Daily Digest - July 12: Stand Up for Workers and Wages

Jul 12, 2013Rachel Goldfarb

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Wal-Mart Won’t Open 3 D.C. Stores Due to Wage Law (Bloomberg TV)

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Wal-Mart Won’t Open 3 D.C. Stores Due to Wage Law (Bloomberg TV)

Erik Schatzker speaks to Roosevelt Institute Fellow Dorian Warren on the D.C. living wage law. Dorian suggests that the mayor shouldn't veto the bill, because Wal-Mart's need to expand in new markets will overpower its distaste for higher wages.

An Oregon Trail to End Student Debt (The Nation)

Katrina vanden Heuvel sees Oregon's new model for financing post-secondary education as an example of how progressives can still achieve real innovative change. Instead of paying tuition up front, Oregon students will pay a percentage of their income for twenty years after graduation.

Want to Fix the US Student Loan Crisis? Put Colleges on the Hook (The Guardian)

Helaine Olen suggests that student loan risk should be put on the schools, by financially penalizing those with high default rates. The price of college needs to drop, but for now this would create an incentive to minimize loans in students' aid package.

Going Abroad With Dodd-Frank (TAP)

David Dayen carefully lays out the Commodity Futures Trading Commission's struggle with a rule regulating foreign derivative trades that is scheduled to be finalized today. He explains why it isn't likely to happen, and how this relates to the broader picture of financial regulation.

Senators Introduce Bill to Separate Trading Activities From Big Banks (NYT)

Peter Eavis reports on the 21st Century Glass-Steagal Act, sponsored by Senators Warren and McCain, and two others. Like the original, passed during President Franklin D. Roosevelt's first term, this bill would mandate a strict separation between banking and speculative activities.

The House Just Passed a Farm Bill with no Money for Food Stamps. What Does That Mean? (WaPo)

Brad Plumer looks at three options for what could happen now that the House has passed the SNAP-free farm bill. The scariest option would cause SNAP funding to lapse on September 30, leaving millions of people scrambling to afford groceries.

Child Care on the Third Shift (WaPo)

Brigid Schulte explains just how difficult it can be for low-wage workers to obtain child care. In retail and hospitality, the fastest growing sectors in today's economy, schedules are erratic and non-traditional, which only increases child care costs.

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Daily Digest - July 2: Staying in Small Town, USA

Jul 2, 2013Rachel Goldfarb

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Roosevelt’s Legacy, Burning Brightly (NYT)

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Roosevelt’s Legacy, Burning Brightly (NYT)

Edward Rothstein reports on the newly renovated Franklin D. Roosevelt Presidential Library and Museum in Hyde Park, NY. The overhaul, the first since FDR dedicated the library in 1941, has been open to the public since Sunday.

Bright Kids, Small City (TAP)

Roosevelt Institute | Pipeline Fellow Nona Willis Aronowitz speaks to Millennials who have chosen to live in Harrisburg, PA on why they are staying in the Rust Belt, reversing a fifty-year trend of young people moving away. A risk-averse approach to money is central to that decision.

Washington Shrugs as Student Loan Rates Double (MSNBC)

Suzy Khimm explains why no one in Congress seems to be doing anything about yesterday's student loan interest rate hike. Congress feels no urgency when the next set of loans won't be taken out until August, so they’re taking a break for the holiday instead.

We Must Hate Our Children (Salon)

Joan Walsh can't come up with any other reason that we would accept the idea that incurring massive amounts of debt for school is a necessary part of starting out in life.

Don't Blame Unemployment Insurance for Our Jobs Crisis (The Atlantic)

Matthew O'Brien looks at a study that shows that the labor market is just broken, and collecting unemployment insurance doesn't stop people from looking for jobs. Cutting benefits just keeps people from being able to pay their bills, which doesn't exactly help the economy.

War on the Unemployed (NYT)

Paul Krugman questions why the benefit cuts in North Carolina and other actions against the unemployed aren't getting more attention. Punishing the unemployed won't increase economic growth, which means it won't help anyone get a new job faster.

Non-Union Federally-Contracted Workers Will Stage Second Strike Today (The Nation)

Josh Eidelson continues to report on the strikes organized by Good Jobs Nation to pressure the federal government to raise labor standards for federal contractors. Strikers report violations of minimum wage and overtime laws by contractors who work in federal buildings.

