Is College Enrollment Falling?

A recent Wall Street Journal declares “More High-School Grads Forgo College in Hot Labor Market.” An accompanying chart and data show the apparent plunge, with just 62% of recent high school grads enrolled in college, down from 66.2% before the pandemic, and well down from the high in 2009 of 70.1%.

The article recites the usual reasons. The high and increasing financial cost of attending college. The increasing opportunity cost due to the “hot labor market” mentioned in the headline. Large numbers of young people getting apprenticeships: apparently a 50% increase over some unstated timeframe!

They give anecdotes. A 21-year-old male in Maryland was put off by the high cost of a four-year degree. He likes working on cars, so instead got a job as a service technician at a Toyota dealership.

We’ve heard this all before. In fact, we know we’ve heard it before, because the WSJ article links to other WSJ articles saying the same thing over the past few years.

But are young people really skipping traditional four-year colleges for other opportunities? The answer is a big fat No. And we can even use the same data the WSJ used (from the CPS) to prove it, but slice it more finely. The percent of recent high school graduates enrolled in 4-year colleges and universities in 2022 was 45.1%. That’s slightly higher than 2019 (44.4%) and is, in fact, the second highest level ever in this data, with only 2016 being higher at 46%.

So what gives? The decline that the WSJ is reporting is entirely driven by a decline in enrollment at 2-year colleges, though you would never get a hint of that in the article. You might even think it was the opposite: perhaps young people are forgoing 4-year colleges in favor of trade schools! Nope. Here’s the data.

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Carl Icahn Under Siege: The Predator Becomes the Prey

The term “investing legend” gets thrown around a lot, but in the case of Carl Icahn, it truly fits. He kicked off the modern era of corporate raiding by taking influential stakes in many companies and forcing changes to his personal advantage. In some cases (e.g., Trans World Airlines) this involved taking over and dismembering the firm, and selling off the pieces. He is considered by some measures to be the most successful “activist” investor ever. His personal wealth is (or was) on the order of $20 billion.

Icahn has rolled much of his personal holdings into a limited partnership called Icahn Enterprise L.P.  (IEP).  According to its blurb, “…Icahn Enterprises L.P., through its subsidiaries, operates in investment, energy, automotive, food packaging, real estate, home fashion, and pharma businesses in the United States and Internationally.” This partnership structure allows Icahn to cleverly avoid paying income taxes on the earnings from his enterprises. Another score for the old wolf.

This arrangement has also allowed us mere mortals to nibble on the crumbs from his table. IEP has paid a very large and growing dividend for more than ten years. Since 2019 it has paid $ 8.00 per year ($2.00 per quarter). This generous payout has made it popular among retail investors and has kept the price of IEP steady in the $50-$55 range for a number of years. This gives around a 15% yield.

It has always been understood that IEP does not actually generate enough cash to pay out $2.00 per quarter on every share, but since “Uncle Carl” owns some 82% of the shares and takes all his dividends in stock (again, to beat the taxman), it has all worked out. That is, until the past month, when IEP was the target of a “short attack” by the ominously-named Hindenburg Research. A short attack is when some outfit takes a short position in a stock, then publishes a report claiming all sorts of misrepresentation and malfeasance on the part of management, to scare the public into dumping the stock. The attacker pockets a tidy profit on their short position when the stock price tanks. Then on to the next victim.

Often, there is not much actual substance to a short attack, but in the case of IEP Hindenburg had something of a real case. Their claim is that the actual net asset value (NAV) of IEP is way, way below $50 / share, and even lower than the NAV officially reported by IEP. Hindenburg made lots and lots of other dire accusations, describing IEP’s operation as a giant Ponzi scheme. Ouch.  Also, it seems Icahn has actually lost his mojo in the past decade (he is 87), making several market bets that went sour and lost billions. Anyway, some of Icahn’s old victims are not sorry to see the former shark being mauled by tactics similar to those he once employed.

The IEP stock price quickly dropped from 50 to 30 when the short report came out, then rallied back to about 36 after Icahn gamely announced that the usual $2.00 dividend was still going to be paid (stock chart below). That is where I sold about half my IEP shares to de-risk my position (disclosure: I had bought a very small amount before the Hindenburg report).  The price then meandered around in the low 30’s for a couple of weeks, then started to slide down again.

Share price for Icahn Enterprises L.P. (IEP). Source: Seeking Alpha.

