Millennials should stop moaning – Why Osman Faruqi is wrong

Unfortunately for Koukoulas the issues with his piece don’t end at the mischaracterisation of milk.

Koukoulas’ piece is a disappointing contribution to the growing debate around the economic well being, or otherwise, of Gen Y because it isn’t really backed by any facts.

He kicks off by arguing: “I would hazard a guess that when today’s Gen Y turn 50, 60 and 70, they will have a living standard that will exceed today’s Gen X and baby boomers”. Which is an interesting thought, but sadly he doesn’t back it up. He doesn’t even attempt to justify it, it’s just his gut feeling. In fact the article that’s hyperlinked in that sentence is a story about how Gen Y is being royally shafted by current economic policy settings that completely contradicts his assertion.

Which is why I was ‘hazarding a guess’, but it was an educated guess. Work done for the most recent intergenerational report confirmed a number of wealth effects that are likely to be experienced by the Australian population over the next 40 years. That is, when someone 30 years old today turns 70 they are likely to be better off than people today. It was an educated guess backed by the work of the Treasury. Faruqi is therefore wrong.

Koukoulas focuses on two main factors to compare how well off Gen Y is compared to previous generations: education and housing.
He states: “Today, about 15% of young people get a university education. Sure they have to pay for it, but the trade-off between no tertiary education and a low-skilled job versus a small fee and wonderful career opportunities is one that is easily calculated.”

Basically he’s saying that because more of us have degrees we’re better off. It’s a very weird argument coming from an economist because “having a degree” is a pretty subjective metric in terms of quantifying someone’s level of economic security. For example, the value of an engineering degree during a construction and mining boom is significantly more than a media degree at a time of global media contraction. To argue that because more Millennials “have degrees” we’re all better off is lazy and simplistic.

This is really embarrassing for Faruqi who is by the comment blissfully unawarwe of the mountains of research that show, without equivocation, the link between educational attainment and incomes. Put “positive correlation between education and income” into Google and there are over 500 million links, including 2.34 million links to scholarly articles on topic. I assumed readers knew this correlation it was so obvious – expect for Faruqi.

Let’s look at some numbers. When student fees were first introduced in 1989 the cost of a law degree was about $8,000. These days it’s more than $40,000. Even accounting for inflation, the real cost of many degrees has more than doubled since fees were introduced. Koukoulas can call it a “small fee” but tens of thousands of dollars of debt is a genuine financial burden — particularly when you consider education was substantially cheaper and even free for previous generations.

Yes, it is a burden for many which is why some of us have worked to stop uni fee increases being too prohibitive and at the end of the article I note “Young people today are facing significant financial challenges, but this is not a new story. Progressive policy makers have, over the past four decades, looked at sustainable ways for the population to have the best possible access to education…”

A better way of actually measuring the prospects of people with degrees is to measure graduate unemployment. Last year graduate unemployment hit its highest rate ever recorded.  (Source? Is that made up?)
A third of graduates struggle to find full time work after job hunting for four months. (What was the figure that baby boomer graduates faced? Is it any worse?) It’s an extraordinary figure and it shows the graduate job market is tougher now than it was during the 1992 recession. (No it doesn’t necessarily – what are some historical benchmarks?)

Graduate incomes are also declining. (Falling incomes – come off it Faruqi– source?) Starting salaries for university graduates are currently the lowest ever recorded. (Egad!  “Lowest ever recorded salaries”!  Source?)

The is a lot of assetion and hyperbole in this mish-mash of claims from Faruqi.

It’s odd that Koukoulas completely skates over the vocational education sector, which trains approximately twice as many Australians as universities do. The slow, steady destruction of TAFE has been well documented. Student numbers are collapsing while fees are being doubled and even tripled in some cases. In NSW alone 83,000 fewer students were enrolled in TAFE in 2015 compared to 2012. If you’re analysing the educational fortunes of Millennials, it’s very strange to just skip over the decay of TAFE.

TAFEs are an important aspect of education and training – I am not sure how Faruqi’s comments here add of subtract to the points I was making.

Whether you’re looking at universities or TAFE, young people are paying more to study than ever before, entering a tougher job market than ever before and earning less money than ever before. It’s hard to align these facts with Koukoulas’ “gut feeling”.

Where is that quote of a “gut feeling” from? Not my article where I never use the phrase.  I actually cite year 12 and university rates over many decades and unemployment rates over many decades. Faruqi is venting his own made up, pretend  feeling about issues without a scintilla of evidence.

The cherry on top is that Koukoulas wants Millennials to “thank” baby boomers for apparently “voting for more university places”.

No where do I want Millennials to “thank” baby boomers for anything – Faruqi making up quotes from me again. Is that three of four? I am losing count. Sloppy work.