The Truth About Immigration Reform and the Economy (Robert Reich)

Robert Reich counters three myths about how immigration reform will affect the economy. Our economic struggles, both short-term and long-term, could actually be nicely solved by a large increase in young workers paying into the system.

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Daily Digest - July 1: New Pot Industry, New Pot Regulations

Jul 1, 2013Rachel Goldfarb

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Legalizing Marijuana is Hard. Regulating a Pot Industry is Even Harder. (WaPo)

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Legalizing Marijuana is Hard. Regulating a Pot Industry is Even Harder. (WaPo)

Roosevelt Institute Fellow Mike Konczal looks at the questions surrounding the new legal marijuana market in Washington state, which is regulated by the Liquor Control Board. The challenges are numerous, and the state's priorities for regulation are still unclear.

Limits to Growth – of What? (TripleCrisis)

James K. Boyce sees growth of national income as a poor measure of national prosperity, because everything from the BP oil spill to the prison system contributes to growth. He thinks policy goals need to shift from pro-growth to growing the good and shrinking the bad.

Signed, Sealed, Deposited (Pacific Standard)

David Dayen suggests that we save the Postal Service by returning to postal banking, which would not only bring in new income but also offer simple inexpensive banking services to the millions of unbanked and underbanked Americans.

Paid via Card, Workers Feel Sting of Fees (NYT)

Jessica Silver-Greenberg and Stephanie Clifford reveal the hidden costs of being paid via payroll cards. The fees for withdrawls, statements, inactivity, and more can result in employees who functionally make less than minimum wage.

North Carolina Axes Benefits for Long-Term Unemployed (MSNBC)

Ned Resnikoff reports that because they cut their maximum benefit, North Carolina is ineligible for federal Emergency Unemployment Compensation. They've also cut the timeline, so where other Americans can collect unemployment for up to 99 weeks, North Carolinians will be limited to 19.

44% of Young College Grads Are Underemployed (and That's Good News) (The Atlantic)

Jordan Weissmann looks at 23 years of recent college graduate unemployment and underemployment, and it's clear that things haven't changed much: unemployment remains in step with all working adults, and underemployment hasn't changed much either.

It’s Not Just the Interest Rate: How Congress Can Help Students (The Nation)

Zoë Carpenter examines other changes Congress could make to the student loan system, even as they've failed to stop the interest rate increase. Her suggestions, such as better income based repayment options, would have far more effect on current debtors.

New from the Roosevelt Institute

Are Less Visible Taxes Really the Answer?

Roosevelt Institute | Pipeline Fellow Elizabeth Pearson makes the case that public opinion about taxation is malleable and that progressives should focus on raising awareness of the purpose of taxation and the benefits taxes will produce.

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Daily Digest - June 14: When Labor Laws are Applied

Jun 14, 2013Rachel Goldfarb

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New York Aims to Treat Underage Models as Child Performers (NYT)

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New York Aims to Treat Underage Models as Child Performers (NYT)

Eric Wilson reports that the New York State Legislature has approved a measure that changes labor laws affecting fashion. It's possible that this could force an aesthetic change on the industry, which produces clothes for women and shows them on girls.

Congress Turns Its Back on Rural America (Bill Moyers)

Greg Kaufmann continues to examine the effect of sequestration across the country, this time with an emphasis on rural areas. If the only Head Start center in a small town in Kansas is closed, the nearest option will be many miles away.

The Student Debt Crisis Is Everyone's Problem (The Nation)

Robert Applebaum reminds us that higher education is not a product to be sold but a public good and an investment in the country's future. The entire economy is dragged down when graduates lack disposable income due to their loan payments.

The Two Centers of Unaccountable Power in America, and Their Consequences (Robert Reich)

Robert Reich compares the powers of the intelligence community to that of Wall Street and the big banks. He doesn't trust either of these groups with the power they have, but the law provides little accountability for any of their actions.

Fortress Unionism (Democracy)

Rich Yeselson lays out a history of private-sector unions in the United States, with suggestions for what unions can do today to maintain their work despite an unfriendly legal climate and low union participation.

Are unpaid internships illegal? (WaPo)

Dylan Matthews discusses this week's ruling that Fox Searchlight violated minimum wage and overtime laws with its interns, and questions how it will affect for-profit versus non-profit sectors. Media coverage of current cases already has many companies reviewing their internship programs.

