Movement in the University of California Privatization and Tuition Debates

A few things to note in the public college access debates, particular with tuition and privatization.

1.  First, the Daily has a story (that provides the graph above) arguing that there will be a “bill of $422,320 in today’s dollars [for] the class of 2034.  If college costs keep rising as they have for the last three decades, the inflation-adjusted price of four years.”

What are the politics of runaway cost inflation?  Health care has this level of cost inflation, and it brought together huge coalitions to react (and counter-coalitions to fight reform).  Education hasn’t.  Why the difference?  It could be that health care impacts an older, more politically engaged group.  It could be seen as a move to a view of the government that just compensates the poor rather than one that provides goods broadly; related, we see health care as a right in a way that higher education isn’t, equality of opportunity issues aside.  Issues that are seen as having a federal component versus state ones?  That health care was never completed, while public education grew up with the country, hit a high-point with the Cold War, and is now in retreat?  I’m not sure.

2. This was matched by a brief debate, proposed by a student group at UC-Riverside, over a plan to that formalize an indenture contract, because they would “abolish tuition and replace it with post-graduation payments equaling 5% of their income for 20 years.”  As friend-of-the-blog Connor Kilpatrick noted in an email, it’s 5% of “their wages (not investments)”, making for an even more regressive system than in the original document.  Funny how investment income gets excluded in these deals.  Given a median wage of $45,000 for someone with a college degree, that’s ~$187 a month – not exactly cheap.

As an economic historian noted to me once about indenture and student loans, one of the fundamental facts about the brutality and intensity of early-American indenture was that workers who were brought to America under indenture could either run off to the frontier and reinvent themselves, or would die from disease.  Since lifespans were short and erratic indenture required intense upfront work, and since the ability of exit was ever present, indenture needed to take place in a Goffman-like total institution.

Nowadays one can’t “escape” students loans – especially through the legal code, which takes place through how the state sees taxable income – and lifespans and lifetime earning capabilities are quite long and smooth, meaning one with replicate an indenture situation without the more overt coercive elements of bonded labor or indenture.  Meaning bidding 5% of future earnings for access to public goods – a system violating vertical and horizontal equity in taxation along with all kinds of fairness rules as we understand them – looks like a brand new thing.

3.  Will the battle be taken to the states?  President Obama, in his State of the Union speech, said ”Of course, it’s not enough for us to increase student aid. We can’t just keep subsidizing skyrocketing tuition; we’ll run out of money. States also need to do their part, by making higher education a higher priority in their budgets…So let me put colleges and universities on notice: If you can’t stop tuition from going up, the funding you get from taxpayers will go down.”

Ralph Nader has an op-ed (which quotes Rortybomb!) arguing against runaway public tuition, and proposing that University of California students “qualify an initiative on the ballot that would set tuition at affordable levels, or even become like some leading European countries where free schooling extends through the university years…Ordinarily, without lots of money for paid petitioners, this can be a formidable challenge. But with millions of community college and university students reachable on campus, combined with their families, this should be a fast process and a piece of cake.”

For the California activists, has this initiative issue been discussed before?  What are your thoughts?

4.  This is a choice, and it was a choice made before the crisis.  During the original Occupy event and California tuition protests in 2009, Aaron Bady wrote a very important post worth revisiting - “The sign-up sheets didn’t have a column for students”: Mark Yudof and the UC Regents = Sacramento - which convincingly argued that “the scandal is that Mark Yudof and the regents are using the crisis of the moment to push forward a plan to privatize the UC system that has long been in the works and is geared to be permanent.”

He links through to an important 2002 essay about the future of the public university by Mark Yudof, “Higher tuitions: Harbinger of a Hybrid University?”  What is the future of the public university, and why?

As higher education comprises a smaller and smaller portion of state budgets, and as state dollars make up a narrowing slice of university budgets, the central implication is that, for the foreseeable future, public research universities will look to students to pay more of their educational costs….For me, the unvarnished truth is that the extraordinary compact between state governments and their flagship universities appears to be dead – or at least on life support….To my mind, a large part of the answer is demographics. Legistators and governors can’t help but be influenced by the graying of America….

Though we believers in the civic value of education may lament it greatly, with the wage premium widening, education today is increasingly seen as a private, rather than a public, good. Consequently, many legislators appear more comfortable with students’ paying higher tuition than they did in the past, tacitly encouraging students to borrow today and pay back later…Paradoxically, to continue the long tradition of broad access for students to public research universities, these institutions will have to become more like their private peers; to ensure the access for low-income and historically disadvantaged students that low-cost tuition once allowed, I believe that public research universities will have to work hard to augment funds for student aid and scholarships.

This vision of the hybrid university, being enacted in California and everywhere else across the nation, is exactly what President Obama and Ralph Nader (!) have targeted in this past week.  It is important to realize that this situation isn’t an accident, but planned and encompasses a vision of how we want education to be.  That vision can be changed.

