What’s Missing from What You’re Hearing About Washington’s Budget

Last June, Gov. Jay Inslee made headlines when he signed a state budget totaling $43.4 billion in spending for 2017-19. Which of the following statements about that budget is true?

A. State spending will grow 15.3% by 2019.
B. State spending will grow 6.1% by 2019.
C. State spending will grow 3.2% by 2019.
D. State spending will grow 0.27% by 2019.

If you chose any answer, congratulations: you’re right (technically)! Let me tell you why – and what you can do with the often-contradictory things you hear about the state budget.

A. “State spending will grow 15.3% by 2019”

Washington’s Fiscal Year (FY) 2017 budget was $19.6 billion, and the FY 2019 budget is $22.6 billion, which is a 15.3% increase.[1] A “double-digit increase” isn’t only helpful for writing catchy headlines – it’s also useful rhetorical bait for conservative and anti-tax (well, anti-tax for the wealthy) activists. But this easy-to-understand calculation is also a pretty misleading one, as we’ll see below.

B. “State spending will grow 6.1% by 2019”

This figure takes inflation into account. Like every market, the amount the state pays for workers and goods changes from year-to-year – usually upward. So unless we account for inflation, simply comparing one budget year to another isn’t “apples-to-apples”.

Here’s an illustration of the difference – in the graph below, the “nominal” line shows spending in current dollars, while the “real” line show the equivalent amounts in 2017 dollars: [2]

Adjusted for inflation, FY 2019 spending ($20.8 billion) will be 6.1% higher than FY 2017 ($19.6 billion) – less than half the increase shown in answer A). But some important information is still missing.

C. “State spending will grow 3.2% by 2019”

Since Washington is a growing state – with just over 6 million people residing here in 2002, and more than 7.6 million projected in 2019 – our budget and spending comparisons also need to account for the fact that the cost of public structures and services goes up as population increases.[3]

To account for population change, we can use the same nominal and real numbers from above and divide by the state’s population for the corresponding year to get spending per capita:

So: adjusted for both population and inflation, the state spent $2,643 per capita in 2017, and will spend $2,728 in 2019 – an increase of just 3.2% ($85/person). You won’t see that figure in many headlines, let alone hear it in talking points from conservative legislators and activists advocating for budget cuts.

This particular chart also highlights why it’s important to know how a reference year fits into the bigger picture. Even using these population- and inflation-adjusted numbers, you could truthfully say that in 2019, Washington is a) budgeted to spend 12.6% less ($395/resident) than it did 17 years ago; or b) spend 14.9% more ($355/resident) than it did 5 years ago.

It all depends on the story you want to tell.

D. “State spending will grow 0.27% by 2019”

Political rhetoric commonly cites spending as evidence government is “too big” – but what exactly is the ruler used to make this judgement? Compared to Washington’s economy (Gross Domestic Product), state spending is well below what it was 10 years ago, and will rise just one-quarter of 1% (0.27%) from 2017 to 2019 [4]:

It’s the same story when you measure by state total personal income – state spending is at historically low levels, and is projected to rise a mere 0.16% from 2017 to 2019 [5]:

Why It Matters and What You Can Do

The old adage that “statistics can be made to prove anything – even the truth” seems applicable here, if a touch too cynical for my taste. And media coverage of Washington’s budget too often revolves around political wrangling, last-minute deal making, or short-term analysis, which doesn’t help.

The case I’m making is not to ignore the numbers or the news, but to remember: without the context of inflation, population, and historical perspective, budget numbers don’t tell us nearly enough about what our government is doing.

So the first thing you should do when you encounter news or opinions on the state (or any other government) budget – whether from a legislator, media outlet, or other source – yes, I’m looking at you, sketchy Facebook meme! – is pause to find out:

  • Are the numbers adjusted for inflation?
  • Does it account for population (or change in enrollment, number of people served, etc.)?
  • What’s the time period of reference for a particular percentage/dollar change? What happens if you use a different year for comparison?
  • Who came up with the source data, and is it public so I can I see it for myself?

If your source can’t or won’t give you those answers, they haven’t done their homework (or they don’t want to tell you the results), and you really can’t rely on them to provide a useful perspective.

Second, remember that Washington’s budget is really a list of public values. For example:

  • In our current society and economy, every child needs a lot more education than they did 50 or even 30 years ago – starting before they’re 5 and continuing after they’re 18. So we fund pre-K, K-12 and higher education.
  • A healthy community and environment are essential not just for our health, but for our quality of life and economic development – so we fund the Department of Ecology, Department of Health, and similar agencies.
  • We consider beautiful natural spaces a birthright for current and future generations to enjoy – so we fund State Parks and the Department of Natural Resources.

