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Americans Hold Over $4.1T in Consumer Debt

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Re: Americans Hold Over $4.1T in Consumer Debt

#171

Post by slededit »

HarryHirsch wrote: post #150
ericd wrote: post #121

Earlier quoted context omitted.

Yep, your main point that economics' rational man is a complete fiction is absolutely correct.

He's a convenient fiction though. Since to homo oeconomicus a certain expense of USD 500 and the 50 % chance of a USD 1000 expense are the same, expect him to be rolled out to sell you high-deductible health insurance and health savings accounts. H. oeconomicus is the model human, consequently he isn't cashflow constrained, and the fact that HSAs double as tax shelters for the wealthy doesn't concern the Ideal Man ei…

> University economics is a religion, not a science

That's a bit harsh. Is every field that employs simplified approximations of complex systems a religion as well? With that definition even physics is out and that's one of the more concrete sciences.

Re: Americans Hold Over $4.1T in Consumer Debt

#172

Post by razorunreal »

uiri wrote: post #72
cylinder wrote: post #63

Earlier quoted context omitted.

The loan is a liability, the degree is the asset. If the degree is unable to land the person a job, or the earnings of the job over the career do not stack up to the price of the degree, then it is an "upside down investment" just like a house with negative equity.

A house isn't an investment either though. An investment is an asset which is expected to go up in value faster than inflation. Housing prices track inflation. This is, on average, generally true; I'm not talking about a specific local market here. In order for something to be an investment, it must generate a return. After transaction costs, property taxes and other upkeep expense, the RoI of real estate is not grea…

An investment isn't necessarily something that is expected to go up in value, it is something that is expected to make you money. If I buy a house and rent it out, and the value of the house also tracks inflation, it made me money through rent. If I owner occupy I receive that money in the form of lower expenses, but that's just details.

Similarly, if my education increases my lifetime earnings by more than it cost me then it is a good investment, regardless of where in my career I make that return. The idea that my education must increase in value over my career in order to be considered an investment is very, very strange.

You can argue that these investments are frequently bad, but it doesn't make sense to argue they are not investments.

Re: Americans Hold Over $4.1T in Consumer Debt

#173

Post by uiri »

snowwrestler wrote: post #112
uiri wrote: post #72

Earlier quoted context omitted.

A house isn't an investment either though. An investment is an asset which is expected to go up in value faster than inflation. Housing prices track inflation. This is, on average, generally true; I'm not talking about a specific local market here. In order for something to be an investment, it must generate a return. After transaction costs, property taxes and other upkeep expense, the RoI of real estate is not grea…

When you buy a house, your investment basis is not the total value of the property. It is the cash outlay you make to acquire the property: the down payment, plus the delta between your monthly payment and the rent on an identical property (since you've got to live somewhere). For most people this is a lot less than the total value of the property. Which means that even if the property only appreciates at the rate of…

If your investment basis is your cash outlay you make to acquire the property, then you should only count the value of the house minus the value of the mortgage as an asset on your balance sheet. Chances are, you will count the whole value of the house as an asset on your balance sheet and the mortgage as a liability so your basis in the house is the total value of the property plus the interest you pay over the lifetime of the mortgage - this is greater than the total value of the property. The rent expense on an identical property is offset by commuted rent income due to occupying the property instead of renting it out.

If the interest rate on the mortgage is equal to inflation, then you will realize the same gains on the house as if you put the downpayment in an interest bearing account at that same interest rate. This is before accounting for transaction costs, property taxes, upkeep, etc. If the mortgage rate is lower than inflation then you will have a larger gain and if the mortgage rate is higher than inflation then you will lose money.

-----

The increase in earnings will be largest when you have 0 years of work experience and smallest when you have 40 years of work experience. In this sense, the value of the degree diminishes over time as the value of your work experience increases.

Alternatively, you can do a discounted cash flow analysis on this increase in lifetime earnings to get the present value of the degree - you could do this while still in school, at graduation or partway through your career. Arguably, if you do this analysis partway through your career, you should include the increases in earnings already realized in which case the value of the degree will likely remain static or drop slightly over time. Regardless, the value of the degree will not go up over time.

The value of the actual education itself to a career is usually lower than the value of a random (as in random access) sample of 4 years of work experience. However, the value of the education & degree to getting the first, second, and perhaps even third job is non-negligible.

Re: Americans Hold Over $4.1T in Consumer Debt

#174

Post by IshKebab »

tzakrajs wrote: post #32
IshKebab wrote: post #24

Earlier quoted context omitted.

Does America really have low wages? Granted, the lack of a minimum wage is crazy, but the median household income is $56k. Compare that to £23k in the UK.

Are suggesting that the US does not have a minimum wage?

I assumed so given all the comments I've read about people getting paid $2/hour. I stand corrected!

Re: Americans Hold Over $4.1T in Consumer Debt

#175

Post by snowwrestler »

jimmywanger wrote: post #138
snowwrestler wrote: post #112

Earlier quoted context omitted.

When you buy a house, your investment basis is not the total value of the property. It is the cash outlay you make to acquire the property: the down payment, plus the delta between your monthly payment and the rent on an identical property (since you've got to live somewhere). For most people this is a lot less than the total value of the property. Which means that even if the property only appreciates at the rate of…

> Which means that even if the property only appreciates at the rate of inflation, your investment will grow faster than inflation. Incorrect. You're also paying interest on the loan, which is usually pretty close to inflation. No matter how you slice it, you're pretty close to breaking even. Also, you're not getting paid interest on the cash outlay you make the acquire the property, which is another loss. > Voila: t…

When you rent, you are also paying interest on a loan--just not your loan. Unless you think that only 100% paid-for properties are rented out, or that property owners rent out their property for less than their own monthly payment.