Sympathy for the Luddites (NYT)

Paul Krugman argues that as disruptive technologies eliminate jobs at all levels of skills and education, we must question whether education is still a solution to inequality. He says no, and that a stronger social safety net is needed to maintain the middle class.

Court: Human genes cannot be patented (CNN)

Bill Mears reports on yesterday's Supreme Court ruling, which concerned one of the ultimate cases of patent trolling: a company patenting a human gene. In this case, it was the breast cancer gene, which Myriad developed the first test for but certainly did not create.

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Governor Cuomo's "Tax-Free New York" Would Come at a High Cost

Jun 13, 2013Richard Kirsch

Eliminating taxes in college communities won't improve the economy, but it will undermine our public institutions.

Eliminating taxes in college communities won't improve the economy, but it will undermine our public institutions.

The decade-long conservative campaign for lower taxes and limited government has hit a wall of public outrage over the unfairness of the American tax system. But while lower taxes for the wealthy and corporations may not be popular, there is still huge public skepticism about how tax dollars can be put to work creating jobs or improving people’s daily lives. Fueling that skepticism are campaigns like that being run now by New York Governor Andrew Cuomo, who is aggressively promoting the idea that we can promote prosperity by lowering taxes.

Governor Cuomo has been racing around New York, with six appearances around the state in less than two weeks, to promote a plan he calls “Tax-Free NY.” Just the name alone should be enough to alarm anyone who understands what society, citizenship. and civilization is all about or what is needed to create broadly shared prosperity. One of a governor’s fundamental jobs is to spend tax dollars wisely, to put the public’s resources to work educating our children, protecting the health of our air and water, building the roads and mass transit systems that allow us to get to work, enjoy community life. and get their goods to market. Taxes pay for public safety and courts that safeguard the rule of law. A “tax-free NY” would be a New York of anarchy, dire poverty, and hopelessness.

Of course, the governor is not really proposing to get rid of all taxes in New York. Instead he would eliminate all taxes – property, personal income, sales, and business – in new tax-free zones established in and around public and private colleges and universities in the state. Every one of these institutions of higher education are supported heavily by taxes in a host of ways: for their very existence and operations in the case of public colleges, and through research grants and government-provided or -guaranteed student grants and loans to private colleges. 

If there is an idea behind the governor’s program, it is that the researchers and thinkers who work in higher education have long made university communities incubators of new businesses. Creating tax-free zones around New York universities is somehow supposed to make them more attractive to business innovation. But Governor Cuomo has this totally backwards. Universities are business innovators because of the creative people who work there. Eliminating taxes around a community college or university does not make the people who teach and do research more creative or innovative. Businesses don’t start in university communities because of low taxes. Businesses are started in university communities because of the quality of the researchers and intellectual richness of the faculty. Attracting and supporting them takes money – from taxes!

As part of Governor Cuomo’s push, I have received two emails from his campaign touting “Tax-Free NY.” The emails are full of quotes from the super-rich promoting the governor’s proposal, including Goldman Sachs CEO Lloyd Blankfein and Jamie Dimon, CEO of JPMorgan Chase. My favorite is from Kenneth Langone, one of the billionaires who tried to defeat President Obama last year: “States need to begin helping businesses by lifting the tax burden and also creating an environment in which employees want to raise their families.” The Blankfeins and Dimons and Langones of this world may live in gated communities, use private education, pay for private health care (at the Langone NYU Medical Center), and enjoy lavish retirements without Social Security, but most other New Yorkers rely on taxes and public programs to help them raise their families.

Of course, Langone – who made his fortune from Home Depot – and the rest of Cuomo’s tycoons would never have become rich without all the public structures that support their businesses and employees. In his advocacy for “Tax-Free NY,” the Governor is encouraging people and businesses to shirk their responsibilities and deny their obligations. The businesses and employees who benefit from the richness of a university community, often marked by excellent schools and libraries and good public services, have a basic responsibility to help pay for the benefits that give them that opportunity.

Building an America that works for all us, with broadly based prosperity, will take leaders who can tell a different story about America – the true story about the great American middle class built by decisions the country made, through our government, to invest in public education, a legal system that protects private initiative, labor laws that protect workers from exploitation, and investment in public infrastructure. That, Governor Cuomo, is also what built New York as the Empire State. 