When you read or hear someone opine that “the budget” for something is too big or too small – or that some unit of government is spending too much or too little on something – they’re actually telling you something else: that it’s a lower (or higher) priority than it ought to be.

Now, there’s nothing wrong with that – just don’t get bogged down in their numbers (unless they haven’t given any, which ought to be a red flag!). Instead, think about the needs and priorities of the wide variety of families, neighborhoods, and communities in (as the case may be) your city, state or nation.

Then ask that person to explain exactly how their proposal will affect the structures and services necessary to deliver on the public values you care about. See what they have to say for themselves. You’ll learn more from that conversation than any graph or spreadsheet can tell you.


[1] Nominal budget data provided by fiscal.wa.gov, Historical Spending (annual), “Near General Fund – State” (NGFS). NGFS includes the General Fund, Education Legacy Trust Account, Pension Funding Stabilization Account, and Opportunity Pathways Account. The largest of these is the state general fund, which is the fund in which most general revenues are deposited; the other funds have more specific purposes. Washington receives additional federal funding (not shown here) that is reserved for specific services, such as Food Stamps, Medicaid, and children’s health. The state legislature also adopts separate budgets for transportation (using the gas tax and other dedicated revenue) and capital projects.

[2] Real (inflation-adjusted) numbers calculated by the author using the Implicit Price Deflator (IPD) provided by the Bureau of Economic Analysis and economic estimates from the Washington State Economic and Revenue Forecast Council. The IPD is a measure of inflation, similar to the Consumer Price Index – however, the IPD includes a measure of inflation specifically for state and local governments, which is used here.

[3] Yes, I hear you there in the back, and I get that not every person uses everything our state has to offer, and different public structures/services cost different amounts. Here’s the thing: in general, everybody benefits, directly or indirectly, when our state government delivers on widely shared/supported public values. Think of it like going to a buffet dinner. Everyone pays at the door, and everyone has access to the entire buffet (in this case, our state’s public structures/services). Maybe you may only eat salad and jello, while others enjoy turkey and potatoes.

[4] State Gross Domestic Product data through 2017 via U.S. Bureau of Economic Analysis, “Annual Gross Domestic Product by State”; 2018-2019 are author’s estimates, based on 3-year rolling average of prior years.

[5] Per Capita Income data through 2017 via U.S. Bureau of Economic Analysis, “Annual State Personal Income and Employment”; 2017 data based on Q1-Q3 average of same year, 2018-2019 data are author’s estimates based on WA Economic and Revenue Forecast Council reports.

Originally published at Economic Opportunity Institute

Social Security: The Swiss Army Knife of American public policy

social securityThe next time you hear a Very Serious Person’s pronouncement about Social Security’s supposedly impending doom, remember: an individual’s interest in seeing Social Security thrive is usually a) inversely proportional to their wealth but b) directly proportional to their empathy for others.

How else to explain the effort by the Trump administration and certain members of Congress to pull the economic rug out from under a huge swath of Americans by cutting Social Security?

In Washington state alone, nearly 1.3 million residents receive Social Security benefits – that’s 18% of our state’s population, who in turn provide income for 30% of the state’s households. But the benefits of Social Security go far beyond that:

  • Social Security supports the young, middle-aged, and elderly: It’s commonly thought of as something for retired people, but that’s only partly true: While 75% of recipients in Washington (969,835 people) are age 65 or older, 19% (245,536) of beneficiaries are age 18-64 and 6% (75,827) are under 18.
  • Social Security is a remarkably effective anti-poverty program: Social Security dramatically reduces poverty among the elderly in Washington, from 35.1% to 7.4%. Retirement benefits are modest, averaging $1,379/month ($16,549/year) – but without them, an additional 301,000 Washingtonians age 65 or older would have lived in poverty in 2015.
  • Social Security protects children and families against tragedy: For 98% of Washington’s 1.6+ million children and families, Social Security is the primary insurance protection in the event a parent or spouse dies or is disabled. In 2016, over 109,000 widow(er)s and children in Washington received an average $1,219/month ($14,631/year); over 211,000 disabled workers and their families received an average $1,061/month ($12,737/year).
  • Social Security bolsters local economies across the state: In 2016, Social Security benefits were equivalent to 5.2% of Washington’s total personal income, and generated more than $31 billion in economic activity, 192,000 jobs and $1.5 billion in state and local tax revenue. In December of that year, nearly $1.7 billion in Social Security benefits went directly to local economies across the state, from King County (288,000 people, $406 million) to Garfield County (660 people, $808,000).

