economics: capitalism

In the lasts 15 years, student debt has grown by over 1,000% and the debt held by public colleges and universities has tripled.  Where is the money going?

The scholars behind a new report, Borrowing Against the Future: The Hidden Costs of Financing U.S. Higher Education, argue that profit is the culprit.  They write:

Scholars have offered several explanations for these high costs including faculty salaries, administrative bloat, and the amenities arms race. These explanations, however, all miss a crucial piece of the puzzle.

Sociologist Charlie Eaton and his colleagues crunched the numbers and found that spending on actual education has stagnated, while financial speculators have been taking an increasing amount of money off of the top.

Higher education fills the pockets of investors in three ways:

• Interest on student loans, paid by students and parents.
• Interest paid by colleges who take out loans to fund projects — everything from new academic buildings to luxury dorms and stadiums — ultimately repaid with tuition hikes and higher taxes.
• And profit from for-profit colleges (with “dismal graduation rates, by the way).

Take a look at this figure breaking down the sources of the rise in the cost of higher education.  Interest on debt — taken on by both students and the colleges they attend — has risen.  Meanwhile, direct profits from for-profit colleges have skyrocketed.

Overall, Eaton and his colleagues found that Americans are spending $440 billion dollars a year on higher education and that 10% of that goes into the pockets of investors who are skimming profit off of all forms of higher education.

Want more?  Read their report or watch their summary:

Cross-posted at Pacific Standard.

Lisa Wade, PhD is an Associate Professor at Tulane University. She is the author of American Hookup, a book about college sexual culture; a textbook about gender; and a forthcoming introductory text: Terrible Magnificent Sociology. You can follow her on Twitter and Instagram.

I am so pleased to have stumbled across a short excerpt from a talk by Alan Watts, forwarded by a Twitter follower.  Watts makes a truly profound argument about what money really is.  I’ll summarize it here and you can watch the full three-and-a-half minute video below if you like.

Watts notes that we like to talk about “laws of nature,” or “observed regularities” in the world.  In order to observe these regularities, he points out, we have to invent something regular against which to compare nature. Clocks and rulers are these kinds of things.

All this is fine but, all too often, the clocks and the rulers come to seem more real than the nature that is being measured.  For example, he says, we might think that the sun is rising because it’s 6AM when, of course, the sun will rise independently of our measures.  It’s as if our clocks rule the universe instead of vice versa.

He uses these observations to make a comment about wealth and poverty. Money, he reminds us, isn’t real. It’s an invented measure.  A dollar is no different than a minute or an inch.  It is used to measure prosperity, but it doesn’t create prosperity any more than 6AM makes the sun rise or a ruler gives things inches.

When there is a crisis — an economic depression or a natural disaster, for example — we may want to fix it, but end up asking ourselves “Where’s the money going to come from?”  This is exactly the same mistake that we make, Watts argues, when we think that the sun rises because it’s 6AM.  He says:

They think money makes prosperity. It’s the other way around, it’s physical prosperity which has money as a way of measuring it.  But people think money has to come from somewhere… and it doesn’t. Money is something we have to invent, like inches.

So, you remember the Great Depression when there was a slump?  And what did we have a slump of?  Money.  There was no less wealth, no less energy, no less raw materials than there were before. But it’s like you came to work on building a house one day and they said, “Sorry, you can’t build this house today, no inches.”

“What do you mean no inches?”

“Just inches!  We don’t mean that… we’ve got inches of lumber, yes, we’ve got inches of metal, we’ve even got tape measures, but there’s a slump in inches as such.”

And people are that crazy!

This is backward thinking, he says.  It is allowing money to rule things when, in reality, it’s just a measure.

I encourage you to watch:

Lisa Wade, PhD is an Associate Professor at Tulane University. She is the author of American Hookup, a book about college sexual culture; a textbook about gender; and a forthcoming introductory text: Terrible Magnificent Sociology. You can follow her on Twitter and Instagram.

On average, U.S. workers with jobs put in more hours per year  than workers in most OECD countries. In 2012, only Greece, Hungary, Israel, Korea, and Turkey recorded a longer work year per employed person.

A long work year is nothing to celebrate. The following chart, from the same Economist article, shows there is a strong negative correlation between yearly hours worked and hourly productivity.