Yes leverage is just a tool. The point is, a mortgage creates leverage and it's silly to ignore that when thinking about return.

> The longer you go in your career, the less people care which school you went to because you have a work history that people can use to more accurately judge your productivity.

This is speculation by you. Again: note how many resumes keep college on them.

> For most jobs, if you've already worked in the industry for 10 years, the salary you'll receive is roughly the same with and without a college degree, and the difference is even less between "good" and "bad" colleges. The earnings over career is a red herring, where right out of college, you get an initial salary boost.

This is self-contradictory unless you think that salaries for people with degrees grow more slowly than for people without degrees.

Re: Americans Hold Over $4.1T in Consumer Debt

#176

Post by CPLX »

FullMtlAlcoholc wrote: post #157
CPLX wrote: post #155

Earlier quoted context omitted.

Your argument is nonsensical. Your scenarios have differences in risk. Transferring risk from one party to another is the entire basis of our financial system. To assume risk is irrelevant in step one is to fundamentally misunderstand how economic decision making works.

You are missing the greater point. I agree with you. Before Prospect Theory, economists did assume risk was irrelevant and that one would choose either A or B for both. That even a layman would find it nonsensical is exactly my point. I should've put rational in quotes to show sarcasm or followed rational with "defined by economists at that time"

> That even a layman would find it nonsensical is exactly my point.

I have a degree in economics and both my parents are professors of economics, so I have some perspective on this. Economics as a discipline has never really been confused about risk in the way you describe.

Re: Americans Hold Over $4.1T in Consumer Debt

#177

Post by narrowrail »

tradersam wrote: post #145
MomentarySanity wrote: post #99

Earlier quoted context omitted.

We have a minimum wage. It's $7.25/hr at the Federal level, so that's the baseline.

I don't know why you're being downvoted, this is accurate.

The idea that this was ever downvoted at all is very strange. What is happening to HN?

Re: Americans Hold Over $4.1T in Consumer Debt

#178

Post by IshKebab »

angry-hacker wrote: post #101
bdcravens wrote: post #89

Earlier quoted context omitted.

> you'd need to adjust for the benefits you get from your government/employer (Health insurance) for a fair comparison Indeed. My out of pocket for medical care this year is $19k (and that's with one of the "gold" plans)

But how much is it compared to your salary? I pay 33% of my income just for Healthcare. Or well, government just takes it :)

Where? UK is 0-10% of taxable pay depending on how much you earn.

Re: Americans Hold Over $4.1T in Consumer Debt

#179

Post by snowwrestler »

uiri wrote: post #173
snowwrestler wrote: post #112

Earlier quoted context omitted.

When you buy a house, your investment basis is not the total value of the property. It is the cash outlay you make to acquire the property: the down payment, plus the delta between your monthly payment and the rent on an identical property (since you've got to live somewhere). For most people this is a lot less than the total value of the property. Which means that even if the property only appreciates at the rate of…

If your investment basis is your cash outlay you make to acquire the property, then you should only count the value of the house minus the value of the mortgage as an asset on your balance sheet. Chances are, you will count the whole value of the house as an asset on your balance sheet and the mortgage as a liability so your basis in the house is the total value of the property plus the interest you pay over the life…

The balance sheet entries for a home are the current market value of the property as an asset, and the current payoff value of the mortgage as a liability.

Mortgage interest doesn't go on the balance sheet because it is an expense, not a liability. Other property expenses include property tax, insurance, upkeep and maintenance, repairs, etc.

These expenses do not magically disappear just because a property is a rental. If you are paying rent, you are paying all these expenses, unless your landlord is purposefully losing money on you.

I'm not here to claim that buying a home with a mortgage is the best investment for everyone. That depends on the particulars of each situation. I'm just challenging the notion that buying a home is not an investment.

People buy homes because they expect to get a return, and most do. Same with education. If your analyses comes to the conclusion that that is not possible, then you need to check against the data actually coming out of the economy.

Re: Americans Hold Over $4.1T in Consumer Debt

#180

Post by FullMtlAlcoholc »

slededit wrote: post #171
HarryHirsch wrote: post #150

Earlier quoted context omitted.

He's a convenient fiction though. Since to homo oeconomicus a certain expense of USD 500 and the 50 % chance of a USD 1000 expense are the same, expect him to be rolled out to sell you high-deductible health insurance and health savings accounts. H. oeconomicus is the model human, consequently he isn't cashflow constrained, and the fact that HSAs double as tax shelters for the wealthy doesn't concern the Ideal Man ei…

> University economics is a religion, not a science That's a bit harsh. Is every field that employs simplified approximations of complex systems a religion as well? With that definition even physics is out and that's one of the more concrete sciences.

At times it does appear to be a religion because of the cult of personality that proliferates (remember the Greenspan years?) and, most significantly, the blind faith and slavish devotion to free markets being a solution to everything.

What I find most off-putting are those who advocate for wholesale changes in our society on little more than hypothesis and faith instead of running experiments starting at the smallest reasonable scale and then successively working your way up from that.

It should at least pretend to try to applying basic scientific methodologies to its practice.Psychology has evolved to being a rigorous, evidence based social science. That psychology is not one of the foundations of studying economics is also problematic too.

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