The justification behind this is that the Phillips curve appears to have become quite flat.  As a result, stronger demand need not drive up inflation by much – suggesting we have a situation where, even with relatively low unemployment, inflation expectations are strongly anchored. 

Why has Phillip’s curve flattened?

The flatness of the Phillip’s curve could have a number of reasons – which would have different implications for policy.

One possibility could be a mismeasurement of unemployment rate – for example those who are considered out of labour force should be taken into account for wage and price inflation. If there were strong opportunities to enter the labour force, willingness of these individuals to participate would positively impact inflation. This would suggest that the labour market is still not strong – and we should then act that way.

Another possibility for attenuated Philips curve is that during recessions employers are reluctant to cut wages of employees, so that during recovery the wage increase looks restrained and businesses rebuild their own corporate savings.

However, the key to her argument can be found at the start of the WSJ piece:

running the U.S. economy hot for a period to ensure moribund growth doesn’t become an entrenched feature of the business landscape

https://www.wsj.com/articles/yellen-cites-benefits-to-running-economy-hot-for-some-time-1476466215

In this way the “flatter Phillip’s curve” represents self-reinforcing expectations by households and firms – and if the central bank doesn’t respond to this by “running the economy hot” weaker expectations of growth can become reinforcing, holding output and incomes below their true potential.

What does this mean?

Janet Yellen suggests running the economy hot. This means letting unemployment fall lower and motivating faster growth to boost consumer spending and business investment. 

This does mean inflation may move beyond its target level, but given the flatter Phillip’s curve such any such response should be smaller.

With central banks seen as “credible” and inflation expectations anchored, weak demand since the Global Financial Crisis could have led to hysteresis. Hysteresis refers to the persistence of an effect in aggregate, even once the cause of that effect has ceased to hold – this is most commonly viewed through unemployment but is a term that is used in a variety of contexts.

In the case of the macroeconomy, a willingness to accept lower growth in prices and output could reduce firms expectations of output growth, which in turn leads to lower investment and employment helping to generating an inferior – but stable – equilibrium.

So Yellen’s idea is that if we believe that hysteresis effect is still a key remaining issue in the economy, we should let the economy run hot in short-term at least to boost demand and lift expectations of nominal growth. If the economy has the capacity to produce at this level, then the expectations of higher output and price growth will also be self-reinforcing.

But … there is no free lunch

However, there is a caution to bear in mind.

Policymakers should understand the true relationship of the flattened Philips curve, to possibly detect what factors led it to the flattened relationship, so that in a state of the downturn, inflation doesn’t shoot up to the sky.

There might be the case that when unemployment stayed low persistently, it could cause a non-linear relationship between unemployment and inflation, so that when unemployment suddenly increased, it would increase inflation by proportionally and significantly high amount.

Asking whether output is lower due to hysterisis (and the existence of a coordination issue that has pushed us into a “Pareto Inferior” equilibrium – or one where everyone is worse off), or is due to structural factors (eg population aging, a slowdown in technological innovation, rising X-inefficiency due to excessive market power) is a key question when asking if running the economy hot makes sense.

If it is the former, a short period of allowing the economy to run hotter than the models would normally suggest would be fine – it would not generate inflation, and the Phillips curve (and inflation expectations) will not switch. If it is the later, we would be repeating the monetary policy mistakes of the 1970s and early 1980s when we misunderstood the Phillip’s curve and the proximate importance of structural shocks (in this case an oil price shock).

Now don’t get me wrong, I am against almost everything that Trump plans to do.  I am socially liberal, his tax policies (and the sharp cuts and spending that will need to be implemented) will redistribute away from the poor, his tariffs programs will hurt the vast majority of Americans and undermine the rate of reduction in absolute poverty in other low income nations, and his lack of trust in the Federal Reserve is likely to erode independent monetary policy.  Furthermore, his divisive rhetoric and willingness to create “other” groups to blame failures on point to a dark undercurrent within the US and within his administration.

But none of these things suggest:

Still, I guess people want an answer: If the question is when markets will recover, a first-pass answer is never.