More importantly, the greater the number of hours worked per year, the greater the likelihood of premature death and poor quality of life.  This reality is highlighted in the following two charts taken from an article by Angus Chen titled “8 Charts to Show Your Boss to Prove That You Can Do More By Working Less.”

In sum, we need to pay far more attention to the organization and distribution of work, not to mention its remuneration and purpose, than we currently do.

Martin Hart-Landsberg is a professor of economics at Lewis and Clark College. You can follow him at Reports from the Economic Front.

Thomas Piketty has just published a massive new book tackling the explosive growth in income inequality.  Here’s what it looked like in Europe and the United States in 2010 (source):

A New York Times review of the book, Capital in the Twenty-First Century, begins as follows:

What if inequality were to continue growing years or decades into the future? Say the richest 1 percent of the population amassed a quarter of the nation’s income, up from about a fifth today. What about half?

To believe Thomas Piketty of the Paris School of Economics, this future is not just possible. It is likely…

His most startling news is that the belief that inequality will eventually stabilize and subside on its own, a long-held tenet of free market capitalism, is wrong. Rather, the economic forces concentrating more and more wealth into the hands of the fortunate few are almost sure to prevail for a very long time.

Piketty’s pessimistic view is based on his argument that income generated from capital normally grows faster than the economy or income from wages.  This means that the private owners of capital benefit disproportionately from growth, which makes it easier for them to increase their asset holdings and by extension future income.  And, since wealth and income translate into political power, we face a self-reinforcing dynamic leading to ever growing inequality.

This suggests that embracing a system based on maximizing the returns to private owners of capital is a mistake for the great majority of working people. A recent study by the investment bank Credit Suisse provides more evidence for this conclusion.  As Michael Burke explains,

The study… shows that long-term growth rates of GDP in selected industrialized economies are negatively correlated with financial returns to shareholders.

That is, the best returns for shareholders are from countries where GDP growth has been slowest, and vice versa. Where growth has been strongest, shareholder returns are weakest…

The negative correlation [seen in the chart below] does not prove negative causality. But it does support the theory which suggests that the interests of shareholders are contrary to the interests of economic growth and the well-being of the population.

All this information is worth keeping in mind the next time business and political leaders tell us that the key to our well-being is boosting business confidence, the market, or private returns on investment.

Cross-posted at Reports from the Economic Front.

Martin Hart-Landsberg is a professor of economics at Lewis and Clark College. You can follow him at Reports from the Economic Front.

Do Millennials really carry more debt than their parents and grandparents did at their age? Yes, according to a new study by sociologist Jason Houle.  “In order to participate in society and gain economic independence,” he writes, “many young adults today must take a massive financial risk.”  Or, as he puts it, “out of the nest and into the red.”

The graph below compares the amount of debt held by three generations in young adulthood (adjusted for inflation and controlled for other variables). Notice that the median debt load has grown, but the average debt load has grown much faster. This means that, while debt has grown over all, averages are also pulled up by a small number of young people that have really high levels.

Some evidence suggests that high debt individuals may be coming from lower income families. They take on debt as young people because the adults in their lives have already maxed out. They can’t count on their parents, for example, to take out a second mortgage on the house in order to pay for their college education. So, if they want to go to college, they have to take on the debt themselves.

Houle’s analysis, however, also shows that the kind of debt has changed across the three generations. The pie charts below reveal that the proportion of debt accounted for by home or car loans has shrunk, while the proportion accounted for by education loans and unsecured debt, like credit cards, has risen.

Moreover, Houle argues that this profile of generation Y’s debt is class specific:

The more advantaged are able to take on debt that helps them pursue a middle class lifestyle and build their wealth, while the less advantaged must take on debt to pay their bills and keep their heads above water.

So, is massive financial risk the new recipe for success?

For some, the answer may be yes. But for many, the gamble does not pay off. Students that take out college loans, for example, are more likely to drop out of college than those who have a parent that can pay. The combination of school loans and minimum-wage jobs can add up to a lifetime of economic insecurity. But, without other resources, not risking at all almost guarantees failure in this economy.  For this reason, Houle argues, the availability of credit and acquisition of debt may be just another driver of income and wealth inequality.  It’s a disturbing story that you can read in more depth here.