Richard Kirsch is a Senior Fellow at the Roosevelt Institute, a Senior Adviser to USAction, and the author of Fighting for Our Health. He was National Campaign Manager of Health Care for America Now during the legislative battle to pass reform

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Every Day is Student Debt Day for Millennials

Jun 5, 2013Joelle Gamble

Young Americans demand action on the student loan crisis, and they have a plan to solve it.

Young Americans demand action on the student loan crisis, and they have a plan to solve it.

“Work hard. Get good grades. Go to a good school and you will be successful.” Our generation has been told time and again that through hard work and dedication, we will be able to live happy lives, have secure jobs, and start families built on comfortable finances. But on this day of action around student debt, it’s clear we need more than these easy answers to help Millennials cope with the growing burden of education costs.

I come from a middle class family. Both of my parents served in the Marine Corps and got good jobs. My father works in law enforcement, and my mother is a teacher. They taught me that if I put in hard work, I would reap the results. So, I graduated at the top of my class in high school and went to a top (public) university. I worked all four years of college and graduated on time. Two days after graduation I started working at a good job.

By all measures, I did everything “by the book.” I even saved up some money to make early down payments on the student loans that I accrued during school. Over the past four months, I have paid off more than was required by law, and currently I am paying more on the principal than on the interest. One would think that I would be in pretty good shape.

But with $26,000 in debt, only slightly above average, I will still be making these payments for the next decade of my life. They will be as regular as my electric bill and rent. They will be considered before I think about how and when to start my family or buy a house.

I am one of the lucky ones: employed with enough spare cash to make student loan payments. So many other recent college graduates are not in the same position.

Student loan debt is one of the biggest economic and social justice issues this nation faces today. An entire generation of young, educated workers is being saddled with financial burdens that will follow them for the foreseeable future.

Recognizing this, the Roosevelt Institute | Campus Network joined with the United States Student Association to make proactive recommendations for addressing the student loan debt crisis. Our report, A New Deal for Students, offers policies by students and for students, past and present.

In this report, students outline their arguments for a better system for financing higher education. Policy recommendations range from tax incentives for students committed to staying in their home states to raising the federal minimum range to supporting new graduates to teach in rural areas.

What we want is a real debate and, above all else, action by our lawmakers on this critical financial issue affecting millions of young Americans.

Joelle Gamble is the Roosevelt Institute | Campus Network's National Field Strategist.

 

Graduation cap and money image via Shutterstock.com

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Daily Digest - May 24: The Real (Student) Debt Crisis

May 23, 2013Rachel Goldfarb

Click here to receive the Daily Digest via email.

Nobel winner: Cut student loan rates (USA Today)

Click here to receive the Daily Digest via email.

Nobel winner: Cut student loan rates (USA Today)

Roosevelt Institute Chief Economist Joseph Stiglitz says he backs Elizabeth Warren's plan to let students borrow at the same discount rate as banks because student debt is holding back our economy, especially compared to countries that are actually doing something about it.

  • Roosevelt Take: The Roosevelt Institute | Campus Network's policy report "A New Deal For Students" lays out concrete and innovative policy solutions from students to solve the student debt crisis.

Donors Urge Cuomo to Press for Public Financing of State Campaigns (NYT)

Thomas Kaplan talks to Roosevelt Institute Senior Fellow Ellen Chesler and others who feel public campaign financing is necessary to combat an unusual form of peer pressure -- the kind the wealthy exert on politicians. According to Chesler, it's a moral issue.

In one chart: we have a demand problem, not a skills problem (Working Economics)

Heidi Shierholz looks at the unemployment and underemployment rates of college graduates under 25, and concludes that when even the young and highly educated have trouble finding jobs, the problem is pretty simple: no one is hiring.

America's Scandalous Underfunding of Community Colleges (Slate)

Matt Yglesias uses data on school spending changes to illustrate just how bad things have gotten at community colleges. Even with tuition hikes, they haven't been able to increase spending, which means they're forced to reduce services to our neediest students.

Black Unemployment Is Still Shamefully High (The Atlantic)

Jordan Weissmann knows the jobs crisis isn't close to over in the black community, where unemployment is both high and long-term. But Congress sees a string of decent jobs reports and a booming stock market and convinces itself the recovery is color-blind.