Reducing benefits, limiting COLAs and/or increasing the retirement age will diminish economic security for nearly every American. It will disproportionately affect low- and middle-income families, women and all workers of color who, unlike wealthy individuals, often do not have significant retirement savings and must work further into old age in more difficult and physically demanding jobs.

For years, Americans have been subjected to a relentless PR campaign aimed at convincing them that Social Security probably won’t be there when they retire. Nothing could be further from the truth.

Social Security is the nation’s most secure and conservatively invested public trust. In anticipation of the “baby-boomer” generation’s retirement, Congress increased payroll taxes and reduced future benefits for millions of Americans in the early 1980’s, building a large surplus in the Social Security Trust Fund. The latest Trust Fund report projects Social Security can pay all benefits in full and on time until 2034, and 75% of benefits thereafter.

Federal lawmakers should be building on that strong foundation by making Social Security payroll taxes more equitable. While 94% of American workers (approx. 151 million people) pay Social Security tax on every paycheck, most of the earnings of the top 1 percent – and especially the top 0.1 percent – escape Social Security taxes.

That’s because workers and their employers each pay 6.2% of wages toward Social Security – but there’s a cap on taxable earnings. As a result, workers earning less than the cap ($127,200 in 2017) pay a higher Social Security payroll tax rate than those who make more.

Congress set the cap in 1977 and indexed it to average wage growth, intending it to cover 90% of all wages. But over the past several decades, wage growth among lower- and middle-income Americans has slowed, while wages at the top have grown dramatically. As a result, the cap now covers just 82% of aggregate wages.

That rising inequality in earnings accounts for 43.5% of the projected shortfall in Social Security funding I mentioned above. Put another way: if the cap on taxable income had continued to cover 90% of total earnings since 1983, the Trust Fund would have at least an additional $1.1 trillion today.

Scrapping the cap now would extend the Trust Fund’s surplus until 2087 – easily far enough in the future for policymakers to make additional adjustments if necessary. Only the richest 6.1% of workers (less than 1 in 15) would pay more. It’s a popular idea: two-thirds of Americans support requiring high-income workers to pay Social Security taxes on all of their wages (as is already the case with Medicare taxes).

To ensure Social Security continues protecting the economic security of working Americans, lawmakers should also expand and improve Social Security for workers and families, by:

Raising benefits overall: Adjusting the benefit formula to raise benefits for those who have had careers in low-wage occupations – such as childcare, restaurant service, or home health care – would better protect the financial security of people just scraping by, particularly older women and people of color.

Protecting the very elderly: Living to extreme old age, or outliving (or not having) a spouse greatly increases the risk of poverty. “Bump-ups” in benefits for seniors living past a certain age and increasing benefits for elderly widows and widowers would reduce financial insecurity among the most vulnerable people in our communities.

Honoring time caring for family: Caring for children or aging family members can cause many people, especially women, to reduce their hours or stop working, greatly affecting their retirement benefits. Reducing the number of years’ earnings used to calculate retirement benefits from 35 to 30 or 28 can eliminate this caregiving penalty. It would also help Millennials and others who had reduced access to employment due to economic downturns.

Restoring student survivor benefits: Before 1981, children of retired, deceased, or disabled workers continued receiving benefits through age 22 if they attended college. Now benefits end once a young person turns 18 and finishes high school. Reinstating college benefits could help children and their families achieve their dreams, as well as reduce socioeconomic barriers to education and lifetime opportunities.

Adopting the CPI-E inflation index: Over the past eight years, the current COLA formula has led to average monthly benefit increases of just over 1% and no increase at all in three of those years. The 2016 COLA was just 0.3%, or about $4.00/month for the average senior – barely the average cost of one Lipitor pill. Adopting the consumer price index for the elderly, or CPI-E, would be a more accurate means of calculating adequate Social Security COLAs.

Restoring office access & services: The Social Security Administration’s (SSA) expenses are self-funded and account for less than one penny of every dollar spent. While demand for SSA services (and staff workloads) have risen to record highs, over the past six years, the SSA’s operating budget has shrunk by 10% (after adjusting for inflation) due to Congressional budget cuts. This has resulted in the closure of one field office and the loss of 776 employees in Washington. Restoring full funding would help ensure people have dependable and easily accessible in-person service at Social Security offices, often at critical moments in their lives.