Household Formation: Divorces, Births Correlated with Unemployment Across States

From the Simpsons episode where Milhouse’s parents get divorced:

Kirk van Houten:  “Singles life is great, Homer; I can do whatever I want.  Today I drank a beer in the bathroom.”
Homer Simpson: “The one down the hall.”
Kirk van Houten: “Yeah, and another great thing, you get your own bed.  I sleep in a racing car, do you?”
Homer Simpson:  “I sleep in a big bed with my wife.”

Kirk is not only employing someone who makes race car beds, he’s also taking up another unit of housing. Kirk van Houten is engaged in the messy business economists refer to as household formation, creating another unit of demand for housing (as well as boosting aggregate demand for things like race car beds in weak economic times).  If you haven’t seen it already, there’s several arguments that a wave of household formations will start, taking pressure off the housing market and boosting overall aggregate demand.  See Yglesias here, Krugman here and Karl Smith here.

As you can see here at Sober Look, “Family households have completely decoupled from the US population growth since 2008.”

You’ve also seen this in relation to divorce rates, child-birth rates, households doubling up, etc. – a big drop-off starting in 2008.  But, usually due to data limitations, this analysis is almost always at the national level.  I wanted to find rates at the state level, to use the range of unemployment rate growth across states to see if household-related changes tracked them, boosting the argument that the weak economy is causing these changes. Weirdly, I can’t currently find household growth at the state level for beyond 2008.

But I did find other things.  From the U.S. Census’ Births, Deaths, Marriages, & Divorces data page, here’s changes in divorce rate (2009 subtracting 2005 averages) against the change in the unemployment rate by state (2009 subtracting 2005):

Significant relationship.  Let me clarify this chart.  As unemployment goes up (vertical axis), the divorce rate goes down (horizontal axis).  We knew that the divorce rate across the country declined with the recession; the fact that it correlates with unemployment rates by state gives us more evidence that this is related to the weak economy.

Getting a divorce is an expensive and economically risky move.  Equally expensive and risky is having a child.  Here’s changes in birth rate from 2009 to 2005 against unemployment.  It’s an even stronger relationship:

Same dynamic.  (It is also true if we use “fertility rate” instead of birth rate.)  If 2009 had the same birth rate as 2005, there would be an additional 2.25 million babies born.  It’s difficult to tease out how much of that is the recession versus general trends, but this evidence tells us that a lot of it has to do with the economy.  Over the course of the past several years, it is likely that there are 5-8 million babies not born as a result of this prolonged recession.

Marriage is, oddly, not correlated with unemployment increases by state.  Is it because marriages are income risk-reducing instead of income risk-increasing events like divorce and having a child?  Is the average cost of a wedding going down in this recession?  Segmentation in who is getting married, particularly by education (Sober Look argued that here)?

In some ways this linkage makes me a bit more worried about the “recovery winter” argument happening.  I read household formation as primarily a young person issue.  Households are doubling up at high numbers, and there are record numbers of adult children living at home.  Census blog: “All in all, 61.7 million adults, or 27.7 percent, were doubled-up in 2007, rising to 69.2 million, or 30.0 percent, in 2011.  Young adults were especially hard-hit…That left 14.2 percent of young adults living in their parents’ households in March 2011, up more than two percentage points over the period.”

My previous worry was that young people will be last in line to get jobs as job growth happens, keeping a lot of potential household formers on the sidelines, thus keeping the recovery in check.  I’m not sure if they are actually “last in line”, but if so there’s a problem there.  Now I’m a bit more worried that household formation dynamics are being equally driven not by something that requires a bit of extra money – like being able to pay rent – but a lot more extra money.  Having a child is expensive, particularly since it requires adding cost household labor hours – if household formation recovery needs to expand the birth rate to truly engage a multipler-accelerator “winter recovery”, that could be quite problematic.

(On the other hand, I can start prepping my #slatepitch: “How the Upcoming Divorce Wave Will Save the Economy.”  Maybe Newt Gingrich can tell us all something about how to have a strong economy and reduce unemployment after all….)

The Debate on Private Equity in 1989, Peter Róna addressing Jensen

Pema Levy has an excellent piece on the differences between private equity and venture capital that I recommend checking out.

Since there’s going to be more discussion of private equity, it would be useful to get some more specifics on what criticisms of private equity have looked like historically.  We discussed the tax preference for debt with Josh Kosman here.  I’ve been reading about the debate over leveraged buyouts (LBO) and the shareholder’s revolution as it played out in the finance journals of the 1980s.  For all the romantic talk about “creative destruction”, the virtues of vultures and the harsh medicine involved in saving dying firms, the real story here is a battle over various stakeholders in the control of the firm.

First, something did change during the 1980s, and LBO was part of this overall shift.

JW Mason:

The blue line shows the after-tax profits of nonfinancial corporations…the solid red line shows total payout to shareholders, that is dividends plus net share repurchases…In the pre-neoliberal era, up until 1980 or so, nonfinancial businesses paid out about 40 percent of their profits to shareholders. But in most of the years since 1980, they’ve paid out more than all of them….In 2007, earnings were $750 billion, dividends were $480 billion, and net stock repurchases were $790 billion. (Yes, net stock repurchases exceeded after-tax profits.)…

It was a common trope in accounts of the housing bubble that greedy or shortsighted homeowners were extracting equity from their houses with second mortgages or cash-out refinancings to pay for extra consumption. What nobody mentioned was that the rentier class had been doing this longer, and on a much larger scale, to the country’s productive enterprises.

