What is There to Know About Education

One of the biggest controversies of 2012 was the vast budget cuts in education spending in Wisconsin by Governor Scott Walker and the newly elected cast of Republicans in the state legislature.  As the nation witnessed swarms of school teachers and their students storm the state capital, Governor Walker didn’t flinch.  He stuck to his stance that the state government needed to make these cuts in order to get its’ fiscal house in order.  Many of the cuts were to teacher pension funds and other benefits paid for by taxpayer dollars.  Eventually, this led to a recall election for Walker and his supporting cast; and in one of the biggest political statements of the year, Walker and every one of the state legislators won their recall election in a huge landslide victory.  The victory marked a strong message to unions and the education system across America.

             Texas education funding, like Wisconsin, was also cut in the last legislative session.  According to politifact.com per-student spending was decreased by an average of $500 per student in Texas.  This number was down from almost $8000 to just above $7000 a year per student.  This decrease in state funding may be due to the trend in the last decade for increased spending by individual school districts in Texas.  The graph below shows this trend.

            In this graph we can see that education expenditures have greatly exceeded enrollment in the last decade by almost 5 to 1 according to this website: http://fastexas.org/study/exec/spending.php

            Recently, the Economist magazine started a project called “The Learning Curve” that aims to help policymakers, educators, academics and others to better understand the factors which go in to having an effective education system (thelearningcurve.pearson.com).  So far, research has shown that there is still a lot we don’t know.  However, one theme the authors hoped to hammer home was that throwing money at a faulty education system will not fix it.  The authors describe the phenomena as multiple factors going into a black box (education) and results pouring out of the other side.  We have no idea what went on inside that black box.  Another point the authors made was that per capita income is affected by the education system, not the other way around.  In other words, better educational outcomes promote higher per capita income, per capita income does not promote better education.  It also said that better educational outcomes are a result of a culture that promotes better educational systems. 

            The fact of the matter is that the trend of the last decade in the Texas education budget begs the question:   Are marginal costs really that steep?  Is another student in the classroom really five times more expensive than the previous amount?  Every year, students in elementary school are required to bring new supplies to be shared by everybody in the class.  My question, what happens to all the scissors every year?

The Fed's New Year's Resolution

So, we have all heard about the looming fiscal cliff at the beginning of January.  It has been hotly discussed and debated on many fronts and the rhetoric of the politicians have controlled the direction of the financial markets.  The Fed has assured that there will be more stimulus through buying of long-term treasuries and selling of short-term treasury bonds. 

This just means that the Fed will, in effect, attempt to drive the interest rates for mortgages down and drive short-term interest rates up.  Thus, in theory, stimulating the economy because one can earn more in the short-term with higher interest rates, right?  Right.  Now here in lies the problem...banks are not so willing to lend as the Fed would like and thus stunting the growth - or stimulus - for the economy.  Banks are still incurring the consequences of the downturn of the mortgage industry in 2007.  What to do?  Refinance your mortgage.  Those who refinance their mortgage will drive the interest rates back up for mortgage loans.  This is also a hard line to walk, though.  If mortgage rates go up consumers will be less willing to buy...but...banks will be more willing to lend so long as underwriting stays solid - which it has seemed to do for the most part as of late.  There is still a long way to go in the recovery but there are signs of life...not enough but some. 

The Fed also announced that it will tie the stimulus programs (previously mentioned) to actual targets in the unemployment rate and inflation rate.  6.5% and 2.5% respectively.  In essence, the Fed is trying to instill more confidence in the market by giving exact targets.  Will this work?  Perhaps, but any new approach seems to initially instill confidence in the market.  I wouldn't suggest that the Fed is going to stick to this curriculum because the employment rate dropped just this month two tenths to 7.7%.  However, over 300,000 dropped out of the labor force.  I'm sure it's just a coincidence, though...

The bottom line...the Fed is trying to stick to its almost impossible dual mandate of low unemployment and steady inflation.  While this is commendable, it's not realistic to think a single entity can truly gauge what the economy needs.  The economy is too complex.  The Fed does have an effect on the system, but it is only part of that system and in many cases its probably better that the Fed listen rather than speak. 

Unemployment at 7.9%

Recently, we have seen a rise in the unemployment rate to 7.9%.  This coincides with an increase in the labor force participation rate to 63.8% according to BLS.gov.  Perhaps due to the recent drop below 8% people have become encouraged that there are more opportunities to get a job.  However, for once this shows a more accurate picture of the unemployment rate by including a few more participants in the labor force.  Some say that the true unemployment rate is upwards of 11 or even 12 percent.  These numbers include those discouraged workers who have quit looking for a job and simply dropped out of the labor force.  I find it interesting that the unemployment rate is given much more weight in the political spectrum when it seems to me the labor force participation rate is equally relevant when describing the state of the economy. 

