Wages or no wages

 “Grace and peace to you from God our Father and the Lord Jesus Christ.”[1]

 

Let us pray.  “May the meditations of my heart and the words of my mouth be pleasing unto you, O Lord, my rock and my redeemer.”[2]  Amen.

 

To begin, I want to take you through a bit of this past week for me and the Backus’ family at May Road in Potsdam.  As you all probably know I keep myself rather busy, perhaps industrious, at work.  This week was one where balancing work and family and volunteering was very challenging.  You see at work, in addition to regular duties as a faculty member doing research, class prep for next year, and managing the construction program at Clarkson (inclusive of the oversight of a number of interns), I have two “big projects” that made this an especially busy time:  1) helping with our program self-study for accreditation as well as, 2) helping the senior leadership determine the path forward for our capital project investments.  It is a lot to be done, all before the start of the new fiscal year next Wednesday.  But this was coupled with the fact that this was the last week of Kindergarten for Emily with a series of half days starting on Tuesdays, meaning Jackie and I had to figure out how to cover things in the afternoons Tuesday through Friday; I took the brunt on Thursday and Friday with Jackie taking earlier in the week.  Emily, of course has swimming lessons at 4 pm that have to be factored into the plans.  And then comes the volunteer/service part of the week.  I was recently notified that I had come up for jury duty and had to report Tuesday afternoon for processing and possible selection; I was not selected so that made for a slightly easier Thursday.  But then there was also two information sessions for the Rock Charitable Fund that happened on Wednesday and Thursday evening that took me across the county in an effort to help churches, cemeteries, historic places, and veterans groups with their needs.  Yea, in a phrase, that is a whirlwind of activity for the week.  One could say, and many often do tell me this, “you have earned your pay this week.”  That is certainly a way to look at it, but in thinking about the lessons this week, I am rather reminded that there is a very different way to look at things.

 

One of the great challenges that those that regularly preach encounter is how to discern the message that is the right one for any given Sunday (for us Saturday) service.  Thanks to the common lectionary, we are given three lessons and a psalm to reflect on and figure out where they are speaking to us: as a collection of texts having a theme or through line, as a voice from the past with something to tell our present, and as something that asks us to ask deeper questions as to what the scriptures mean, not just what they say, and what they mean to us and how we live our lives.  In hearing about “wages” and “sin” and “obedience” and “welcome” and “slaves” and “grace”, I was drawn into thinking about Luther and his take on economics and how we ought to live our lives.

 

As most of us Lutherans know, Luther did not shy away from having an opinion.  Whether we hear of these through his many table-talks, or from letters to his various correspondents, or from his formal writings and sermons, Luther was willing to more or less talk about anything.  As offered in one paper, “Martin Luther has, in the modern economic as well as historian’s literature, often been portrayed as a mediaeval ignoramus helplessly shouting against the forces of modern capitalism, with little meaningful economic insight or contribution made to modern economic reasoning.”[3]  But, as the same author notes, “… to fully understand Luther’s economics also means we have to engage with the origins of his theology, not only because his economics and theology were intrinsically related and built upon one another, but because in a historical context it makes little sense to analytically disentangle theology from economics.”[4]  Thus, the lessons today might better be understood if we see them through the things that Luther had to say about God’s economy.  As one author notes, “the principle of benevolence is at the root of Martin Luther’s thinking on society, the economy, and business ethics.”[5]  As the same author indicates, “Luther had two different economic systems in his thinking: The temporal tamed market economy and the coming eschatological economic system of Christ.”  Whether it is in works like the “Bondage of the Will” or the “Freedom of the Christian,” or in “On Trading and Usury”, Luther comes again and again to the spiritual reality that God had, from our origins in creation, a very different economy in mind.  And where I might differ with the second author is in the fact that not only is that economy a “coming eschatological economic system of Christ” it is a present economic system that is essential to understanding the Kingdom of God that has come near to us.

 

Today’s lessons point to this in the way that God illustrates how we ought to live out our calling in this world.  In the gospel lesson today it is “[w]hoever welcomes you welcomes me, and whoever welcomes me welcomes the one who sent me.”[6]  God is calling us to a welcome that:  a) is without reservation, b) is an explicit invitation to be in relationship with God himself, and c) is accomplished in the welcoming of each and every one of us in our daily lives.  In Paul’s letter to the Romans, it is “[d]o you not know that, if you present yourselves to anyone as obedient slaves, you are slaves of the one whom you obey, either of sin, which leads to death, or of obedience, which leads to righteousness? But thanks be to God that you who were slaves of sin have become obedient from the heart to the form of teaching to which you were entrusted and that you, having been set free from sin, have become enslaved to righteousness.”[7]  Here God is inviting us fully into the paradox that it is in becoming slaves to, or being fully obedient to, God’s grace, or by giving up trying to be in charge, giving up trying to possess everything, we become fully free and enriched.  Paul reminds us of this explicitly by stating clearly that “… the wages of sin is death, but the free gift of God is eternal life in Christ Jesus our Lord.”[8]  This is true now and forever more because of what God first did for us.  Jeremiah points us to the way we know this in the first lesson when he says that “[a]s for the prophet who prophesies peace, when the word of that prophet comes true, then it will be known that the Lord has truly sent the prophet.”[9]  Jesus, in his resurrection, proved that he was indeed the Word, the Word that came true and has established God’s kingdome on earth now and always.  And because of that, as Paul offers, sin will have not have dominion over us, since we are not under the law but under grace.”[10]

