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  • Economic Letter: 'College Degree Remains Worthwhile Investment'

    Mary C. Daly , senior vice president at the San Francisco Fed, and Leila Bengali , research associate, weigh in on the value of higher education in a new Economic Letter . And like others who take a research driven approach, as opposed to the anecdotal approach that some in the media seem to prefer, they find that there is still clear value in going to college. In fact, they say the value "remains high." A common way to track the value of going to college is to estimate a college earnings premium, which is the amount college graduates earn relative to high school graduates. We measure earnings for each year as the annual labor income for the prior year, adjusted for inflation using the consumer price index (CPI-U), reported in 2011 dollars. The earnings premium refers to the difference between average annual labor income for high school and college graduates. We use data on household heads and partners from the Panel Study of Income Dynamics (PSID). The PSID is a longitudinal study that follows individuals living in the United States over a long time span. The survey began in 1968 and now has more than 40 years of data including educational attainment and labor market income. To focus on the value of a college degree relative to less education, we exclude people with more than a four-year degree. Figure 1 shows the earnings premium relative to high school graduates for individuals with a four-year college degree and for those with some college but no four-year degree. The payoff from a degree is apparent. Although the premium has fluctuated over time, at its lowest in 1980 it was about $15,750, meaning that individuals with a four-year college degree earned about 43% more on average than those with only a high school degree. In 2011, the latest data available in our sample, college graduates earned on average about $20,050 (61%) more per year than high school graduates. Over the entire sample period the college earnings premium has averaged about $20,300 (57%) per year. The premium is much smaller, although not zero, for workers with some college but no four-year degree. A potential shortcoming of the results in Figure 1 is that they combine the earnings outcomes for all college graduates, regardless of when they earned a degree. This can be misleading if the value from a college education has varied across groups from different graduation decades, called “cohorts.” To examine whether the college earnings premium has changed from one generation to the next, we take advantage of the fact that the PSID follows people over a long period of time, which allows us to track college graduation dates and subsequent earnings. Using these data we compute the college earnings premium for three college graduate cohorts, namely those graduating in the 1950s–60s, the 1970s–80s, and the 1990s–2000s. The premium measures the difference between the average annual earnings of college graduates and high school graduates over their work lives. To account for the fact that high school graduates gain work experience during the four years they are not in college, we compare earnings of college graduates in each year since graduation to earnings of high school graduates in years since graduation plus four. We also adjust the estimates for any large annual fluctuations by using a three-year centered moving average, which plots a specific year as the average of earnings from that year, the year before, and the year after. Read Is It Still Worth Going to College? here .
  • Advance Estimate for First Quarter Shows 0.1% Growth in GDP

    Real Gross Domestic Product expanded at an annual rate of 0.1% in the first quarter of 2013, according to the advance estimate from the Commerce Department . As we know, the advance estimate is only the first public release based on source data, and we are likely to see a different figure at the end of May. But still, that is a far cry from the fourth quarter growth rate of 2.6%. The Bureau of Economic Analysis report points to personal consumer expenditures driving the growth, while the slowdown came from several directions: •A downturn in exports. Exports of industrial supplies and materials as well as foods, feeds, and beverages declined after increasing in the fourth quarter. •A downturn in business investment. Spending on transportation equipment fell after rising significantly in the fourth quarter. Spending on computers and peripherals also turned down. •A larger decrease in inventory investment. Inventory investment by retail trade companies (mainly motor vehicles dealers) declined significantly after an increase in the fourth quarter. •A slowdown in consumer spending, mainly in nondurable goods, notably clothing and footwear as well as food and beverages. These movements were partly offset by faster growth in utilities and healthcare. Here is a look at the trend: Read the BEA release here .
  • IMF Releases Positive Economic Outlook Report on Asia and Pacific

