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Economic View: Why Innovation Is Still Capitalism’s Star

August 17, 2013 by

The decisive role of the “spirit of capitalism” is an old concept, going back at least to Max Weber, but it needs refreshing today with new evidence and new thinking. Edmund S. Phelps, a professor of economics at Columbia University and a Nobel laureate, has written an interesting new book on the subject. It’s called “Mass Flourishing: How Grassroots Innovation Created Jobs, Challenge and Change” (Princeton University Press), and it contains a complex new analysis of the importance of an entrepreneurial culture.

Professor Phelps discerns a troubling trend in many countries, however, even the United States. He is worried about corporatism, a political philosophy in which economic activity is controlled by large interest groups or the government. Once corporatism takes hold in a society, he says, people don’t adequately appreciate the contributions and the travails of individuals who create and innovate. An economy with a corporatist culture can copy and even outgrow others for a while, he says, but, in the end, it will always be left behind. Only an entrepreneurial culture can lead.

Is the United States really becoming corporatist? I don’t entirely agree with such a notion. Even so, President Obama has been talking a lot about innovation as a job creator this year, and while some of his intentions may be good, I’m afraid that some of his proposals look a little corporatist, and might suppress individual initiative.

In his State of the Union address in January, for example, the president proposed that the government should create 15 new “innovation institutes,” modeled on a public-private partnership that he helped start in Youngstown, Ohio, that is devoted to developing 3-D printers. There was more in this vein in his administration’s 2014 budget, offered in April. And in a speech on July 30 in Chattanooga, Tenn., Mr. Obama suggested extending the number of innovation institutes to 45, or almost one for every state. The institutes, he said, would be “getting businesses, universities, communities all to work together to develop centers of high-tech industries all throughout the United States.”

Will such measures work? Should the government really be trying to start a 3-D printer center? And why in Youngstown? It is easy to be skeptical of such a plan, especially when it was started in a swing state just before the presidential election. Web sites of the two senators and two representatives introducing bills this month supporting the president’s latest proposals are suggesting, in not-too-subtle terms, that the legislation would bring jobs to their own states.

Successful companies aren’t usually started this way. Professor Phelps, citing a McKinsey study, suggests that in free-market capitalism, “from 10,000 business ideas, 1,000 firms are founded, 100 receive venture capital, 20 go on to raise capital in an initial public offering, and two become market leaders.” It is easy to doubt, as Professor Phelps does, that the odds are favorable for a Youngstown 3-D printer center.

How you view the innovation institutes, and the topic of capitalism and culture, may depend on your own experience. Many people have never seen the hatching of a successful business idea. That makes it hard to judge the subtle changes that may be occurring in the nation’s culture and in its potential for innovation.

My own business experience has certainly helped shape my thinking. Yale, like many other universities, sensibly allows its professors to spend limited time in business, providing the opportunity for faculty members to gain valuable experience outside of the ivory tower and to offer their technical skill to the business world.

In 1991, I started a business with Karl Case, an economics professor at Wellesley College, and Allan Weiss, a former student of mine at Yale. We called it Case Shiller Weiss, Inc., and it was devoted to an innovation we dreamed up. The idea was a new “repeat sale” home price index — which would track the changes in the value of the same houses over time.

At the time, this was an entirely new line of business. And, at first, that posed a problem: we were spectacularly unsuccessful in raising money. We talked to venture capitalists and their committees, to no avail. They just didn’t seem to get our business plan. We must have appeared odd to them — overly academic, perhaps. One remarked that we’d do better proposing a new shopping center.

But we went ahead with our idea anyway. At first, Allan worked without pay. A friend of Professor Case, Chuck Longfield, contributed some money. And in 1995, I took out a home equity line of credit on my house in New Haven so I could personally lend more money to help keep our business afloat. The experience was stressful, especially when adding it to the burdens of my main job, as a professor. I have much to thank my wife, Virginia, for her tolerance of my overwork and my worrying, and for allowing me to put our family savings at risk.

In the end, our business was successful, and I think a big part of it was that we relied on our own ideas and energy and, to a large extent, our own money. In 2002, we sold the business to Fiserv Inc., then licensed Standard Poor’s to create what are now known as the SP/Case-Shiller Home Price Indices. In 2006, the Chicago Mercantile Exchange began trading futures on 11 of our indexes. Fiserv sold the index business to CoreLogic early this year.