 

Part of why this has come to me as a bit of a revelation is from my listening to the Bible Project podcast over the last several weeks.  Starting in late March, Tim Mackie and Jon Collins, have been doing a week by week look at the 10 commandments, or as they have articulated them “the 10 words”.  For me this has been like a deep dive into the small catechism, returning to not just reading the commands but understanding “what does this mean” as Luther repeatedly calls us to know.  There is a lot I can share about the 10 commandments, and there are volumes of texts that can be read.  But related to todays lessons was the most recent episode where Tim and Jon explored the final commandments around “coveting”.  For those needing a reminder:

 

“Neither shall you covet your neighbor’s wife.” “Neither shall you desire your neighbor’s house, or field, or male or female slave, or ox, or donkey, or anything that belongs to your neighbor.”[11]

 

In contemplating these commands, what I appreciated most was how they looked at it.  Tim being a Hebrew scholar, went back to the actual words in Hebrew, as is his habit, and drew out how “coveting” was nothing more than “desiring”.  And what they drew out from their conversation is how what God is constantly revealing to us is that our who desire ought to be on Him and our relationship with him.  To desire other things, to place other things above God, really is at the heart of what sin is about.  Our fall in the Garden, the Genesis 3 moment, was, at its core, about desiring something other than God.  To use a phrase, we chose “not-God” over God.  As written, when our first parents “… saw that the tree was good for food and that it was a delight to the eyes and that the tree was to be desired to make one wise …”[12] we chose to imbibe in the fruit of that tree instead of remaining in the fullness of grace that was how the world was supposed to work.  Tim and Jon highlight that repeatedly, here in the decalogue and throughout all of scripture, God over and over seeks for us to return again to centering our desires on him and his grace.

 

For me then, that is what I am gleaning from these lessons.  They are a call, especially in the light of Jesus as our savior Lord, to give in and let go to the things in this world that are hindering our relationship with Him.  And this should be a joy not a chore.  As Martin Marty says, living into God’s grace allows us to do the things we need to do, not because we have to, but because we get to.  The economics of God’s Kingdom are such that we recognize and become dumbfounded by the fact that everything we are and everything we have is first and always from God the Creator.  We are mere stewards, we really own nothing.  And with that we should and deserve no wages.  No we are merely doing what is the right response, if we are being righteous, for what we have already received.  Regardless, however, God, in his mercy and unjust justice, heaps on us His grace, His blessings and His love, without reservation and with the fullest welcoming embrace.  May we learn to do likewise, out in His world.

 

“Now may the piece of God that surpasses all understanding, keep our hearts and minds in Christ Jesus.”[13]  Amen.

[1] 2 Corinthians 1:2

[2] Psalm 19:14

[3] Rössner, “Martin Luther and the Making of the Modern Economic Mind.”

[4] Ibid.

[5] Mangeloja, Martin Luther’s Business Ethics and the Economic Utopia.

[6] Matthew 10:42

[7] Romans 6:16-18

[8] Romans 6:23

[9] Jeremiah 28:9

[10] Cf. Romans 6:14

[11] Deuteronomy 5:21

[12] Genesis 3:6

[13] Philippians 4:7

What’s holding Manufacturing back? CTR and Regulations? Not so much.

This post is in response to a Facebook post by a Mr. Eric July which had been reposted by an acquaintance Mr. Jay Pellegrino.  I met Jay through a mutual friend Josh Cantor and he happens to be a fellow Clarkson alumni.  While more conservative than I, I’ve come to find he’s equally pragmatic.  To that end, I responded.  Here is the link to the post I’m responding to below.

https://m.facebook.com/story.php?story_fbid=pfbid02rSGcSW4hHqJTLFhqLyX1hsBzkaiJ4xSXPR4Uc6WGpBJWJB525x1kBBT87Hx3V8GBl&id=100044485267539

I find it funny how people develop whole arguments based on cherry picked data and absent an elephant sized amount of context.  One can and should look at the period from just after WWII to the 1960s as the hay day of American manufacturing.  As a portion of GDP, in 1953 it was above 28%, while by 2017 we were at 12% (Source:  https://www.stlouisfed.org/on-the-economy/2017/april/us-manufacturing-really-declining,noting the authors go on to discuss GDP vs. Real GDP, a and how those percentages overstate the decline).  What’s also true is that the portion of the labor pool working in manufacturing has declined, having peaked at over 19 million workers in 1979 and never getting close that since (Source:  https://www.bls.gov/opub/btn/volume-9/forty-years-of-falling-manufacturing-employment.htm). So one ought to ask, if you are wanting to realize an improvement in domestic US manufacturing, what were the underlying reasons for said “golden era” so that we can apply those lessons now.

