Tuesday, June 24, 2014

Five Years after the Financial Meltdown: The State of the US Economy and College Grads

The LA Times has provided a good detailed analysis of where we stand five years after the fiscal meltdown of 2008. The overall takeaway is that the richer are getting richer, and almost everyone else is suffering.  One important point is how much wealth and employment was lost during the Great Recession: “Over 19 months, the Great Recession erased trillions of dollars of wealth, destroyed 8 million jobs and robbed tens of thousands of their homes. More than half of adults lost a job or saw a cut in pay or hours, and almost everybody's wealth fell.” This incredible loss of wealth and income has been followed by an uneven recovery: although household net worth has increased to a record $81.7 trillion, this wealth has not been shared evenly.

One reason why the rich have gotten richer is that after the last stock market dive, people with extra cash were able to re-invest in stocks: the result is that “household assets in equities have more than doubled since 2008 to $20.6 trillion earlier this year.”  In fact, the wealthy have profited from the financial crisis: “Moreover, for the wealthy, a downturn or a slow recovery can provide advantages: With real interest rates near zero, the price of assets — investment property, securities, luxury goods and so forth — remains relatively cheap.”  Thus, as everyone saw their income and wealth decreased, if not wiped out, the rich were able to buy low and sell high. 

In terms of employment, all of the jobs that were lost during the Great Recession have returned, but they are different jobs:  “As of May, total employment in construction and manufacturing, where pay is relatively high, was down more than 3 million compared with before the recession. By contrast, restaurants, temporary help firms and retail outlets have added 3 million jobs, making them three of the fastest-hiring industries during the recovery. But their average hourly pay ranges from $12.35 for restaurants to $16.96 for retail, compared with $24.72 for manufacturing and $26.59 for construction.” In what is now called the polarized economy, there has been some job growth at the top, but most of the new jobs are low-paying service work.  As middle-class jobs are eliminated, middle-income families are still recovering from a loss of over two trillion dollars in home equity.  The end result is that the median household net worth is now lower than what it was in the late 1990s. 
For recent college graduates, the news is ever worse: “Underemployment has become a vexing problem. Four out of 10 recent college graduates have jobs that typically do not require a bachelor's degree, and many of the positions don't pay much. And the job market is a lot worse for those without a bachelor's degree.”  If we add together the underemployment and employment rates for recent college graduates, it is now over 50%, and of course, these young people hold a high level of student debt: “The college class of 2014 is the most indebted ever, keeping many from going out on their own and helping boost a shortage of first-time home buyers.”  In other words, student debt is depressing the economy, which then reduces job opportunities in a vicious cycle.
On the same day the LA Times article appeared, a story in The New YorkTimes Magazine, further documented the plight of recent college graduates: “The problem for college graduates began well before the Great Recession, around 2000, as employment demand stirred by the computer revolution started to wane. Specifically, there's evidence of sharply curtailed opportunities for people in so-called cognitive-task occupations, those typically associated with college graduates.” While we continue to hear stories about the need for more college graduates, especially in the STEM areas, the reality is that these jobs make up less than 5% of the labor market, and the wages in these areas have been driven down by the high number of applicants for each job.
As young people find themselves facing low-paying jobs and high debt repayments, they have been forced to delay their lives and return back to their parents: “One in five people in their 20s and early 30s is currently living with his or her parents. And 60 percent of all young adults receive financial support from them. That’s a significant increase from a generation ago, when only one in 10 young adults moved back home and few received financial support. The common explanation for the shift is that people born in the late 1980s and early 1990s came of age amid several unfortunate and overlapping economic trends. Those who graduated college as the housing market and financial system were imploding faced the highest debt burden of any graduating class in history. Nearly 45 percent of 25-year-olds, for instance, have outstanding loans, with an average debt above $20,000.”  As more college graduates rely on their parents to support them, we have to ask what happens to the young people who do not have parents with extra resources.
As several economists have shown, if you have the bad luck of graduating college during an economic downturn, your entire life can be affected: “And more than half of recent college graduates are unemployed or underemployed, meaning they make substandard wages in jobs that don’t require a college degree. According to Lisa B. Kahn, an economist at Yale University, the negative impact of graduating into a recession never fully disappears. Even 20 years later, the people who graduated into the recession of the early ’80s were making substantially less money than people lucky enough to have graduated a few years afterward, when the economy was booming.” Adding insult to injury, the people who will suffer a life of lower income will also be the ones having to pay back the most amount of debt.
Adam Davidson argues that the reason for this crisis stems from political and economic decisions made over the last 34 years: “Since 1980, the U.S. economy has been destabilized by a series of systemic changes — the growth of foreign trade, rapid advances in technology, changes to the tax code, among others — that have affected all workers but particularly those just embarking on their careers.”  Like so many journalists and economists, Davidson does not mention de-unionization, financialization, and profit-hording.  The fact is that corporations continue to make huge profits, but nothing is forcing them to share their wealth with labor.   Meanwhile, the entire economy is rigged to make the wealthy wealthier.
In a typical analysis of what has happened to the American worker since 1978, Davidson refuses to look at the loss of labor power and ascendency of management power: “But we now know that, during the ’70s, this system was becoming unhinged. Computer technology and global trade forced manual laborers to compete with machines at home and with low-wage workers in other countries. The changes first affected blue-collar workers, but many white-collar workers performing routine tasks, like office support or drafting or bookkeeping, were also seeing their job prospects truncated. At the same time, these developments were hugely beneficial to elite earners, who now had access to a larger, global market and productivity-enhancing technology. They were assisted by changes in government policy — taxes were cut, welfare programs were eliminated — that further rewarded the wealthy and removed support for the poor.”  Yes, the welfare state has been reduced through tax cuts and anti-government politics, but businesses embraced an intentional strategy of destroying labor power and increasing profits at the top.  In contrast, in Northern Europe, where most of the workers are unionized and participate in workplace decision-making, high economic productivity has been combined with low-income inequality and fortified social programs.  There are simply better and fairer ways of doing things.

