Is college worth it?

Governments are big winners from college degrees

Politicians are always in favor of more education. The chart below explains why.  A college graduate pays more than twice as much income tax as a high school graduate,  while a professional degree holder is four times as valuable.

(Chart note: I'm counting social security taxes as well as federal and state income taxes )


Notice that while the states bear much of the burden of financing education, the big winner on tax day is the federal government. However, looking at income taxes captures only part of the additional tax revenues from the well educated. Higher earners spend more and buy bigger homes, so they pay more sales and property tax.

Taxes significantly reduce the return on education to students

While college graduates earn more than high school graduates, 36% of the college premium goes to the government in tax. This has to be paid before the student pays for the cost of the degree itself.

For people going on to grad school, 42% of the premium over a BA degree holder goes in tax.

When people in education and the media promote the benefits of a degree, they invariably ignore the fact that a significant fraction of those benefits disappears in tax. And much of the cost of that education has to be paid for out of after tax earnings, reducing the true benefits of college still further.

Relative to other business investments, educational investments are uniquely tax disadvantaged. If a self-employed person invests in a truck for their business, they can reclaim the capital costs of the vehicle out of before tax income. However the cost of investments in education and training have to be paid for out of after tax income.


Government loses when students can't afford college

For every student who doesn't graduate college due to financial reasons, the Federal government will lose up to $6000/year in tax revenue, or up to $240,000 over a working life. For a government who is currently able to borrow extremely cheaply, this is a tremendous missed opportunity. There are powerful social justice arguments for making it possible for people from all social backgrounds to attend college. Even when those are ignored, the prospect for higher future tax revenues justifies financial aid to students who otherwise can't afford college. This is true as long as the students in question are likely to graduate. Government should avoid giving financial aid to students who lack the aptitude for academic work.

This study provides evidence that many academically gifted students from poor families do not complete college. Of students who scored highly on math tests, only 29% achieved a college degree if their family was poor.  High scoring students from wealthy families achieved degrees at a 74% rate.

Further reading:
Reproduction of privilege
Pell grants cover fewer costs
Statistics from the College Board

How oil shortages could threaten a global economic recovery

Some left-wing columnists are suggesting that opening up new areas to drilling is unnecessary, because we are already having a hydrocarbon boom in the US, which is "reversing a decades long decline in US oil production." On closer examination, the hydrocarbon boom is much less dramatic than it sounds. I've plotted North American crude oil production from 2002 to 2011. This captures falling Mexican production due to the collapse of the super giant Cantarell field, and also includes the impact of the Canadian tar sands.

US crude oil production is doing well. Output for December 2011 is the highest since May 2002.  However much of the shale oil boom is simply offsetting declines in production elsewhere. Mexico lost 1.6 million barrels/day of production from the Cantarell field during the period. They replaced 1 million barrels/day by developing other fields, leaving their production down by 600,000 barrels/day.

My second chart looks at the major changes in North American oil supply and demand from 2007 to 2011. This helps to put the US shale oil boom in context. It shows the impact of different factors in barrels per day. Thanks to fracking, US oil production is up. Fracking has also boosted US natural gas production, which means than more natural gas liquids are being produced. Some natural gas liquids can be blended into gasoline, some are sold as propane, and others are used for plastics production. 

There has been much discussion in the media about the shale oil and shale gas booms. The growth of the Canadian tar sands has also received a lot of coverage. The fall in Mexican production due to the depletion of Cantarell has received much less attention, even though it has cancelled out about half of the oil production growth elsewhere in North America. Another thing that is easy to overlook is the contribution made by surging ethanol output, which added about 800,000 barrels/day to gasoline supplies.

What the mainstream media has missed is the sharp fall in demand for oil products in North America since 2007. Demand is down about 10%, and this factor outweighs everything else. This is the main reason why US fuel imports are dropping and refineries are shutting down. Much of this is due to the great recession which started in 2008, throwing millions out of work and reducing the need for transportation. Some of it is due to fuel switching to natural gas, and some is due to ongoing efforts to improve the efficiency of cars, trucks and planes.


What happens when the economy recovers?

Oil demand fell by 2.3 million barrels/day in North America when the recession hit. OPEC allegedly has 2.8 million barrels/day of usable spare capacity. A rapid US economic recovery would stress global oil supplies. If Europe economies recovered as well oil supplies would be stretched to the limit. There may very well not be enough oil production capacity to fuel simultaneous economic recoveries in the US and Europe.

Returning US and European demand to 2007 levels would require an additional 3.2 million barrels/day of oil. That can't happen, because there isn't enough spare oil production capacity. Full economic recovery will depend on efficiency improvements in oil use.