Social Security reduces poverty, protects kids and families, stimulates local economies, and promotes a dignified retirement. And contrary to what its wealthy opponents would have you believe, Social Security is not only fiscally sound – it’s ready for an upgrade. It’s time to “Scrap the Cap” and expand and improve Social Security to create a more equitable and secure future for all Americans.

More info. about the sources linked above is available in our latest Social Security fact sheet: Delivering on the promise of Social Security: America’s pension plan »

Originally published at EOI Online

What recession? Washington’s Top 1% saw 13.1% income growth from 2009-2011

When we talk about “getting us out of the recession”, who are we really talking about? A recent report by the Economic Policy Institute reveals that the top 1% has captured the lion’s share of economic growth since 1979, even shrugging off the Great Recession with a 13.1% income gain. Washington Top 1 Percent Stats

But with gains concentrated at the top rung of the economy, the majority of American families and the Middle Class are being left behind.

In Washington, income growth for 99% of income earners has decreased by 3.4% since 1979.  From 2009-2011, the bottom 99% in Washington lost 3.5% of total income.

For the top 1%, it’s a different story. Top income earners in Washington state saw a 13.1% increase of income during the economic downturn. Since 1979, Washington’s top 1% have seen a 125% growth in income.

Overall, the top 1% have snagged a whopping 59.1% of all income growth in Washington state since 1979.

The sharp disparity in growth between top earners and the middle-class has led to stagnated wages, rising costs of living, declining workplace benefits, high debt burdens for education and rampant retirement insecurity. In a nutshell: the Middle Class is disappearing while corporate coffers flourish.

Washington needs innovative ways to fight economic inequality and restore a prosperous Middle Class. We can’t afford to wait on the ‘other Washington’ to take action and fight for working families. A strong minimum wage, family and medical leave insurance for all, affordable higher education and universal retirement savings accounts are simple, proven policies that will support working families through the predictable booms and busts of life.

It’s also time to have a serious conversation about revenue. There’s no reason to give big tax breaks to billion-dollar oil companies at a time when schools are struggling and our roads and bridges are falling apart. Together, we can can make our state a more vibrant, prosperous place for every family – not just the ones fortunate enough to have millions.

From EOI Online

A Seattle Mom’s Story: Why We All Need Paid Sick Days

One evening in 2010, Monica’s baby had a seizure. After a frantic call to 911, a terrifying rush to the hospital, and a night spent by her son’s side, Monica had to get to her 7 am shift at a local Safeway. She hated to leave her son but she couldn’t afford to lose a day’s pay or risk her job. But now with paid sick days in Seattle, Monica — and more than two and a quarter million other workers across the county — don’t have to leave an ill child or go to work sick.

Learn more and get engaged in Washington’s campaign for paid sick days with the Washington Work and Family Coalition.

For a related story see The FAMILY Act is Badly Needed to Update the Outdated Workplace Policies That Are Hurting America’s Families. “Of the 188 countries for which data are available, the United States is one of just seven that do not guarantee paid maternity leave.” The FAMILY Act, introduced by Senator Kirsten Gillibrand (D – N.Y.) and Representative Rosa DeLauro (D – Conn.), will fix that.

Originally published at EOIOnline.

Join EOI Dec 3 for the Legislative Summit on Racial Equity

Too often, policies are blind to the true impact they have on low-income and communities of color. Well-intended hopes can result in disastrous outcomes when the voices of those most affected are not included or considered.hands

Here at EOI, we believe in the power of everyone coming to the table to have a stronger collective voice – that’s why we’re co-sponsoring the upcoming Legislative Summit on Racial Equity with the Washington Community Action Network (Washington CAN!) and more than 20 other community partners.

The summit will focus on 5 key areas critical to racial equity here in Washington:

  1. Statewide Paid Sick Days for all workers in Washington.
  2. The Basic Health Option increasing access to health insurance for low-income Washingtonians.
  3. The Dental Access Campaign, for more affordable dental care.
  4. The DREAM Act, to provide financial aid to more young aspiring citizens.
  5. The Youth Opportunity Act, helping rehabilitated youth reintegrate into society.

“The goal of the event is to bring together legislators and community members to discuss issues impacting communities of color and low-income communities in Washington. The focus of the event will be sharing personal stories, and outlining a proactive policy agenda that will move our state towards racial equity.

Legislators will have time to talk with community members, hear people’s experiences and gain a deeper understanding of 2014 policy pieces that will advance racial equity. There will be a call to action/commitment from the larger group to work on these issues, and we’ll be asking legislators to be champions for the various bills we’re advocating for.”

We hope you will join us!

