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Posted on the June 23, 2021


Investors are concerned the U.S. is headed for a repeat of the lackluster economic expansion of the prior decade — that once the country gets past reopening pains, it will resume the same modest-but-steady growth that was interrupted by the pandemic. The plunge in 30-year Treasury yields last week after a hawkish turn from the Federal Reserve only heightened the sentiment.

But that view overlooks a key factor that held back the economy in the 2010’s and that should now boost it through the 2020’s: household balance sheets. Americans are richer than ever before thanks to a booming stock market coupled with a surge in home values. And households aren’t burdened with the same level of debt that dragged on spending in the years following the 2008 recession. That should mean faster growth in the years to come as Americans again feel free to borrow.

Between the end of 2019 — before Covid-19 hit the U.S. — and the first quarter this year, household liabilities rose 5%, or $820 billion. Household assets, though, rose by 14.8%, or almost $20 trillion. That’s the kind of balance sheet math that should put households in a spending mood once they’ve put pandemic fears behind them.

The rise in leverage that restrained economic growth in the 2010’s began in the early 1980’s. As interest rates declined, households increased their debt faster than they grew their assets, and that trend continued 25 years. Then, as home prices fell in the late 2000’s, Americans’ assets — houses and stock holdings — lost value while their debt levels stayed the same or increased, producing even more highly leveraged households. It took many years after the 2008 recession for Americans to pay down all that debt and repair their balance sheets.

Back in a Spending Mood
After a decade of paying down debt, rising home values have increased wealth in the U.S.

Source: Federal Reserve Bank of St. Louis
Note: Data are not seasonally adjusted.
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But what started as balance sheet repair has now turned into something else, in large part due to pandemic-related shifts. Home prices have skyrocketed over the past 18 months and the stock market has risen to all-time highs, inflating the asset side of household balance sheets. The personal savings rate has also been historically-elevated because of a combination of fiscal relief measures passed by Congress during the pandemic, and a lack of spending on activities like travel and dining. The net effect is that by the end of the first quarter of 2021, the ratio of household assets to liabilities is close to a 50-year high, and continued strong gains in home values and stock prices in the second quarter of 2021 should push it even higher.

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While there’s surely some sort of distributional tilt to this metric — we know how much the net worth of billionaires rose last year — the surge in home values means a lot of middle-class homeowner wealth has been built or restored as well. Even for the bottom tiers of the household net-worth distribution, wage growth is surging, and child tax-credit payments included in the American Rescue Plan begin going out in July, so there’s a reasonable amount of inclusiveness here.

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It’s possible households continue to improve their balance sheets indefinitely, but there’s more likely to be a limit to it, with Americans feeling confident enough to take on more debt in the years to come. Household deleveraging has been happening for more than 12 years now; scars from the 2008 financial crisis eventually fade, or in the case of the youngest generation entering the workforce, may not exist at all. We’re already seeing homeowners beginning to take equity out of their houses again (though nowhere near the level we saw in the mid-2000’s at the peak of the bubble).

The oldest members of the Baby Boomer generation are now over 75 and will find themselves drawing down their savings and selling their assets in the years ahead, and Millennials looking to buy houses will find themselves taking on debt like generations before them. Low interest rates make debt management easier than ever.

The prospect of more household borrowing and spending driven by strong balance sheets and a wealth effect should mean faster overall economic growth, particularly as businesses look to hire and invest in new capacity in response to a more robust demand environment.

It may take awhile for people to get their bearings in the post-pandemic world, assess their newly-flush financial situation and change their spending behavior, but it’s a scenario that makes sense for a lot of American households. It won’t mean the borrowing excesses of the mid-2000’s, but perhaps something more like the 1980’s and 1990’s.

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U.S. Universities Are Due for a Shakeout
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The Economics of Higher Education Are Only Getting Worse
For too long, universities have cranked up tuition and students have gritted their teeth and paid up. That era is over.
By Noah Smith
June 23, 2021, 8:00 AM PDT
It’s not just students getting hurt from soaring tuition.
It’s not just students getting hurt from soaring tuition. Photographer: Timothy A. Clary/AFP via Getty Images
Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Higher education in the U.S. has been heading for a shakeout for a long time, and now it has come. Universities are facing a big, long-lasting funding crunch as demand for undergraduate education looks unlikely to return to pre-pandemic levels anytime soon. That means schools need to find new ways to pay their bills or risk going under.

