(This week your editor was inspired by a depression era favorite, Popeye. I also want to express my sincerest condolences to the Charleston community for this week's tragedy and their open hearted family who expressed love and forgiveness. "Hate won't win.")
Let's start with a cartoon:
David Madland of the Center for American Progress has a new book out on why the economy doesn’t work without a strong middle class. In an interview on Salon.com, Madland discusses the reasons behind the middle class’s recent collapse and why "trickle-down" economic management doesn't work :
The underlying idea behind trickle-down, really, is that high levels of economic inequality are good and that if you help the rich get richer through things like tax cuts and less regulation, that will buy some greater economic growth. The premise that inequality is good is fundamentally wrong. It might be true in a very narrow sense that, yes, [it provides] some incentive to work harder; but that ignores the larger context. When inequality gets to extreme levels, you have all these harms that happen as a result. I talked about trust; you have governance getting corrupted, you have fewer people able to develop their human capital. And you also have weakening of demand, which we saw that in the Great Recession’s aftermath.
You might be interested in this new report from the Urban Institute looking at the future of homeownership and why we might not have enough policies in place to deal with the surge in renting. Meanwhile, a recent feature in the New York Times shows that the middle class is greying. While many Americans have struggled with layoffs, stagnant wages and plummeting home values, senior citizens have rested comfortably—or in some cases, made economic gains—by entering the workforce in increasing numbers and benefiting from Social Security checks, investments and pensions:
In the past, the elderly were usually poorer than other age groups. Now, they are the last generation to widely enjoy a traditional pension, and are prime beneficiaries of a government safety net targeted at older Americans. They also have profited from the long rise in real estate prices that preceded the recession. As a result, more seniors now fall into the middle class — defined in this case between the 40th and 80th income percentile — than ever before.
At the other end of the age spectrum, Joe Pinsker in the Atlantic reports that teenagers are losing faith in the American Dream:
What a difference 15 years makes. In the 1990s, those loosed upon the world after high-school graduation faced a booming economy and relatively sunny job prospects; more recently, high-school and college graduates have faced less hospitable conditions. A study published recently in the Journal of Poverty juxtaposes adolescents’ perceptions from those two eras, and the results, while qualitative and limited by their small sample size, suggest that young Americans’ outlook on social mobility has gotten bleaker. (The study’s findings align with a more-expansive survey of young people suggesting an erosion of confidence in the American Dream.)
The study’s authors, Carol Hostetter, Sabrina Williamson Sullenberger, and Leila Wood, observe that the palpable faith in meritocracy in the 90s faded, making way in the 2010s for a belief in what they call “The American Dream 2.0.” “In this version of the American Dream, anyone can go to college IF they have the resources, are ok about going into debt, can somehow get the coveted scholarship, are willing to go to community college, or come from a family of means,” they write. The new normal appears to be meritocracy with an asterisk.
And kids might have a good reason to be cynical--just look at student loans. CNBC examines how massive student debt is potentially harming the economy as a whole:
The numbers are staggering: more than $1.2 trillion in outstanding student loan debt, 40 million borrowers, an average balance of $29,000...
The high levels of student debt are also serving to perpetuate and even worsen economic inequality, undercutting the opportunity and social mobility that higher education has long promised. Americans almost universally believe that a college degree is the key to success and getting ahead—and the data shows that, generally speaking, college graduates still fare far better financially than those with just a high school diploma.
But for those who are saddled with massive student debt, even getting by can be a challenge, much less getting ahead.
As more Americans question the value of a college education, the temptation to just default on loans is growing. Despite this all, the Wall Street Journal's Josh Mitchell explains how the student loan figures are misleading and in actuality much worse than they already appear:
Nearly one in three Americans who are now having to pay down their student debt–or a staggering 31.5%–are at least a month behind on their payments, new research from the Federal Reserve Bank of St. Louis suggests. That figure is far higher than official delinquency measures reported by the Education Department and the New York Fed. And it’s also likely the most accurate.
Here’s why: The official measures reflect delinquencies as a share of all Americans with student debt, but millions of borrowers aren’t even required to make payments yet. Many are currently in college or grad school and thus don’t have to make payments until six months after they leave. Others are out of school and past that grace period but have received permission by their lender—the federal government in most cases—to suspend payments for a range of reasons, such as being unemployed.
Including these borrowers in the broader pool of student-loan debt makes official delinquency rates artificially low. For example, figures from the New York Fed’s quarterly report on household credit shows roughly 17% of all student-loan borrowers were at least 30 days behind on a payment at the start of this year. That’s still a very high number, but misleading nonetheless.
Earlier this month, the Obama administration announced it will forgive the loans of students who were defrauded by the now-closed for-profit Corinthian Colleges. Alia Wong reports in the Atlantic on the concerns critics have regarding the feasibility and whole truth of the process:
Moreover, borrowers have to individually and proactively apply for the relief—a process that requires legal savvy and documents, including transcripts, that could be difficult to obtain, especially considering the schools are no more. The finance blogger Alexis Goldstein criticized the plan for forcing students to “re-prove they were injured”: “Instead of providing broad debt cancellation to former students of Corinthian Colleges, Inc.,” she wrote, “the Department decided to require students to jump through extensive loopholes in order to apply for relief.” Meanwhile, a group of nearly 200 former Corinthian students who called a debt strike earlier this year against the DOE—and presumably helped spearhead the current initiative—says the plan doesn’t do enough to ensure students get the relief they need. According to The Chronicle of Higher Education, the group is warning that the “bureaucratically tortured” process will “revictimize” borrowers...