Or:

So we are very probably looking at a global recession, with no end in sight. I suppose we could get lucky somehow. But on economics, as on everything else, a terrible thing has just happened.

When these things don’t happen, it will further undermine the credibility of economists – and implicitly tell Trump supporters and opponents that ALL the costs economists had said would occur from his election do not exist!

I am especially disappointed with Krugman given that he stood against this type of argument by panic for Brexit.  And he himself was disappointed with all the economists warning of recession as:

And I worry that what we’re seeing is a case of motivated reasoning, which could end up damaging economists’ credibility.

There are real winners and losers from Brexit.  There are real winners and losers from the policies President Trump will put in place.  And a credible set of Economists would inform the public of those without recourse to panic – without a determination to panic the public into doing what the economist themselves believes is morally right.

However, for a long time economists HAVE mixed their relatively objective discipline with their own normative values, and have used the authority they had to try to push the public towards what they have believed is right.  In a classic case of “boy who cry’s wolf” economists – along with other experts – have undermined their own credibility with the public.

And what has filled the void?  “Common sense” and “folk economics” – concepts that do not require facts and figures, but instead offer clear narratives that help people understand the world around them quickly.  A loss of credibility by experts (both self-inflicted and due to changing communication technology), a failure for policy makers to remember that “compensating losers” is really part of any potential pareto improvement from global trade, and a willingness to confuse opinion for fact when convenient by ALL sides is what is driving political change.

The people voting for change are not stupid, their willingness to follow folk economics concepts that are false is not idiotic.  In truth our inability to persuade the public to believe our research on some of the basic trade-offs that exist in society is our own fault – due to an increasing desire for economists to act as advocate as well as adviser.  Instead of focusing on how to communicate our research more clearly to the public, our discipline has increasingly been associated with telling people they should eat less sugar, pay taxes on their fuel, and surrender a variety of their choices to government because it is in their interest – how exactly do we expect people to react when we just tell them “we know better”?

Where, as an economist, I may find many of these policy arguments persuasive, if the public doesn’t we really need to think about why – instead I often hear the argument of stupidity.  As long as we rely on that argument to protect our fragile egos, we aren’t serving anyone as economists.

The move will be watched closely in the UK, where the recent one-month unemployment figures touched the Bank of England’s guidance threshold of 7 per cent. If the trend continues then we could see the guidance threshold broken within a year of being implemented. That risk is likely to be behind the strong hints from the Bank that it is unlikely to begin tightening for some time after the guidance threshold is broken. Essentially, it is trying to informally extend its forward guidance.

The difference in the UK is that the Bank of England has rejected Kohn’s idea and claims that interest rates should move first. Mark Carney reiterated this position at the House of Lords hearing earlier this week. Under vigorous questioning from Lords Lawson and McFall he indicated that the MPC view QE as something of a ticking bomb. Markets’ nervous reaction to the prospect of Fed tapering earlier in the year has made the MPC very wary of touching their £375bn of QE. Interest rates are the known quantity and the MPC prefers to lift them until they are well off the zero bound before beginning asset sales. The hope is that the market reaction to easing can be bedded in through the known channels before the QE is gradually unwound in a less volatile environment.

This is a question that only time can provide an answer to. One thing that is certain is that expectations have proven to be the most powerful tool in the central bank’s arsenal. It was not the tapering that touched off a stampeded in the US earlier in the year but talk of potential tapering. Now that actual tapering has begun the market is placing more emphasis on the FOMC’s softening of the guidance threshold than the reduced rate of asset purchases. Carney is right to be concerned but the nuclear tool isn’t unwinding, it is his words themselves.

I disagree with this piece.  But, it is well laid out and argued – which makes it a good piece!  So let us go through the reason why I take issue:

1) They are advocating one tool, many targets.

If the excess becomes a systemic threat, the Fed should then address it through its (existing) powerful interest-rate levers.

Although they seem to do this for nice enough reasons:

We are not advocating expanding the Fed’s tool kit and do not think the Fed should micromanage the economy.