What: Legislative Summit on Racial Equity
When: Tuesday, December 3rd from 6pm-8pm
Where: New Holly Gathering Hall (7054 32nd Ave S, Seattle, WA. 98118)
Registration: https://www.surveymonkey.com/s/LegSummit

Childcare and interpretation will be provided. Light snacks and refreshments will be served.

The Trillion Dollar Money Pump for the 1 Percent

By Stan Sorscher, EOI Board Member, and Labor Representative at the Society for Professional Engineering Employees in Aerospace

I saw the movie Inequality for All, where Robert Reich explains the depth and meaning of inequality in America. He paints a compelling picture.

Reich sets up the movie with a teaser: “Something happened in the mid-’70s.”

Indeed “something did happen in the mid-’70s.” For one thing, since then workers’ wages as a fraction of the total economy have lagged by over a trillion dollars per year. If workers’ wages had kept up with gains in productivity since the mid-70′s, wages would be double what they are now. Most new income goes to the top 1 Percent.

The movie translates my blue squiggly line in the graphic below  into human terms, seen in the faces of families, students, workers, co-workers and neighbors. Their struggle, disappointment, and diminished prospects answer another key question in the movie: Does inequality matter?

It matters. A lot.

Our current downward spiral leads us to a Lesser America — less social cohesion, less political stability, less prosperity, less ability to compete globally.

Figure 1. Workers' wages have fallen as a share of total GDP.

Figure 1. Workers’ wages have fallen as a share of total GDP.

The upward spiral of my parents’ era expressed American ideals — stronger communities, opportunity and fairness, shared prosperity, and investment in the future.

In one scene in the movie, Robert Reich is speaking to power plant workers facing layoff. One worker says the owners are probably smarter and more deserving than he is, and they should keep the gains he produces. He is happy to take whatever they offer.

We hear a different view from a co-worker’s wife. Her husband takes his job seriously, works hard and creates value through his work. Don’t rich people have enough already? What is gained when the 1 Percent have even more? Isn’t there some left over for her family?

This woman has just enough self-esteem to claim a fair share of the wealth her husband creates. Her husband’s work has dignity, and her family has a legitimate claim when our society divides the gains from work.

Attitudes matter. My daughter once told me that I usually make eye contact with housekeepers in a hotel, or a waiter filling my water glass, or a cab driver. Actually, most people I know in the labor movement do that. It’s a fundamental labor value — all work has dignity.

Look at this image from the Norman Rockwell Museum, representing a Vermont Town Hall meeting. The tradesman with dirty fingers has the attention of his neighbors. His interests matter.

It took decades to create this trillion dollar money pump for the 1 Percent.

First, advocates for the 1 Percent took away the dignity of work. In today’s political discourse, the tradesman in the Rockwell painting is thrown together with teachers, public employees, construction workers, grocery store clerks, students in public universities, and fast food workers as moochers, or parasites.

Second, public sentiment and public policies shifted bargaining power away from workers, in favor of the 1 Percent.

Business strategy replaced “stakeholder” value with shareholder value. These terms are obscure, but the very real effect was to abandon any commitment large businesses may have had to communities and workers.

Job security has largely vanished. The idea of “a career” has been replaced by contingent or precarious work. We see more part-time, and temporary work, “perma-temps,” unpaid interns, wage theft, and dumping older experienced workers in favor of cheaper younger workers. Good jobs are privatized or contracted out, where the same worker comes back at lower wages, with worse benefits and less job security. College professors — the ultimate knowledge workers — are displaced by precarious adjunct faculty.

When workers are regarded as commodities, businesses provide less training on the job, externalizing those costs to workers and communities. Pensions express a long-term employment commitment. The message of a 401(k) is portability — you will leave this job, probably in 3-5 years.

Executives aggressively oppose union organizing, spending millions of dollars to intimidate, discourage, delay, and punish union organizers. We hear less and less about a strike, where workers seek more or defend what they have. Now, it’s lockouts by employers demanding concessions — at ports, in hockey, basketball and football — even symphony orchestras in Minneapolis and New York!

Households have stopped saving, piling up huge debt instead. Families, living paycheck to paycheck, are constantly at risk of ruin from layoffs or medical expenses. Crushing student loans make recent graduates very compliant and risk-averse in the labor market. Changes in bankruptcy laws favor investors, and banks, but put homeowners, students and retirees in the back seat.

Speculative hedge fund income and capital gains are taxed at a fraction of rates the rest of us pay on wages and earned income.

Millions of good manufacturing jobs moved offshore. Job growth is strongest in lower-paid service jobs. One-sided trade agreements consolidate investor rights and corporate rights at the global level, handcuffing civil society in every country. Investor rights take priority over the environment, labor rights, human rights, public health, and prudent financial regulation.

