Category Archives: Poverty & income gap

Fed Theft Update: $749 Billion from Bank Depositors

silent_theftFederal Reserve Bank suppression of interest rates has cost bank depositors $749 billion in interest income on savings accounts, CDs, and money market accounts over the past six years, according to Richard Barrington with MoneyRates.com.

Quantitative Easing has made possible one of the greatest redistributions of wealth in United States history. Unlike with taxes, which tend to be highly visible, most people don’t understand how interest rate suppression affects them. Low interest rates have devastated not only bank account savings but public and private pension funds and savings vehicles such as insurance policies. Beneficiaries are borrowers, including house buyers, car owners, college students, credit card owners, corporations leveraging their balance sheets, and, of course, the U.S. government. Every percentage point in interest rate suppression across the yield curve benefits Uncle Sam to the tune of $180 billion a year.

So, how did Barrington calculate the cost to bank depositors?

MoneyRates.com starts with the total amount on deposit at U.S. banks as of March 31, per the FDIC. That total is then increased by average money market rates over the subsequent year … and then adjusted for the inflation rate over the same period. The difference between the resulting figure and the original amount on deposit at U.S. banks represents the hidden cost of the Federal Reserve’s low-rate policy.

The little guy knows the system is stacked against him. He just doesn’t know how. Pass this blog post around.

— JAB

The Decimation of Coal Production and Alienation of the Working Class

coal_production

In rejecting the extension of coal tax credits Friday, Governor Terry McAuliffe noted that the number of coal miners employed in Virginia has tumbled from 11,100 in 1988 to less than 3,000 in 2015.

At one time — the late 70s and early 80s, as I recall — coal mining employed more than 20,000. Since then, many jobs have been lost to automation, and more to declining production. Coal has been mined in Virginia for more than 100 years, and all the thick, easily accessible seams have been tapped out; it’s not easy extracting coal profitably from three-foot-thick coal seams. In the past decade came the fracking boom, which allowed natural gas to displace coal in the utility market, as well as the Environmental Protection Agency crackdown on mercury and other toxic byproducts of coal combustion. The Clean Air Act, assuming it moves forward, likely will be the death knell of steam coal in Virginia, leaving only a handful of mines producing metallurgical coal for steel making.

From 1988 until 2015, McAuliffe said, coal mine operators, electricity generators and other coal-related companies claimed more than $610 million in tax credits. “It would be unwise to spend additional taxpayer dollars on a tax credit that has fallen so short of its intended effectiveness,” stated McAuliffe in a press release.

It seems cruel to kick the coal mining industry when it’s down, but McAuliffe has a point. A 2012 report by the Joint Legislative Audit and Review Commission (JLARC) found that while the credits had slowed the decline of coal production and employment, both declined at the same or even faster rates than were predicted before the credits were created.

If we want to help the economy of far southwestern Virginia, there are probably better ways to do it. If there are only 3,000 coal mining jobs left, there’s nothing much to save anyway!

Not surprisingly, inhabitants of Southwest Virginia are among the most disaffected and alienated in the state, as can be seen by these two maps from the Stat Chat blog showing the percentage of votes that went for Donald Trump in the Republican primary, and, less lopsidedly, to Bernie Bernie Sanders in the Democratic primary.

trump_voters

sanders_voters

Buchanan County, in the heart of Virginia’s coalfields gave 70% its votes to Trump in the Republican primary.

Clearly, alienation is not limited to coal miners — it permeates the southern tier of counties across Virginia where local economies traditionally were built around tobacco, textiles, apparel and light manufacturing. Trump voters have been the losers in the world of globalization and the knowledge economy.

I wish I had an answer for what it takes to salvage Southwest Virginia, but I don’t. The Tobacco Indemnification and Community Revitalization Commission has been throwing money at the problem — workforce development and incentives for light manufacturing, mostly — but doesn’t have much to show for it. The region is just too rugged, too isolated, too hard to get around, and too bereft of workers with skills valued in the knowledge economy to attract much investment.

Sadly, the only long-term solution may be the emigration of young people in search of job opportunities elsewhere.

— JAB

Sorry, College Kids, Living off Beer and Pizza Does Not Make You Poor

Source: Demographics Work Group, UVa

Source: Demographics Work Group, UVa

As readers know, I am a data junkie, and I post a lot of maps and charts highlighting, among other things, the variations of wealth and poverty in Virginia. The data is useful in helping us understand social, economic and political dynamics of the state, but they usually come with an asterisk. Poverty rates tend to be abnormally high in college towns. Judging by the statistics, one would expect places like Blacksburg, Charlottesville, Harrisonburg, Radford and Lexington to be havens for housing projects and trailer parks. Yet to all outward appearances, they seem to be fairly prosperous places.

