Aunt Pythia’s advice

Greetings, friends! I’ve missed you all!

Since returning from her travels, Aunt Pythia has been continuously marveling in the wonders of flannel and wool, and has decided to knit up something along these Celtic lines:

Is that not gorgeous?

Is that not gorgeous? I love the tangled-upedness of the center. And, of course, the doubly rainbow-ic aspects.

Here’s the thing, though: the pattern comes from the excellent book Celtic Charted Designs that Aunt Pythia is absolutely sure she has somewhere in her house, but can’t find. in fact she’s spent the good part of the morning searching her house. So if the column is a wee bit short and/or frustrated today, you’ll know why.

On to business! Aunt Pythia has lots of questions to answer, given that she was away last week, and she’s eager to get through some. But before she forgets,

please think of something Celtic

to ask Aunt Pythia at the bottom of the page!

By the way, if you don’t know what the hell Aunt Pythia is talking about, go here for past advice columns and here for an explanation of the name Pythia.


Dear Aunt Pythia,

What are your thoughts on this 401k article

Another Potential Pass At Legalizing Longterm Investments Not Going (well)


Wow, your sign off is longer than the body of you letter. Well done. OK so let me quote the heart of the problem fingered in the article:

Millions of people are clearly not using 401(k) plans as retirement accounts at all, and it’s a threat to their financial health.

I’d phrase it differently, namely:

In this day and age, working people need all their money, and 401(k) plans have proven to be saving strategies which are only realistic for well-off people, which entirely misses the point of how to deal with the older middle class in our country. Instead of relying on such wishful thinking, we should scrap the whole system, which by the way only serves to expand Wall Street’s power and give tax breaks to the rich, and we should instead expand Social Security.


Aunt Pythia


My Dearest Aunt Pythia,

In mid-90′s I completed class work on an MA in Applied Economics/Econometrics at a state school in California. Stupidly did not complete thesis (things got busy on political campaigns and such, and never got back to it). Like many I fell in love with economics, public policy, and their interrelations.

Now, many years later, my econometric/data/statistical modeling skills have aged with me and have become lost from my mind.

My first question is: What would you recommend as a refresher of data skills? I’m certain I don’t need to redo all I’ve done before- the skills are there but need to be refreshed and awakened (I assume/hope).

My second question is: Assuming the skills can be reawakened, what is my fastest and least costly method to enter data work? For programming many people create apps or small programs to be able to show code samples to prospective employers. Is there something analogous in data work? Should I build a model of aggregate demand changes from quantitative easing/M2 changes and shrinking consumer credit (from institutional rule changes) and post it online to show skills? I’ve also been looking at the data science certificate from Coursera/Johns Hopkins, but don’t know that it would matter on a resume. My old university requires restart for the old M.S. (which I understand), so should I pursue a new M.S. in current state school (UMUC has a Masters Data Analytics, which I think I would enjoy anyway, but is pretty pricy).

Anyway, hoping you, my dear Aunt, will have some advice for a data enthusiast with dusty data skills to freshen skills and move into analysis. Oh, I should mention that I am taking a lot of computer programming classes lately to get skills in that area as well.

Dusty Skills

Dear Dusty Skills,

Please don’t take this the wrong way, but the very first thing you need to do when applying for any data job is to use a spell-checker. I must have corrected 5 words in your letter.

Next, although I agree that a Coursera certificate might not be considered all that important, the skills you hopefully acquire with such a certificate would be. And yes, I do suggest you build something with your skills, although tackling QE seems both onerous and unlikely. I’d do something less abstract if I were you, and set up a website portfolio so everyone can see your mad skillz. Oh, and you might want to take a look at my book, Doing Data Science, although you might be past that stuff already.

Good luck!

Aunt Pythia


Aunt Pythia,

I’m a father whose daughter is applying to colleges. I also work at a college, as does my wife. And like many employees in academia, I’ve been following with horror the reports of college rape: the under-reporting, the Judicial review boards, the administrators eager to downplay the problem, etc.

As a father the horror easily spills over into terror. I want my daughter to grow into the challenges of living away from home; I want her to learn in a enlightening, and encouraging environment; and I want her to have fun. I also want her to be safe.

I am outraged at the clueless administration officials and public safety officers who say “girls should not go to parties, or drink,” all the while wanting to scream at my daughter “don’t go to parties or drink.”