The author you posted posits this is because of a low corporate tax rate (CTR) and regulations.  But he starts at 1952 and doesn’t tell you what the rate is prior to that.  Well, here is a link to that data (as far back as I can find it):  https://taxfoundation.org/data/all/federal/historical-corporate-tax-rates-brackets/.  If you look at the data, you’ll see that the CTR really doesn’t track all that well with having spurred on manufacturing or not, given that the rates varied between 21% to 53% (depending on earnings) during WWII.  It’s also not lost on me how his whole argument shows an ever declining CTR while at the same time manufacturing is declining.  It’s as if the whole argument that CTR having any effect on manufacturing is moot (which, it is and it isn’t).  And as for regulations, the author doesn’t explain what regulations are costing US manufacturing jobs or manufacturing output as a portion of GDP.  I submit that regulations cost something, and certainly regulatory schemes that are lax or imbalanced with our competition have an impact, but then there are the long term (e.g. healthcare costs, etc.) and other costs (e.g. health and well-being, lifespans, etc.) the come along the way that more than offset the short term gains.  I’ll come back to CTR and regulations later, but for now let’s get back to the massive elephant in the room about then and now, context.

Again, why was manufacturing in the US so powerful after WWII?  Well if we just sit back and pull in the global context, it’s not hard to realize it has very little to do with US tax policy and entirely everything to do with the rest of the world in relation to the US.  In 1945, the US stood as the only major economic power that did not have the ravages of war visited upon it.  Its manufacturing base was unscathed by a single bomb, its infrastructure had not been run over by tanks, its homes were fully left intact.  The war never made it to US shores, excepting Hawaii and several small Pacific territories, so rebuilding at home was not on the agenda.  And it also had just had a huge government infusion into the economy to build out the manufacturing sector to become the famed “arsenal of democracy”.  While there’d be a need to be retool to produce domestic goods instead of military wares, there was massive capacity to produce things already in place.  And then let’s not forget the financial status of the US both for the government and private sectors.  Yes, the US was by far the largest creditor nation, having helped bankrolled the war for the Allies and having encourage thrift and savings which could immediately be put to use to buy homes, retool, invest in education, new technologies, and become the unrivaled economic engine that it became within a decade.  And also contributing was massive foreign investment in friendly markets to ensure there were buyers for what America made and sold, as well as an obliteration of tariffs moving toward free trade that made market penetration deep and without much of a gate to worry about.

The point of all this is that CTR had next to nothing to do with why our manufacturing boom happened after WWII, it had much more to do with the fact we were practically the only ones able to manufacture goods at scale on the entire globe.  After Europe and Japan rebuilt and got humming again, this all started to slip.  With China finally getting out of its own way (and our “opening” with them) and now India, Southeast Asia, and parts of Africa and South America getting in on the action (thanks to decades of stability and relative world peace), the US is in a much different place.  The pandemic highlighted a massive problem in this regard, in that we let it slide too far and for too many things.  We’ve created massive vulnerabilities by putting too much reliance on being able to get goods from places that may be working in completion if not being outright hostile to us and our way of life.  We also saw the fact that our investments in infrastructure made in the 50s and 60s were in need of reinvestment and redevelopment as were are getting outpaced by our competitors.  We need to do more to near shore or re-shore manufacturing, and fast.

Now I’ll say that among the only things I thought Trump et al did right in his first term was to cut the CTR to a historic low. Yes, it can’t be denied that we need the private sector to help create the jobs and prosperity to be able to compete and drive innovation.  I’ll admit we need to look at regulations, but not so much to eliminate them, but to streamline them, understand the short and long term costs, and to find ways to bring balance so as to not negatively effect the growth we need in manufacturing.  But the CTR reduction and the regulatory world don’t change the fundamentals that require other actions.  And his use of tariffs proved counterproductive for the economy and this change, because the reciprocal response tariffs prevented our goods from getting to the open markets we need to have to make a trade balance in our favor.  What was needed was direct investment in fixing our infrastructure (e.g. IIJA), investment in new and emerging technologies as well as proven areas of manufacturing market growth (e.g. IRA and CHIPS Act, even as more needs to be done), figuring out the full labor needs especially as it relates to immigration (still yet to be addressed comprehensively), and training and education pathways for the labor pool to be able to move manufacturing back to the forefront (still yet to be done).  The last four years got us a good start on this, but now who knows where we will go.  The last few weeks haven’t given us much hope that we will build on the needed work, rather the opposite.

