Monday, August 15, 2011

U.S. Debt Pt 2: The Crush of Student Loans

This is a follow-up post from yesterday when I briefly discussed the composition of US debt. Table 3 showed the composition of entire US debt and broke household debt into 2 components--consumer and mortgage. Here is a more detailed breakdown of US debt from the NY Federal Reserve. As listed earlier, mortgage debt is by far the largest source of household debt and has recently dipped (scaled on the right hand side; the other sources are scaled on the left hand side), as have all other sources of debt except for school loans which have been rapidly increasing. While the other forms of debt represent a decrease in consumption and debt release from bankruptcies. Student loan debts do not fit into either of these patterns, therefore represent a new form of debt for two reasons.

First, student loans are exempt from bankruptcy, so cannot be released other than by payment. Second, a decrease in consumption (housing, cars, leisure spending) are reasonable choices when the economy contracts, when your personal wages do not increase with the cost of living, or when you have lost your job, and we see these reasonable choices reflected in the data. However, we are told that the only way out of unemployment is retraining and higher education, which is exactly what people are doing--going back to school. Often, these retrainings take the form of for-profit "schools" that promise to certify, license or train students for work. These options might be viable if jobs were available. However, in some parts of the country, like Los Angeles, the U6 unemployment is over 25%, and Indiana it is 17%. Moreover, the jobs that are waiting for the few that graduate with a 6-month or online degree will typically pay little more than minimum wage. As an example of the limited choices even for those with a 4-year degree, a local corporation that scores standardized tests from across the U.S. pays $10/hr, requires a BA/BS, offers no benefits, and its workers' minute-to-minute work is strictly regimented to limit worker interaction, and arrival and departure is like a cattle-call where the warehouse fills and empties within 15 minutes--no late arrivals or departures are allowed. There is no job security from month to month when new tests cycle in to be scored.

The effects of these changes cannot be positive for the future of the US economy, when its workers are using the bulk of their money to pay for an education, especially when many of the schools that are offering training, are for-profit institutions whose certifications will statistically never end in a job commensurate with the money invested. Not only this, but even traditional degrees are not guaranteeing a job that produces self-sufficiency. This represents a fundamental change in the economy, since traditional debt was at least producing something that grew the economy--buying a house represents the work of laborers to make the house, and property owners are motivated to engage in community work to maintain the value of their investment. Car purchases, and other consumer spending, goes back into the larger economy in the form of GDP and workers. Further, these other forms of debt can be released either by selling the property, or by legal dissolution. Educational debt cannot be resold, nor can it be dissolved, thus tying up the funds from future middle and lower class borrowers. This takes us back to the point from the first part of this essay, that if the US economy is built on consumer spending, as the data clearly indicates, the crush of debt subverts the mechanism that would help us grow out of this recession.

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