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Economix Blog: Let Your Rich Uncle Pay for College

July 15, 2013 by Leave a Comment

Nancy Folbre, economist at the University of Massachusetts, Amherst.

Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.

If you borrow money to go to college, you should be able to pay it back from your higher post-graduation income. Rather than a loan, you could offer an equity investment — a share of your future earnings.

Today’s Economist

Perspectives from expert contributors.

Most education in modern economies is financed either through debt or equity. The big issue is who’s making the investment and on what terms.

The Oregon state legislature dramatized this issue with its decision to develop a pilot program to eliminate tuition and fees for students in the state university system who agree to pay about 3 percent of their income for the next 20 years to help finance the education of future students.

The “pay it forward” scheme, proposed by students at Portland State University and building on a model developed by the Economic Opportunity Institute, has re-energized debate over ways of alleviating the burden of student debt. As it happens, the Oregon legislature voted to pursue it on the same day that federal student loan interest rates doubled to 6.8 percent from 3.4 percent.

Would you be better off paying 3 percent of your income for 20 years, or 6.8 percent on a specific loan amount? The answer depends both on your projected income and the amount you need to borrow. In general, students from low- and middle-income families would fare better than students from rich families under the Oregon plan, because they are more dependent on loans to pay for college.

The Oregon plan would improve educational opportunity and reduce income inequality, raising more payback money from high earners than low earners. Yet it is less egalitarian than the largely free public university system that once existed in the United States and currently survives in countries including Denmark, Sweden and Norway.

Subsidized public higher education is also based on a “pay it forward” principle. College graduates are expected to earn more and, as a result, pay more in income and other taxes over their lifetime. The reciprocity is just less direct. Instead of helping pay only for future college students, graduates help reimburse all past taxpayers — including the older generation — for the taxes they invested in previous years.

At the other end of the spectrum, “human-capital contracts” can be fully privatized, with students offering investors a share of their prospective earnings in return for an upfront investment. This model, originally suggested by Milton Friedman, developed in some detail by Miguel Palacios of the Cato Institute and advocated by Luigi Zingales in a commentary in The New York Times, was put into practice by a student-loan company called My Rich Uncle about 10 years ago.

Both socialized and individualized human-capital contracts help solve an important problem, increasing productive investments and contributing to economic growth. Yet neither type of contract is foolproof.

Critics of public investment in higher education often contend that it is inefficient, because it subsidizes students who goof off along with those who indulge in the development of skills with little market payoff — such as theater arts. Public subsidies can also have the effect of reducing pressure on providers of higher education to cut costs or to encourage students to develop job-specific skills.

Advocates of public investment in higher education assert that there are compensating benefits. They often couch their arguments in terms of political rights to educational access and enhanced equality of opportunity. These political rights have economic consequences. Students develop general skills in college that don’t necessarily pay off in higher wages but may nonetheless generate tangible benefits for themselves and others. College graduates may become better informed citizens, more successful parents and more creative members of society.

Some students who may not seem like a good bet either for private investors or public taxpayers at age 18 can be transformed by their college experience.

It’s pretty hard to assign a specific value to their human capital, however you define it.

The lifetime payoff to a college degree depends on many factors other than individual effort or choice of major, including global supply and demand for educated workers, and a business cycle that economists don’t fully understand.

On the Marginal Revolution Web site, Tyler Cowen registers his skepticism with the Oregon model, suggesting it would suffer from adverse selection: “At the margin I would expect this to attract people who don’t have a vivid image of the distant future.”

But if everyone’s vision of the distant future is blurred, public investment in human capital becomes especially important. The large number of students taking part in the payback scheme pools risk and provides more effective insurance against unanticipated declines in earnings.

This insurance helps encourage human capital investment. As the Economic Opportunity Institute report points out, “pay it forward” systems in Australia and Britain have contributed to increased college enrollments there.

Do you doubt the significance of risks to private investments in human capital? Consider that the lending enterprise known as My Rich Uncle declared bankruptcy in 2009, exercising a legal privilege of getting out from under its obligations that most student debtors are denied.