Food Stamp Cuts Backed By Farm Subsidy Beneficiaries (HuffPo)

Arthur Delaney points out the hypocrisy of lawmakers who receive significant subsidies for their family farms but feel the government doesn't have an obligation to feed the poor through SNAP. Anti-poverty programs: too costly. Photo op on a tractor: priceless.

Japan the Model (NYT)

Paul Krugman makes the case for Japan's current intense political efforts to turn around its economy, noting that no one else in the developed world is attempting stimulus on this level, and while it's too early to be certain, the signs look good that it's working.

New on Next New Deal

Michael Kinsley Gets It Wrong On "Austerians"

According to Mike Konzcal, austerians are setting eliminating the deficit as the only priority, while the rest of us see a bigger picture. Kinsley and other austerians are in a fantasy world where everyone saves, no one spends, and the economy improves without stimulus.

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Are Student Loans Becoming a Macroeconomic Issue?

Apr 23, 2013Mike Konczal

What's the general economic consensus on the impact of student loans on the household finances of those who hold them? Here's "Student Loans: Do College Students Borrow Too Much—Or Not Enough?" (Christopher Avery and Sarah Turner, 2012), which argues, "[t]here is little evidence to suggest that the average burden of loan repayment relative to income has increased in recent years." Using data from 2004-2009, the authors find that "the mean ratio of monthly payments to income is 10.5 percent" for those in repayment six years after initial enrollment.

They boost that number with a 2006 study by Baum and Schwarz to conclude that two trends cancel each other out: there's rising debt but steady student debt-to-income ratios. How can this happen? It "can be attributed to a combination of rising earnings, declining interest rates, and increased use of extended repayment options." This is how, though average total undergraduate debt jumped 66 percent to a value of $18,900 from 1997 to 2002, "average monthly payments increased by only 13 percent over these five years. The mean ratio of payments to income actually declined from 11 percent to 9 percent because borrower.”

Let's put this a different way. If you asked economists looking at the data if student loans could be having a macroeconomic effect, especially through a financial burden on those that have them, they'd say that the actual percent of monthly income paying student loans hasn't changed all that much since the 1990s. They may be making larger lifetime payments, since they'll carry the debts longer, but that's a choice they are making, which could reflect positive or negative developments. Certaintly there's no short-term strain. So there aren't any economic consequences worth mentioning when it comes to student loans.

I always thought this approach had problems. First, they were only looking at the pre-crisis era, so we couldn't see the impact of student loans once we hit a serious problem. And they were just rough averages of short-term income aggregates, rather than looking at specific individuals with or without student-debt and seeing what kinds of spending, particularly on longer-term durable goods, they do. But since I had no data myself, I never pushed on this very hard. Part of the problem is that student loans have happened relatively quickly, so quantitatively it's hard for data agencies to adjust their techniques to "see" this data easily, and not just lump them in with "other debts."

That is starting to change. The Federal Reserve Bank of New York is doing some high-end analysis of student loans, and their economists Meta Brown and Sydnee Caldwell have a great post from last week, "Young Student Loan Borrowers Retreat from Housing and Auto Markets." They find that over the past decade, people with student loans were more likely to have a mortgage at age 30 and a car loan at age 25. In the crisis this edge has collapsed:

There's a similar dynamic for car loans.

The researchers argue that two obvious explanations stands out for this collapse. The first is that the actual future expected earnings have fallen for this group, so they are going to spend less. The second is that credit constraints are especially binding, as those with student loans have a worse credit score than those without.

Derek Thompson at The Altantic Business responds critically, arguing that: (1) cars and mortgages are falling out of favor with young people, so this is likely a secular trend; (2) young people are essentially doing a "debt swap," switching cars and mortgages for education to take advantage of an education premium, and the cars and mortgages will come later; and (3) though this is, at best, a short-term drag on the economy and reflecting short-term problems, it'll super-charge our economy come later.

What should we make of this?

(1) It's possible that there is a secular trend to it, with young people not wanting mortgages or cars. But why wouldn't the spread survive? "People with student loans" is a broad category of people, and it is difficult to assume that it's just people moving to become renters in urban cores driving the entire thing. The collapse of the spread between the two coinciding with the crisis makes it hard to believe it's just a coincidence.

