Tuesday, March 21, 2017

Why Won't Someone Think of the Children?! ;-)

The typical debate about K-12 education starts almost exactly as follows:

"Have no illusions. INSERT PROPOSED CHANGE HERE will gut public schools.  Don't we want ALL our children in America to have a good education?"

Almost all Americans fail to understand education is primarily a state and local function.  Why federal dollars are involved at all is an excellent question no one really asks.

I've volunteered at afterschool programs funded by federal dollars, sometimes called Title I schools. Most of the money goes to existing teachers, not kids. (I was an unpaid volunteer who decided to continue volunteering after teaching a financial literacy class affiliated with Junior Achievement.)  The goal seems to be to reserve as much money for existing staff as possible.  A principal in a different California district told me when she considered using general funds to expose students to organized activities by outside nonprofits, a tenured teacher complained the funds should be used first for teachers, and teachers should object or file a union complaint.

In any case, the afterschool program--funded with federal dollars intended to help schools with impoverished children bridge educational gaps--would hand out juice boxes and small snacks like wheat crackers or leave them out for children to take as needed.  In some schools, the kids play videogames. In one middle school, I ran into two unsupervised kids in a gym. When I mentioned I found two kids in the gym, the supervising administrator became angry with me for being alone with them, even though the gym should have been locked and the kids shouldn't have been in there in the first place.  When the gym was supervised, the kids played in a haphazard fashion, sometimes with deflated balls.  (By the way, I live about 10 miles from the school, and a single family home costs around 700,000 USD in the district--about three times the nationwide median price.) In short, federal dollars used for education and nutrition are sometimes babysitting programs with no educational value whatsoever.

92% of all K-12 funding comes from state and local sources, and taxpayers are no longer as tolerant when it comes to inefficient federal spending. Why should taxpayers in Kansas, Indiana, and Minnesota pay millions each year to California teachers for afterschool babysitting programs that do nothing to improve educational outcomes? And why can't states do these programs themselves instead of relying on slush funds from nationwide taxpayers? If a program is important to local voters and has mostly a local impact, shouldn't they fund it with their own tax dollars or increase taxes as necessary? (I suppose they could borrow money, which would be a great opportunity for Congress to pass a law mandating all local government programs be funded at least 95% by local or state taxes and not debt--to the extent the local government receives any federal dollars.) [Update: I just realized my proposed Congressional check on states won't work. States will just shift state spending obligations to the federal government, which has greater and almost unlimited borrowing capacity.  Instead of issuing state bonds at higher and higher interest rates--essentially stealing from future generations--states will just ask the feds for more money and then horse-trade with more fiscally-conservative states to get that money. For example, a California legislator needing x dollars for y and z program would tell Kansas, Nebraska, and Iowa that they can have the next five years' defense contracts in their states, as long as they put a provision in the defense bill giving California federal grants for x and y programs.  Without integrity and some sense of long-term consequences, no law or proposed change will fix substantive problems. Sigh.]

The consequences of corruption, which include inefficient government spending, can unfortunately include wholesale elimination of programs. This doesn't preclude administrations from instituting new programs that accomplish the goal more efficiently and without employing the formerly corrupt employees. While no one enjoys change and new responsibilities, without them, governments will stagnate.  Governments that fail to adapt to change will promote protectionism and a desire for the "good ol' days," which are never as good as anyone thinks.  What is giving rise to voters' lower tolerance for inefficient government programs? (aka "compassion fatigue") 

1.  Lessened accountability. Anyone familiar with California's government unions knows they promote systemic corruption.  Some police officers use excessive force, and even when the evidence is on camera, the worst that follows is paid vacation or reassignment.  Why?  Because police unions have passed laws defining "excessive force" in their own favor.  (What's the definition of "sex" again, Mr. Clinton?) When you can invent your own dictionary, the law can't touch you.

