Failures of The American Education System - The American Inequality Series #5

In this final instalment of the American Inequality Series, we analyse how responsible the USA's education system is for the nation's growing economic inequality.

The quality and level of education is seen worldwide to be a strong determinant of an individual's future socioeconomic status. 

fig.1

Take a look at this graphic (fig.1) from the US Bureau of Labour- a clear positive correlation exists between level of education and earnings, and a clear negative with the level of education and unemployment rate. 

According to the Institute of Education Studies, the median earnings for young adults with a bachelor’s degree was $46,900- the equivalent for high school dropouts was less than half, at $22,900. It’s been getting worse for high schoolers: those who have only graduated from high school have seen their real incomes decline by over a quarter in the last 25 years.

So a correlation can be observed, but is there a causality between the two? The general consensus among academic seems to answer yes- in a well-known study by David Card, of UC Berkeley confirms the causality, concluding that “individual returns to education are declining with the level of education”. Education was proven to be a major factor in unemployment during the recent recession- nearly 4 out of 5 jobs lost during the economic crash belonged to workers with a high school diploma or less. Furthermore, 63% of US jobs now require a postsecondary degree- up from 28% in the 1970s. So education, now more than ever, seems to provide a safety net from both unemployment and low earnings.

Sometimes even a bachelor’s degree is not enough: according to Elena Bajic, CEO of online executive job recruitment site IvyExec, “when an employment recruiter looks at an Ivy League degree, they will look at it more carefully”.

Nevertheless, clearly advanced education of some level plays a role in one’s future economic prosperity. The ‘American Dream’ dictates a desire for opportunity for all to become prosperous- so if education is a key (though not the only) to the door from poverty into prosperity, do all Americans have this opportunity?

fig.2

The greatest barrier for many Americans to college education (in particular elite the Ivy League elite) is financial. The Higher Education Research Institute at UCLA observed choices made by students with regards to college- in particular those who had been offered a place at their first choice. HERI noted that only 56.9% of students enrolled in their first choice college in 2013- and compiled the most significant factors for why so many students didn’t enrol in their first choice, even if they got an offer. Fig.2 shows the 4 most notable reasons- all of them centering around college fees highlights how much finances matter to students wishing to go to college.

Public colleges hold relatively little clout over the education ‘market’ of the USA. Only 5 of the top 20 universities in America are public (state-funded)- a damning statistic, though it must be considered that there are almost three times as many private 4 year institutions as there are public equivalents.

But there is still an increasing pressure among the young people of America to go to top universities- and the majority of these are private colleges, whose national average total fees (for a typical four year study) in 2013-14 were $40,917, $9,000 more than the public equivalents. 

Two conclusions can be drawn from this data:

1) The poorest of society are struggling to afford a college education, and therefore are more rarely enrolling. 

2) Those who are only able to afford a public college education remain at a disadvantage when it comes to post-graduate employment.

fig.3

Colleges have attempted to lower economic barriers of entry via financial aid; for example, 70% of students at Harvard University receive such aid from the college. 

However, the effect of this has been minimised by rapidly rising college tuition fees- fig.3 shows how in the past decade, fees have inflated at a rate disproportionate to most other goods and services- and at a strongly contrasting level to real household income, which has in fact fallen in previous years (fig.4). 

fig.4

This has led to a widening gap between education opportunities for the poor and wealthy. The wealthy are mostly in the best position to provide their children with good quality education, which in turn benefits their future income, so they can educate their children well, and so on.

Socio-economic mobility is not dead- successful ‘rags to riches’ stories are not unheard of- however for many lower class people the environment and opportunity is not present to help them succeed academically- and the state of the US jobs market means they often remain poor for their whole life as a result.

The Symptoms Of Wealth Inequality Are Visible In All Parts Of American Society- The American Inequality Series #4

The (Not) Working Class: Homelessness

Over 22,000 children live on the streets of New York- a stunning statistic, the highest since the times of the Great Depression. The problems don’t end outside the walls of the Big Apple- the 22,000 children in NYC form part of 1.2 million across the United States. 