In short, our business made its mark without any help from the government.

This little real-life experiment convinces me that committees of experts, even at smart venture capital firms, will often not recognize real innovation. I think that America’s business success through the decades has occurred because we have so many people with specialized knowledge who are willing to put their money, time and resources on the line for ideas that can’t be proved to a committee.

THAT experience may also help explain why I think the new crowdfunding initiative, started by the Jobs Act that the president signed last year, is an exciting step forward. It’s all about finding and mobilizing people who really understand specific, hard-to-prove ideas for important investments.

At the same time, other of my experiences incline me to think that government-appointed committees of experts can help set the stage for an entrepreneurial culture, under certain limited circumstances.

Long before I started any commercial ventures of my own, I received some federal government support — in the form of National Science Foundation research grants, awarded to me decades ago as a young professor. They allowed me to do research, and though it was not directly related to my later business endeavors, the process developed my expertise and reinforced a sense of entrepreneurial opportunity.

These grants were awarded competitively, based on the quality of the proposals, and gave me experience with a system focused on creating opportunities for those who try hard. Later, from 1983 to 1985, I evaluated others’ proposals when I served on the foundation’s panel for economics. Observing the process from the government side convinced me that the foundation really works. Maybe it’s because the panelists are chosen from successful scientists, who serve anonymously out of public spirit.

In any case, as Professor Phelps has argued, direct government involvement in capitalism is a delicate thing. The system’s success depends on subtle cultural factors — and these require careful nurturing.

Robert J. Shiller is Sterling Professor of Economics at Yale.

Article source: http://www.nytimes.com/2013/08/18/business/why-innovation-is-still-capitalisms-star.html?partner=rss&emc=rss

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Obama Focuses on Economy, Vowing to Help Middle Class

July 24, 2013 by Leave a Comment

Returning to the site of his first major economic speech as a young senator eight years ago, Mr. Obama lamented that typical Americans had been left behind by globalization, Wall Street irresponsibility and Washington policies, while the richest Americans had accumulated more wealth. He declared it “my highest priority” to reverse those trends, while accusing other politicians of not only ignoring the problem but also making it worse.

“With this endless parade of distractions and political posturing and phony scandals, Washington’s taken its eye off the ball,” Mr. Obama told an audience at Knox College. “And I am here to say this needs to stop. This needs to stop. This moment does not require short-term thinking. It does not require having the same old stale debates. Our focus has to be on the basic economic issues that matter most to you — the people we represent.”

The hourlong speech, one of the longest of his presidency, resembled a State of the Union address at times. The president mainly offered revived elements of his largely stalled economic program, like developing new energy, rebuilding manufacturing, spending more on roads, bridges and ports, expanding preschool to every 4-year-old in the country and raising the minimum wage.

But he and his aides hoped to use the speech both to claim credit for the progress made since the recession of 2008-9 and to position himself as the champion of a disaffected middle class that has yet to recover fully.

He chastised Republicans in Congress for not focusing on economic priorities and obstructing his initiatives. “Over the last six months, this gridlock has gotten worse,” he said.

And he challenged them to come up with their own plans. “I’m laying out my ideas to give the middle class a better shot,” he said, addressing himself to Republican leaders. “So now it’s time for you to lay out your ideas.”

Republican leaders were not impressed by Mr. Obama’s renewed push on the economy. Speaker John A. Boehner said beforehand that a speech would not make a difference. “What’s it going to accomplish?” he asked on the House floor. “You’ve probably got the answer: nothing. It’s a hollow shell. It’s an Easter egg with no candy in it.”

Senator Mitch McConnell of Kentucky, the Republican minority leader, said Mr. Obama’s speech would just be partisan rhetoric. “With all the buildup, you’d think the president was unveiling the next Bond film or something,” he said before the speech. “But in all likelihood it will be more like a midday rerun of some ‘70s B-movie. Because we’ve heard it all before. It’s old.”

Republicans said they had in fact advanced ideas for improving the economy, particularly in education, energy, tax changes and regulation. They noted that a House panel was taking up bills intended to relieve businesses of what Republicans consider burdensome regulation by the Environmental Protection Agency. “Mr. President, just get the federal government out of the way,” said Representative Kevin Brady, Republican of Texas, the chairman of the Joint Economic Committee. “Instead of putting handcuffs on job creators, try shaking their hand for a change.”

