Economic View: A Dearth of Investment in Young Workers

For Americans aged 16 to 24 who aren’t enrolled in school, the employment picture is grim. Only 36 percent are working full time, down 10 percentage points from 2007. Longer term, the overall labor-force participation rate for that age group has dropped 20 percentage points for men and 14 points for women since 1989.

This lack of jobs will damage the long-term careers of a big chunk of the next working generation. Not working after you finish school very often means missing out on developing the skills and habits that will serve you well later on. The current employment numbers are therefore like a telescope into the future labor market: a 23-year-old who is working part time as a dog walker, yoga instructor or retail clerk may be having fun, but perhaps will receive fewer promotions as a 47-year-old.

One culprit in this situation may be the higher minimum wage enacted in 2009, but the root causes run much deeper.

Employers appear to be more risk-averse, more concerned about overhead costs and less willing to invest in developing young workers’ skills. And that seems true across a wide variety of sectors.

In the legal profession, for instance, there is less interest in hiring junior associates and grooming them for partner status. Colleges and universities are often more interested in hiring adjuncts than tenure-track young faculty members. And publishing houses, instead of providing a big advance upfront and investing in young authors over a series of books, now expect many writers to earn their share of a book’s revenue through royalties.

If we consider how many jobs are being advertised, without asking whether they are being filled, the labor market seems to be booming. If we measure labor market progress in terms of actual hiring, however, it’s clear that the economy is recovering slowly. Employers appear to be looking around for workers but then holding out for the very best candidates, and, if need be, making do with few new hires or none at all.

These are signs of a world where next year’s business income is less certain, and many employers take greater care to keep weaker workers off the corporate team. Some employers would rather spend on information technology than hire the wrong workers. Some prefer to invest in the developing world with its longer work hours and lower wages. I outline these processes in my forthcoming book, “Average Is Over: Powering America Beyond the Age of the Great Stagnation” (Dutton Adult).

Young people who are hired often fail to find desirable, high-paying jobs. If we consider four-year college graduates only, average starting salaries, inflation-adjusted, were higher in 2000 than they are today, a decline that started well before the financial crisis. On balance, though, college remains “a good deal,” in part because wages for nongraduates have fallen even more than those for graduates. That is hardly a reassuring sign for the broader economy.

THESE developments put economic pressure on higher education. If it’s harder to get a good and lucrative job after college, why should students pay ever-rising tuition rates? College doesn’t always prepare students very well for the work force, and most graduates don’t enjoy the relatively rosy job prospects of computer science and engineering majors.

As tuition increases slow because of a sluggish labor market, colleges will have to change, making their offerings more relevant. But significant improvements may be hard to come by. Slow-growing or even shrinking revenue will strip colleges of financial resources, and they may suddenly have to focus on managing a decline rather than building for a more innovative future.

Policy changes to bolster economic growth and employment, whether by simplifying the tax code, repealing some occupational licensing, bringing more rigor to K-12 schooling or accrediting cheaper online education, may help reverse or curb these trends. But to focus on policy alone is to miss the gravity of the situation.

Falling wages for new entrants to the job market suggest that a sizable chunk of the American labor force may never achieve middle-class wages in a relatively secure full-time job. And many young people don’t want to take physically demanding jobs, which are often filled by immigrants. Some young people are breaking out of these traps by starting new Internet or service-based businesses, in lieu of looking for traditional employment. But others end up in part-time, temporary or low-quality jobs, biding their time and hoping that something changes.

We may not like what the market is indicating here, but it would be a mistake to shoot the messenger — namely, the market itself. Businesses are measuring value more accurately and choosing more cautiously, and though that raises overall productivity, it isn’t good for all workers. Many face the burden of meeting the standards of a more demanding world, and not all are succeeding at that task. It’s a problem that won’t be solved by any kind of quick fix.

Tyler Cowen is a professor of economics at George Mason University.

DealBook: Pension Reform Could Disrupt Investment Funds

Wealth Matters: What to Do When a Friend Pitches an Investment Idea

“It’s Question 1 at the cocktail party,” he said. “If someone like me doesn’t ask this question, they’re silly.”

Mr. Liss is a founder of Closeline, a nationwide title insurance company. He is wealthy, so people think he has money to invest in their ideas. He has learned that how he responds to them takes more than a little thought.

He said he knew not to turn down a request on the spot. He sees no reason to offend the person and he has had success with investments that have come to him through friends. Yet Mr. Liss has also lost friends and money in investments that fell at his feet, so he has grown more circumspect in the two decades since he started his company.

Others have learned the same lesson. “The first thing I tell clients is, ‘One of the things that happens when you’re successful is somehow, some way, someone is going to ask you for money, and it’s going to be someone you know,’ ” said Jeff Leventhal, a managing director at HighTower Bethesda, who has focused his advisory practice on working with entrepreneurs.