This is predicated on the idea that Wall Street and the capital markets know how to invest better than managers at firms.  Recent events should give you pause on this: reflect on the fact that most of the stuff you like (your Apple products, for instance) are developed by managers at established firms under constant pressure to release cash, and the capital markets and Wall Street’s grandest achievement was to create trillions of dollars in housing investment that is now worthless or sitting in a quasi-foreclosure state rotting.  They failed at their main job – allocating capital in a productive way.

What did the arguments against LBO and shareholders revolution look like in real time?  This recap from Doug Henwood’s book Wall Street (available for free as an e-book) starts us off.  For all that’s been written about Wall Street in the past 3 years, Henwood’s book really stands out even though it was written in 1997.  I’ve seen very little coverage on corporate control, for instance, which his Chapter 6 is all about.  Henwood:

Starting in the mid-1970s, Michael Jensen, Chicago-school fellow traveller now at Harvard, began developing a finance-based theory of corporate governance that would become influential in the 1980s…Jensen’s (1986a) answer was to load up these firms with debt…As the decade wore on, Jensen celebrated the advent of a new form —the LBO (leveraged buyout) association (Jensen 1989a)…

Back, though, to Jensen and his manifesto. It drew a blizzard of responses, mainly from anti-Jensenites. One, from Peter Róna (1989), head of the IBJ Schroder Bank & Trust in New York, made several points worth quoting — and Róna’s position as a financier rather than an industrialist makes his comments especially interesting. First, Róna argued that Jensen grossly overstated the shareholders’ case. In return for limits on their liability (they can see the value of their stock wiped out, but the rest of their assets can’t be attached), shareholders give up the right to dispose of corporate property on their own; they can sell the shares, but not the firm’s assets. By making the shareholder sacrosanct, Jensen preempted any “thoughtful analysis of the very question that is at the heart of the issue —what should be the rights and privileges of shareholders?” Second, the LBO is based on the redistribution today of cash flows expected tomorrow and beyond; if these estimates are wrong, then the public shareholders who are bought out in an LBO have the cash and “everyone else is left with a carcass.” But shareholders are in the game only to maximize value; having consummated this goal, “they take pretty much the same view of the corporation as the praying mantis does of her mate.” Finally, Jensen assumed that shareholders are better judges of capital projects than are managers and corporate boards — an “ideologically inspired assertion that lacks empirical support.” As Róna says, it’s hard to imagine how one would go about testing this empirically, but “the burden is on Jensen” to take on the task, “since he has already reported the results.

The 1989 Róna response to Jensen in Harvard Business Review is fantastic, though sadly not online.  It’s worth quoting at length.  First, the privileges of shareholders should be subject to debate, since it’s a legal creation that excludes many of the responsibilities that come with ownership:

As the author admirably sums it up in a rhetorical question: “Who can argue with a new model of enterprise that aligns the interests of owners and managers, improves efficiency and productivity, and unlocks hundreds of billions of dollars of shareholder value?”

Well, let me try. To begin, as a matter of settled corporate law, shareholders are not “owners” of the enterprise in any sense of the word. In exchange for these significant limitations on liability, shareholders give up virtually every significant right normally associated with ownership-notably, the right to operate and manage; the right to sell, dispose, pledge, encumber, or hypothecate; the right to create lesser titles in interests, such as leases, licenses, easements, or covenants; and the right to bequeath. Of course, they can exercise all of these rights with respect to their shares but none as to the corporation or any of its assets. So quit calling them “owners” of the corporation, for, in doing so, not only are legal principles violated but also thoughtful analysis of the very question that is at the heart of tbe issue -what should be tbe rights and privileges of shareholders-is preempted.

Here’s the crux of the argument that this is really about a battle between stakeholders:

The very foundation of tbe LBO is the current actual distribution of hypothetical future cash flows. If the hypothesis (including the author’s net present value discounted at the relevant cost of capital) tums out to be wrong, the shareholders have the cash and everyone else is left with a carcass. “Creating shareholder value” and “unlocking billions” consists of shifting the risk of future uncertainty to others, namely, the corporation and its current creditors, customers, and employees…

The notion that underleveraging a corporation can cause problems is neither new nor unfounded. What is new is the assertion that shareholders shouid set the proper leverage because, motivated by maximizing the return on their investment, they will ensure efficiency of all factors of production. This hypothesis requires much more rigorous proof than Jensen’s episodic arguments… although Jensen denies it, the maximization of shareholder returns must take place, at least in part, at someone else’s expense. And the conflicts are not just the obvious ones between creditors, shareholders, labor, and management. The scientist whose research budget is cut, devastating his hopes for a Nobel Prize, may seem like an “inefficient layer of management” to Jensen or to shareholders, and he may well be, in the sense that his future Nobel Prize has no present value. But to that scientist, the decision is rank betrayal. No creative taient will work for organizations that think this way.