    If uncertainty in Western developed economies has taught us anything this last decade, it is that the global economy depends on robust growth in Asia. So the latest projections from the IMF will be seen by many as welcome. Hitting these projections depends on Asia's policymakers staying on course. The IMF report suggests the risks are not as great as they were a year ago, but there are still clear risks: Risks to the outlook have become more balanced. Global growth has strengthened and overall global prospects have improved (especially in advanced economies). But Asia still faces new and old risks (geopolitical uncertainty, exit from unconventional monetary policy in the United States and low inflation in the euro area). The main external risk remains an unexpected or sharp tightening of global liquidity. Rapid movements in global interest rates could lead to further bouts of capital flow and asset price volatility. Pockets of high corporate leverage in some Asian economies could magnify the effects of higher interest rates and lower growth on balance sheets, and weaken domestic demand. Asia is also facing various risks emanating from within the region. Growth in China and Japan could also fall below expectations, with negative spillovers for the rest of the region. In China, a gradual slowdown as a result of reforms would be welcome as it would put growth on a more sustainable path. However, a sharp fall in growth—which remains a low risk—would adversely affect those regional trading partners that are most dependent on Chinese final demand. In Japan, Abenomics could be less effective than envisaged, resulting in lower inflation and weaker growth, with spillovers to economies that have strong trade and foreign direct investment linkages with Japan. Strong intra-regional trade integration, which is shown to have contributed to greater business cycle synchronization and spillovers over the years, could transmit geopolitically related disruptions along regional supply chains. Read the full report here .
  • The Case for College Remains Strong

    For soon-to-be college students and parents of soon-to-be college students, April is a month of mixed emotions. Pride is high, as competitive students learn what elite institutions want them. But then anxiety rises, as the reality of the cost sets in. The Washington Post 's Catherine Rampell makes the case that college is still worth the investment. Maybe not as much as in the past, but it remains a ticket to better earnings and higher quality of life. And, our overall economy improves when a higher percentage of Americans go to college. Even though unemployment rates for young college grads seem high — especially in the first few months after graduation — they’re still much lower than they are for people without degrees. According to Labor Department data, the unemployment rate for Americans ages 20 to 29 who have a bachelor’s degree was 5.8 percent in 2013. In that same age group, among people with no education beyond a high school diploma, it was 14 percent. And for those who do find work, the wage premium for higher education has grown over time. In 1979, among full-time workers of all ages, the median college graduate earned 38 percent more than did the median high school graduate; today the college-educated worker earns about 82 percent more. College is, as the Hamilton Project has pointed out, one of the best possible investments you can make, outperforming stocks, gold, long-term Treasurys, AAA corporate bonds and housing. That’s true for both a four-year degree and even more so for an associate’s degree. A college degree is certainly no guarantee of financial success, but it is nearly a prerequisite for moving up the income ladder if you’re poor. Of Americans born into families in the bottom income quintile, almost half who didn’t get a college degree remained stuck in the poorest income quintile as adults; the same was true for just 10 percent of Americans born poor who then got a college degree, Pew’s Economic Mobility Project found in 2012. Read College is not a losing investment here .
  • Zachary Karabell on Making Statistics More Meaningful

    Zachary Karabell is on a quest. He wants us to have a healthier relationship with economic statistics. And that means not placing too much pressure on those statistics to tell us more than they are designed to. In his latest book, The Leading Indicators: A Short History of the Numbers That Rule Our World , Karabell knocks some of the magic shine off of GDP and other key data that we follow closely. He recently spoke about GDP, income per capita, and other headline stats at the Carnegie Council . Here is an excerpt: For more information on the event, and to listen to the full talk, click here .
  • Planet Money: Greece's Economy May Stop Shrinking

    Greece's economy has a had a bad six years. At times, very very bad. But it may be getting better. The latest Planet Money podcast focuses on Greece, because the government there has put out a less-than-bad economic forecast. If the forecast is accurate, "the amazing shrinking economy will finally stop shrinking."
  • Pew: Americans Remain Bearish About the Economy