The decision to decline or invest, say those with deep pockets, requires as much an analysis of the offer and the person making it as an assessment of the pain of losing a friend if the investment turns sour.

PARRY THE PITCH Chat Reynders, chief executive of Reynders McVeigh Capital Management, said he had grown cautious of the typical party pitch since the 2008 financial crisis. They seem to be thinner.

“More often than not what you have is a situation where someone is reinventing himself or trying to get their feet beneath them, and they have an idea,” he said. Most times, he said, the person doesn’t understand how hard it will be to bring that idea to fruition.

He speaks from experience. He is now a successful investor in and producer of Imax films like “Whales"and “To the Arctic,” but he had a tough start. “I got the tar beaten out of me,” he said. “The difficulty was in learning what I didn’t know. I learned a lot about how hard it is to be an entrepreneur.”

The one investment in a friend’s idea that still haunts Mr. Liss was far easier to grasp than an Imax movie. It was an investment in a store that sold bedroom furniture for teenagers, and the friend had some experience in retail. Mr. Liss believed in him and trusted that he would treat him well.

“It wasn’t completely harebrained, but looking back, the business was completely weak,” he said. “We lost it all.”

The friendship also ended, but not because of the investment. Mr. Liss said it was his friend’s reaction to failure, which as an entrepreneur he knew was possible.

Then there are pitches that require a stone-faced adviser to hear out, like one for the mobile electrolysis machine. “They would come to your home to conduct electrolysis,” said John P. Rompon, managing partner at McNally Capital. “I get it conceptually, but from a business perspective, that dog don’t hunt.” His firm was charged with letting the person down gently.

DEVELOP A PROCESS Many pitches are for something an investor may actually need. Amy Renkert-Thomas, managing director of Withers Consulting Group, for 12 years ran Ironrock, her family’s paving stone company in Ohio, which was founded in 1866.

When she took over, as a member of the fifth generation to run the company, she found processes in place to evaluate direct pitches for investments. But when an uncle approached her, seeking to sell insurance, it was more difficult.

She said she fell back on the company’s processes to assess all investments. She went with a different insurer, and her uncle understood, she said. More important, he is still happy to see her at Thanksgiving.

“What saves a family is having a policy we follow,” she said. “Most family members are not that offended when you tell them that. If you said, ‘I don’t like you,’ that wouldn’t work as well.”

Drew McMorrow, president of Ballentine Partners, said a strict set of guidelines on when and under what conditions they would make additional investment could also save people from investing more than they wanted. One strategy, he said, was to have all investments pegged to a percentage of what the person could raise from other investors — for example, putting in 20 percent of every outside dollar raised.

Bucks: Investment Plans and Forecasts Don’t Mix

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Wealth Matters: Taxes Influence Investment Strategy, and Not Always for the Better

That may not be a good thing for their portfolios.

“Clients are definitely asking, because it’s a real issue in today’s environment,” Michael N. Bapis, a managing director and partner with the Bapis Group at HighTower Advisors, said. “We try to keep them focused on the goals — preserving what they have, capturing some of the upside, limiting the downside. At the end of the day, we can’t change the tax laws.”

When asked about how tax rates would affect an investment, he said his advice was almost always the same. “If it doesn’t make sense for your portfolio, then it doesn’t make sense,” he said, even if there is tax savings. “If it does make sense, regardless of the tax consequences, we’re going to put it in your portfolio.”

Last week, I looked at how the changes to the tax code were affecting how people thought about their estate plan. This week, I’m looking at how tax increases can influence people’s investing behavior.

The tax rates on investments have increased significantly from last year. Depending on a person’s income, taxes on long-term capital gains and dividends are now as high as 23.8 percent, an increase of 59 percent over last year’s rate. Taxes on investments that are held for less than a year that incur short-term capital gains tax or investments subject to income tax rates have increased for top earners by 24 percent, to 43.4 percent (with the Medicare surtax included) from 35 percent.

Those are substantial increases, but focusing on them alone can obscure a fuller analysis of risk. Investors can end up paying no taxes on an investment, but that may be because they lost money on it, or they may pay lots of taxes on a large gain that they might not have achieved otherwise. This is why advisers stress that taxes should not be the first concern when deciding whether to buy — or not buy — an investment.

If there is one investment that has been promoted as great for minimizing taxes and achieving a large gain, it is master limited partnerships. Most are involved in the transportation or storage of oil and natural gas. What makes them appealing, from a tax perspective, is that a large portion of the dividend they pay is treated as a return of principal and is not taxed.

But in the rush for one type of tax savings, investors can end up paying other taxes. Master limited partnerships with pipelines that run through several states can incur state tax bills for investors, though usually only when the income goes above a certain threshold.