Icahn made numerous enemies in his career, including fellow corporate raider Bill Ackman. Icahn went very long on a company (Herbalife) that Ackman was heavily shorting, back in the day. One YouTube you can listen to a 2014 CNBC show where they had both called in, where they were hurling very personal insults at each other on the air.  Ackman recently piled onto the short thesis for IEP, tweeting that even after the recent fall in price, the shares were still overvalued by at least 50%. IEP shares promptly plunged another 14%, to under $20.  Icahn’s response: “Taking advice from Ackman concerning short selling is like taking advice from Napoleon or the German General Staff on how to invade Russia.”  Some things don’t change.

The debt ceiling crisis was real and will be again

I’ll make this quick. A deal appears to have been reached and the US will not, in theory, default on any of its debt obligatons next week. Some view this as evidence that this is simply a political melodrama that continues to play out with a pre-determined ending, the only thing having changed is the introduction of greater levels of Trumpian kayfabe.

I am less sanguine. My only real evidence is the the prices that bond traders were demanding:

“At the moment, the T-bill market is in a state of dislocation, one in which yields ranged from as little as 2.614% on government obligations maturing on May 30 to as high as 6.881% on the bill that matures two days later on June 1, according to Bloomberg’s data.”

What that tells me is that market thought there was non-trivial risk of debt going unpaid. That also tells me that the market views current US politics as having introduced real risk of default, regardless of whether some fraction of the players intend it as theater or not. That a deal was reached is almost (almost) besides the point.

Yes, media observers often engage is a certain amount of performative credulity to heighten dramatic interest in the story du jour. But I take a Schelling-esque stance on debt default, which is to say that not unlike pre-emptive nuclear strikes, it is something where the mere discussion of it increases the probability of occurrence. Each time our elected officials indulge in this melodrama, the underlying probability of default goes up, as will the cost of serving US debt, making each and every American a little poorer. Add in the current status of the dollar as the global reserve currency, and we’ve got ourselves perhaps the greatest example of concentrated benefits and diffused costs I’ve ever come across. A reduction in global wealth touching upon very nearly every human on earth all for the benefit of a few marginal votes for a couple dozen Congressional representatives.

Maybe I’m being melodramatic now. But honestly, I don’t think so.

The Value of Student Organizations and On-Campus Education: Anecdotal Evidence from Tim Keller

Tim Keller, who was the founding pastor of Redeemer Presbyterian Church in New York City, died last week. Starting and growing a church in Manhattan takes talent. I am reading Tim Keller’s biography by Collin Hansen through the lens of Tyler’s Talent book.

How did a successful leader and famous speaker get started? Keller is not described in the book as an outgoing child. Although academically gifted, “He grew up socially awkward, a wallflower…”

In 1968, Keller started at Bucknell University. Keller, who would go on to write multiple best-selling books, may have refined some of his writing skills through his coursework. From my reading, the most important aspect of his college experience was not the classes but the chance to be a leader of a campus (religious) club and having so many peers close by to practice “working” with. “Some 2,800 students lived within short walking distance of each other…[on campus].”

He planned retreats and invited famous guest speakers who appealed to his audience. He got feedback on the effectiveness of different messages and programs. Due to Keller’s efforts, the college club chapter meetings more than doubled in size. You can see the beginnings of the man who would go on to manage a large organization and attract over 5,000 people to hear him on the Sunday after 9/11.

In the debate over the value of a college education, the value of the experience students gain from holding officer positions in campus clubs is underrated. The information or credentials that can be obtained through online classes doesn’t build this kind of social capital. For leaders of organizations, college clubs are how some of them gained momentum and developed confidence.

Students can learn in a low stakes environment. For example, an ambitious club president can get 20 students to show up for pizza instead of 8. Club leaders get to make the key decisions and solve the problems that determine the success of their organization, because the faculty are too busy to micromanage club meetings. This gives students accurate feedback on the success of their own ideas.

In-person campus-based education is more than acquiring knowledge from textbooks. It is a dynamic environment in which students can develop social skills and form their network for future professional support. By participating in these organizations, students learn collaboration, decision-making, problem-solving, and mentoring — skills that are transferable across various domains of life.  

Early or Late, Never On-Time

Say that you live in a metropolitan area and that everyone works downtown. If you leave early, then you get to work WAY early. If you leave late, then you get to work WAY late. What’s up with that? Let’s say that the closer people live to downtown, the proportionally deeper you work in downtown.

