Friday, August 31, 2012

Two Interesting Papers From NBER

I noticed a couple of interesting working papers on the National Bureau of Economic Research (NBER) website. The first (NBER Working Paper No. 18075) has to do with how changes in housing wealth affect college choice. You might expect that as the value of a family's home grows, the more likely that family is to send their child to a better (and more expensive) school. Indeed, Michael Lovenheim of Cornell University and Lockwood Reynolds of Kent State University document that for every $10,000 increase in housing wealth, the probability of attending an elite public university increases by two percent. Furthermore, they found that the effect is strongest for the lowest income homeowners. However, their study was limited to the 1993-2003 time period, which is well before the housing bust began. It would be interesting to see what has happened to college choice now that so many homeowners are under water on their mortgages. It would also be interesting to see what is going on at the very expensive elite private universities. I suspect only the very poor and very rich are able to attend these kinds of schools. The very rich, of course, don't really care how high tuition goes. They are more than happy to write a big check to send Johnny to a top school. As for the poor, they are eligible for all kinds of grants. (Harvard, for example, waives tuition for students coming from families that make less than $60,000 per year). As is usually the case, it is the middle class that gets squeezed. They are considered too well off to qualify for grants, yet they are not well off enough to be immune to the pain of writing a large tuition check.

The second paper (NBER Working Paper No. 18035has to do with how recent recessions have affected the income of the wealthy. Conventional wisdom says that the wealthy are immune to recessions. No matter what happens, they continue to roll in the big bucks. Indeed, the authors, Fatih Guvenen, Serdar Ozkan, and Jae Song argue that in past recessions, lower income individuals suffered larger drops in income than did the very rich. They find, however, that just the opposite occurred during the most recent two recessions. I suspect the authors' findings may be related to sources of income. For example, the very rich are more likely than the poor to generate a substantial amount of income from interest, dividends, and capital gains. The most recent recessions, of course, have decimated investment income. With interest rates so low, interest income has all but disappeared; and income from dividends have not made up for large capital losses. Some people might applaud the low interest rate environment and the toll it is taking on wealthy savers. They should not rejoice. Low interest rates punish every saver (rich or poor) who is trying to plan for the future.