    Americans don't seem to be letting traditional economic indicators get in the way of their feelings about the economy. Andrew Kohut --Founding Director of the Pew Research Center --looks at some of the latest survey data he and his team has gathered, and calls citizens' "bearish" views of the economy as a big puzzle. As the new year began, the Associated Press summed up the optimistic outlook of experts succinctly: “Consumers will spend more. Government will cut less. Business will invest more. And more companies will hire.” In that regard, the Bureau of Labor Statistics first report of the year showed that the unemployment rate fell to a five-year low of 6.7 percent, and essentially remained at that level in February. But even so, much of the American public is still not over the Great Recession. And the factors that drive economic pessimism are not easily mitigated. Surveys show that a complex combination of partisanship and widening socio-economic gaps are in play, undermining chances of an improvement in the public mood any time soon. At the outset of what appeared to be a brightening economic climate, the Pew Research Center’s January national survey found just 16% of the public rating the national economy as excellent or good while a whopping 83% rated it as only fair or poor. This is little different than a year earlier when the survey found 12% giving the economy a positive rating and 86% rating it negatively. In fact, this is only modestly better than at any point since the onset of the Great Recession. The same pattern is seen in how Americans size up their personal finances. While Americans have a better opinion of their own finances than of the national economy, ratings of personal financial well-being remain well below what they were pre-recession. In 2007, and for much of the decade before it, about half of Americans rated their finances as excellent or good. Today, just 39% do. While there is a significant split on Americans' views about the economy based on political party affiliation, the split on personal finance issues is based on what Pew terms an education gap: Read the full article here .
  • Harvard Business Review: 'Why Is Ukraine's Economy Such a Mess?'

    Harvard Business Review editor Justin Fox looked at growth in Ukraine since independence and compared it to neighboring, former Soviet bloc economies, and was surprised by how much it lagged: So he called up Chrystia Freeland , former FT correspondent and now member of Canadian Parliament. Freeland was in Ukraine when it became an independent nation, and, Fox notes, her mother helped "craft the country's constitution." Here is an excerpt from the interview: Fox: The East has this old industrial base. What does the Ukrainian economy consist of on the whole? Is it heavily agricultural? Freeland: The industrial base is important, particularly in eastern Ukraine. We all know about Ukraine as the breadbasket of Europe, and it is indeed an incredibly fertile country. There’s been a lot of Chinese investment in that part of the Ukrainian economy. There is also a technology outsourcing industry. And then finally, in some parts of Ukraine, tourism has been becoming more important. Why is the economy such a mess? Because of very bad, kleptocratic governments. That is 90% of the reason. In terms of the economy, Ukraine only accomplished maybe half of the things that you need to do, when the Soviet Union collapsed and they moved to a market economy. They did do privatization. There are now a lot of private companies, and there is a market. It’s important for us to remember that not so long ago even selling a pair of jeans was illegal. But what they failed to do was build an effective rule of law and government institutions. Corruption, in the Yanukovych era at least, was absolutely rampant. And some important reforms of state finances haven’t happened. In particular, energy prices are still subsidized. Of course, when you move to free-market prices that’s a huge shock to the society. But Ukraine’s failure to liberalize energy prices is part of the reason that it has this great dependency on Russia. Having said all of that, and having been in Kyiv* last week, I think there’s a bit of an Italian phenomenon going on, where you actually have a highly educated, very entrepreneurial population, but because you had this incredibly corrupt state, a lot of the Ukrainian economy has gone underground. Walking through the streets of many Ukrainian cities — Kyiv, Lviv in Western Ukraine, Dnipropetrovsk in the East — you feel yourself to be in a much more prosperous society than the official data reflect. The official data is incredible. Poland on the one side and Russia on the other are both in the low twenty-thousands in GDP per capita, and Ukraine is officially at $7,298. There is no doubt that Ukraine has fared much, much worse than Poland. That is a testament to how important government decisions are. These countries were not so far apart in 1991 when Ukraine became independent, and the Poles by and large have done the right things, and the Ukrainian government has not. Read the full interview here .
  • Crimea Crisis: The Economic Costs to Russia

