Is Education In The United States Really As Bad As We Think?

By Keenan Mann

I attended my niece's graduation from high school today.  I can hardly believe it.  It doesn't seem like that long ago that I watched her mother and grandmother put her in a backward facing car seat. Today, Jada drove her mother and grandmother to the graduation ceremony.

Most ceremonies follow a familiar script.  This one was no different.  It went something like this:

Opening Scene:  The graduates marched in to the "Pomp and Circumstance" theme song.
Rising Action:  A few students addressed the audience, followed by the Valedictory speech.
Climax:  School officials took turns reading off the list of graduating seniors one by one.
Falling Action/Resolution:  The graduates marched out again to "Pomp and Circumstance".

I should stipulate that while it followed the script, ceremony wasn't as painful as it might sound.  I actually couldn't have been more impressed with all of the student speakers.  But I will admit, I was dreading the name call out portion of the program.  Why?  Because there were 412 graduates!

The ceremony was held in a very large church.  We sat in the last row and occupied the four spots closest to the aisle (and a door).  I had every intention of making my escape once her name was called, but my wife was having none of it.  So I sat and watched and listened as parents and friends exploded in excitement, blurting out nicknames and cheers as their loved ones' names were called.

But in all my watching I also noticed a man, sitting in the same spot, one row in front of me.  I started paying attention to him.  I'm not sure why.  Then a name got called,  and I noticed him give just the slightest fist pump.  It wasn't a gesture done for the entertainment of the crowd, like so many others, and it obviously wasn't meant for the graduate to see.  It was just for him it seemed.  I figured he was related to the kid whose name was just called in some way.  I don't recall the first name , but I'm pretty sure the last name was Foster.  Then, a few names later, another subtle fist pump, then another, and after a few more names another. It went on like that until the entire roster had been read aloud.  I was intrigued.

So during the recessional, with "Pomp and Circumstance" once again playing in the background, I tapped him on the shoulder and asked him how he knew so many of the kids.  He said, "Oh, I'm a math teacher here.  I teach real world mathematics, which includes things like personal finance".  It all made sense. Then he added, "I counted one hundred and fifty kids that I've taught up there today!" The sense of pride was evident in his broad smile and,  in hindsight, in the very subtle yet emphatic celebratory gesture he performed with each familiar name called.

He made such an impression on me that I asked for his phone number and gave him mine with the idea that a future collaboration would be both fun and beneficial.  I also concluded (once again) that there are lots of good teachers out there and that educators are probably not the biggest problem with education.  That thought lead to my recollection of the following quote by the famous statistician and quality guru, W. Edwards Deming:

"A bad system will beat a good person every time"

And that quote lead me me on a bit of a quest for some perspective on the notion of the system as the real problem.  It was during that research session that I came across some statics on education in the US that startled me in a good way.

The data is from PISA (Program for International Student Assessment) which tested around 510,000 15 and 16 year olds from OECD  (the Organization for Economic Cooperation and Development) countries.  The top level summary data isn't surprising.  WIth the stipulation that a higher score is better than a lower one, the US average score was 500 while the average OECD score was 493.  Of the 34 OECD countries, the US ranked 17 overall.  Again, this isn't new stuff.

But this next data set is, at least to me.  You'll find it below.  It's from some research done by the National Association of Secondary School Principals (NASSP).  They concluded that:

"A closer look at the data tells a different story. Most notable is the relationship between PISA scores in terms of individual American schools and poverty.  While the overall PISA rankings ignore such differences in the tested schools, when groupings based on the rate of free and reduced lunch are created, a direct relationship is established."

Free and Reduced Meal Rate	PISA Score
Schools with < 10%	551
Schools with 10-24.9%	527
Schools with 25-49.9%	502
Schools with 49.9-74.9%	471
Schools with >75%	446
U.S. average	500
OECD average	493

With strong evidence that increased poverty results in lower PISA scores the next question to be asked is what are the poverty rates of the countries being tested?  (Listed below are the countries that were tested by PISA along with available poverty rates. Some nations like Korea do not report poverty rates.)

