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In the United States at least, people with a post-secondary degree tend to earn more than people without one. For instance, looking at the statistics for people aged 25-34 in 2007, the median annual income for high-school graduates was about $25,000, while people with an Associates (2-year) degree earned $31,000, and those with a Bachelor’s (4-year) degree earned nearly $41,000. Since earning these degrees has such a positive affect on income, it should be good news for women that, as Mark Perry recently noted in his blog, women are now receiving more post-secondary degrees than men, even at the doctoral level.

However, if you look at the situation in more detail, using the US Department of Education statistics for the 2006-2007 graduation year (for bachelors, masters, and doctoral degrees), you’ll find that higher education may not be as women-dominated as the overall statistics would indicate:

• In Computer Science, women receive only about 20% to 25% of the degrees at each level.
• In Engineering, women receive only about 15% to 20% of the degrees at each level.
• In Math, women receive about 44% of the Bachelor’s degrees, 40% of Masters degrees, and 30% of Doctoral degrees.
• In the Physical Sciences, women receive about 40% of the Bachelors and Masters degrees, and 30% of Doctoral degrees.
• Women continue to receive more degrees than men at all levels in areas they have dominated since at least the early 1970s: Ethnic and Gender Studies, Communication, Education, English Language and Literature, Foreign Languages, Liberal Arts, Public Administration, Social Services, and Visual and Performing Arts.
• There has been a shift in the area of Biological Sciences from male-dominated at all levels in the 1950s to female-dominated at all levels today.
• Women continue to dominate the Health Sciences area at the bachelors and masters degree level (this has been true since the 1970s), and are also now (since the 1980s) ahead in doctoral degrees.
• In Psychology, women surpassed men at the Bachelors degree level in the late 1970s, and at the doctoral degree level in the mid 1980s.

Looking at the income statistics for men and women separately (again, in the 25-34 age group for 2007, so as to discount any left-over problems from previous decades), we can see that the median income for all women is $27,000 per year, while for men it is about $33,500, in spite of the fact that a higher percentage of women have post-secondary degrees. In fact, men in this age group with 4-year degrees are earning about $47,000, while women earn $36,000. This is likely due to the difference in the subject area of the degrees noted above — salaries for engineers are certainly higher than those for teachers.

So, I am not sure that the fact that women are earning more college degrees than men translates into anything very meaningful.

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I recently read The Green Collar Economy, by Van Jones (with a forward by Robert F. Kennedy, Jr.). I think President Obama must have read it too, since the ideas he’s been talking about lately for fixing the economy are basically the same as what Jones sets out in his book. This is a good thing, in my opinion. Here are the main points from this book:

• The US is spending about $1,000,000,000,000 (1 trillion dollars by the US definition of “trillion”, or 1 billion by the British definition of “billion” — 1 million million either way) per year to subsidize the coal and oil industries. The book doesn’t give any documentation on how it got this number, but if it’s true, I can only ask: Why?
• Given that burning oil, natural gas, and coal contributes to global warming and other pollution problems, that the supplies of these resources is finite, and that dependence on foreign oil is a major security issue, we need to move towards not burning these fuels at all.
• We can replace the energy coming from coal and oil with geothermal, wind, and solar energy (see my previous post on energy for more on that idea), in conjunction with a move towards better efficiency and sustainable food production.
• The following public policy shifts are needed, in order to make this happen:
  • Stop subsidizing oil and coal
  • Introduce a “cap and trade” system that will cap carbon emissions in the US at current levels, decreasing the cap every year on a pre-determined schedule (so that industry can plan ahead), and set up a system for companies to trade their carbon cap credits.
  • Streamline electricity transmission rules, so that any electricity producer is guaranteed access to the local grid everywhere, while owners of transmission lines and local grids are compensated for their use (similar to the access to local telephone lines from the Telecommunications Act of 1996).
  • Modernize the electric grid, adding high-voltage long-distance trunk DC transmission lines, better control software, and battery storage facilities, so that solar and wind-generated electricity can be effectively generated when and where the sun and wind hit, and used when and where it is most needed. The estimated cost of this modernization is about the same as the 1-year oil and coal subsidy mentioned above, and as with the telecommunications modernization that led to our current Internet backbones, if access is guaranteed, private investment may pay for a significant portion of this cost.
  • Subsidize efficiency and sustainability, ranging from home and building lighting/heating/insulation improvements to mass transit to organic food production.
• Jones and Kennedy believe this will not only improve the environment, but also significantly improve the economy. They cite examples of Sweden and Iceland, which have both significantly reduced their use of oil and coal, and whose economies are booming as a result. Jones also points out that many of the “green collar” jobs generated by these programs would pay a decent wage, be attainable by people with a high-school education (with a little training), and be impossible to outsource (things like installing solar panels and weatherizing buildings have to be done here in the US).
• Jones also advocates for an approach that is based on principles of equal protection and equal opportunity: making sure that this environmental movement includes, protects, and creates jobs in lower-income areas as well as among the more affluent.