    War is costly on all levels. And Russia's involvement in Ukraine is going to be costly economically, not only for all Ukrainians, but for the Russian economy. How costly? Very costly, argues Sergei Guriev , a professor of economics and former Rector at the New Economic School in Moscow who is currently a visiting professor at Sciences Po . At Project Syndicate Guriev writes "The economic damage to Russia will be vast." First, there are the direct costs of military operations and of supporting the Crimean regime and its woefully inefficient economy (which has been heavily subsidized by Ukraine’s government for years.) Given the uncertainty surrounding Crimea’s future status, these costs are difficult to estimate, though they are most likely to total several billion dollars per year. A direct cost of this magnitude amounts to less than 0.5% of Russia’s GDP. While not trivial, Russia can afford it. Russia just spent $50 billion dollars on the Sochi Olympics and plans to spend even more for the 2018 World Cup. It was prepared to lend $15 billion to former Ukrainian President Viktor Yanukovych’s government and to provide $8 billion annually in gas subsidies. Then there are the costs related to the impact of sanctions on trade and investment. Though the scope of the sanctions remains uncertain, the effect could be enormous. Annual inward foreign direct investment is estimated to have reached $80 billion in 2013. A significant decline in FDI – which brings not only money but also modern technology and managerial skills – would hit Russia’s long-term economic growth hard. And denying Russian banks and firms access to the US (and possibly European) banking system – the harshest sanction applied to Iran – would have a devastating impact. In the short run, however, it is trade that matters much more than investment. Russia’s annual exports (mostly oil, gas, and other commodities) are worth almost $600 billion, while annual imports total almost $500 billion. Any non-trivial trade sanctions (including sanctions on Russian financial institutions) would be much more painful than the direct cost of subsidizing Crimea. Of course, sanctions would hurt Russia’s trading partners, too. But Russia’s dependence on trade with the West is certainly much larger than vice versa. Moreover, the most important source of potential damage to Russia’s economy lies elsewhere. Russian and foreign businesses have always been worried about the unpredictability of the country’s political leadership. Lack of confidence in Russian policymaking is the main reason for capital flight, low domestic asset prices, declining investment, and an economic slowdown that the Crimea crisis will almost certainly cause to accelerate. Read Putin's Imperial Road to Ruin here .
  • The Case for Measuring Gross National Disposable Income

    GDP gets all the attention of the media, but there are limits to relying on it as the measure of economic progress. GNI, or Gross National Income, is another measure, and one that is popular with a lot of economists. But for some countries, it doesn't include all of the funds coming in to a nation's people. Clara Capelli and Gianni Vaggi , of the University of Pavia, argue that we should pay more attention to GNDI, or Gross National Disposable Income. From Vox : Traditionally, the Gross Domestic Product is the most widely accepted indicator of an economy’s size and performance, although in the last decades many contributions have suggested to adopt alternative tools to measure people’s wellbeing (see Stiglitz, Sen, and Fitoussi 2008). The Gross National Income (GNI) is largely considered a better indicator to account for the income available to the dwellers of a country because it captures the incomes related to the mobility of factors of production (wages earned by cross-border workers, repatriated profits and dividends, etc.), the so-called Net Primary Incomes (NPI), in the Systems of National Accounts (see UN 2008 and IMF 2009). However, GNI does not include unilateral transfers such as foreign aid and, most importantly, remittances: the so called Net Secondary Incomes (NSI). GNI accounts for the income of cross-border workers – the so called compensation of employees – but not for the money sent home by those who live and work abroad for more than one year, which are by far the largest share of remittances. Remittances have increased by approximately seven times between 1990 and 2010 (see the World Bank database); they now represent one of the largest types of monetary inflows for many developing countries and in some developing countries they can be as high as 20% of GDP. Unilateral transfers are recorded by a third indicator, the Gross National Disposable Income (GNDI), which includes both primary and secondary distribution of income. GNDI provides a much better indicator than the GNI of the living standard of the people of a country and in many cases it should substitute for the latter measure. However the GNDI is not easily available in major international reports and databases. The OECD calculates GNDI for its members and for some non-member countries such as China and Indonesia. Furthermore, GNDI is sometimes confused with GNI in common practice (see for instance Todaro and Smith 2011, page 54). Read A better indicator for standard of living: The Gross National Disposable Income here .
  • Gallup Economic Confidence Index Level in February, Remains at Pre-Shutdown Level