Students who don’t have a family member or other angel investor willing to finance their college education might consider moving to Oregon. Or, they could start organizing to win more generous support from their Uncle Sam.

Article source: http://economix.blogs.nytimes.com/2013/07/15/let-your-rich-uncle-pay-for-college/?partner=rss&emc=rss

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Even Pessimists Feel Optimistic Over Economy

June 15, 2013 by Leave a Comment

But could the New Normal, as this long economic slog has been called, be growing old?

That is the surprising new view of a number of economists in academia and on Wall Street, who are now predicting something the United States has not experienced in years: healthier, more lasting growth.

The improving outlook is one reason the stock market has risen so sharply this year, even if street-level evidence for a turnaround, like strong job growth and income gains, has been scant so far.

A prominent convert to this emerging belief is Tyler Cowen, an economics professor at George Mason University near Washington and author of “The Great Stagnation,” a 2011 best seller, who has gone from doomsayer to a decidedly more optimistic perspective.

He is not predicting an imminent resurgence. Like most academic economists, Mr. Cowen focuses on the next quarter-century rather than the next quarter. But new technologies like artificial intelligence and online education, increased domestic energy production and slowing growth in the cost of health care have prompted Mr. Cowen to reappraise the country’s prospects.

“It’s better than it looked,” Mr. Cowen said. “Technological progress comes in batches and it’s just a little more rapid than it looked two years ago.” His next book, “Average Is Over: Powering America Beyond the Age of the Great Stagnation,” is due out in September.

Certainly, there are significant headwinds that will not abate anytime soon, including an aging population, government austerity, the worst income inequality in nearly a century and more than four million long-term unemployed workers.

These and other forces prompted some leading economists, led by Robert J. Gordon of Northwestern, to conclude not long ago that the arc of American economic growth for centuries was over, to be replaced by decades of stagnation. Productivity might grow steadily, Professor Gordon argued, but the benefits will not flow to most Americans.

Other analysts are challenging that perspective, which they said was colored, in part, by the severe downturn that hit the global economy more than five years ago. And some of them now see a brighter outlook right around the corner, not just far into the future.

Two widely followed economic forecasters, Morgan Stanley and IHS Global Insight, have both increased their estimates for growth in recent days.

“It’s been a long time coming,” said Nariman Behravesh, chief economist at IHS. “There is more optimism about the U.S. and in particular about the second half of this year and 2014. Three months ago, we wouldn’t have come to that same conclusion.”

Indeed, a number of forecasters are now predicting that the expansion, which began in 2009 and has remained subpar ever since, might prove to be far more durable than the typical five-to-six-year growth cycle, in part because of the absence of the traditional boom, then bust pattern.

The optimistic view is hardly universal and there have been premature proclamations of better days before, most famously the “green shoots” spotted by Ben S. Bernanke, the chairman of the Federal Reserve, in 2009.

Whether or not the economy is poised to grow faster in the months ahead will be the central question when Federal Reserve policy makers meet this week, with more volatility expected on Wall Street as traders look for any sign the Fed is ready to taper back its huge stimulus efforts.

Whatever the Fed’s conclusion, many analysts insist the more upbeat view is justified this time.

In particular, Mr. Behravesh and other economists said, the economy has shown greater resilience than expected in the face of tax increases and spending cuts in Washington. As the impact from this fiscal tightening eases, the overall growth rate should pick up.

Article source: http://www.nytimes.com/2013/06/16/business/economy/even-pessimists-feel-optimistic-over-economy.html?partner=rss&emc=rss

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The Trade: On Wall Street, Some Insiders Express Quiet Outrage

December 1, 2011 by Leave a Comment

Police cleared the Occupy Los Angeles camp early Wednesday, arresting about 300 protesters.Frederic J. Brown/Agence France-Presse — Getty ImagesPolice cleared the Occupy Los Angeles camp early Wednesday, arresting about 300 protesters. Raids in Philadelphia led to 52 arrests.