Country	Poverty Rate	PISA Score
Denmark	2.4%	495
Finland	3.4%	536
Norway	3.6%	503
Belgium	6.7%	506
Switzerland	6.8%	501
Czech Republic	7.2%	478
France	7.3%	496
Netherlands	9.0%	508
Germany	10.9%	497
Australia	11.6%	515
Greece	12.4%	483
Hungary	13.1%	494
Austria	13.3%	471
Canada	13.6%	524
Japan	14.3%	520
Poland	14.5%	500
Portugal	15.6%	489
Ireland	15.7%	496
Italy	15.7%	486
United Kingdom	16.2%	494
New Zealand	16.3%	521
United States	21.7%	500

Leveling the playing field

A more accurate assessment of the performance of U.S. students would be obtained by comparing the scores of American schools with comparable poverty rates to those of other countries.

Schools in the United States with less than a 10% poverty rate had a PISA score of 551.  When compared to the ten countries with similar poverty numbers, that score ranked first.

Country	Poverty Rate	PISA Score
United States	<10%	551
Finland	3.4%	536
Netherlands	9.0%	508
Belgium	6.7%	506
Norway	3.6%	503
Switzerland	6.8%	501
France	7.3%	496
Denmark	2.4%	495
Czech Republic	7.2%	478

In the next category (10-24.9%) the U.S. average of 527 placed first out of the ten comparable nations.

Country	Poverty Rate	PISA Score
United States	10%-24.9%	527
Canada	13.6%	524
New Zealand	16.3%	521
Japan	14.3%	520
Australia	11.6%	515
Poland	14.5%	500
Germany	10.9%	497
Ireland	15.7%	496
Hungary	13.1%	494
United Kingdom	16.2%	494
Portugal	15.6%	489
Italy	15.7%	486
Greece	12.4%	483
Austria	13.3%	471

For the remaining U.S. schools, their poverty rates over 25% far exceed any other country tested.  However, when the U.S. average of 502 for poverty rates between 25-49.9% is compared with other countries it is still in the upper half of the scores.

Mathematically Speaking

The results of the latest PISA testing should raise serious concerns.  However, the overall ranking of 14^th in reading is not the reason to be concerned. The problem is not as much with our educational system as it is with our high poverty rates. The real crisis is the level of poverty in too many of our schools and the relationship between poverty and student achievement. Our lowest achieving schools are the most under-resourced schools with the highest number of disadvantaged students. We cannot treat these schools in the same way that we would schools in more advantaged neighborhoods or we will continue to get the same results. The PISA results point out that the U.S. is not alone in facing the challenge of raising the performance of disadvantaged students.

U.S. % Poverty	Other Countries	PISA Score
U.S. (<10%)		551
	Korea	539
	Finland	536
U.S. (10-24.9%)		527
	Canada	524
	New Zealand	521
	Japan	520
	Australia	515
	Netherlands	508
	Belgium	506
	Norway	503
U.S. (25-49.9%)		502
	Estonia	501
	Switzerland	501
	Poland	500
	Iceland	500
U.S. (Average)		500
	Sweden	497
	Germany	497
	Ireland	496
	France	496
	Denmark	495
	United Kingdom	494
	Hungary	494
	Portugal	489
	Italy	486
	Slovenia	483
	Greece	483
	Spain	481
	Czech Republic	478
	Slovak Republic	477
	Israel	474
	Luxembourg	472
U.S. (50-74.9%)		471
	Austria	471
	Turkey	464
	Chile	449
U.S. (over 75%)		446

The statistics are powerful, but the author's assertion that the system is not the problem may be a bit off the mark, at least the way W.E.B Dubois defines it below:

"Education is that whole system of human training, within and without of the schoolhouse walls, which molds and develops men." 