Police unions and their lobbyists know that protecting the worst amongst their members--it's a fraternal order, after all--causes the general public to mistrust all cops, even good ones.  Incredibly, they don't care.  They assume with enough marketing and political influence, they will always be able to protect themselves--even at everyone else's expense.  When you don't know whether the officer who just pulled you over has used excessive force and gotten away with it, you're not going to vote to increase tax dollars to the police.  You won't trust any of them.  From the perspective of political lobbyists, however, it doesn't matter.  You can complain, but dispersed voters, even if right, cannot effectively counter political and legal moves by groups, even if wrong.

It's the same concept with teachers--who only teach about 158 to 180 days a year in California.  Many of them refuse to do volunteer work for the benefit of the school, which reduces the school's role as a positive influence on the community.  In the past, if Johnny was falling behind, maybe a teacher tutored him one-on-one for an additional 15 minutes, without pay.  Today, teachers unions counsel members not to do any volunteer or additional work during contentious budget negotiations.

Such tactics aren't new--California's teachers unions campaigned against one of the best teachers in the world and drove him back to his native Bolivia ("Faculty colleagues and union officials complained that his extra hours and large class sizes set unhealthy precedents for other teachers and violated existing work agreements.")  They, too, have passed laws favoring themselves over all other taxpayers, making it almost impossible to shut down underperforming schools or to eliminate even the most egregious pension loopholes.  Meanwhile, teachers' pensions grow at guaranteed rates, regardless of actual tax revenue. Incredibly, some teachers still wonder why the public has turned against them.

2.  Reduced accountability isn't leading to better performance or results.  One potential upside in protecting government workers is some of them will be encouraged to try new programs or take more risks.  That hasn't actually happened.  California still doesn't have universal pre-school, despite guaranteeing K-14 education receive at least 40% of each year's budget (see Proposition 98).  Educational outcomes are still primarily determined by two factors: 1) parental educational levels; and 2) parental income levels. ("America: the worst caste system in the world, but with new and improved propaganda"?) 

Worse yet, most 6th to 12th grade programs don't teach in ways that promote better analytical ability or better citizenship. Americans are likely to learn WWI started when Archduke Ferdinand was assassinated, but such knowledge is worthless without some overall context, including incorporating modern information such as NATO and internal independence movements. In short, not only is critical thinking or logic absent in K-12 courses, even the material taught is useless because it usually lacks any connection with modern-day knowledge or practical skills.

3. As governments have become less accountable, businesses have become more responsive to consumer needs, giving corporate leaders more credibility than politicians. With the exception of a few outliers, most Americans will sooner read a book by Nike's CEO or a professional athlete than any politician not named Obama.  When you think of prior leaders like Eisenhower and Kennedy--people who captivated the entire world--this shift from political to corporate power is a dramatic change. How did it happen?

Globalization forced businesses to compete and provide individually-tailored solutions while governments reduced competition--and therefore accountability--through gerrymandering and other legal mechanisms. While businesses were behaving more nimbly, American voters forgot their political systems' numerous checks and balances allow only incremental change.  In other words, once a political change is enshrined in law or through vested power, it is as close to permanent as one can get.  Once vested, power removes some portion of a country's political flexibility and its ability to absorb anything radically new--an issue for anyone who believes America's economic, social, and innovative engine runs on immigration and tolerance.

To avoid reform and making hard choices, governments--as well as corporations--have been relying on debt to prop up unsustainable legal and benefit structures that make Jim Crow's "separate and equal" look tame by comparison.  (Say what you want about Southern racists, but even they didn't argue that "separate and unequal" was defensible, like government unions are doing now with their different compensatory and disciplinary rules for government workers.)

Corporations and real estate developers have relied on debt, too, but have usually done so to facilitate new products or changes (moving to the cloud, new condos, etc.).  In contrast, governments have used debt to make change more difficult and to support separate and unequal legal structures.