All this to say, the analysis about CTR and the regulatory state here is built on a false premise and thus its conclusion is just wrong.  If we are having an honest conversations (which is what the author started with) you have to start with the full story, with all of the context, and looking at the full scale of what needs to be done. The author is right, tariffs alone won’t fix this (actually tariffs are a horrible way to address this need), but neither is it true that you can blame taxes or the regulatory state as the major contributors to our US domestic manufacturing problem.

“Free” stuff just isn’t free, and we need to stop using that term

“Free” stuff just isn’t free, and we need to stop using that term

Over the last several years, with increasing abandon, the term providing “free” things has been a central theme of American political discourse.  For instance Bernie Sanders maintained (and is still maintaining a) pledge to “Make Public Colleges, Universities, and Trade Schools Free for All”.[i]  There’s been calls to make health care “free” and universal.  Even the US government provided COVID-19 vaccines are said to be “… free and available to anyone who wants one.”.[ii]  Here is the thing, however, they are absolutely NOT free.  Higher education, for instance, costs tens of thousands of dollars per student annually.[iii]  Health care represents approximately 20% of the US GDP, which represents over $4 trillion of the US economy.[iv]  Simply put, these things cost something and have enormous value.  Last I checked, money doesn’t grow on trees and there is a severe limitation for how long we can just print money before it has larger economic implications (e.g. becomes worthless).

 

Front cover of the seminal text on the issues with “Free” Parking[v]

Besides those realities, the whole mentality of making something “free”, that really isn’t, is massively detrimental.  The quintessential example of this is the affliction that “free parking” has had on the US in particular, but broadly across the globe.  In his over seven hundred page text (cover pictured here), Donald Shoup, PhD., lays out in excruciating detail how, despite the moniker, “free parking” is exceptionally expensive.  He puts into specific relief the costs to society and to the individual that is a part of a place and system that employs the paradigm that is “free parking”.  And he makes the case, strongly, that part of the “high cost of free parking” is that it has created perverse and spiraling incentives that only create more costs and more damage.  He lays out how the mere fact that people believe it ought to be free, as if it was a right, is massively damaging in two distinct ways:  1) that the ones paying for it are not even often aware how much or how imbalanced it is for what they get and 2) it creates the illusion that there is not an incredible amount of value (sunk or otherwise) in the provisioning of said capacity.  In other words people take it for granted and people don’t have a clue about the bill they are actually being forced to pay for it.  He lays out, as a set of prescriptions, that we make it transparent how much it is costing and reform the systems in place to align usage to who pays for it, equitably, in the marketplace.  In this sense, what is “free parking” would be an ever more appropriately called “taxpayer subsidized” or “taxpayer provided” parking.

 

This exact analysis translates to any government provided service or provision of goods.  They are not “free”.  Someone is (or someones are) paying for it.  Even if you don’t have to pay directly for it at the point of service, its still not “free at the point of service”, its “provided to you by the taxpayer” or “provided to you on account of your being a taxpayer”.  We simply need to expunge this notion of things being “free”, because the only real things that are free are those natural and inalienable rights that simply are a part of being.  And to that, this incessant need, especially on the political left, to make things free, or assert a “right” that is anything but, really diminishes the value of what it is that they are advocating for.

 

I am all for the idea that we have a social compact that is managed and facilitated through the government as the final arbiter.  I further believe that it could be a good thing, for instance, to support a drive to fully taxpayer provided post-secondary education (tied to a national service requirement, military or otherwise) as a potential model.  It cannot nor should not, however, be considered “free”.  We need to get our heads around the fact that there are things that are common goods that necessitate contributions through mandatory efforts (we did NOT fight a revolution against paying taxes; we did fight the revolution to end paying taxes we did not have a say in imposing on ourselves[vi]).  It is a necessary thing, for instance, to promote and ensure that the demos in a democratic republic, are educated sufficiently to self-govern themselves.  Relying on secondary education as the only requirement in a lifetime to achieve that need, as the majority proportion in society, is no longer sufficient.  Trade schools, higher education, and other certification or education pathways are needed.  It is everyone’s responsibility to ensure this happens, not just those that choose those pathways.  And we ought to be clairvoyant enough to call it like it is: taxpayer subsidized, taxpayer supported, and/or taxpayer provided (depending on the level of fiscal support provided to the program).  Likewise, if we choose for universal pre-K or healthcare or what ever other program we enact or service that is provided.  Its not free.  It costs something, it has value, and it is a part of what we pay for as citizens.

