September 22, 2023

Economix Blog: Nancy Folbre: The Once (but No Longer) Golden Age of Human Capital

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

Only slightly more than half of college presidents (54 percent) believe that a bachelor’s degree is worth more or a lot more than five years ago, according to a recent survey conducted by the Chronicle of Higher Education.

A majority of Americans (57 percent) say the higher education system in the United States fails to provide students with good value for the money they and their families spend, according to a recent survey by the Pew Research Center.

Today’s Economist

Perspectives from expert contributors.

It seems that the golden age of human capital is losing its shine.

That shine came not just from a high rate of return (both individual and social) on a college degree, but also from a beautiful, if partial, alignment between ideals of human development and the needs of employers.

It was a happy alignment, not just for college professors and their students, but for the soul of capitalism itself. Academic striving would be rewarded. Merit would prevail. Students willing and able to invest in their own abilities had a good shot at permanent prosperity.

Not anymore. Problems are particularly conspicuous on the supply side: declining state support, higher tuition and fees, increased inequality of access and the growing burden of debt. The investment costs more than it once did and remains beyond the reach of those who need it most.

Problems are also increasingly apparent on the demand side: high unemployment and underemployment rates among college graduates.

Historical data suggest that investing in college still offers significant economic benefits to those who actually complete their degree requirements and find employment (especially if they enjoy parental support or generous financial aid).

But private rates of return have begun to decline. Uncertainty about future benefits lowers the expected dollar value of a degree. Rates of return differ widely by personal characteristics, the institutions students attend and the majors they choose.

In their highly respected economic history, “The Race Between Education and Technology,” Claudia Goldin and Lawrence Katz contend that the demand for college-educated workers began to outstrip the supply in the United States about 1980. Since then, the college premium, or difference in lifetime earnings between those with degrees and without, has increased.

But in the 1990s the global supply of college-educated workers burgeoned and large American corporations improved their ability to use skilled labor in other countries. As the economist Richard Freeman points out, developing countries have invested heavily — and successfully — in their higher education systems. In 2005 Chinese universities awarded five times as many bachelor’s degrees as they did in 1999.

This global expansion of the educated labor force is likely to put downward pressure on the college premium in the United States.

Another possibility is that the demand for highly educated workers has changed shape in recent years. With vast improvements in information technology, employers may now seek a small number of specialized, technically trained experts rather than a large number of versatile, diversified liberal arts graduates.

Certainly students are now encouraged to think more strategically about their majors and to specialize in more technical fields. This is good financial advice, but it won’t guarantee success. Unlike financial capital, which can be easily moved from one investment to another, investment in human capital represents a sunk cost.

If more and more students pile into science, technology, engineering, and mathematics, the wage premiums for those majors could decline. With a high rate of technical change and continued globalization of labor markets, some students could also find their specialization obsolete. Someday soon there will probably be an app for writing apps.

The evolution of the global human capital market has momentous political implications. Like many Democrats, President Obama is bullish on human capital. He favors increased public investment in education, ranging from early childhood to post-secondary programs. The assertion that such spending will generate a high individual and social rate of return is based on the optimistic expectation that demand for better-educated workers will remain strong.

On the other hand, many critics of public-education subsidies are bearish on human capital. The economist Richard Vedder, for instance, warns against both private and public overinvestment in education, pointing to the growing tendency for college graduates to land in jobs that don’t actually require the credential they hold.

If the bears are right, we may be moving toward a stage of capitalism less dependent on a growing supply of home-grown human capital. In that case, many of those bullish on higher education investments in the United States could end up as red meat.

Those who believe, as I do, that education has intrinsic value both to individuals and to society as a whole should reconsider their habit of relying on market-based private rate-of-return rhetoric.

Rather than bowing to market forces, an intelligent, well-educated citizenry would bend those forces toward better ends, including the best possible development of human capabilities.

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Mortgages: Financing for Foreigners

During the financial crisis, risk-wary lenders were less likely to extend financing to foreigners. The pool of lenders offering such financing is still limited, but their foreign loan business is up.