4. The above phenomena have led to ineffective remedial responses.  This is to be expected, because remember: America's political structure only allows incremental changes because of its numerous checks and balances, which generally operate against non-military governmental overreach but also against removing vested interests that harm the public trust.

On the federal level, governments have responded by trying to reduce expenses and costs as much as possible--without regard to quality.  One way to reduce expenses, given the lack of fiscal checks and balances within most government entities, is to hire contractors.  Yet, even this approach is no longer working, because most businesses now understand their goal is to submit a low bid then increase costs over time through negotiations and add-ons.  In other words, governments have made internal hiring too expensive because of unsustainable benefits and no real incentives for timely delivery, forcing them to rely on more efficient outside workers, who themselves have become corrupt over time. (Study private prisons if you're curious for details.)  Also, even if costs are kept in-line, the service under contract might be so clunky, it forces consumers to rely on costly experts to navigate the system. (Talk to anyone who's navigated the Covered California website for more details.)

Bottom line: governments are no substitute for culture.  If your culture is filled with hubris, inefficiency, unsustainable legal structures, and a lack of critical thinking and compassion, your government won't be able to do anything.  Anyone who can set up private or external systems will do so--if only out of a desire to get things done.  When this self-segregation inevitably occurs, people stuck in the mainstream will complain, but in America, only incremental change is possible, so individual complaints, regardless of merit or veracity, will generally go nowhere.  Society will fracture and eventually decline as the best and brightest move away or find more accountable systems that allow them to prosper.  And that, boys and girls, is why every empire eventually collapses or becomes a military dictatorship, where some force feeds off of dissatisfaction and overrules all established rules and opposition, especially minorities.  In short, it's a scary time to be an individual in America.

"Civilizations die from suicide, not by murder." -- Arnold Toynbee

© Matthew Mehdi Rafat (2017)

Bonus: I keep saying I'm going to write more about people and non-economic culture, but you can't really do that in America.  The average American in 2017 is in debt, more uptight than almost any other culture, hasn't read more than two books in the past year, and is generally unaware of his or her exposure to constant propaganda. (80% of the TV commercials I recently saw were military-related and for soda and alcohol.  The alcohol commercial, for a low calorie beer, featured semi-professional athletes engaged in vigorous exercise.)

The most interesting Americans I've met in the last 22 years are immigrants or ones who have traveled to at least 10 countries starting at a young age.  If the most interesting Americans are the ones exposed to non-Western cultures, perhaps the best places to study culture are outside the "West."

Pro tip: if you are enamored with "Western" life but desire a bit more soul, try Buenos Aires, Argentina. If money isn't a concern, visit Santiago, Chile.

Flashback from 2010https://willworkforjustice.blogspot.com/2010/09/teachers-unions-running-california.html 

Friday, March 17, 2017

Consequences of Housing Inflation Policy in the U.S.

From OECD 
The above chart compares the types of countries' 2015 financial assets.  More specifically, it shows the percentage of cash (currency and deposits) held by households as a percentage of overall wealth.  You'll notice the U.S. is an outlier, because most Americans have their life savings in their home equity. From the Federal Reserve, on housing before the 2009 financial crisis:

[H]ousing wealth of U.S. households at the end of 2008 was 25.4 trillion dollars. Housing wealth is about one half of total household net worth (which is 52.9 trillion dollars), and is larger than the Gross Domestic Product (14.4 trillion dollars). Moreover, since financial wealth is more unequally distributed than housing wealth, housing wealth accounts for almost two thirds of the total wealth of the median household.

Housing as the driver of America's savings vehicle is no accident.  Tax policy guarantees housing prices will always increase absent extraordinary circumstances. In fact, tax policy is so potent in this regard, what brought about the 2008-2009 financial crisis wasn't some unexpected event but the overuse of this magical money-making machine.  (Like most sure things, the main threat is overloading and overextension of the thing itself.)