The bigger tax concern generally comes when investors sell their partnerships, since the part of the dividend that was not taxed for years reduces the original price of the investment. Greg Reid, a managing director at Salient Partners and chief executive of the firm’s $18 billion master limited partnership business, said an investor who bought a partnership and sold it five to 10 years later could be faced with two types of taxes. The first is income tax, because the original purchase price would have been reduced by the amount of principal returned in the dividends. The second is capital gains tax on the increase in the value of the investment itself.

Another way to look at these partnerships is to consider the solid and increasing dividends they have paid over the last 25 years, often 6 to 7 percent.

“The baby boomers are going to need a lot of income to live,” Mr. Reid said. “M.L.P.’s are particularly great for older people who are retiring. They have a growing income stream.”

As for avoiding high taxes, the solution is to give the partnership to charity or die with it in your estate. Both may be viable options for investors in their 70s and 80s but are probably less attractive to people in their 30s.

Municipal bonds, which have long been attractive to wealthier investors because the interest they pay is not taxed by the federal government, pose a different sort of risk.

Mr. Bapis said he was concerned that investors who were not paying attention to the broader economic news were not aware of the current risks of buying an existing municipal bond. With yields on many municipal bonds extremely low — around 0.75 percent for five-year bonds and 1.74 percent for 10-year bonds, according to Bloomberg — even a small increase in their price, which would cause the yield to go down, would cause a loss of principal.

DealBook: Barclays and Credit Suisse Post Strong Earnings in Investment Banks

Darren Staples/ReutersBarclays’ investment bank benefited partly from a bullish stock market performance in America.

LONDON — As European policy makers push financial institutions to cut back on their risky trading activity, some of the region’s largest banks are becoming more reliant on their investment banking operations to bolster performance.

On Wednesday, the British bank Barclays and a Swiss rival, Credit Suisse, both reported strong first-quarter earnings for their investment banks that helped to offset some sluggish growth in other divisions like retail banking and wealth management.

The healthy performance comes despite a push by European politicians to limit firms’ exposure to financial risks and to promote lending to local economies.

New tougher capital requirements have forced European banks to shed billions of dollars of assets since the financial crisis began. A proposed cap on banker bonuses that will become effective at European institutions next year has led to fears of a mass exodus of firms’ top earners to international competitors.

The two banks’ first-quarter earnings reflected the strength of investment banking.

Barclays’ quarterly pretax profit for its investment bank rose 11 percent, to £1.3 billion, or $2 billion, or roughly 74 percent of the company’s combined pretax profit over the period.

Over all, Barclays’ quarterly profit, when adjusted for one-time charges, was £1.8 billion, down 25 percent from the same period last year, which missed analysts’ estimates. The fall was linked to £514 million ($784 million) of costs related to a restructuring that includes 3,800 layoffs and a £235 million ($359 million) charge connected to the value of the bank’s debt.

Barclays’ investment bank benefited from renewed deal activity and a bullish stock market performance in the United States, where it now generates around 50 percent of its revenue. For example, the bank is advising Dish Network on its proposed $25.5 billion takeover of Sprint Nextel. “The reality is that investment banking is becoming more dominant for Barclays,” said Ian Gordon, a banking analyst at Investec in London. “The first quarter was a blowout performance.”

At Credit Suisse, pretax profit in its investment banking division rose 43 percent, to 1.3 billion Swiss francs, or $1.4 billion, partly driven by a strong performance in the bank’s fixed-income sales and trading business. In contrast, earnings from the company’s private banking and wealth management business fell 7 percent, to 881 million francs, over the same period.

Credit Suisse reported a net profit of 1.3 billion francs ($1.4 billion) in the first quarter, compared with a profit of 44 million francs ($47 million) in the same period last year, when the bank booked a loss of 1.6 billion francs ($1.7 billion) on the value of its own outstanding debt.

Analysts said the bank’s strong earnings were a result of a cost-cutting program started by the chief executive, Brady W. Dougan. The company’s investment banking division also benefited from a pickup in global stock markets in the first three months of the year.

“The investment bank was the main driver with impressive cost management,” Kian Abouhossein, a banking analyst at JPMorgan Chase in London, said in a research note to investors.

Shares in Barclays fell 1.3 percent in London on Wednesday, while Credit Suisse’s stock price rose 1.5 percent in Zurich.

Attention will now turn to other large European banks that will report their first-quarter earnings over the next few weeks.

Deutsche Bank, the largest bank in Germany and one with a major investment banking division, will announce its results on Tuesday, as will the Swiss banking giant UBS. Analysts are expecting a fall in UBS’s first-quarter net profit as the company continues to carry out sharp reduction in its investment bank, which includes around 10,000 job cuts, to focus on its wealth management business.

