Archive for April 2012

Investing For The Future

April 30, 2012

President Obama calls government spending on education “an investment”.  What makes some expenditures an investment and others just spending?

In the political world the answer lies in who said it.

In the real world (which includes the political world), the differences are very important.  It explains why some countries, like Germany, seem to always have a strong currency and healthy economy.  It seems to explain why other countries like Italy, Spain and Portugal go from boom times to dire straits every couple of years.  Germany invests in education and its infrastructure while the Southern European countries spend money on education and infrastructure.

Doesn’t that make it all clear?

Consider the case of the US government subsidies for college education.  Congress delighted in a food fight this past week when Republicans chose to “pay for” the continued college loan subsidies by cutting Affordable Care Act funding.  The GOP chose hurting the poor over taking the money from oil subsidies.  This investing “issue” is not where the college tuition subsidy comes from, rather it is the “ins and outs” of subsidizing college education in the first place.

As a general statement, education (from vocations to skills to liberal arts to engineering to medicine), all things being equal, should be endorsed.  The question is whether all education being pursued today will produce graduates who can generate enough income (or quality of life) to justify the cost.

The average college loan outstanding is about $25,000 with loans of $100,000 or more not uncommon.  If we looked at these amounts as if they were a home mortgage, then on a 30 year basis, the $25,000 would call for a monthly repayment of $135 per month.  The $100,000 would require a $535 per month.

Now consider that 2011 college graduate starting salaries average about $50,000 (about $3500 per month after taxes).  Let’s add in rent, car loans, cell phones, and general living expenses. there is not much left for paying off the loan.

And remember that the $50,000 is the average.  It is boosted up by starting salaries of engineers.  That means there are a lot of people earning much less than $50,000 if they are fortunate to get a job at all.

So what’s this got to do with Europe and especially the southern European countries facing financial difficulties?

In Europe, most governments subsidize Universities and in the process keep tuition cost low.  So, when these countries get in trouble with their budgets and run out of room to borrow, they are forced to cut spending.  When that spending is tuition support, it is not long before students riot in the streets.

In the US, the federal government does not support universities directly.  Instead the feds encourage student loans.  These two approaches begin to look the same when students begin to default and bail outs become necessary.

Part of this discussion are those students who graduate and find themselves unable to find work.  This is more like southern Europe and not like Germany.

Of course no student can see into the future.  All students, however, can ask what future jobs will pay given their future degree, what it will cost to live, and how much they could afford to invest to get one of those future jobs.

At the end of the day, however, the student is responsible for his debt.   Unfortunately, all tax payers will be responsible for cleaning up the mess when these “investments” default.

 

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Who Is Really Thinking For The GOP?

April 28, 2012

The Republican controlled House of Representatives passed an extension to the Stafford Loan legislation which would keep the interest rate students pay from doubling.  Does this broadly bi-partisan act signal a new high for the normally divided Congress?

It might but Republican political strategists managed to snatch defeat from the jaws of victory.

Democrats, if left to their own devices would have passed the extension “as is”, that is without any accompanying funding to pay for it.  “Put it on the bill” would have been their call.

Republicans would have none of that.  The extension must be paid for.  And then the food fight began.

House Democrats settled on reducing oil industry subsidies as the means to generate the funds needed to offset the lower interest rates.  Seems fairly logical given oil industry profits.  House Republicans would have none of that either.

So, what would be next?  House Republicans decided the money should come from certain provisions in the Affordable Care Act.  And so that became the House bill.  Money for extending low interest rates for students would be paid for by cuts in health care for the poor.  Sounds like a deal to me.

What are they thinking?

The strange part of this is that why would the Republicans hand President Obama another campaign issue that he can use to gratuitously bang them over the head.  How can Republicans choose health care cuts over subsidies to rich oil companies?  How can they do that in an election year?

Healthcare for the poor trumps student loan interest rate support.  Student loan interest rate support trumps big oil subsidies.  The GOP picked another losing hand.

A Thirst For Education

April 25, 2012

A thirst for education is generally a highly respected attribute.  It now seems the norm that everyone should be encouraged to seek a college or university degree.  As proof, some point to the unemployment numbers following the 2008 recession.  They showed significantly higher unemployment among those with only a high school degree compared to those who had finished college.  Shouldn’t everyone seek higher education?