Odds are that you live somewhere in between super far away and somewhere super close. That means that when you arrive at work, there are people closer to and further from the city center also arriving at their jobs. They are your competition. Their mere existence adds congestion to the roads and slows your velocity. As you all make your way closer to the downtown area, the congestion increases and the velocity falls still further such that your slowest speed occurs as you approach work.

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South Carolina Repeals Certificate of Need

Last week South Carolina Governor McMaster signed a bill repealing almost all Certificate of Need (CON) laws in the state. If you want to open or expand a health care facility in South Carolina, you can now do so faster, cheaper, and with more certainty.

This is a bigger deal than West Virginia’s reform earlier this year because it applies to almost all types of facilities, and applies to both new facilities and expansions of existing facilities. Only two parts of the CON system remain: a 3-year sunset where hospitals still need special permission to add beds, and a permanent restriction on nursing homes (why? see my recent post on why states hate nursing homes).

As is often the case, this reform took years to enact. I wrote last year about a repeal bill passing the SC Senate; it didn’t make it through the House then, but did this time. As I said then:

This seems like good news; here at EWED we’ve previously written about some of the costs of CON. I’ve written several academic papers measuring the effects of CON, finding for instance that it leads to higher health care spending. I aimed to summarize the academic literature on CON in an accessible way in this article focused on CON in North Carolina.

CON makes for strange bedfellows. Generally the main supporter of CON is the state hospital association, while the laws are opposed by economistslibertariansFederal antitrust regulatorsdoctors trying to grow their practices, and most normal people who actually know they exist. CON has persisted in most states because the hospitals are especially powerful in state politics and because CON is a bigger issue for them than for most groups that oppose it. But whenever the issue becomes salient, the widespread desire for change has a real chance to overcome one special interest group fighting for the status quo. Covid may have provided that spark, as people saw full hospitals and wondered why state governments were making it harder to add hospital beds.

Why did reform succeed this time in South Carolina? From where I sit in Rhode Island I can only guess, but here are my guesses. First, the reform side really had their stuff together. See this nice page from SC think tank Palmetto Promise on why to repeal CON, and this paper from Matt Mitchell that does a comprehensive review of the literature on CON and explains what it means for South Carolina. Legislative supporters like Senator Wes Climer just kept pushing.

Second, the biggest opponent of CON reform is usually the state hospital association, but in this case they did not formally oppose repeal. Why not? Here I’m really speculating, but in general it has been faster-growing states that repeal CON. Population growth makes it obvious that new facilities are needed, and it means that existing facilities are thinking about how to grow to take advantage of new opportunities, rather than thinking about lobbying to maintain their share of a static or shrinking pie. You can see some hospital CEOs say they don’t mind repeal in this article (where I’m also quoted). South Carolina has been growing at a decent clip, as is Florida, which also almost-entirely repealed CON in 2019. On this theory, the next big CON reform would happen in a fast-growing CON state like Montana, Delaware, North Carolina, Georgia, or Tennessee. If I had to pick one, I’d say North Carolina.

Update: Apparently Montana already repealed all non-nursing home CON in 2021 and I missed it!

Inflation in G20 Countries

Most recent annual rates, compiled by Trading Economics. The US is right in the middle:

Argentina 109%
Turkey 43.7%
United Kingdom 8.7%
Italy 8.2%
Germany 7.2%
Australia 7%
Euro Area 7%
South Africa 6.8%
Mexico 6.3%
France 5.9%
Singapore 5.7%
Netherlands 5.2%
United States 4.9%
India 4.7%
Canada 4.4%
Indonesia 4.3%
Brazil 4.2%
Spain 4.1%
South Korea 3.7%
Japan 3.5%
Saudi Arabia 2.7%
Switzerland 2.6%
Russia 2.3%
China 0.1%

Why No Recession (Yet)

Where is that recession that pundits have been predicting for over a year now? The suspense is killing me. Despite savage hikes in interest rates that have led to a collapse in regional banks and in home buying, the economy just keeps chugging along, and inflation continues to run way above the targeted 2% level. What’s going on?

An article I just read on the Seeking Alpha applied finance website points to three interrelated factors. I will cite and credit the author (whose moniker is “Long-Short Manager”; he runs a couple of investment funds) for the content here, while noting that I agree with his points based on other reading. These points all relate to ongoing strong financial position of the (average) American consumer, who mainly drives the spending in our economy.

