Assets and Debts

The big headline this week is that aggregate student debt in the U.S. surpassed a trillion dollars and to no surprise, it's hitting grads hard. It's now greater than credit card and auto debt. It's also something that, as a researcher of urban issues, I wish we had a better handle on.

(from HeatherMG on Flickr)

People say that student debt is "good debt", because you used it to buy something of value. People with college degrees make more money than people without them - that's not really up for debate here. Mortgage debt could also be considered "good debt" in this regard. Every month you're paying a chunk of money to eventually own a really big asset - a house.

There's one huge difference between owning a house and having a college degree though. A house is an "asset" from an accountant's perspective. It's a physical thing that sits on top of a piece of land. Both the sticks and bricks and the land are worth something (except in the worst case scenarios). If you buy a house and then 10 years down the road decide that you don't want it anymore, you sell it. As long as it hasn't depreciated, you wipe out your debt and probably have some money in the bank too.

A student loan is an asset in another perspective, because holding one opens certain doors that otherwise you wouldn't be able to open. But you can't ever sell your degree to somebody else if you don't want it anymore, and that's a problem for college grads working at Starbucks who might actually prefer a debt free life if they feel discouraged and stuck in low wage work. Unfortunately for them, you can't sell your degree, and the debt you used to buy it is nearly impossible to expunge.

The Occupy people have opened a dialogue about wealth in America, but I feel like the discussed is heavily tilted toward  the question of income. Income is the money that comes in the door. Wealth is that money minus the money that goes out the door. Who's in better financial shape? A recent grad working at a job with a $40,000 salary and no student debt? Or a recent grad working the same job for the same income but whose paying $6,000 a year in loan payments? There's a pretty big difference between $34,000 and $40,000, especially in a high-cost city.

I can really easily look up data about income. The U.S. Census Bureau collects it as part of their American Community Survey. I could tell you which cities, and which neighborhoods in cities, have people that earn a lot and which have people who don't. What I can't tell you is how much student debt people in those places have - Census simply doesn't collect it.

That's really unfortunate, because without knowing how much student debt college grads have, it's nearly impossible to know whether the income numbers are truly accurate when assessing how wealthy a city or a neighborhood is. I have some ideas how how this could possibly be modeled, but it would be an estimate at best. In the meantime, I'll keep thinking.
I overheard a conversation earlier in the month by someone who felt frustrated with Easter mass because so many people go and there's not enough parking spaces, so she had to get there extra early for a choice space. A lot of urbanists write about their distaste for laws requiring minimum parking spaces, often arguing that stores, apartment buildings and restaurants have more spaces than they need and would build fewer if the law didn't require them to. Churches are one institution that get a lot less attention.

I went to a Catholic school from Kindergarten through 8th grade. The school was part of a parish that also had a sizable church. It also had a huge surface parking lot (probably 50-60% of the parish's land was set aside for this parking lot).

During recess, the teachers would take the kids outside and we would run around in the parking lot . There were balls and such, so you could play touch football or kickball or foursquare. But there was no playground and no ball field. The public school down the street, on the other hand, had both of these, even though they had about the same amount of total land. I outlined both on this satellite map.

(click to zoom-in)

It never struck me until just recently that my school probably didn't get a proper ballfield or a playground because there was no space - that huge parking lot was deemed as more important use of land.

Why? Probably because Sunday churchgoers argued that they needed a place to park, or else they wouldn't be able to attend services. I suspect, in any case, that many of these churchgoers lived within walking distance of church, but chose to drive because it was so easy (and yes, I'm accounting for the disabled or elderly here). Plus, what about funerals and other occasional events that require ample parking?

If that parking lot didn't exist, motoring churchgoers would have had to park on residential sidestreets, which would have probably upset the neighbors, who might eventually have lobbied the city government to ban all church parking. So in order to appease the right people, the church simply provided as many parking spaces as they could squeeze onto their parcel of land.

Who paid for that parking? The kids did, it seems. 5 days a week, they didn't get to enjoy proper play area so that for 1 day a week there would be sufficient room for church-attending motorists. The kids, of course, had no say in this. Most of them (myself included) never even realized what was going on.

It's just another example of the tradeoffs that have to be made when people demand that something of value be provided unconditionally for "free".

Tax Time

In honor of tax day (which is not officially for two more days), I thought I'd make a brief comment on the complexity of the U.S. tax system. Since I've earned enough money to receive a W-2, I've always done my own taxes. At first I used the IRS's 1040-EZ form, but I've since graduated to the standard 1040 form and I do my taxes online. I'm still amazed how many people, even folks with financial situations no more complex than my own, that spend a non-negligible amount of money to have someone else prepare their taxes.

(from kenteegardin on Flickr)

This is what makes the idea of tax reform is so compelling, in theory anyway. Instead of having to go through pages and pages of questions asking really detailed and personal questions about your life situation, or paying someone your hard earned money to do the paperwork, why can't there just be a single form where you type in my income, withholdings, and be done with it?

Alan D. Viard says tax reform won't happen because it's not a top priority for the voting public. Instead, they're more interested in tax cuts, even within the complex framework. I think that's mostly correct.

From another perspective, tax reform would mean giving up some control over certain aspects of the economy. Like it or not, taxes can be used to drive consumer behavior.