 

So, stop it with the “free” mantra.  It’s a falsehood.  Get on with meeting our responsibilities as taxpayers and being clairvoyant about what government can and does for us.  After all, that is what we are paying for, whether we know it, like it, or not.

 

[i] https://berniesanders.com/issues/free-college-cancel-debt/, accessed on 2 September 2022

[ii] https://www.vaccines.gov/, accessed on 2 September 2022

[iii] https://files.eric.ed.gov/fulltext/ED498601.pdf,

[iv] https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsHistorical#:~:text=U.S.%20health%20care%20spending%20grew,For%20additional%20information%2C%20see%20below., accessed on 2 September 2022

[v] For short synopsis of this 700+ page text, you can read it at this link:  https://www.researchgate.net/publication/235359727_The_High_Cost_of_Free_Parking

[vi] Further, despite what the talking heads and politicians keep professing, we live in a democratic republic, which we, as citizens, are the ones going in the voting booth to have a say about.  It is only because, “we the people” have let them get away with it, that we have the results that we have and the obfuscations are so thick.

Economics and Data – Real Unemployment and Labor Force Participation

 

Economics and Data – Real Unemployment and Labor Force Participation

 

On June 6^th, as part of his regular segment called “data download” Chuck Todd of NBC News and Host of “Meet the Press” highlighted a stark reality as it relates to our current labor situation, that our Labor Participation Rate in June 2021 is no different than it was in June 1977.

 

Take a watch and listen to this video:

I have been saying for some time that I strongly believe that our (the USA’s) economic fundamentals are really off kilter (“screwed up” as I put in in some posts).  To me there are several measures that I look at to see what the overall health of the economy is, and they aren’t’ what typically get rolled out in the general media coverage of how things are going.  You know the measures put out there:  GDP growth, unemployment, stock market growth, size of the federal annual budget deficit, overall trade deficit, quarterly earnings, and so forth.  These are “ok”, but they really are too gross to get a real picture of the economy and its health across sectors and effecting most of us.  I won’t go over many of these now, and what a good analysis says about them, but some of the time based trends I carefully watch are:

• Real GDP per capita (production on a per person basis), its growth/decline, and in comparison with the EU, China, and other major competitors; https://fred.stlouisfed.org/series/A939RX0Q048SBEA)
• Gini Index (https://fred.stlouisfed.org/series/SIPOVGINIUSA)
• Inflation rate (https://fred.stlouisfed.org/series/T30YIEM)
• Trade balance (https://fred.stlouisfed.org/series/BOPGSTB)
• Housing and household statistics (https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2016/03/household-expenditures-and-income)
• Real wages (https://fred.stlouisfed.org/series/LES1252881600Q)
• Business debt (https://www2.deloitte.com/us/en/insights/economy/issues-by-the-numbers/rising-corporate-debt-levels.html)
• Business Investment (https://fred.stlouisfed.org/series/W790RC1Q027SBEA)
• Federal debt as a percentage of GDP (https://fred.stlouisfed.org/series/GFDEGDQ188S)
• GDP by industry over time (https://www2.deloitte.com/us/en/insights/economy/spotlight/economics-insights-analysis-07-2019.html)
• Federal spending as a percent of GDP (https://fred.stlouisfed.org/series/FYFRGDA188S) 

I look at them not only in terms of their own meanings (which can be significant), but also in comparison with one another.  And if you look at all of these, you will start to see a picture that isn’t healthy for the long-term, and we really need to have a plan to address many of the problems therein.

The one I want to focus on here, however, is specific to employment.  For some time now it has become too fashionable to determine how “normal folks” are doing by looking at the unemployment rate.  If the rate is in low single digits, the media, politicians, and seemingly everyone believes that the economy is doing great!  If it creeps above 8% or more, especially if it goes double digits, the reports are that the economy is in the toilet and that folks are suffering massively.  Here is a chart tracking the unemployment rate over that last couple decades in the US (2001 to 2021):

[i]

Here is the thing though; the unemployment rate is a very short-term measure of things.  This is because the term “unemployed” is a very loaded term.  Here is that definition according to the Bureau of Labor Statistics:

“In the Current Population Survey, people are classified as unemployed if they meet all of the following criteria:

• They were not employed during the survey reference week.

• They were available for work during the survey reference week, except for temporary illness.

• They made at least one specific, active effort to find a job during the 4-week period ending with the survey reference week (see active job search methods) OR they were temporarily laid off and expecting to be recalled to their job.