If this is the new system, and it appears from the vantage point of 2012 it is, why do we allow shareholders to continue to have limited liabilities?

On the technical level, the question is whether shareholders are entitled to earnings or cash flow, and my view is that opting for the latter amounts to conferring on them life-threatening powers. If they are to have such rights, exemption from liability no longer makes sense, since it is precisely the general availability of cash flow against a variety of risks, known and unknown, together with shareholders’ lack of control over its management and disposition that justifies the exemption.

There were many other responses in that issue of Harvard Business Review.  We’ll continue to discuss them in upcoming posts.

The Concentration of Capital Gains and Dividend Income

Mitt Romney turned over his taxes yesterday, revealing that ”Unlike most Americans who earn a paycheck, Romney gets the majority of his income from investment profits, dividends and interest…Romney and his wife Ann paid an effective tax rate of 13.9 percent in 2010 and expect to pay a 15.4 percent effective tax rate when they file their returns for 2011.  Those rates are roughly in line with the effective tax rates paid by most Americans, but they are far below the top income tax rate levied against wages, which is 35 percent, because the U.S. tax code favors investment income over wage income.”  Even with this, there are still many unanswered questions.

It might be useful to get some data on how concentrated dividend and capital income is among the top 1% and especially the top 0.1%, since the tax status of this income will be a political topic in 2012.

Let’s look at Congressional Research Services, Changes in the Distribution of Income Among Tax Filers Between 1996 and 2006: The Role of Labor Income, Capital Income, and Tax Policy.  First thing to notice is that for the bottom 80% of Americans receive less than 1% of their income from dividends and capital gains, while it is half the income the top 0.1% receives:

As Jared Bernstein wrote when this CRS report first came out, “The largest single contributor to the growth of inequality, 1996-2006, was dividends and capital gains.”  Here’s a chart he created from the CRS report, noting what has and hasn’t contributed to inequality as measured by the gini coefficient:

I’m not sure of the percentage of the audience here that thrives on Lorenz curves.  For those that do let’s take some from the big CBO report, Trends in the Distribution of Household Income Between 1979 and 2007.  Here are the Lorenz curves for each of the major types of income.  Noticed how capital gains is packed into the very topmost part of the distribution curve.

Also notice how inequality of every type of market income has increased over this time period.

Why does the tax code disadvantage against those who make the large majority of their incomes from wages and salaries?  Progressive taxation based around the equality of sacrifice has had a very long tradition; does Mitt Romney and others in the top 0.1% have less of an ability to sacrifice than someone making $70,000 a year?

Some Notes on a Potential Foreclosure Fraud Settlement

There are rumors that a settlement over foreclosure fraud might be happening in Chicago today.  There are also rumors that such a settlement will be in the State of the Union.  Since the conversation will likely go complex quickly, here are a few things to keep in mind as you try and understand what is going on.

-  I’d recommend separating out the issues of (a) whether the banks caused the housing bubble and whether they’ve faced consequences for it, (b) the desirability of mortgage debt being reduced as either an issue of fairness, reclaiming ill-gotten bank profits and/or macroeconomic stimulus and (c) the idea of excessive number of foreclosures going through as a result of perverse incentives.

The core of this problem is one of record-keeping and legal process, and this utility-like function in our economy has broken down.  Even if there weren’t any foreclosures, even if there was no housing bubble or underwater mortgages and even if there weren’t record Wall Street bonuses, what is happening with the servicing model needs a serious investigation and airing.  (a)-(c) all add to the severity of the issue and are consequences of this broken model, but they are not necessary for the case to be made that there needs to be an investigation of what is going on in our mortgage markets.

-  Some links:  You may have heard about “robosigning” but the allegations go way beyond that.  I went over a lawsuit against LPS here that will introduce you to many of the claims.  I did a For Dummies series when the big scandals first broke.  And I argued that we shouldn’t think of servicers adding market information in the traditional Hayek sense as a result of the way these business models are setup.  The status quo is a disaster all around.

-  For those who claim it is an issue of the current wrecked housing market (or Dodd-Frank, or whatever), judges and advocacy groups have been flagging this for over a decade.  Let’s get some quotes from bankruptcy judges in here:

“Fairbanks, in a shocking display of corporate irresponsibility, repeatedly fabricated the amount of the Debtor’s obligation to it out of thin air.” 53 Maxwell v. Fairbanks Capital Corp. (In re Maxwell), 281 B.R. 101, 114 (Bankr. D. Mass. 2002).

“[t]he poor quality of papers filed by Fleet to support its claim is a sad commentary on the record keeping of a large financial institution. Unfortunately, it is typical of record-keeping products generated by lenders and loan servicers in court proceedings.” In re Wines, 239 B.R. 703, 709 (Bankr. D.N.J. 1999).

“Is it too much to ask a consumer mortgage lender to provide the debtor with a clear and unambiguous statement of the debtor’s default prior to foreclosing on the debtor’s house?” In re Thompson, 350 B.R. 842, 844–45 (Bankr. E.D. Wis. 2006).