Homelessness is one of the major signs of extreme poverty, caused by the dropping economic standing of the poorest in society. 

The problems of homelessness go further than the obvious- of course we don't want to see people forced to live on the streets- but it can have further implications on society as a whole, often causing both societal and economic problems such as drug abuse and crime.

Homelessness certainly matters- the speed an effects of its growth provide real threat to American society, particularly those edging closer to losing their homes. It is a prominent sign visible to all of the growing level of economic inequality present in the US.

The Middle Class: Wage stagnation

The causes of wage stagnation go further than just the recent economic crash- wages of most Americans have actually stagnated for the last few decades. 

This stagnancy in the face of a boost in productivity, and general economic growth (averaging 3.27% since 1947) in previous decades is surprising; had wages kept up with economic growth since 1970, the median household income would be around $92,000. In 2012, the US Census Bureau reported the median household income to be just $51,371.

Increase in productivity has also failed to lift average wages- between 1979 and 2012 the median worker’s productivity has risen 74.5%; yet their wages have only gone up by 5%. 

Of course, technology has also played a role in this productivity boom.  Computers have revolutionised word processing, the internet communication and so on- so one could perhaps expect it to bring a drop in working hours, resulting in more leisure time. But according to Erik Rauch of MIT, “if productivity means anything at all, a worker today should be able to earn the same standard of living as a 1950 worker in only 11 hours per week”. 

An 11-hour working week is unheard of today- suggesting today’s workers are working harder, producing more than their 1950s counterparts by far- yet their compensation is not proportionately higher.

The minimum wage has also been stagnant. 5 states are yet to even establish a minimum wage. Currently the highest minimum wage is available in Washington, at $9.32, set at the turn of 2014, but according to a 2012 study by the Centre for Economic and Policy research, even this is too low. The study, setting inflation and productivity as benchmarks, concluded that if the minimum wage had kept pace with productivity and inflation increases since the year minimum wages peaked, 1968, the figure would have reached $21.72 per hour- over double that of the highest in the USA. 

It seems apparent that wages for the general population has failed to keep pace with economic growth and productivity- so where has the extra capital created by a growing economy gone? Fig.1 shows clearly; the top 1% has benefited disproportionately, enjoying an increase in salary of over 240% between 1979 and 2009.

The Upper Class: The 1%

While the wages of most of the population stagnated during the economically relatively non-turbulent years, the resistance of the incomes of the wealthiest could be observed just in the recent economic crash. The average CEO salary dipped in 2008, but it was back up on its feet by 2010- back to 243 times the wage of the average worker.

Questions have been raised over these huge salaries- mainly the question over whether they really deserve it. Under a true meritocracy, people would be paid according to a mixture of their effort, production and influence- so do CEOs really work 243 times harder than an average worker, or produce 243 times as much? Many would argue that CEOs have it easier than the worker- enjoying the power to delegate work more than doing it- but perhaps the CEOs themselves would argue the salary is more a reward for the hard work they have done to get to that position, rather than their current activities alone.

The ‘1%’ of wealthiest Americans have become the faces, to many Americans, of the problem of wealth inequality that is present. After all- how can the USA, a country with the most billionaires in the world (515, far ahead of second-placed China with just 157) have at the same time one in seven people living in poverty?

Has Neoliberalism Failed America? The American Inequality Series #3

The practice of neoliberal capitalism in the USA has been the focus of much debate. In this third instalment of The American Inequality Series, we will take a look at two of the key tenets of neoliberal capitalism: the beliefs in the right of the free-market to rule the economy, and in the idea that the pursuit of self-interest will lead to the best outcome for society.

Scottish icon Adam Smith, the 'Father of Modern

Economics', laid the foundations for much of

neoliberal economic theory.

Free markets rule

An idea that has dominated Western economics for quite some time now is marginal productivity theory- the idea of the competitive, regulation-light free market being the best instrument for aligning productivity, social benefits and private returns. Essentially, those who have skills that help them to be more productive will be in more demand in the competitive market- thus their ‘price’ (income, job benefits) will be higher than those incapable of being productivity. 