People waiting to start a new job must have actively looked for a job within the last 4 weeks in order to be classified as unemployed.  Otherwise, they are classified as not in the labor force.”[ii]  And, the “unemployment rate represents the number of unemployed people as a percentage of the labor force (the labor force is the sum of the employed and unemployed).  The unemployment rate is calculated as: (Unemployed ÷ Labor Force) x 100”[iii]

Long and short, if you’re reading carefully, the term “unemployed” does not mean the sum total of all those that are “out of work”.  No, it is a very limited sub-category of those that are “out of work”, given that it omits anyone that has been determined to no longer be in the “labor force”.  So while “unemployment” may have a low percentage, there could still be a large percentage of folks not working, aka “out of work”.  So, how then do we figure out what the reality is in terms of who is really “out of work”?  To get at that, we need to get at the Labor Force Participation Rate.

The labor force participation rate (or participation rate) “represents the number of people in the labor force as a percentage of the civilian non-institutional population. In other words, the participation rate is the percentage of the population that is either working or actively looking for work.  The labor force participation rate is calculated as: (Labor Force ÷ Civilian Non-institutional Population) x 100.”[iv]  Imbedded in this is the idea of the civilian non-institutional population, which is the “population age 16 and older… published by BLS … [excluding] the following:

• active duty members of the U.S. Armed Forces
• people confined to, or living in, institutions or facilities such as
• prisons, jails, and other correctional institutions and detention centers
• residential care facilities such as skilled nursing homes

Included in the civilian non-institutional population are citizens of foreign countries who reside in the United States but do not live on the premises of an embassy.”[v]  So, basically, this rate is the percentage of civilian people in the country that could, potentially, work.  It will never be 100%, as it still includes folks that are not likely to be working anyhow, namely (and these are just some examples):

• retirees

• students still in school, including those finishing high school (typically through age 18) and in college

• those on long-term disability but not in a residential care facility

• those undergoing temporary medical treatments, that may last a long period of time

• those that just don’t want to work by choice

So what does that rate look like over time?  The following is a chart of the Labor Force Participation Rate since the end of World War II:

 

[vi]

 

As can be seen in this chart, prior to the mid-1970s, the rate was somewhere between 58 to 60%.  Another way to look at this is that roughly 40% of the civilian population was not in the labor pool.  Social mores up until that time, often precluded women from pursuing careers and often were not working, yet were certainly part of the “civilian non-institutional population”.  Given that women make up 50.8% of the population[vii], this means that a large part of that 40% was likely to be women.  Women taking on a more vigorous role in the labor force should have seen a significant rise in the participation rate.  The rate, however, by the mid-1990s, more or less stayed in the 66 to 67% range; a nominal 10% rise to prior to the widespread of women entering the workforce.  This means we still had about a third of the potential labor pool not working.

Since 2000, this rate has been in decline; the point being that the percentage of the labor pool that is working is shrinking.  People have simply moved from “unemployed” to “not in the labor pool” at a seriously concerning rate.  Yes, when we see a spike in unemployment rate, which is bad.  However, even if the unemployment rate is low (as we saw from 2002 to 2007) it does not mean that the labor participation rate is increasing or recovering (as we saw from 2002 to 2007, where it, basically, continued to drop and settled at a new lower rate).  Moreover, even when there is an economic expansion (defined as a growth in GDP), does not mean “average folks” are seeing the benefit of it.  If you look at this, then you should be getting a clearer picture why there is increasing dissatisfaction both in the political and economic arenas, especially for those that have heretofore taken it for granted that the American dream provided for a good paying job, in their hometown, doing something that their parents, grandparents, and generations before had done.  This just is not the reality, and instead of unleashing the power and potential of the fullness of women in the workforce, we have missed a huge opportunity.

One might say that the economy does not exist to create jobs for people.  I’d say that an economy that isn’t taking advantage of its human capital to the maximum justifiable extent (we shouldn’t be forcing 80 year olds to work), is truncating the opportunities not only for those out of work, but for the potential of the collective economy to strive.  Having never broken the 70%, mark in the participation rate, given the widespread entry of women in the US workforce, is telling of some significant problems long term.  And, when brought into the context of the rest of the statistics I mention above, it is certainly a clear reason we need to rethink our economic approach in the not too distant future.

 

 

---

[i] Source:  https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm

[ii] Source:  https://www.bls.gov/cps/definitions.htm#unemployed

[iii] Source:  https://www.bls.gov/cps/definitions.htm#ur

[iv] Source:  https://www.bls.gov/cps/definitions.htm#lfpr

[v] Source:  https://www.bls.gov/cps/definitions.htm#population

[vi] Source:  https://fred.stlouisfed.org/series/CIVPART

[vii] Source, 2010 Census, https://www.census.gov/programs-surveys/decennial-census/decade.2010.html

The Cause of the High Rate of Price Increase in Higher Education in 9 Charts

I continue to have this dialog about the cost of higher education and the college debt crisis.  It is driving me more or less nuts that I can never find the time to write the full explanation for what is happening and why.  People keep blaming the wrong things on why the cost of college education on the part of the individual student is rising at a faster pace than nearly everything else in the economy.  Here are some of the reasons I have heard that are just bunk:

• Federal government backing college loans is driving up the cost of higher education.

