When I was an undergrad attending a state university in the middle of nowhere, I often encountered people who seemed out of place. They didn’t look or speak differently from other students they just didn’t have their mother following them around with a vacuum cleaner or their father constantly reminding them to do their homework or wash their feet. They were decent enough people and fun to drink beer out of whiffle ball bats with they just didn’t belong in college.
I happened to meet up with one of these folks when we had both been out of school for about three years. I was working part-time at a liquor store while getting a master’s degree. He had put his communications degree to use and was working as an assistant to a stock broker. When I read that President Obama wants to increase the number of people attending two year and four year colleges I have to wonder if this is a good move. Do we need more people spending four or more years and tens of thousands of dollars to get job or career they could have obtained without a degree?
According to Manpower Inc., the country’s largest placement and employment service, only four of the "The 10 Hardest Jobs To Fill In America" require a four year degree. Engineering, as always, is number one and certainly dependent on undergraduate and advanced degrees. The other three are Nursing, IT Staff, and Teacher. That leaves Skilled Trades (electricians, carpenters, plumbers, etc.), Sales Reps, Technicians (skilled or semi-skilled workers), Driver, Laborer, and Machinist or Machine Operator. You can certainly become any of the last six with a college degree but a degree is not required.
So what? Well, to begin with, when you look at the President’s proposal it’s essentially an entitlement program with little or no long-term economic benefit. Here’s the Shady breakdown of the plan:
Create the American Opportunity Tax Credit: Creates the American Opportunity Tax Credit that allows for the first $4,000 of a college education to be completely free for most (no % provided) Americans, and aims to cover two-thirds of the cost of tuition at the average public college or university. (Commentary: Not a bad idea but by next year when fewer than 50% of Americans will be paying federal income tax will this matter?)
Simplify the Application Process for Financial Aid: The President believes “The application process for financial aid is cumbersome and evidence shows it may be a reason why students never apply for college. Research has shown that the low take-up rate of the Pell Grant and HOPE and Lifetime Learning tax credit programs is likely due to the complexity of the application process. The current Free Application for Federal Student Aid (FAFSA) is 5 pages and 127 questions – making it longer and more involved than many federal tax returns. Not surprisingly, over 1.5 million high school students failed to apply for aid in 2004, despite being eligible for a Pell Grant”. (Commentary: This reads like something out of Monty Python “Seeing as it is too difficult for college students to fill out the form to get into college, we are killing the form so that more students can get into college”.)
Help Students Become Aware of College Readiness: According to the President’s website “Barack Obama and Joe Biden will provide $25 million annually in matching funds for states to develop Early Assessment Programs. These funds will also promote state efforts to raise awareness about the availability of federal and state financial aid programs”. (Commentary: Yes, I know that these days $25 million is literally nothing when it comes to federal government largesse but can’t we do something really useful with this dough like buy polar bears canoes or send out more free HDTV converter boxes?)
Expand Pell Grants for Low-Income Students: The goal is to achieve an increase in the Pell Grant to $5,400 over the next “few” years and will ensure that the award keeps pace with the rising cost of college inflation.
Community College Partnership Program: This is the majority of the proposal’s spend focusing on providing grants to “(a) conduct more thorough analysis of the types of skills and technical education that are in high demand from students and local industry; (b) implement new associate of arts degree programs that cater to emerging industry and technical career demands; and (c) reward those institutions that graduate more students and also increase their numbers of transfer students to four-year institutions”.
Eliminate Costly Bank Subsidies: Aims to kill the Federal Family Education Loan (FFEL) Program, which provides subsidies and guarantees to banks and other lenders and absorb all Federal lending into the Direct Loan program as a way to save billions of dollars.
