From the second quarter of 2014, there has been a sharp decline in global fuel prices, which not only meant a lot of extra money being saved for vehicle owners, but also meant major changes in the sales and profits of automobile manufacturers. Vehicles and fuel are dependent on each other, and the price and demand for one affects the price and demand for the other. The fuel industry is driven by car sales, and changes in fuel prices also greatly impact consumer spending on vehicles, which in turn affects the revenues and profits of automakers. There are different ways in which automakers can be affected by volatility of oil prices. Changes in oil prices affect overall consumer spending and behavior. Also the sales of fuel-efficient, high fuel consuming cars and alternative fuel cars are affected differently when hit by a substantial increase or decrease in oil price.

The trend in oil prices for the past three years is shown in the following graph published by the NASDAQ stock exchange.

 

The last three quarters of 2014 is the crucial period that is to be focused on when exploring the correlation between declining fuel prices and vehicles sales and profits made by manufacturers. A more comprehensive view of these quarters as compared with its previous years can be seen in the following graph.

 

The average oil price decrease through 2014 has greatly impacted consumer spending and saving. When oil prices go down, consumers think they are inevitably saving a lot of money. In a paper published by NACS, Jeff Lenard elaborated that fuel is a commodity that is intertwined into an average citizen’s everyday life and changes in fuel prices fundamentally impact consumer spending and behavior in different ways.

Firstly, some consumers might change their driving habits. When asked through a NACS survey why people were driving more when compared to the previous year, the answers by people from different genders and age groups were very close to the results summarized in the table below.

It is evident from this table that lower gas prices were 40% of the reason why people chose to drive less and these people were almost equally distributed throughout all the age groups. Hence this indicates that fuel prices have an affect on consumer spending and consumer behavior, which is critical to the sales of the automobile industry.

Secondly, consumers are sometimes able to make decisions on weather they will reduce their driving if gas prices increase. A different survey, also conducted by NACS explored this issue and asked people how much would oil prices have to increase for them to lower the number of miles they drive, and the results were summarized in the graph below. The graph below illustrates the average gas price for each month and the increase in the oil price that would have to occur for consumers to start reducing their driving. Most results show that if oil prices were even $1.00 more per gallon, there would be a direct effect on the number of miles driven by vehicle owners.

During changes in fuel prices, not only is consumer behavior changing accordingly, but people also feel differently overall about the economy which affects every industry, and the automobile industry is especially hugely affected by this. The overall feel of an economy is a subjective term that can be defined by varying characteristics. For example, it could be defined by many characteristics, like economic recessions, decline in the stock markets, or political instability. However, it could also be measured by more specific factors like decline in oil prices. For example a survey that asked target customers during 4 different years (with distinctive oil prices) about how they essentially felt about the economy, their response reflected that the there was more optimism in the economy within people and their consumer behavior during the periods of sharpest decline in oil prices. The outcomes of the survey are presented in the diagram below.

 

When people have a positive attitude towards the economy because of decline in fuel prices, they tend to be more liberal about spending money, because as mentioned previously, they think they are certainly saving money on gas (vehicle owners). As a result, this benefits the retail industry, and the sales and profits of automobile manufacturers are impacted in an interesting manner.

The data pertaining to light weight vehicle sales and oil prices throughout the years is displayed in the graph below.

It is evident from the graph the fluctuation in oil prices is not directly consistent with the sales of light weight vehicles. However, it would be useful to breakdown the broad category of these vehicle sales into categories to analyze the trend in detail, firstly, small light weight cars, secondly big SUVs and trucks and lastly hybrid or electric vehicles that do not run on fuel.

Small vehicles that have a high mileage, which means they drive for a high number of miles for the amount of gallons of fuel, and these vehicles are usually the more fuel-efficient vehicles. Fuel-efficient vehicles usually have higher sales during of periods of rising or high oil prices.

As can be seen in the graph below that is comparing fuel prices and sales small fuel-efficient car sales, the trends of both have been very similar. There is a direct correlation for the trends of oil prices and sales of small cars from 2010-2014.

The second category of cars that can be explored is large cars that include SUVs and trucks. These large cars are usually gas-guzzlers, which means they give a lower number of miles for a certain amount of gallons of fuel and hence consume a lot of gas. The trend between large car sales and oil prices from 2010-2014 can be seen in the following graph.

There is not a consistent relationship or trend between changes in oil prices and sales of large cars. For example, there is a major decrease in sales of large cars in the second and third quarter of 2010, but there is a decrease in oil price in the second quarter and increase in the second quarter. Also during the last two quarters of 2013, when the US was progressing towards recovering from the financial crisis of 2008, there was an increase in fuel prices but large car sales were slowly diminishing: which could have been because of their low mileage and fuel efficiency. During the period of decline in oil prices, the sales of large cars did not increase. It continued to decrease, but at a much lower rate. This shows that oil prices are not the sole factor that determine or influence car sales, especially in the large cars/SUVs segment.

The third and final category of automobiles that can be explored is the alternative fuel (electric or hybrid) vehicles. Within alternative fuel vehicles, there are electric cars and hybrid cars. Only about a little less than 1% of households in America drive an EV, so though they do not have a very significant contribution towards the automobile industry, it is extremely important to consider EVs, especially when comparing its trend with fuel prices, because EVs are the primary potential solution to the energy and fuel crisis. Analyzing the trends of sales of EVs is important because they are a key alternative to fuel run cars that will face a major crisis in the future.

The following graph shows the trends of oil prices as compared with electric vehicles, and there is almost no correlation between the two. However as mentioned before, electric vehicles only make up less than 1% of total car sales, and how oil prices affect EV sales would not drastically matter for the automobile industry as a whole.

Hybrid cars are cars which combine the systems of both a conventional fuel run engine and an electric vehicle. Hybrid cars make up a larger percentage of the automobile industry than electric vehicles. The graph below quantitatively compares the trends of changes in oil prices and sales of hybrid cars.

It can be inferred from this graph that the sales of Hybrid cars have been quite coherent with changes in oil prices, except for in the last few quarters of 2011. Similar to the trend in small cars, hybrid cars are also considered very fuel-efficient. Hence their sales go up as fuel prices go up because they do not require as much fuel to run for the same number of miles as other cars, and when fuel prices decrease, consumers inevitably think they are saving money and opt for bigger gas guzzler cars, reducing the sales of hybrid and small fuel efficient cars.

In conclusion, to answer the research question posed at the very beginning of this composition: fluctuations of fuel prices do affect car sales, but very distinctively for different categories of cars. Changes in oil prices both directly and indirectly affect car sales. Fuel prices directly affect car sales when trends in sales of a certain type of car changes correspond to trends in oil prices (for example small cars and hybrid cars). Changes in fuel prices indirectly affect sales of cars by influencing consumer spending and behavior, which is in turn reflected in every retail industry, including sales in the automobile industry. Fuel and cars are almost like complimentary goods from an economic perspective and hence the connection between oil prices and car sales is significant. Consumers’ decisions to purchase certain types of cars is however not solely dependent on fuel prices. A vehicle buyer takes a lot of different factors into account before buying a certain type of car. Also, with the swiftly progressing nature of technology, hybrid cars and electric vehicles have been revolutionizing the nature of the automobile industry. Though EVs do not make up a large percentage of car sales, hybrid cars, especially the Toyota Prius have been becoming increasing popular. Another interesting element to consider could be that many of the self driving cars being built by Uber have been focusing on increasing fuel economy, reduce oil use and curb carbon emissions, according to an article in the wall street journal, written by a former energy advisor for the government. This could also make car sales and decisions made by consumers less dependent on fuel prices. However, driving habits itself have been affected since the initiation of Uber, and car sales have been affected since, so it would be intriguing to see how much further effect the introduction of self-driving cars by Uber have on car sales. Nevertheless, fuel prices continue to affect sales of automobile manufacturers in a substantial manner.

Sources:

 

http://www.usatoday.com/story/money/2015/08/03/nissan-us-sales-up-8-big-vehicles-soar/31046075/

 

http://www.fuelsinstitute.org/researcharticles/fuel-prices-auto-sales.pdf

 

http://www.nacsonline.com/YourBusiness/FuelsCenter/Pages/2016-Retail-Fuels-Report.aspx

 

http://www.lazardnet.com/docs/sp0/18334/USConsumerAndCorporateBehaviorInALowOil_LazardResearch.pdf

 

http://www.nacsonline.com/Media/Daily/Pages/ND1114144.aspx#.V_xRSenBzzI

 

http://www.nacsonline.com/YourBusiness/FuelsCenter/Documents/2016/Consumer-Sentiment.pdf

 

http://www.ucsusa.org/clean-vehicles/electric-vehicles/bev-phev-range-electric-car#.V_1LV-nBzzI

 

http://blogs.wsj.com/experts/2016/04/27/how-driverless-cars-might-actually-harm-the-environment/

 

 

Traveling outside of Mongolia’s only major city, Ulaanbaatar, can seem like traveling back in time 800 years. Among the hundreds of miles of rolling hills in which you would be hard pressed to find any permanent, man-made structure, you half expect to see Genghis Khan’s enormous army thunder down a hill aboard hardy little ponies. Nomadic herding culture has been a part of Mongolia for thousands of years and it remains a major part of Mongolian life however, Mongolia’s economy is undergoing massive transformation that could change both the cultural and natural landscape forever.

From 2009 to 2013, the Mongolian GDP nearly tripled in size from a scant $4.584 billion (US) to $12.582 billion, according to the World Bank. Yet more important than the rise of the nation’s GDP is the source of economic growth and geographic location: valuable minerals and metals and its location just north of resource hungry manufacturing powerhouse, China.

The story of Mongolia’s rise from irrelevance to noticeable actor in the Asian sphere began in 1997 when the democratic government, established after the fall of the Soviet Union, which maintained Mongolia as a buffer against China, passed the Minerals Law of Mongolia. This law established the state’s ownership of all mineral resources within its borders and reserved the right to sell mining and exploration licenses.

The goal of this law was to grow Mongolia’s economy after a dip that left their GDP below the billion-dollar mark from 1993 to 1994. If the government could sell its mining and mineral exploration rights to international mining corporations, it could dramatically increase levels of foreign direct investment, lower unemployment, and raise GDP.

For investors, abundant Mongolian reserves of copper, gold, fluorspar, and uranium were highly attractive. Especially in the early 2000s when prices for rare earth metals and minerals were climbing. In addition to natural resources, Mongolia shares a border with China, the world’s largest importer of raw materials. This presents a lucrative opportunity to sell materials to China at a lower price by minimizing transportation costs that make metals and minerals from South America more expensive.

Combining natural resources with its proximity to China, a country that imported $25.1 billion in refined copper and $63.9 billion in gold in 2014, Mongolia looked like the world’s premier destination for mining operations.

After a few years of exploration on the Mongolian steppes, international mining mavens concluded that there were fortunes to be made and the investments started pouring in. From 2009 to 2011, a World Bank report found over a $4 billion increase in foreign direct investment from $623 million to $4.713 billion.

High investment was not meant to last. Beginning in 2012, foreign direct investment plummeted just as quickly and dramatically as it shot up. Investors likely balked at copper prices that plummeted in the second quarter of 2012. As a result, between 2012 and 2015, foreign direct investments fell $4.2 billion to a mere $196 million last year.

In spite of the massive expansion and contraction of foreign investment in Mongolian businesses, private international mining company spending on their own ventures has kept the GDP from shrinking even though growth has slowed. The exponential growth that started after the 1997 Mongolian Minerals Act peaked in 2013 at $12.583 billion, a 17 percent growth rate, but was followed by a downturn in GDP with growth rates slowing to 2.3 percent in 2015.

One such company is Turquoise Hill Resources Ltd., a subsidiary of the Canadian Ivanhoe Mines. It announced a $4.4 billion investment in underground development at its mining sight Oyu Tolgoi on December 14, 2015. Estimated to be the world’s third largest reserve of copper, Turquoise Hill originally invested $6.2 billion in 2013, after years of exploration and analysis, to begin production.

These investments, and others like them, have helped and continue to be a vital part of the Mongolian economy. In 2013, mining made up 16 percent of the GDP and the exportation of copper, gold, and coal made up 65 percent of exports in 2012.

In spite of goals to bolster the economy, the Mongolian government has not opened the floodgates to capitalist investment in such a way that would allow foreign corporations to lay waste to the Mongolian countryside, people, and economy to benefit their bottom lines. The emphasis is on sustainable and fair growth.

In order to include Mongolian interests in mining decision making, the Mongolian government and Turquoise Hill spent five years negotiating the Oyu Tolgoi Investment Agreement. The agreement states that the state has a 34 percent equity stake in the mine with the ability to renegotiate their ownership to 50 percent as soon as initial investments have been recuperated.

Additionally, the agreement holds the investor accountable for regional economic development, adhering to national and international environmental standards, contributing to national infrastructure, maintaining a workforce that employs mostly Mongolians, and investment in the education of the Mongolian people.

Leveraging the Oyu Tolgoi mining contract with Turquoise Hill has allowed Mongolia to begin developing more evenly than some of its resource rich peers, who sold extraction permits heedless of local peoples’ needs and health, such as Ecuador. In creating stipulations that require the mine to be staffed 90 percent by Mongolians, with 50 percent of engineers being Mongolian citizens within the first five years of operation, holistic development is at the center of project.

As a result, GDP per capita increased, poverty rates decreased, and unemployment rates shrank. Since the beginning of development at the Oyu Tolgoi mine in 2011, GDP per capita has grown over 800 percent. The GINI Coefficient, a measure of income distributions in which a value of 0 represents perfect equality and 100 represents absolute inequality, Mongolia is rated a 36.5, a ranking very similar to that of China.

Recently, however, growth has not been as impressive as it was in 2011 and 2012 during which GDP growth was in the double digits. In 2015, growth slowed to 2.2 percent. This has in turn caused the Mongolian currency, the togrog, to plummet in value.

Many economists blame Mongolia’s economic downturn on changes in the slowing Chinese economy. China, which is the destination of 80 percent of Mongolia’s exports, has decreased its demand for commodities like copper and coal which has driven down international commodity prices significantly. This serves as a double blow to the Mongolian economy because China is not buying as much and prices are falling in the international marketplace.

Because of slow growth and a faltering Chinese economy, investors who were drawn to invest in the Mongolian government due to the profitability of mining, have quickly sold government bonds, raising the supply of the currency, and further exacerbating the devaluing of the togrog. In order to mitigate these affects, the Mongolian central bank raised interest rates to 15 percent in August. Theoretically, this will curb currency depreciation by incentivizing investors to invest again, which will increase demand for Mongolian currency. But, for now, the strength of the togrog is still a major source of concern for Mongolia.

Regardless of its economic impacts, mining has had some secondary, unintended negative affects on the Mongolian people and environment. As the economy grows, due in large part to the mining industry, there exists an unrivaled concentration of wealth and opportunities in the few cities and mining towns in Mongolia. As a result, there has been a rapid increase in levels of urbanization.

This population shift is common in developing countries because many city and mining jobs are more productive and therefore more profitable than agriculture.

While this trend is the norm in many developing nations, Mongolia’s rich cultural heritage is based in its traditions of animal husbandry and nomadism, which are increasingly viewed as economically uncertain and therefore undesirable ways of life. The increasing frequency of unusually cold winters, called “zuud,” are intensifying movement to urban areas as herds die off on the ice covered steppes. These extreme weather conditions have been attributed to pollution and its affects on climate change.

To move to the city, many families sell what remains of their herds, which have traditionally served as a source of food in the form of meat and dairy, clothing made from the wool of sheep and goats, and even fuel from manure to ward off the frigid winters. Since so many herders have relocated to Ulaanbaatar in particular, the outskirts of the city are crowded with “gers,” traditional felt tents, that lack running water and proper plumbing.

While these ger areas are difficult to manage in the summer months, it is during the winters, when low temperatures average around -28 degrees Fahrenheit, that real problems arise. In order to keep warm and cook, many former nomads living in gers burn coal and wood. Air pollution is so bad in the colder months that it exceeds the World Health Organization’s most lenient standards by 600 to 700 percent.

This creates a spiral of urbanization. As more nomadic families leave the countryside and gather in mining towns and cities, pollution increases thereby worsening and increasing the frequency of hard winters, forcing more families to trade their herds for mining or manufacturing jobs.

Without intervention, urbanization could potentially lead to the disappearance of the nomadic traditions that have inhabited and characterized the region for over one thousand years.

When I first came to the United States with a student visa eight years ago, I dreamed of working in the states because my friends and family members had been talking to me about how America is the land of opportunity. Yet, it is very interesting for Koreans to view how the United States has more opportunities than Korea because South Korea has had lower unemployment rate than the United States has had by having the unemployment rate of 3.2% in 2008.

Just looking at data on 2005, South Korea was ranked as the number one country to have the largest population of students studying abroad in the states. According to an article in Radio Korea in 2006, the U.S. had 117,755 Korean international students. Furthermore, the article states how most of South Koreans wanted to live and work in America between 2005 to 2006.  This sentiment indicates how many Koreans (either students or workers) regarded the United States as the economic powerhouse where it was very desirable to leave their homes.

Though South Korean youths dreamed about immigrating to the United States, there was a problem. For countries with low birth rates, it is advantageous to attract intelligent and talented foreigners to expedite countries’ development. In case of South Korea, the foreign workforce in the country has been concentrated in manual labor, which does not require high education background. Does the allocation of foreign workers in manual labor mean that South Korea has a high birth rate? No, the World Bank Statistics in 2014 indicates that South Korea has  suffered from low birth rate of 1.21 children born per women.

With low birth rate and less welcoming of educated workers, South Korea should have a great education to promote R&D. However, there is an indication where the  intelligent and talented Koreans are avoiding to work in their homeland when they are getting PhD through studying abroad. According to the Korean Institute for International Trade report on 2006, South Korea had brain drain of 1.4% from 1990 to 2000 and it has not been getting better at all.

Why would the students be hesitant to go back to their country? Is it economically bad to go back to Korea? To answer this, it is important to compare Korean economic history between 1990s and today because the change in economy and social consciousness may be the reason for the brain drain.

Until the Asian financial crisis in 2007, South Korea was having the prime time of its economic prosper. According to the article Finance and Growth of Korean Economy from 1960 to 2004 in Seoul Journal of Economics by Shin-Haing Kim, the political shift from military despotism to democracy made better environment for Korean economy to grow. The democratization of politics in 1987 fostered economic liberalization and brought higher wages. In 1996, South Korea became the member of OECD (Organization for Economic Cooperation and Development) by meeting the requirement of having enough income per capita.

Despite the increase in wages ensured Koreans to have high hopes for further economic growth, Chaebol economy ultimately triggered South Korea to fall into Asian financial crisis of 1997. Chaebol (재벌) is a unique economic faction in Korea that is equivalent to family owned conglomerate. In the 90s, the government favored Chaebols and started to implicitly guarantee loans for them. In the essence, the government guided the fund allocations towards Chaebols by favoring them; the process of non-biased surveillance and evaluation of risks was skipped. Where the loans should have been granted equally to small business owners and firms, the loans were concentrated to Chaebols. In turn, the Chaebols became too big for the government to bailout when they were in debt. Consecutively, the foreign investors lost confidence in the ability of Korean economy to protect loans and many loans were withdrawn. As a result, big Chaebol corporations such as Hanbo, Sammi, Jinro, and Kia defaulted and the government had no power to bail them out. With the Chaebols fallen, South Korea faced a great amount of debt and South Korean government reached out to International Monetary Fund for financial remediation.

In 1998, South Korea had a record low GDP growth rate of -7% and it seemed that all hope was lost. However, Korean people rose up together and voluntarily accumulated 227t of gold to recover from financial crisis. According to an article in Korea Daily, the Koreans at the time submitted their luxury assets like gold bracelet and wedding rings to support their homeland to get out of the crisis. Though this campaign was not the main source of Koreans to escape from crisis, South Korea was able to pay the debt and interests to IMF  one year earlier than it was expected to.

Entering 2000s with free of IMF debts, South Korea has emerged as one of strongest Asian economic hubs alongside of China and Japan. From 1998 to 1999, the GDP growth had a miraculous increase from -5.7% to 10.73% according to data listed on The World Bank. From 2000 to 2015, South Korea’s GDP growth in 2000s is recorded to be 4.25% in average, which is bigger than the average United States’ GDP growth in 2000s (1.929%). Though the export heavy economy of South Korea has been showing slow growth, the unemployment rate has been low as 3.5% in 2016. However, the surviving Chaebols still assume a great power in economy and politics in Korea.

Economy definitely has gotten better for South Korea. However, the students who received doctorate degrees overseas state that they prefer staying outside Korea due to the disadvantageous circumstance they face as they get back. Mostly, the brain drain (phenomenon of talents emigrating into other countries) in South Korea is shown by the engineering and science talents migrating into the United States. According to Meil Business Newspaper’s analysis from the 2016 report of American National Science Foundation, 65.1% of Korean international students with doctorate degrees in engineering and science favored to stay in the states.  MBN also interviewed one of the international students who recently received a doctorate degree in engineering from Stanford. He said, “If I return to Korea, I may have to say permanent good-bye to my family. There are no universities offer me to be a professor and the jobs offered by corporate labs are all far away from the main city. I rather try to get a job at the U.S. defense company so I may get a citizenship. I know I may face racism, but I think being a second citizen is better than having no place in Korea”.

According to Radio Korea, international students with doctorate degrees in engineering/science leaving South Korea has increased from 2006 to 2016 by 170%. Yet, staying in the United States can often pose more problems for the Korean talents. In order to work in the U.S., the international graduates need to apply for jobs that sponsor working visas, and it is not an easy task. According to myvisajobs.com, the rate of U.S. companies granting visa sponsorship to foreigners in 2013 was roughly 55%. In other words, only the half of total international graduates may work in the states legally. In addition,  obtaining employment as a foreigner in the U.S. is a very painstaking process. First, the foreigner needs  Permanent Labor Certification(ETA Form 9089). Then the foreigner needs an Immigrant Petition for Alien Worker(Form I-140). And finally, the foreigner needs an Adjust of Status to a permanent resident of the United States(Form I485). It is definitely not an easy process to go through. 

Despite this not-so-favorable employment condition in the United States, the South Korean engineering/science talents desire to stay in the U.S. after getting doctorate degrees because the Korean academia does not socially welcome them . As stated in the interview above, becoming a professor in Seoul is extremely difficult for Korean international graduates. To begin with, the Korean work space culture often repel the international graduates. According to the book The Korean Mind by De Mente and Boye Lafayette, Korean workers inside Korea value the concept of “Anshim” or 안심. Mente and Lafayette describe “Anshim” as a “peaceful heart” state of mind that is developed from Buddhism and Confucianism. Though this concept is about finding peace in mundane, it also reflects how close-minded the Korean people are. Mente and Lafayette further comments on this state of mind in their book that “Anshim” dictates Korean language, etiquette, ethics, personal relations, and even business relations. For “Anshim” state of mind, irregularity is a very negative force. For the case of talents returning with doctorate degrees overseas, those talents are the irregular force that will invade the safe space of academia to the professors in Korean universities; the degree earners come back with American demeanor and suggest ideas that are not common in Korean academia. In turn, the Korean professors will outcast the foreign doctorate degree earners; this creates the similar discrimination as racism in the United States.

Furthermore, becoming a researcher in Korea is not profitable to the U.S. graduates due to poor wages. For example, the U.S. offers $80,000~$90,000 as the first annual income but Korea offers about $35,707 (converted from 40,000,000 Korean Won). For the less wages and cultural discrimination, Radio Korea criticizes Korea for not providing solution to these returning doctorate degree earners.

Interestingly, the amount of Korean international students in the U.S. has decreased over the years, contrary to the concern of the brain drain and falling demand in international students’ willingness to return to Korea. I compared the statistics of U.S. Immigration and Customs Enforcement report on 2014 and 2016. Between those years, the percentage of Korean students studying abroad in the U.S. drops year by year. The Financial News (Korean news agency) also has reported that the amount of U.S. dollars Koreans spent on studying abroad in the U.S. decreased from $1,920,000,000 on 2013 to 1,570,000,000, which is 18.1% decrease over the three-years period. According to its statistics, the Korean international students fell by 20% from 2011 (262,465) to 2015 (214,595)  because there are no longer additional merits the international degrees offer to students who strive to get jobs in Korea. According to the Korean Ministry of Employment and Labor, the labor market is not favorable to the student population. In 2013, the ministry stated on an article in Ulsan Daily that the total unemployment rate was 4% but the youth unemployment rate (15 to 29 years old) was 9.1%. The ministry sees the rate of achieving higher education as the problem. By 2011, 72.5% of youth work force had university degrees; thus, the youth work force became overqualified for most of jobs offered. This was the same for the returning studying abroad students as well. Since there has been an increasing trend of students who studied abroad from 2006 to 2011, the international degrees lost its values; the supply increased but demand fell down.

Besides the increasing supply of international degrees losing its value, the United States’ sentiment on foreign workers affect the decrease in value of degrees outside Korea. According to the interview Dong-A Daily (Korean News Outlet) had with a Korean employer in the states, he said: “The U.S. government demanded answers for my decision to hire a Korean international student. They came to the office very frequently to find any wrongdoing of my company just because I hired non-U.S. citizen.” According to Dong-A, there are similar cases in which the employers made a policy within the company to only hire U.S. citizens because they want to avoid any trouble. This sentiment is also clearly shown in this presidential election. The policies regarding international students have been tweeted and stated by both candidates.

As introduced in Little Book of Economics by Greg Ip, ideas, population, and capital are crucial for economic growth. On this issue of global talents immigrating and emigrating, ideas and population are directly influenced by those talents. As mentioned above, it is a great strategy for developed country with low birth rate to welcome more global talents and acquire jobs to make up for the low birth rate and further innovation. Yet, a recent phenomenon of global talents returning to their native countries after acquiring degrees and doctrine makes Korean problem bizarre. According to an article in the Huffington Post, the “People born in developing countries move to well-developed ones . . . but with the passing of time, some of them are willing to go back to their native country ‘to breed in the area where they were born'”. Just as Huffington Post describes with many international students from China, Kenya, and Italy, Korean students should also feel more confident to use the knowledge they have acquired from the U.S. universities in their own native countries.

The highly intelligent Korean international students not returning to their homeland can be damaging to Korean economy because the innovation may slow down. In any market competition, research and development are very crucial. Yet, the phenomenon of South Korean students who have potential to advance the R&D in their homeland getting discouraged by the work environment is definitely an issue Korea needs to solve in the future. The prime reason for the bad environment is the Korean university boards. According to the Hanguk-Kyungjae (Korean economics newspaper), Korean universities lack interdisciplinary system. Even though the Korean board of education publicly promoted interdisciplinary education, the professors in academia thought otherwise. The article describes that the professors think if professor A in one field of study tries to fuse his or her field of study with professor B’s field of study, they think of this phenomenon as an invasion instead of innovation. This view clearly has to do with aforementioned Korean state of mind, “anshim”. Due to the fact that “anshim” culture makes the academia to be very close minded, interdisciplinary education only exists as a noun. This problem is what repels the foreign doctorate degree earners as well. The students who earned their doctorate degrees in the United States are very used to interdisciplinary studies that they may want to research further when they become professors in Korea. However, the cultural state of mind hinders their motivation to come back and contribute to the close-minded academia.

The Hanguk-Kyungjae further sees this exclusivity problem in Korean academia as the main factor of not-returning intellectual talents who have acquired degrees overseas. Although South Korea has experienced tremendous of economic prosperity ever since the end of the Cold War due to innovative technologies in electronics and automobiles, the experts see that innovation is slowed down because of the exclusive culture in academia and it will slow economic growth even further. Though the number of Korean international students are declining, the brain drain issue is critical in South Korea because it will eventually slow down the competitiveness of Korean products. Though those are my worries, the future is still unknown because of the youths in Korea. Every year, the youth population are moving in the direction of becoming more open-minded than the generation before them. If Koreans continue to try, the struggle for returning foreign degree earners might meet its end. Culturally, Korea has definitely become more progressive compare to its very conservative past. Just as it is a remedy for everything, time may be the answer for the perception Korean academia has on foreign degree earners; thus, the problem of brain drain may be over in the future.

Part One: The Student Debt Crisis and How We Got Here

Pursuing a degree in higher education is often romanticized. The mentality has remained that a job is guaranteed as long as you sacrifice anything and everything for a bachelor’s degree, and ideally, a master’s degree or two. Of course, there are valid arguments for this, and for the most part, it’s true. Over time, all the financial strife will be well worth the wait, as education is an investment into the future.

But what happens when the investment doesn’t pay off? It is not uncommon for students to have a period of unemployment post-graduation, which results in ignoring those looming student loans. In addition to this, we all know the job market is still on shaky ground, and not all of us will find something that actually pays us enough to survive.

According to Student Loan Hero, the total U.S. student loan debt is up to $1.2 trillion, with 40 million borrowers, and $29,000 being the average balance. Why have we allowed this to become our reality? Despite a generous financial aid package, even I fit into this statistic. To sleep at night, I let myself believe, “You’re in USC Annenberg, and you’ll be fine.”

Unfortunately, this is the mentality many students have. A respected degree from a prestigious university helps, but nothing is guaranteed. Student loan debt is often blamed on private universities, but cuts in state budgets have led to a rise in tuition at public universities as well. Additionally, private universities sometimes have more scholarships than public universities can afford to offer. It is difficult to argue that private establishments are not the worst offender, because of course they are. However, it is a case-by-case basis (for example, the UC’s had little to no scholarships available to me, therefore I would have a similar debt situation graduating from UCLA.)

At the end of the day, it is better to have a degree, but the federal government’s over eagerness to give out student loans has led to a serious problem. According to Business Insider, Bill Ackman is convinced the outstanding balance in student debt could trigger the next market crash. Ackman claims that the government has loaned out too much money, which is true. “Student-loan delinquencies, in red, have risen as late payments in other types of payments have dropped,” according to a study by the Federal Reserve Bank of New York. The student loan debt crisis is being compared to the housing market crash. Wall Street kept saying “the housing market is stable, there’s nothing to worry about.” Throwback to 2008 when our country faced the worst recession since the Great Depression. Ringing any bells? We all know history repeats itself, so why is it so hard to connect the dots, and realize predatory lending back then, isn’t so different from our current situation?

To clarify, it is a tad exaggerated to say the student loan debt crisis is a carbon copy of the housing market bubble. However, the issue is the casual attitude towards loans, credit cards, and OPM in general. Since the 1970’s, the convenience of credit cards and the mentality of “get it now, pay later” has transformed our economy. This transformation was crucial since consumers were encouraged to spend, which drove the demand up, which all in all boosted the economy. Today, without credit cards and the ability to borrow money, our economy would be at a stand still. Nonetheless, student loans are another story. Especially when student loan knowledge is lacking. According to a survey by intuition, two-thirds of millennials who received loans felt they did not have enough information about their loans. 45% of students are not receiving repayment counseling, 47% do not know the interest rates on their loans, and 75% have not been offered an income-driven repayment plan. In summary, college students do not know what the heck is going on. It is easy to point the finger at the students. Obviously, we don’t care about our financial future if the tiny, fine print isn’t read word for word right? Wrong! Student loans are perceived to be far more confusing than they actually are, the repayment process feels much more difficult than necessary. We all know young people are a bit naive, so why would the government or private lenders willingly keep us dazed and confused? It’s like they want us to default.

Additionally, no one is doing us any favors by never capping the amount of money we can borrow. There are measures taken to ensure that students don’t take advantage, but there are too many loopholes. Students are usually given a six-month grace period post graduation. What happens when graduate school is the next step? Paying back undergraduate loans are deferred, the interest goes up, and a few years later, you may be looking at paying off loans for 30 plus years. In some cases, the rest of your life.

Take Liz Kelley, an extreme example of how allowing students to borrow to their heart’s desire is risky business. In the New York Times article “Student Debt in America: Lend With a Smile, Collect With a Fist,” Ms. Kelley admits that she “made her own choices.” Ms. Kelley has $410,000 in debt due to a number of circumstances. Long story short, Ms. Kelley had financial factors such as her autoimmune disease, childcare, divorce, foreclosure, and much more that kept delaying her from completing her education. By the time she finished undergraduate school and eventually graduate school, the interest rates destroyed her ability to pay all this back anytime soon. This story goes to show the “deep contradictions in the federal governments approach to student loans.” There are so many students that are still handed out loans, despite a shaky history of repaying loans in the past. When it is time to pay back the loans, forgiveness is hard to come buy. This is setting students up for failure, and most importantly, the decline of our economy.

The argument is made that those with the most debt have the highest degree, and therefore have the means to pay back loans. In many instances, this holds true. However, according to William Elliot, director of the School of Social Welfare at the University of Kansas, ” ‘even people with only $5,000 to 10,000 [in loan] are still going delinquent.’ ” The Federal Reserve study reveals that the 90-day student delinquency rate has raised to 11.3%. The White House Study attributes this to drop outs or people with lower degrees (who therefore have low wage jobs,) but that doesn’t mean delinquency only applies to a certain group of people. The fact of the matter is delinquency is rising, and the amount of student debt people under the age of 35 must pay back is decreasing economic growth due to lack of willingness to spend.

Part Two: How Student Loan Debt is (Potentially) Crippling the Economy

Millennials are the future of the economy, and yet most are reluctant to be ” ‘big spenders’ .” According to the Los Angeles Times, millennial’s are cautious as ” ‘children of the Great Recession.’ ” However, there is much more complexity to this issue than millennials simply being too frugal (in comparison to past generations.) Student debt is a major deterrent from investing in the future. The graph below (left) shows how people aged 35 and under have much higher student debt rates than past generations. Therefore, buying a house, marriage, child rearing, even buying a car is all postponed. Many students resort to living with their parents, not because millennials are too “coddled” (I promise you no one willingly lives with their parents post grad,) but because ” ‘student loan debt, more than any other kind, contributes to people having less favorable views on their own financial well-being.‘ ”

 

The lack of confidence in spending has lead to the slowing of our GDP and overall economic growth. As young people put off buying homes, the housing market slows down. Those who need to sell their homes are unable to, because the young, hip couples are crammed in their minuscule, overpriced apartment. According to a survey conducted by the National Association of Realtors and American Student Assistance, “seventy-one percent of those surveyed said their student loan debt is delaying them from buying a home. More than half said they expect that delay to last longer than five years. ” Additionally, one third of current homeowners revealed that they cannot afford to sell their home and buy another one because of student debt. Something else to keep in mind is that not being able to pay back student debt negatively effects your credit score, and your credit score effects every crucial financial decision in life, such as buying a home. This is probably another reason why the housing market has struggled recently.

(Note: As of May 2016, there was indeed a boost in the housing market. However, this survey was taken in June 2016 and indicates that the housing market is still not as strong as it should be. Everything else in the economy? Sluggish in comparison.)

Waiting to have children till later in life is not the end of the world, but if this continues for too long, our economic future could adversely affected by not having enough young people in the next generation (take Japan or Germany as great examples.) Not saving for retirement could also cause problems down the road. All in all, everything is being affected by student debt, more than economists and the elitist Wall Street “geniuses” would like to admit

Wall Street believes that student debt is a ” ‘fiscal headache rather than a financial risk,’ “ since many loans are backed up by the federal government. Most are convinced that due to this, there is a low chance of another financial crisis if defaults become rampant. However, if the government ends up needing to bailout student loan debt, the $1.2 trillion necessary to do so will halt economic growth, and raise taxes.

The hesitance to refer to the student loan debt issue as “crisis” is the wrong action to take. Why wait for things to get worse when there are ways to fix the problem now? Senator Elizabeth Warren and Attorney General Kamala Harris have made the effort to find solutions, but no one has taken them seriously. Decreasing government loans is not the right move either, as the demand for student loans would stay the same, and private lenders would swoop in and take further advantage of students. Some might say blaming student loan debt for the slow economic growth is pushing it, but why discredit the statistics that are right in front of us? Why ignore the millennials, who are arguably the most important group of people for the future of the economy? It is only a matter of time before this problem thoroughly unravels, and all we will be able to do is say, “I told you so.”

 

 

 

 

 

 

 

 

 

 

Residential investment currently accounts for about 5% of the United States gross domestic product. Considering the US GDP stands at just under 18 trillion dollars, housing is clearly a significant portion of American spending. As a major driver of economic growth, housing indicates the wealth of the people, but since the 2008 recession, it has taken a dip, and it is important to examine why. At 35%, the largest generational group of buyers consists of millennials between the ages of 18 and 34, but since the 1980s, the probability of this age group owning a home has gone from almost 17% to just under 14%. The question now is whether this is a permanent change or if it is just a fluke due to the economic crisis.

In the early 2000s, credit was very cheap, and this led to banks loaning money to people who probably should not have been given that responsibility. They took this money and bought up homes because they were known as a stable, surefire investment. Eventually, these people struggled to pay back their loans, and the bubble burst, causing banks to suddenly tighten up and be wary of loaning money. This does not bode well for average young adults because they do not have a long financial history to back up their ability to pay off loans. Right now, young adults are also being hit with a plethora of other problems, such as student debt and a flailing job market. The average college graduate in 2015 has to pay back over $35,000, which is more than double the amount borrowers had to pay back only 20 years ago even when adjusted for inflation. What is worse is that 44% of college graduates in their 20s are stuck in low-wage, dead-end jobs. With such shallow income-growth trajectories, millennials are more focused on paying current bills and making rent every month than saving for their future home.

 

This goes against the fundamental “American Dream,” which is a traditional idea consisting of three entities: job, family, and home. The hope is that with hard work and determination, one can acquire a high-paying job and eventually purchase a home for his or her family. As a result, young Americans have set life goals around hitting milestones to put them on this path, but as illustrated above, this “dream” is increasingly becoming out of reach.

The share of young homeowners has fallen steadily for the last thirty years, which means many millennials have taken up a new, or perhaps old, residence: living with their parents. For the first time in 130 years, the most common living arrangement among millennials is sharing a home with their parents, and over one-third of this generation is choosing to do so. Much of this can be blamed on the recession. Young adults do not have the money for a down payment or the continuous stream of bills stemming from mortgage and upkeep. Additionally, the housing market is not making this any easier with its increasing market prices and decreasing number of available affordable homes. Young people say they will move out the day they can afford it, but that day is looking depressingly out of reach.