Wednesday, June 18, 2014

Free Higher Ed in the News: The Good, The Bad, and The Ugly

Almost every week, there is a new plan to make higher education free.  The latest two proposals come from Starbucks and a new group of former politicians called Redeeming America’s Promise; although there are issues with many of these new initiatives, the emergence of plans to change how we pay for college is an important first step.

The Starbucks policy has received the most news coverage and has generated the highest level of misunderstanding.  Although many people are reporting that Starbucks is going to pay for the tuition of its workers, what is really happening is the coffee company is making adeal to enroll some of its employees into Arizona State University’s onlineeducation program. In fact, it turns out that ASU is paying formost of the cost, and this new Starbucks’ plan replaces a previous policy that helped students attend a college of their choice.   

The Redeeming America’s Promise plan is much more comprehensive and ambitious, but its fatal flaw is that it is really providing tuition help to lower- and middle-income students, but it is not paying for the total cost of attendance.  The problem with this strategy is that on average over 60% of the cost of attending a public university or college comes from room, board, books, and other living expenses, and while federal, state, and institutional aid often covers much of the tuition, the total cost of attendance fuels high student debt. 

As the film Ivory Tower shows, one reason why most of student loan money goes to living expenses is that universities and colleges have engaged in an amenities arms race at the very moment states have been cutting back in their support for higher education.  In 2012-13, the average total cost of attendance at four-year public universities was $21,683 and the part going to tuition and required fees was $8,005. At community colleges, the total cost in 2012-13 was $13,277 and the part going to tuition was $3,080.  This means that for public universities, funding only tuition only accounts for 36% of the total cost, and for community colleges, it makes up 23%.  Thus, as everyone always talks about the cost of tuition, the biggest problem is the related costs of room, board, books, and living expenses. 

The RAP plan does address this issue of related costs by stating that students will be able to take out income-based repayment loans with a cap to pay for non-tuition costs, and they could write off on their taxes the full principle of the loan once they graduate.  There is also an effort to control tuition levels by tying them to a state’s medium family income level.

These efforts to make higher education free to the students should be applauded, but there needs to be a more realistic discussion of what is really driving student debt. 

Wednesday, June 11, 2014

K-12 Tenure Declared Unconstitutional in California: Could Higher Ed be Next?

A Los Angeles judge ruled against the current system of granting tenure to K-12 teachers because he found that low-income students are adversely affected by the inability to remove ineffective teachers in a timely manner.  On one level, this seems like a progressive ruling protecting the educational rights of the poorest among us; however, on closer inspection, we discover that the decision is based on several myths regarding education. 

One of these myths is the idea that students from low-income areas perform poorly because they don’t have the best teachers.  What this view rejects is any understanding of the different economic, psychological, and social forces affecting young people.  Not only does this myth repress the role that poverty plays in shaping every aspect of these students’ lives, but it also neglects the advantages given to the wealthier students.  Instead of looking at school funding or how the lack of good healthcare prevents students from going to school, the judge is highly invested in the current idea that a great teacher can overcome all social and personal obstacles facing a low-income student.    

The ruling begins by citing Brown v Board of Education to point to the important value of providing equal education to all races.  In two other cited cases, the theme is once again the equality of educational opportunity.  Although it would be hard to argue against this egalitarian ideal, it is clear that self-segregation and white flight have made schools very unequal.  Moreover, while the Governor has pushed through a new plan to redistribute funds to low-income schools, this plan has yet to come into full effect. 

The Judge ruled that tenure keeps “bad” teachers in low-income schools, and it makes it hard to remove ineffective instructors in a quick and cost-free manner.  Of course, he did not suggest how to recruit and keep teachers in schools with high levels of poverty and stress.  What the judge did do is buy into research showing that a single ineffective teacher can reduce a student’s earning power over a lifetime.  This reductive analysis, which confuses causation with correlation, is based on the idea that we can determine the value of someone’s education by looking at how much money he or she earns later on life.  Once again, a wide-range of variables is excluded in order to establish a simple causal link between the quality of a teacher and the financial success of a student.