    Americans' confidence in the economy remained flat in February. Confidence had plummeted in October with the partial shutdown of the federal government, but recovered significantly in the three months following. Gallup 's Economic Confidence Index : is now at -16, roughly where it was last spring when it began a climb to a 5 year peak of -7. Here's a look at the monthly averages since the start of 2008: From the report: The end of consecutive monthly climbs in Gallup's Economic Confidence Index is not an auspicious sign, particularly as Americans remain more negative than positive about the economy overall. After the government shutdown wreaked havoc on Americans' confidence in both the government and the economy in October, a parade of monthly improvements offered some hope that economic confidence might finally escape negative territory. But the readings have plateaued at the pre-shutdown level -- in other words, they are back to "normal." However, if 2014 is anything like 2013, good things could be in store as the seasons change. Last spring and summer saw some of the highest economic confidence index readings Gallup has recorded since it began tracking these measures in 2008. And with contentious gridlock on fiscal matters temporarily out of the way for the president and Congress, political sideshows should be less of a threat to economic confidence in the near future, giving confidence a fighting chance of reaching positive territory.; Read the full release here .
  • Rogoff on Potential Blocks to Sustained Economic Progress

    When you look at the collective rise in the quality of living for most people over the last century, it is easy to understand why Warren Buffett says he will continue to bet on economic prosperity. But, writing at Project Syndicate , Kenneth Rogoff warns that "past growth performance is no guarantee that a broadly similar trajectory can be maintained throughout this century." And he lays out four problems to consider: The first set of issues includes slow-burn problems involving externalities, the leading example being environmental degradation. When property rights are ill-defined, as in the case of air and water, government must step in to provide appropriate regulation. I do not envy future generations for having to address the possible ramifications of global warming and fresh-water depletion. A second set of problems concerns the need to ensure that the economic system is perceived as fundamentally fair, which is the key to its political sustainability. This perception can no longer be taken for granted, as the interaction of technology and globalization has exacerbated income and wealth inequality within countries, even as cross-country gaps have narrowed. Until now, our societies have proved remarkably adept at adjusting to disruptive technologies; but the pace of change in recent decades has caused tremendous strains, reflected in huge income disparities within countries, with near-record gaps between the wealthiest and the rest. Inequality can corrupt and paralyze a country’s political system – and economic growth along with it. The third problem is that of aging populations, an issue that would pose tough challenges even for the best-designed political system. How will resources be allocated to care for the elderly, especially in slow-growing economies where existing public pension schemes and old-age health plans are patently unsustainable? Soaring public debts surely exacerbate the problem, because future generations are being asked both to service our debt and to pay for our retirements. The final challenge concerns a wide array of issues that require regulation of rapidly evolving technologies by governments that do not necessarily have the competence or resources to do so effectively. We have already seen where poor regulation of rapidly evolving financial markets can lead. There are parallel shortcomings in many other markets. Read Malthus, Marx, and Modern Growth here .
  • Buffett Forever Bullish on U.S. Economic Future