President Obama apparently wants something very much like this plan to be put into effect, and the economic stimulus plan being signed today contains at least some of these ideas. I’ll be interested to see what comes next.

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Because I used to work on Wall Street, some people I know are under the (incorrect) impression that I’m an expert in all things financial, and they have been asking me if I can explain how we got into our current state of financial collapse. So, I thought I would write a short summary of my understanding of how rampant greed around the practice of sub-prime lending led to a full-scale financial crisis.

First, let’s set the scene: the sub-prime lending market. Here’s a brief summary of how it worked:

• For at least the past ten years, many banks and mortgage companies in the U.S. have been aggressively seeking out people who were not financially ready to buy homes (bad credit history, no savings for down payments, insufficient income to afford a house, etc.), and giving them mortgages. These borrowers had to pay high interest rates for their “sub-prime” mortgages, to offset the increased risk that they would default on them.
• Many of the borrowers were not very knowledgeable about money, and they often did not understand the implications of their mortgages. Some borrowers had low payments for the first couple of years, which they didn’t realize would go up dramatically after that. Other borrowers weren’t able to calculate the full cost of owning a home (including fire insurance, real estate taxes, association dues, and water and sewer bills that a renter typically would not pay), and they couldn’t even afford the initial payments.
• Many mortgage agents and brokers did not educate the borrowers or fairly assess their ability to afford the mortgages — they either were under no legal obligation to do so, or the laws were not enforced.
• Most mortgage agents and brokers are paid commissions (at least to some extent), so they had a financial incentive to make as many deals as possible, and no penalty if the borrower eventually defaulted.
• The lending companies sold the mortgages rather than holding them. Once they had traded a mortgage contract for cash, they had no more risk, and could go out and lend the same money again to another borrower. Because they were able to transfer the risk away and lock in their profits, they also had a financial incentive to make as many deals as possible, and no penalty if the borrower eventually defaulted.
• The companies that purchased the mortgages re-packaged them into very complex “mortgage-backed securities“, and sold them to investors (mostly banks); the companies that originally bought the mortgages therefore also transferred away all risk of default and locked in profits, and again had an incentive to do as much of this as possible.
• Since the Reagan era, we have had less and less regulation of our financial market (under the philosophy that a capitalist market can regulate itself more efficiently). One of the ways in which the financial market is supposed to regulate itself is that we have two big investment rating agencies (Moody’s and Standard & Poor’s), which rate the risk of financial assets. In this case, they failed: the investment rating agencies gave the mortgage-backed securities “investment-grade” ratings. This allowed companies that bought them to count them fully as assets on their books, rather than having to discount them according to the actual level of risk they carried.
• The traders and strategists within the purchasing banks (often people like me: ex-physicists who went to work on Wall Street), who were in the best position to understand the long-term risks of mortgage-backed securities, also had a large personal incentive to do these deals. They were basically gambling using someone else’s money: they made huge bonuses in the short term because the deals they did looked great on paper, and the most drastic down-side risk they faced is the possibility that they could lose their job some years in the future if the value of the mortgage-backed securities they had bought went too far down.
• Because of all of the sub-prime borrowers entering the housing market, there was a strong demand for houses, which contributed to housing prices rising at a rate that far exceeded inflation. This led to additional demand from housing speculators, who could buy a house, hold it for a short time, and sell it again (”flipping”), which drove housing prices even higher.
• So, everything worked smoothly for many years, with many people making a lot of money off the sub-prime mortgage market: even if someone defaulted on a mortgage (and the market expected a certain fraction of these borrowers to default), the principal could be recovered by investors because the house had increased in value. At the same time, many analysts warned that when the time came that the economy wasn’t so strong, the sub-prime mortgage could easily collapse.
• But because they were making money in the short term, banks ignored the underlying problems, and mortgage-backed securities became large fractions of many large banks’ assets.

In order to understand our current crisis, you also need some background on the workings of other (non-financial) businesses in our current economy:

• Much of the world economy currently depends heavily on credit. Medium to large companies do not generally operate by using the proceeds of their current and prior operations to fund their current expenditures. Instead, they fund their current expenditures by borrowing against their future profits. The businesses borrow by issuing bonds for longer-term capital needs, and by obtaining bank loans for their short-term needs. The banks get money to loan by borrowing from larger banks.
• This whole system depends on trust. The banks lend money to companies based on their belief that the companies will be able to generate income in the short term and pay the money back. Banks lend money to other banks based on their trust in the borrowing bank’s assets and loan portfolios.
• The current economy is also focused on the short term. Nearly every publicly-traded company focuses on quarterly profits rather than long-term prospects — the reasons being that their stockholders (who hold stock on average for days rather than years) demand it, and their upper management’s compensation is based on it.
• The current economy is also based on an underlying assumption that the economy as a whole will always grow, that the world will always increase its consumption. But consumption cannot grow forever — it’s not environmentally sustainable.

