Editor’s Note: Gennady Stolyarov II was my best student at Hillsdale College (where I taught from 2003-2006). We have kept in touch, and he recently alluded to how devastating the economic crisis has been on his generation. I asked him to elaborate, because in my circles things are bad, but mostly along the lines of, “Wow our household is cutting back because everything is so scary right now.” As you will see, things look different from the perspective of recent college grads. Note that when Gennady below describes his personal regimen and financial goals, I don’t think he’s bluffing; his description is consistent with his behavior when I knew him at Hillsdale. –RPM
The Effects of the Economic Crisis on Young People
The current economic crisis may seem abstract and distant to some, but it cannot be more immediate and pressing for young people in their early twenties. Indeed, one of the greatest injustices to come out of this crisis is that its heaviest burdens are being imposed upon individuals who did absolutely nothing to bring it about – by any theory or argument. In particular, the graduating classes of 2009 and 2010 have been punished by this crisis for absolutely no fault of their own. In this article, I hope to convey some understanding of the experiences faced by this group of people, who have been marginalized and overlooked by virtually all of the institutions that unfortunately still dominate contemporary society. I will also argue that intense anger is warranted among young people, but that this anger should be constructively channeled into comprehensively reforming contemporary society through the heavy use of technology and spontaneously emerging, “bottom-up” institutions.
I write as a member of the college graduating class of 2009 who, to date, has escaped the worst effects of the crisis. I have a job with decent pay and working conditions; I am married and own a house (getting the house was quite an ordeal, but more on that later). I have managed to create a good life for myself despite the crisis, but many of my peers – including the highly deserving ones – are not so fortunate. And certainly, the struggle I personally underwent to introduce the least bit of stability and prosperity to my condition was considerable. Here, I will focus on some of my experiences during this crisis, to convey an impression of what even its mild effects on young people are like. However, I will also generalize beyond my own experiences on the basis of both broad and particular observations that I have had the opportunity to make these past two years. For responsible and meritorious members of my generation, the crisis has brought about the kinds of struggles that they thought could be avoided by sufficient hard work and learning. Indeed, it is undeniable that the future of virtually every young person today hangs on a precipice due to adverse political and macroeconomic developments.
Unemployment, Underemployment, and the Complete Devaluation of College Education
One important shift over the past two years has been with regard to the degree – or lack thereof – to which a college education is valuable for a young person’s employment prospects. Two generations ago, a college degree was a virtual guarantee of a comfortable, well-paying office job for as long as one wanted it. One generation ago, one’s prospects for such a job out of college were still good, provided that one performed well in college and received one’s degree in a remunerative field. This was the expectation with which the present generation of graduates was raised. However, even before the present crisis, a bachelor’s degree had become devalued through the considerable increase in the number of people seeking and receiving it. Many people had been incentivized by extensive federal subsidies to seek “educations” for which they had neither the inclination nor, perhaps, the merit. Colleges responded with astronomical escalations of tuition (since demand increased and they figured the federally aided students could afford it), lowering of academic standards, and greater tolerance toward the “party school” atmosphere. It became difficult for employers to establish whose bachelor’s degree was a valid signaling mechanism for merit, and whose was a joke.
Now, however, a bachelor’s degree by itself – even from a private college with rigorous standards – will not earn even a job at a fast-food restaurant. Good grades have also ceased to be a gateway to employment or to much else that is related to finances. Indeed, I know many high-performing students in my graduating class who, because their only “official” qualifications were a bachelor’s degree and good grades, ended up moving in with their parents and remain there to this day. The best students among the group that relied on college alone have become woefully underemployed. I knew, for instance, a high-achieving English major who ended up working at a drugstore pharmacy for minimum wage and a perceptive philosophy major who wandered around doing odd jobs, not quite sure what, if anything, he would find from month to month. The tragedy is compounded by the fact that it is hard even to become underemployed for young college graduates; many employers paying near the minimum wage have begun to snub “overqualified” candidates, for fear that these individuals might be dissatisfied with the parameters of a standard convenience-store or fast-food-restaurant job. Others have gone on to graduate school and may be earning minimal stipends for serving as teaching assistants – but this simply pushes their dilemma back a few years and may even place their finances in greater jeopardy when they graduate several years from now and find that they have few tangible assets with which to survive the coming hyperinflation.