    Warren Buffett has always bet on economic growth in America, and he is not stopping now. In his annual letter to Berkshire Hathaway shareholders, Buffett comes across as being as bullish as ever, despite the impact of the Great Recession and the slow recovery. Here is an excerpt that explains his thinking: Late in 2009, amidst the gloom of the Great Recession, we agreed to buy BNSF, the largest purchase in Berkshire’s history. At the time, I called the transaction an “all-in wager on the economic future of the United States.” That kind of commitment was nothing new for us: We’ve been making similar wagers ever since Buffett Partnership Ltd. acquired control of Berkshire in 1965. For good reason, too. Charlie and I have always considered a “bet” on ever-rising U.S. prosperity to be very close to a sure thing. Indeed, who has ever benefited during the past 237 years by betting against America? If you compare our country’s present condition to that existing in 1776, you have to rub your eyes in wonder. And the dynamism embedded in our market economy will continue to work its magic. America’s best days lie ahead. With this tailwind working for us, Charlie and I hope to build Berkshire’s per-share intrinsic value by (1) constantly improving the basic earning power of our many subsidiaries; (2) further increasing their earnings through bolt-on acquisitions; (3) benefiting from the growth of our investees; (4) repurchasing Berkshire shares when they are available at a meaningful discount from intrinsic value; and (5) making an occasional large acquisition. We will also try to maximize results for you by rarely, if ever, issuing Berkshire shares. Those building blocks rest on a rock-solid foundation. A century hence, BNSF and MidAmerican Energy will still be playing major roles in our economy. Insurance will concomitantly be essential for both businesses and individuals – and no company brings greater human and financial resources to that business than Berkshire. Moreover, we will always maintain supreme financial strength, operating with at least $20 billion of cash equivalents and never incurring material amounts of short-term obligations. As we view these and other strengths, Charlie and I like your company’s prospects. We feel fortunate to be entrusted with its management. Read the letter here .
  • Lagarde: Three Reform Steps for Spain (and Europe)

    Christine Lagarde was in Bilbao, Spain this morning to discuss the state of the economy in Europe in general, and Spain in particular. The IMF managing director noted that there are encouraging signs of growth across the EU. But the big challenge remains the high unemployment rates in member nations. Spain, of course, is the poster child for the jobs problem. Lagarde: I am here reminded by President Rajoy who said: “Spain is out of recession but not out of the crisis….The task now is to achieve a vigorous recovery that allows us to create jobs." I fully agree—creating jobs must be the overriding focus for Spain. What does this mean in practical terms? It means there can be no let-up in the reform momentum. The strong reform momentum must be maintained. And we can see three key areas where further progress will be crucial. The first area is labor market reforms—which need to be deepened so that they can work for all. Both firms and their workers need to be assured that they can reach appropriate agreements on working conditions and wages. This is essential for jobs to be protected and created. Workers need to be directly supported as well—through enhanced skills training and job-search assistance for the unemployed. And by further cutting the tax costs of employing people, especially the low-paid, the unemployed would face fewer barriers in finding work. The second area concerns debt—which needs to be lowered. For firms, this means helping insolvent but viable ones restructure their debts, so they can stay in business and continue to invest and hire people. For the government, it means continuing to reduce the fiscal deficit in a gradual, growth-friendly way—especially by relying more on indirect taxes. The third and final area is the business environment—which needs to be strengthened. Making it easier for businesses to start up and grow will lift their capacity to create employment. Making domestic firms more competitive will also boost their employment and productivity. The government’s plans to liberalize professional services and promote free trade among Spain’s regions go very much in this direction. Read the full speech here .
  • Fourth Quarter GDP Growth Revised Down

    Real Gross Domestic Product expanded at an annual rate of 2.4% in the fourth quarter of 2013, according to the latest (second) estimate from the Commerce Department . Growth was revised downward from the advanced estimate, that reported 3.2% growth in real GDP. The Bureau of Economic Analysis reports these four areas were revised down from the last report: •Consumer spending on both goods and services; the revisions were widespread. •Inventory investment, led by wholesale trade industries. •Exports, mainly nonautomotive capital goods and consumer goods. •State and local government spending, mainly investment in structures. Here is an updated look at the trend: Read the BEA release here .
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