Poverty does and always will exist.  The US education system, if it is to improve the results of the most economically disadvantaged among us, will have to work at finding solutions that address the "whole" cited above.  In other words, it has to be willing to help find solutions or at least experiment with ideas proposed by outsiders which might lead to better results for poor kids.  I suspect those solutions are not incremental and traditional but rather sea change and radical and I hope we can soon muster the courage to begin the improvement process in earnest.

KM

Warren Buffet Weighs In On Minimum Wage Debate

By Keenan Mann



In a piece for the Wall Street Journal titled, "Better Than Raising The Minimum Wage", Warren Buffet, the chairman of Berkshire Hathaway, makes a well reasoned case for not distorting the labor market while still providing assistance to those in need.  In making his case, Mr. Buffett doesn't cast aspersions on the rich for being rich nor does he berate the poor for simply not working hard enough. He also dismisses the idea that getting an education is a panacea.  His solution, though he doesn't call it that, is wealth redistribution.  But it's not as cringeworthy as it may sound.  See the full article below:

"The American Dream promises that a combination of education, hard work and good behavior can move any citizen from humble beginnings to at least reasonable success. And for many, that promise has been fulfilled. At the extreme, we have the Forbes 400, most of whom did not come from privileged backgrounds.

Recently, however, the economic rewards flowing to people with specialized talents have grown dramatically faster than those going to equally decent men and women possessing more commonplace skills. In 1982, the first year the Forbes 400 was compiled, those listed had a combined net worth of $93 billion. Today, the 400 possess $2.3 trillion, up 2,400% in slightly more than three decades, a period in which the median household income rose only about 180%.

Meanwhile, a huge number of their fellow citizens have been living the American Nightmare—behaving well and working hard but barely getting by. In 1982, 15% of Americans were living below the poverty level; in 2013 the proportion was nearly the same, a dismaying 14.5%. In recent decades, our country’s rising tide has not lifted the boats of the poor.

No conspiracy lies behind this depressing fact: The poor are most definitely not poor because the rich are rich. Nor are the rich undeserving. Most of them have contributed brilliant innovations or managerial expertise to America’s well-being. We all live far better because of Henry Ford, Steve Jobs, Sam Walton and the like.

Instead, this widening gap is an inevitable consequence of an advanced market-based economy. Think back to the agrarian America of only 200 years ago. Most jobs could then be ably performed by most people. In a world where only primitive machinery and animals were available to aid farmers, the difference in productivity between the most talented among them and those with ordinary skills was modest.

Many other jobs of that time could also be carried out by almost any willing worker. True, some laborers would outdo others in intelligence or hustle, but the market value of their output would not differ much from that of the less talented.

Visualize an overlay graphic that positioned the job requirements of that day atop the skills of the early American labor force. Those two elements of employment would have lined up reasonably well. Not today. A comparable overlay would leave much of the labor force unmatched to the universe of attractive jobs.

That mismatch is neither the fault of the market system nor the fault of the disadvantaged individuals. It is simply a consequence of an economic engine that constantly requires more high-order talents while reducing the need for commodity-like tasks.

The remedy usually proposed for this mismatch is education. Indeed, a top-notch school system available to all is hugely important. But even with the finest educational system in the world, a significant portion of the population will continue, in a nation of great abundance, to earn no more than a bare subsistence.

To see why that is true, imagine we lived in a sports-based economy. In such a marketplace, I would be a flop. You could supply me with the world’s best instruction, and I could endlessly strive to improve my skills. But, alas, on the gridiron or basketball court I would never command even a minimum wage. The brutal truth is that an advanced economic system, whether it be geared to physical or mental skills, will leave a great many people behind.

In my mind, the country’s economic policies should have two main objectives. First, we should wish, in our rich society, for every person who is willing to work to receive income that will provide him or her a decent lifestyle. Second, any plan to do that should not distort our market system, the key element required for growth and prosperity.

That second goal crumbles in the face of any plan to sizably increase the minimum wage. I may wish to have all jobs pay at least $15 an hour. But that minimum would almost certainly reduce employment in a major way, crushing many workers possessing only basic skills. Smaller increases, though obviously welcome, will still leave many hardworking Americans mired in poverty.