HSBC, the multinational bank based in London, reports that its volume of home loans extended to foreign borrowers in the United States has tripled since 2010. “It’s just the ability to get that money at such a low interest rate that is really driving all these applications,” said Joe D’Alessio, an HSBC mortgage consultant who works with high-net-worth clients.

With a presence in 81 countries and territories, HSBC has a big appetite for foreign customers and offers some of the most attractive mortgage terms. Financing is available for up to 70 percent of the purchase price, up to a maximum of $3 million.

Interest rates tend to be slightly higher on loans to foreigners, Mr. D’Alessio said, but the rate on a five-year adjustable mortgage is still in the mid-2 percent range.

HSBC’s terms are stiffer on apartments in buildings that are nonwarrantable (meaning they don’t meet Fannie Mae’s financing guidelines). In these cases, the bank may require 50 percent down.

“But that doesn’t seem to deter buyers,” said Mr. D’Alessio, who has worked with clients from Britain, Hong Kong, Turkey, Japan and Brazil. “They are usually coming and looking for all-cash deals. Then they find out they can borrow, and so they take advantage of it.”

Borrowing also gives foreigners more buying power. Some choose to “buy a larger property that might have a higher rate of return in the next few years,” he said.

Foreign interest in investing in New York is driven in part by the perception that property here is a bargain compared with that in other global cities, said Ace Watanasuparp, the president of DE Capital Mortgage, an affiliate of Wells Fargo.

A recent report by Knight Frank ranked New York the eighth-most-expensive city for residential property. Going by average price per square foot, New York has an edge over Monaco, Hong Kong, London, Geneva, Paris, Singapore and Moscow. The report notes that growth in high-quality housing in New York is also a draw.

Through Wells, DE Capital offers financing for foreign buyers, but the program is “not an aggressive one,” Mr. Watanasuparp said. Loan amounts are capped at $1 million, and borrowers must put at least 40 percent down.

First Choice Loan Services, a subsidiary of First Choice Bank, has seen an “uptick” in inquiries from foreign nationals in the last few months, according to Jason Auerbach, a divisional manager. The company will lend foreigners up to 65 percent of the purchase price. But such loans are carefully scrutinized by the bank before approval.

“We will also generally ask them to keep a small escrow account with us so we feel that we are definitely protected,” Mr. Auerbach said.

Other lenders that work with foreigners include the Bank of Internet and Apple Bank.

Still, currency remains king for many foreign buyers. Alen Moshkovich, a sales agent with Douglas Elliman Real Estate, says the vast majority of the foreigners he works with — most recently buyers from Brazil, Russia, China, Venezuela and Israel — continue to pay in cash.

For the superwealthy, any savings obtainable from financing is insignificant, Mr. Moshkovich said. More important, he said, “cash gives them more purchasing power, in terms of negotiating deals, and a quicker closing.”

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Wealth Matters: An Investment Firm, Evercore, Offers Clients Honest Returns

Sure, the 12 percent returns of Bernard L. Madoff proved ephemeral and the financial crisis lowered investors’ expectations. But 3 percent? Maybe less? That certainly seems to be a meager return, particularly given the stock market’s fast start this year.

Yet this was the pitch I heard when I met Jeff Maurer, chief executive of Evercore Wealth Management, and John Apruzzese, Evercore’s chief investment officer. They formed the firm four years ago with several former executives from U.S. Trust. I joked with them that offering such measly returns did not seem to be a good way to win new business.

“We don’t win every client we pitch,” Mr. Apruzzese said.

It turns out, though, that these low returns do not come from poorly performing investments. The firm is simply being honest. That 3 percent return includes projections on performance of many types of investments but also assumptions on tax rates, inflation and fees — both theirs and those of the outside managers they use.

“One of our key principles was transparency on fees, which has hurt us,” Mr. Maurer said. “Another was how we talked about what could happen in a downturn, which has also hurt us.”

Mr. Maurer said his firm preferred to say that there was a chance your portfolio could go down 25 percent, instead of trying to attach a probability to its happening. Saying there was a 1 percent chance, he said, was misleading because the chance of a market collapse like the one in 2008 was small. But it happened nonetheless.

Fees, of course, are a constant source of friction in investing. If you are the type of person who believes it is impossible to get better than the market rate of return, then you probably believe that the lowest-fee index fund or exchange-traded fund is the way to go. On the other hand, if you are the type of person who believes that managers can get returns higher than the market average, you may be willing to pay higher fees, calculating that the net return will be better or at least the swings in the investments’ value will be less volatile.

What piqued my interest was that Mr. Maurer and Mr. Apruzzese made a point of disclosing all the charges, even the ones investors would not see. With that knowledge, investors could understand what those fees were doing to their portfolios’ returns.

So I asked to come back and play a prospective client to see how they revealed the fees. For the record, I was not assessing the quality of their advice or their offerings but how they presented likely returns, warts and all.

Evercore manages $4.7 billion and has an average account size of $10 million, so the firm serves a rarefied niche. Most of its clients also have the bulk of their wealth in taxable accounts and not in tax-deferred retirement accounts, where the money is taxed only when it is taken out.

But regardless of their wealth, all investors would benefit from asking their advisers to subtract not just their management fees, as most already do, but the fees in the investments themselves. Investors would also benefit if their advisers factored in inflation and any probable taxes. At the very least, this would give a sense of the real return and help investors be more realistic in their planning.

For the purpose of the meeting, Mr. Maurer and Mr. Apruzzese created a fictional me who resembled a typical 40-year-old client of theirs. The fictional me began his career at a top-tier consulting firm and is now an executive at a financial firm. He earns $500,000 a year with a $500,000 bonus. He has company stock worth $1.5 million with a lot of embedded capital gains and he inherited $4 million in 2010. He has a $500,000 mortgage on a $2 million house. His goal is to retire at age 60.

Mr. Maurer said this typical client would probably arrive with over half of his $10 million portfolio in cash and municipal bonds and another 20 percent in retirement accounts. Only about 10 percent would be invested in equities other than the company stock.

Mr. Apruzzese walked me through the six baskets the firm uses for thinking about how money is invested: cash, defensive assets (municipal and taxable bonds), credit strategies (high-yield bonds, mortgage-backed securities), diversified market strategies (commodities, foreign bonds, liquid alternative investments), growth assets (stocks) and illiquid alternatives (private equity, venture capital).

This was a fairly standard approach. Advisers generally aim to divide up a portfolio in ways that investors can understand, regardless of their level of financial sophistication. Another popular way is to put money into fictional buckets for specific needs, like current expenses or charity.

For me, the firm presented three investment options — capital preservation, balanced and capital appreciation, which could be translated as conservative, moderate and aggressive portfolios. Mixing the six baskets together for each objective generated pretax, after-fee returns of 6.1 percent, 7 percent and 8.2 percent a year, with maximum losses of 15 percent, 25 percent and 35 percent, respectively. The projections were for the next decade.

I selected the balanced portfolio, and Mr. Apruzzese showed me how taxes reduced the solid 7 percent return to 5 percent, by factoring in long- and short-term capital gains at the highest federal rates. Inflation of 2 percent knocked it down to 3 percent. (The capital preservation portfolio fell to 2.3 percent, while the capital appreciation portfolio ended up at 3.9 percent.)

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Loose Ends: Powerball!

“There are three ways to make a living in this business,” says Jeremy Irons, playing a Wall Street C.E.O. in “Margin Call.” “Be first, be smarter, or cheat.”

Now there is a fourth: Powerball.

Last week, the chance of winning the biggest lottery in Connecticut’s history was one in 195,249,054 — about the odds of Herman Cain’s winning the Republican nomination for president. But when three executives at Belpointe Asset Management in Greenwich, Conn., bought a $1 ticket in the Powerball lottery, it became, overnight, $254.2 million.

The winners elected to take a lump sum, giving them $151.7 million and a tax bill of about $48 million. That’s $34.6 million per winner. And yet Timothy C. Davidson, Brandon E. Lacoff and Gregory H. Skidmore didn’t look happy about their astronomical rate of return when, as mandated by Connecticut law, they appeared at a news conference holding a giant check made out to Jackpot Winner.

Why so glum? It’s not hard to identify reasons for their distress.

First, personal embarrassment. They knew that media reports would lead with lines like this one from The New York Times, “The lottery is full of rags-to-riches tales. Now the 1 percent has its own feel-good story.” And the thing of it is, in Greenwich they’re not 1 percenters. In a haven where many have had Powerball wealth and then some for decades, there are, a longtime resident told me, three kinds of money. “There’s ‘world money,’ which lives in houses that start at $20 million. There’s ‘Wall Street money,’ which means, ‘I’ve got $10 million.’ And there’s ‘I’ve done well money,’ which lives in houses that cost less than $7 million. That’s these guys.”

Worse, these oh-so-few millions have created unwanted transparency. The trio has given no interviews, but they don’t have to; a few minutes with Google and Google Earth will tell the curious, the envious and the resentful more than Greenwich’s wealthiest would like them to know. And not just about these men.

A few years ago, Belpointe developed Beacon Hill, “the first guard gated town community in downtown Greenwich.” These 16 stone-and-shingle homes, set on 1.75 acres, are massive by non-Greenwich standards. In their 4,400 square feet, you’ll find as many as five bedrooms, 10-foot-high ceilings, white oak floors, wine cellars and “tasting” rooms, plus the obligatory exercise room. A calculator on the Web page saves you the trouble of wondering if you can afford to live here. Put down 20 percent of the $2,595,000 purchase price, take a 30-year fixed-rate mortgage at 5 percent, and your bank will want $11,344 a month from you.

These are not numbers that will endear Greenwich to many in the 99 percent. And remember, this is Greenwich at the low end. Let your fingers do some walking down Round Hill Road, and you’ll find yourself taking a virtual tour of a “livable scale” home with a 70-foot marble reflecting pool and fountain in the courtyard, an 86-foot great hall and a 52-foot indoor pool. Price: $42,900,000. And, surely, there are better.

Pity the Powerball winners. There are, as they know well, many asset managers who have “one large” — a billion dollars — to invest. Belpointe has $82 million. Collectively, the winners are worth more than their employer. And yet, in Greenwich, they’re schmoes.

But would the barbarians at the virtual gates listen to the facts? Sadly, no. Occupy Greenwich could so easily follow.

Jesse Kornbluth is the editor of

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Bucks: Best Advice Is to Stop Losing Money

Carl Richards

Carl Richards is a certified financial planner in Park City, Utah. His sketches are archived here on the Bucks blog and on his personal Web site,

I’m more convinced than ever that Mark Twain was correct when he decided that he was more interested in the return of his money than the return on his money.

A couple of weeks ago, we discussed how often people in their 60s and 70s say that their primary residence of over 30 years was their best investment. This belief exists despite the fact that home values barely kept pace with inflation. How can this be, given that during the same time period average annual returns in various stock market indexes ranged from 8 to 13 percent?

Because for most people, it was the only investment that didn’t lose money!

While the same outcome may not apply to housing in recent years, the principle still applies to investing in general. Most of us are chasing the highest return, because that’s what investing is all about, right?

But the experience of many people has been that the well-intentioned search for the best investment actually cost them money. They bought at the peak and sold at the bottom, and their overall returns ended up being meager. I suspect lots of these people would gladly trade their actual experience over the last decade or more with simply having their money returned to them.

So, what if the key to investment success is to start by making sure that you don’t lose money? Could it be that accepting a lower rate of return might result in having more money than continuing the wild goose chase of this magical 10 percent we hear that the stock market delivers over time?

Part of the problem is that we focus on the wrong thing, like finding the very best investment or beating a particular stock market benchmark. Both are a wild goose chase. Having the money for a dignified retirement, however, is not. By setting real financial goals, we can quit chasing investment performance and focus instead on creating a plan for the future that makes sense.

Once a plan is in place, it may very well be that the best thing we can do with our investments is to simply not lose money and take the time and energy we were spending in the chase and focus on those things that we have more control over. Things like finding creative ways to earn or save more, or just enjoying the one life we have to live.

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