I graduated from a well-known private liberal arts college as the salutatorian of my class, with three majors in economics, mathematics, and German. My majors and grades did not, however, earn me my job. Rather, I was hired because of the four actuarial exams I passed while in college, on my own time and initiative. The exams helped me bypass the old notorious Catch-22 of lack of work experience leading to lack of job leading to lack of work experience – since the hiring rules of the organization for which I work consider two passed actuarial exams to be the equivalent of one year of work experience. But even with those actuarial exams, it was a matter of great fortune that I found a job at all. When I began taking the actuarial exams in 2007, it was under the assumption that even one exam was, in most cases, a gateway to a job. However, virtually no company was hiring for entry-level actuarial positions when I sent out my applications in early 2009; even candidates with four exams were routinely ignored by employers. The few positions that were available all required some number of years of work experience in the immediate field, even if they primarily involved entry-level work. To help me search, I contacted an actuarial staffing firm, which failed to update me regarding any prospects for months at a time. When I followed up periodically with its representative, I was told that no contact occurred because no openings had been found within the vast geographical area which I had specified as acceptable. Out of the fifty applications I circulated on my own, I received one job offer and accepted it. I am glad I did. I was one of the few people of my graduating class to secure a job prior to graduating, which made my life immensely easier than it might have been. To this day, I still recommend that college graduates looking for a job accept the first offer they get, because they will not likely get a second. Now, no number of professional exams or certifications would guarantee finding paid employment – although they certainly help. And of course, any individual’s chances of finding a job have deteriorated considerably since I conducted my search. Then there were about three unemployed persons for every job, on average; now the number is probably closer to ten, especially if discouraged workers are considered.
What struck me about my own experience is that all the accomplishments which, throughout my earlier life, I perceived as “extra” and optional, were absolutely indispensable to just barely enabling me to secure a decently paying job and a modestly comfortable standard of living. I, like most of my peers, had been raised with the expectation that, for the best academic performers, the question was not whether one would get a job out of college, but rather which offer one would accept on the basis of the desirability of the job and its surrounding environment. This expectation has shown to be completely illusory. Moreover, a truly pitiable situation afflicts those individuals who, for lack of financial resources within their families, decided to accumulate debt in order to attend college – hoping, perhaps, that the value of the resulting degree would eventually pay for their loans and propel them well into the middle class. These individuals are now affected with crushing financial obligations – sometimes in the hundreds of thousands of dollars – and no means to repay them; moreover, student loan debt cannot even be erased via a bankruptcy. In my case, I had no educational debt for a variety of reasons, and I also accumulated a small amount of savings throughout college by engaging in a variety of writing ventures online and collecting prizes from essay contests. That, too, I considered to be optional and exceptional at the time. But that small pool of savings was vital to enabling me and my wife to survive during my transition into my job and later contributing to the substantial down payment that allowed us to obtain our house. Fortunately, all has turned out for the best for us thus far. But, along the way, there were numerous junctures where our lives could have deteriorated dramatically simply because of the vicissitudes of macroeconomic events. I am still astonished at the realization that if I did not pass those actuarial exams, or win those essay contests, or spend my lunch breaks and evenings in college writing articles for various online enterprises, I might either be financially dependent or on the verge of starvation today.
The War of Fannie Mae and Freddie Mac against Responsible Young People
For the fortunate young people who do manage to secure jobs during this crisis, the ordeal is far from over. In order for one to be truly financially secure in an era of impending hyperinflation, only the ownership of useful tangible property can suffice. Roughly, whatever material standard of living one had right before the hyperinflation is the maximum standard of living one will retain until a stabler currency regime returns. In particular, because the prices consumers have to pay tend to rise faster than those consumers’ earnings, only an abundance of durable goods can tide one over at a tolerable standard of living while the real costs of food and disposable goods continue to skyrocket. Owning a residence in a hyperinflation is a virtual necessity if one does not wish to be evicted for failing to pay astronomically rising rent. But what is it like for a responsible young person today to try to obtain a house? My own experience with this showed me how utterly irrational and unfairly discriminatory today’s centralized lending system is toward the young.
Keep in mind that prior to obtaining my mortgage, I never had any serious debt – only a credit card which I used once a month as a formality, to build my credit history, and for which I promptly paid off the balance every time. I had also been a tenant for 3.5 years and had a perfect payment record for all of my bills. During most months, I can save circa 60% of my income and support both myself and my wife on the remainder. Both my wife and I have excellent credit scores – enough that, when we applied for a mortgage, we were told that, if we qualified for a loan at all, we would qualify for the best interest rate. In short, it is no exaggeration that we are about as financially responsible as people – not just young people – get. But apparently this was not enough for our bank.
