory behind you is cold comfort when the inflationary pain and the wage pain, and the debt interest pain is personal and immediate...

  • Report this Comment On January 25, 2014, at 7:49 PM, TMFHousel wrote:

    Thanks for the comment skeptical.

    <<,if you cherry pick the statistics to carve off the years of really high inflation from 1980- 1984, as well as the times when wages were most activly suppressed from 1978 - 1983 you come up with a number series that ignores the worst inflation and the worst wage suppression.>

    Nominal annual wage growth, 1980-1984: 8.1%

    Average inflation, 1980-1984: 7.5%

    Wages, 1978-1984: 9.3%

    Inflation, 1978-1984: 8.1%

    (All of these figures are from the FRED database).

    There's really no cherry-picking here. You can't have inflation without wage growth because your spending is my income. That's why gross domestic income (the sum of everyone wages) is the exact same number as gross domestic product (the sum of everything we produce).

    Again, where people protest is the difference between personal experience and aggregate. Some people's incomes didn't keep up with inflation during the 1980s. Others well exceeded inflation. For the purpose of our original point -- growth in tax revenue to pay a rising interest bill -- aggregate is the most important figure, because owners of Treasury bills don't care how much Skpetical himself is being taxed; they care how much the entire government is pulling in each year.

    Thanks again,

    Morgan

  • Report this Comment On January 25, 2014, at 7:51 PM, TMFHousel wrote:

    The elaborate, this chart shows gross domestic income and gross domestic product. They're the same.

    Your spending is my income. Your company's production is your income. When prices go up, wages go up -- in aggregate.

    http://research.stlouisfed.org/fred2/graph/fredgraph.png?&am...

  • Report this Comment On January 25, 2014, at 7:52 PM, TMFHousel wrote:

    The real wrath of inflation isn't on current wages, but past savings. That's where wealth is destroyed.

  • Report this Comment On January 25, 2014, at 11:09 PM, SkepikI wrote:

    ^ As a saver, I am no doubt guilty as charged. I still think your stats are warped. In fact, Housel, there were many serious observers who believe that the "books were cooked" on inflation and wages in real time from 1977 or so to 1987 or so.

    Among the afflictions of the very young, besides a persistent habit to not do as they are told, is to believe that the authorities "facts" or "statistics" are actual experience. I can give you two real thought experiments to mull over:

    I don't know if you ever engaged in a Physics or Physical Chemistry Lab. One "experiment" I witnessed was a Lab that involve very arcane and precise measurements which ALWAYS yielded commendable and linear results...UNTIL I and my lab partner took honest measurements and accurately reported the true readings with statistical error analysis that showed the "experiment" was a bust. Which was the correct result, and the foregoing labs were essentially "dry labs" reporting the expected result with no real serous error analysis.

    The other is a current idiocy where "climate change" temperature increases (sic) are reported without error analysis and including "data adjustments" that are supposed to account for "drift" due to heat islanding from surrounding structures and pavement.

    These sorts of "statistical" fictions are accepted by all sorts of analytical agents with no particular skepticism and no evaluation of objections to their veracity. Of course this makes me a conspiracy theorist, but when my experience does not square with the accepted "data" I certainly make an effort to question if the "data" is reality.

    Naturally, this makes me a curmudgeon, but I enjoy my exalted status as a questioner of conventional wisdom.

  • Report this Comment On January 25, 2014, at 11:53 PM, bbell46356 wrote:

    One more factor to consider when suggesting we can inflate our way out of debt. a huge percentage of government spending is on entitlements which include automatic cost of living adjustments tied to inflation. Increase government revenue isn't necessarily available to pay down debt or even higher interest payments.

  • Report this Comment On January 25, 2014, at 11:59 PM, bbell46356 wrote:

    With regards to Greece, do you really suggest that Greece would be better off printing their way to hyperinflation? Is that the sort of economy you would want to invest in? Are you really suggesting workers in Weimar Germany were just fine? What were they able to buy with their wheelbarrow full of money? Unless a barter economy is the desired outcome, these argument sound crazy to me.