The labor force participation rate has seen a steady decline over the past 3 years.  The unemployment rate has seen some modest improvement over the past year and a half but that may be due to that decline in the labor force participation rate.  These two rates have a relationship that helps paint a somewhat clearer picture of the economy.  While the labor force participation rate has declined we have also seen prices increase--the price of gas the most notable indicator of rising prices.  Wages have decreased and inflation has increased.  It's a pretty bleak picture, I know.  However, I feel this picture only reenforces the core principles of economics and finance.  These principles suggest that there are consequences when spending is increased.  An increase in the money supply leads to higher prices. Bailouts of bankrupt companies may keep the status quo and save jobs in the short term but overall purchasing power has now decreased because we have an industry that was bailed out.  No one can say exactly what would have happened but one thing is for sure:  jobs were prevented from being created elsewhere. 

Unemployment, Uncertainty, QE3, November 6th

It's been quite some time since my last post.  All I can say is that it has been a very busy semester.  However, I feel an economics post is always warranted.  Obviously, the presidential election is on most people's minds as November 6th draws much closer.  We've seen debates between the candidates and shifts in momentum on either side with the most concerning topic being the economy.  As employment is still abnormally high and the national debt at over $16 trillion, the economy has shown only mild signs of improvement.  Investment is still low(even with record low interest rates) mostly due to uncertainty in the future economy.  Are there any signs of life?  Some, but not much.  The housing market has consistently shown gains in 2012 since the bubble burst back in 2007.  However, it has yet to make a full recovery.  This seems to coincide with the general theme of the recovery for the past two-three years that has been slower than expected.  

In the beginning of October we saw the unemployment rate unexpectedly drop below 8% to 7.8%.  This was the sharpest job-gain in over 30 years and for lack of a better word, it was well...weird.  The unemployment rate is derived by two surveys that are sent out to both employers (business owners) and households.  And while the employer survey sent back gains of a meek 140,000 jobs, the household survey showed gains of over 800,000 jobs in September.  This is a staggering contrast and makes one understandably skeptical of the methods used while conducting this survey.  

Perhaps part of the reason for the slow economic recovery is the fact that most of the job gains have been low-wage earning jobs which have effectively increased the ever-so-delicate wage gap.  This has effectively shrank the middle class and forced many to pursue two jobs in order to make up for earnings from previous employment.  Not only that, but another round of Quantitative Easing has hit the fore front with no deadline in sight.  In effect, QE3 will inject currency into the economy in order to generate liquidity and create an incentive to invest or spend.  While the FED pushes money into the economy, it walks a tough line with the declining dollar on the world market.  The injection of currency also contributes to inflation and may lead to a decrease in REAL income, i.e. purchasing power.  

The big question is:  What will happen after the election?  Does the country need another sales pitch to increase confidence in the economy, or a CEO that will substantively implement changes from what we've previously seen?  Perhaps this uncertainty will lead us to make a substantive decision to make change, rather than JUST rely on hope. 

100 Million now on Welfare

Recently, the number of Americans receiving welfare benefits exceeded 100 million.  Now most, I'm sure, are not surprised by this fact given the state of the economy.  With the unemployment rate steadily above 8% over the past 4 years it is easy to see why the number of welfare recipients has increased.  However, this is a staggering 1/3 of the U.S. population.  I'm sure after the 1996 welfare reform bill was signed into law in order to create work incentives for those on welfare would have never expected such a sharp increase only 16 years after the law was passed.  Perhaps, there is more to the story.  

One of the things the passage of the 1996 welfare reform act did was introduce the benefit-reduction rate.  This rate worked by creating an optimal amount of hours per week the beneficiary should work in order to make the most money possible through welfare benefits and earned income.  For example, someone on welfare has a benefit reduction rate of 50% then for every dollar earned there is a 50 cent reduction in welfare benefits.  This creates an incentive to work because one could earn more through working and receiving welfare benefits at the same time.  Now, each state can set the BR rate however they like.  Something to note is the lower the BR rate, the higher the incentive to work because one could simply earn more by working more.  It works the other way as well.  If the BR rate is 100%, as it was before the 1996 bill, then the incentive is to not work at all and simply receive benefits because each dollar earned is a dollar lost in welfare benefits.  

Texas has done well in this economy and perhaps the BR rate has something to do with it.  
Take a look at the map below.