Since the collapse of the housing market, Fannie Mae and Freddie Mac, which have also been fully nationalized, have imposed highly stringent underwriting guidelines for all “conventional” loans backed by them – i.e., all loans not backed by the more lenient Federal Housing Administration (FHA). For those unfamiliar with the term, underwriting standards determine whether or not a loan even gets made, irrespective of what terms the borrower would qualify for if he were deemed eligible. Given that banks were perversely incentivized to employ ridiculously loose underwriting standards during the housing-boom years, it would seem sensible at a first approximation for these standards to become more rigorous. However, as is the tendency with federalized entities, the alleged “solution” to a problem becomes worse than the problem itself. The standards imposed by Fannie Mae and Freddie Mac today are arbitrary, draconian, and completely unrelated to the underlying factors that determine whether the borrower will repay the mortgage. They have contributed to many genuinely responsible people being denied the opportunity to purchase a house, while many genuinely irresponsible people continue to get loans. The recent passage of the gargantuan “financial reform” legislation in Congress (H.R. 4173 / S. 3217) would essentially foist these standards as federal law upon all mortgage lenders – meaning that, had my wife and I waited to apply for a loan until after the reforms’ implementation date, we would have been denied the opportunity to purchase a house altogether.
One of the one-size-fits-all underwriting standards that obstructed our ability to get a “conventional” loan was the requirement that one have a certain number of active credit accounts in one’s credit report (irrespective of one’s credit score – and no, rental, utility, insurance, and telecommunications payments do not count under this arbitrary rubric). Because I never had a need for credit cards, I had only one, simply to build up my credit score. And, truly, what reasonable college student would ever need more than one? Apparently, I was required either to borrow and spend lavishly – replicating the consumer behaviors that fueled the current crisis – or to play the game of nominal credit card usage with multiple accounts. But nobody told me that, to remain financially responsible and in the good graces of Fannie Mae and Freddie Mac, I needed to buy my haircut with Card A, my groceries with Card B, a cup of coffee with Card C, and the occasional little trinket with Card D – and remember to pay off all of those little balances before the end of the month to avoid interest and fees. Understandably, I preferred to use my debit card – but this resulted in my failure to qualify for a “conventional” loan and ultimately cost me considerable money. Indeed, under the 2009 Credit CARD Act (H.R. 627), young people under the age of 21 are now prohibited from obtaining credit cards unless the cards are co-signed by a parent or the young people can verify independent sources of income (again, in accord with arbitrary and unduly stringent standards). This means that a person several years my junior, even if he wanted to, could not play the credit card game in college in order to qualify for a “conventional” loan later on.
Fannie Mae and Freddie Mac did offer an alternative by which this requirement could be bypassed: a demonstration of a 12-month payment history in at least three non-credit accounts. While I had such a payment history, it so happened that, for my old apartment in college, my landlady would pay for the utilities but would collect their cost from all of the tenants as part of the monthly check. Thus, all those utility payments did not qualify under the federal standards.
The other criterion – which will now likely be mandatory for all lenders to use – was conventional employment history, as documented via tax returns, at a certain income level and in the same occupation. While I did have some relatively minor earnings in college, I did not then have a “job” as conventionally defined, and certainly not anything that paid as well as actuarial work. The federal requirements insisted on two years of employment history in the same occupation, whereas I could only, at the time, document eight months. The unintended consequence of this requirement, of course, is that it would bar financially responsible young people from getting a “conventional” loan – simply for lack of having spent “sufficient” time in their post-college occupation. The loan I was applying for would have put me significantly below the threshold 30% debt-to-income ratio; moreover, I had a 20% down payment and a decent amount of savings left afterward. But no; two years was the cutoff threshold, and so I was denied a “conventional” loan for a house I could easily afford. My wife and I were able to get an FHA-backed loan, which required a substantial private mortgage insurance (PMI) premium, irrespective of the borrower’s amount of equity in the house. While most borrowers choose to finance the PMI into the loan, I decided to put this nonsense behind me right away and pay it upfront. To add insult to injury, the incompetence of certain staff at the lending bank resulted in the PMI being double-counted on five separate occasions as being both financed into the loan and paid upfront; apparently, nobody at this gargantuan, nationwide, probably bailed-out institution had ever encountered a 15-year, fixed-interest-rate, FHA-backed loan with the PMI paid upfront. Indeed, our closing was delayed because of the bank’s inability to promptly correct this error, and the error remained on the loan documents on the day of closing; it was only corrected via an emergency call to the bank by our title agent. If we were any less vigilant, less persistent, or less mathematically inclined, we might have acquiesced to becoming several thousand dollars poorer.