It’s not really clear what he’s talking about but my guess is he is referring to the policies introduced by the Labor government in 2012 to introduce “demand driven funding” that significantly expanded university access. Given the policy wasn’t taken to a referendum, and in fact the Gillard Labor government lost the next election in a landslide, I’m not sure how you can draw the conclusion that baby boomers specifically voted for this policy outcome.

When looking at education policies that have boosted university places, Faruqi goes all the way back to 2012. He missed the point for the umpeenth time in his blog post, and in doing so ignores the reforms of Menzies, Whitlam, Hawke and Keating which were pivotal is driving up university places and opportunities for millions of people. This is a humiliating misunderstanding from Faruqi of how policies have changed to bring about the fantastic increase in university places over the past 3 or 4 decades. Perhaps that lack of context explains Faruqi’s whole misunderstanding of the issues in my original article. 

On the other hand, we know that baby boomers have continuously voted for governments that have steadily increased fees and cut funding to both universities and TAFE over decades.

Perhaps the weirdest bit of the whole article is Koukoulas’ attempt to twist numbers to suggest it’s actually easier for young people to buy a house now than it was in the 1970’s. His argument is that since interest rates are lower now, the fact that capital cost of property has increased substantially is irrelevant.

Again, here are some facts: In 1982 more than 55 per cent of Australians aged 25–34 owned a house. In 2011 that figure collapsed to 34 per cent. A raw drop of 21 per cent. Meanwhile the percentage of 65+ year olds who own a home actually increased by 6 per cent over that same period.

Faruqi has his facts mixed up yet again. In other words, wrong. In the early 1980s, 60% of 25-34 year olds owned a house, the number has dropped to about 48% in 2012 – see Graph 5 of the RBA article linked. Faruqi fails to note that home ownership of 15 to 24 year olds have increased since the mid 1990s from 21% to 24%, but has dropped for every age cohort.

As the RBA article notes, demographic and social factors may have had an influence (people like renting because the relative cost is lower), or issues relating to the provision of public housing and the taxation of housing. 

If it was so much easier to buy a house the numbers would show that to be the case. (No – see above). Instead the numbers show the opposite. As pretty much everyone (except Koukoulas, it seems) knows housing affordability is a massive, massive issue.

Koukoulas cites Reserve Bank of Australia (RBA) research that apparently justifies his argument that interest rates, not housing prices, are the real factor when it comes to affordability. But here’s what that RBA research actually says: “Of the possible economic causes of declining home ownership rates among younger households, the most obvious would be the sharp rise in housing prices in Australia since the mid 1990s”

Ok so that directly contradicts Koukoulas. “The rise in housing prices since the mid 1990s has contributed to declining home ownership rates among younger households.”

As noted above, Faruqi cheery picks one possible reason and igores the RBAs other findings that home ownership could be lower because of a trend “towards latter marriage and family formation … [which] … would be expected to reduce home onwnership rates”. It adds, “Over recent decades there has also been an increase in the prevalence of single adult households, particularly single-parent households, in part driven by significantly higher divorce rates since the 1970s. This trend is also likely to have weighed on the home ownership rate, as single adult households have a much lower tendency to own their own home.” So not just house prices but social and demographic issues – damn those facts!  

Faruqi failed to read the next page where the RBA made the point that “housing affordability, measured as the share of average household income required to service a loan on a median-priced dwelling, has continued to cycle between 20 and 30 per cent, and is currently well below previous peaks.”

Which was my point exactly.

Here’s some other factors that the RBA thinks are creating affordability issues: “An increase in income inequality over recent decades… leading to increased borrowing capacities for households with high home ownership propensities, which will tend to have advantaged older households over younger ones.”
“The shift from traditional rules of thumb based on debt-servicing ratios for assessing mortgage serviceability to more sophisticated net income surplus models, and elsewhere, probably had the effect of advantaging higher-income earners (lower-risk borrowers), who are often older.” Basically every assertion Koukoulas makes about housing is demolished by the RBA research paper he links too.

I think there’s a risk in over-egging the whole “generational war” theme developing in Australia, and Osmond Chiu has put that case well here. But when an economist publishes inaccurate and sloppy assertions in a highly respected publication, it’s worth responding. The economic issues facing Millennials are much more complex than “Argh baby boomers!”, but clear, generational disadvantages are emerging.

When a middle-aged and economically secure bloke like Koukoulas emerges to lecture young Australians about how good we have it, and demonstrates his deep, deep lack of knowledge about the basics of coffee consumption, we should point, laugh and then cry. Because even though he’s so very wrong, he probably owns a house and we never will.

My article was not a lecture to young Australians, but was merely making a point that, as the article noted and sorry to repeat it, but “Young people today are facing significant financial challenges, but this is not a new story. Progressive policy makers have, over the past four decades, looked at sustainable ways for the population to have the best possible access to education, housing and retirement savings. Everyone, young and old, has benefited from these policies and it is vital that policy settings do not hinder progress in these areas.”