• Higher education really isn’t “non-profit” or “not-for-profit” and is all about raking in money.

• Colleges and Universities have been on a building spree, creating mounting debt that is only causing tuition to rise.

• Athletics is costing more and the average student is paying for these non-academic “luxuries”.

• Too many are going to college that don’t need to, inflating the cost for those that do.

• And many more.

I am not going to spend time debunking each of these, because I want to get out a post on this now.  Suffice it to say, they just are not the reasons for the spiking cost of higher education.  The real reason for why this is happening comes down to a perfect storm of factors that have very little to do with the above, at all!  What it comes down to, in order of effect, is:

1. Plummeting taxpayer/public support for higher education by the several states.

2. Significant increase in labor cost to employers especially for healthcare and daycare in an industry that is highly labor dependent.

3. Increased mandated oversight and administrative tasks requiring increased administrative full time equivalent staff.

4. Increased demand for capacity for student support and auxiliary services as a differentiator among the competition.

So here in a series of graphs and charts I am going to try to spell it out.  Let’s first start with the fact that, yes, the cost of higher education has skyrocketed over the last several decades.  Here is a handy chart from the American Enterprise Institute that lays it out fairly clearly; other than hospital stays, the cost of the price college (to the consumer) has risen starkly.

[i]

But the question is why?  Well let me start with the most clear reason:  its simply not being subsidized like it used to be.  As a case in point, here is a chart from George Mason University, a public institution in the Commonwealth of Virginia.  This chart lays out in clear terms the impact of what the precipitous loss of State support to the institution is doing to the individual student and their expenses.

[ii]

Basically, since 1985, the ratio of state support coverage of the cost of attending Mason to that of what the student paid or other revenue sources[iii] pay has more than flipped (and if you go back to the 1960s, where many a baby boomer will recall covering college by “working their way through”, it is even more stark).  Simply, the taxpayer used to cover most of the cost, and now they are “supporting” the effort at a significantly reduced rate.  Mason is simply an easy example with a clear chart.  The next two charts show how States have pulled out of the college funding business, in some cases nearly completely.

[iv]

[v]

And as recessions hit, or other economic challenges emerge within the world of State financing, it’s getting worse each time.  As shown in this chart, the easy answer for State legislatures to help balance their budgets and/or lower taxes is to cut higher education spending when times are tough.

[vi]

So bottom line is that a huge contribution to the driver of the rise in the cost of college education to the individual student is that government is not helping nearly as much, or even at a reasonable proportion of as much as it did for their parents or their grandparents.  So what we have is that college costs are going to rise faster than inflation, or the general cost of everything else, because what had previously covered it was gone.

This brings us to the next driver, however, and that is the general cost of labor has risen steadily over that last decades driven by several things, but certainly healthcare.  The following a chart created from data available from the U.S. Bureau of Labor Statistics as it relates to employer costs for employing its labor.

You will note from this graph, that the cost of labor has gone up.  If you look carefully, however, you will also note that workers’ wages are NOT increasing, rather it is really driven by the cost of insurance going up.  On the side of the higher education customer (students and their parents), this basically means that there aren’t any increased resources on their part to cover the costs that they are incurring.  So, the many charts available that show how the cost of college is outpacing wages and salaries are on par.  All good there (well not "good" but accurate).  What folks continue to forget, however, is that on the college and university side, this has yet another effect: driving the cost of higher education even higher.

As is illustrated in a report from the California State Legislative Analyst’s Office, the following graphs make clear that largest portion of any college or university is the cost of its employees, somewhere between 66 to 75% of the overall enterprise.

[vii]

Thus, when you put together that the largest portion of the actual cost to run a college or university has risen some 15 to 25% in the last two decades (and over 60% since the 1980s), it becomes clear that the reality is that it just costs a lot to do education, because education is a human resource intensive enterprise.  This is seen in K-12 education as well.  This is especially true when you want to do it well and at a level commensurate with the expectations society has for it (e.g. leading to professional careers or other pursuits near the top of society).  This is not really any different than one of the major causes of the rise in health care costs, in that health care is inherently human resource intensive too (which creates a bit of a price spiral).  To that point the following chart helps you see how salaries have tracked as it relates to higher education as compared with medical professionals as well as lawyers.

[viii]

These are just not industries like construction, finance, industry or others where there are other components like materials, energy, and equipment drive the cost of the enterprise.  This means the cost of it will outpace the cost growth in most of those other industries consistently.  So when you add the precipitous drop in public/taxpayer support higher education to this intensive real cost increase, that exceeds the norm for most any other industry or component in the economy, it is a perfect cost storm to the individual student.  These two factors (loss of support and increased cost of labor) are the largest components of the actual reasons for the increased cost of college for the average individual student.