Lisa Wade, PhD is an Associate Professor at Tulane University. She is the author of American Hookup, a book about college sexual culture; a textbook about gender; and a forthcoming introductory text: Terrible Magnificent Sociology. You can follow her on Twitter and Instagram.

One conventional explanation for our economic problems seems to be that our businesses are strapped for funds.  Greater business earnings, it is said, will translate into needed investment, employment, consumption and, finally, sustained economic recovery.  Thus, the preferred policy response: provide business with greater regulatory freedom and relief from high taxes and wages.

It is this view that underpins current business and government support for new corporate tax cuts and trade agreements designed to reduce government regulation of business activity, attacks on unions, and opposition to extending unemployment benefits and increasing the minimum wage.

One problem with this story is that businesses are already swimming in money and they haven’t shown the slightest inclination to use their funds for investment or employment.

The first chart below highlights the trend in free cash flow as a percentage of GDP.  Free cash flow is one way to represent business profits.  More specifically, it is a pretax measure of the money firms have after spending on wages and salaries, depreciation charges, amortization of past loans, and new investment.  As you can see that ratio remains at historic highs.  In short, business is certainly not short of money.

So what are businesses doing with their funds?  The next chart looks at the ratio of net private nonresidential fixed investment to net domestic product (I use “net” rather than “gross” variables in order to focus on investment that goes beyond simply replacing worn out plant and equipment).  The ratio makes clear that one reason for the large cash flow is that businesses are not committed to new investment.  Indeed quite the opposite is true.

Rather than invest in plant and equipment, businesses are primarily using their funds to repurchase their own stocks in order to boost management earnings and ward off hostile take-overs, pay dividends to stockholders, and accumulate large cash and bond holdings.

Cutting taxes, deregulation, attacking unions and slashing social programs will only intensify these very trends.  Time for a new understanding of our problems and a very new response to them.

Cross-posted at Reports from the Economic Front.

Martin Hart-Landsberg is a professor of economics at Lewis and Clark College. You can follow him at Reports from the Economic Front.

A majority of both Democrats and Republicans believe that economic inequality in the U.S. has grown, but they disagree as to its causes and the best solutions, according to a new survey from the Pew Research Center.  While 61% of Republicans and 68% of Democrats say inequality has widened, only 45% of Republicans say that the government should do something about it, compared to 90% of Democrats.  A study using the General Social Survey has confirmed the findings.

Republicans and Democrats also disagree about what the best interventions would be.  At least three-quarters of Democrats favor taxes on the wealthy and programs for the poor, but 65% of Republicans think that helping the poor does more harm than good.

The differences may be related to beliefs about the cause of poverty.  Republicans are much more likely to endorse an individualist explanation (e.g., people are poor because they are lazy), whereas Democrats are more likely to offer a structural explanation (e.g., it matters where in the class structure you begin and how we design the economic system).

Interestingly, answers to these questions vary much more by political affiliation than social class.  Using data from the survey, I put together this table comparing the number of percentage points that separated the average answers to various questions.  On the left is the difference by political party and, on the right, income (click to enlarge).

Clearly political affiliation drives opinions on the explanation for and right solutions to income inequality more so than income itself.

This is a great example of hegemony.  A hegemonic ideology is one that is widely supported, even by people who are clearly disadvantaged by it.  In this case, whatever you think of our economic system, it is pretty stunning that only there is only a six point gap between the percent of high income people saying it’s fair and the percent of low income people saying so.  That’s the power of ideology — in this case, political affiliation — to shape our view of the world, even going so far as to influence people to believe in and perhaps vote for policies that are not in their best interest.

Cross-posted at Pacific Standard.

Lisa Wade, PhD is an Associate Professor at Tulane University. She is the author of American Hookup, a book about college sexual culture; a textbook about gender; and a forthcoming introductory text: Terrible Magnificent Sociology. You can follow her on Twitter and Instagram.

If you’re looking for just one image that says a thousand words about what’s wrong with America, here’s a contender.  It is a screenshot of the website for the Silver State Schools Credit Union:

Yep, it’s an invitation to K-12 teachers to go into debt to do their job.

Speechless.

Lisa Wade, PhD is an Associate Professor at Tulane University. She is the author of American Hookup, a book about college sexual culture; a textbook about gender; and a forthcoming introductory text: Terrible Magnificent Sociology. You can follow her on Twitter and Instagram.