  • Report this Comment On January 26, 2014, at 3:15 AM, kyleleeh wrote:

    @bbell

    First off, no government spending is automatic or mandatory. With the stroke of a pen government can, and has in the past changed payouts for entitlement programs.

    Second their is a lot of possible outcomes in between zero and hyperinflation...it's not an all or nothing scenario when you print money.

    Third,the comparison to Weimar Germany is a common one when denying that you can't inflate your way out of debt....it's also untrue. Weimer Germany's debt was reparation debt from the treaty of Versailles. That debt was denominated in the currency of the allied nations that imposed it, namely French Franks, and British Pounds. So printing more German Marks did nothing to alleviate the debt burden, because the exchange rate went up the more they printed. You can't print your way out of debt if your debt is denominated in a currency that you don't have the ability to print...which is exactly the situation Greece finds itself in now, they surrendered control of their currency to the ECB when they switched to the Euro.

  • Report this Comment On January 26, 2014, at 8:48 PM, bbell46356 wrote:

    kyleleeh,

    The reason their debt is in the euro, at least part of the reason is because Greece's debt is so high, no one wants to do business in their currency. Same reason Weimar's debt was in pounds and francs. If your broke and your currency is worthless because you printed a bazillion of it, you don't get to set the rules anymore. Look to Zimbabwe as a similar more recent example.

    would you make an investment using Greek currency - or Zimbabwe's?

  • Report this Comment On January 26, 2014, at 9:00 PM, TMFHousel wrote:

    bbell,

    Greece's debt is in euros because Greece joined the euro in 2001, along with most European nations. The idea was that currency union would make commerce more effective across the continent. It had nothing to do with Greece being weak. In fact, only strong countries were allowed to join. Weak nations from the eastern Europe were by and large denied.

    In Wiemar's case, it was't so much "print a bazillion and you don't get to set to rules" as much as it was "start a world war that ultimately kills 15 million people, lose that war, and you don't get to set the rules."

    -Morgan

  • Report this Comment On January 26, 2014, at 10:04 PM, kyleleeh wrote:

    @bbell

    Germany's debt was not borrowed, it was forcefully imposed as war reparations. It had nothing to do with economics in Germany.

    As for Zimbabwe if your nation produces next to nothing in the way of goods or services, your currency is not going to be worth much whether you print a bunch of it or not. Remember money is nothing more then a medium for exchanging goods and services, it's the amount of goods and services you make that backs the value of your currency.

  • Report this Comment On January 27, 2014, at 10:13 AM, twcooper wrote:

    Great article. From what I've seen, people tend to make macroeconomic analysis too simple and equity analysis too complicated.

  • Report this Comment On January 27, 2014, at 12:10 PM, stan8331 wrote:

    Another incisive, nuanced, thoughtful article.

    I've believed college tuition was in a growing bubble for a long time, but I think that issue is beginning to self-correct as more people start to shop for schools based on a sort of price conscious cost-benefit analysis that hasn't been common in the past.

  • Report this Comment On January 27, 2014, at 12:27 PM, SPARTANBURG wrote:

    Wonderful exchange of ideas and regardless of the level of agreement on points made by Morgan, the primary thought that nothing is as simple as 1 plus one equals two is totally in center stage.

    Great article, great exchange of thoughts and experience.

  • Report this Comment On January 27, 2014, at 1:13 PM, JSMBAPhD wrote:

    On the participation rate, it is not at all predictable that it would drop this much purely due to demographic factors. Structural factors have been debunked as a cause of the low participation rate. Brad DeLong, one of the top-ranked economists in this country, has discussed the issue, for example, here:

    http://delong.typepad.com/sdj/2012/05/in-the-words-of-christ...

    The drop in participation rate is very worrisome and indicates a very weak economy. Roughly one million Americans who one would expect to want work are not even looking for work. The GDP cost of this is tens of billions of dollars-- perhaps hundreds of billions.