That said, there are a couple more reasons for the rapid cost increases, that are not at the level of the previous reasons, yet are worth mentioning.  Of the two, one is shown in the following chart, which shows the increase in the full time equivalent senior staff and administrators compared with faculty in the University of California system over time.

[ix]

This is not unusual or particularly helpful in itself, except as it relates a couple points.  Administrators typically cost more than faculty at most ranks, so an increased number means increased marginal cost to the institution.  The further question is, why then are there more administrators?  Good question.  Well the biggest driver of the increase in the number of administrators is the numerous additional regulations and other oversight mechanisms that have been put into place on the industry, creating an administrative burden that someone is paying for (aka the average college student).  But it also ties to the other reason for the uptick in the college price tag: the demand for services that go beyond what we had in yesteryear.

The following chart helps to show this shift.  This chart from the University of California system, again, highlights the breakdown of the spending from two different snapshots in time, just 5 years apart.

[x]

If you look carefully, you will note that, as a percentage, instruction costs have gone down from 26.3% to 24.2% (and facilities costs have gone from 3.3% to 1%).  Then you will see that three specific areas have had varying levels of growth:

• Academic support went from 7% to 8.5%

• Student services went from 3.8% to 3.9%

• Auxiliary enterprises went from 6.3% to 9.1%

Adding those increases together, is a whopping 5% shift, all towards providing more “niceties” if you will.  Some of these are certainly things like an on campus Starbucks or better recreation facilities, but others are much more robust accommodative services, increased and improved tutoring or other academic help, counseling services, increased public safety, and better student life activities for all, which, many times are also mandated.  These final two reasons also contribute to the rise in per capita cost to the customer.  The bottom line is, yes, there are potentially some small nice to haves that are adding to the bottom line.  In many cases however, the cause for them is based on “must do” items that won’t appreciably change the picture unless the said same legislatures that are reducing the support for higher education also give relief from those requirements; there is fairly low likelihood of that.

In conclusion, the biggest driver of the increase in the price tag of college comes back to the rather dramatic decrease of taxpayer/public support coupled with the significant increase in the cost of the human resources required to make the enterprise work.  Fixes for this will inevitably come in the form of public policy shifts that we have to struggle to debate and resolve.  Public policies, however, can also make the problem a lot worse.  One such prime example is a minimum wage hike where colleges and universities employ many low-wage workers, sometimes college students, to accomplish a myriad of activities across campuses.  Adding even more costs to the already intensive human resource enterprise will only add to the high rate of growth.  I am not sure I have a silver bullet, other than to realize that yesteryear’s highly subsidized false price tag of higher education is a false comparison.  To that end, we need to get real and get on making some hard choices going forward.

End Notes:

[i] “Chart of the Day.... or Century?,” American Enterprise Institute - AEI (blog), January 11, 2019, https://www.aei.org/carpe-diem/chart-of-the-day-or-century/.

[ii] Davis, J.J. Wagner (2016), Presentation to the Board of Visitors, Finance and Land Use Committee, George Mason University, October, 13 2016

[iii] Basically, on campus enterprises, auxiliaries and so forth as well as fundraising.  In some cases this further increases the cost to the student (e.g. for housing and dining) and in others has driven decisions about things like athletics, public-private partnerships, and so forth with the costs being carried by others.

[iv] Mitchell, Michael, Michael Leachman, and Kathleen Masterson. “Funding Down, Tuition Up: State Cuts to Higher Education Threaten Quality and Affordability at Public Colleges,” August 15, 2016, 28.

[v] Mitchell, Michael, Michael Leachman, and Kathleen Masterson. “Funding Down, Tuition Up: State Cuts to Higher Education Threaten Quality and Affordability at Public Colleges,” August 15, 2016, 28.

[vi] Mitchell, Michael, Michael Leachman, and Kathleen Masterson. “Funding Down, Tuition Up: State Cuts to Higher Education Threaten Quality and Affordability at Public Colleges,” August 15, 2016, 28.

[vii] “The 2020-21 Budget: Analyzing UC and CSU Cost Pressures,” December 17, 2019, 20.

[viii] Archibald, Robert B, and David H Feldman. “Drivers of the Rising Price of a College Education,” August 2018, 20.

[ix] Christensen, Kim. “Is UC Spending Too Little on Teaching, Too Much on Administration?” Los Angeles Times, October 17, 2015. https://www.latimes.com/local/education/la-me-uc-spending-20151011-story.html.

[x] Public Policy Institute of California. “Higher Education in California: Institutional Costs.” Accessed December 8, 2020. https://www.ppic.org/publication/higher-education-in-california-institutional-costs/.