Last week, I had a conversation with a man who runs his own trading firm. In the process of fuming about competition from Goldman Sachs, he said with resignation and exasperation: “The fact that they were bailed out and can borrow for free — it’s pretty sickening.”

Though the sentiment is commonplace these days, I later found myself thinking about his outrage. Here is someone who is in the thick of the business, trading every day, and he is being sickened by the inequities and corruption on Wall Street and utterly persuaded that nothing has changed in the years since the financial crisis of 2008.

The Trade
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Then I realized something odd: I have conversations like this as a matter of routine. I can’t go a week without speaking to a hedge fund manager or analyst or even a banker who registers somewhere on the Wall Street Derangement Scale.

That should be a great relief: Some of them are just like us! Just because you are deranged doesn’t mean you are irrational, after all. Wall Street is already occupied — from within.

The insiders have a critique similar to that of the outsiders. The financial industry has strayed far from being an intermediary between companies that want to raise capital so they can sell people things they want. Instead, it is a machine to enrich itself, fleecing customers and widening income inequality. When it goes off the rails, it impoverishes the rest of us. When the crises come, as they inevitably do, banks hold the economy hostage, warning that they will shoot us in the head if we don’t bail them out.

I won’t pretend this is a widespread view in finance — or even a large minority. You don’t hear this from the executives running the big Wall Street firms; you don’t hear it from the average trader or investment banker. From them, we get self-pity. For every one of the secret Occupy Wall Street sympathizers, there are probably 15 others like Kenneth G. Langone, who, like downtrodden people before him, is trying to reclaim and embrace a pejorative, “fat cat.”

The critics are more often found on the periphery, running hedge funds or working at independent research shops. They are retired, either voluntarily or not. They are low-level executives who haven’t made scrambling up the corporate hierarchy their sole ambition in life. Perhaps their independent status removes the intellectual handcuffs that come with ungodly bonuses. Or perhaps they are able to see Big Money’s flaws because they have to compete with the bigger banks for dollars.

Are these “Wall Streeters”? To civilians, they work on the Street. Bankers at the bulge-bracket firms wouldn’t think they are. But that doesn’t mean they don’t count. They know the financial business intimately.

Sadly, almost none of these closeted occupier-sympathizers go public. But Mike Mayo, a bank analyst with the brokerage firm CLSA, which is majority-owned by the French bank Crédit Agricole, has done just that. In his book “Exile on Wall Street” (Wiley), Mr. Mayo offers an unvarnished account of the punishments he experienced after denouncing bank excesses. Talking to him, it’s hard to tell you aren’t interviewing Michael Moore.

Mr. Mayo is particularly outraged over compensation for bank executives. Excessive compensation “sends a signal that you take what you get and take it however you can,” he told me. “That sends another signal to outsiders that the system is rigged. I truly wish the protestors didn’t have a leg to stand on, but the unfortunate truth is that they do.”

I asked Richard Kramer, who used to work as a technology analyst at Goldman Sachs until he got fed up with how it did business and now runs his own firm, Arete Research, what was going wrong. He sees it as part of the business model.

“There have been repeated fines and malfeasance at literally all the investment banks, but it doesn’t seem to affect their behavior much,” he said. “So I have to conclude it is part of strategy as simple cost/benefit analysis, that fines and legal costs are a small price to pay for the profits.”

Last week, in a Bloomberg Television event, both Laurence D. Fink, the chairman and chief executive of the mega-money management firm BlackRock, and Bill Gross, the legendary bond investor, evinced some sympathy for the Occupy Wall Street movement.

Over the last several decades, “money and finance have dominated at the expense of labor and Main Street, and so how can one not sympathize with their predicament?” Mr. Gross said, speaking of the 99 percent. “To not have sympathy with Main Street as opposed to Wall Street is to have blinders.”

It’s progress that these sentiments now come regularly from people who work in finance. This is an unheralded triumph of the Occupy Wall Street movement. It’s also an opportunity to reach out to make common cause with native informants.