(Source Paper.)  This paper by Katherine Porter concluded that “mortgage servicers frequently do not comply with bankruptcy law. A majority of mortgage claims are missing one or more of the required pieces of documentation for a bankruptcy claims. Fees and charges on claims often are poorly identified and do not appear to be reasonable. The bankruptcy data reinforce concerns about the overall reliability of the mortgage service industry to charge homeowners only the correct and legal amount of the debt and to comply with applicable consumer protection laws.”  And that was in 2008, before the market went sideways.

The problems that are being flagged are not a new problem with servicing, and by all accounts they have gotten a lot worse.  We need a serious investigation to get to the bottom of what is happening.  Alternatively, there needs to be some serious terms for enforcement during a settlement – and by all accounts they aren’t even close to something that meets those needs.

-  The consequence of Porter’s research is that this has real impacts on people holding debts.  A sophisticated conservative argument is that there is a problem here, but it is primarily a problem between banks and investors.  Or a problem between lots of rich people capable of hiring lawyers, and a problem that doesn’t involve consumers (or AGs) one way or the other.   The evidence is overwhelmingly against that – it could potentially impact the pocketbook of any homeowner if phantom claims end up targeting them.

- This is not specific to housing debt either.  David Dayen flags ”We know that JPMorgan Chase recently suspended all their court filings over debt collection, presumably because of some truly awful misconduct in which their debt collectors were engaging.”  When JPMorgan resells your debt, there’s no checks to make sure the right amount and the right legal obligations are being followed, and individual consumers are a terrible check on these specifics.

If power plants were failing this way there’d be immediate investigations.  Why isn’t there one for this situation?

Changes in the Wealth and Income of Those at the Bottom Over the Past 30 Years

Alex Gourevitch has a recent post that brings up an excellent point.  So much of our conversation on changes over the past thirty years describes what is going on at the median or average value.  There’s an active debate on whether or not median incomes have stagnated and what that means.  But there’s little focus on what is going on at the bottom end of the distribution and less discussion of the wealth distribution.  Alex:

Recently, the Economic Policy Institute published “11 Telling Charts from 2011,” including the following one showing the share that different segments of the US Population took of the wealth gain from 1983-2009.

When we first looked at this chart, we started reading from the left and adding the numbers but did a double take by the time we added the Top 1%, Next 4%, Next 5%, and Next 10% – or the top 20%. Add their shares together and you get 101.7%. At first that just didn’t seem right, since our assumption was that when you add up all the shares one would get 100%. Naively, we had assumed that, while radically unequal, the gain in wealth for all quintiles would positive. A piece of folk philosophy in the United States is that the rich can gain huge gobs of money and power, so long as the poorest can also have some piece; and that those who rise do so on their own merits, but not by making the worst off even worse off. That, as it turns out, is also a premise of the most influential theory of justice in contemporary political philosophy, which states that the only permissible inequalities are those that make the worst off better off than they otherwise would be under pure equality.

The past twenty-five years have followed a different path from mainstream, common sense theories of justice. The worst have been made worse off.

It’s not even the worst off – those in the middle 40%-60% range lost wealth.  A smaller slice of pie for an American picked at random.

There’s two things to examine – income and wealth.  To add another chart, let’s look at differences in income.  Heidi Shierholz at EPI was kind enough to email me the following chart and description:

The mean income of the lowest decile is 11% below where it was in 1979, and the average income of the second decile (20th percentile to 40th) is roughly unchanged from where it was in 1979 (2% above).  The middle decile (40th-60th) is 10% above where it was in 1979, the fourth decile (60th-80th)  is 22% above, the highest decile is 45% above, and the top 5% is 64% above.

The bottom 20% has substantial losses and the 20th-40th essentially holds steady.  It’s probably safe to say that somewhere between a fourth and a third of the income distribution has seen actual declines in real terms since 1979 by the Census definition of income (pre-taxes, only includes cash transfers, no cap gains, etc).

Hence the need to critically examine pre-transfer, market-based distributions from our economy.  Also notice the strong gains in income for those at the bottom in the late 1990s – full employment really does raise all boats.

Meanwhile, what is driving the wealth difference?  Table 8 in the document used to create the first chart shows that an explosion in debt dropped out the net wealth of the bottom 40%.  There wasn’t much, if anything, gained in stocks and other forms of equity and wealth, and a lot gained in debt.

When widening inequality and declining real wages give you lemons, make lemonade.  There was a popular argument in conservative circles a few years ago that income inequality wasn’t so bad because consumption inequality hadn’t increased so much.  This was in part due to arguments that the cost of being poor was increasing less than the cost of being rich (while ignoring that most of those trends had to do with food inequality - that link will give you links for that debate).  And part of it, almost by definition, had to be the result that debt was exploding to maintain consumption.

But this is a crucial part of the debate that always gets hidden – whatever is going on for the average American, there are a huge group of Americans worse off, in absolute and relative terms, in the wages they get in the current market economy and with the wealth they’ve tried to build.