The kinds of underwriting criteria I described did exist prior to the economic crisis, but they were typically not used as exclusionary criteria. Prior to the crisis, if a borrower failed to meet one underwriting benchmark, most banks would simply demand higher measures on the other benchmarks. Thus, a short employment history might be compensated by a low debt-to-income ratio, or an “insufficient” number of credit accounts might be overlooked because of a 20% down payment. Today, however, it is all or nothing – and this is likely to become the federal mandate throughout the entire future of U.S. mortgage lending. This will create an underclass of property-less young people whose earnings become consistently inflated away to pay for federal debts and obligations to special interests and some members of older generations who have acquired political connections and influence. Unless they can obtain houses shortly upon entering the job market – which the law would essentially prohibit, except for those few with the money to buy a house outright – young people will never be able to obtain them. This is because by the time they have accumulated enough “employment history”, the money they earned in the interim will have been devalued considerably. Slave labor, anyone?
Implications and Solutions
The disproportionate suffering of young people during this crisis has had significant and ongoing societal and economic implications. Among these are the following:
• There is a growing disillusionment with the idea that merit and effort are connected with proportionate rewards: to many young people today, it seems that life will be poor no matter how hard one tries. This may continue for decades as the “lost generation” of recent college graduates is required to pay for the accelerating growth of federal obligations through higher taxes, hyperinflation, mandatory health insurance, diminished economic growth, and stifling restrictions on individual freedom. In the meantime, politically favored corporations and special interest groups have received unprecedented federal support for literally destroying wealth.
• There has been a slowdown in workplace productivity because of a lack of young employees who are immersed in the latest technologies and do not shy away from them by habit. Older, less efficient ways of doing business continue to predominate because no influences counterbalance the habits of many older workers or, through the incentives of competition, invite those workers to step outside their comfort zones. While some of the more forward-thinking older workers continue to innovate technologically, there are not enough of them to assure a sufficient rate of progress without a steady influx of young people – people who grew up in the Internet era – into the workforce. Various federal mandates, corporate subsidies and bailouts, and other incentives to retain existing institutional structures may further ossify and perpetuate current massive business inefficiencies.
• Some of the less determined young people have resigned themselves to continued financial dependence on their parents after college. This may eventually plunge the United States into the dilemma experienced in Italy and Spain, where many young people continue to be supported by their parents until their forties. This will lead, in many people, to a further extension of “carefree” adolescence, with its ill societal and economic effects. Worse yet, it will lead to the expectation that people remain infantilized until their health begins to decline – leaving no period of simultaneous youth and prosperity during which the greatest accomplishments are possible. The most responsible young people will still try to make it on their own, but they will increasingly be denied opportunities via coercive means – just as an enterprising teenager seeking to start his own business might be thwarted under today’s child labor laws.
• In lower-income areas – particularly the urban ghettoes – marriage and family have become even further threatened, as young people in those areas see no avenues of financial mobility by which they are able to sustain a spouse and children. Meanwhile, those areas continue to be plagued by the refusal of many young people to take care of their out-of-wedlock children.
• The nexus of pre-crisis institutions has survived the crisis largely intact because of federal support. These institutions have become a new feudal/guild system which perpetuates obsolete and wealth-destroying economic arrangements. As the record of the Congress and Obama administration has shown, any attempts at federally imposed “reform” only further entrench these institutions by enshrining some variant of existing practices into law. The dominant institutions are generally uninterested in hiring recent college graduates, whose cultural expectations – as epitomized by the free culture dominant on the Internet – are at odds with the hyper-compartmentalized, ultra-restricted, “cog in the machine” culture of the bailed-out, subsidized U.S. corporations.
• Meanwhile, the honest, relatively politically unconnected businesses fear to hire young people because of the economic uncertainty engendered by federal policy. Who knows what sorts of mandated benefits, paperwork, and other federally imposed obligations those new employees will bring with them – especially several years in the future? Many business owners, even if they recognize that talented young people would benefit their enterprises, are deterred from hiring because of rational and understandable desires not to be burdened by the political challenges that might accompany such a decision.