(2) As discussed at the beginning, the overall idea in the student loan data literature is that student loans shouldn't have a negative impact on consumption, especially at the national level. The extra cost of servicing the debt is more than balanced out by the extra income earned, even if the length of the debt needs to adjust to meet that. Indeed, there's often a "best investment ever" or "leaving money on the table" aspect to the discussion of higher education and student loans. So if this data holds, it's a major change from the normal way economists understand this.

And the issue of student debt is where the problem with the "education premium" is going to hit a wall. The college premium is driven just as much by high school wages falling as it is by college-educated wages increasing, which has slowed in the past decade. So if you have to take on large debt to secure a stagnating college-level income, it suddenly isn't clear that it is such a great deal, even if there's a strictly defined "premium" over the alternative.

(3) It isn't clear that the upswing in people, particularly women, taking on additional education is involved with this collapse in borrowing, as the ages of 25 and 30 cut off many people in school. I think it would reflect the collapse in the housing market, but the auto loan market is there as well. It is true that the economy as a whole is deleveraging, but that is largely reflective of housing and foreclosures.

How much this reverts if we get back to full employment and whether there's a "swap" that could lead to a better long-term economy are good questions, but the fact that we even have to put the question these way shows a change in what economists believed about student loans. No matter what, this shows that education isn't enough of an insurance against the business cycle.

And I actually see it the other way - right now Ben Bernanke is working overtime to try and get interest rates to the lowest they've ever been, and he still can't induce borrowing by college-educated young people. Congress also lowered interest rates on new student loans, though too many student loans are out there at high rates given the disinflationary times. If the lower lending isn't the result of institutional issues with credit scores, that means college-educated young people are particularly battered in this economy. And there could be a low-level drag on the economy for the foreseeable future.

If the New York Fed is taking requests, the biggest question I have is how student loans are impacting household formations. Young people are living with their parents for longer at a point where getting an additional million homebuyers would supercharge the economy. Are they living at home because they are unemployed, or because they are un(der)employed and have student loans? If it is the second, then there's definitely a serious lag on the economy.

But the real issue revealed by this study is that this stuff is important. It is showing up in national data; the people arguing that student loans simply disappear under higher earnings now have a macroeconomic issue to deal with.

Follow or contact the Rortybomb blog:

  

 

What's the general economic consensus on the impact of student loans on the household finances of those who hold them? Here's "Student Loans: Do College Students Borrow Too Much—Or Not Enough?" (Christopher Avery and Sarah Turner, 2012), which argues, "[t]here is little evidence to suggest that the average burden of loan repayment relative to income has increased in recent years." Using data from 2004-2009, the authors find that "the mean ratio of monthly payments to income is 10.5 percent" for those in repayment six years after initial enrollment.

They boost that number with a 2006 study by Baum and Schwarz to conclude that two trends cancel each other out: there's rising debt but steady student debt-to-income ratios. How can this happen? It "can be attributed to a combination of rising earnings, declining interest rates, and increased use of extended repayment options." This is how, though average total undergraduate debt jumped 66 percent to a value of $18,900 from 1997 to 2002, "average monthly payments increased by only 13 percent over these five years. The mean ratio of payments to income actually declined from 11 percent to 9 percent because borrower.”

Let's put this a different way. If you asked economists looking at the data if student loans could be having a macroeconomic effect, especially through a financial burden on those that have them, they'd say that the actual percent of monthly income paying student loans hasn't changed all that much since the 1990s. They may be making larger lifetime payments, since they'll carry the debts longer, but that's a choice they are making, which could reflect positive or negative developments. Certaintly there's no short-term strain. So there aren't any economic consequences worth mentioning when it comes to student loans.

I always thought this approach had problems. First, they were only looking at the pre-crisis era, so we couldn't see the impact of student loans once we hit a serious problem. And they were just rough averages of short-term income aggregates, rather than looking at specific individuals with or without student-debt and seeing what kinds of spending, particularly on longer-term durable goods, they do. But since I had no data myself, I never pushed on this very hard. Part of the problem is that student loans have happened relatively quickly, so quantitatively it's hard for data agencies to adjust their techniques to "see" this data easily, and not just lump them in with "other debts."

That is starting to change. The Federal Reserve Bank of New York is doing some high-end analysis of student loans, and their economists Meta Brown and Sydnee Caldwell have a great post from last week, "Young Student Loan Borrowers Retreat from Housing and Auto Markets." They find that over the past decade, people with student loans were more likely to have a mortgage at age 30 and a car loan at age 25. In the crisis this edge has collapsed:

There's a similar dynamic for car loans.