It’s also a failure. One notable absence in this crisis and its aftermath was a great statesman from the financial industry who would publicly embrace reform that mattered. Instead, mere months after the trillions had flowed from taxpayers and the Federal Reserve, they were back defending their prerogatives and fighting any regulations or changes to their business.

Perhaps a major reason so few in this secret confederacy speak out is that they are as flummoxed about practical solutions as the rest of us. They don’t know where to begin.

Over the next year, maybe that will change. Things are going to be tough on Wall Street. Bonuses will be down. Layoffs are coming. Europe seems on the brink of another financial crisis. Maybe from that wreckage, a leader will emerge.

Article source: http://feeds.nytimes.com/click.phdo?i=78887c42ac59e19894ff446547018f84

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Common Sense: Occupy Wall Street Has Plenty of Potential

November 28, 2011 by Leave a Comment

In the wake of this week’s eviction of protesters from Zuccotti Park in New York and other urban campgrounds around the country, it’s tempting to dismiss the Occupy Wall Street movement as little more than a short-lived media phenomenon. The issues that spawned the movement — income inequality, money in politics and Wall Street’s influence — were being drowned out by debates over personal hygiene, noise and crime.

By Wednesday morning, when I dropped by the park, about 20 people, including some who looked disheveled and homeless, shared food and barely listened to a speaker with a graying ponytail who denounced New York as an “illegitimate police state.” Thursday’s “Day of Action” led to some more arrests, but it didn’t spawn the mass demonstrations some local politicians had predicted, let alone attract the throngs that the Tea Party mustered for a march on Washington in 2009.

But critics and supporters alike suggest that the influence of the movement could last decades, and that it might even evolve into a more potent force. “A lot of people brush off Occupy Wall Street as incoherent and inconsequential,” Michael Prell told me. “I disagree.”

Mr. Prell is a strategist for the Tea Party Patriots, a grass-roots organization that advocates Tea Party goals of fiscal responsibility, free markets and constitutionally limited government. He’s the author of “Underdogma,” a critique of left-wing anti-Americanism, which includes a chapter on the Berkeley Free Speech movement of the 1960s, which may be the closest historical parallel to the Occupy movement.

“They claim to stand up on behalf of the ‘little guy’ (the 99 percent), while raising a fist of protest against the big, rich, greedy and powerful 1 percent,” he said of the Occupy movement. “The parallels between Occupy Wall Street and the Berkeley Free Speech Movement are too clear to ignore — right down to the babbling incoherence of the participants. The lesson from Berkeley in the 1960s and the protest movement they spawned is: it doesn’t matter that they don’t make sense. What matters is they are tapping into a gut-level instinct that is alive, or lying dormant, in almost every human being. And, when they unleash the power of standing up for the powerless against the powerful — David vs. Goliath — the repercussions can ripple throughout our society for decades.”

Mr. Prell hopes that doesn’t happen and is adamantly opposed to what he considers the movement’s big government agenda, but points out that “last generation’s protesters are today’s leaders.”

Sidney Tarrow, a visiting professor at the Cornell Law School, an expert in social movements and author of “Power in Movement: Social Movements and Contentious Politics,” agreed that the movement could emerge as a more potent national force once the encampments were no longer an issue. This week’s evictions “could be the foundation for a national social movement,” he said. The 1964 Sproul Hall sit-in at Berkeley “created a communal basis for a future social movement. They hadn’t met until they were carried out by police. That’s a powerful solidarity-creating experience. We may well see networks of activists growing up because of this. People in the same encampments, and people in different encampments, are now in constant contact and can share experiences. They’ll build a community. That’s why occupation of space is important.”

Mr. Tarrow said he was sympathetic to the goals of the movement, “and I’m especially pleased there’s someone outside the Democratic Party establishment who’s saying these things. Someone had to seriously open a debate about the yawning gap of inequality in this country.” He added: “My advice to them is, ‘Move on.’ The encampments were running out of steam. They’ve achieved the best they could hope to achieve, which is to draw the country’s attention to extraordinary inequality. In my view, they should pack up their tents and march on Washington.”