For some, this situation is old news. Those who grew up in poor neighborhoods have always been less likely to be motivated to leave their hometown. These young adults probably will not go too far for college, and they are stuck doing low-wage jobs that, even in the long run, will not provide enough income for them to save and eventually spend on their own house. Those in this group are more likely to live with their parents and may be providing for the family just to make ends meet. Their situation is dire, and they are bound to a place that cannot allow them to grow and prosper.

On the other hand, take a look at those who have the greatest chance of being able to afford their own home. These include high-achievers who tend to come from rich backgrounds, move away for college, and settle in popular cities with a concentration of jobs like San Francisco or New York. Compared to the first group, this group has drastically more resources and therefore more freedom to set their own priorities. However, they are still not buying homes, but this could actually signal a cultural shift and a delaying of the whole process. There are many rational reasons why a young person of decent money would want to wait to splurge on a home, and it is possible this is due to a change in mindset.

For one, the rent in the cities mentioned above has reached astronomical, and for many, unaffordable levels. In both New York and San Francisco, the average square footage of a one-bedroom apartment is 750 square feet. This is a comfortable size for at most two people. The median rent per month for this apartment is $2,200 in New York and an outrageous $3,600 in San Francisco. This means that per year, those who choose to live in these cities are committing between $26,400 and $43,200 to solely rent. For many, moving to these cities is not so much a choice as it is the best way to find a career in their desired industry. New York is a financial district, and San Francisco is the land of the start-ups. There are definitely more job opportunities, but as a location gains popularity, it also gets more expensive. This leaves little room for young adults to save a large enough sum for their own property.

Millennials also have this newfound desire for flexibility, and homeownership does not allow that. Many graduates have the mindset that they will take a job for at maximum a few years and then move onto something else. In fact, it is completely normal for millennials to switch jobs an average of four times in their first decade out of college, and more often than not, this career change also results in a location change. This demands the ability to be mobile, and renting means that once the contract is up, renters can move out without having to worry about finding someone else to take their place. Selling a house requires a whole other set of considerations, such as possible remodeling and hiring an agent in order to get the best price. From this point of view, renting property simply provides conveniences that buying does not.

Consider a newly married couple where the wife works at a large insurance company and the husband is a doctor. This couple has moved three times during their time together: once from college to medical school, again for medical school to residency, and one more time for the husband’s first real job. Throughout the years, the couple has accumulated a healthy sum in comparison to others in their age group, but because of their tendency to hop from place to place, they do not see the point in buying a house. Selling after just a few years does not provide much profit, even in high-income areas, and moving without selling the house does not make much sense. Years ago, it was uncommon for people to move across the country multiple times, so there was not much risk involved when buying a house. For young people nowadays, this is rather commonplace, so they have a totally different mindset than their parents did. Norms are changing, and that means cultural decision-making is changing as well.

On top of this, there is currently a shortage of starter homes, so young people have a very limited set of options. Housing starts went way down after 2008, and it is slow going on its journey back to pre-crisis levels. Instead, new construction is now being focused on the luxury side, so homes that used to be entry-level are now priced above what young adults can pay. Because of increasing expectations, the new supply is being adjusted to fit the demand. Getting fancier also means getting more expensive, which only prices out the people who actually want to purchase their first home. This is clearly a vicious cycle.

Money is a driving factor in most decisions. It hides behind other reasoning and provides concrete limits, but maybe it should not be the first thing people blame for the decline in homeownership. Perhaps it is simply a change in the mindset and priorities of millennials that has veered tradition off course.

Product sharing is an idea that can only exist in modern age companies because of not only technology but also the cultural shift mentioned above. One example is Zipcar. It boasts over 700,000 members, which makes it the largest car-sharing company in the world. Members are able to borrow these cars from various locations, and Zipcar covers gas and insurance. These conveniences are highly appealing to many people because this eliminates two large worries associated with owning a car. There is also no need to search and pay for long-term parking, which can reach exorbitant levels in big cities. If people do not want to worry about parking at all, they can turn to Uber or Lyft and simply pay for the ride itself. This “sharing” business model has been repeated across industries, including Airbnb for housing, Rent the Runway for clothing, and Spinlister for sports equipment. The list goes on. Sharing companies are now commonplace, and they are born out of a newfound prioritization of convenience and flexibility.

Regardless of the cause, the decline of homeownership has very real implications, and it is telling about the health of the economy. High levels of homeownership signal a certain confidence among buyers. They believe they can make good on payments, and this means they are earning a comfortable wage. Typically, a family’s largest purchase is their home, and home purchasing decisions are telling of the nation’s economic development. Families exhibit their buying power through what home they choose to purchase, but if they no longer have the desire to buy a home, this affects other industries as well. For example, urban planners who map out entire neighborhoods of homes suddenly have less demand, and construction workers have fewer jobs as a result. There are also real estate agents and others who have fewer sales to make, and the list goes on. Changes in the housing market no doubt affect the greater economy, which is why the decline in homeownership is so alarming.

At least at this stage in their lives, millennials simply place less of an emphasis on actually owning items than past generations have, and this translates to a decrease in young adult homeownership. However, this does not mean that young adults do not hope to one day own their own homes. Among millennials, 65.3% still associate homeownership with the American dream, and more than half of all millennials expect to buy a home within the next five years(USAToday). Their plans may be delayed, but there is definitely still a checkbox next to homeownership that they hope to tick off within their near future. The American dream lives on; the millennials just need more time to get there.