( 1 )  Reduced Debt Service

The article notes:

The graph above shows household debt payments as a percent of disposable personal income going back to 2000. Since peaking at 13% right before the financial crisis, it steadily improved to 2020, with a subsequent large drop due primarily to lowered mortgage rates (usually the largest debt obligation of a household). It is the lowest it has been this century.

(Although mortgage rates have jumped in the past year, most existing mortgages were taken out pre-2023, when interest rates had been pushed to near zero by the Fed.)

( 2 )  Robust Wage Growth

The next graph from the Atlanta Fed’s wage tracker (note that the methodology used by this tracker is fundamentally different from the Fed’s employment cost index …) shows that job hoppers on average are making about 3% more than core inflation (call that 5%) whereas the average stayer is making a half percent over core inflation. This is allowing people to catch up for the year that they got behind on inflation.

Likewise, the author notes that although job quits have come down in the past year, they remain well above re-COVID levels.

( 3 ) We Are Still Spending Down Gigantic Pandemic Stimulus Windfall

As we have noted earlier, the government/Fed combination dumped some $4 trillion into our collective pockets in 2020-2021. This includes enhanced unemployment benefits as well as direct stimulus payments, at a time when much of our normal spending (e.g., on travel, sports, commuting, etc.) was curtailed. We are still spending down these excess savings at a good clip, which seems to be a fundamental driver of the currently robust economy:

The last figure on the consumer shows how excess savings (defined as the extra savings consumers accumulated during the pandemic due to fiscal transfers and reduced spending due to lockdowns) has evolved – it should now be around 700 billion and ought to be fully depleted by the end of the year – leaving the consumer still with the lowest debt service ratios of the century and wages caught up with inflation. If you are wondering why we haven’t had a recession despite economists saying we will have it within 6 months for about 12 months now, these charts should tell you why. The tailwind from consumers has exceeded any headwinds from reduced investment due to higher rates. 

And there you have it.

The problem is the (lack of) points

The Writers Guild of America is on strike because everyone in Hollywood is unhappy. Nobody is making enough money or getting hired for long enough stretches. Complaints appear fairly universal as well, from showrunners and producers all the way down to the newest hire. In fact the only thing that doesn’t appear to be running a shortage is blame.

I know the complexity of trying to collectively bargain such an enormous industry means that any deal struck, even if it starts out relatively efficient, will be a bad deal for someone within 3-5 years. That’s just the nature of things when you’re trying to forecast both technology and the shape of multiple labor markets. It’s an impossible task. That said, I think we can boil down a lot of what has gone to hell to a single problem. Streaming is currently the dominant platform and streaming studios don’t pay points i.e. profit share on the back end.

Of course streaming services aren’t the totality of the television and movie business, but they are sufficiently dominant that the lack of points, and the problems downstream of it, have fundamentally altered both the labor market and the incentives facing the people creating entertainment. Writers, directors, producers, and even some of the bigger actors have routinely accepted a percentage share (i.e. percentage points, get it?) of the profits of an enterprise as a portion of their compensation. Blumhouse films famously got bigger name actors to join their small genre projects for scale (i.e. guild actor minimum wage) by contracting them for a sizable profit share. It’s a great way of mitigating risk for small studios while also attracting actors with the possibility of a big pay day.

Profit sharing is about far more than just mitigating risk, though. They are about aligning incentives. Everyone cares that much more about the quality of the product when their eventual payout is directly connected to success. Aligning incentives is both exceptionally important and difficult in contexts where quality is difficult to assess and forecast at intermediate stages of production. The only thing you need to know about Hollywood is a cliche that I choose to attribute to legendary screenwriter William Goldman who always asserted, with regards to the entertainment business, “Nobody knows anything.”

“Nobody knows anything” means that 1) forecasting success or failure of a project is difficult, but just as importantly, that all of the really important information is tacit. There’s somone who knows what the best bit of dialogue is, the perfect costume, who to cast as the best friend and the villain, how to frame the shot, how to light the third scene, how to make the write kind of fake snow, what kind of bagels to get, etc. Someone knows, but that someone probably couldn’t explain why they know what they know, couldn’t pass that information on, couldn’t identify the underlying factors in audience and historical film data. They just know. And if you want them to take the optimal action, and make the necessary committments and sacrifices to make the film the best it can be, they need to have incentives in place to ensure that they are rewarded for infusing their tacit knowledge within the final product.

Those incentives are currently broken in the film and television business.