Mr. Obama acknowledged before the speech that it would not “change any minds,” nor would it outline new proposals. Any new ideas will come in a series of other speeches in the weeks to come.

But Mr. Obama and his aides billed his second Knox College speech as an important milestone in the president’s tenure on the national political stage. They said they hoped it would reset a national economic debate that had become too mired in the bitter clashes between the parties in Congress.

The Knox College speech was the president’s first stop on Wednesday. Afterward, he was to travel to the University of Central Missouri in Warrensburg for a second speech that afternoon before returning to the White House in the evening. As part of his pitch, he promised to develop in the next few months “an aggressive strategy” to tackle rising college costs.

Michael D. Shear reported from Galesburg, and Peter Baker from Washington.

Article source: http://www.nytimes.com/2013/07/25/us/politics/obama-to-restate-economic-vision-at-knox-college.html?partner=rss&emc=rss

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Jobs Boom Built on Cheap Energy Has Yet to Appear

April 1, 2013 by Leave a Comment

Despite all the upbeat news, however, Libbey recently announced it would lay off 200 workers at its plant in Shreveport, La., and move some production to Mexico as it cuts costs and discontinues several products.

Libbey’s decision is just one example of why manufacturing, for all its renewed promise, is likely to fall far short of the claims by industry groups that millions of new factory jobs are about to be created in the United States because of the unlocking of abundant supplies of domestic energy.

“Even though the U.S. is more competitive globally, manufacturing doesn’t give you the kind of direct job creation it did in years past,” said Joseph G. Carson, director of global economic research at AllianceBernstein, a Wall Street investment firm. “At the end of the day you still want a strong manufacturing base, but there aren’t as many people on the factory floor.”

Indeed, while the sector has added 500,000 jobs since the recession ended and the value of what the nation’s factories churn out is close to a high, there are nonetheless two million fewer manufacturing workers today than in 2007. Ever since the early 1960s, the share of jobs in manufacturing has been on a nearly uninterrupted downward slope, now accounting for less than 9 percent of all employment in the United States.

The dream that a reinvigorated manufacturing sector will restore prosperity to the middle class and bring back millions of well-paying blue-collar jobs has made for some unlikely political bedfellows recently.

Even as heavy industry has garnered strong support from the White House — in his State of the Union address in February, President Obama proposed financing 15 new centers for manufacturing innovation — a number of lobbying groups have been promising that more drilling for natural gas will lead to a jobs boom in dozens of industries that would benefit from cheaper energy. They argue that if additional land is opened for exploration, especially shale formations where hydraulic fracturing, or fracking, can increase production, millions of manufacturing jobs that migrated overseas will return to the United States.

Fracking’s environmental impact has made it a flash point for activists, but the promised job gains, other than in the petrochemical industry, have been slow to materialize.

“It’s not going to happen as fast as a lot of people think and it will be selective,” said Stephen T. Maurer, who heads the manufacturing practice at AlixPartners, a consulting firm. The sector may not be hemorrhaging jobs as in recent years, he said, “but it’s going to be a long, slow climb back.”

For all the caution of experts like Mr. Maurer and Mr. Carson, industries that benefit from cheaper gas have not been shy about talking up the coming manufacturing jobs bonanza they foresee. A December 2011 report by PricewaterhouseCoopers and the National Association of Manufacturers predicts fracking could help add one million manufacturing jobs in the United States by 2025.

“It definitely is a game changer for the United States,” said Chad Moutray, chief economist at the National Association of Manufacturers. “It puts us in a position that we might not have been in a couple of years ago.”

A May 2012 study by the American Chemistry Council, which represents the chemicals industry, estimated that increased gas production could create 200,000 jobs in the broader manufacturing sector, including several thousand in the glass industry. “It’s resulting in a renaissance in manufacturing,” said Kevin Swift, the chemical council’s chief economist.

But glass industry veterans say cheaper natural gas, which is used to melt sand into glass and is critical to the manufacturing process, isn’t a game changer in terms of jobs, however beneficial the cost savings are. Pressure from inexpensive imports remains intense, and labor in Mexico and China is still cheaper than in the United States.