Now that we have set the scene, we are ready to understand the crisis:

• A few months back, the delicate balance in the average sub-prime borrower’s finances tipped (due to rising interest rates, rising oil and food prices, layoffs, etc.), and more sub-prime borrowers started defaulting on their mortgages than had previously been the case.
• Once this started, the houses these borrowers had owned started flooding the market, and housing prices started dropping quickly. This meant that the holders of the mortgage-backed securities not only held more defaulted mortgages, but the houses that formed the loans’ collateral were worth significantly less than the principal of the mortgages.
• The defaults and housing price drops meant that suddenly no one trusted the value of sub-prime mortgage-backed securities, which had become a very large portion of the total holdings of many banks. This led to a problem where the banks wouldn’t loan each other money, even in the short term, since they didn’t trust the financial stability of the other banks.
• When the banks couldn’t borrow from other banks, they couldn’t make loans to businesses, and the businesses didn’t have the money to fund their current operations (payroll, raw materials, etc.), and went into a state of crisis.

So that’s the story: short-term profits and risk transfers fueled sub-prime lending, and it got so big that when it collapsed, it took the confidence in the banking industry with it; without trust, no loans were made and our credit-based economy entered a state of crisis. This is why the U.S. government bailout is aimed at getting capital back to banks, and buying their untrusted mortgage-backed securities: so that the banks can once again loan money to businesses, and the businesses can get back to normal operations.

But I am not convinced this will solve the problem, since the underlying issues will not be changing:

• Economy focused on the short term
• Economy based on the availability of short-term credit, provided by banks
• Little oversight on the operations of banks and the investment rating agencies
• Economic assumptions of continual growth, which is environmentally unsustainable
• Coming crises in food and energy (see my previous blog articles) that no one is planning for

It will be very interesting to see if our next President and Congress will do anything to address these issues. So far, I haven’t seen much evidence that they plan to…

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I have been thinking a lot lately about economic growth. It seems like the news media, and practically everyone else, assumes that if the economy is growing, it’s a good thing, and if it isn’t, something terrible is occurring. This assumption has been bothering me for a while, and I recently read a book that put my vague uneasiness into words: Deep Economy: The Wealth of Communities and the Durable Future by Bill McKibben. In this book, McKibben makes the following points:

• When you measure the economy, only things that cost money count. So, for instance, increases in things like hospital stays, divorces, and burning coal in out-dated power plants count towards economic growth, whereas things like volunteer work, walking rather than driving, and spending time reading a library book with your child don’t.
• Economic growth in recent decades has not actually increased most Americans’ real earnings or standard of living.
• We are already facing food and energy crises, which will get worse if we keep “growing” the way we have been, and we can’t afford the global warming that would result. (See my previous articles on The Energy Future and Biofuels for more information.)
• Economic growth that raises individuals’ income up to the point where their basic needs are reliably met (roughly $10,000 per person per year) certainly makes them happier, but after most people have reached that point, economic growth does not increase people’s happiness.

So the problem is clear: economic growth is not improving the world or our happiness, and it isn’t sustainable. Unfortunately, the solutions are not easy. Here are McKibben’s key ideas:

• In the area of measuring the economy: When we measure the the value of economic activities, put a value on the natural resources they use up, as well as the pollution they produce, and count that against their economic benefit. Also, rather than only measuring things that cost money, attach an economic value to happiness and to beneficial activities like teaching, volunteer work, and child raising.
• In the area of sustainability: Work on making our economy more localized instead of more globalized, letting each local community come together to figure out how to make itself better. McKibben is convinced that if we all try to make more of our economic activities local, we will both solve our larger economic problems and make ourselves happier, as we get more of a sense of being involved in a community. His ideas include using building materials that come from nearby; eating food that is grown on nearby, small organic farms; adding small wind turbines and solar panels to our cities; and building sidewalks, bike lanes, and bus rapid transit. It’s hard to argue that any of those would be a bad idea.

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The city that I live in (Shoreline, a suburb just north of Seattle) closed two elementary schools this year, and the city of Seattle has also been talking about closing schools, in both cases because the number of children enrolled in school has declined. Yet the population of both Seattle and Shoreline must be increasing, as houses are replaced by condo buildings and apartments, so I had been somewhat confused about this… Until someone yesterday pointed out the (in retrospect) fairly obvious reason: housing in the nearby suburbs and the city of Seattle is getting more and more expensive. So people in my situation (two good jobs, no kids) can still afford to buy houses, but families with school children are having to move farther north or south, to find housing they can afford. So we are closing elementary schools in my part of town, and Kent (a farther-out suburb) has been building new ones. Food for thought…

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