The judge was also impressed by a study that said that between 1% and 3% of all teachers are grossly ineffective.  Since there are about 250,00 teachers in the state, the judge accepted the notion that there must be between 2,750 and 8,250 horrible teachers.  Here a questionable statistic is translated into a scientific fact and applied to a supposedly impartial ruling.  Moreover, if there is an even distribution of bad teachers, then it would seem that all schools should be equally effected.  However, we are never told what defines a grossly ineffective teacher; all we know is that it is hard to get rid of them because of tenure. 

At the heart of the decision is the question of whether two years is enough time to decide on tenure for a teacher.  This question actually has some validity, but it is unclear how a two-year path to tenure causes discrimination against low-income schools; in fact, the judge adds that the quickness of this high stakes decision may unfairly harm new, good teachers who are not given enough time to prove themselves.  Yet, this rational argument is undermined by the judge when he claims that since many states have a longer pre-tenure period and some states do not allow for tenure at all, then, California is an outlier, and its system should be changed.  Just because some states have terrible rules, it does not mean that everyone should race to the bottom.         

The judge also ruled against using seniority in layoffs, but did not suggest an alternative and did not say how this process causes discrimination.  What is so concerning is that Arne Duncan, the Secretary of education endorses theruling: "The students who brought this lawsuit are, unfortunately, just nine out of millions of young people in America who are disadvantaged by laws, practices, and systems that fail to identify and support our best teachers and match them with our neediest students. Today's court decision is a mandate to fix these problems. Together, we must work to increase public confidence in public education. This decision presents an opportunity for a progressive state with a tradition of innovation to build a new framework for the teaching profession that protects students' rights to equal educational opportunities while providing teachers the support, respect and rewarding careers they deserve. My hope is that today's decision moves from the courtroom toward a collaborative process in California that is fair, thoughtful, practical and swift." Like so many others, Duncan focuses on just the individual student and the teacher, but not the multiple other factors that influence education.

Although this ruling only dealt with K-12 teachers, its logic could be expanded to include all levels of education, including higher education.  In fact, the promotion of star teachers and the critique of failing community colleges is gaining much media attention these days, and so it wouldn’t be surprising if another millionaire funds a lawsuit against tenure in higher education.  

Monday, June 2, 2014

Piketty and the Austerity of Imagination

Thomas Piketty’s recent book Capital in the Twenty First Century has gotten rave reviews and has been proclaimed by many liberal and progressive pundits and scholars as the best thing since Marx.  Piketty’s central claim is that the return on capital (investments, real estate, rents) will always exceed the return on labor unless some extraordinary shock occurs, like a world war or depression.   In laymen terms, this means that rich people who can inherit and invest their wealth will always make more than everyone else who has to earn their money through labor. The solution Piketty proposes to this inevitable growth in inequality is a global wealth tax, which he himself says is utopian and unlikely.

So why is this book so popular with liberals?  One possible reason is that it displays moral indignity in the face of wealth inequality, but it does not ask any of us to change or do anything.  It also gives the reader a strong sense of historical knowledge of the global economy, but this understanding is plagued by several glaring blind spots.  As Thomas Frank has pointed out, in a book on labor and capital that goes on for close to 700 pages, the role of unions is barely mentioned.  Moreover, the incredible destructive nature of the 2008 global financial meltdown is also ignored, and most of his statistics only focus on a small number of countries, and this is due to his reliance on a narrow set of tax data.  In short, Piketty is blinded by his own limited source of information and his own ideology.  Although he looks like a Occupy Wall Street proponent, he really is locked into a moderate austerity mindset.

Since he believes that the only thing that can cause income from labor to exceed wealth from investments and inheritance is a war or massive depression, he promotes the logic of austerity: we will never have strong economic growth, so all we can do is try to tax the wealthy and reduce social benefits like pensions.  If this austerity logic sounds familiar, it is what is driving the thinking of the White House and the State House.

What is missing from this austerity of imagination is any hope that we could expand economic growth by increasing the wages of working people.  While Piketty justifies the Federal Reserve lending trillions of dollars to banks and corporations to stabilize their books, he does not even ponder how some of this money could have been used to refinance mortgages or student debt.  Like Piketty, the Fed does not think that the government can do anything to spur economic growth and job creation, and so the only alternative is to feed money to the investment class who have decided that we no longer need consumers or workers since businesses and banks can make money by just buying back their own stocks from cheap government loans. 

What we need are policies that help to create better high paying jobs so we can increase consumer demand and create even more economic growth.  However, companies have found that they can increase their profits, stock valuation, and executive compensation by reducing labor costs, and this is done in part by hiring people part-time with low wages and no benefits.  Since most workers do not have any bargaining power and do not belong to unions, there is a global race to the bottom as everyone loses ground to inflation except for a small number of managers and investors.