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3 Economic Stories That Get Blown Out of Proportion

By Morgan Housel - Aug 6, 2013 at 2:23PM

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Perception and reality.

"We exaggerate misfortune and happiness alike." Honore de Balzac wrote. "We are never as bad off or as happy as we say we are."

How true, and how relevant to today's hyper-sensational media. 

Here are three economic stories I find overblown.

Overblown story No. 1: Student loans now exceed credit card loans
Nearly every article on student loans these days carries the same statistic: Student debt now exceeds credit card debt.

Is this supposed to be shocking? Am I supposed to be upset that more people are financing bachelor's degrees at 4% interest than plastic garden gnomes at 25% interest?

Student debt has put a lot of people in awful financial situations. But anecdotes aren't trends, as they say. There will always be students who borrow a quarter million dollars for a degree that makes them no more employable than they were before it. These examples dominate stories on student loans in a way that portrays them as common.

But they are not.

According to the Federal Reserve, the median student loan balance is $12,800. Seventy-five percent of borrowers owe less than $28,000, 90% owe less than $54,000, and only 3% owe more than $100,000.

Put this in perspective. The median student loan of $12,800 with a 10-year standard payback plan at 3.9% interest (the new rate on government loans Congress approved last week) will generate a payment of $128.99 per month. A graduated 10-year repayment plan would create a monthly payment starting at $72.10. Compare that to the average cell phone bill ($71 per month), the average cable bill ($70), the average monthly entertainment budget for single-person households ($137), the average amount spent on restaurant food ($153 per month), and the average amount spent on alcohol ($33 per month).

Or think of it this way: The average student loan is smaller than the average new car loan.

Or how about this: Statistically, about the same percentage of the population will end up with a net worth above $5 million than will graduate with more than $100,000 of student debt.

Student loans will hurt a lot of people. But you have to keep your gloom in perspective.

Overblown story No. 2: The recovery is being driven by part-time jobs
Take these headlines from the last week:

US Turning Into a Part-time Worker Economy

A disproportionate number of the added jobs were part-time

Jobs report reveals troubling trend in part-time employment

ObamaCare to blame for part-time job surge?

There are hundreds of similar articles.

Each has a hair of truth to them. Part-time jobs have made up a big share of job gains in recent months.

But the Bureau of Labor Statistics' measure of part-time work comes from a small survey of households that is notoriously volatile, rather than the much larger survey of businesses that's used to calculate the monthly jobs figure. We regularly fret over job swings measured in the tens of thousands, but the survey used to measure part-time workers has a margin of error of plus or minus 400,000 per month. It tells you broad trends, but never specific month-to-month levels.

And the broad trend is clear: Workers labeled as part time for economic reasons -- those who want full-time hours but are working less than 35 hours per week -- have been dropping since the recession ended four years ago:

Source: Bureau of Labor Statistics.

Every jobs report over the last four years can be summed up in five words: Things are getting better slowly. But that doesn't make a compelling narrative, so we resort to looking for things that aren't really there.

Overblown story No. 3: The pension crisis
Google the words "pension crisis," and you'll be greeted with 16 million articles foretelling utter doom. 

A lot of pension funds are in terrible shape, some beyond repair. Detroit is a good example. But most pension doom is based on two factors, neither of which is permanent.

First, as economist Dean Baker shows in this paper, the main cause of underfunded pensions is -- surprise -- the financial crisis. Pension fund assets took a walloping. If public pensions had earned the risk-free rate of return available in Treasury bonds from 2007 to 2010, most of the current shortfall would disappear.

Shoulda, woulda, coulda. But pointing this out is important because pension funds aren't investing for the next quarter or the next year; they're typically investing for the next several generations. They have time to wait for below-average returns to be offset by above-average results. Last year, I asked Joseph Dear, chief investment officer of CalPERS, the nation's largest pension fund, about his pension's poor performance. He replied:

It's not been so great for the past ten years, but if you look at big cycles in investment and see 10-year returns from equities relatively low, what we've seen after that is a return to better returns, a reversion to the mean. So I think there is a reasonable basis to be confident.

We are coming off one of the worst decades in history for stock and real estate returns. It is intuitive to extrapolate these low returns into the future. But that's a bad assumption. History shows that booms follow busts -- which is what's happening now, with the S&P 500 up 172% in the last four years.

Second, ultra-low interest rates can balloon a pension's liabilities. Pensions use a discount rate typically linked to bond yields to convert future obligations into present dollars. The lower that rate is, the higher a pension's liabilities are. And with interest rates at all-time lows, that discount rate is really, really low.

But as interest rates rise, the opposite can occur, with pension liabilities falling. Here's Joseph Dear again last year:

In a super-low rate environment like we have today, liabilities are definitely bigger. But are interest rates going to stay low? Is the 10-year Treasury going to stay at 1.6% indefinitely? I doubt it. So interest rates will go up and those who [discount on] the yield curve will see liabilities coming down.

This is already happening. As interest rates on 10-year Treasury bonds climb from 1.7% earlier this year to 2.6% today, pension liabilities are declining. According to HR Consulting company Mercer, rising bond yields this year have reduced S&P 1500 pension deficits by a combined $150 billion. Pension funding improved from 80% in April to 86% in June. That's the best figure in two years. "If rates got back up another 1.50 percentage points, we'd certainly be in a very good spot from a pension funding perspective," Mercer's Jonathan Barry told The Wall Street Journal.

Chin up
Student loans are a problem, part-time jobs mask the health of the jobs market, and many pension funds are in trouble. But reality is never black and white; it's nuanced and constantly changing. Never let sensational stories get in the way of the bigger picture.

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


Follow Morgan Housel on Twitter @TMFHousel. The Motley Fool has a disclosure policy.

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