How can I have a meaningful conversation about going off to college, learning, having fun, but be safe, without sounding like *those* administrators?

Worried In Academia


Dear Worried,

I went to college in the early 1990′s at UC Berkeley. My first year there was the scene of multiple Gulf War protests, and about 3 or 4 street riots, streaming by my dorm near Telegraph Ave, during which me and my two roommates didn’t dare leave our room. In my sophomore year we heard the Rodney King verdict and it was chaos in the streets for a few days.

I guess what I’m saying is that, due to the obviously volatile and threatening mood of the campus and neighboring towns back then, I was always on alert, and defensive. All of my friends took self-defense classes, and I carried around pepper spray, in my right hand, and my keys in my left, whenever I walked home at night. I biked places so I could get away more quickly. It was my assumption that I would need to protect myself and that there were people who would hurt me if I didn’t. I’m not saying there weren’t people who drank too much and got themselves vulnerable – in fact while I was there, there were multiple burning deaths in fraternities that did crazy things with couches – but that I personally would never have been involved with such stuff. For that matter there was a lot of campus rapes, which we knew about, and the police knew about, and kept us going to our self-defense classes.

Nowadays, we have a very different notion, and also a different reality, which is mostly a good thing, but has weird consequences. One of them is a sense that colleges are safe places, which they most certainly are not. College administrations have come a long way on marketing their campuses as attractive and safe, but it’s just a marketing thing, and it sends confusing and deeply mixed messages to parents and kids, which pisses me off. At the end of the day, when you go to college, you are an adult, and you need to be responsible for your safety, which means not getting out of hand, and keeping trustworthy friends close to you to make sure you don’t, and to make sure they don’t.

So, and I know this is a tough issue, but my advice is to tell your daughter to learn to size up the energy of a party, and see if dangerous things are happening, and to have a group of friends at all times that are looking out for you, and who you are looking out for, and to take self-defense classes, and to carry mace or at least a siren for when you travel alone at night.

Also, and this is actually the most important piece of advice: get your daughter to drink with you a few times, before she goes to college, so she’ll know what it feels like to have too much. The most educational night of my life was a night in the summer before college, when my dad got me and my friend Becky puking drunk. I never let that happen again, because I knew when I’d had too much. I think far too many kids get to college never having been allowed to go overboard with drinking, so they do it for the first time with strangers. Bad idea!

One last thing. I think that in the next couple of decades, the police will learn how to adequately and sensitively deal with rapes, and when that happens we won’t need to worry as much about campus police forces, which are totally inadequate and rife with conflicts of interest. But obviously you don’t have two decades to wait for that to happen, since your daughters are going to college now. Plus, I may be just being unrealistic about the progress we could make.

I hope that helps!

Aunt Pythia


Dear Aunt Pythia,

I keep hearing about how rampant sexism is in STEM fields, particularly in tech workplaces, where I can see myself heading toward after college. It’s really discouraging, especially since I think I experience some sort of sexism in my classes here in college (in computer science way more than in math), and even worse, I can’t seem to speak up because this kind of sexism is really subtle (i.e. a guy got angry with me for his incompetence with a certain technology. I would’ve spoke up but the assignment was worth so little.)

These hurtful incidences just build up over time, and whenever I vent to my friends, some “brush it off” as it not being serious. My parents told me that what I experience here in college won’t be any different in the workplace.

So as I search for summer internships, I carry this cloud of insecurity and doubt. Should I go forward? What’s the point? Breaking gender barriers sounds great, but my God, there are so many women out there who choose to leave because the barrier is so high and strong. I can easily see myself leaving the tech industry because its stubborn lack of support toward women and its more harmful PR farces showing that they do “support women.” Is it ever worth it? How do I reconcile with this?

Unsure of the future

Dear Unsure,

My motto is, celebrate the victories and ignore the defeats. Where by “victories” we mean “getting a computer program to work” and by “defeats” we mean “some insecure guy took out his frustration on me because I’ve got boobs.”

In other words, don’t think about yourself or your actions as A Woman In STEM. Instead, think about what your personal goals are, and what interests you, and what you’d like to learn about or accomplish. Make it an internal conversation about your wants and needs and passions, rather than an external conversation about how you look to other people. And if your internal voice is telling you to leave STEM, then by all means do it, but if not, don’t let those fuckers get you down. Do it because it’s cool and you love it, not because some assholes do or do not have an agenda for you or an ego riding on what and how you do things. Separate the two issues and it will help, because math and computer science are really cool.