While demand for their products is improving thanks to a more robust housing market and other factors, don’t expect a ramp up in hiring, said Richard A. Beuke, vice president for flat glass at PPG Industries, a Pittsburgh-based glassmaker.

Article source: http://www.nytimes.com/2013/04/02/business/economy/rumors-of-a-cheap-energy-jobs-boom-remain-just-that.html?partner=rss&emc=rss

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Economic Scene: U.S. Example Offers Hope for Cutting Carbon Emissions

March 19, 2013 by Leave a Comment

This is the nation, after all, where a former chairman of the Senate committee on the environment, James Inhofe, wrote a book about global warming called “The Greatest Hoax.” This is where a presidential election took place not six months ago in which climate change barely merited a mention, buried under an avalanche of promises to dig for coal and drill for oil.

Fuel economy performance for cars and trucks is still among the worst in the developed world. And only 7 percent of the nation’s energy comes from renewable sources, less than in most other advanced nations.

Yet when President Obama talked about the nation’s energy revolution during his State of the Union address last month, he could have boasted that American emissions of CO2 had fallen almost 13 percent since 2007. It was perhaps the biggest decline among industrial countries, and substantially steeper than in Europe, which has been much more committed to combating climate change.

Carbon emissions from the United States have never fallen this much, not after the first oil price shock following the Arab oil embargo of 1973, nor after the Iranian revolution of 1979, when American drivers suddenly discovered the virtues of Japanese small cars and President Jimmy Carter installed solar panels on the White House to heat the water.

What stands out most in this shift, however, is not environmental regulation or public concern about global warming but the price of energy and market-driven technological advancements. “It wasn’t so much a policy shift that brought carbon emissions down,” said James Hamilton, an energy economist at the University of California, San Diego. “It was irresistible market forces.”

The United States consumes 9 percent less energy for each $1 of G.D.P. than it did five years ago. Total energy use has fallen about 5 percent in the last five years.

To be sure, regulations have contributed to the process; tighter fuel economy standards are expected to lead automakers to double the fuel efficiency of new cars and light trucks by 2025. Tax breaks are encouraging companies to invest in renewable energy sources and retrofit buildings to increase energy efficiency.

But the main reasons are economic. The great recession and the world’s sluggish recovery have depressed energy use. As in the 1970s, high oil prices have encouraged drivers to drive less, and switch to cars and trucks with better fuel economy.

There is a new force as well: high prices underpinned the widely trumpeted investment in hydraulic fracturing, or fracking, of shale rock rich in oil and natural gas, which pushed the price of gas to some $2 per thousand cubic feet last April, down from $9 four years ago. Cheap gas, in turn, has encouraged power companies to switch to the cleaner fuel, replacing the most heavily polluting source of energy that we know, coal.

Since 2007 the share of the nation’s electricity produced by gas-powered generators has jumped to 30 percent from 21 percent; CO2 emissions from electricity generation have tumbled more than 15 percent. This new fuel brings potential problems of its own. Environmental groups have sounded the alarm about chemicals and methane leaking from wells, potentially contaminating local water supplies and releasing additional carbon into the air.

But fracking also appears, against all odds, to have brought Mr. Obama’s early, hopeful promise to cut CO2 emissions by 17 percent between 2005 and 2020 within reach.

Will our carbon footprint continue to shrink? The Energy Department forecasts that CO2 emissions will tick up nearly 2 percent this year and 0.7 percent in 2014, as the economy recovers. Coal use in power plants is also expected to rebound as gas prices rise from their 2012 trough.

Historical precedent is not promising. The drive for energy efficiency that started in the 1970s did not continue once oil prices fell in the 1980s; among other things, American drivers fell in love with S.U.V.’s and trucks. In 1981, the Ford F-series pickup truck became the nation’s best-selling light vehicle. In 1986, Ronald Reagan had the White House solar panels taken down.

Nonetheless, there are some encouraging signs that this time may be different. The shift from coal to gas-fired power plants should be sped up by new rules requiring old coal generators to install expensive environmental equipment. Oil prices are supported by fast rising demand from the developing world and are unlikely to plunge despite new sources found in Canadian tar sands and American shale.

The United States’ experience with new fuels also offers some options for countries intent on pursuing economic growth while restraining carbon emissions.