Clearly, the presence of large numbers of college students who are studying (and partying)  rather than working full-time to earn a living are skewing the figures. As a new census brief from the Demographics Working Group at the University of Virginia observes:

Most college students report very low incomes, putting them below their respective poverty thresholds and—especially in cases of large off-campus student populations—raising the rate of poverty in the towns where they live. Yet, intuitively, we recognize that college or graduate student “poverty” means something different than poverty among the unemployed, families with children, or the persistently needy.

In calculating the official poverty rate, number crunchers make some adjustments to minimize the student amplification of poverty by excluding people living in group quarters such as college students in dormitories, older adults in nursing homes, prisoners and inmates, and military personnel in barracks. Even so college students living off-campus inflate the poverty numbers.

By removing all students involved in undergraduate or graduate education, the Demographics Work Group provides a clearer picture of what most of us would think of as “real” poverty. In the aforementioned college towns, making this adjustment cuts poverty rates in half. Even in most populous jurisdictions, such as Richmond, the adjustment creates a noticeable drop.

— JAB

Are the End of Times Upon Us?

Big hands... Rest easy, America

Big hands… Gog (left), Trump, and Magog

by James A. Bacon

Surely we have reached the end of times of apocalyptic lore when the leading Republican candidate for president flapped his arms during a national debate and assured the American people that not only are his hands of respectable size but so is another part of his anatomy. “I guarantee you, there’s no problem,” said the inimitable Donald Trump last night.

Such is the state of the nation that rather than explicate how he proposed to “make America great again” — beyond building a big wall, bringing in “really great” people, and hammering China, Japan and Mexico on trade — Trump felt compelled to assure the public that the size of his genitalia is something the nation can be proud of.

While Trump is grotesque, he taps into a very real malaise across a broad swath of the electorate. The American people know that something is very wrong, and that the elites have rigged the rules of the game to their favor, although they’re really not sure how. Americans are appalled by political correctness, they’re appalled by Wall Street bailouts, and they’re appalled by big money in politics. They are enraged by the loss of jobs, many of them to competitors overseas, and they are demoralized by the increasingly difficult struggle to maintain a middle-class standard of living.

My argument in Bacon’s Rebellion is that much of this malaise can be traced to the failure of core economic institutions. The health care sector, which comprises close to one-fifth of the economy, is plagued by the poorest record of productivity and quality of any economic sector, making the cost of health care increasingly unaffordable for all. Meanwhile, college tuitions have become even more burdensome, blocking a traditional path to a middle-class occupation. Both sectors have become captured by the leading players — hospitals, insurance companies, institutions of higher education — and are run to protect their interests, not the interests of the public. And don’t get me started on dysfunctional land use patterns, also the playground of special interests, which drive up the cost of housing and transportation.

How these complex systems work is poorly understood, so Trump personifies the enemy as illegal immigrants and Chinese factory workers stealing American jobs, while both Democratic candidates personify the enemy as cops killing innocent black men and deploring the United States as institutionally racist.

There is another contributor to this malaise, also poorly understood: monetary policy. I have addressed it periodically in Bacon’s Rebellion, although I only dimly comprehend the dynamics myself and assuredly speak with no authority on the subject. But Bill Gross, head of Janus Capital Group and one of the leading bond investors in the world, does understand it. And I will let him do my talking for me.

In the current issue of his monthly newsletter, Gross writes the following:

Our global, credit based economic system appears to be in the process of devolving from a production oriented model to one which recycles finance for the benefit of financiers. Making money on money seems to be the system’s flickering objective. Our global financed-based economy is becoming increasingly dormant, not because people don’t want to work or technology isn’t producing better things, but because finance itself is burning out like our future Sun.