The ultimate loss of bargaining power for workers is the billions spent to elect our political leaders. Having cornered the market in electoral politics, the 1 Percent are furiously discrediting the role of government, eroding worker protections, and dismantling programs that offered economic security and opportunity for past generations.

This shift in bargaining power happened for two reasons. In the early ’70s, the 1 Percent realized they could do it, and because we let them do it.

The power plant worker in the movie accepts his wage peonage, dependent on his patrón for his livelihood. His co-worker’s wife still believes in her husband’s career.

The first step toward disabling the trillion-dollar money pump is within our power as individuals. We can recognize a key human value — the dignity of work. We are all connected to our communities. We all do better when we all do better.

Originally published at EOI Online

Bad math, selective reporting on Pay It Forward undercut Chronicle of Higher Education critic

A column criticizing Pay It Forward in the Chronicle of Higher Education misses the mark – by a wide margin.

\Chronicle of Higher Ed Pay It ForwardIn a recent Chronicle of Higher Education article (subscription required), staff reporter Eric Kelderman writes that enthusiasm for Oregon’s Pay It Forward* debt-free degree plan “reveals either naïveté or willful ignorance” about the “risks and rewards…not to mention basic economics”. But his case is based on selective and narrow reporting that does a disservice to readers, policymakers, and students looking for solutions to America’s crushing student debt problem.

Lower Start-up Costs

Kelderman starts by calling out the “estimated $9 billion start-up cost” for Pay It Forward (PIF). He neglects to mention two very salient points: first, that dollar amount represents the cost of incorporating all 85,000+ students in Pay It Forward at one time; second, Oregon’s legislation mandates no such scope. It calls for a pilot project – one still being designed – which might include just one state university and one community college, only one cohort of students at a time, or other variations. That would cost quite a bit less. (But presumably wouldn’t make for such dramatic reading.)

Regarding payment of these start-up costs, Kelderman writes that it would come from either “state debt or philanthropy”, which is at once both too vague and too narrow. Some context proves useful. For example, in November 2014, Oregon voters will consider a proposed constitutional amendment to allow the Treasurer to issue bonds to create an “Opportunity Fund” for higher education. If passed, a portion of the proceeds of this bond issue could be dedicated to start-up costs for the pilot PIF program.

Two other viable ways to finance Pay It Forward start-up costs also go unmentioned: raising taxes, which Oregon voters have very recently shown a willingness to approve, and federal start-up funding, a proposal Oregon Senator Jeff Merkley introduced more than two weeks before the Chronicle published Kelderman’s article.

A Smarter Investment

Kelderman’s chief criticism of Pay It Forward is this: college students who believe they will earn more than the average graduate won’t participate, because they would pay more in total under Pay It Forward than they would with loans. That means the Pay It Forward trust fund won’t benefit from their (larger) contributions, and so won’t be sufficient to pay for future cohorts of students. Economists call this a problem of “adverse selection”. It’s appealing in its simplicity, but hardly the problem Kelderman makes it out to be, for two reasons.

First, he doesn’t account for the adverse selection created by debt financing a college degree. High debt is a disincentive to apply to and attend college. It also makes it harder for students who want to teach, be a nurse, or social worker (to pick just three of many professions that pay high social dividends, but not high salaries) to afford a degree. Pay It Forward has the potential to generate a tremendous amount of educational opportunity and social equity that is lost under today’s debt-financed degrees.

Second, even among students who “know” that they’ll make a good salary after college (and I think many college students today would find that a dubious assumption) Pay It Forward is more attractive than debt financing for one simple reason: it puts you in a stronger position from which to start life after college. Keep in mind that tuition is already at or above $10,000/year for one or more 4-year public universities in 21 different states.** Meanwhile, 80% of American households have less than $100,000 in annual household income. For the vast majority of students coming from those households, PIF is going to look like a much better deal than going into debt.

To understand why, put yourself in the shoes of someone who would seem very unlikely to use Pay It Forward: say, an ambitious lawyer- (or engineer- or entrepreneur-) to-be whose parents are well-off enough to have $50,000 in cash for you to use for college. You’ve been accepted at the University of Washington in Seattle, where tuition is about $12,000/year. Which of the following is your best option?

a) Borrow the money for school, graduate in debt (with the monthly payments to match) – but have the $50K to start your business or go to grad school afterward;

b) Graduate debt-free but without the$50K from your parents, because you spent it on 4 years’ tuition; or

c) Use Pay It Forward to graduate debt-free, and still have the $50K available to start your business or go to grad school, knowing that whether your start-up tanks or gets a big IPO…whether you have to string together internships or land in a big corporate law firm…you’ll still contribute just 3% of what you earn, no matter what.