It still doesn’t make sense.  They are trying to assume away some of the costs directly inherent in trying to get the US Fed to do what they want, by just not giving them the tools to do it!  The number of tools needs to be equal to the number of targets (here, wiki of Tinbergen), so if you aim to target some functional relation of financial stability as well as inflation we need these macroprudential tools!

Admitting this, and ensuring the institutional structure is appropriate for the given tools and targets is important.  When discussing having monetary policy and financial stability policy it was justifiably stated on VoxEU that:

Institutionally, it can be advantageous to assign both policies to the same authority, namely the central bank. However, safeguards are then needed to counter the risks of dual objectives, and institutional frameworks should distinguish between the two policy functions, with separate decision-making, accountability and communication structures.

2) The suggest attacking bubbles as part of an employment mandate – as a popping bubble lowers employment

Yet when financial excesses are building and not accompanied by inflation or unemployment, the Fed is unlikely to act. We need not accept this inaction. Fed governor Jeremy Stein, who has been writing on bubbles, said this summer that deflating a bubble would be consistent with the goal of promoting full employment because a bursting bubble affects employment.

Is the Stein argument a good one?  Is the Borio argument a good one?

It appears a growing number of central bankers think so as well.

But I find it uncompelling as it is confusing policy related and unpolicy related costs from bubbles!  A bubble ‘pops’, implying that some people that purchased the asset at a higher price lose out – this is NOT policy relevant.  A bubble ‘pops’, people default, a bank is about to fail and drag everyone down with it.  This is a concern.  But understanding why the other banks are not sufficiently insured against this failure, and why a bank is fragile to the “popping of a bubble” that is supposedly so obvious is important here – the ideas of systemic risk, and the fact that current regulations act as a subsidy on borrowing for banks is the main issue here. NOT the popping of some ‘bubble’ itself.

So far the only argument I’ve seen for directly targeting bubbles is “its obvious, look at the crisis”.  This is a bad argument.

Note, none of what I’m saying disagrees with this:

we were almost unanimously blind to the risks of rising housing prices and bank leverage

But it just states that we should think about where the issue, and concern, with systemic risk comes from.  It is the idea that, in the face of a shock, our financial system would fall over – a financial system that won’t be allowed to fail, and in turn is willing to take on excessive risk.  Our solution should be based on this itself – not using interest rates to target financial stability.  And in practice this still doesn’t make any sense unless we are willing to stick our neck on the line with a “model” of the bubble, and an ability for ex-ante identification, which can be used to make the policy action transparent!

And it doesn’t really disagree with this:

The simplest way to encourage Fed governors to be vigilant for excesses is to make maintaining financial stability explicitly part of the Fed’s mandate. This would have two effects. First, governors would be required to search, proactively, for imbalances. In essence, Fed officials would have to approach the economy from a different perspective than would most Americans.

Except that I ask us to think about this more carefully.  If we are mandating a specific regulatory role, why do we have to mix it up with monetary policy?  Why can’t we simply have two organisations with independence and a mandate signed by the finance minister.  Hell, make it three organisation and do it with tax as well

The fact is that financial stability is a different role.  Yes monetary policy (and fiscal policy) influence it, but it is a separate target.  If we justify a target on public policy grounds, and if that target is subject to dynamic inconsistency, and requires clear communication, then we SHOULD have a clear independently set mandate for an independent organisation on that basis.  That is the kicks.

And for financial stability this is the real big kicker for me – can we at least make an attempt to come up with a clear target and to justify it on policy grounds.  Rather than throwing around heaps of nifty ex-post justifications for doing things, which inherently lead us to move towards discretion, political interference, and micromanagement

Often people in New Zealand talk as if whatever is happening in the US is happening here, therefore something must be done.  However, lets be a bit more careful – especially as in the case of the employment rate that is untrue.

Source:  Stats NZ.  Quandl.

Yes, the story is more complicated (Working for families increased the number of second earners in the labour market, a factor that will in of itself have pushed up the participation and employment rates).  But if anything that suggests we need to be a lot more careful applying “lessons” from the US situation to New Zealand.  We are not the United States – a point we’ve noted when looking at median income comparisons in the past

But anyone who reads TVHE knows what I’m like, I just really really want to know ‘why’ certain things are being said!  I emailed a few economists and some suggested I do a bleg asking, so why not!