This meritocratic system is what most people would like- but the key question here is how to achieve this, and marginal productivity theory answers that the free market is most effective in doing so. So to examine their claim further, what are the tenets of free marketism in the USA? Is there a ‘laissez-faire’ approach, where markets are given total free reign, or a more regulated way to keep competition alive?

A popular argument against regulating fast food chains such
as McDonalds has been that the free market will itself find the
best solution over time.

Well, as is often the case, there is no definitive answer. US economic policy is not entirely coherent (no nation’s policy is); for example, observing the lack of regulation over fast food, that has contributed to the quadrupling of adolescent obesity between 1980 and 2012, one would think America is running a free market almost fully dependent on the ‘invisible hand’, that guides resources to where they are most needed by itself. Yet a glance at antitrust laws such as The Clayton Act, that bans the monopolistic practice of merging market dominators, suggests the contrary. 

Individualism

Perhaps the most retold saying of Adam Smith is his thoughts on us as consumers, 

how "it is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest".

Theory states that the businessman inevitably has the contentment of his customers in his own self interests- if he doesn’t make the customer happy, the customer will not return to him and thus the businessman will lose out. So following his self interests will benefit both himself and his customers.

The internet is held often as an example of such a successful self-regulating market where companies such as Google and Facebook have succeeded of their own merit, while others such as ask.com and Myspace have felt the consequences of failing to appease the market.

However, free markets have been seen by many to be against the interests of the ‘customers’. Allowing American companies to outsource employment is a pertinent example. Free international trade has allowed companies (particularly in the primary and secondary sectors) to hire cheaper employment in places like China, resulting in a wave of job losses in America. In the decade 2000-10, US multinationals sent 2.4m jobs overseas, simultaneously putting 2.9m Americans out of work.

Gates' Microsoft dominated the computer market during
the 1990s. 

Monopolies such as that of Microsoft over the IT market in the 1990s highlighted further free market failure- a lumbering giant was unrestrained from crushing competition such as Netscape, resulting in a lack of choice that prevented any market self-regulation from taking place. If people didn’t like Windows or Internet Explorer, there was nothing else they could choose- they had to deal with it, without the democratic power free market theory promised.

Paul Samuelson (the first American to win the Nobel Prize in economics), claimed how “utterly mistaken was the Milton Friedman notion that a market system could regulate itself”. And while free market has arguably created the environment for new businesses to prosper, it has failed to live up to its promise of market democracy- as recent monopolistic activity and the loss of domestic employment have shown, the consumers have little power over the market.

Debt And Social Welfare Failures Are Fuelling Wealth Inequality In America: The American Inequality Series #2

The phenomenon of easy access to credit and the debt has been a key factor in the stability of the USA’s modern economy. Borrowing plays a huge role- consider the housing market, whose dependence on the lending industry has drastically increased in the past 50 years; between 1949 and the turn of the millennium, the mortgage debt to household income ratio rose from just 20% to 73%. 

There are many reasons for this phenomenon of ‘credit addiction’- the principle of these being increasingly easy access to credit, changing consumer decisions and the squeezing of incomes. Let’s analyse these and see which contributes most, if at all, to American wealth inequality.

Credit addiction has without doubt been encouraged by the financial sector in America. The subprime market’s recent catastrophic explosion exemplified how open credit has become in the US. The subprime market emerged from a restricted financial industry- previously, banks had to take great care in selecting who they could lend to, to minimise the likelihood of future unpaid debts. This process was rigorous- any previously outstanding debts, or missed payments would almost rule you out of contention for a mortgage.

The subprime market sought to open a whole new world of profitability- opening the door to credit to these individuals who were previously deemed unsuitable to receive a mortgage. The industry boomed- at its peak in 2005 the subprime industry had granted $625bn of loans, contributing to over a trillion dollars in loans made by subprime lenders between 1994 and 2007.