The issue isn't just the well-known mortgage tax deduction, which cost the government about $70 billion in 2013--it's the way it favors banking dependency and excessive borrowing.  You can deduct all of your mortgage interest up to $1 million in principal on the home in which you live, which means banks and buyers are incentivized to borrow as much as they can up to that limit.  By setting a limit by fiat, the government has encouraged everyone to game the system up to that limit (a corollary to Goodhart's Law).  What's worse is the government compounds the problem by guaranteeing the borrowed money indirectly through agencies like Fannie Mae and Ginnie Mae.  Meanwhile, homeownership rates in the U.K. and Canada are similar to the United States, even though the first two countries don't allow such a tax loophole, er, deduction.  (Anything that allows you to minimize your taxes is a "loophole," but if the government likes a loophole, it'll call it a deduction to make it sound nicer and to encourage its use.)  Why set up tax policy that confers so much power to the banking system?

First, in theory, it makes sense to support home ownership.  Owning a home is usually a long-term decision that creates more interest in sustaining your surroundings.  The reality, however, is different--as cities have become larger, community becomes difficult to achieve, and most Americans tend to be private folks anyway--they may bring an apple pie to a new neighbor, but unlike many other countries, an invite into one's home is rare.

Second, by having so much wealth held illiquid and therefore captive and subject to fees (broker fees, closing costs, etc.), which discourages impulse moves, the government can manipulate its citizens' financial freedom and also its currency strength.  In contrast, in other countries, especially China, residents can remove their wealth--such as stock market gains--and transfer it elsewhere, such as Canada (Vancouver) or the United States (Cupertino, CA).  Such options can create havoc for governments, because not only do they lose wealth that supports their own currency, but the wealth they helped created is now captive in another country's currency and protected by law, making its return more difficult.

Third, if wealth is illiquid, easily tracked, and tangible, it can provide stable tax revenue.  How does this help the average resident?  Under a cost-benefit analysis, it doesn't.  In California, even after passage of a proposition that limited the government's ability to raise property taxes, some local governments still tried to over-estimate housing prices for purposes of increasing the applicable tax revenue or granted more developer permits than usual, harming quality of life by not accounting for public transportation or improved roads or new highway lanes.

At the end of the day, globalization requires more flexibility, more consumer disposable income, and more individual labor mobility.  Meanwhile, America's tax code continues to prioritize the exact opposite.  What could possibly go wrong? (Again?)

Bonus: the key to currency strength is reserves, and when your non-gold and non-natural-resource reserves are guaranteed to grow as well as be held captive, the (financial) world is a reserve bank's oyster.  In normal economic circumstances, if you want to make your exports more attractive, you can weaken your currency by issuing more debt; if you want your currency to remain strong, you issue less debt or debt at ultra-low interest rates.  In America, however, you can have the best of both worlds--you can issue more debt, keep it captive in housing, and create tax policies that ensure the debt becomes an asset at some point.  How does this captive wealth, which allows greater government manipulation of both currency and exports/imports, help sustain a growing middle class? Well, it doesn't.  It actually leads to more boom-bust cycles and debacles like the 2003 Cancun WTO trade failure and its continuation. Rendering the sale of essential items like housing and education on the financial sector's willingness to issue debt is a recipe for short-term gains and long-term disaster.

Worse, by ensuring both private and public banking entities have disproportionate influence over the economy, you cede power to the financial sector in the absence of almost perfect regulation and enforcement.  What does the financial sector do in exchange for such power, given that it doesn't make anything?  In theory, it exists to encourage stability, predictability, and the integrity of economic transactions.  Unfortunately, with pro forma accounting and conflicts of interest within banks, it doesn't even do accounting or valuation well.  In short, America's current tax system takes a sector that should be the designated driver in the economy and makes him or her into a Formula One fan itching to get into the driver's seat.  Given the global nature of finance, it's not just America that falls prey to such problems--google "Deutsche Bank hidden losses swaps" for more.