What readers should know is that the global economy has been powered by credit – its expansion in the U.S. alone since the early 1970’s has been 58 fold – that is, we now have $58 trillion of official credit outstanding whereas in 1970 we only had $1 trillion. Staggering, is it not? But now, this expansion appears to be reaching an ending of sorts, at least in its current form. Private sector savers are growing leery of debt piled upon debt and government regulators have begun to build fences against further rampant creation. In addition, the return offered on savings/investment whether it be on deposit at a bank, in Treasuries/ Bunds, or at extremely low equity risk premiums, is inadequate relative to historical as well as mathematically defined durational risk. The negative interest rates dominating 40% of the Euroland bond market and now migrating to Japan like a Zika like contagion, are an enigma to almost all global investors. Why would someone lend money to a borrower with the certainty of getting less money back at a future date? …

Negative yields threaten bank profit margins as yield curves flatten worldwide and bank NIM’s (net interest rate margins) narrow. The recent collapse in worldwide bank stock prices can be explained not so much by potential defaults in the energy/commodity complex, as by investor recognition that banks are now not only being more tightly regulated, but that future ROE’s will be much akin to a utility stock. …

In addition to banks, business models with long term liabilities that depend on 7-8% future returns from risk assets are themselves at risk – not necessarily of bankruptcy but future profitability. … Same goes for pension funds. Puerto Rico follows Detroit not just because of overpromised benefits but because they cannot earn enough on their investment portfolios to cover the promises. Low/negative interest rates do that. And the damage extends to all savers; households worldwide that saved/invested money for college, retirement or for medical bills. They have been damaged, and only now are becoming aware of it. Negative interest rates do that. …

In addition, government policymakers seem to be setting up future roadblocks for savers. There is a somewhat suspicious uniform attack on high denomination bills of global currencies. Noted economists such as Larry Summers; respected journalists such as the FT’s Gillian Tett, central bankers such as Mario Draghi – all seem suddenly concerned that 500 Euro or 10,000 Yen Notes are facilitating drug dealers and terrorists (which they are). But what’s an economist/central banker doing opining on law enforcement? It appears that the one remaining escape hatch for ordinary citizens is being closed. Money in a mattress will heretofore be associated with drugs/terror.

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The Structural Racism of Student Loan Debt

Student loan delinquency rate by zip code. Darker colors indicate higher delinquency rate.

Student loan delinquency rate by zip code. Darker colors indicate higher rates. (Click for more detail.)

by James A. Bacon

Americans now owe $1.3 trillion in student loan debt, exceeding the amount they owe on credit cards ($700 billion) or automobile loans ($1 trillion). Unlike other forms of debt, student loans are disproportionately concentrated among young people. Further, student loans are uniquely onerous because the debt cannot be discharged in bankruptcy proceedings. In the past two decades or so, America has created a new indebted class — I call it the indentured servant class — where none existed before.

After decades of advocating the expansion of federal lending programs on the grounds that everyone who wants to attend college should be able to, America’s progressives are waking up to the idea that maybe the massive accumulation of debt is not such a good thing. Indeed, the student debt issue has become a major presidential campaign theme for the first time in American history with Bernie Sanders and Hillary Clinton vying to outbid the other with proposals for loan forgiveness, free college and the like. Progressives wouldn’t be progressives, of course, without turning massive student indebtedness, which they aided and abetted for so long, into a racial issue. Student loans, you see, constitute “structural racism.”

After an extensive analysis of the data, Marshall Steinbaum and Kavya Vaghul with the Washington Center for Equitable Growth have concluded that minority populations disproportionately suffer from high delinquency and that middle-class minorities seem to be the most adversely affected. “We believe that these two facts reflect the impact of structural racism in the U.S. higher education system, credit and labor markets, and distribution of wealth.”

Actually, I have observed previously that the piling on of student debt represents a form of “structural racism.” But rather than blaming credit and labor markets, I indict the U.S. system of higher education exclusively. One of the most proudly progressive institutions in the country is also one of the most racist — assuming we define racism the same way that progressives do, which is by the disparate impact institutional arrangements have on the poor and minorities.

Steinbaum and Vaghul have performed a useful service in building a map of student debt (from which the image above was taken). They analyzed each zip code in the country by median household income, racial composition, and student loan debt delinquency. (You can see the interactive map here.) Not surprisingly, they found strong correlations between household income, race and default rates.

Unfortunately, they superimposed upon the data their own progressive framework for analysis, citing discrimination in credit markets (minorities get less generous credit terms) and labor markets (minorities are less likely to get job offers) as important reasons for the higher default rates. Those are interesting claims, which may or may not be true — a good topic for a different blog post — but I think it’s fair to say that the most important factor explaining the higher default rate by minorities is the college completion gap.