In the Yahoo story there are a couple of segments I’m a touch confused on and I’d like it if someone could answer them for me  (Note:  Seamus from Offsetting offers some example answers at the bottom of this post)

Grimes said investors were still likely to pile into asset price bubbles because they expected that even if they burst, central bank action to support the economy would soon cause asset prices to return to their previous levels.

On the face of it this is a type of moral hazard argument where we have “implicit insurance” of asset prices by the central bank, leading to excessive risk taking, and weakening market discipline to prevent “bubbles”.

But let us think a little further, if the central bank is ensuring stability in the price level in a way consistent with closing the output gap/keeping unemployment near some natural level I’m not sure I see the issue.  Don’t we need to answer the question of why the relative price of assets to goods and services remains elevated due to central bank action?

Furthermore, if an asset price collapses with economic activity and then rises back to its prior level with economic activity was there really a “bubble” – can we really even say the “bubble” popped.

I don’t know what his “model of bubbles” is.  But I also know Grimes is insanely smart, so I was wondering if you have any idea of what the mechanism in this is?  What are we calling a bubble here, the rate of return on assets being lower than we think is reasonable, or is it due to expectations that are out of line with reality?  And where is the economic cost of this – if the volatility in asset prices merely causes a transfer between participants who cares.  After all we can’t just draw a straight line from asset prices to economic activity without asking “why” about the bubble – the ‘tech bubble’ and the ‘housing bubble’ were quite different beasts for example.

We may use some type of structural insurance argument.  My guess is that view in the above quote may involve implicit commitment by the Fed holding up asset prices relative to their fundamental value, therefore leading to excessive investment and greater borrowing for a given level of goods price growth.  But here the “asset prices back to their previous level” call makes no sense to me – as this implies that the relative price of assets is also returning.

Either this is an inconsistency, or I’m not sure if I buy this model of bubbles … as implicit insurance IS one of the drivers of fundamental value.  I really need a “model of bubbles” before this makes sense to me and I just don’t know what it is.  Furthermore, this is increasingly sounding like a structural issue rather than a monetary policy issue – as there is nothing inherent in stabilising the price level and closing the output gap that would imply asset prices will be ‘propped up’.

Note:  The model of bubbles matters.  We need it to understand policy.  And as Shiller, Sumner, and Gali have all noted this is a very difficult issue that doesn’t fit into a single box named “bubble”.

And then in terms of the conclusion.

“They are stuck between a rock and a hard place, in terms of the Fed officials themselves. You would have to have a big bang to say: ‘We are targeting price stability. We are targeting stable asset prices as well as stable goods prices.'”

Stability in asset prices?  How does saying you will keep asset prices stable reduce the moral hazard issue – doesn’t it increase it by directly taking on systemic risk in asset prices.

Is this really something we should announce with regards to monetary policy?  How do we judge “stability” in this way, given that movements in asset prices as an aggregate are a useful piece of information about monetary policy (given their flexibility, and the fact that are made up of forward looking expectations about nominal returns).

Note that asset prices that are “too high” are an indicator that monetary conditions are “too loose”.  Is the complaint that monetary policy in the US tends to be too loose here?

And lets not even get started on trying to measure aggregate asset prices through time … that is an even stickier issue than measuring goods price

What’s the bleg

I was just wondering what is being said in this article, and why.  What is the bubble mechanism being used?  What is the implied criticism of Fed policy?  In what ways does this imply that Fed policy should change?

On the face of it, I just don’t see the argument against simply targeting goods prices and closing the output gap (or NGDP targeting if you are that way inclined) in this piece.  And given the Fed has been easing policy INSUFFICIENTLY on this basis, the argument that their policy has been too loose also wouldn’t make sense.

Seamus Hogan’s answer

After I finished this post, but before I popped it up, Seamus from Offsetting Behaviour flicked me the following answer, and said I was allowed to pop it up here.  It offers a good framework for us to think of working through this question.  This was just a quick answer as him and Eric are a bit short on time to post a full discussion on it right now.  They were happy for me to pop it up here though!

