Monday, May 6, 2013

The Future is So Bright, I Gotta Wear Shades

We have been facing two powerful and counteracting economic forces in the last couple of months.  The negative force has been the cuts in government spending resulting from sequestration, the end of the stimulus funds and cuts in state and local government budgets.  This has been accompanied the expiration of the payroll tax cut in January.  The payroll tax increase is a powerful negative stimulus since the gains from the tax cut mostly went to high spending low and middle income families.

The counter-acting force has been a revival of the animal spirits of capitalism.  Business confidence has shot upward and firms have begun to increase investment and hiring after four years of stagnation. This may have started out as the result of pent-up demand in household formation, inventories and aging equipment.  But the good news is that these forces have revived the animal spirits of capitalists.  Companies who were sitting on cash waiting for more certainty in the future, seem to believe that the future is bright.

Right now, the more powerful force is the animal spirits.   The media will take a long time to adjust to reporting good economic news.  The economic story has been bad economic news for so long, analysts will have trouble making the shift to a different mentality.  But eventually, the conventional wisdom will shift and the recovery may actually begin to accelerate. 

Monday, April 15, 2013

The Short Run and the Long Run

One of the biggest points of confusion in the deficit debate is the long run versus the short run.  In the long run we have an entitlement driven budget problem that is solvable but politically problematic. In the short run we have a inadequate effective demand problem is that is related to both tax increases (the payroll taxes) and the animal spirits of consumers and investors (which is resulting in weak spending). 

Most analysts want it one way or another.  Conservatives want to deny the stimulus problem and focus on shrinking government. This is not a surprise, a small government has always been their goal. Many liberals believe the entitlement problem is something that we should ignore for now and would instead focus on job creation. 

Obama has it right in his budget proposal.  Stimulate demand now with infrastructure investments that bolster the long-run economy.  But at the same time, agree to future long-term cuts to entitlements. This has the effective of calming markets and perhaps stimulating the animal spirits of capitalists allowing in an additional increase in investment. 

Wednesday, March 6, 2013

Complexity and Financial Aid: A Barrier to College Completion

Behavioral factors often play a bigger role in decision-making than financial or economic factors. For example, all of us tend to discount current losses compared to future gains. This factor, known as “hyperbolic discounting,” is true for all of us. We are unlikely to risk 50 cents today for $1.00 next year despite the return on investment.  Consequently, more than 80% of all Americans have a negative personal savings rate.  This tendency becomes magnified for low income families where earnings are barely able to keep up with daily life expenses.
All of us are loss averse. Potential losses loom larger than gains. We overvalue what we already have and discount what we may get in the future.  Research on loss aversion indicates that we require gains equal to double of that of the current loss. That factor is magnified again when the loss is potentially ruinous or your lifestyle is threatened.[1]   Let’s say your income is $45,000 a year, are you willing to lose $35,000 right now in exchange for $15,000 in additional income over the next ten years?  That is the risk many low-income students face.

We also tend to base our decisions on our experiences rather than theoretical projections offered by other people.  Lower-income families have little experience with college and thus the gains seem far more uncertain.  The combination of risk aversion and complexity not only leads to an aversion to borrowing but an aversion to seeking and receiving financial aid.

When confronted with a high risk decisions like investing in college, small barriers can become huge barriers. This starts with the process of seeking financial aid. According to the Advisory Committee on Student Financial Assistance, “Millions of students and adult learners who aspire to college are overwhelmed by the complexity of student aid. Uncertainty and confusion rob them of its significant benefits. Rather than promote access, studies show that aid often creates a series of barriers - a gauntlet that the poorest students must run to get to college.” [2] 

[1] Hahnemann, (2011) Thinking Fast and Slow  Farrar, Strauss and Giroux
[2] Advisory Committee on Student Financial Assistance. (2005). “The Student Aid Gauntlet: Making Access to College Simple and Certain.” Final Report of the Special Study of Simplification Of Need Analysis and Application for Title IV Aid. Washington, D.C.: Department of

Tuesday, March 5, 2013

The Cost of College

The most important indicator of regional economic success is the number of residents who have completed a college degree or certificate.  The problem is that the economic payoff from college occurs after completion of the program, so the costs precede the benefit.  And the costs are substantial. Tuition and fees at Washington Community and Technical Colleges have risen by 50% over the past five years.[1] The average cost of tuition, books, fees and the cost of living[2] for community and technical college students in Washington State is $17,044.[3] Even low income independent students actually receiving Pell Grants and the State Need Grants face an average unmet need of $6,400 per year.[4] This imposes an unsustainable burden on low-income and low middle income students. 

Perhaps most importantly, eligibility for Pell Grants, low interest Stafford Loans and the Washington State Need Grant is limited to families with incomes of under roughly $40,000. For example, a grocery clerk with a child earning $45,000 per year would be ineligible for aid.  Lost earnings for attending college as well as other college costs would take up over 40% of the family’s income. 