Unpacking Newt’s South Carolina Win: Food Stamps, Apocalypse and Zombies Candidates

Newt Gingrich won the South Carolina primary over the weekend.  This may all be a historical blip depending on what happens in Florida, but if Gingrich wins that state we could see a drawn out primary.  Conservative and liberal writers are trying to make sense of what happened, and conservative writers and the conservative establishment are starting to panic.  But Gingrich’s win is really the conservative establishment’s chickens coming home to roost, as their recent actions made Gingrich’s campaign a winner in three key ways.

Food Stamp President  There’s been a bunch written about how Gingrich’s attack of food stamps brings up images of racism embedded in pre-welfare reform arguments.  You can see the standing ovation for Gingrich’s arguments in the video linked above for what this looks like in practice.  But beyond the specifics of a singular program, the imagery of food stamps links back to the Tea Party vision of the welfare state.

A common trope for conservative policy intellectuals is that they want to “means test” the welfare state – reduce its availability for those with high wealth and income and focus it on those with the least wealth and income.  But the Tea Party base wants the opposite – they are opposed to a welfare state for the poor, young people, undocumented workers and other groups they think are undeserving.  The welfare state is worthwhile for people like themselves, but should be nonexistent or a burdensome affair for people they think don’t make the cut.

From the latest research on the Tea Party we learn that “Tea Partiers judge entitlement programs not in terms of abstract free-market orthodoxy, but according to the perceived deservingness of recipients…The fundamental distinction for them is not state vs. individual, it is the division of the United States into ‘workers’ vs. ‘people who don’t work.’”  This is welfare as private charity, charity conditional on fitting certain expectations, not as an unconditional right.

Food stamps are a particularly smart form of stimulus and redistribution.  But the conservative mind doesn’t see the economy as something that is defective when involuntary unemployment shoots up or something that should work to the advantage of those who have the least.  To them, the threat of people going hungry for failing in the market is what creates the ability to thrive in that market.  The market doesn’t just reward the successful, it punishes those who fall behind.  Food stamps deny people of that experience and leave them dependent; some conservatives are running once again with the idea that a base of people receiving aid in this Great Recession creates a permanent Democratic coalition by design.  Conservative elites nursing this Tea Party movement now have to deal with what the Tea Party policy agenda looks like, and Gingrich is capable of understanding and amplifying that appeal.

Apocalypse Visions  I’m not sure what the conservative establishment actually looks like.  But I imagine that a conservative establishment criticism of President Obama is that he’s in over his head, has weakened the economy by insulting the business community and “job creators” in both tone and policy, is ignoring the deficit which is also keeping the recovery in check and wants to raise taxes to expand the government even further. If that’s your critique, then Mitt Romney is your guy.  That’s his criticism as well, and his supposed strengths as a manager play to that critique.

If you think that President Obama has tried to realize a Marxist, socialist state at home while apologizing and undermining its power abroad, you need a candidate who will defend the country with an equal and opposite force.  In the 1990s, as the conservative writer James Poulos noted here, Newt used to keep a sign that stated he was an “advocate of civilization, defender of civilization, teacher of the rules of civilization, arouser of those who form civilization, organizer of the pro-civilization activists, and leader ‘possibly’ of the civilizing forces.”  If the battle is for the very stakes of civilization itself, then you need a candidate who can match the apocalyptic vision.  Gingrich can, Romney can’t.

Here endless number of books, op-eds, interviews and other conservative infrastructure products proclaiming President Obama a Marxist, a socialist and a fundamental threat to the United States have stoked this debate.  From the talk radio stations to the President of AEI arguing that Obama presents two choices – one where  ”America will continue to be a unique and exceptional nation organized around the principles of free enterprise. In the other, America will move toward European-style statism” – the stakes have never been higher for the conservative self-image.

Gingrich has amplified the most buffoonish version of these arguments, noting ”What if [Obama] is so outside our comprehension, that only if you understand Kenyan, anti-colonial behavior, can you begin to piece together [his actions]?  That is the most accurate, predictive model for his behavior.”  Romney has tried to say these things, but Gingrich clearly believes it more.

Zombie Candidates  TP Carney notes that South Carolina is where “where the GOP establishment historically builds a firewall against insurgents.”  It probably more accurately described as the place where weak candidates have run out of money.  As a Democratic fundraiser once noted about primaries, “People don’t lose campaigns. They run out of money and can’t get their planes in the air. That’s the reality.”  That quote is from this post by Mark Schmitt on how the current campaign reflects the free-for-all of the post Citizens United ruling:

In the old system, money really mattered. It made or broke campaigns. Mostly it broke them. But it was the lack of money that really shaped the system. It was an invisible primary in which many candidates were excluded either before it started or soon into it….

So whereas in the 1990s we had candidates who died prematurely — they ran out of money while they still had a chance — we now have, in effect, zombie candidates. They’re alive and can spend money and attack Mitt Romney even though their actual political lives are over….it’s also moved to a scale where everything changes. Money becomes an end in itself. It shapes the behavior of campaign consultants, who can now become very, very rich. It’s increasingly disconnected from candidates themselves or the incentives that might make sense for them…

A bunch of zombie candidates attacking Mitt Romney with money to burn might be welcome for Democrats, who can use their research and language in the fall, but it’s no more the ideal democratic process than was the old one, when candidates had to quit because they ran out of money, not votes. We need a campaign finance system that both limits the excesses and gives real candidates a means to be heard.