Well if college attendance was like picking an apple from a limitless grove of trees, there seems little reason for not encouraging college attendance.  Unfortunately, colleges cost money to attend.

That, however does not seem to be slowing the rate of either college attendance or the rate of yearly increases in college expense.  So where is all this money coming from?

It is coming from the great ATM in the sky.  Government figures indicate there is about $1 trillion outstanding in college loans.

Graduates are leaving their campuses with a diploma and a “book of the month club” repayment plan.  It is not uncommon to hear students say the owe over $100,000 or more.  This is like a good sized mortgage.

Consenting adults (and these students qualify) are responsible for their actions.  The problem is that there are only too many older adults, from college officials to loan originators, who are willing to sugar coat the prospect of getting a loan.  Students are introduced quickly to the “free lunch” facts of life.  Unfortunately, they will not learn until much later.

At the end of the day, this is the student’s responsibility.  For most, the realization of what they have done will not be clear until well after their graduation.  At that point, too many will also realize they have mediocre paying jobs and a financial hole they must dig their way out of.  Will it be walking time?

This situation is not unlike the housing bubble which merged with the predatory mortgage fiasco.  The trends are clear and yet there seems to be no action to curb the debt run up.

Full disclosure might be a place to start.  Colleges or loan originators could describe the consequences of taking a loan.  How much more money will the student need to complete their degree program.  How much interest will the student need to pay yearly for this money.  What would be the likely range of repayment terms the student should expect and compare that to the average salary similar degree students would earn.  And, over the lifetime of the loan, how much would the student pay back.

There is no doubt that if this trend is left as is, student loans will throttle the economy.  In time more and more students will default.

In the process, this will put great pressure on the government for a bailout.  It will syphon government expenditures (to cover these defaults) away from Medicare, Medicaid, and Social Security.

Robbing Peter to pay Paul.

Downward Spirals

April 24, 2012

The Philadelphia “School Reform Commission” announced that another 40 schools would need to close due to projected tax revenue shortfalls.  It is hard to argue with closing under utilized facilities and adjusting schools in line with shifting residential patterns.  Somehow, this announcement has a ring of disbelief with it.

One reason the announcement raises eyebrows is that there is much talk about opening more charter schools.  Again it is hard to argue against Charters providing their output is measurably better than straight public schools.

With Philadelphia, funding is lagging due to State cut backs and overall City budget shortfalls.     Cries for improving chronic “failing” schools is now drowned out by the cry “any school is better than no school”.

This is not a Barack Obama problem, nor is it one that a President Mitt Romney’s proposals could solve.

In Philadelphia, we have a melting pot of the worst.  Administrators who can not administer.  Finance directors who do not know the system’s actual costs.  There are too many teachers who cannot teach the students they have (they might be able to teach in the suburbs, however).  There are too many old and inefficient school buildings each costing extra to just keep open.  There are too many parents who should be in class themselves and instead failing in the parenting role.

So what can be done about this?

First, ask yourself what you would do if you came across a severely injured person who was bleeding from multiple wounds.  Would you stop providing blood just because the person’s body was leaking blood almost as fast as you could put it in?

Well just adding blood will not save this victim.  The wounds must be closed also and a deeper look into internal injuries would be necessary.  Stop the bleeding, give more blood, look for other injuries, and fix them would be the logical prescription.  You would not do one or two, but would do them all concurrently.

The State has an obligation to continue, if not increase, its funding.  Philadelphia has a duty to raise its taxes, if necessary, to provide adequate funding.  And the School Reform Commission had better do what its name says, or get out of the way.

SB 1070 Thinking

April 23, 2012

This week the Supreme Court will hear arguments over the Constitutionality of Arizona’s anti-immigrant law SB-1070.  It is a bit of a mystery why the Court accepted the case but all this will be revealed soon.

The Constitution clearly places the power of immigration in the hands of the Federal Government.  Arizona contends that the Federal Government has failed to secure the boarders and Arizona wants to “help”.  The first part of Arizona’s assertion is demonstrably correct, the second part is a bit suspect.