The obvious solution would be to expand traditional financial aid programs, which have failed to keep up with the soaring cost of college. The proportion of college costs covered by Pell Grants has fallen dramatically over the past 30 years, and now cover the lowest portion of costs in history.  In the state of Washington, budget cuts to the State Need Grant have left 32,000 students, or 30% of the eligible students, without aid.  And as a result of federal budget cuts in 2011, Federal Pell Grants no longer cover summer programs. [5]

Unfortunately, both state and federal budgets are shrinking and Washington voters show little interest in making college more affordable. 

There needs to be a creative way out of this box. Some kind of creative loan package might work. However, many working adults have little history or understanding of personal finance and borrowing.  Students fear indebtedness in a time of high unemployment and mortgage foreclosures. Many colleges have not offered federal students loans because of penalties related to the high default rate.  Private loans are only offered at very high interests, if at all, for lower income working adults.  

[1] Washington Higher Education Coordinating Board, 2012, Key Facts About Higher Education in Washington.
[2] The cost of living is included in this figure since students who work more than half time are unlikely to complete programs. Program completion requires students to forgo earnings to attend college.
[3]  Scott Copeland, State Board for Community and Technical Colleges, July 9, 2012; Higher Education Coordinating Board, January 2004,  Key facts about higher education in Washington (adjusted for inflation)
[4] Washington State Higher Education Loan Program Work Group, December 2012, Higher Education Loan Program Legislative Report
[5] Washington State Higher Education Coordinating Board, January 2012, Access, Affordability, Achievement: Annual Report on State Financial Aid Programs 

Monday, March 4, 2013

Working Adults are Today’s Community College Students

The profile of college students in the minds of policy-makers today is an eighteen year old who lives at home and is going to school full time. 

Nothing could be further from the truth. Community college students (and university students as well) are older, often with dependents, and going to school part time while they are working. Unfortunately, policy-makers have designed tuition and financial aid around the needs of single, recent high school graduates. 

The median age of Seattle Community Colleges students is almost 30.  Almost a fifth are immigrants, over 30% have dependents, a quarter are working full time and well over half are working part time or more.  A majority are students of color. For the entire post-secondary system in Washington State, almost 40% of the students are over the age of 30. Two-thirds of the students who entered college at age 25 or older are low income.[1] In Seattle, only 5% of community college students have entered directly from high school. 

Seattle Central
Seattle North
Seattle South
Seattle Vocational Institute
Washington State Community Colleges
Immigrants or refugees
Single with Children
Couples with Children
Work Full time 
Work Part Time
Median age  
Over age 30

Students of Color
Source: Washington State Board for Community and Technical Colleges, Data Warehouse, 2011

However,  college programs and financial aid are not designed to meet the needs of today's students.   Adult friendly evening and weekend schedules exist at many colleges but are significantly less common than traditional school schedules. Child care is rarely provided on campus and financial aid programs are geared towards traditional college registration schedules. 

Most importantly,  these workers will still be a majority of the workforce for the next quarter century yet many lack the skills to compete. [2]  If our goal is to succeed in global competition over the next decade, we need to begin thinking about how to retool our college system to meet the needs of the workforce. 

[1] Prince and Jenkins, April 2005, Building Pathways to Success for Low-Skill Adult students, CCRC Brief,
[2] Thanks to Robert Baker, Economist, Division of Forecasting, and Washington Office of Financial Management for help in calculating labor participation and population data... 

Sunday, August 19, 2012

We Take Care of Our Own

As Bruce Springsteen points out in his recent song, We Take Care of Our Own, American don't seem to have much tolerance for moral hazard when it comes to the social safety net.

I've been knockin' on the door that holds the throne 
I've been lookin' for the map that leads me home 
I've been stumblin' on good hearts turned to stone 
The road of good intentions has gone dry as bone 
We take care of our own 
We take care of our own 
Wherever this flag's flown 
We take care of our own 

Despite a long great recession, rising poverty and high unemployment, Americans persist in their belief that the poor are culpable for their own plight. 

Nothing divides Americans more than attitudes towards the poor. A recent Kaiser/Kennedy School pool on the causes of poverty asks the question, "Which is the bigger cause of poverty today — that people are not doing enough to help themselves out of poverty, or that circumstances beyond their control cause them to be poor?" 

Americans are split down the middle on this one. 48% says the poor aren't doing enough and 45% say circumstance beyond their control.  This issue almost defines the difference between Republicans and Democrats - Republicans go 63-31 on not doing enough while Democrats end up 57-37 on circumstances.  Not surprisingly,  Europeans with their vastly more expanded welfare state, go for circumstances by more than a 2 to 1 margin.  

Americans who believe the poor aren't doing enough are worried about moral hazard. 
Moral hazard hazard arises when an individual does not take the full consequences and responsibilities for their actions, and therefore has a tendency to act less carefully than they otherwise would, leaving another party to hold some responsibility for the consequences of those actions. 