In the end the Obama plan will probably send more people to two and four year schools. Hopefully many of those people will be able to parlay the education they receive into personal and national gain. Unfortunately history is not on their side. Most European countries take a realistic attitude towards advanced education and have no or very low cost secondary education. However, they also have vast apprenticeship and technical programs. Germany, for example, provides 342 apprenticeship programs where students work three to four days a week and attend classes for one or two days. Companies get skilled labor at the ready and the government doesn’t fund a lengthy college career.
Are we missing a golden opportunity to close the gap on many of those 10 hardest jobs to fill? Are we committing a vast misallocation of human capital by sending kids to college when they don’t need or want to attend? Are we stuck in an outdated mindset where a bachelors degree is always better than an associates or no degree?
Yes, yes, and yes.
Later
PS: Please feel free to comment on how people who go to college make X% or $Y more than people who don’t. I’ve got a garage full of data that says ‘maybe’.
Monday, July 27, 2009
Thursday, July 16, 2009
Schezuanenfreude
In the global schoolyard there are many ways to pick on someone (i.e. some country) based on how much you want to embarrass them or piss them off. There’s the annoying North Korean spitball: I’ll hack into your government websites and then duck behind the tetherball pole before the playground monitor notices. There’s the Iranian virtual wedgie: I’ll tell Hezbollah to fire some rockets into a few of your neighborhoods then watch from the swings with a smile on my face as you chase them around. And then there’s the more sophisticated and subtle hijinks reserved for the older mean girls to promulgate against a Jan Brady like target as part of a broader strategy of complete playground hegemony. A prime example of this is China’s call for the end of the U.S. dollar as the world’s default reserve currency.
Far from an easy poke at the lone superpower when it just fell off the economic monkey bars (OK, I’m done with playground metaphors), the recent rhetoric from several senior Chinese officials suggesting that a non-national currency or form of reserve replace the dollar as the go-to global standard is a subtle sign of longer term Chinese ambitions.
So why care? From an economic and financial standpoint, thou who controls the world’s reserve currency controls much of the playground (whoops). And it’s not just a financial advantage. A country can use the liquidity and flexibility of its dominant currency to build a war chest and finance other ambitions cheaper than its rivals.
The way foreign exchange reserves and reserve currencies work is made complicated because it’s usually explained by economists. Here’s the shade tree 160 word deep dive on the subject:
In order to buy and sell things with other countries you need to convert your currency into theirs and vice-versa. In the old days, currency was issued literally as gold and silver certificates. Theoretically you could take a dollar bill to the Federal Reserve and get a dollar’s worth of gold in return. For many reasons (most of them due to economists paid to explain currency and exchange rates) you can’t do that anymore. So you can hold all kinds of currency reserves in your national bank hoping that you have it right when the Andorrans (no, they’re not aliens, Andorra is a small country wedged in the Pyrenees between Spain and France) show up to buy a 777, or you can use a fiat currency. After WWII the U.S. dollar became the world’s fiat currency, enabling you to buy oil from Russia in dollars, Lawn Darts from China in dollars, and finance yourself silly because everybody else uses dollars.
Now the Chinese and other emerging economic players want to change the status of the dollar. From an international finance view they make a good point. As The Economist magazine puts it “China has particular cause to worry that America’s massive printing of money in response to the financial crisis will undermine the value of its (China’s) dollar reserves”. China and others hold massive amounts of dollars in their banks in order to lubricate trade with the U.S. and with each other. If the world becomes awash in dollars, they have to give up more of their reserves to play and they lose money. On the other hand, finding a new reserve is not easy. It could take decades and wild swings in currency valuations to come up with a new standard.
So the Chinese have begun to slow their purchase of dollar denominated U.S. government securities and increase the support of their currency, the Yuan, to settle international trades. There’s nothing illegal about this but it is risky. If the dollar were to fall because of this the massive amounts of dollars held by China (and others) would be worth less. But the Celestial Kingdom looks like it’s willing to take that risk because there are additional payoffs, the most prominent being the lower use of the dollar as the world’s fiat currency will lessen the power of the U.S. while seemingly increasing China’s.
So what’s wrong with China trying to flex a little muscle? It’s China. The reason the dollar has worked well as a global currency is largely due to America’s advanced, transparent, and liquid capital markets. No one who has looked at China’s capital markets would use those adjectives to describe it. Yes, the financial crisis resulting from American mismanagement of monetary policy and bizarre regulatory environment deserves criticism and questioning. However, putting China in the driver’s seat would be like letting the Tasmanian Devil take the wheel from Mr. Magoo.
Later
Far from an easy poke at the lone superpower when it just fell off the economic monkey bars (OK, I’m done with playground metaphors), the recent rhetoric from several senior Chinese officials suggesting that a non-national currency or form of reserve replace the dollar as the go-to global standard is a subtle sign of longer term Chinese ambitions.
So why care? From an economic and financial standpoint, thou who controls the world’s reserve currency controls much of the playground (whoops). And it’s not just a financial advantage. A country can use the liquidity and flexibility of its dominant currency to build a war chest and finance other ambitions cheaper than its rivals.
The way foreign exchange reserves and reserve currencies work is made complicated because it’s usually explained by economists. Here’s the shade tree 160 word deep dive on the subject:
In order to buy and sell things with other countries you need to convert your currency into theirs and vice-versa. In the old days, currency was issued literally as gold and silver certificates. Theoretically you could take a dollar bill to the Federal Reserve and get a dollar’s worth of gold in return. For many reasons (most of them due to economists paid to explain currency and exchange rates) you can’t do that anymore. So you can hold all kinds of currency reserves in your national bank hoping that you have it right when the Andorrans (no, they’re not aliens, Andorra is a small country wedged in the Pyrenees between Spain and France) show up to buy a 777, or you can use a fiat currency. After WWII the U.S. dollar became the world’s fiat currency, enabling you to buy oil from Russia in dollars, Lawn Darts from China in dollars, and finance yourself silly because everybody else uses dollars.
Now the Chinese and other emerging economic players want to change the status of the dollar. From an international finance view they make a good point. As The Economist magazine puts it “China has particular cause to worry that America’s massive printing of money in response to the financial crisis will undermine the value of its (China’s) dollar reserves”. China and others hold massive amounts of dollars in their banks in order to lubricate trade with the U.S. and with each other. If the world becomes awash in dollars, they have to give up more of their reserves to play and they lose money. On the other hand, finding a new reserve is not easy. It could take decades and wild swings in currency valuations to come up with a new standard.
So the Chinese have begun to slow their purchase of dollar denominated U.S. government securities and increase the support of their currency, the Yuan, to settle international trades. There’s nothing illegal about this but it is risky. If the dollar were to fall because of this the massive amounts of dollars held by China (and others) would be worth less. But the Celestial Kingdom looks like it’s willing to take that risk because there are additional payoffs, the most prominent being the lower use of the dollar as the world’s fiat currency will lessen the power of the U.S. while seemingly increasing China’s.
So what’s wrong with China trying to flex a little muscle? It’s China. The reason the dollar has worked well as a global currency is largely due to America’s advanced, transparent, and liquid capital markets. No one who has looked at China’s capital markets would use those adjectives to describe it. Yes, the financial crisis resulting from American mismanagement of monetary policy and bizarre regulatory environment deserves criticism and questioning. However, putting China in the driver’s seat would be like letting the Tasmanian Devil take the wheel from Mr. Magoo.
Later
Monday, July 6, 2009
All The Golden Eggs In One Basket
I have a schizophrenic view of taxation: On the one hand governments need money to provide services that the private sector cannot or should not provide so taxes are inevitable and necessary. On the other hand governments take our money and spend it on things we don’t agree with or can’t see the direct benefits of so taxes are excessive and arbitrary. However, as a drunk and disorderly self-educated economist what really concerns me about taxes is the people who pay them. More specifically, the risk inherent in the ever decreasing number of people who actually pay income taxes.