The better answer is a major and carefully crafted expansion of the Earned Income Tax Credit (EITC), which currently goes to millions of low-income workers. Payments to eligible workers diminish as their earnings increase. But there is no disincentive effect: A gain in wages always produces a gain in overall income. The process is simple: You file a tax return, and the government sends you a check.

In essence, the EITC rewards work and provides an incentive for workers to improve their skills. Equally important, it does not distort market forces, thereby maximizing employment.

The existing EITC needs much improvement. Fraud is a big problem; penalties for it should be stiffened. There should be widespread publicity that workers can receive free and convenient filing help. An annual payment is now the rule; monthly installments would make more sense, since they would discourage people from taking out loans while waiting for their refunds to come through. Dollar amounts should be increased, particularly for those earning the least.

There is no perfect system, and some people, of course, are unable or unwilling to work. But the goal of the EITC—a livable income for everyone who works—is both appropriate and achievable for a great and prosperous nation. Let’s replace the American Nightmare with an American Promise: America will deliver a decent life for anyone willing to work."

The EITC is redistribution pure and simple, so it's not perfect.  But it's better than forcing private citizens/companies to bear that burden, thereby putting the ongoing viability of their enterprises at risk.  Of course, nobody calls minimum wages laws wealth redistribution, but that's exactly what they are - government mandated, privately supported redistribution programs.  And they've largely been a failure.  That's because, as UC-Irvine Economics professor David Neumark put it recently in an article for the LA TImes, "data indicate that minimum wages are ineffective at delivering benefits to poor or low-income families, and that many of the benefits flow to higher-income families. That's because minimum wages target low wages rather than low family incomes. And many minimum-wage workers are not poor or even in low-income families; nearly a quarter are teenagers who will eventually find better-paid jobs. Moreover, most poor families have no workers at all.  As a result, for every $5 in higher wages that a higher minimum imposes on employers, only about $1 goes to poor families, whereas roughly twice as much goes to families with incomes above the median." 

Ideally, we wouldn't need to redistribute income.  But since we apparently do, let's call it what it is and get on with it rather than politicizing the issue and making villains out of entrepreneurs.


KM

Sound Bite Politics, Government Mandates and Freebies

Free college is a hot topic these days. But how can college be free? Are the professors and administrators going to donate their services? Of course not.


See Student Debt Is Hot Topic for 2016 Field which is subtitled 'Republicans focus on driving down tuition prices, Democrats on pumping more federal funds into public universities.' Of one thing we can all be sure -- whatever the case, in the end, taxpayers will pay --- both current and future ones.


19th century French political economist and theorist Frederic Bastiat said this about government, "The state is that great fiction by which everyone tries to live at the expense of everyone else." Some things never change.


Economic growth is required for the payment of our bills. We don't have enough economic growth. Is this a permanent condition and the way forward? Let's hope not.


We can debate minimum wage laws, free college, Social Security, ObamaCare and even how much to spend on the nation's defense. But somebody's going to have to pay for what we spend.


There's no free lunch. See Health Insurers Seek Healthy Rate Boosts which is subtitled 'Proposals set the stage for debate over federal health law's impact.'


Don't Be So Sure the Economy Will Return to Normal has this to say in part about what's ahead for our American economy:


"It is hard to avoid the feeling that our current economic problems are more than just a cyclical downturn. We know that the economy has gone through some bad times. But what exactly are we experiencing?

One relatively optimistic view is that observed deficiencies — like slow growth in real wages and the overall economy, persistently low interest rates and low levels of labor participation — are merely temporary. In this view, these problems will dwindle after manageable problems like high levels of public or household debt have been reduced.

Another commonly heard view is that we made the mistake of letting the last recession linger too long, allowing some of its features to became entrenched. That analysis suggests that if we correct past policy errors, whatever they may have been, an underlying normality will re-emerge

No one knows whether or how much of a reset may be underway. Yet I can’t help but wonder which features of current data might prove harbingers of larger, more permanent changes to come. . . .

The debate over the economy these days isn’t just about income inequality and what should or should not be done about it. Perhaps the most crucial issue is whether economies will return to normal conditions of steady growth, or whether we are witnessing a fundamental transformation, unveiled in bits and pieces. Nominations for the nature of that transformation include a “robot economy,” a new political economy where elites have too much power or, perhaps, a new global economy where the United States no longer holds such a dominant position, to the detriment of American firms and workers.

No one knows whether or how much of a reset may be underway. Yet I can’t help but wonder which features of current data might prove harbingers of larger, more permanent changes to come."

Summing Up

In the end, the future is up to us --- each and all of us --- not the politicians.

We soon will have another expensive, emotional and largely sound bite driven national election season underway.

But don't look for any of the politicians to seriously address, let alone propose, workable and effective private sector initiated solutions for our huge problems with slow economic growth and its debilitating effects on all Americans.


In fact, don't even expect a serious discussion of the real issues facing our nation's future health and prosperity.


The politicians either don't know what to say or don't think we want to hear the truth.


Today's American politics is very much a 'Gruber' fantasy land where the truth isn't told or even welcome, things are 'free' and a return to 'normal' lies just around the corner.


It's a 'vote for me and I'll set you free' falsehood.


Sadly, that's my take.


Thanks. Bob.

An Innovative Minimum Wage Law In Los Angeles?

By Keenan Mann

Imagine for a moment that you are in need of a new pair of running shoes.  You know of a strip mall that has two shoe stores so you get in your car and make the short drive.  The first store, Uncle Sams's Sports, is closer to where you parked, so start there.  When you walk in you're greeted by the manager who asks if he can help you.  You politely tell him that you're looking for a pair of running shoes but you also indicate that you'd like to browse on your own.  After ten minutes or so of looking at display models, you zero in on a shoe that isn't quite what you were looking for from a functional standpoint but is aesthetically pleasing.  Then you flip the display model over and discover the pair is priced at $60 more than you expected.  So you replace the shoe and proceed towards the exit, intending to visit Freedom Footwear, which is two storefronts down. As you pass by the register, the manager asks if you've found everything okay. You tell him you found a pair you liked but since the price was more than you wanted to pay, you were going to Freedom to see what they had to offer.

At that point the store manager tells you that you are not allowed to do that and insists that you retrieve the shoes you liked, bring them to the register, and complete your purchase.  When you try explaining again that price is more than you want to pay, the clerk informs you that, by law, you must make the purchase.  He goes on to explain that he has overhead to cover (it turns out he's the owner too).  He says to you, "There are employees to be paid, the rent is due, and I have to pay myself a salary too.  That's why we worked so hard with our city council to get a law passed that forces people who come into our stores to buy our products at council-approved prices."  He goes on to tell you about the three kids he has to feed and the fourth on the way and explains to you that it's your duty to help him with these things.

You tell him that while you certainly appreciate his situation, having one of your own, you don't believe you have any obligation to support him.  You say to him, "I'm just here to buy a pair of shoes and I'm perfectly fine with your store deriving a benefit from our exchange but please understand that is not my primary objective.  In fact, it is not among the very short list of objectives I have in this regard.  I know you have a store to run, but I have my own budget to manage and purchasing these shoes from you at this price is inconsistent with my budgetary objectives."

You bid him good day and leave the store, not realizing or caring that there are surveillance cameras everywhere.  A few days later you receive a letter from the city government regarding your shoe shopping incident. It seems you have broken the law and the city has levied a fine in the exact amount of the purchase price which will start accruing interest in 30 days.  You've barely had time to recover from the shock when you notice protesters on the sidewalk in front of your house.  It's the store manager and some of the workers, all holding signs that read, "Uncle Sam Wants You to Buy His Shoes".



Sounds silly right?  You can't be forced to buy something at a price you don't agree to right?  But that's exactly what minimum wage laws do.  They force businesses to buy labor at prices they might not otherwise pay.  There is no difference, in other words, between the shoe shopper and the labor shopper.

Of course, those who favor legal minimum wage mandates argue that the wage thresholds are necessary to lift people out of poverty and pay them living wages.  And while that sentiment is noble, it is misguided  (more on that point in a separate post) and it places a responsibility on the businesses in question that is well beyond reason.

The business owner doesn't open a store to help people raise families and escape poverty.  He does it so he can make a living.  If others are able to make a living and raise families, that is secondary benefit.  If those same others need to make a living and raise families off their wages and they can't convince the business owner to make the necessary adjustments, they should sell their services to a business willing to pay them what they desire, if they can.  In the end, if the business owner is unable to attract labor at the wages he is offering, he will have to raise his wage levels or go out of business.

That's how it works.  But someone forgot to tell that to the city council members in Los Angeles. According to an LA Times article, they recently voted to raise the minimum wage to $15.  The plan is to have the $15 phased in by 2020.  But on top of that, by 2022 the minimum wage will be indexed to inflation, which means as prices rise the minimum wage will rise automatically.

The problems inherent in that approach seem obvious.  The story's author even pointed out that, "Autopilot inflation adjustments will exacerbate price increases across the board at....The higher prices would in turn push up inflation measures, resulting in a never-ending spiral of wage increases".

But University of Washington Professor Martha Klawitter saw the inflation indexing arrangement as an obvious solution rather than a problem as she said, "This is a way to allow the minimum wage to respond directly to the economy, to adapt to the current conditions automatically without requiring the political process to intervene."  Mrs. Klawitter seems a bit confused about what market forces are and how they differ from governments mandated wage hikes.

She might want to get barbecue shop owner Todd Schwartz to help her bone up on real world economics as he explained it very succinctly with the following, "Wages don't come from me; they come from the customer.  What is the most you are willing to pay for a barbecue sandwich?"

Todd Schwartz for City Council President!


KM

Unfunded Public Sector Pensions Are Harmful to Our Citizens' Health ... Same's True for Social Security and Medicare

There used to be an old radio commercial by Fram Oil which encouraged car owners to change filters regularly by saying, "You can pay me now, or pay me later."

That reminds me of the underfunded public sector pensions in many American cities and states today. And then, lest we forget, there are the biggest elephants in the room --- Social Security and Medicare.

Public sector pensions operate pretty much on the pay as you go method which obligates future generations of taxpayers to make good on the promises made by today's governing officials to future retirees. But there are huge problems developing across America with that unsustainable and unaffordable pay/go way of governing.

First, there's the unaffordability issue related to undeniable demographics. We're getting older as a society and fewer working age taxpayers will be sent the bill to pay for more retirees down the road. More leaving the workforce than entering it, in other words, means fewer payers and more goers. It definitely doesn't make for a healthy financial situation.

Second, the promises which have already been made are largely underfunded. The money isn't there to pay these future pension promises unless pension assets grow at unrealistically high rates over time.

Third, the rate of return assumptions used by governing entities to fund the promised pensions are unrealistic and too optimistic given our economic growth, employment, wages, debt service and inflation outlooks going forward. That in turn simply means we're going to be even more underfunded down the road than we are currently absent huge changes in either additional taxation or lower than promised benefits. 'Fram' again.

Fourth, I could go on but by now you get the message. Treat your IRA/ 401(k) opportunities seriously and pay attention to the enormous mess in taxpayer obligations for retirees in the public sector as well as Americans' alarmingly large and growing financial dependence on public sector pensions, Social Security and Medicare.

A Debt-Ratings Rift Rattles Chicago tells the tale of one large American city where using the word mess is an understatement of epic size:

"The world’s two largest ratings firms are divided in their view of Chicago’s fiscal health as the city grapples with a $20 billion pension hole, a potential preview of battles expected to break out around the U.S. as retirement obligations mount.