The researchers argue that two obvious explanations stands out for this collapse. The first is that the actual future expected earnings have fallen for this group, so they are going to spend less. The second is that credit constraints are especially binding, as those with student loans have a worse credit score than those without.

Derek Thompson at The Altantic Business responds critically, arguing that: (1) cars and mortgages are falling out of favor with young people, so this is likely a secular trend; (2) young people are essentially doing a "debt swap," switching cars and mortgages for education to take advantage of an education premium, and the cars and mortgages will come later; and (3) though this is, at best, a short-term drag on the economy and reflecting short-term problems, it'll super-charge our economy come later.

What should we make of this?

(1) It's possible that there is a secular trend to it, with young people not wanting mortgages or cars. But why wouldn't the spread survive? "People with student loans" is a broad category of people, and it is difficult to assume that it's just people moving to become renters in urban cores driving the entire thing. The collapse of the spread between the two coinciding with the crisis makes it hard to believe it's just a coincidence.

(2) As discussed at the beginning, the overall idea in the student loan data literature is that student loans shouldn't have a negative impact on consumption, especially at the national level. The extra cost of servicing the debt is more than balanced out by the extra income earned, even if the length of the debt needs to adjust to meet that. Indeed, there's often a "best investment ever" or "leaving money on the table" aspect to the discussion of higher education and student loans. So if this data holds, it's a major change from the normal way economists understand this.

And the issue of student debt is where the problem with the "education premium" is going to hit a wall. The college premium is driven just as much by high school wages falling as it is by college-educated wages increasing, which has slowed in the past decade. So if you have to take on large debt to secure a stagnating college-level income, it suddenly isn't clear that it is such a great deal, even if there's a strictly defined "premium" over the alternative.

(3) It isn't clear that the upswing in people, particularly women, taking on additional education is involved with this collapse in borrowing, as the ages of 25 and 30 cut off many people in school. I think it would reflect the collapse in the housing market, but the auto loan market is there as well. It is true that the economy as a whole is deleveraging, but that is largely reflective of housing and foreclosures.

How much this reverts if we get back to full employment and whether there's a "swap" that could lead to a better long-term economy are good questions, but the fact that we even have to put the question these way shows a change in what economists believed about student loans. No matter what, this shows that education isn't enough of an insurance against the business cycle.

And I actually see it the other way - right now Ben Bernanke is working overtime to try and get interest rates to the lowest they've ever been, and he still can't induce borrowing by college-educated young people. Congress also lowered interest rates on new student loans, though too many student loans are out there at high rates given the disinflationary times. If the lower lending isn't the result of institutional issues with credit scores, that means college-educated young people are particularly battered in this economy. And there could be a low-level drag on the economy for the foreseeable future.

If the New York Fed is taking requests, the biggest question I have is how student loans are impacting household formations. Young people are living with their parents for longer at a point where getting an additional million homebuyers would supercharge the economy. Are they living at home because they are unemployed, or because they are un(der)employed and have student loans? If it is the second, then there's definitely a serious lag on the economy.

But the real issue revealed by this study is that this stuff is important. It is showing up in national data; the people arguing that student loans simply disappear under higher earnings now have a macroeconomic issue to deal with.

Follow or contact the Rortybomb blog:

  

 

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If More Efficient Government is the Goal, Capping Revenues Isn't the Answer

Apr 18, 2013Joelle Gamble

Arbitrarily limiting revenues and cutting critical services doesn't boost efficiency; it just shifts the burden onto citizens.

Arbitrarily limiting revenues and cutting critical services doesn't boost efficiency; it just shifts the burden onto citizens.

The 2013 tax-filing deadline is just a few days behind us, but many Republican members of Congress have already started talking about this year’s revenue intake. Due to CBO projections that federal revenues in 2013 will be the highest in history, Republicans are arguing that the real issue with government is that it has a serious spending problem, and that it is too big and too inefficient to allow for domestic economic prosperity. Predictably, their solution to this problem is to cut taxes and spending. But this approach could actually create more of the inefficiency they claim to oppose.