Citizens United has likely ended a huge portion of the work of the invisible primary, but allowing random billionaires to indefinitely keep whatever campaigns they like on life support doesn’t strike me as a better outcome.  $5 million dollars is not a lot of money to a handful of citizens and corporations, domestic or international, and as we can see it has allowed Gingrich to stay in the election when it looked like he would have been defeated.  If the primary turns into a long battle of millions of dollars in attack ads on Republicans for the next several months, they’ll have one of the major conservative achievements of the past decade, Citizens United’s destruction of campaign finance regulation, to blame for it.

Michael Hudson on GE Capital, WMC and Fraud

There’s a 1998 Brookings book by Bob Litan and Jonathan Rauch, American Finance for the 21st Century. Originally prepared as a report to Congress by the Treasury Department, it provides the arguments that were used as the justification for the repeal of Glass-Steagall.  I think it’s a great document for how Washington people saw the remaining parts of the New Deal-era financial regulatory architecture going into the housing bubble:

To use a transportation analogy, the twentieth-century model of financial policy has, for the most part, set a slow speed limit, specified a few basic models for cars, separated different kinds of cars into different lanes, and demanded that no one leave home without a full tank of gas and a tune-up.  Better suited for the mercurial financial world now emerging is a model that, while not abandoning all that went before, focuses less on preventing mishaps and more on ensuring that an accident at any one intersection will not paralyze traffic everywhere else.

Those two focuses, preventing fraud (mishaps) and contagion (paralyzed traffic) is exactly what the financial system and regulators turned out to be worst at in the 2000s.

What kind of new cars were going to hit the road?  There’s one company that gets particular attention, GE.

In the recent past, for example, newcomers in the credit business, such as GE Capital and GMAC, were offshoots of manufacturing companies that discovered-learning, in effect, by doing-that they could see credit as profitably as could the traditional providers.  Tomorrow’s companies “spinning” in to financial services will be drawn from the sectors holding the keys to the information revolution: software and communications.

Another key they held was the ability to destroy the careers of internal people flagging fraud and abuse.  It paid to be outside the formal regulatory architecture and also outside the informal ethics network put them in a place where anything went.

The excellent financial reporter Michael Hudson, author of the book The Monster: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America–and Spawned a Global Crisis, wrote a fantastic piece investigating fraud and abuse at WMC, the subprime mortgage wing GE purchased.  GE Capital (and its bailout) is a particular fascination of mine, so I was excited to read this piece.  I wasn’t disappointed.

Here’s Fraud and folly: The untold story of General Electric’s subprime debacle.  Here’s an excerpt:

Dave Riedel, a former compliance manager at WMC, says sales reps intent on putting up big numbers used falsified paperwork, bogus income documentation and other tricks to get loans approved and sold off to Wall Street investors…

Riedel, who worked as quality-control manager for the lender’s largest production division, claims that after he informed a GE official about fraud inside the lender, WMC’s management demoted him — reorganizing him out of his job, taking away his office and his staff and forcing him to sit at a desk for months without a job title…

Questions about WMC’s lending tactics were also raised by an academic study that looked at a pool of 5,610 loans the company had made around the country in 1998. By December 1999 almost 25 percent of the loans were facing foreclosure or were seriously delinquent — more than five times the rate for loans originated by other major subprime lenders, the study found….

He helped put together a presentation in May 2006 aimed at giving GE officials a sense of how serious WMC’s fraud problems were. Riedel says an audit of soured loans that investors had asked WMC to repurchase indicated that 78 percent of them had been fraudulent; nearly four out of five of the loan applications backing these mortgages had contained misrepresentations about borrowers’ incomes or employment.

 By October 2007 — as Riedel had predicted — WMC Mortgage was effectively out of business, dead after having pumped out roughly $110 billion in subprime and “Alt-A” loans under GE’s watch, according to industry data tracker Inside Mortgage Finance…

A study by federal regulators, “Worst Ten in the Worst Ten,” found WMC’s loans accounted for the second-highest number of foreclosures on subprime and “Alt-A” mortgages in the nation’s 10 hardest-hit foreclosure hotspots, trailing only New Century Financial.

I do like happy endings – what happened to the person who put $110 billion dollars worth of poison into the capital markets?

 WMC’s former CEO had a 30-acre ranch outside Los Angeles where she kept a dozen horses. She’d used some of the millions she’d earned at the lender, the magazine said, to start an independent record label, YMA Music Group, which signed such artists as former Limp Bizkit guitarist Wes Borland. She’d also become CEO of Vantium Capital, a private equity fund that planned to make money off distressed mortgages.

Make the disease, sell the cure.  Brilliant.  A crucial question: how would this person, or anyone in the article, do anything differently if they had to repeat it all?  The only exception would be the fraud whistleblowers, who wouldn’t even flag what they saw as they would know it would destroy their careers.

I recommend reading the whole article, but expect to wonder why nobody has gone to jail.

