March 29, 2017

Cost of college contributing to income inequality, Fed economist says

As the cost of college rises, a Federal Reserve Bank economist said Wednesday, the necessity of obtaining an advanced degree for earning potential has contributed to Boston's income inequality - ranked most unequal in the nation last year by the Brookings Metropolitan Policy Forum.

"I think the biggest disparities that we're facing in our economy right now are between the outcomes that we can achieve as someone with just a high school education or less as opposed to the outcomes you can achieve with a college degree or an advanced degree," Mary Burke, senior economist at the Federal Reserve Bank of Boston, said at a breakfast event. "The premium for getting an advanced degree continues to increase, so people who don't have those advanced degrees are increasingly getting left behind. You're seeing a hollowing out of the middle-skilled jobs.

Boston and New Orleans "led all other cities with a similar level of inequality," according to the Brookings analysis, which found inequality is increasing in large American cities.

Massachusetts, which has experienced a prolonged post-recession recovery, is running into "barriers" associated with slow labor force growth and smaller increases in productivity, Burke told attendees at the Economic Outlook Breakfast hosted by Santander Bank and the Greater Boston Chamber of Commerce.

Without international migration, Massachusetts would be losing population, according to Burke. She said, "They come in to get jobs, so they're boosting our labor force, which needs boosting."

The Fed economist said the state's gross domestic product is projected to have a small increase this year.

"Projected growth rates for Massachusetts for the first half of 2017 are quite modest - 1 percent growth or less, and that's much lower than the average growth rates we've seen in the past couple years," Burke said.

Massachusetts budget writers have projected state tax revenues growth is about to accelerate, rising 3.9 percent in fiscal 2018 which begins July 1. State budget writers have repeatedly readjusted spending plans over the years as revenues failed to keep up with expenses and overly optimistic revenue guesses.

Simmons College President Helen Drinan said Massachusetts is the only state in the country that educates more of its residents in private education than in the state system and that dynamic "severely influences how we treat the public system."

Education is the only sector where cost growth has exceeded the health care sector and private institutions have a responsibility to address that, she said.

"The cost of education in this country is becoming untenable," Drinan said. She said, "Expense management has never been a big deal in higher education, and it's recently become. It's like we've gotten religion, and it's taken a long time."

The manufacturing sector, which traditionally has not required advanced degrees, did not recover from the Great Recession and has "flat-lined," Burke said. She said "better coordination in education and training" could help improve job growth in the smaller cities outside of Boston where economies have lagged behind the regional hub.

Travis McCready, the president and CEO of the Massachusetts Life Sciences Center, was bullish about the biotech sector and bearish about the impact of President Donald Trump's proposed health research funding cuts, which he estimated would result in about $500 million less annually for Massachusetts.

"We are very bullish on the future. We're very bullish on our ability to drive growth, not just in Greater Boston but also in the Gateway Cities," McCready said. But with an 18 percent cut to the National Institutes of Health on the table for the fiscal 2018 federal budget, McCready said, "The uncertainty is killing us."

Burke said Trump's intention to boost defense spending "could be a benefit to the region." New England is home to military contractors.

Over the long-term - forecasting out to about 2020 - the Federal Reserve's interest rate is projected to "top out" at 3 percent, according to Burke, who said that is "very low, historically."

Burke said the Fed wants to increase rates gradually so that the central bank does not need to "slam on the brakes" in response to inflation and risk triggering a recession. The Fed raised interest rates in March to between 0.75 and 1 percent.

Over the past two years, inflation in Boston has been slightly higher than the nation as a whole, Burke said, citing the costs of education, health care and energy.

Office space is in "short supply" in Boston where the vacancy rate is about 7 percent and in the suburbs, where it is about 12 percent, and most of the new commercial construction has been "built to suit," said Burke. She said "speculative development" of office buildings is expensive.

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