The mortgage interest deduction is a classic example of a tax incentive designed for a very specific purpose: get people to buy homes. Society thinks homeownership is good, so government strives to get more people to buy homes. There are a lot of people who have a strong interest in maintaining the mortgage deduction: homeowners, home builders, contractors, Realtors, etc. So even if tax reform generally isn't a top priority for anyone, it can be easily spun as a tax hike for anyone receiving this deduction.

And this is just one of many examples. I benefited greatly this tax year by the student loan interest deduction. It required keeping track of more documents, and spending more time filling out the 1040, but it was worth it.

So sure, everyone is for tax reform, until you put a price tag on it. Calling tax reform a tax hike is all it will really take to kill it politically.


Amanda Erickson has a really great article over at the Atlantic Cities about Washington DC's efforts to get visitors to branch out from the typical tourist traps and explore the rest of the city.

(from C.M. Keiner on Flickr)

On paper, this sounds great. There's a compelling economic case to be made too - since tourists typically frequent the same attractions and restaurants, there are businesses who don't directly benefit from tourists at all. So while the Hard Rock Cafe downtown probably does 90%+ of its business from out-of-towners, there are some watering holes in DC's neighborhoods who get almost none of their business from visitors. Talk about an untapped market...

Still, tourists often go to unfamiliar cities and they feel intimidated. They want to stick to the tourist traps because that's where they feel safe. So maybe marketing cities and neighborhoods directly to them isn't the best idea. Erickson writes...
But maybe selling neighborhoods straight to tourists is missing the point. The real goal, argues Pat Wheeler of nonprofit Cultural Tourism DC, is to convince locals that the District's history, culture, and ethnic enclaves are worth a visit...

Wheeler's organization hosts regular walking tours of historic D.C. neighborhoods that are aimed not at tourists, but at residents. Part of the idea, she explains, is that the next time participants have out of town guests, they'll remember what they saw and be inspired to take their visitors someplace a little less obvious. And maybe that restaurant or bar will then become a place where the residents themselves will decide to go on their own. In time, they could become the opposite of a tourist. They'll be a regular.
I have to admit, this is so often easier said than done. Too often when friends of this blog come to visit DC from out of town, they make an immediate beeline to the national mall. Yes, they'll let me take them into a neighborhood after the stuff down there has closed for the night, but like a magnet, they're constantly drawn back to those museums and monuments.

The appeal of tourist traps has always fascinated me in a way. Why are people so obsessed with them? When I visit a new city I seek out the hidden gems. I want to go to the places where the locals go, not the places where tradition thinks I ought to go. But I also understand that I'm unique in this regard. I'll keep doing my part in trying to convince my friends there's more to the city than monuments.

Monopolistic Competition

Caitlin Kenney has an interesting video story over at Planet Money about why her wedding dress cost so much money. As someone who will soon be married, I can appreciate this. It's not just clothes, it seems like everything associated with a wedding is wickedly expensive.

According to her research, the cost of producing the dress was about $500 in materials and $200 in labor. She doesn't explicitly mention other indirect costs, like shipping from China, overhead of the retail company that sold it, and other G&A. But let's round that off to an even $300 for argument's sake. Even if the total cost for the dress was $1,000, it was still marked up over 173%!

It seems like a terrible deal, and it would truly be a rip-off if the market for wedding dresses were perfectly competitive. But it's not... The market is monopolistically competitive. In other words, you don't walk into a store, find the first wedding dress in your size and walk out the door with it. Each one has its own style. The reason one costs more than another is because the buyer perceives that one style of dress is more valuable than the others.

Furniture makers are famous (infamous?) for exploiting this psychological cue. It costs roughly the same amount of money to make a couch that's a beautifully dark red color as it does to make one that's a disgusting green-vomit color. The one that looks nice can retail for more than the ugly one. The ugly one was probably made specifically to steer the customer to the higher-priced item.

The same is true for kitchen appliances. Why is a stainless steal range so much more expensive than a plain white one, even for the exact same model with the exact same features? Again, it's because you're paying for the finish and putting them side-by-side on display makes you want to pay more for the one that will actually go into your home.

The wedding dress market probably isn't much different. A 30-second search on the David's Bridal website turns up a number of dresses at the $100 price-point. Of course, I wouldn't be surprised if these were designed specifically to be the "ugly furniture" of wedding dresses, intended to get buyers to want to pay more for the nice looking products.

The other factors that Kenney mentions - signaling and information asymmetry - are reasonable explanations for why people pay so much for wedding dresses. But there's also the question of why the dress ought to be priced at its cost of production? If it cost $1,000 to make and sell the dress, is it a consumer's right to buy it for $1,000?

Retail culture is interesting. We now live in the Walmart/Amazon era were we expect that things will always be priced ridiculously low. We have stopped appreciating what it means for a store to sell something as a "loss leader" and feel entitled to buy it for less than even they paid for it.

Perhaps there's another way to think about this in economic terms. A bridal store is loaded with dresses, but at the end of the day, if the buyer decides there is only one dress in that whole store that she would be willing to buy, and there's no others that she'd be willing to consider, no matter the price; then the market has essentially become a monopoly. She will pay whatever the seller asks for, even if the mark-up is through the roof.