There is  debate over how much of OPEC's claimed spare capacity is actually real. There is no doubt that much of it consists of undesirable, hard to process oils.  However, any economic recovery is highly likely to be derailed by a spike in oil prices.

Things get much worse if we end up in a war with Iran. Iran exports a little over 2 million barrels/day, so most of the usable OPEC spare capacity would disappear overnight. We can either have an economic recovery or a prolonged conflict with Iran, but not both.


Employment impact?

Paul Krugman pointed out  in a recent column that employment in oil and gas extraction has only increased by 70,000 jobs since the middle of the last decade. He went on to claim that drill, baby, drill wasn't a serious jobs program.

However, if the global economy runs up against the limits of oil production capacity, job losses are likely to be in the millions.  From 2007 to 2009 US employment fell by 6.2 million while US oil demand declined by 1.9 million barrels/day.  This suggests that a shortfall of 1 million barrels/day in US supplies could cost 3.3 million jobs.

On the other hand, simply dividing current US employment of 140 million by current US oil demand yields an estimate of 7.5 million jobs lost per 1 million barrels/day shortfall.

Either way, it is a big impact.


(Data from US Energy Information Administration and IEA Oil Market report)

How the California coast is blighted by oil drilling

To listen to environmentalists, you would think that offshore drilling causes enormous environmental damage. It is so bad, enviromentalists say, that it should be prohibited even if it 200 miles out to sea. It pollutes the air, fouls the water, and kills all wildlife for miles. It must be banned off America's coastline, except for the National Sacrifice Zone known as the Gulf Coast.

You might be forgiven for thinking that a beach a mere five miles from an offshore oilfield would be an environmental ruin that nobody in their right mind would want to visit. You might be forgiven for thinking that such a beach could not possibly exist in the enviro-republic of California.

You would be wrong.

A few years ago I was looking for campsites and drove into Refugio State Beach on the California coast. When I arrived it was foggy, and I quickly noticed a few unusual looking bumps on the horizon. I knew I was looking at one of Southern California's offshore oilfields. As I walked along the beach I looked for signs of tar or pollution in the water.  The beach was littered with seaweed and driftwood, but there was no sign of oil. The water looked clean, and the waves were calm and safe. After a while the fog started to lift, and I snapped this picture.

What about those hideous eyesores otherwise known as offshore platforms? It turns out that even though the platforms were only five miles away, they made little impression on the scenic beauty of the spot. I had to use the zoom on my camera to get a decent picture of the platforms, so the only picture I have of them greatly exaggerates the impact they have on the view.

These platforms are part of the Hondo oilfield, which is one of the largest offshore fields on the Californian coast. Those little bumps on the horizon have produced oil worth over $20 billion at today's prices. I think it is debateable if oil development should be allowed this close to the coast or this close to the major urban areas of Los Angeles and Santa Barbara. A Deepwater Horizon style spill could oil the beaches of Malibu and Santa Monica, and the national media would go into hysterics. However, spills are very rare, and as long as nothing goes wrong, the impact of the oil industry on Refugio Beach seems modest. The region of the coast which the oil industry would like to develop in future is more remote and further offshore, and  I see no good reason to oppose it.

The main issue with the place is too few campsites and too many RVs.

Why China trade is bad for America

I've argued for a while that free trade with China has been a disaster for the US.  The US has been running massive trade deficits with China for years. We are told that Americans need to work harder or study more to improve our competitiveness. We are told that China's trade surplus is due to very low wages, and that low skilled jobs will inevitably move there. We are told that globalization is inevitable.

What the defenders of free trade miss is that US - China trade is abnormally unbalanced. For 2011 the ratio of imports from China to exports to China was 3.8:1  I don't believe this is the result of lazy American workers or cheap Chinese wages. The charts below cover countries which account for 78% of US imports.  Many of our trade relationships are reasonably close to balance, but something is very wrong with China and Russia. They simply don't buy American goods. These are both former centrally planned economies, and I believe their trade surpluses are the result of deliberate government policy.

Some people claim that China's surpluses are the result of low wages. However, India also has very low wages, and our trade with the Indians is far more balanced.

When I started this, I thought that Venezuela and Saudi Arabia's surpluses were simply the result of high oil prices. Oil prices have risen enormously in the past ten years, so I thought that if I went back to 2001 I would find that Venezuela and Saudi were running trade deficits with the US. Here is the same chart with 2001 data.

That's odd! Venezuela and Saudi Arabia were running trade surpluses with the US even when oil prices were far lower.  Most of export ratios don't seem to have changed very much. Brazil was still the only country with which we had a trade surplus, and China was still dreadful. What happens if I go back another ten years to 1991?