At the beginning of the pandemic, there were many predictions of economic doom that happily failed to materialize, thanks in large part to ambitious government relief efforts. Unfortunately, the devastation of the higher education sector seems to be one prophecy that is coming true.

In 2020, employment in the higher-education sector fell by 650,000 — a decline of more than 13%. Nor is relief on the horizon; spring numbers show enrollment is not yet bouncing back from the declines suffered during the pandemic. Undergrad numbers are down 4.9% from last year. All sectors have been affected, but public 2-year colleges have been hit hardest:

No Bounceback
College enrollment had already been declining before the pandemic
Source: National Student Clearinghouse Research Center
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And this merely exacerbates a trend of flat or declining enrollment that was firmly in place years before the pandemic. In the last five years, more than 50 colleges have closed down or merged. Probably the most high-profile institution to succumb recently was Mills College in California.

Why is this happening? It has to do with the history of how higher education is funded. Various programs of government-guaranteed and subsidized student loans over the past half century encouraged students to go into debt as a way to pay for college. As a 2015 paper by economists David O. Lucca, Taylor Nadauld and Karen Shen found, much of this increased student lending simply allowed colleges to raise tuition. The net effect was more expensive college and a much higher debt burden for graduates.

Decades of steadily increasing student debt was a process that couldn’t go on forever. By now everyone has heard or witnessed the horror stories of graduates trapped in debt. For a long time, the lure of a college degree was enough to keep people borrowing and ponying up ever more cash, but they may have finally hit their limit. The earnings premium for college graduates has been constant for years, meaning that the benefits of college simply didn’t keep up with the costs.

On top of that, the Great Recession then dealt a huge blow to college funding. Cash-strapped states made huge cuts to higher education spending that were only partially reversed when the recession ended. The result was that colleges were more dependent than ever on tuition dollars to stay afloat. They made up for the loss of public funds in part by letting in many more high-paying international students. But international enrollment peaked in 2016 and has fallen since then; Trump’s xenophobia and attempts to gum up the visa system no doubt played a part.

So what are colleges and universities going to do now? A federal bailout as part of President Joe Biden’s pandemic relief bill helped stanch the bleeding for some schools, but it’s pretty clear that won’t turn into a permanent federal takeover of higher-education funding. It’s possible that Biden will be able to put some money toward making community colleges free, and perhaps bolster federal funding for lower-ranked state schools like Cal State and City University of New York that do the heavy lifting in terms of educating the broad middle class.

A Biden presidency could also restore the flow of high-paying international students, but I’m not overly optimistic; a great many tend to come from China, and U.S. tensions with that country combined with widespread suspicions of espionage have led to a backlash against Chinese students on U.S. campuses.

That means colleges are going to have to do some combination of cutting their spending and finding new funding sources.

What kind of spending can colleges cut? Administrative costs seem like the obvious target:

Room to Trim
Fancy dorms and expanding student activities have helped bloat college costs
Source: Goldwater Institute
That probably means less-fancy dorms and fewer student life activities. That should be fine; somehow, young people will find ways to live rich and exciting lives without universities treating them like country club members.

Unfortunately, it also probably means that both teaching and research will suffer cuts as well. On the teaching side, expect the trend toward classes being taught by adjuncts, nontenured lecturers and grad students to accelerate. That’s not going to make aspiring academics happy, but the quality of instruction probably won’t be hurt that much.

Decreased research funding is a bigger problem. Though most researchers with expensive labs secure grants, universities pay their salaries and pay for the construction of various facilities that are used in research. With tuition money drying up, there will be less of that to go around. This threatens the economic competitiveness of the U.S. as a whole, so hopefully the federal government can step in with increased research funding — at universities, and also at national labs.

As for new funding sources, philanthropic donations are one possibility. Billionaire MacKenzie Scott recently announced that she’s giving $2.73 billion to community and regional colleges. Hopefully this becomes a trend; it would be nice to see endowment money flow to these institutions instead of to the Ivy League.

In any case, it seems like the shakeout in the higher education sector can no longer be avoided. For too long, universities enjoyed a world where they could keep charging students more and more, and students would grit their teeth and pay up. That era is over.