Jeff Goodwin, a professor of sociology at New York University, who has both studied and at times joined the protesters, said he felt Mayor Bloomberg did the protesters “a big favor. The attempt to disrupt or suppress the movement will backfire. People involved think this is just the beginning. People are having a conversation about what’s wrong with the country. The police are not going to dissuade them from protesting or remaining active. It’s just going to anger people and radicalize them, and maybe draw new people into the conversation.”

While Occupy Wall Street has caught the attention of the White House and shifted the national debate over the economy, much as the Tea Party movement did from a conservative and libertarian perspective, it hasn’t yet had anywhere near the Tea Party’s impact, and it hasn’t elected any political candidates or raised significant funds. But it may have less conventional goals.

Cornel West, a Princeton professor who has emerged as a prominent voice of the movement, called me from Seattle, where he’d just joined Occupy Seattle protesters at Seattle Central Community College, and was en route to Oakland to participate in more protests there. “We’ve got to regroup and bounce back,” he said of this week’s evictions. “There’s already been a victory. Everyone is talking about corporate greed and income inequality, and that wouldn’t have been imaginable even a year ago.” He added, “To think that New York City spent all of that taxpayer money on policing the protesters and arresting people, while right there on Wall Street are all these financial criminals and no one has been charged. The oligarchs get away with everything. The hypocrisy is just too much to take. The shift towards truth and justice is what the movement is all about.”

Mr. West said he didn’t know where the movement was headed, but “you can’t evict an idea whose time has come.”

Article source: http://feeds.nytimes.com/click.phdo?i=7a4d3b7d2d54af368011f0285cbf1906

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Economix: Inequality Rising Across the Developed World

May 4, 2011 by Leave a Comment

America isn’t the only rich country dealing with a rise in inequality. Most of the developed world is, too.

A new report from the Organization for Economic Cooperation and Development finds that most of its member countries have seen their richest citizens get much, much richer in the last few decades, leading to a widening income gap.

DESCRIPTIONSource: OECD Income Distribution and Poverty Database. Note: Data for mid-1980s refer to early 1990s for Czech Republic and Hungary.

Today, across developed countries, the average income of the richest 10 percent of the population is about nine times that of the poorest 10 percent, with much bigger multiples in Israel, Turkey, the United States, Chile and Mexico. In these last two countries, the income ratio is 27 to 1.

So what accounts for the growing gulf?

Changes in capital income — which primarily affects wealthier people — have contributed to rising inequality, although the impact has been relatively modest when compared to changes in labor income, the report says. As lower-paid workers have seen their incomes stagnate or even fall, the highest-paid workers have gotten steep raises.

Many factors have contributed to the rising labor income inequality. Globalization has had an impact, as rich countries have been sending more of their commodifiable, generally less-skilled jobs offshore, which has displaced many lower-paid workers in rich countries.

Besides outright layoffs, there have also been cuts in work hours (sometimes voluntary, sometimes not), disproportionately affecting lower-paid employees:

DESCRIPTIONSource: Organization for Economic Cooperation and Development. Note: Paid workers of working-age. Mid-2000s refer to 2000 for Belgium and France. Mid-1980s refer to early 1990s for Austria, Czech Republic, France, Greece, Hungary and Ireland.

Technological improvements have also disproportionately benefited the pay of high-skilled workers. Regulatory changes, like loosening protections for temporary (and less-skilled) workers and lower unemployment benefits, may have also had an effect.

The report notes that changing courtship patterns may also be contributing to the widening income gap.

Over the years people have become more and more likely to marry mates who have similar incomes. “Today, 40 percent of couples in which both partners work belong to the same or neighboring earnings deciles, compared with 33 percent some 20 years ago,” the report says.

Surely to some extent this has to do with more women having earnings, period, and therefore having more women’s earning matching what their husbands make. But in any case if poor marry poor and rich marry rich, that magnifies the income gap effect. After all, if poor married rich, the result would be more evenly distributed wealth.

Article source: http://feeds.nytimes.com/click.phdo?i=fd15e9e06e6ac134b02b5b4042b5534f

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