And because it’s not always possible to totally ignore the defeats, I’d also encourage you to find better friends who will let you vent and will vent along with you. What’s up with them?!

Good luck, for reals! Keep me posted!

Aunt Pythia


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Categories: Uncategorized

Guest Post: What does it mean to “create jobs”?

This is a guest post by FogOfWar.

The phrase is used constantly by politicians and economists, but what does it actually mean to “create jobs”?

Here’s an example: I open a coffee shop and hire two people. So I’ve created three jobs (counting myself), right? Really? Let’s assume for the moment that I’m no more or less efficient at making and distributing coffee than my competitors and also that the total amount of coffee required in the world is constant. Then my coffee shop must be taking customers away from another coffee shop, and at a frictionless level, there are three coffee jobs lost for the three coffee jobs I just created.

Yet no politician, and indeed no economist quoted on TV or newspaper, will go into the distinction between gross job creation (3) and net job creation (0). For politicians this makes sense because they want the appearance of good results to be reelected (and often nothing more than that). For economists, or at least economists dealing with journalists, it may well be that it just gets too fuzzy to make a simple point, and a story without a simple and strong hook is killed by your editor.

Another point: I can think of a specific example of something that really did “destroy jobs”–it’s the invention of the EZ Pass. When I was growing up (yes, I’m ancient), there were dozens of people working at each of the toll collection booths on the highways, each counting out miserable hours collecting change from surly passengers and inhaling vast amounts of carbon monoxide. Now there are a handful at each on ramp and a row of EZ-Pass computers.

There’s no question in my mind that EZ-Pass destroyed jobs, but this seems like a good thing rather than a bad thing. Should we strive to keep really crappy jobs that are obsolete by technology just so that people have something awful to do with themselves all day, instead of doing something equally unproductive like watching TV all day, or maybe even spending time with their families and community? I think this is a variation of the “broken window fallacy” if I remember my intro economics correctly.

Lastly, I’ve assumed a closed system, but let’s relax that assumption. Here are two things that definitively will create jobs: (1) start manufacturing cell phones in the US; and (2) have 20% of the US consumers buy American when they have a choice. Both of these actions will move actual jobs from overseas to the US and thus will “create [US] jobs” in a very real sense of the word.

One other thing that must be true: I’m not the first person to think of this and suspect there are people who have dedicated more serious time and attention to the question than my casual observations. Thoughts?

Categories: FogOfWar

I am old in Haiti

I am old in Haiti. This fact dawns on me slowly over the six days I am there, because there is so much to take in. Mostly I figure it out because I am constantly amazed by how beautiful and healthy everyone looks. But then again, I keep finding myself thinking, people who are 24 often look healthy and beautiful. It’s when you’re 54 that you begin to show signs of wear and tear. I will reserve judgment until I see older folks.

But then, after a while, I realize how few people I’ve seen that are 54, or even 44, or even 39. Almost nobody, in fact. Every now and then a very old person will cross the street slowly, hobbling with a stick for support. On my 6th day there I tried to figure out exactly how old such people were. Maybe not much older than me, in fact.

The statistics, which I don’t look at until afterwards, back up my observation. A third of the population is below the age of 15, half of the population is below the age of 20, and 70 percent of the population is below the age of 30. Probably the places I went, the cities, skew even younger. It looks like about 25% of the women of childbearing age are pregnant, and all of the women are of childrearing age. The population has tripled in Haiti since 1950 and it isn’t slowing down. If anything it’s bumping up because of the devastating 2010 earthquake – women tend to replace their lost babies by even more babies after such events.

This matters because the Haitian land is overpopulated. In fact it’s worse than that: the land suffers from a severe erosion of its topsoil, due to deforestation over the years. In part – get this – Haiti was deforested to repay the debt to France for letting them be free back in the early 1800′s after the (world’s only successful) slave revolt. But it’s continued since then, and when you chop down all your trees, the rains take away your topsoil, which means your land slowly becomes desert. For the most part that’s what it looks like when you drive through. The result is not very much agriculture, and when you combine that with a fast-growing population, you get an horribly unsustainable situation.

In spite of all these problems, and in part because of them, the Haitians I came across seem incredibly nice to me and to each other. Trucks, people, motorcycles, cars, and 4-by-4′s compete for space in the one-lane roads in Port Au Prince but everyone stops dead when a young child needs to cross the street. It is a society that cherishes safety and looking out for one another.