Mental Note: Link Black Panther Free Lunch Program, OWS Infrastructure

There’s a new documentary worth checking out, The Black Power Mixtape 1967-1975.  It is streamable on Netflix.  It’s full of old footage Swedish filmmakers took while following the Black Power movement in the United States, footage which has just recently been found.

The documentary mentioned something I was unaware of – one of the gravest threats the FBI saw in the Black Panther movement was their Free Children’s Breakfast Program.  And I just saw that program mentioned on Larisa Mann’s tumblr, originally from nativethoughts:

If you read the FBI files you will see that even Mr. J. Edgar Hoover himself had to say that it was not the guns that were the greatest threat to the internal security of the United States of America; it was not the guns, it was the Free Children’s Breakfast Program that was the greatest threat to the internal security of the United States of America. Grits. Now why was it the Free Children’s Breakfast Program?

As proposed by the Black Panthers in 1969, “The Free Breakfast for School Children is about to cover the country and be initiated in every chapter and branch of tile Black Panther Party. This program was created because the Black Panther Party understands that our children need a nourishing breakfast every morning so that they can learn…It is a beautiful sight to see our children eat in the mornings after remembering the times when our stomachs were not full, and even the teachers in the schools say that there is a great improvement in the academic skills of the children that do get the breakfast. At one time there were children that passed out in class from hunger, or had to be sent home for something to eat.”

Here’s what Hoover wrote: “The Breakfast for Children Program (BCP) has been instituted by the BPP in several cities to provide a stable breakfast for ghetto children. . . . The program has met with some success and has resulted in considerable favorable publicity for the BPP. . . . The resulting publicity tends to portray the BPP in a favorable light and clouds the violent nature of the group and its ultimate aim of insurrection. The BCP promotes at least tacit support for the BPP among naive individuals .. . and, what is more distressing, provides the BPP with a ready audience composed of highly impressionable youths.. . . Consequently, the BCP represents the best and most influential activity going for the BPP and, as such, is potentially the greatest threat to efforts by authorities . . . to neutralize the BPP and destroy what it stands for. ” (FBI airtel from director to SACs in twenty-seven field offices. May 15, 1969.)

It’s funny, because if you listen to libertarians and conservatives this is precisely what they want to see – private charity stepping into poverty and providing welfare locally.  Yet this was the major threat the FBI saw in the Black Power movement.  Beyond books and speeches and marches and guns, providing food to hungry young people, unconditional on anything, had their greatest power.

One thing that wasn’t noticed enough was the focus in Occupy on providing basic, unconditional infrastructure on necessities and care in occupation spaces.  Sarah Jaffe has written about this, first in this good Alternet article: “Free health care, a sanitation team, a public library, solar power, and free childcare are just a few of the services the Occupy Wall Street protesters are providing.”  Free childcare!  Also here: ”They are building that other world. They have given up on asking for political action and have simply modeled the world they want to see.  That world provides free childcare.”

I’ve heard some critics say that these spontaneous infrastructure projects reify a certain mode of neoliberal governmentality. The process of anarchists taking it upon themselves to provide an unconditional welfare state in miniature locally simply removes the demand for the state to do these things broadly.  It makes austerity look ok, because dedicated citizens and community will just step into the breach and make their own, entrepreneurially-focused, welfare state in the new neoliberal-era.

If so, why did Hoover find the breakfasts so worrisome?  Is it because, as the ethnographic literature tells us, participation often proceeds beliefs – and participating in this unconditional welfare state creates the belief that it is a deserved human right?  And did Occupy’s unconditional care infrastructure propose a similar type of challenge?  Mental note: need to think more about this.  Your thoughts?

US Unemployment Now Down to Where African-American Unemployment Was, Pre-Recession

There’s been a lot of expectation management over the recent news that the U.S. unemployment rate has dropped from 8.7 percent to 8.5 percent. Alan Krueger noted that “[i]t is critical that we continue the economic policies that are helping us to dig our way out of the deep hole that was caused by the recession that began at the end of 2007.” Many economists expect unemployment to increase if the economy picks up, because people who have drifted out of the labor force will start looking for work again, raising the unemployment rate. And as everyone recognizes, there’s still a terrible amount of suffering with unemployment as high as 8.5 percent — wasted capacity, wasted opportunities, and mass misery. Though things may be looking up, they are still quite painful.

One interesting thing to note is that the number in between 8.7 percent and 8.5 percent, a threshold the country just crossed, was the average unemployment rate for African Americans going into the recession. The rate from 2006-2007 for African American men and women over 16 was 8.6 percent. Let’s chart that out (click through for larger image):

Total African American unemployment is currently at 15.8 percent and has been hovering around 16 percent for three years now. All the other major employment health indicators are down as well. For instance, the employment-to-population ratio is down to 51 percent from 60 percent in 2001. Nearly half of all African Americans aren’t working.

The economy is terrible for all Americans right now and we desperately need action to both expand the economy and repeal attempts to contract it. But it is worth remembering that the unemployment misery all Americans are experiencing right now is equal to what it was like during the best two years of the 21st century for African Americans.