The authors do acknowledge the reality of this gap:

African Americans and Latinos are, on average, less likely than white students to complete college once they start. According to the National Center for Education Statistics, in 2013 roughly 57 percent of recent African American high school graduates and 60 percent of recent Latino high school graduates were enrolled in college compared to 69 percent of white students. Yet the National Center for Education Statistics reports that for the 2005 starting cohort of college students, about 21 percent of African Americans and 29 percent of Hispanics complete a four-year institution within four years compared to a four-year completion rate of 42 percent for white students.

This is fundamental. The longer it takes to graduate, the more debt a student accumulates. Moreover, if a student fails to graduate and acquire the credential it takes to succeed in the job market, their debt is all the more difficult to pay off. All other factors pale in comparison.

So, the real question we should be asking is this: Why are blacks and Hispanics dropping out of college at higher rates than whites, and why do they take longer to complete their degrees? Are they less prepared academically on average than whites and Asians, perhaps because of the inadequate quality of their K-12 education? Do they take more remedial courses in college? Do they struggle with higher-level courses? Do they fail more courses? Do they get more discouraged and wonder what the hell they’re doing?

Rather than blaming credit markets and labor markets, perhaps we should take a closer look at the policies of America’s colleges and universities. To what extent, in their pursuit of diversity, do they admit minorities with lower SAT scores than the student average? If minorities do have lower SAT scores, do the colleges provide them additional support it takes to keep up — remedial classes, tutoring, mentoring, whatever — or do they let the students fend for themselves?

Here in Virginia, the University of Virginia stands out for the negligible difference in graduation rates between blacks and whites. Clearly, although UVa aggressively recruits minorities, it either (a) succeeds in recruiting minorities who are equally qualified academically, (b) provides the necessary support for those who aren’t as qualified, or (c) accomplishes some combination of the two.

If UVa is the gold standard for minority retention (not just recruitment), we should ask, how do other Virginia colleges and universities, both public and private, compare? Colleges recruiting minorities and congratulating themselves on their diverse enrollment, but then allowing minority students to struggle, drop out and accumulate massive, unpayable debt are guilty of what I call institutional racism. Such behavior is a stain that no amount of good intentions can wash away.

(Hat tip: Larry Gross)

In an Age of Washington Gridlock, the Laboratory of Democracy Is looking Pretty Good

atlantic_coverby James A. Bacon

Seventy-two percent of Americans think the United States is headed in the “wrong direction,” according to a recent AP-Gfk poll, and most of those discontents attribute their sentiment to the dysfunction of American politics. That’s no surprise given the gridlock that has beset Washington, D.C. — gridlock resulting from the polarization of the American electorate between an evenly matched “red” America and “blue” America in a constitutional system designed to thwart radical change based on slim majorities.

James Fallows, a national correspondent for the Atlantic Monthly, is nostalgic for the days when an visionary effort could galvanize the country behind a national goal. But he is clear-eyed enough to see that the political will does not exist to address, to pick an example he cares about, the inequality of wealth and power in America’s second “Gilded Age.” What ever does a social reformer solver do?

After three years of criss-crossing the country in a single-engine plane, an aerial “Travels with Charlie,” so to speak, Fallows has discovered that the national funk is less pronounced in America’s states and metropolitan regions. Indeed, working at the community level, people are finding ways to solve problems and get things done. Apparently, the old “laboratory of democracy” is alive and well, with thousands of experiments occurring across the country. Communities rich and poor, red and blue, are reinventing themselves. “Many people are discouraged about America,” he writes in the current edition of Atlantic Monthly. “But the closer they are to the action at home, the better they like what they see.”

Fallows quotes University of Virginia professor Philip Zelikow, director of the Rework America initiative, as saying: “In scores of ways, Americans are figuring out how to take advantage of the opportunities of this era, often through bypassing or ignoring the dismal national conversation. There are a lot of more positive narratives out there — but they’re lonely, and disconnected. It would make a difference to join them together, as a chorus that has a melody.”

Ordinary Americans have lost faith that they can make a difference in a Washington, D.C., ruled by special interests, entrenched bureaucracies, lobbyists and political action committees. But they feel they can make a difference in their own states and communities. Thus, according to a Mary Washington University-sponsored poll taken in November 2015, while 58% of Virginians responded that the nation was going in the wrong direction, only 43%  felt that the state is heading the wrong way. I don’t know if anyone has asked that question at the metropolitan regional level, but I suspect that, here in Virginia at least, the wrong-way sentiment would be even lower. Speaking personally, I believe that my home metro of Richmond, despite many warts and blemishes, is very definitely moving in the right direction.