Their open availability made subprime mortgages incredibly attractive- a complex arrangement between financial institution and bond traders meant banks were in little danger if mortgages were to go unpaid. They could benefit from cheap loans, avoiding the traditional risks associated with defaulting customers.

Unsurprisingly, the result was devastating- the recent subprime crisis had severe implications on homelessness for example. According to the National Coalition for the Homelessness (NCH), there were 342,038 foreclosures of US properties in April 2009 alone- a third higher than the already high foreclosure figure of April 2008.

The authorities have also played a role in this disaster- attempting to kickstart the economy following the dot-com crash of 2000, the Federal Reserve cut long term interest rates from 6.5% to just 1%- former Chairman of the Fed Alan Greenspan admitted that this move “fundamentally engendered” the development of the doomed housing bubble whose explosion caused this economic trouble.

One could argue Western society has developed a culture of debt-accumulation. Availability of finance on any consumer product, from a blender to a Mercedes, has encouraged people to be less financially responsible. You no longer need to take a single heavy hit on your bank account to purchase a car- finance allows the (greater) cost to be spread over a few years. As a result, prices in the short term are lower and thus customers are more likely to be seduced to purchase a car that is beyond their financial boundaries.

Additional interest payments make the situation worse- Jeremy Vohwinkle of GenerationX Finance describes new car purchasing as borrowing money at a high rate of interest to invest it in a stock guaranteed to lose value rapidly. Yet March 2014 saw the average amount borrowed by American car buyers surpass $27,000 for the first time ever. 

The wealthy are not so reliant on financing- cash purchases ultimately cost less and often cars do not represent a significant enough hit on a millionaire’s finances that he has to take a loan for it. 

America’s total consumer debt lies at almost $3.2tn- over $10k per man, woman and child- 67% of this debt being as a result of loans, and 72.5% belonging to the bottom 90% of Americans. This is despite almost half of post-recession consumer spending coming from the wealthiest Americans. 

The ever-present temptation of taking loans, trading short term gain for a greater long term loss, to cover purchases such as cars and more significantly homes, has driven down the economic prosperity of much of the poor and middle class.

Debt has also been piled on by the US’ social welfare system (or lack of one). Take the medical system- a NerdWallet survey found that Healthcare bills were the primary cause of personal bankruptcy. Healthcare is special in this regard because unlike a house or a car, we usually have no choice as to whether we need it or not. After a car accident, one cannot choose not to go to hospital- they are taken by emergency services, and often they wake up to the bill- which they must pay, as they’ve already been treated.

This unlucky 20 year old got charged $55k for an appendectomy.
Even after insurance contributions, he had $11k left to pay.

One could argue that health insurance solves this problem- but even ignoring its ever-rising price (family health insurance topped $16k for the first time ever last year) over 10 million fully insured Americans aged 19-64 are expected to face bills they will be unable to pay in the near future. Plus, as the picture on the right shows, even health insurance can leave a substantial bill for the individual to pay. This idea of healthcare being financially unattainable is something that, while far from being exclusive to the USA, is pretty much unheard of in similarly developed countries like the UK and much of Europe.

These problems are mostly faced by the poorer of society. Like an overly expensive house or car, it adds to personal debt. However, usually being an involuntary expenditure, it can be even more damaging.

How Corporations Are Contributing To Wealth Inequality In The USA : American Inequality Series #1

The power of the Corporate Lobby, according to George Monbiot, is a ‘Great Unmentionable’- rarely discussed in the media or among politicians, it has maintained a firm grip on every level of American policymaking. Not only has it subverted the very system of representative democracy that the West prides itself upon, but it has potentially created conditions conducive to a strong socio-economic imbalance in the States.

Corporate lobbyists have one primary goal- to represent their employers in the political arena, not by competing directly within it but by gaining favour with those already within. 

Outgoing Congressional Speaker John Boehner was seen
handing out cheques on the House floor seeking votes
against the cutting of tobacco subsidies.