    Just because one economist correctly predicts a statistic, that does not prove the causation proposed by that economist. Respectfully, this is not an incisive, nuanced, and thoughtful segment to this article.

  • Report this Comment On January 27, 2014, at 1:16 PM, TMFHousel wrote:

    <<Brad DeLong, one of the top-ranked economists in this country, has discussed the issue, for example, here:>>

    Who ranks economists?

    <<Just because one economist correctly predicts a statistic, that does not prove the causation proposed by that economist>>

    Does that hold true for DeLong as well?

    I generally like Brad. But he gets very ingrained in his position even when I think some of his colleagues offer counterpoints.

  • Report this Comment On January 27, 2014, at 4:15 PM, zillatilla wrote:

    Great article!

  • Report this Comment On January 28, 2014, at 12:00 AM, bbell46356 wrote:

    All,

    I stand corrected on several points:

    Britain GDP growth.

    Weimar war debt.

    I still find it incredible and irresponsible to promote a position of spending well beyond one's means. Sooner or later the bill has to be paid, government or individual.

    I still say that the US massive debt creates a very real risk of the dollar being replaced as the international currency of choice. There are many good reasons why it may not or even probably won't happen, but huge debt pushes in that direction.

    As for individuals, starting life and family is hard enough without debt. To minimize the hardship of doing so with $30,000 to $200,000 of college debt seems irresponsible to me, especially when a fairly good percentage of those with college debt won't graduate or land jobs that require college degrees.

  • Report this Comment On January 28, 2014, at 9:06 AM, TMFHousel wrote:

    << Sooner or later the bill has to be paid, government or individual.>>

    Thanks for the comments. A government can run a deficit that is lower than GDP growth forever, and keep debt to GDP growth in check. Since 1901 the government has spent more than it brought in in 81 out of 112 years. Individuals can't do this because they eventually die.

    <<To minimize the hardship of doing so with $30,000 to $200,000 of college debt seems irresponsible to me>>

    I would never minimize the hardship of $200k of debt. But when putting this in historical comparison, it's appropriate to point out that US households now have the lowest debt payments as a percent of their income since records began more than 3 decades ago.

  • Report this Comment On January 28, 2014, at 9:07 AM, TMFHousel wrote:

    To elaborate, there is no date that says "The US government must repay all of its debts and be completely debt free on XX date." There is for individuals -- the day they die (or the day their estate is settled).

  • Report this Comment On January 28, 2014, at 5:41 PM, bbell46356 wrote:

    Morgan, I agree, governments don't die. But the debt does come due and has to be refinanced continuously. Except for the period immediately following WWII, debt to GDP is higher than ever and has increased from something like 50% or 60% to close to 100% in the past several years. A government can and the US has had debt continuously - but not at these levels.

    With regards to US households having the lowest debt payments in three decades, a very positive statistic and one that probably helps offset higher government debt as well. But it really may not be relevant to the subset of college graduates.

    The typical household has, or at least should have the benefit of proven earning power, equity in a home, a retirement plan and other savings that offset whatever debt they may have accumulated. Your typical college grad has nothing and therefore in my opinion should have little or no debt.

  • Report this Comment On January 28, 2014, at 5:57 PM, TMFHousel wrote:

    <<But the debt does come due and has to be refinanced continuously>>

    Yes, but it's refinanced with new debt. Andrew Johnson is the only president to have presided over a debt-free nation, and only for a brief period of time. We'll always be in debt. And that's fine.

    <<The typical household has, or at least should have the benefit of proven earning power ... Your typical college grad has nothing>>

    They have a degree that statistically increases their earnings potential dramatically as soon as they graduate.