Well, the data series for Russia and the European Union don't go back that far. The other ratios have changed far less than I would have expected. Canada, Mexico, Brazil and South Korea have all kept their trade with the US close to balance.  China was a dreadful trade partner 20 years ago, and that hasn't changed even as the volume of trade has swelled 20-fold.

I personally find it very surprising that the ratio of imports to exports for most countries has stayed relatively constant  over the past 20 years even though the volume of trade has expanded enormously. My economics textbook says that imbalances in trade should be corrected by shifts in exchange rates. The surplus country's currency is supposed to rise, making its exports more expensive and eliminating its trade surplus. Unfortunately for my textbook, this never seems to happen in the real world.

What if textbook economics is wrong? A trade deficit has to be financed by borrowing.  If it goes on long enough, debt levels will eventually become unsustainable and a massive financial crisis will result. This is what has happened to Greece.  Will the same thing eventually happen to America?

Conclusions

China and Russia's trade surpluses with the US in 2011 are so far out of balance that I think they must be the result of deliberate government planning. Both are former Communist economies and I think that enough of the old central planning machinery has survived to allow both nations to 'manage' their trade with the US. Manipulation of their currency is a key element of this. Introducing a broad based tariff on all of their exports is the only way for the US to restore balanced trade.

However I also fear that our modern system of globalisation and free trade may contain the seeds of its own destruction. Trade imbalances seem to be baked into the structure of the global economy. They don't seem to correct in the way that economists say they should. In the long run a widespread abandonment of free trade might be necessary to avoid a global debt crisis.

Why the opponents of Keystone XL are wrong

I believe the fight against the Keystone XL pipeline is one of the dumbest environmental causes to come along in a long time. What is most shocking to me is how badly informed the opponents of the project are. There seem to be three main arguments against the project.


Spills from the pipeline represent an environmental hazard?

As this graphic shows, the US is already covered by thousands of miles of crude oil pipelines. They were mostly built to carry Texas and Rocky Mountain oil to the Midwest.

Source

Kinder-Morgan's Platte pipeline already moves 145,000 bbl a day across Nebraska, right across the Ogallala aquifer. Somebody has given the environmentalists the idea that an oil pipeline would present a huge threat to the aquifer. They seem to be totally unaware that there has been an oil pipeline operating trouble free in the region for over 60 years.


The oil will all be exported?

This is wrong. As of 2010, the US was a net importer of petroleum products, to the tune of 269,000 barrels a day, which represents 1.4% of domestic demand. It is true that US refineries, particularly those on the Gulf Coast, do export some products like diesel.   The graphic shows the nine largest net buyers of oil products from the US. It turns out that a lot of US net products exports are going back to the countries that sold us the crude oil in the first place.

 The US has many of the world's most sophisticated refineries, and they can handle heavy, high sulfur and/or acidic crude oils which most refineries won't touch. Mexico in particular produces a lot of high sulfur heavy crude from their Cantarell field. They send it to the US for refining, and then buy back some of the gasoline, diesel and jet fuel produced. Why don't the Mexicans build their own refineries? Because producing oil is far more profitable than refining it!

What about places like Singapore? It turns out almost all of their purchases are fuel oil. This is a nasty substance which is only used by power plants and large ships. Our electricity generators are moving away from it because natural gas is now much cheaper.

80% of what Japan buys is petroleum coke. This is a coal-like byproduct of the refining process, which the Japanese use in cement furnaces. Almost all of what Holland imports is diesel. These exports are offset by imports of gasoline from other parts of Europe. Diesel cars are very popular in Europe, so they have a surplus of gasoline.

That leaves Panama and Chile as the only regions actually taking energy out of the US market. Both countries have strong trade links with the US and neither has any oil of their own.

In the past year US product exports has gone up, and in November 2011 the US had net exports of  778,000 barrels/day, or 4% of domestic demand. This was due to surging fuel demand from Latin America, especially Mexico. China also started importing our petroleum coke, which they will use as a coal substitute.

The bottom line here is that very little of the gasoline, diesel and jet fuel produced from the oil delivered by Keystone XL is likely to be exported. US product exports are mostly either exports of refining services or of low value products that we don't need.

We need to stop the pipeline in order to stop tar sands development?

Is this likely to work? No! With oil at $100 / barrel, the Canadians have many export options. They can build pipelines to the west or east, or they can ship by rail. What makes Keystone XL unique, is that it sends the oil and the benefits to the US. The tar sands oil is very similar to the crude that Mexico produces from Cantarell. The Cantarell field is in steep decline, and Mexican exports to the US have declined by half a million barrels/day over the past 6 years. This decline is expected to continue. Keystone XL will provide a replacement for the Mexican oil.


What about global warming?

While researching this issue I noticed something else. US consumption of oil products fell nearly 8% between 2005 and 2010, a reduction of 1.6 million barrels a day. Some of that is due to the recession, but I think that there is a real efficiency improvement as well.