China is rushing to develop its large fields of shale gas. Europe — where natural gas, most of it imported from Russia, is expensive and power plants rely heavily on coal — may follow suit. Several European governments have banned fracking or imposed sharp restrictions on it, but some — like Britain — are moving ahead.

Still, the United States’ serendipitous success in reducing greenhouse gas emissions suggests how much more needs to be done than switching from a particularly dirty source of carbon to a cleaner one.

Even if every American coal-fired power plant were to close, that would not make up for the coal-based generators being built in developing countries like India and China. “Since 2000, the growth in coal has been 10 times that of renewables,” said Daniel Yergin, chairman of IHS Cambridge Energy Research Associates.

Fatih Birol, chief economist of the International Energy Agency in Paris, points out that if civilization is to avoid catastrophic climate change, only about one third of the 3,000 gigatons of CO2 contained in the world’s known reserves of oil, gas and coal can be released into the atmosphere.

But the world economy does not work as if this were the case — not governments, nor businesses, nor consumers.

“In all my experience as an oil company manager, not a single oil company took into the picture the problem of CO2,” said Leonardo Maugeri, an energy expert at Harvard who until 2010 was head of strategy and development for Italy’s state-owned oil company, Eni. “They are all totally devoted to replacing the reserves they consume every year.”

Perhaps the most important lesson from the American natural gas boom is how prices drive both demand and supply. Putting a price on emissions of CO2 that reflects the burden they impose on the environment and the threat excessive amounts pose to future generations would almost certainly be the most effective strategy to persuade energy companies, power generators — and you and me — to spew less of it.

E-mail: eporter@nytimes.com;

Twitter: @portereduardo

Article source: http://www.nytimes.com/2013/03/20/business/us-example-offers-hope-for-cutting-carbon-emissions.html?partner=rss&emc=rss

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You’re the Boss Blog: S.B.A. Proposes Rule Changes to Lure Borrowers

March 11, 2013 by Leave a Comment
The Agenda

How small-business issues are shaping politics and policy.

Concerned, apparently, that not enough businesses are taking advantage of government-guaranteed loans, the Small Business Administration recently proposed changing some of its lending rules. If adopted, the new rules could make the agency’s loan programs accessible and popular enough that they could reach their legal limits on lending — something the programs have seldom ever done. Oddly enough, this is happening at the same time the prospective “sequester” budget cuts may force the agency to make fewer loans.

The moves are the latest in a series of steps by taken by both Congress and the administration to expand the S.B.A.’s reach by making more existing businesses eligible for the agency’s programs. Many of these businesses would have been too large to get an S.B.A.-backed loan just three years ago.

In an interview, the outgoing S.B.A. administrator, Karen Mills, said, “you have to be inclusive when you look at our programs.” President Obama, she noted, vowed in his State of the Union address to make assisting domestic manufacturers a top priority for his second term, adding, “So without ever taking our eye off the ball on Main Street, we are now highly equipped to help our important manufacturing small businesses and job-creating supply chain members in-source more large-company manufacturing.”

In the changes announced this week, the S.B.A. would relax its affiliation rules, which are meant to ensure that a small-business loan applicant is not in fact controlled by a larger (and ineligible) company. Mainly, the agency would not look too deeply into the business connections of minority stakeholders. Ms. Mills said that stringent affiliation rules made sense for other S.B.A. programs, but not for getting a loan. “If you are a large company, there’s a benefit for you to pretending you’re small to get a government contract,” she said. But she said the agency was less concerned about infiltration in the lending program because a bigger borrower with good credit would find an S.B.A loan more expensive than a conventional loan. “Why should you pretend to be small?”

But in fact, S.B.A. loans have been available to larger businesses since 2010, when the Small Business Jobs Act increased both loan limits as well as the size of businesses eligible for loans to include those with net income of $5 million. Under those new size standards, which are ostensibly temporary, even a business with $100 million in revenue and a 5-percent profit margin could obtain a small-business loan. As a result, said Bob Coleman, who collects S.B.A. industry data for banks,  most of these larger companies can qualify for an S.B.A.-backed loan even after accounting for all of their affiliations. “That number-crunching, tree killing exercise” — establishing affiliates, that is — “is now moot,” he said.

Relaxing the rule, then, may entice some companies that were legally entitled to seek loans beginning in 2010 but found the affiliate issue too cumbersome to take another look. Indeed, Ms. Mills called the proposal her agency’s latest effort to streamline and simplify its programs. She described a situation where a gas station with three owners applied for a loan. “We had required 28 tax returns, because we said we wanted three years of tax returns of every individual who owns 20 percent or more, and then for each of those individuals, we wanted tax returns for other entities they owned.” Under the new rules, businesses with no clear majority owner would simply have to sign an affidavit identifying all of their affiliates. The owners would still have to supply their individual tax returns — but not documents for their affiliated businesses.

Ethan Smith, a lawyer in Port Washington, Pa., who represents S.B.A. lenders, said the change would lead to more lending simply by making the application and approval processes less intimidating. “If it brings more clarity to lenders — if lenders don’t have to sit there and guess what’s an affiliate and what’s not — it’s going to make it easier for them to extend financing,” he said.

The second big change the S.B.A. is considering, eliminating the agency’s so-called “personal resources test” for borrowers, could have more profound effects. This rule essentially requires investors with at least a 20-percent stake in a loan applicant and a lot of cash on hand to inject some of that cash into the business before the company can get a loan. (How much cash is determined by the resources test.) For decades, borrowers have had to show they cannot obtain credit elsewhere before getting a government-backed loan, and the S.B.A. has presumed that an owner’s deep pockets served as credit available to the business.

Now, though, the S.B.A. is reconsidering that view. “S.B.A. has become concerned that even borrowers whose principals have significant personal resources may be unable” to find reasonably priced loans, the agency said in its explanation of the change, concluding that the rule “unnecessarily restricts the pool of potential investors for small businesses” seeking loans.

However, doing away with the personal resources test could have other consequences. “It was not an unreasonable position to take that if you’ve got a lot of money, you should put your money on the line before we risk government assets,” said Mr. Smith. For banks, the lawyer added, the change poses a more practical problem: the S.B.A. would still require lenders to show that borrowers could not get credit elsewhere, a task made more difficult — and subjective — when the investors have a lot of cash on hand. “They’re eliminating the rule, but saying you still need to follow it,” he said. When a loan defaults under these circumstances, “the S.B.A. is going to come in and second-guess the lender’s decision prior to paying that guarantee.”

In the interview, Ms. Mills said that even if the business owners’ money has not been invested in the business, it is still on the line, in the form of collateral. “We still require them to back all their loan with all of their personal assets,” she said. As for the banks’ concerns, Emily Cain, a spokeswoman for the agency, noted that this was only a first draft of the rule. “Comments about what we are proposing are welcome and we will take them into consideration as the final rule is written,” she said.

Ms. Cain said that the agency has estimated that with the rule changes it would make as many loans as allowed by law — $22 billion in 2013 — and more if Congress increased the agency’s lending authority. However, unless the sequester is addressed, the agency is unlikely to have the money to approve more loans this year — the agency has said that if the sequester takes full effect, the amount of lending it can guarantee could fall by about $900 million.

So if the new rules take effect, it seems likely the agency will turn some small-business borrowers away. The only question is, which borrowers will be shown the door?

Interested members of the citizenry can read the proposed rules and comment on them as well before the rules are finalized. Comments are due April 26th. Ms. Cain said the agency would have a better sense of when it will be able to issue a final rule once the comment period has closed.

Of course, You’re The Boss readers can also comment below.

Article source: http://boss.blogs.nytimes.com/2013/03/11/s-b-a-proposes-rule-changes-to-lure-borrowers/?partner=rss&emc=rss

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Economix Blog: Putting a Number on Federal Education Spending

February 27, 2013 by Leave a Comment

Jason Delisle is the director of the Federal Education Budget Project at the New America Foundation.

In his State of the Union address, President Obama proposed to expand access to preschool, but offered few details on how much money the federal government would contribute. When the White House eventually releases that figure, everyone will want to know how it stacks up against what the federal government already spends on education each year. The trouble is, that number is tough to pin down.

You might try to look it up. But beware: most tallies, even official government figures, are incomplete or inaccurate because of the way they treat student loans, refundable tax credits and education programs run by agencies other than the United States Department of Education. Other tallies go too far, lumping veterans’ education benefits and other programs into the mix.

Before explaining how to get to a good number, I’ll give you mine. The federal government spent $107.6 billion on education in fiscal year 2012. As a point of reference, that sum is about one-eighth as much as Social Security spending and about a fifth of Medicare spending. Most of our national education budget comes from state and local governments. But the $107.6 billion provides a dose of perspective for when federal policy makers pledge to “invest in education” and make education a “top priority.” Federal education spending accounts for just 3 percent of the $3.5 trillion the government spent in 2012.

The figure includes the annual appropriation for the entire Department of Education ($67.4 billion), so-called mandatory spending at the department ($16.3 billion), the school breakfast and lunch programs ($14.8 billion), the refundable portion of a higher education tax credit ($6.6 billion), the Head Start program ($8.0 billion) and the subsidy provided on all of the student loans the government will disburse in one year (which happened to be negative — -$5.5 billion — last year).

*Congressional Budget Office fair-value estimate for fiscal year 2013 cohort.Sources: U.S. Department of Education, Department of Health and Human Services, U.S. Department of Agriculture, President's Fiscal Year 2013 Budget Request, Congressional Budget Office, New America Foundation Federal Education Budget Project *Congressional Budget Office fair-value estimate for fiscal year 2013 cohort.
Sources: U.S. Department of Education, Department of Health and Human Services, U.S. Department of Agriculture, President’s Fiscal Year 2013 Budget Request, Congressional Budget Office, New America Foundation Federal Education Budget Project

The annual appropriation for the Department of Education is an obvious figure to include, but as you can see, education spending includes a significant amount outside annual appropriations, much of which goes to support the Pell Grant program for college students from low-income families.

The school meal programs are less obvious components, but should be included. The programs help ensure that more than 31 million children each year do not go hungry at school, a prerequisite for good educational outcomes. Surely when a local district builds a new school it doesn’t consider the cafeteria an optional line item tangentially related to the school’s purpose. Feeding children during the school day is, in fact, integral to their education.

Similarly, the Head Start program, although housed in the Department of Health and Human Services, is a national preschool program dedicated to early education. When people think of federal education spending, Head Start often comes to mind.

The federal government also provides a long list of tax benefits (i.e., credits, exemptions and deductions) to support education. They totaled $33.2 billion in 2012 by one count, but I’ve excluded them in the spending tally. Experts argue over whether tax benefits are part of federal spending policy or tax policy. No funds leave the Treasury to finance these programs; instead, funds fail to arrive as revenue in the first place. Others argue that the benefits are not different from spending because a $1,000 tax credit has the same bottom-line effect on the federal budget as a $1,000 grant.

A “refundable tax credit” is, however, a different matter. No one debates the fact that a refundable tax credit is government spending. The recipient owes no taxes but receives a refund check as if he did. He pays negative federal income taxes. Even the Treasury Department treats the payments as “outlays.” Last year the government spent $6.6 billion in refundable payments under the America Opportunity Tax Credit, which I include in my measure of education spending. Tax filers can claim up to $1,000 of the credit against expenses for higher education, even if they have no tax liability to offset.

Finally, the federal government disbursed $112 billion in student loans in 2012. Most of that will be paid back, with interest. So what does the government spend on the loans? The government measures the cost of its loan programs by the subsidy that they provide to the borrower. Put simply, if the government lends at very favorable terms, then the borrower receives a subsidy equal to the discount the borrower received relative to a loan he or she otherwise could have taken out. Even though the benefit is spread over the life of the loan, this calculation treats the subsidy as one lump sum in the year that the loan is made.

By that measure, official figures show that the government’s student loan programs provide negative subsidies, which is to say, interest rates and fees are set high enough that the government makes money. But there is a big flaw with those figures.

The Congressional Budget Office and many economists argue that official figures don’t factor in all of the risks inherent in the loans. In response, the Congressional Budget Office publishes fair-value estimates to more fully reflect risk, and I use those figures in my tally of federal education spending. Note that even after the adjustment, the one year’s worth of loans still show a net gain to the government of $5.5 billion.

Excluded from my tally are any of the education benefits provided through the Department of Defense and Department of Veterans Affairs. Funds for those programs should be considered military and veterans’ spending rather than federal education spending. The benefits are part of the compensation packages that the government provides to support an all-volunteer military. Similarly, a housing allowance for a member of the military is not a federal housing assistance program. The benefits are in-kind costs associated with financing the military. If included, those programs would add more than $10 billion to the $107.6 billion total.