For-profit colleges across the board have come under scrutiny for a range of shady practices and are widely seen as the biggest culprits when it comes to fraud in higher education. Despite being charged thousands and even tens of thousands of dollars in tuition, students at many for-profits typically get very little out of their education aside from massive debt.
That's why NY Times' Lee Siegel's recent piece on why he "chose life" and decided to default his student loans has stirred quite a buzz:
It struck me as absurd that one could amass crippling debt as a result, not of drug addiction or reckless borrowing and spending, but of going to college. Having opened a new life to me beyond my modest origins, the education system was now going to call in its chits and prevent me from pursuing that new life, simply because I had the misfortune of coming from modest origins.
Over at Slate, Jordan Weissman offered up a scathing response:
Contra Siegel’s assertion that “moneyed stumbles” like tax fraud and insider trading “never seem to have much consequences” compared to student loan defaults, the federal government actually spends a greatdeal of time prosecuting precisely those crimes. And while it’s true that our student lending system is irrationally punitive, the people who really suffer tend to look like Corinthian’s hapless alums, not a white, male literary gadfly who decided he needed a second master’s before going on to write for the New Yorker, the Times, Harper's, and (yes) Slate while settling down to write books in a nice suburb of New Jersey.
Sir Ronald Cohen and Tim Jackson, representing Social Impact Investment Taskforce for the Group of Eight, penned a recent piece in Canada's Globe and Mail:
Impact investing offers a new twist on venture capitalism. It’s a simple concept that looks at new ways to mobilize private capital for the public good...
The SVX is the first platform in North America connecting impact ventures, funds and investors. Registered with the Ontario Securities Commission in 2013, it is expanding to other parts of Canada and across the Americas. Canada has picked up the impact investing torch and is carrying it forward.
That’s the good news.
The bad news is that the money raised for these funds is only a small fraction of private investment money circulating in the market. While the SVX supports more than 100 investors and 26 issuers, it has so far raised only $3.5-million for startups like SolarShare, a renewable energy co-op. There is enormous potential for growth. Canadian foundations manage more than $45.5-billion, and Canadian pension funds hundreds of billionDone: 4:s more. While foundations are required to direct 3.5 per cent of their assets to grants, the rest is generally invested to maximize financial returns.
Some of you may have heard that the California Public Employees’ Retirement System, aka Calpers going $300 billion in assets strong, has fired about half of its money managers over fees, reports the New York Times:
Despite a bull market for the last several years, many state and municipal pension funds have not received large enough returns on their investments and are now faced with having too few assets to cover future costs...
Since the financial crisis, when the value of their assets was decimated by losses, pension funds have moved more aggressively into private equity and hedge fund strategies, lured by the promise of high returns even in years when the broader market is down. But returns after the fees — which typically follow a “2 and 20” model in which investors pay an annual management fee of 2 percent of assets under management and 20 percent of returns — have been disappointing in more recent years.
In other news, Goldman Sachs is getting into the consumer loan business online to "compete with Main Street banks and other lenders":
Before the financial crisis, Wall Street firms were generally not permitted to do traditional consumer lending because they were not set up as federally insured banks. But as part of the government bailout in the 2008 crisis, Goldman and its archrival, Morgan Stanley, were required to become bank holding companies...The initial financing for the loans would come from certificates of deposit, which Goldman has been amassing in recent years. As the business grows, the bank may securitize the loans — bundle them and sell them to investors — to reduce some of the risk that it holds on its own books.
Why does your editor have a feeling this will all end in tears?
The Salt Lake City Tribune is calling for Orin Hatch to fix the H1B visa program, which instead of helping place skilled foreign workers in hard to fill jobs is being used to replace American workers at lower salaries:
How do corporations benefit from this? Major savings: Many of the workers laid off at Disney and SCE earned $100,000 a year or more. Government data indicate the H-1B workers replacing them earn around $60,000.
The companies that usually do the actual replacement — offshore outsourcing firms like HCL, Infosys and Tata — are the top recipients of H-1B visas, and get about half the allotted visas every year. Their business model is based on replacing U.S. workers and shifting jobs overseas. Their clients that replaced U.S. employees with guest workers include companies like Fossil, Pfizer, Northeast Utilities, Harley Davidson and Cargill.
And finally, over at the Philantopic blog, the Foundation Center's Brad Smith discusses philanthropy's difficult dance with inequality (Heron gets a bit of a shout out toward the end):
Foundations are the product of accumulated wealth. Poor people may be charitable but they do not create foundations: the wealthy and super wealthy do. Foundations emanate from the top 1 percent of American households, a cohort whose share of household wealth rose from 7.1 percent in 1977 to 22.8 percent in 2012. Over that same time span, the number of foundations in America grew from 22,152 to 86,192, while their collective assets mushroomed from $35.4 billion to $715.5 billion. Wealth and privilege are deeply encoded into the DNA of philanthropy.
What's more, foundations tend to be governed by wealthy people. In family foundations, the direct owners of the wealth that made the foundation possible, or their descendants, typically control the board. In endowed, independent foundations, it is not uncommon to find CEOs of large corporations, successful entrepreneurs, and/or investment managers serving as trustees. While wealth does not automatically make one insensitive to inequality, it cannot help but influence the worldview that one brings to decisions about how to invest assets, establish program priorities, and determine which grants (and organizations) are safe and which entail risk.
Nada Kittaneh and Katherine Blum contributed to this report.