When the water and soda sellers come to our public bus window to offer us drinks, and someone wants a cake instead, or to buy minutes for their cell phone, there’s a scramble by the nearby vendors to find the cake seller or the roaming Digicelwoman. The sellers at each stop form a collective that look out for each other, because if they didn’t look out for each other they’d all be screwed.

The same is true for with any resource. A UN worker we met explained that microfinance researchers are frustrated by Haitians when they try to estimate the impact of their loans, because they keep finding that a family has borrowed money and given it to another family. But if they didn’t share resources locally, all the families in a given neighborhood would be risking too much. It is better to be known as a generous person so that in a time of scarcity people will be generous to you. Your reputation is your most valuable asset.

When I think about how we live here in New York – where I don’t know most of my neighbors’ names, and nobody can see what happens behind closed doors, and we hoard resources except in our most immediate family – I feel like we’re missing out on something valuable. At the same time, privacy is nice, and I don’t think most Haitians have much of that. Not to mention a healthy middle age.

Categories: musing

What the fucking shit, Barbie?

I’m back from Haiti! It was amazing and awesome, and please stand by for more about that, with cultural observations and possibly a slide show if you’re all well behaved.

Today, thanks to my math camp buddy Lenore Cowen, I am going to share with you an amazing blog post by Pamela Ribon. Her post is called Barbie Fucks It Up Again and it describes a Barbie book entitled Barbie: I Can Be a Computer Engineer

The other book is called "I Can Be an Actress"

The other book is called “I Can Be an Actress”

Just to give you an idea of the plot, Barbie’s sister finds Barbie engaged on a project on her computer, and after asking her about it, Barbie responds:

“I’m only creating the design ideas,” Barbie says, laughing. “I’ll need Steven and Brian’s help to turn it into a real game!”

To which blogger Pamela Ribon comments:
What the fucking shit, Barbie?
Update: Please check out the amazing Amazon reviews of this book (hat tip Chris Wiggins).

Wanted: Dead or Alive

November 18, 2014 2 comments

I came across an interesting poster that’s been put up on a few lampposts on my street.  It rather pathetically offers a $2,000 reward for information leading to the arrest of George Welch for operating a bucket shop in New York.

This got me thinking about the notion of vigilante justice and the failure of the Department of Justice, or pretty much anyone else, to prosecute people on Wall Street for the financial crisis.  What if more people, frustrated by the lack of prosecutorial interest in Wall Street, decided to take matters into their own hands?  What if there was an outbreak of bounties being put on the heads of wrong-doing bankers so that some street justice could be applied, as the person posting this poster appeared to be seeking?

Wikipedia has a surprisingly elegant definition of vigilante justice as:

the idea that adequate legal mechanisms for criminal punishment are either nonexistent or insufficient. Vigilantes typically see the government as ineffective in enforcing the law; such individuals often claim to justify their actions as a fulfillment of the wishes of the community.

The mood of the community I follow on Twitter and around the web certainly resonates with this definition.  A lot of ink has been spilled on how the government has failed to enforce the law with respect to the Financial Crisis and that a collection of the wrong-doers, big and small, have gotten away with it, at the expense of the rest of us. Occupy, obviously, was an expression of frustration about the lack of law enforcement, though it did not have a vigilante component.  Growing dissatisfaction with our government is manifesting itself in many places -  including the most recent anti-incumbent mid-term elections.  And despite whistleblowers, such as Alayne Fleischmann or Edward Snowden naming names and institutions, nothing seems to change.

There’s a long, (not so) proud tradition of vigilante justice in our country (and, of course dating back to societies much older than our country).  Vigilante justice stories in the American frontier were tales of how people bound together to fight back against lawlessness.  In my youth, movies like Billy Jack, Death Wish or Rambo portrayed the desperate, yet justified (?), actions of people who had had enough with lawlessness and weren’t going to take it anymore.  The real life story of Bernhard Goetz was often portrayed in a similar fashion in the tabloids.  Today, vigilante themed movies and shows, like Batman or Dexter, are everywhere.  In the hands of the right storyteller, vigilante justice has a visceral appeal.

Vigilantism also has an awful, dark history in the US and elsewhere, including the legacy of lynchings in our not too distant past.  As angry as many of us have been about the aftermath of the financial crisis and the sense that the government has been bought by Wall Street money, the notion of vigilantism is still scary.  Who will really be making decisions about right and wrong if people take law into their own hands – the downtrodden and righteous, or the powerful and corrupt?