  • Report this Comment On January 29, 2014, at 3:53 AM, kyleleeh wrote:

    <<The typical household has, or at least should have the benefit of proven earning power, equity in a home, a retirement plan and other savings that offset whatever debt they may have accumulated. Your typical college grad has nothing and therefore in my opinion should have little or no debt.>>

    A typical collage grad is not a typical household. A typical collage grad is just one person starting out in the world. A typical household is two adults and two children who have been in the game for awhile.

  • Report this Comment On January 29, 2014, at 2:13 PM, SkepikI wrote:

    I've been quite fascinated with the discussion to date, but more than a bit concerned about over confidence in "Statistical Information" that may not be (Statistical that is). My persnonal situation and experience makes me suspicious, but not skeptical (ha imagine that). When I TEST my suspicions, I find quite frequently where BLS and other "Statistics" are concerned a gaping hole in the qualification of them as correct sampling and or "statistical populations.

    It seems to be a human affliction to treat groups of numbers as bell curves (Gaussian distributions) and apply standard "statistical formulas" to get averages, means and the like....EVEN IF THEY ARE NOT bell curves. The formulas will give you answers, not even nonsense, just WRONG answers that you cannot detect as wrong.

    Thus you get "statistics" that are not real information and "statistical quantities" like averages that are flat out wrong. Worse we don't know they are wrong because nobody tests them.

    I know of NO serious, reliable and rigorous examinations (NO not "studies" Housel, rigorous examinations) which have proved (or disproved for that matter) that Inflation figures or Unemployment figures are really collections of rational data and conform to populations that are treatable as statistical quantities. You would be doing me and your readers a favor if you would point one out, because it would relieve some of my Skepticism. At that point, I would only be aflicted by distrust over the imprecise, sloppy and unreliable methodology of gathering the underlying data, which would be progress.

    Now that I have cause my own eyes to glaze over and my brain to short, let me just note that it would be interesting Housel to rigorously test your statement for statistical applicability:

    <They have a degree that statistically increases their earnings potential dramatically as soon as they graduate. >

    You might find out it is statistically correct, but my expectation is you would find at least Two and maybe more populations lumped together, some of which (by degree and school) this is not true off and therefore not random, and some of whom it is very true for and can be treated as a statistical population. Fade as eyes glaze completely shut....

    I remain SkepickI

  • Report this Comment On January 31, 2014, at 3:30 PM, cmalek wrote:

    "They have a degree that statistically increases their earnings potential dramatically as soon as they graduate. "

    Lies, damned lies and statistics.

    Unfortunately one cannot pay for groceries with "statistical earnings potential." No bank will accept a "statistical earnings potential" as collateral for a loan of cold, hard cash. They want to see an actual paycheck before they give you anything besides the boot. If minimum wage jobs are all you can get, that is exactly what a degree is worth. As they say in NY "Potential and $2.50 gets you on the subway."

  • Report this Comment On January 31, 2014, at 3:48 PM, 092326 wrote:

    I suspect the debt will be retired in three ways, increased GDP, inflated dollar and an increase in bank reserves. The cereal you buy today may be in the same box but there is less of it, two bottles of orange juice that were once $5.00 are now $6.00. What do you call that?

  • Report this Comment On February 01, 2014, at 12:01 PM, geezer27606 wrote:

    There is a lot of silliness in this article. It is not good if people who cannot find work take early retirement or stay in school. It is not good if enough inflation will cover the debt by in effect confiscating savings.

    Student debt should be looked at as a an investment decision. Money is borrowed to create an asset which is future earning power. Students need to carefully consider how much they borrow and how they spend it. Student loans too often finance a lifestyle and curricula which will never yield a profit leaving the borrower with a crushing debt burden.

  • Report this Comment On February 05, 2014, at 4:56 PM, kyleleeh wrote:

    <<No bank will accept a "statistical earnings potential" as collateral for a loan of cold, hard cash. They want to see an actual paycheck before they give you anything besides the boot.>>

    If that was true there would be no such thing as a private student loan.

Add your comment.

DocumentId: 2808543, ~/Articles/ArticleHandler.aspx, 4/23/2014 1:58:05 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement