FAIR MONEY

Face to Face with Inequality


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Student Loan Fairness Act

Rep. Karen Bass (D-Calif.) is trying to introduce a new bill to ease the burden of student loan debt. You can read about her efforts and become a Citizen Co-Sponsor at her website.

Summary

This new legislation will be a combination of two bills from the 112th Congress: Rep. Hansen Clarke’s Student Loan Forgiveness Act (H.R. 4170), as well as The Graduate Success Act (H.R. 5895).

This legislation would establish a new “10-10” standard for student loan repayment as the new standard repayment plan. In the “10-10” plan, an individual would be required to make ten years of payments at 10% of their discretionary income, after which, their remaining federal student loan debt would be forgiven.

The Student Loan Fairness Act would also combat crushing interest rates of public and private loans by capping federal interest rates at 3.4% and allowing existing borrowers whose educational loan debt exceeds their income to convert their private loan debt into federal Direct Loans, then enrolling their new federal loans into the 10/10 program.

This bill works to jumpstart the economy and adds to the public service workforce by rewarding students who enter public service professions and work in underserved communities with a reduced period for loan forgiveness.

The Student Loan Fairness Act also sends a lifeline to student borrowers who have fallen on difficult times. The bill seeks to ensure that no one will be pushed into poverty because of illness or loss of their job and extends interest-free deferments to unemployed borrowers of unsubsidized federal student loans and those enrolled in the “10-10” repayment plan.  It also seeks to replace the current, 10 year “Standard Repayment Plan” for the full amount of the loan balance with the “10-10” plan as the default repayment option for borrowers entering repayment.


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Inequality

Bill Moyers talked to economist Richard Wolff yesterday about the astonishing rise of inequality in the last 30 years. One telling fact is that peak purchasing power of the minimum wage was in 1968. Advancing inequality is astonishing not because it’s unprecedented, but because it’s happening in a so-called democracy, with the apparent consent of the governed.

Sadly, this aligns with a striking non-finding from the FAIR Money research: nobody talked of social injustice in connection with their personal finances, even though all but one or two had drawn an extremely short stick in the lottery of American life. All our participants internalized their difficulties as personal challenges, which may tip over the edge into personal failure anytime. This is why FAIR Money means to develop tools that give people more power in their own financial lives and, perhaps, a footing to participate differently in the political decision-making that affects them every day in every way.


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Should We Trust Economists?

An article in the Atlantic today asks the title question: Should We Trust Economists?

I like Noah Smith’s question as stated, but I think it can be improved. I suggest: What Kind of Economics Should We Trust?

The interesting part of Smith’s article touches on the relationship between formal models and empirical reality. Economists are wonderful at formulating models and finding faults in each other’s models but less wonderful at checking those models against the messy and contingent world of human behavior. Much to Noah Smith’s credit, he is quite open about the limitations of economics as it is practiced today:

The problem is that economists haven’t really built a model of the whole economy that works. A lot of smart people have spent a lot of time creating tools with names like “dynamic stochastic general equilibrium.” But as of this moment, those models can’t really forecast the economy like our meteorologists can forecast the weather. Furthermore, they contain a lot of obviously wrong assumptions. To give just one example, many of the models stipulate that companies are only allowed to change their prices at random times! Crazy, right? Economists include things like that to make the models easier to use, and they hope that those zany assumptions are actually decent approximations to the way the world really works. But even with these kludges in place, none of the existing models can do much to predict the economy.

The participants in Fair Money’s initial study are great examples of the limits of formal modeling. Little of what they reported to us could have been predicted by standard models of consumer behavior, in large part because the conditions they face would not be predicted by those models.

While I admire Smith’s openness about the limitations of economics, I have to take issue with his implicit assumption that economists are forever doomed to work in a world dominated by formal (but empty) models derived from mathematically informed premises, which bear an uncertain relation to reality.

For inspiration, Smith needs to look no further than the example of Harold Innis. Innis’ most famous book The Fur Trade in Canada: An Introduction to Canadian Economic History, which spawned the once well known “staples thesis,” was informed by several months of fieldwork on trade routes in the Canadian wilderness. Innis quite literally took a canoe trip along the traditional fur trading routes, taking notes and interviewing people as he went. As a result, Innis’ work has empirical teeth too often lacking in economic work and remains one of the better arguments against neo-liberal economic policy.

In the spirit of Harold Innis, Fair Money welcomes any economist to our project willing to loosen the tie and pick up a notebook. No paddling required.


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The Spirit of Indenture

Jeffrey Williams, a professor of English and literary and cultural studies at Carnegie Mellon, compares student loan debt to indentured servitude. Here’s the pith of his argument:

“the growth in debt has ushered in a system of bondage similar in practical terms, as well as in principle, to indentured servitude. The analogy to indenture might seem exaggerated but actually has a great deal of resonance. Student debt binds individuals for a significant part of their future work lives. It encumbers job and life choices, and it permeates everyday experience with concern over the monthly chit. It also takes a page from indenture in the extensive brokerage system it has bred, from which more than four thousand banks take profit (even when the loans originate with the federal government, they are still serviced by banks, and banks service an escalating number of private loans).”

It struck me how we would be reflexively outraged by 17th-century forms of indentured servitude, but we are pretty accustomed to modern versions of it, to the point of having to work at seeing it clearly.

A summary of Williams’ argument is available for free, while the full article is harder to lay hands on.


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Organized Money

In his new book The Unwindings, George Packer talks about “the default force in American life, organized money.” That rings so true and is so elegantly put, I felt compelled to look it up. In fact, it appears, FDR originated the phrase “organized money” and said it was as dangerous as the mob. I think we now know it is actually more pervasive and more destructive, but it certainly is interesting that the threat was apparent in 1936.


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Homeless in Silicon Valley

Moyers & Company aired a segment on homelessness in Silicon Valley this April. Moyer’s observes in the prelude:

California’s Silicon Valley is a microcosm of America’s new extremes of wealth and poverty. Business is better than it’s been in a decade, with companies like Facebook, Google and Apple minting hundreds of new tech millionaires. But not far away, the homeless are building tent cities along a creek in the city of San Jose. Homelessness rose 20 percent in the past two years, food stamp participation is at a 10-year high, and the average income for Hispanics, who make up a quarter of the area’s population, fell to a new low of about $19,000 a year — in a place where the average rent is $2000 a month.

All of the above is true, but it doesn’t capture the full range of economic inequality in Silicon Valley. The phrase “hollowing out the middle” Moyer’s discusses further on is more accurate. That term describes a process which has largely gone unseen and unheard in Silicon Valley, but which affects people across a surprising range of income brackets and occupations. Over the course of the Fair Money project we found people struggling at income levels in the six figures as well as at income levels far below that level. Homelessness is up in Silicon Valley, but homelessness is only the most visible example of a more general process.

Nor does Moyer’s segment do justice to the ingenuity and innovations deployed by those facing harsh economic realities. People do not passively accept their circumstances; they actively transform them. While the phrase “hollowing out the middle” and the signs of homelessness grab headlines, the process of filling in the gaps and getting on with living is a hopeful accompaniment.


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Rising Poverty

The Brookings Institution just released a report showing a 64% increase in poverty in suburban America between 2000 and 2011. (While the headline focuses on the suburbs, the cities saw a 29% rise in poverty, which by any reckoning is newsworthy in itself.) An infographic offers a quick synopsis, which talks about implications in terms of policy (mentioning schools and transit). The implications for the people in question undoubtedly are much more complex than that.


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The Student Loan: Grim Reaper of Hope

The Huffington Post reports some jaw-dropping numbers for projected profits from student loans in May 14 article entitled Obama Student Loan Policy Reaping $51 Billion Profit:  “The Obama administration is forecast to turn a record $51 billion profit this year from student loan borrowers, a sum greater than the earnings of the nation’s most profitable companies and roughly equal to the combined net income of the four largest U.S. banks by assets.” The whole article is a must-read


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The Lure of Stuff

A.O. Scott has an article about recent movies celebrating luxury goods, which offers an explanation of some of the behaviors we have seen in our research. Scott doesn’t offer any of the knee-jerk judgments about materialism that we are all prone to, at the same time that we feel the lure of beautiful things. Holding back the judgment is undoubtedly key to defining and building structure around what we want and may not be able to afford. The piece also reminded me of the work of Daniel Miller, who has studied the meanings of our stuff for a long time and concludes that the ability to find meaning in things is strongly connected to our ability to find meaning in relationships to other people. In The Comfort of Things, he writes “All my academic studies have shown that the people who successfully forge meaningful relationships to things are often the same as those who forge meaningful relationships with people, while those who fail at one usually also fail at the other, because the two are much more akin and entwined than is commonly appreciated.”


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Preying on Would-be Retirees

The New York Times has an article about “pension advances,” which may carry interest rates as high as 106 %. Here’s a little extract: “A review by The New York Times of more than two dozen contracts for pension-based loans found that after factoring in various fees, the effective interest rates ranged from 27 percent to 106 percent — information not disclosed in the ads or in the contracts themselves. Furthermore, to qualify for one of the loans, borrowers are sometimes required to take out a life insurance policy that names the lender as the sole beneficiary.”

lumpsumHere’s the website of the most polished one I could find. The company is mentioned in the NYT article. They seem to go to some length to make it appear not to be a loan–possibly because a loan is associated with an interest rate, and people might make uncomfortable inquiries when they realize they are taking out a loan. If you visit the website, a rep will attempt to chat with you after a few seconds. Maybe we should try it and see what they have to say for themselves.