We should be clear that Arizona is talking about primarily Mexican undocumented workers but other Central Americans fit their definition too.  Arizona is not worrying about Uighurs, Iraqis, or Indonesians.  They will let the Federal Government worry about them.

The Mexican and Central Americans immigration mess is perplexing.  The demensions of this problem have been well known for several Administrations, yet nothing has been done.

One reason is that there is an estimated 11 million undocumented aliens, mostly Mexicans, already living in America.  Short of ethnic cleansing, there is no practical way to deal with relocating (read deporting) this many people.  Yet the same politicians who breath fire when denouncing the porous boarders, utter the sick words, “no cutting in line” for these undocumenteds when a process to document and allow a means to gain citizenship is discussed.

These same politicians call for only a limited number of work visas citing the need to provide Americans jobs first.  As a sound bite, these words are like honey.  The after taste, however, makes you wonder.  Americans do not want those low paying, hard labor jobs.

It is often argued that if these jobs paid more, there would be a long line of Americans willing and ready.  The problem of course is that your local grocery store will buy imported produce if it is cheaper.  Why?  Because we as consumers look for the lowest price all other things being equal.

So immigration actually comes back to all of us.  If we did not buy so much from Walmart, or chose not to buy Hyundai autos, or only bought American made textiles, there would be a lot more jobs for those Americans qualified and willing to work.

Picking avocados, however, does not take much skill.   It does take patience and willingness to stoop over for long periods in hot fields.

So back to SB-1070.

Arizona is already feeling the impact of fewer workers.  The previous employers of these undocumented workers, day workers to laborers to agriculture hands, have not raised their wages and are generally going without.  Reports indicate employers are dissatisfied with these results.

The citizen groups and law makers who pushed through legislation where a child could not register for school with out providing their “documents” or where police officers “could” ask to see documents if someone they stopped looked suspicious, should be looking in mirrors.

They will see someone who doesn’t look like the undocumented.

This is probably the greatest problem with SB-1070.  It tends to divide us into “us” and “them”.  “Them” are Mexican and they do not belong here.

That is, unfortunately, how America, from time to time, was made.  Each time this phobia arose, the Country lived to regret its rejection of those immigrant groups.

The peculiar aspect of SB-1070 is it focuses on the wrong end of the problem.  If someone is stopped and found “undocumented”, immediately that person should be “documented”.  If employed (or a member of a family unit where there is a bread winner), the real issue is about the newly documented person paying taxes and choosing whether to follow a path to citizenship or to one of temporary guest worker status.

Stranger still is the observation that Mexicans, as a group, are family oriented, hard working, religious, and proud people.  These are all qualities most Americans as well as those currently determined to exclude undocumented workers from citizenship have prized.

Why Do Republicans Fear Mitt Romney?

April 22, 2012

The presumptive GOP nominee, Mitt Romney, seems more like a skunk at a church picnic.  Why is the last man standing so lukewarmly greeted?

“He’s not conservative enough”, we hear.  Well, what does that mean?  “He’s a Massachusetts moderate”, they answer.  Well, what is that?  “He’s simply too liberal”, is the final claim.

There are also whispers.

“You know, he’s a Mormon”.  Or, “Obamacare is the same as Romneycare”.  Or, “He once supported gay rights and the woman’s right to choose”.  But what do any of these claims (all true of course) have to do with whether Mitt Romney would be a competent President?

The answer in my opinion is nothing.

So once again why are so many Republicans so lukewarm about Mitt?

I would submit the answer is “freedom of speech”.  The primary votes and the results of so many polls are reflecting carefully cultivated anti-Romney feelings.

Under the broad banner of Republicanism, stands a wide range of special interests.  These interests have lots of money and want to see a government that caters to those interests.  They worry about “redistribution of wealth” (taxes), loss of government funding in certain key industries (like defense and oil), restrictions on wealth accumulation and the death tax, and they do not worry about others.

Romney is much like Jimmy Carter.  He is an outsider, not understood, and can’t be trusted.

There is, however, an even bigger risk with Romney than was with Carter.  Romney is smart, capable, and a highly effective executive.  He has a track record of setting goals and achieving them.  What if those goals were different than what the GOP’s special interest wanted?