Environmentalists and the Obama Administration have pushed through steep increases in auto fuel efficiency standards, so this decline is likely to continue. US coal consumption is also down about 10% over the same period. As a result, US greenhouse gas emissions are slowly moving in the right direction.

If people want to reduce greenhouse gas emissions, they need to focus on things that might work. Stopping Keystone XL will hurt the US while doing absolutely nothing to stop global warming. The Keystone XL fight is a waste of time and money for the environmental movement. Global warming is a global problem and needs a global effort lead by the US and China.

Environmentalists need to work out how to move both countries away from coal, which is cheap but has many disadvantages as a fuel. Low US natural gas prices offer an opportunity here. Enormous budget deficits in the US may offer an opportunity for introducing a carbon tax. Environmental groups also need to do a far better job of defending the science against politically motivated attack.


References:
EIA US net imports by country and product
Lincoln, Nebraska newspaper article about the existing oil pipeline crossing Nebraska
Energy blogger Rob Rapier's case for Keystone XL
Nocera column one
Nocera column two

Where are the jobs being created right now?

In the chart below I show job growth per 1000 residents from July 2010 to June 2011.

The best performance is coming from poor, heavily rural states. Remember how I said that rural areas shed jobs from 2002 to 2009? That seems to have been completely turned on its head. The only way I can make sense of the latest numbers is that rural areas seem to be adding a lot of jobs. This is obviously due to higher commodity prices, especially higher farm prices.

A Rural Boom?

Each economic upswing seems to have a theme. In the 90s it was the internet, and in the 00s it was housing. I think that one of the themes in the next upswing is going to be a boom in rural economies. Perhaps the next bubble will be in the price of farmland.

Job creation in rural areas also explains why many of the jobs created are low wage, as  this New York Times story reports. Those are the kind of jobs that rural areas tend to have.
Rural economies have been through many years of hard times and it will take many good years before these areas start to look prosperous. Republican voters are more likely to be rural than Democrats. If people see hiring in their local economies, they are more likely to oppose government spending on stimulus. That may explain some of our political divide.

California versus Texas: Part 7: Conclusions

So what is Texas doing right? The first thing to say is that, like California, it is a heavily urbanized state. Over the past decade, rural areas everywhere shed jobs. Higher food prices may be changing that picture, and I will address that in a future post.

The next thing to point out is that Texas receives a big boost from being a right-to-work state. Educational levels and wages are average, but low housing prices keep standards of living high.

I think that California's big mistake is letting housing prices get too high.  This drives people out of the state and drives up labor costs. For a while a house worked as a third source of income for Californian families, but this is no longer happening. Despite better wages, Californians aren't doing any better than Texans once housing costs are paid for. High labor costs drive employers away. 

California's costs will never be as low as Texas, but Texas really isn't our natural competitor. We need to compete with the East Coast. If California could lower our housing costs and raise the number of college graduates in our workforce, then sunshine and scenery would do the rest.

Exploding the Rick Perry myth

We are told that Texas Governor Perry has a great jobs story to tell. Texas has done well, but I don't think Perry had much to do with it. The Texas economy was doing great before Rick Perry showed up as governor. Below I have charted the job creating performance of several states during the 1990s. I use March 1991 to January 2002 to try to match the lows of the economic cycle. Right-to-work states are in red.

Once again Texas is a top performer. The best way to have a great jobs story is to inherit one.

California did much better in the 90s than it did in the 00s. The state's economic performance has now deteriorated to New York levels.

The Washington state anomaly

One reason I worked out some numbers for the 90s is that I wanted to see if Washington state did as well in the 90s as it did in the 00s. While not matching the performance of job creation superstars like Utah and Arizona, Washington state finished just behind Texas. That is a very good performance for a moderately high wage, union friendly state. I don't know if this is just the influence of Boeing and Microsoft, or if something else is going on.

Things that don't seem matter much

I thought that the amount of federal spending per dollar collected in taxes would have a strong economic impact. It seemed reasonable that places that have a net inflow of money from the government would have more jobs. I looked for this effect and didn't find it. Great economies are not built on government pork.

I wondered if the size of state government would have an impact. Nevada and Florida have an exceptionally low state tax burden. Their economic performance is good but not exceptional. I don't think that the level of state taxes matters as much as Republicans think. Education, on the other hand, is very definitely important.
I also looked to see if having very large cities or having hub airports mattered. I didn't see any evidence of that, although I will have to do an Metropolitan Statistical Area based analysis before I can say that these things don't matter at all.

In my next post I will write about where jobs are being created in 2011.

(1991 Population data from: http://www.census.gov/popest/archives/1990s/ST-99-03.txt)