It seems that the present young generation has largely been designated as the party onto which the costs of this crisis shall be offloaded. This was not brought about by a deliberate central design (though many deliberate central designs contributed to it), but rather as the inexorable outcome of the currently dominant morass of “vampire” institutions which have outlasted their time. Only the replacement of these institutions can return a semblance of prosperity to most members of today’s “lost generation”. Moreover, only young people themselves can effectuate the desirable new institutions, which should be modeled on the free, open, and participatory culture of the Internet. There can be no better example than the Internet for what the creativity of even average humans can achieve when it is not strictly bound to narrowly defined established ways of doing things. Moreover, the Internet facilitates alternative methods of human interactions to those sanctioned by the bailed-out institutional establishment.
I mentioned previously that anger is the warranted response of young people at the present predicament – for anger is a far better response than despair and depression. But not just any anger will do; it must be channeled constructively. Protest rallies and other publicity stunts, for instance, will accomplish nothing, while strikes or work slowdowns will only exacerbate the problem. No – the solution lies in more determination, more productivity, more achievement, more innovation – to overcome through the strength of mind and will the barriers posed by the obsolete dominant institutions. The young person’s best friend in this endeavor is technology, which dramatically amplifies a person’s productive capacity and, by implication, that person’s impact on the world. Technology challenges established media, financial institutions, and production methods. Information technology especially brings to the ordinary people a degree of self-sovereignty and mastery of the external world that the politically privileged have always attempted – and assiduously continue to attempt – to monopolize. Technology can provide free, legal access to education, art, and entertainment. It can remove most of the inefficiencies conventionally associated with communication. Most importantly, though, it brings with it a marvelous decentralizing cultural and economic shift that renders increasingly fewer areas of a person’s life inextricably dependent on established institutions. Young people today should create an alternative economy based on personal technology – which would also be largely independent of the manipulations of monetary authorities and might even counteract inflationary tendencies by increasing the quantity of goods “chased” by money. Such an economy is already manifest in the open-source and Creative Commons models which have surged in popularity online. The great challenge of our generation will be to bring this model into the realm of the most tangible goods imaginable. Fortunately, the rate at which technological knowledge advances has never been faster, even with this crisis. The key will be to implement potentially world-changing new knowledge.
In effect, I am proposing a cultural resistance to the driving forces behind this crisis. This resistance is, in many ways, the diametrical opposite of the campus rebellions of the 1960s generation – the generation which currently occupies the dominant roles in our society. Instead of disdaining wealth, comfort, and respectability, today’s young people should strive for these values with renewed vigor – if only to show that the “vampire” institutions cannot defeat their aspirations to prosperity and happiness. Moreover, the profound injustices of the crisis and the enormous gap between achievement and reward existing today should motivate young people to strive for a society based in all its dimensions on the principle of merit – the principle that a person should rise and fall based on his individual qualities and achievements, not on the arbitrary, one-size-fits-all decisions of the parties that caused the crisis.
To overturn the status-quo-preserving command-and-control collectivism of the dominant powers and replace it with an individualistic, meritocratic society characterized by rapidly accelerating technological progress of everyday relevance and visibility, young people today will need to accumulate resources of every kind, both through conventional and alternative channels. Any position, within or outside established institutions, that brings about access to such resources should be welcomed. For those fortunate to get any job at any institution – private or public, old or new – working with honesty and integrity to improve that institution – to imbue it with progress, justice, and respect for human rights and virtues – is in itself a praiseworthy endeavor; it will also counteract the crisis and the policies and practices that brought it about. Those who cannot find or do not need to find a job should still engage in activities that would advance an individualistic, technological, merit-based society. Such activities are abundantly available and include the creation of free media and software as well participation in unconventional volunteer activities – such as connecting one’s computer to a distributed computing project that performs technically useful or theoretically interesting computations. Finally, I recommend that all young people engage in at least one creative endeavor of their own choosing, on their own time, every day. It is important to always remember that one is an intelligent, rational human being with a creative faculty; doing only what one is told or what necessity requires is the surest way to dim that faculty. With the technologies available today to foster human creativity at the computer, there is no excuse anymore to simply “go with the flow” and avoid shaping the culture. And it is such creation that will win the world for the lost generation.
Gennady Stolyarov II is an actuary, independent philosophical essayist, composer, amateur mathematician, and editor-in-chief of The Rational Argumentator. Mr. Stolyarov is the author of numerous free study guides for economics, advanced mathematics, and actuarial science and holds the highest possible rank (Clout Level 10) for a content producer on Associated Content. See his YouTube videos and G + W Audio Broadcasts, a new series of intellectual conversations by Mr. Stolyarov and his wife Wendy. Send him mail.