My first pass:

1. Asset bubbles are bad because when they burst, they cause damage to the economy.
2. However, when they burst they are bad for those caught buying at the end of the bubble.
3. The central bank can use monetary policy to mitigate the damage to the economy.
4. But at the same time that policy mitigates the extent to which the asset prices fall.
5. Therefore, unless the central bank can credibly commit to not helping the economy, speculative investors will know that there isn’t much downside to buying up assets as their expected value has been elevated by dampening the prospect of a bad economy.
6. In which case, why are we worried about the bubble in the first place?

My second pass:

1. Asset bubbles are bad because when they burst, they cause damage to the economy.
2. However, when they burst they are bad for those caught buying at the end of the bubble.
3. The central bank can use monetary policy to mitigate the damage to the economy.
4. This policy will only partially undo the damage to the economy, but will heavily mitigate the extent to which asset prices fall.
5. Therefore, unless the central bank can credibly commit to not helping the economy, speculative investors will know that there isn’t much downside to buying up assets as their expected value has been elevated by dampening the prospect of a bad economy.
6. In which case, the inability to commit to not slightly help the economy in the event of a damaging asset-price-bubble burst will heavily increase the risk of such a damaging burst happening, and so the expected cost of future bubble bursts will be higher than in the case where the Bank could commit to letting the economy languish in a recession.

The two differences in these logic steps are in red. The key is whether the change in Point 4 makes empirical sense. If so, there is still an empirical question as to whether the relative magnitudes make point 6 in the second pass make sense, but the blogging point needs to rest on point 4. I’m not sure I buy it. I can buy that the Fed’s only help-the-economy-strategy—printing money (QE) or lowering interest rates can easily lead to leveraged portfolio investment rather than fixed investment, for some settings of expectations; I am having a hard time seeing how, though an asset bubble burst that largely goes away because of Bank policy can harm the economy.

Now I do not disagree that there was, and would have been, a recession without Lehman Brothers – and even without the uncertainty caused by the lack of clarity around insurance of the shadow banking system which grew post August 2007.  However, these issues, and in turn the failure of Lehman Brothers did make the crisis significantly more severe than it would have been.

He appears to say that the failure of Lehman Brothers was a good thing (Note:  There is nothing wrong with wiping out the company – but the way it was handled, was a big driver of the global slowdown that was to come), and that the US was on the road to recovery post this.  So here we are focusing just on the US, not the contagion to other countries.  His evidence is the following graph:

Employment and consumption stopped declining not long after Lehman Brothers failed, and although the largest declines occurred WHEN Lehman Brothers failed this doesn’t mean the failure caused them – in fact, employment tends to lag the cycle and the drop may well have been the result of prior economic weakness … and the amazingly high fuel prices through the first half of 2008.

Now I agree that there were factors driving a recession prior to the failure of Lehman Brothers – but the impact of Lehman Brothers as an event is captured by asking what would have happened in the absence of the Global Financial Crisis that stemmed from it, and the full blown “bank run” on wholesale financial markets that had been building pressure from the start of 2008.  Going to FRED, grabbing consumption and population, and running a basic time regression in excel no less (so it’s easy to copy) we can get an idea of what the “trend” rate of consumption per capita was during the 1952-2012 period.  Armed with that, we can ask what the percentage difference is between this trend and actual consumption per capita outcomes.  This is:

Something is broken here – I will try to fix that up tonight.  The strange thing is that I can see the graph when editing the post … but it then wont let me do anything with it

Now we can start arguing that consumption per person was too high and a whole bunch of other things if we want to here.  However, this basic analysis clearly shows that the gap between trend consumption and actual consumption, something that should have a tendancy to head back to zero after a recession, actually deterioarted further … and has continued to deteroriate.  We look at business cycles “around trends” not “around levels” given that our counterfactual involves growth – and this makes this post by the Cato institute a bit misleading.