Kelderman says students who expect to earn more will attend private colleges and thus avoid the system. But even for students coming from families with means – or those who are likely to go on to earn a good salary – Pay It Forward still offers no debt and a better cash flow position than student loans. That makes Pay It Forward far more attractive than debt financing, not just for upper middle class, but also middle class, working class, and low-income students.

It’s true that individual situations will vary, but therein lies the beauty and strength of Pay It Forward: it protects your options no matter your situation. Many of today’s college students instinctively “get” this key difference between Pay It Forward and student loans – even as many of the idea’s detractors fail to acknowledge it: PIF is a social insurance plan designed to protect you after you graduate. And as such, it gives students the freedom to choose a post-graduation path without being encumbered by personal debt.

Those who don’t need or want the insurance that Pay It Forward provides – probably students from families with over $100,000 in income – are already much more likely to find their way into private colleges, as has been the historical precedent. But even for those students and their families, public universities are going to have a very different value proposition with (effectively) no upfront tuition costs.

A Closer Look at Higher Ed Expenses

Kelderman’s second main criticism is that Pay It Forward’s trust fund won’t be sufficient to cover long-run costs, because even while state fiscal support for higher education is falling, expenses are climbing (he asserts) at twice the rate of inflation. However, his figures cover just one year – from 2011 to 2012 – and that does not a trend make. Nor do national numbers tell the complete story about what’s happening in each state, where clearly it’s possible for public higher education administrators and policymakers to take steps to control costs.

At the University of Washington for example, the total cost of education per student was $16,310 in 1990-91, and $17,103 in 2011-12. (All figures in 2012 dollars.) That’s an increase above inflation of just 4.8% over a period of 21 years. At the state’s comprehensive universities, the total cost per student has actually declined 15% (from $11,929 to $10,128) during the same time period. Community college costs have increased nearly 20%, but that’s still less than a 1% increase per year.

Credit where it’s due: Kelderman is correct to say that state support for higher education is falling dramatically. But he fails to connect the dots – it’s the cuts to state higher education funding which are driving the tuition increases that lead to high student debt.

A New Political Calculus

Kelderman’s greatest overreach is his condemnation of Pay It Forward because “there is no guarantee that states would continue to subsidize public colleges at the same level for a quarter century.” That’s true – but it’s also true of every public policy ever created, unless the political will exists to keep it in place. And as it turns out, that is actually one of Pay It Forward’s strong suits.

Even as ‘just an idea’, Pay It Forward is already reshaping political dialogue and intention. Students, families and policymakers – who have long understood that debt financing works well for Wall Street, but not for working families – now have a viable policy alternative to put on the table. That’s why at last count stakeholders in 14 different states are exploring Pay It Forward, from writing legislation to studying how the model might work for them.

As legislation, Pay It Forward can also create public policy mechanisms and help build political will to improve higher education funding and rein in tuition increases. For example, federal start-up funds could be made available only to states that maintain a minimum level of public funding for higher education. The high demand for Pay It Forward will increase the political inclination to maintain or even lower tuition – because doing so reduces the necessary size of the PIF trust fund, and makes it possible for that fund to reach self-sufficiency more quickly. And as the number of people participating in and benefiting from Pay It Forward grows over time, so will political resistance to attempts to undermine it or higher education in general.

Disrupting the Status Quo

Pay It Forward is an alternative to the high-tuition/high-debt status quo. There are important details to be worked out and improvements to be made, which is normal for any public policy proposal. But Kelderman’s critique doesn’t offer a viable alternative to either Pay It Forward or to the current high-tuition/high-debt system. Hopefully, future discussions of Pay It Forward can be used as opportunities to create workable policy designs that help resolve our nation’s student debt problem, instead of prolonging it.


*If you’re just tuning in, here’s a quick summary of the Pay It Forward (PIF) proposal:

A student can attend a public university or college without paying upfront tuition fees. In exchange, the student agrees to contribute a small, fixed percentage of their post-education income for a fixed period of time. Their contributions, together with other Pay It Forward participants, are pooled in a trust fund that (once fully funded) enables future students to also attend college without paying upfront tuition fees.