The $107.6 billion figure, despite excluding military and veterans’ programs, reflects a more comprehensive measure of federal education spending than most. Even so, it is probably surprising to many that education spending comes in at just 3 percent of the $3.5 trillion the federal government spent in 2012. It is hardly the figure that comes to mind when a lawmaker or the president speaks of investments and priorities.

Article source: http://economix.blogs.nytimes.com/2013/02/27/putting-a-number-on-federal-education-spending/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Expansion of European Bailout Fund Clears Hurdle

September 29, 2011 by Leave a Comment

The 103-to-66 vote, with 30 legislators absent, still leaves 7 of the 17 members of the euro zone yet to ratify a bailout fund that, despite expanded resources and power, is considered much too small to fend off further market attacks on Greece and other wounded countries.

The laborious approval process, which can be held up by objections from any one of the countries in the euro zone, has highlighted deep flaws in alliance’s decision making. Every major initiative must traverse an obstacle course, and each hurdle can jostle financial markets anew.

On Wednesday, major stock market indexes in Europe fell after three consecutive sessions of gains.

Though Finland can now be checked off the list, the next holdout may prove to be Slovakia, where there was talk a vote on the bailout fund might be delayed until late October, past the unofficial deadline of midmonth. Many Slovakians resent having to help bail out Greece, which, despite its problems, is wealthier.

José Manuel Barroso, president of the European Commission, warned Wednesday that countries in the euro zone must move toward greater unity for the alliance to survive.

“We are today faced with the greatest challenge our union has known in all its history,” Mr. Barroso said in his annual State of the Union address at the European Parliament in Strasbourg. “If we don’t move forward with more integration, we will suffer more fragmentation. This will be a baptism of fire for a whole generation.”

Leaders in Germany and elsewhere played down speculation that they were working on bolder responses to the crisis, like a mechanism that would multiply the borrowing power of the bailout fund, the European Financial Stability Facility. Officials said they were preoccupied with getting parliamentary approval for existing measures.

But the euro zone countries face intense pressure from the United States, China and other countries to more forcefully address the sovereign debt problem before the meeting of the Group of 20 leading economies that begins Nov. 3 in Cannes.

“The euro area has been given an ultimatum to put its crisis once and for all behind its back over the coming six weeks,” Jacques Cailloux, chief European economist at Royal Bank of Scotland, wrote in a note to clients.

In an initial attempt to impose more spending discipline on euro zone members and to prevent future crises, members of the European Parliament voted Wednesday in favor of rules that would impose fines on countries that break budget and deficit rules.

Members of the euro zone are supposed to hold their budget deficits below 3 percent of gross domestic product, and total debt below 60 percent of G.D.P., but few do.

Under the new rules, countries that exceed those limits will be pressed to make a cash deposit — in an account that pays no interest — equal to 0.2 percent of G.D.P. If they still fail to rein in spending, they will forfeit the deposit.

While finance ministers would still need to agree to punish countries, the voting system has been adjusted to make it significantly more difficult to block sanctions.

In addition, national budget plans will come under greater scrutiny, and there will be an alert system to try and detect looming problems like the housing bubbles that helped create the debt crises in Spain and Ireland.

The German Parliament is scheduled to vote Thursday on the bailout fund, in what is seen as a crucial test for Chancellor Angela Merkel.

Austria is scheduled to vote Friday. The remaining countries are Cyprus, Estonia, Malta, the Netherlands and Slovakia.

There were indications that Slovakia’s Parliament might not vote until Oct. 25, beyond the midmonth deadline set by Olli Rehn, the European commissioner for economic and monetary affairs.

That would be about three months after representatives of the 17 countries in the euro zone agreed to give the rescue fund more money and power. The expanded fund will be able to loan up to €440 billion, or about $600 billion, and issue guarantees for €780 billion.

Mr. Cailloux said that the fund needed about €2 trillion to be effective.

Article source: http://feeds.nytimes.com/click.phdo?i=e3124b2bff6780a1ab4a53d9cbc42ae1

Filed Under: Business News Tagged With: , ,