Moody’s Investors Service lowered Chicago’s bonds to junk status last week while rival Standard & Poor’s Ratings Services settled on an investment-grade A-minus rating , a more optimistic view of the nation’s third-largest city. As recently as five years ago, both firms gave Chicago the same grade of double-A-minus.

The highly unusual four-notch ratings gap is the result of a change Moody’s made two years ago when it decided it would no longer rely on the investing returns targets submitted by cities and states to calculate pension costs. Its own estimates are more conservative, meaning the city’s pension problems look worse.

Chicago represents the most prominent example yet of how diverging views of bulging pension obligations can have huge ramifications for financially strapped cities. The split views are befuddling investors and the bearish grades could lead to higher borrowing costs, difficulties refinancing debt and new doubts about navigating the $3.7 trillion municipal-debt market. . . .

Projected pension costs can vary greatly based on what state or local governments select as their return assumptions. Public officials are under pressure to keep those targets high as a way of avoiding higher taxes or benefit reductions as they try to recover from heavy investment losses incurred during the 2008 financial crisis.

State and local pension liabilities ballooned at more than twice the rate of their assets in the aftermath of the crisis, according to the National Association of State Retirement Administrators. Public pensions now have about $3.8 trillion in assets versus $5 trillion in liabilities . . . .

Philadelphia has $5.3 billion in unfunded pension liabilities, while Phoenix has $2.5 billion and Atlanta has $1.5 billion . . . .

What makes Chicago unique is the magnitude of its retirement shortfall. The city has only half the assets it needs to cover its pension liabilities, or the equivalent of four years of general operating budgets. Mr. Emanuel’s cost-cutting pension overhaul looks less likely to win court approval after the Illinois Supreme Court struck down a similar proposed law earlier this month that sought similar benefit cuts.

“As Mayor Emanuel has repeatedly stated, the City of Chicago’s financial crisis is real, urgent, and has been decades in the making,” said Chicago Deputy Mayor Steve Koch in a statement. . . .

Last week’s Moody’s downgrade—the fourth in two years for Chicago—could trigger around $2 billion in accelerated payments by the city, Moody’s said."

Summing Up

Public sector finance throughout America is a mess.

That's true for government agencies as well as many cities, states and the nation as a whole.

The unfunded debt and future obligations problem goes far beyond the acknowledged $18 trillion debt at the federal level.

As Donald  Rumsfeld might say, taken as a whole, it's a 'known unknown' but definitely well in excess of $100 trillion and more likely $200 trillion.

That's not being an alarmist. It's just facing facts.

It's time to get real.

That's my take.

Thanks. Bob.

Hilary-ous

By Keenan Mann



From a Hilary Clinton speech on May 18th, 2015 in Mason City, Iowa:

“There’s something wrong when the average American CEO makes 300 times more than the typical American worker or when hedge fund managers themselves make more and pay less in taxes than nurses and truck drivers.”

According to a fact check done by The Washington Post however, the average CEO makes $200,000 a year.  It''s actually only the top tier CEOs that make $15 million annually, or 300 times the average worker. The second line about hedge fund managers paying less in taxes was also patently false.

So Hilary tried to shore up her 'I'm here to protect you against the greedy fat cats' message one day later in Cedar Falls, Iowa with the following:

“People aren’t getting a fair shake. Something is wrong when CEOs earn more than 300 times than what the typical American worker earns and when hedge fund managers pay a lower tax rate than truck drivers or nurses.”

Now her conscience was clear having removed the word average and having changed "pay less in taxes" to "pay a lower rate".  But it shouldn't have been clear according to more fact checking done by The Post.  They gathered data from the Bureau of Labor and Statistics that put the median salaries for a nurse and a truck driver at $66,640 and $39,901 respectively.  At those levels and after all deductions and exemptions are taken, their effective tax rates would be less than 15% and less than 10% respectively.  That compares to the hedge fund manager's high earner capital gains rate (the fact checker notes that hedge fund managers are able to have much of their income taxed as capital gains rather than ordinary income through a tax provision known as carried interest) of 20% plus a 3.8% surcharge to bolster medicare for a total 23.8%.  So even when considered on a percentage basis, which is kind of silly since we pay our tax bills with cash, not percentages, the hedge fund manager seems to pay more than his "fair share". 