Upon doing a little internet research into the Wanted! poster on my street, I discovered that it wasn’t exactly a call for justice from a poor aggrieved investor in some bucket shop scheme.  Perhaps the name of the firm – Hooke, Lyon and Cinquer – should have given it away. Instead, this poster seems to be a reference to a piece of strange art by a early 20th Century artist named Marcel Duchamp.  Duchamp was a mysterious man and many people had a hard time understanding what he was getting at with his art.  He made this poster, with a picture of himself as the wanted man, but critics are unclear about what he was saying with it.


Frankly, I have no idea why someone is posting them on my street now, almost 50 years after the original artist’s death.  It seems noteworthy, somehow, that Duchamp’s poster originated in the lawless, Boardwalk Empire days of the 1920s, but I’m not sure why exactly.

I realized that I had been pranked by the poster, because I was sympathetic to a story about a small investor being burned by a Wall Street con artist, and a bounty on the scammer’s head seemed like an innovative, though unlikely, solution to the failure of law enforcement.   So what was the point of this prank by Duchamp and by his new imitator on my street?

I’m not an art expert in any way (particularly not an expert on Dadaism that Duchamp helped originate), but my interpretation of today’s poster is that vigilantism is, itself, a prank.  Despite fantasies of lawless bankers being tarred and feathered, what I (and I assume others) really want is a justice system that works, not one where people have to take the law into their own hands.  In an excellent article written in response to the Ferguson troubles, Kareem Abdul Jabbar argues that we should use our rage at injustice to work to fix the system, and he has a point.  Vigilantism is an illusion of justice… but the sense that the system isn’t working is still real.  Maybe there’s an alternative interpretation of Duchamp’s prank:  Unless more people within the system actually start to enforce the law against the powerful (as folks like Judge Rakoff or Ben Lawsky have shown is possible), then justice and government will lose their authority and become an illusion.

It’s art, so I don’t know that there is a definitive interpretation, but Duchamp’s piece tricked me and challenged me and pushed me, so I like whichever of these interpretations I apply.

Categories: Uncategorized

What Happens as a Bubble Deflates?

November 17, 2014 7 comments

Having written a couple of guest posts about bubbles possibly inflating (college tuition, high end Manhattan condos), I thought it might be interesting to consider what a deflating bubble looks like.

A number of observers point to the oil markets, where the price of crude has fallen by about 30% since June of this year, to a multi-year low today of about $75.50 per barrel.   Just last spring, Bloomberg was reporting on how the drilling and exploration business in the US was heavily dependent on the issuance of junk rated debt – over $160 billion worth by some measures – to fund the shale drilling that has been so popular lately.  The junk debt had been popular because it was a source of relatively cheap funds, thanks in part to the Federal Reserve’s efforts with Quantitative Easing to drive down bond yields.   Oil and shale exploration are expensive and there are quite a few people that believe that certain types of exploration only make economic sense when the price of oil is above a certain level – say $80 a barrel (or perhaps even higher).  Now that the price of oil has plummeted, there is a possibility that a whole collection of oil drillings and mines are underwater, so to speak, and no longer profitable.

Funding a bunch of expensive exploration with junk bonds makes things complicated and speculative.  For instance, a substantial portion of these junk offerings were purchased by issuers of collateralized loan obligations (CLO) and then rated (up to the AAA level), securitized and distributed to an audience of investors who may or may not have been investing in energy related debt otherwise.  CLOs are being issued at a record pace, by the way, and 2014 is on track to be the highest issuance year ever, exceeding the pre-crisis peak in 2007 of $93 billion.  If the energy exploration companies that issued junk debt are no longer profitable and getting squeezed by the falling price of oil, will that lead to a bunch of companies defaulting and then sending shockwaves through the securitized market, via CLOs?  (Note – the CLO market is much smaller than the subprime mortgage backed collateralized debt obligation market got to be before the 2007 implosion and energy companies are only a portion of the total issuance).