Fallows sounds a rarely heard tone of optimism. Among his observations:

A talent dispersal is underway. The “big sort” is short-hand for the tendency of the most highly educated, creative, productive and entrepreneurial people to migrate to the nation’s largest talent magnets like New York, San Francisco, Seattle or Washington, D.C., draining the rest of America of energy and talent.  While that phenomenon is real, there is a counter-migration, Fallows asserts. “We were surprised by evidence of a different flow: of people with first-rate talents and ambitions who decided that someplace other than the biggest cities offered the best overall opportunities.

An archipelago of creativity. Not every computer programmer with big dreams wants to move to Silicon Valley. Enough prefer to live in less expensive, family-friendly cities that technology companies can take root elsewhere. Writes Fallows: “American thinks of itself as having a few distinct islands of creativity; I now see it as an archipelago of start-ups and reinventions.”

Even “hopeless” places are reinventing themselves. Fallows highlights the forlorn communities of San Bernardino, Calif., and northeastern Mississippi as places that have hit bottom and are clawing their way back. “If you wanted a vista of American hopelessness, you might think to start in Mississippi,” he writes. “But here again, we heard that through the country as a whole was in trouble, things are home were moving in the right direction.

The assimilation engine moves forward. While national politics focuses on illegal immigrants and Muslim terrorists, those just aren’t pressing issues at a local level. “Red” America may have the reputation as inhabited by racists, know-nothings and bigots, but Fallows was struck by how inclusive many communities are. “The anti-immigrant passion that has inflamed this election cycle was not something that most people expressed in most of the cities we visited,” he says. “Politicians, educators, businesspeople, students, and retirees frequently stressed the ways their communities were trying to attract and include new people.”

The arts revolution is transforming small cities. Art isn’t just for big, wealthy cities anymore. Fallows finds extraordinary energy poured into local arts in communities across the country.

So, where do we go with this? Washington gridlock is probably with us for a long time. I see little indication in the polls either of an electoral revolution that will give either party a lock on all three branches of the federal government, or a readiness of either Republicans or Democrats to sacrifice core principles on the size and scope of government. Any action that occurs will take place at the state and metropolitan levels.

I’ve been corresponding recently with an old Bacon’s Rebellion contributor, E M Risse, who has long argued that what he calls New Urban Regions (roughly conterminous with Metropolitan Statistical Areas) are the fundamental units of economic competition and development in the global economy. The problem, he argues, is that governance structures in the United States have not evolved in sync with the underlying economic reality. He and I used to explore this issue in depth when he was active on the blog. Perhaps it’s time to revive that discussion.

VLDS Big Data Just Got Bigger

big_databy James A. Bacon

This blog post is geeky, but it’s important — so stick with me! If you favor public policy based on what works as opposed to public policy based on ideology or political muscle, then you should be very encouraged by the progress made by the Virginia Longitudinal Data Survey (VLDS) in incorporating new government data sets.

The VLDS started as a master database of mainly educational and employment data. Now it is adding poverty-related data from the SNAP (food stamp), TANF (Temporary Assistance for Needy Families) and VIEW (Virginia Initiative for Employment not Welfare) programs from 2005 to 2014. Coming up: data sets for foster care, child care, child protective services.

Combining all this data will allow researchers to provide more authoritative answers to a host of public policy questions.

For example, writes Jeff Price in a recent VLDS blog post, “We have never been able to evaluate the impact food security, as provided by the SNAP program, has on the academic success of young children. Do children whose family receives food stamps miss fewer days of school and do better on standardized tests than children from other low income families that do not participate in the SNAP program?”

Previously, it was a bureaucratic nightmare for researchers to obtain this data. VLDS eliminates many of the obstacles by anonymizing the data, that is, stripping out personal identifiers. Price continues:

We now have the opportunity to describe the entire population of citizens we serve in ways we never could before. This will provide insight into patterns and relationships we either knew existed but couldn’t quantify, or never knew existed.  It will allow agencies to better evaluate their program policies and the approaches and strategies used in the past to determine what works best.  In some cases current assumptions will be confirmed.  In others prevailing assumptions will be shown to be incorrect.

The value of the VLDS cannot be overstated. For population studies it is a game changer.

Bacon’s bottom line: VLDS has enormous potential. My only beef is that the research conducted so far has addressed extremely narrow-bore topics, and I have yet to see any eye-opening findings. (Click here and scroll down to “VLDS Research” to view the research projects based on VLDS data.)  Hopefully, that will change as new data sets are added and researchers are able to address an ever wider array of questions.