In contrast to debt financing (i.e., student loans), PIF doesn’t involve repaying a specific amount plus compound interest. Rather, participants are guaranteed a manageable contribution, regardless of income (or income fluctuations). The specific terms would vary depending on the state. In Oregon, Pay It Forward supporters estimate students would contribute about .75% for each year of school – so graduates from a two-year community college would contribute 1.5% of their income, and a four-year college graduate, 3.0%, for 20 years. Those who attend but don’t graduate would contribute a pro-rated percentage of their incomes.

Oregon’s legislation passed unanimously and was signed by Gov. John Kitzhaber in late July. It directs the state’s Higher Education Coordination Commission to develop a Pay It Forward pilot project for consideration by the 2015 Legislature, and to develop a plan for a four-year tuition freeze.

**States with tuition above $10,000 at one or more of their public 4-year universities:

Arizona, California, Colorado, Connecticut, Delaware, Illinois, Massachusetts, Maryland, Maine, Michigan, Minnesota, New Hampshire, New Jersey, Ohio, Pennsylvania, Rhode Island, South Carolina, Texas, Virginia, Vermont, Washington.

Originally published at eoionline.org

What does it take for a family to make ends meet in Washington state today?

The “poverty level”, as most people know it, is the income line below which a person or family is living in serious economic deprivation. But recognizing is what does a family need to live a modest, secure life – and how does that vary by where you live?

Listen to the discussion on KUOW’s Weekday right now.

The Economic Policy Institute’s (EPI) Family Budget Calculator measures the income a family needs in for housing, food, child care, transportation, health care, other necessities, and taxes.

As compared with official poverty thresholds such as the federal poverty line and Supplemental Poverty Measure, EPI’s family budgets offer a higher degree of geographic customization and provide a more accurate measure of economic security. In all cases, they show families need more than twice the amount of the federal poverty line to get by.

See family budget data for other Washington cities EPI »

Originally published at Washington Policy Watch

New interactive state budget tool a boon for Washington’s citizens, journalists, students

With state legislators still at an impasse over Washington’s budget, we’re unveiling a new interactive research tool that allows citizens, journalists, and students to easily examine how public dollars are being spent, and assess the impact of this year’s budget proposals on public schools and universities, hospitals, prisons, courts, health care, and other critical state services.

Visit the State of Working Washington to compare expenditures on budget items as broad as Public Education or as specific as the Department of Fish and Wildlife. For example: since 2009, state parks have lost 83% of their funding. Higher education now accounts for just 8.38% of the state budget – a loss of more than $650 million since 2002:

budgetviz1

Screenshot from the State of Working Washington

All charts and tables display both “real” (inflation-adjusted) budget numbers calculated by the Economic Opportunity Institute, alongside “nominal” (unadjusted) numbers provided by the Washington State Office of Fiscal Management.

More screenshots and examples from http://stateofworkingwa.org/budget:

budgetviz2

A pie chart showing distribution of funds to Higher Education in 2010

budgetviz3

A line chart showing Department of Fish and Wildlife expenditures from 2002 – 2013

budgetviz4

An itemized list of major spending areas in the 2010 state budget

Originally published at Washington Policy Watch

10 companies in the Fortune 500 with lower income tax rates than the average American family

A new report from Citizens for Tax Justice (CTJ) illustrates how profitable Fortune 500 companies in a range of sectors of the U.S. economy have been remarkably successful in manipulating the tax system to avoid paying even a dime of tax on billions of dollars in profits.

As a group, the ten companies paid no federal income tax on $16 billion in profits in 2012, and they paid zero federal income tax on $57 billion in profits over the past five years. All paid exceedingly low rates over five years – in fact, all but one had a lower tax rate in 2012 than a median-income family of four:

effective-tax-rates-2012

While General Electric, Facebook, FedEx and Pepco are fairly well-publicized tax avoiders, the CTJ report report also includes:

  • The oil and gas exploration company Apache, which paid no tax on $7.6 billion in pretax income over five years, enjoying a $169 million tax rebate over that period.
  • Health-care giant Tenet Healthcare, which hasn’t paid a dime of federal income tax on $905 million in U.S. income over the past five years, receiving a tax rebate of $51 million.
  • In the airline sector, Southwest Airlines paid no federal income taxes on $673 million in U.S. income last year, and actually received an income tax rebate of $45 million.
  • The Principal Financial Group, an investment services provider, which avoided all federal income taxes on its $919 million in 2012.
  • Ryder System, which provided truck rentals and services, paid a negative 2.3 percent federal income tax rate in 2012 and a negative 4.7 percent rate since 2008.
  • The Interpublic Group, a marketing and communications firm, also had negative tax rates both in 2012 and over the five-year period.

Get the full report from Citizens for Tax Justice »

Originally published at Washington Policy Watch