One thing that happens when investable asset prices fall, is that a bunch of people think that maybe it means there’s a new buying opportunity – a chance to get a hot asset at a cheap price on the expectation that prices will spring back up again soon.  That’s what a bunch of hedge funds did a couple of weeks ago, betting that the sharp fall in oil would turn around.  And then it fell another 6 or 7% to today’s levels.   If oil prices continue to fall, as some speculate may happen, that would be called “catching a falling knife” and the investors may end up feeling rather burned by their optimism.  Once cut by the falling knife, some investors become reluctant to come back a re-test their theory on rising prices, and this can contribute to a negative spiral for the falling asset.

I learned from my father-in-law, who worked at an oil company his whole life until he retired, that the oil business is always complicated.  Up and down, supply and demand; they don’t work the way you’d think they would.  When oil prices go down, gasoline gets cheaper, so people drive more, which drives prices back up (unless people are driving less and buying fewer cars, as appears to be happening now, perhaps because of those darn millennials and their urbanization and bike riding).  Plus, there’s international politics, with Russian, OPEC, the Middle East, China the drive for energy independence, solar power, etc.  On the other hand, gasoline and home heating oil and such are getting cheaper, which is a nice bonus for consumers, particularly in more car dependent regions.  The economy benefits from the effect of extra money in the hands of consumers as that money gets spent elsewhere (other than on oil executives third or fourth homes, presumably). Oil is complicated.

But oil can and does crash.  When it does, it can have a wider adverse impact on local oil-dependent economies, like Texas in the 80′s or perhaps, North Dakota, today.  While there are a number of mysterious factors at play in the current fall in oil prices, the knock-on effects are starting to pile up.  Oil producers are cutting production, idling rigs and cutting prices to stay competitive.  The somewhat worried sounding consensus is that there is “too much oil supply” currently. The speculative portion of the oil market will be hit hardest, i.e. the junk-debt fueled shale companies.  At some point, investors in the CLOs (and regular debt) backed by this highly leveraged debt from companies that aren’t profitable anymore, are going to get nervous (yields on such debt are already quite a bit higher) and start selling.  In all likelihood, some exploration companies will fail.  I wouldn’t describe it as a fear environment yet – in many cases the junk debt from exploration companies doesn’t come due for a few years – but the seeds of worry have been planted on fertile ground.  One observer described the current environment as a “negative bubble”, with a herd mentality driving investors away from any optimistic assumptions for the market.

Why should we care?  For most consumers, the most likely impact of a continuing deflation in oil prices will, as I mentioned, be cheaper gas and heating costs.  When the housing market crashed, the negative impact was mostly felt by average Americans, as wealth was destroyed up and down the block, whereas the oil market seems very different and more removed.  Still, it’s fascinating and instructive to watch the dynamics of a (potential) collapse of a bubble – on exploration, shale, oil prices, international politics – and the odds are high for unexpected consequences and global volatility.  What will happen to the recent growth in solar and other renewable energies, if the price of the competing product gets much cheaper?  What about the local politics of fracking? What kind of exposure do banks have to the oil markets and will it trigger any regulatory issues?  What will happen to the international politicians, who like moving chess pieces around the Middle East map if oil-producing countries lose their political clout?  Also, it’s odd that the Fed’s efforts to fight deflation have contributed, in part, to a price collapse of a crucial commodity, via QE-fueled easy money helping to push oil producers to dig up too much oil? How will the Fed react to this challenge?

I don’t know the answer, nor do I expect anyone else does either.   But oil and energy are hugely important issues to most Americans (and the people of other countries, too, obviously) and to the national and global economies – not as big as housing, but pretty close.  What happens in the next few months may affect many of us and it bears watching how our regulators, politicians, mega-companies and generals respond to the emerging (potential) collapse.

Categories: economics, finance

Will Demographics Solve the College Tuition Problem? (A: I Don’t Know)

November 14, 2014 14 comments

I’ve got two girls in middle school. They are lovely and (in my opinion as a proud dad) smart. I wonder, on occasion, what college will they go to and what their higher education experience will be like? No matter how lovely or smart my daughters are, though, it will be hard to fork over all of that tuition money.  It sure would be nice if college somehow got cheaper by the time my daughters are ready in 6 or 8 years!

How likely is this? There has been plenty of coverage about how the cost of college has risen so dramatically over the past decades. A number of smart people have argued that the reason tuition has increased so much is because of all of the amenities that schools have built in recent years. Others are unconvinced that’s the reason, pointing out that increased spending by universities grew at a lower than the rate of tuition increases.  Perhaps schools have been buoyed by a rising demographic trend – but it’s clear tuition increases have had a great run.