If we want to build a more efficient government and increase economic prosperity, we should not slash critical government services or restrict revenues across the board. In fact, in a still weak and recovering economy, limiting revenues can heighten inefficiencies in government in a way that exacerbates resource inequalities. We can look to the effects of state property tax caps in Massachusetts and California as local-scale examples of what happens when we try to shrink government just for the sake of shrinking it.

In 1978, at the height of an anti-tax wave, California voters passed proposition 13, a cap on residential and commercial property taxes. Under the new law, increases in tax rates on assessed real property values essentially cannot exceed 2 percent per year. In addition, the law imposed two strict requirements for how new state and local revenues can be raised: State taxes can only be increased either by ballot or with a supermajority vote in both houses of the state legislature, and special-purpose taxes by local governments can only be increased by a supermajority of votes in a local election.

Similarly, Massachusetts’ proposition 2 ½, passed in 1980, limited property tax revenues to 2.5 percent of an area’s assessed property value while also capping growth in revenue from those assessments to 2.5 percent per annum.

Arguments in favor of these initiatives assert that caps on taxes are a needed move to increase government efficiency and to relieve strained families from the economic burden of higher taxes. Essentially the same ideas are permeating the national debate around the federal budget and deficit reduction as deficit hawks claim that government is too big and its spending is too much of a burden on the economy. Recently, as Roosevelt Institute Fellow Mike Konzcal notes, evidence has been growing that this argument is built on shaky ground.

Caps on annual property assessments, which had been a statistically stable source of revenue, forced municipalities to scramble to adjust to the permanent loss of resources, resulting in haphazard cuts and unreliable financial decision-making. Coupled with the movement to give more direct power over taxation to the voters (see CA proposition 218, the Right to Vote on Taxes Act), this state of uncertainty has only calcified – and uncertainty does not breed the efficient government systems that anti-tax advocates have promised.

Furthermore, instead of providing “efficiency savings” to state and local government, reduced revenues have simply shifted the burden of providing services from a stable entity onto the backs of the affected communities. The price of basic government operations doesn’t suddenly get cheaper because there is less revenue. It forces officials to sacrifice important programs to cover basic operational costs, and often the people who relied on those programs are those who can least afford to take the sudden hit. For local low- and middle-income communities in California and Massachusetts, this meant school funding shortages that exist to this day. At the federal level, the mounting effects of sequestration on various services and workers are setting up similar long-term problems.

Everything is amplified in a weak or recovering economy. Direct cuts to services that low- and middle-income communities rely on only exacerbate economic inequality and further hamper future prosperity. Families who already are having difficulty paying bills will be forced to deal with new challenges, from cuts to student aid and Medicaid to being laid off or furloughed.

In setting our fiscal course for the next several years, Congress should take a hard look at the risks taken by the states and avoid caving into the idea that revenue is a necessary evil to be restricted as much as possible. We can agree that our common goal is a smarter, more efficient government; however, cutting revenue streams to force reform is not the smartest, most efficient policy to achieve that goal.

Joelle Gamble is Deputy Field Director of the Roosevelt Institute | Campus Network.

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Higher Ed Cuts Could Hold States and Students Back

Mar 21, 2013

President Obama has talked about the need to "win the future" by investing in higher education, but based on the deep budget cuts states have made in recent years, it looks more like we're trying to forfeit. A new report from the Center on Budget and Policy Priorities finds that states are now spending 28 percent less per student on higher education than they were before the recession.

President Obama has talked about the need to "win the future" by investing in higher education, but based on the deep budget cuts states have made in recent years, it looks more like we're trying to forfeit. A new report from the Center on Budget and Policy Priorities finds that states are now spending 28 percent less per student on higher education than they were before the recession. Many states have experienced a budget crunch due to decreased tax revenues, but instead of raising tax rates to close the gap, they've often resorted to counterproductive cuts in public resources and services. In the case of higher education, those cuts have been passed on to students and their families in the form of soaring tuition rates. CBPP finds that per-student revenue fell by $2,600 while per-student tuition rose by $2,600 in the last 25 years. But even tuition hikes aren't covering the full cost of state budget cuts, so public colleges and universities have been forced to lay off staff and elminate programs while students wind up paying more for less.

The Roosevelt Institute | Campus Network and the United States Students Association released a report this week on Millennial solutions to the student debt crisis, and this is part of the problem. If we're not willing to invest more in our public university systems, we won't just be driving students further into debt. We'll be denying them the quality education they need to become productive and competitive members of the work force.

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