Let’s be clear.  I am not suggesting that Mitt would suddenly endorse Planned Parenthood or put his weight behind the unions.  Rather I am suggesting Mitt may just choose to put Defense Spending dollars in other pockets and favor big energy companies that are different from the ones now with the silver spoon.

A new guy who is not already part of the “system” is a threat simply because he might make his own decisions and favors his own friends.

Maybe the whispers are just a warning to Romney.  “Please pay attention to us or we will make your life difficult.  The next election in 2016 is not that far off.  We can wait but you can’t.”

Thanks to “Citizens United”, Romney is hearing from a lot of GOP “friends”.

The Great Deception?

April 21, 2012

What do the Stock Market and Economic Prognosticators know?

The Market bounces up and down seemingly depending upon news of jobs growth or some default of a European Country.  In one breath we hear the economy is recovering, the next we hear the economy is slipping back into recession.  Greece or Spain or Portugal or where ever is about to default, will it be bailed out?

We hear that Mitt Romney with his vast business background will turn the US around.  Romney knows what job creators need.  Jobs will be everywhere.  Oh, if it were that easy, or if that was even possible.

This is not a Mitt Romney problem.  And for that matter, it is not a Barack Obama problem either.

The US has about 92% of its labor force employed.  Full employment is reached when employment reaches 95-97%.  There simply aren’t that many people unemployed nor will there be that many more eager buyers once full employment is reached.  How can jobs be such a factor in the strength of the economy?  How can employment statistics be such an influence on the Stock Market?

I would submit that current employment statistic are not the root cause.  More troublesome,  Americans prefer to ignore the basics and live in delusion.

Behind the strength of the economy lies two big ugly (but real) factors.

Uncertainty.  I am referring to the certainty (or uncertainty) that any particular job will last.  So of the 92% employed, a large percent of these Americans carry fear that their job will be outsourced, eliminated due to productivity gains, or simply cut due to lack of funding (particularly in public sector jobs).

Low salaries and wages.  Again, within the 92% employed, too many earn too little to have much money left for discretionary spending.  The last time these people had extra money to spend, they were drawing money from credit cards and sucking money from the equity in their homes.  No one seems anxious to go back to those sources.

Over the past 50 years, the US economy has undergone a slow but sure erosion of good jobs with the resulting loss of middle class (and lower) buying power.  This changed has been masked by over time pay, second jobs, two income families, credit card debt, and home equity extraction.  A great deal of middle class income has been outsourced to low wage countries and to non-union jobs.  In 2007, just before the banks and investment firms melt down, the financial sector was reporting 30% of corporate America’s profit.  Much of that profit, in the past, would have shown up in companies that mine, make, or grow things (and employ Americans at good wages).

The reality is that America is in a hole.  The hole is not so deep or so mysterious that we can not get out of it.  The silent hand of capitalism, if not hindered, will reallocate resources.  Hard work will do the rest.

Government policies can both help and hinder.  One thing, however, is that these policies cannot produce results overnight.

Positive policies will include infrastructure and education investments so that employees possess the most competitive skills and businesses can ship their products and services in the most efficient manner.

Tax and healthcare reform can help or place an even greater weight on the economy.  More tax revenue is mandatory and it should come from all levels of wealth.  America is already afflicted with “deficit disease”, yet will require more spending, short term, to invest in infrastructure and education.  Political rhetoric that calls for lowering tax rates is a disservice.

Healthcare costs are a pervasive cancer in America.  Too many Americans receive inadequate healthcare coverage while for others, the costs of healthcare are robbing both families and businesses of money to spend.  Unless America gets control of its healthcare costs, sustained long term economic recovery will be slow in coming, if at all.

The 2012 election will likely be about jobs and the economy despite what the candidates say.  Neither candidate is likely to tell Americans the truth.  Instead they will speak half truths or simply mislead.  (I am sure in their minds they think that once elected, they can do the right things.)

Americans will face in November the option of picking the least worse of two candidates with dead end platforms.  Americans must look beyond the short term symptoms and recognize what has to change first before we can see the return of “good jobs” and a “robust economy”.