Saying that the downturn, or even the crisis, started with Lehman Brothers is wrong, I agree with the author here – however Lehman Brothers failure started a new dangerous stage of the crisis which, when combined with the persistent institutional failure in Europe, has made sure that the US economy has remained below potential.  A market monetarist would say that the Fed is truly responsible for this in terms of policy action, but even if we were to accept this it is undeniable that it is the “shocks” that have occurred in financial markets are the very things the Fed needs to respond to by “loosening policy”.

It’s failure is indicative of what was underlying the crisis, and the evidence shown in no way suggests that allowing its failure and initially ignoring the quiet, and then full scale, bank runs in wholesale financial markets was good policy.

In the statement, they commit the the purchase of mortgage debt people expected (carrying on for an undefined period of time), they state they will keep the cash rate exceptionally low until at least mid-2015 (which was anticipated) – but they also say they will do more unless they get traction on the labour market.

This is reasonably significant.  They are fully testing their view that there is no structural problem in the labour market (which is empirically supported) and are banking on the idea that easier monetary conditions, combined with a credible commitment on the labour market will lead to households and firms finally bringing forward consumption and investment.

This makes more sense than prior policy.  The constant forecasting of “failure” in monetary policy in the US led to policy that can be seen as insufficient – the Fed was treating the risks of inflation (and thereby the outlook for the domestic economy) asymmetrically – obviously Woodford’s speech had an impact (although the projections still have a pretty slow improvement in the unemployment rate – would need to see employment rate forecast to really get a feeling for what they mean).

It may also be seen as reinforcing the view of market monetarists (eg Sumner) that the Fed’s expectations have a significant impact on expectations of real economic and labour market activity within the cycle (at least in response to large shocks – possibility of multiple equilibrium.  Note:  They wouldn’t see it the same way.).  This is a view I would like to see in more detail (eg what sort of expectations does this rely on, and what sort of conception of the real rate – are they are artifact of current monetary policy settings).

Although this is encouraging – when looking over here in NZ it is the European debt crisis that is impeding growth.  Yes, a stronger US economy will support growth in Asia and NZ helping remove large scale risks – but the European debt crisis continues to have a separate impact on NZ that is binding.

Update:  Having a read around on the piles of good sites discussing the issue, I ran into this post via Money Illusion.  Now, doesn’t this scream multiple equilibrium to you?  To criticise the Fed for rates being low and indicating a weak recovery, we need to blame the Fed for the drop in the natural interest rate – this has to imply that the Fed either created uncertainty, or is so far away from their mandate we’ve fallen into a “suboptimal” eqm.  You cannot blame the Fed for exogenous shocks (which you’d normally pin this on), so there MUST be an implicit multiple eqm argument behind NGDP level targeting – I find it conceivable, although potentially hard to test empirically … can someone send it to me please

Update II:  Good point from Scott Sumner:

In addition, they did move closer to level targeting, something I didn’t think was politically possible:

(Fed statement) To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.

What’s changed since June?  That’s pretty easy to answer; Woodford’s paper was obviously very influential, and that changed the politics on level targeting.

This is still consistent with flexible inflation targeting at the ZLB.  Of course, NGDP level targeting and inflation targeting share a lot of similarities – and to be fair, NGDP level targeting would be more transparent when faced with the ZLB problem.  In net terms I’m still a flexible inflation targeter – as the benefits of a predictable price level ex-ante from a point in time seem significant, and best served by doing that directly (through inflation targeting).  Of course, if the facts at my disposal change I’m happy to move around

Now in New Zealand we have similar data here.  According to this, private sector credit growth was 2.3% year-on-year (or 3.2% if we exclude repurchase agreements – which is preferable IMO).  This compares to a decade-long average of 7.3%pa (8.3%pa), and if we were solely quantity focused this would seem insufficient.  [Note:  I did decade instead of history, as the implicit inflation target moved significantly over the decades – a factor that pushes this figure around.  Would be best to look at “real growth” for a longer-term focus]

I’m not concluding anything from this per se – it is just interesting that NZ analysts are running around getting concerned about inflation and rising credit growth, while analysts in the US, who are observing stronger credit growth than we are, are generally complaining that more needs to be done.  Tbf, their unemployment rate is a lot higher, and their output gap is correspondingly larger (presumably).