Of course, this cannot be done by a friendship alone- since 1998 the nation’s largest lobby, the US Chamber of Commerce, has spent over $1.1bn on lobbying activities. The massive payments involved reflect lobbying’s effectiveness; PepsiCo spent $10m in 2009 lobbying to (successfully) prevent 24 states attempting to pass a soda tax. Even more spectacularly, current House of Representatives Speaker John Boehner was caught handing out cheques to fellow politicians written by a lobbying tobacco company- on the very house floor a debate on cutting tobacco subsidies was to be discussed. The tobacco company saw these payments as an investment to prevent their own subsidies being cut- and, unsurprisingly, the House voted against cutting them. 

But a more appropriate action of the lobby to the topic of economic inequality is the influence of corporations over minimum wage legislation. A minimum wage naturally affects businesses, leading them to either spend more or reduce staffing. However, in a period of constantly inflating costs of living, arguments are being made that minimum wages set by every state are all insufficient to maintain a decent standard of living. Governments around the world have sought to address this issue- the British government, for example, recently implemented a 'living wage' designed to provide enough for workers to maintain a decent standard of living.

Housing is a key indicator of living standards- yet in Florida, the minimum wage ($7.93) is less than half of what is needed to rent a two-bedroom home at official ‘Fair Market Rent’ calculations. Similar results arise in every state- the National Low Income Housing Coalition calculates that it would take two minimum wages to afford a Fair Market Rent nationwide, even with many one-bedroom properties.

Corporate taxes have sunk in recent decades as profits
have boomed.

Corporations have repeatedly successfully lobbied for tax cuts- a significant reason why corporate taxes have sunk in recent decades while profits have boomed (see graph). For example, Whirlpool Corporation spent just under $2m in the year 2011-13 in lobby fees chasing the renewal of lucrative tax credits (equivalent to tax breaks) for creating environmentally friendly appliances. The passing of this motion, thanks to the lobbying, was worth an estimated $120m in 2012-13- a healthy return on the initial investment, and government revenue lost. 

Both movements of corporate lobbies to maintain low minimum wages (such as the success of the National Restaurant Association over employees in 2014) and win tax breaks, subsidies and such from the government have drastically exacerbated the issue of wealth inequality- they have made it easier for those higher up in business to profit more, often at the cost of employees lower down.

The American Inequality Series: An Introduction

“The richest country, is not that which has the most capitalists, monopolists, immense grabbings, vast fortunes, with its sad soil of extreme, degrading, damning poverty, but the land… where wealth does not show such contrasts high and low, where all men have enough- a modest living…”

The famous words of 19th-century American poet Walt Whitman ring true perhaps more than ever in the United States of today. The previous few decades have seen economic inequality in the USA escalating with little end in sight- and recent economic crashes have not exactly helped the situation either. 

Economic inequality has been a theme reoccurring throughout the world, throughout history- from the time of Ancient Greece, where Plato described any city to be split into “the city of the poor, the other of the rich… at war with each other.”, to today where inequality is often a side effect of economic development (India, China are notable contemporary examples). 

But the USA has experienced a more unorthodox growth in inequality. Like China and India, in recent decades the US economy has been growing- yet an almost unique mixture of politics and economic culture has made the USA, according to the Credit Suisse Global Wealth Databook, the most unequal of the top 20 developed global economies, scoring a GINI coefficient of 85.1% (the higher the coefficient, the more the inequality). In comparison, the UK scored a relatively modest 67.7%, the aforementioned India 81.1% and China 69.5%. 

The GINI coefficient is the most common mathematical measure of wealth inequality, measuring income distribution. Considering a score of 0% means perfect equality (everyone has the same income) and 100% means total inequality (one person holds all income, everyone else has nothing), 85.1% shows how far the USA’s inequality has grown.

The last time the USA saw inequality at the levels of today was in the years leading to the Great Depression- so what is it that is driving today’s inequality? 

Over the next few weeks at poponomics we'll be discussing all things America, from the idea of the 1%, to education, to politics, to the very nature of capitalism itself, as we closely analyse this massively important question.

Stay tuned- the American Inequality series starts on Wednesday, as we turn our attention to the impact Corporations have had on American society.