 This map shows which states increased and which states decreased the BR rate from 2007 to 2009.  As the map shows, most states increased their rate (incentivizing more leisure and less work) but Texas and a few others actually reduced their rate.  This is not surprising because in Texas the policies and regulations are very business-friendly and this map may be just one of the many contributing factors for Texas' success during this "great recession". 
 

Social Insurance Continued

In a previous post where I talked about social insurance I contended that there should be an opt-out age at 25 and because of this there would likely be an increase in federal funding for welfare programs.  I say this because if most opt-out of social security payments, it might lead to an increase in taxes else-where since the government is no longer receiving the funds to support welfare programs.  Yes, through social security taxes, government supports other programs.  Now, the reason for this is because the social security trust fund isn't actually there.  It is an IOU from the government to the government through bonds.  This IOU is expected to be depleted in the next twenty years.  And after the IOU is depleted then social security goes back to a pay as you go system.  Did I just call a trust fund an IOU?  I can't be making any sense.  Well, nothing is really new here, as the government seems to mostly function on IOUs social security is no different.  Except that instead of issuing an IOU to another country like China, it's actually an IOU to itself.  We have truly come a long way. 

The way I see it, government has crowded out the market for retirement insurance from those who could afford a small premium for retirement.  Now I would assume, again, that those who go off of their social security plan will probably take that extra money and use it for themselves in day-to-day expenses as opposed to instantly investing in a retirement account.  OR, they might now have an incentive to open a brand new retirement account since they will no longer have social security.  I don't know for sure but my belief is the latter.  If one opts our for social security they may be doing so in order to open their own retirement account because social security is so marginal in almost every way.  7.5% of your paycheck goes into the social security fund.  If you make $50000 a year that is $3250.  Now here's the catch; social security is not means-tested which means even if you have a 401k with your employer or you make over a million dollars a year, or both, you will still qualify for social security benefits, this is also what puts it in a separate category from welfare.  Just think.  If you were able to take that extra $3250 what would you do with it?  If you only made $15000 a year that's $1125!  I point this out because there is a market for these accounts!  Why not allow the private sector to provide retirement insurance?  If this were to happen, there would be an influx of jobs.  Social security crowds out this market for low premium retirement insurance companies.  This amount of money going towards social security could easily be transferred to low premium, private sector, retirement insurance for individuals.  Now I'm well aware of the transition problem that always exists which is why I mentioned an opt-out age of 25 to help alleviate this issue.  Those still relying on social security will still receive their benefits.  And I'm aware that many individuals would likely keep the extra money for day-to-day expenses, but I also believe the extra jobs created by this seemingly massive market may help to alleviate the poverty as well.  Retirement insurance is a large market, and in today's economy, we would do well by saving. 

Gun Control

Recently, I read an article from The Economist on the subject of gun control.  If you're interested in reading the article, here is the link http://www.economist.com/blogs/democracyinamerica/2012/07/gun-rights?spc=scode&spv=xm&ah=9d7f7ab945510a56fa6d37c30b6f1709

In this article the author refers to Justice Scalia's comments on the second amendment.  As a Justice, Scalia interprets the amendment in a very literal sense calling "bear" the idea of being able to wield a gun with your "bear" hands, so to speak.  This idea rules out the possession of say a tank or a fighter jet.  The original intent of the second amendment is to allow the citizens to prevent a tyrannical governmental takeover.  In today's world, the government military has possession of much better artillery than a handgun or even an AK-47.  Scalia suggests that if the second amendment is to live up to its' original intent, citizens should be aloud to own a tank or a rocket launcher.  I completely agree.  Of course, the way to go about doing this would be to amend the second amendment (which of course is very unlikely to happen).  Or, simply legalize the purchase of these military weapons!  Yeah, I'm sure this will go over well in the media...the simple fact of the matter is that the more of those who own guns, the less likely it is we will kill each other.  

The author goes on in this article and makes this point if we are to legalize all sorts of weaponry for purchase in the United States:  "And should those citizens decide to fully exercise such rights, then their second-amendment freedom will become the freedom to be attacked and crushed by the police and the US military, on behalf of those of us who support the integrity of the American government we have elected and the enforcement of its laws."  To which I say, very unlikely.  It is the citizenry which enacts such laws and protections.  It's an easy argument to make when you say everybody has a gun so we're all dead.  It's much tougher to make the argument that if we all have guns then we're all protected.  However, it is much easier for someone to attack an unarmed enemy than it is an armed one.  This notion has been proven on numerous occasions.  Namely, the cold war.