The social safety net provides assistance to people who for one reason or another have fallen on hard times. Divorce or pregnancy might lead to poverty for a single woman with a child. Mental illness including addiction might lead to the loss of a job and eventually a home. A serious illness could lead to bankruptcy and poverty.  During today's recession, long periods of unemployment leave people with few or little resources to make ends meet.  

The degree to which  the safety net helps or hurts a person varies. In some cases,  the availability of unemployment insurance, welfare, food stamps or other benefits might lead to people postponing their job search, or avoid seeking mediation in marriage.  The assistance could insulate people from the adverse consequences of their actions. 

The problem is that there is no way to calculate the absolute level of moral hazard in social programs. In reality, most safety net programs benefit a mix of people and thus a wide mix of motivations and behaviors. The public policy question is does the amount of moral hazard created by the program exceed the net benefit to those in need? How much moral hazard are we willing to tolerate to meet the need of those in real need?  If there are 500,000 people on food stamps and 25 of them use the stamps at a casino, should the program be curtailed cutting off another 25,000 people to prevent the abuse? 

Unfortunately, most people derive the answer to this policy question based on values or ideology rather than empirical data. As we can see from the recent survey on the causes of poverty, the question of moral hazard versus needs essentially defines the two political parties in the U.S.   

Those who believe in moral character versus circumstances continue to hold to their beliefs even as conditions change radically. It doesn't matter if unemployment is 4% or 8% or if poverty rates change from 11% to 16% - the conclusion is always the same - the safety net will lead insulate people from taking action to change their situation. 

Today, in one of the hardest times in American history, a near majority of Americans appear to have little or no tolerance for moral hazard. For them, taking care of our own is merely a crutch. 

Wednesday, August 8, 2012

The Political Agenda

What determine what gets on the political agenda at the national, state and local level? Which issues get to be debated and considered,  which never see the light of day?

The most common answer to this question is interest groups. Interest groups invest money in campaigns and then in lobbying and their issues get considered and often accepted by policy-makers. There is no doubt that they exert enormous clout in determining the outcome of public policy issues.  However, I really don't think it is that simple. I don't think interest groups or even political parties actually get to decide most of what is considered in government. Looking at the policy agenda in the U.S. the key issues appear to be jobs and the economy, health care, gay marriage, immigration, education and the budget deficit . While interest groups may play a disproportionate role in determining many of the alternatives that are considered to solve these problems, they don't get to pick which ones draw the attention of policy-makers.

Author and professor, John Kingdon in his classic works
Agendas, Alternative and Public Policy  identifies three policy streams that most often need to come together for an issue to be seriously considered by policy-makers.

1. Problems - problems come up and have to be dealt with. I worked with a former Federal Reserve Board economist during the Locke Administration who was always frustrated that the Governor's agenda never seemed to stay the course. For him, it was always issue du jour. You are working on economic development and then all of sudden energy prices skyrocket and you have to drop it and work on energy issues. Problems become the focus because citizens expect elected officials to deal with them. But problems in themselves aren't enough.

2. Solutions - if a policy-maker is going to consider an issue, she is going to want to know that the problem can be solved. Otherwise, an enormous amount of political capital will be spent and you will end up looking pretty foolish. The property tax is unfair because it doesn't include the value of financial assets in the valuation of property. But how would you do it? Could you administer it or would cheating be so prominent it wouldn't be worth it?  Tornadoes, earthquakes and Tsunamis are horrible events that should be stopped, but can you? A more realistic example might be health care reform - in a country so ideological devoted to the free market, can you have a solution that doesn't involve government ownership?

3.  Politics - there has to be the right political alignment for the issue to move through the political process. Somebody or some people who are policy-makers have to make it a priority. Health care reform wasn't politically ripe during the Cater Administration because it wasn't the priority of the president and the political mood of the country was souring on government solutions. On the other hand, the election of Barak Obama was accompanied by large majorities in the House and the Senate and Obama made it the #1 priority of his administration. Climate change was clearly on the agenda in 2008 with major Republicans and Democrats in Congress and the President seeking legislation. But the 2008 recession knocked it off the agenda as concerns moved away from the environmental protection to it's effect on jobs.

Politicians who understand these forces are often said to have a good sense of timing.  An advocate for education reform might hold off on passing major investments in education because they know that during a severe budget crisis there is no viable financial solution. But when the economy improves, and revenues are back on track, they may have a solution in hand and will work ensure that the public sees that it is a problem worth solving. When that time comes, they will jump on any news on comparative test scores or school failures try and put the issue on the agenda. Advocates for small government jumped on their chance to shrink government when the great recession and tax cuts led to huge budget deficits.

Given the problems we are facing today, the political climate and the availability of realistic solutions, what issues might be ripe for getting on the agenda?