As best I can tell, what broke them was that a) streaming is a lot less profitable than Netflix, Disney, et al. hoped, and b) out of a desire to keep internal data private, compensation contracts could no longer include an “outcome” based component i.e. profit sharing.

Streaming services make money from subscriptions. How an individual production contributes to those subscriptions has a relationship to data associated with that production, but streaming companies have thus far been unwilling to release data associated with individual productions. Yes, Netflix started releasing a little bit of data, but nothing compared to previous entertainment paradigms. Ticket sales, nielson ratings, and advertising always allowed for intuitive mechanisms for profit sharing via points and residual checks. In order to keep their data private, firms have opted instead to move to simple compensation structures, including before-after compensation where a writer, producer, or director is paid when a project is started and when it is deemed completed.

Receiving roughly half of your pay when a an amorphous product, like a film script, is “done” is a really terrible idea for the simple reason that the writer has far less incentive to make the script “good” and far more incentive to make it acceptable to person who must stamp it “done” so they can get paid. How do you get that stamp? By doing whatever they tell you to do. The problem is, they don’t know what the script needs to be good, that’s why they aren’t a writer. They don’t have the tacit knowledge. The writer has it, but fighting to infuse that knowledge in the script does nothing to improve their pay, in fact, it only delays it.

These breakdowns in incentives are all over Hollywood and you can feel it in the films and shows coming out. Scripts feel half-assed, as if written by disconnected employees scattered to the winds of Zoom and a California housing crisis. Performers seem unsure of what to do within a menagerie of green screen and tennis balls on sticks. Audio is famously terrible in movies now.

So how do they fix it? Well, I’m not even sure who “they” are one answer might be found in the Blumhouses, A24s, and every troupe of actors and filmmakers who keep working together. Shrink the number of people involved to the point where you solve incentives not with perfect contracts but with longer term relationships. Repeated interactions have always been a great way of aligning incentives. When credit can more naturally flow to smaller number of people, when working together over and over is the best way to create job security, all of the other problems become easier to solve.

What about the revenue problem though? Well, maybe ticket sales never recover, and streaming never prints money the way advertising did, but modern technology also means you can make a show or film with a smaller number of people than ever before, which means every single one of those people could feasibly participate in profits. Maybe the answer is to simply recreate the old model externally to the big studios, at the earliest stages of coordination, recruiting and writing, before distribution or marketing even enter the equation. Smaller teams, direct participation in profits. Smaller movies and shows. Smaller can be better, just ask anyone who’s ever tasted a beer in the last 20 years.

Maybe the WGA (and the directors and actors guilds too, for that matter), should be thinking a little bit less about what they can negotatiate from the studios, and more more about how much it can cut them out of pre-distribution entirely. Vertically integrating the film and television business is not the only possible state of the world. In fact, given the current state of technology and the broader labor market, it’s entirely feasible that one of the main reasons that industry has collapsed into such a small number of firms is that guild contracts grant cost advantages to being enormous, even in the case where much of the companies in question have next to zero knowledge about the creative side of their industry. There may very well come a time where a million micro-studios, teams of writers, actors, directors, and production staff simply work to make their products and then sell ex-post to the highest of the content-starved bidders. There was a time with the Shane Blacks of the world got to enjoy the benefits of bidding wars for their scripts. Maybe the WGA,DGA, and SAG can bring those back. Does anyone have Sotheby’s number?

Or maybe the world collapses into a hellscape of reality-influencer tik tok stars and I wholly divorce myself from entertainment entirely. Bird watchers seem happy. Maybe I could get into bird watching.

Is Your Head in the Arm Hole of Your Dress?

There is something morally instructive about watching a preschooler melt down. It was the morning of my __th birthday yesterday. Kids still had to be dressed and fed and shipped to school on time.

My daughter, who is almost 5, was screaming on the stairs instead of coming to breakfast. Upon inspection, I realized that her head was through the arm hole of the sleeveless dress she had chosen to wear to school. I offered to help her. She screamed louder and lurched away from me. Her pride was more hurt than her neck at the thought of accepting help. She was not yet really wearing the Anna (the character from Frozen) dress because of the snafu of the sleeves. She stomped around screaming for minutes, refusing all offers of help or comfort from me.

Adults do this kind of thing all the time, although it looks different. People do the stupidest things and then dig in instead of accepting help and reversing course.

My daughter is exceptionally brilliant and kind. She is loved by everyone she meets. Even she has these moments, because we all do. That is some behavioral economics for you.