In 2008 46% of all US Federal Government receipts were from income taxes. If you take out the 40% of receipts used for ‘Social Insurance’ (Social Security, Medicaid, and Medicare) that the government saves for future expenditures (ah, that’s a good one!) then income tax accounts for 76% of total direct federal taxes.
In 2008 the top fifth of income earners paid 69% of those federal income taxes and the top two fifths (40% of all people who filed income tax returns) paid 87% of all federal income taxes. If I’m understanding my timses and gozintas right, less than half of all income tax payers get the bill for about half of all government receipts (76% if we want to be honest).
Where you sit on the financial food chain may make you smile or cringe at these numbers but let’s not go there. Instead, let’s think about how risky this is. If California is the beta site for American culture get ready for a disturbing phenomena; Tax payers who leave. George Will of the Washington Post provides this eye opener from a column on eBay ex-CEO Meg Whitman who’s running for California's Republican gubernatorial nomination “Twenty-five percent of California's revenue comes from income taxes paid by the 144,000 richest taxpayers, so ‘if one of them leaves, it's a really bad thing’."
California’s highly progressive state income tax ranges from 0% to 9.3%. The top 5% of the Golden States income earners pay 47% of all the state's income taxes. If I live in Cali I don’t mind if Brad and Angelina or Tom and Katie are getting soaked (I’m not sure if these people are California residents but they make better examples than Gary Coleman or Robert Blake). But I do mind if they move out of state. Yes, just one of them. If TomKat is raking in $20 million a year, that’s a $1.86 million revenue hit if they find a delightful place out of state with a Church of Scientology around the corner.
Putting aside class warfare and politics, depending on an elite few for a majority of your revenue is dumb. It becomes scary dumb when those few meal tickets are part of a global virtual economy and can easily work from Dubai, the back of their Gulfstream G650, or Nevada.
The Obama economic team, as well as any state or municipality, should consider this risk when setting tax and budget policies. None of them will but it never hurts to point this stuff out.
Later
In 2008 46% of all US Federal Government receipts were from income taxes. If you take out the 40% of receipts used for ‘Social Insurance’ (Social Security, Medicaid, and Medicare) that the government saves for future expenditures (ah, that’s a good one!) then income tax accounts for 76% of total direct federal taxes.
In 2008 the top fifth of income earners paid 69% of those federal income taxes and the top two fifths (40% of all people who filed income tax returns) paid 87% of all federal income taxes. If I’m understanding my timses and gozintas right, less than half of all income tax payers get the bill for about half of all government receipts (76% if we want to be honest).
Where you sit on the financial food chain may make you smile or cringe at these numbers but let’s not go there. Instead, let’s think about how risky this is. If California is the beta site for American culture get ready for a disturbing phenomena; Tax payers who leave. George Will of the Washington Post provides this eye opener from a column on eBay ex-CEO Meg Whitman who’s running for California's Republican gubernatorial nomination “Twenty-five percent of California's revenue comes from income taxes paid by the 144,000 richest taxpayers, so ‘if one of them leaves, it's a really bad thing’."
California’s highly progressive state income tax ranges from 0% to 9.3%. The top 5% of the Golden States income earners pay 47% of all the state's income taxes. If I live in Cali I don’t mind if Brad and Angelina or Tom and Katie are getting soaked (I’m not sure if these people are California residents but they make better examples than Gary Coleman or Robert Blake). But I do mind if they move out of state. Yes, just one of them. If TomKat is raking in $20 million a year, that’s a $1.86 million revenue hit if they find a delightful place out of state with a Church of Scientology around the corner.
Putting aside class warfare and politics, depending on an elite few for a majority of your revenue is dumb. It becomes scary dumb when those few meal tickets are part of a global virtual economy and can easily work from Dubai, the back of their Gulfstream G650, or Nevada.
The Obama economic team, as well as any state or municipality, should consider this risk when setting tax and budget policies. None of them will but it never hurts to point this stuff out.
Later
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