But with underlying inflation in the lower end of the RBNZ’s target, credit growth numbers objectively soft, and the unemployment rate undeniably elevated I feel that the inflation calls may be a touch overplayed.  [Note:  A relative price lift in construction due to a rebuild in Canterbury is not inflation – it is a signal of scarcity, as prices are supposed to be].

As a note, this post is focused exclusively on the situation in the United States – the trends in other countries (such as New Zealand) have been significantly different.

The sluggish job market has forced Americans to reexamine their financial priorities. As a result, prospective graduate students must decide if earning (i.e., paying for) a master’s degree constitutes a sound investment. The good news is that research shows that students who do opt to get degrees in areas like business or accounting are generally able to make a return on their investment within a few years.  To receive an even greater return, students may want to explore getting their education at one of the colleges found on this site featuring online MBA courses since online schools are often much cheaper than their brick-and-mortar counterparts. Whatever option students choose, many experts agree that 2012 is a great time to be a grad student.

Last September, The New York Times reported that enrollment in U.S. graduate programs decreased between 2009 and 2010, despite 5.5 percent growth the previous year. According to the Council of Graduate Schools (CGS), this marked the first decline in seven years and the drop-off is likely a byproduct of the thin job market. The council’s president, Dr. Debra W. Stewart, said that, historically, the economy and master’s enrollment had an “inverse relationship,” but this is currently not the case. “They’re both down,” she noted, “so the question is, why?”

Stewart warned that fewer grad students would ultimately hurt the economy. She explained that higher education, specifically, graduate education, is a boon to the job market. If degrees are only attainable to the wealthy, then national prosperity will be detrimentally affected. However, she conceded that dubious job availability and high cost of college fees are keeping grad students out of classrooms. Stewart said that “with this recession going on for so long, people who have a job are less likely to want to leave it to go back to school, because it’s not at all clear that there will be a job for them at the other end.”

USA Today Education columnist, Jon Frank, sympathizes with students who face this dilemma but reassures them that graduate education is always advisable, especially now. Contrary to the notion that enrollment is a waste of time during such a messy recession; he reasons that grad schools provide career opportunities that are unavailable elsewhere. Students have an entire campus, in which to network with fellow students, professors and guest lecturers about their prospective career path. He also notes that a master’s degree ultimately makes a candidate more hirable in the eyes of potential employers, which will be useful in the coming years. “One thing that the past 200 years of economic history has taught us is that bad times are followed by good times,” he writes. “We are in a down phase now. Most likely, things will be better in two, three or four years (read: by the time you finish your program).”

In regard to grad school costs, Frank admits the sheer amount can be initially daunting. However, he advises students to view the degree as a long-term investment. Though students may work as long as four or five years before making a return on said investment, this period is relatively brief compared to a 30- or 40-year career. He adds that many students, such as MBA recipients, can make a return in as little as two years.

In addition to the poor job market and college fees, some students are apprehensive about enrolling in a master’s program because they do not see its worth. However, a 2009 study by the Georgetown University Center on Education and the Workforce debunks the myth that bachelor’s degrees are just as valuable as graduate degrees. In many of the most popular areas of study, the difference in median annual earnings between bachelor’s and master’s degree holders was quite significant. In many areas of study, such as business, computers and mathematics, agriculture and natural resources, master’s degree holders out-waged their undergraduate counterparts by as much as $20,000 per year. Most significantly, graduate students who earned degrees in biology and life science made $35,000 more than those who held a bachelor’s degree in the same field.

Graduate degrees are a sound investment, regardless of the economy. In fact, students are encouraged to enroll in master’s programs during times of great financial duress. The economy will eventually improve—and when it does, employers will seek out bright, well-educated men and women to lead the work force toward prosperity.

Bio:

Kate Manning didn’t expect to find herself at the intersection of business, marketing, and the Internet, but with sound writing and editing skills, she makes the most of it. She’s worked under others’ supervision and on her own for herself.