The continued reliance on investment banking at some of Europe’s largest institutions follows efforts by politicians and top banking executives to reshape the Continent’s financial sector.

Some banks, like UBS and Royal Bank of Scotland, are reducing their exposure to risky trading assets, while others, like HSBC and Standard Chartered, are increasing their operations in fast-growing emerging markets.

Antony P. Jenkins, Barclays’ chief executive, also is trying to rehabilitate the company’s image after a series of recent scandals. Last year, the bank agreed to a $450 million settlement with the United States and British authorities after some of its traders were found to have manipulated crucial global benchmark rates for financial gains.

Your Money: Your Money: Rental Investment May Seem Safer Than It Really Is

The idea of buying a house and renting it out may seem especially attractive now, with home prices still reasonable, though rising, in many places, and interest rates at levels practically begging you to borrow. And if you’re thinking about retirement, the income can serve as an inflation-adjusted annuity of sorts, since rents are likely to rise over time.

But our perceptions can be deceiving. “There is a lot of idiosyncratic risk associated with rental income,” said Christopher J. Mayer, professor of real estate, finance and economics at Columbia Business School. “That is the word that economists use for when a lot of things can go wrong, even if on average they don’t go wrong very often.”

Tom and Ana Vogel, a retired couple in their early 70s, are seasoned landlords. So they’re aware of the risks, having dealt with problematic tenants in the past. Still, with a sizable piece of their retirement savings tied up in certificates of deposit earning less than 1 percent, they thought they could do better by buying a house and renting it out. They recently bought a five-bedroom house in their hometown, Germantown, Md., for $350,000, and they expected about a 6 percent return on their investment, as well as some tax benefits.

“It is high risk, you just have to be careful,” said Mr. Vogel, who worked as a geodesist and information technology manager for what was the Defense Mapping Agency. “You have no control over the stock market,” he added, explaining that they didn’t have the stomach for the volatility after losing half of the $100,000 they had invested in mutual funds during the market downturn in 2000.

With a pension accounting for half of their retirement income, the couple may have more room for error than other retirees. They also paid for the property in cash — the C.D. money covered half, and they used a home equity loan on their primary home to cover the remainder.

If you’re thinking about testing these waters, you can expect to compete with cash buyers like the Vogels — they represented 32.3 percent of home sales in February, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey. But a lot of those investors have much deeper pockets. In certain spots across the Sunbelt, in particular, the homeowner next door may actually be a faceless private equity firm. The Blackstone Group and other Wall Street investors are gobbling up properties in places like the Tampa Bay area of Florida by the thousands. And their exit strategy could affect yours.

Jack McCabe, a real estate consultant in Deerfield Beach, Fla., said he had never seen large investors purchase so many homes in one fell swoop, giving them such great sway over pricing in the market. “A lot of the price increase is not due to a market that is getting healthy, but is due to the influx of hedge funds, and a high percentage of homes are selling at artificially inflated values,” Mr. McCabe said.

Should you decide to follow the Vogels’ lead, there are a variety of calculations you should make, and concerns and questions you should have ahead of time, several of which are sketched out below.

DO I NEED FINANCING? Taking out a mortgage obviously increases your financial risk, even if you believe there is a healthy spread between what you can charge in rent and what you owe on the mortgage (and other expenses). In fact, what you’re really doing is borrowing to expand the size of your investment portfolio, explained Professor Mayer, which can be particularly risky for retirees who are no longer working. “They can turn their $500,000 portfolio into $600,000 by borrowing, but if you told them you were going to borrow money to buy a REIT, people would say, ‘Gee, that’s really risky,’ “ he said. “Well, then why is it less risky to do that with a rental property?”

We don’t have to look back too far to remember what can happen if home values fall. “If stuff goes down in value, that leaves you much more exposed,” Professor Mayer said. “Borrowing money to earn a higher return involves risk.”

CAN I GET A MORTGAGE? Not only is getting a mortgage on an investment property more difficult than getting a loan on your primary home, it also tends to be more expensive. Mortgages on investment properties tend to carry slightly higher interest rates — anywhere from 0.25 of a percentage point to a full percentage point — and may require higher down payments, according to Keith Gumbinger of HSH.com, a mortgage data firm. “Things can also get more complicated where the income from the property is needed to support the loan,” he added. “The purchaser may need to provide a rental history for the property, if any exists, or they may need to have a rental market analysis conducted.”

AM I DIVERSIFIED ENOUGH? If you have a $600,000 portfolio, putting $300,000 into one asset is a highly concentrated bet. “People tend to mentally compartmentalize their investments, but really, you should be looking at them together,” Professor Mayer added.