One way colleges have been able to keep increasing tuitions is by competing aggressively for wealthy students who can pay the full price of tuition (which also enables the schools to offer more aid to less than wealthy students).  The children of the wealthy overseas are particularly desirable targets, apparently.  I heard a great quote yesterday about this by Brad Delong – that his school, Berkeley, and other top universities presumably had become “finishing school[s] for the superrich of Asia.”  It’s an odd sort of competition, though, where schools are competing for a particular customer (wealthy students) by raising prices.  Presumably, this suggests that colleges have had pricing power to raise tuition due to increased demand (perhaps aided by increase in student loans, but that’s an argument for another day).

Will colleges continue to have this pricing power?  For the optimistic future tuition payer, there are some signs that university pricing power may be eroding.   Tuition increased at a slower rate this year (a bit more than 3%) but still at a rate that well exceeds inflation.   And law schools are already resorting to price cutting after precipitous declines in applications – down 37% in 2014 compared to 2010!

College enrollment trends are a mixed bag and frequently obscured by studies from in-industry sources.  Clearly, the 1990s and 2000s were a time a great growth for colleges – college enrollment grew by 48% from 1990 (12 million students) to 2012 (17.7 million).  But 2010 appears to be the recent peak and enrollment fell by 2% from 2010 to 2012. In addition, overall college enrollment declined by 2.3% in 2014, although this decline is attributed to the 9.6% decline in two-year colleges while 4-year college enrollment actually increased by 1.2%.

It makes sense that the recent college enrollment trend would be down – the number of high school graduates appears to have peaked in 2010 at 3.3 million or so and is projected to decline to about 3.1 million in 2016 and stay lowish for the next few years. The US Census reports that there was a bulge of kids that are college age now (i.e. there were 22.04 million 14-19 year olds at the 2010 Census), but there are about 1.7 million fewer kids that are my daughters’ age (i.e., 5-9 year olds in the 2010 Census).  That’s a pretty steep drop off (about 8%) in this pool of potential college students.  These demographic trends have got some people worried.  Moody’s, which rates the debt of a lot of colleges, has been downgrading a lot of smaller schools and says that this type of school has already been hit by declining enrollment and revenue. One analyst went so far as to warn of a “death spiral” at some schools due to declining enrollment.  Moody’s analysis of declining revenue is an interesting factor, in light of reports of ever-increasing tuition. Last year Moody’s reported that 40% of colleges or universities (that were rated) faced stagnant or declining net tuition revenue.

Speaking strictly, again, as a future payer of my daughters’ college tuition, falling college age population and falling enrollment would seem to point to the possibility that tuition will be lower for my kids when the time comes. Plus there are a lot of other factors that seem to be lining up against the prospects for college tuition –  like continued flat or declining wages, the enormous student loan bubble (it can’t keep growing, right?), the rise of online education…

And yet, I’m not feeling that confident.  Elite universities (and it certainly would be nice if my girls could get into such a school) seem to have found a way to collect a lot of tuition from foreign students (it’s hard to find a good data source for that though) which protects them from the adverse demographic and economic trends.  I’ve wondered if US students could get turned off by the perception that top US schools have too many foreign students and are too much, as Delong says, elite finishing schools.  But that’s hard to predict and may take many years to reach a tipping point.  Plus if tuition and enrollment drop a lot, that may cripple the schools that have taken out a lot of debt to build all of those nice amenities. A Harvard Business School professor rather bearishly projects that as many as half of the 4,000 US colleges and universities may fail in the next 15 years.  Would a sharp decrease in the number of colleges due to falling enrollment have the effect of reducing competition at the remaining schools?  If so, what impact would that have on tuition?

Both college tuition and student loans have been described as bubbles thanks to their recent rate of growth.  At some point, bubbles burst (in theory).  As someone who watched, first hand and with great discomfort, the growth of the subprime and housing bubbles before the crisis, I’ve painfully learned that bubbles can last much longer than you would rationally expect.  And despite all sorts of analysis and calculation about what should happen, the thing that triggers the bursting of the bubble is really hard to predict. As is when it will happen.  To the extent I’ve learned a lesson from mortgage land, it’s that you shouldn’t do anything stupid in anticipation of the bubble either bursting or continuing.  So, as much as I hope and even expect that the trend for increased college tuition will reverse in the coming years, I guess I’ll have to keep on trying to save for when my daughters will be heading off to college.

Categories: data science, education

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