So what's the point?  I think Ayn Rand nailed it way back in 1957 when she said the following through one of her characters in Atlas Shrugged:

“Learn to distinguish the difference between errors of knowledge and breaches of morality. An error of knowledge is not a moral flaw, provided you are willing to correct it; only a mystic would judge human beings by the standard of an impossible, automatic omniscience. But a breach of morality is the conscious choice of an action you know to be evil, or a willful evasion of knowledge, a suspension of sight and of thought. That which you do not know, is not a moral charge against you; but that which you refuse to know, is an account of infamy growing in your soul. Make every allowance for errors of knowledge; do not forgive or accept any breach of morality.” 

Oh, by the way, her son-in-law is a hedge fund manager.  I wonder whether she wears a garlic necklace to ward him off at family get togethers or looks to him for advice on where to put the well over 100 million dollars in speaking fees she and her husband have made over the last 14 years.

There is indeed something wrong, as Mrs. Clinton intimated in her speeches, but we're the only ones who can fix it.  


KM

Housing's 'New Normal' .... Year to Date Starts are 7.6% Stronger Than Last Year But 44% Lower Than the 2007 Peak Year

The U.S. economy is recovering, albeit slowly, from its mult-year recession. That's a sign that better days lie ahead. How far ahead, and how much better those days will be, those are the relevant questions to ask.

In my view, we are best advised not to believe that the various small signals of economic improvement offer solid proof that what we used to refer to as a normal economy is coming anytime soon. Times have changed and the new normal is upon us. We'll take housing as an example of what we mean by the 'new normal.'

First, let's consider the good news. Yesterday we learned that housing starts for the month of April were up 20% from last year. For the first four months taken as a whole, they've increased a solid if unspectacular 7.6%.

Now let's look at this through our new normal lens. Despite this improvement, new home starts were still 44% lower than they were in 2007. That's the bad news.

The lower 'new normal' is here to stay, it seems.

Home Building Surges to Best Pace Since 2007 has the good news/bad news story:

"U.S. home building surged in April to the highest level since before the recession officially began, a sign of thaw in the housing market during the crucial spring selling season.

U.S. housing starts rose 20.2% from a month earlier to a seasonally adjusted annual rate of 1.135 million in April, the Commerce Department said Tuesday. That was the highest reading since November 2007, and the biggest percentage increase since February 1991. New applications for building permits, a bellwether for construction in coming months, increased 10.1%. . . .

The increased activity was broad-based. Starts on single-family units, which exclude apartments and represent almost two-thirds of the market, climbed 16.7%, the most since January 2008. Multifamily units, including apartments and condominiums, rose 27.2%. . . .

Construction levels for new homes have been historically low during the recovery, though the latest figures suggest firming demand. . . .

From a year earlier, housing starts were up 9.2% in April while permits rose 6.4%.

Although housing data has been volatile over the past several months, the latest figures are looking up. A forward-looking gauge of U.S. home purchases rose for the third straight month in March, the National Association of Realtors said last month. A separate report from the industry group showed sales of previously owned homes rose to the highest level in 18 months in March.

But U.S. home builders appear less optimistic this month. The National Association of Home Builders’ confidence index fell for the fourth time in five months, to a reading of 54 in May, the group said Monday. A reading above 50 means most builders generally hold a favorable views of the market for newly built, single-family homes.

From a broader perspective, housing starts are off to a steady but not spectacular start to 2015. Construction starts for single-family homes for the first four months of the year totaled 209,400, which is up 7.6% from the same period last year but still nearly 44% less than the same period in the headier market of 2007. John Johnson, chief executive of David Weekley Homes, a closely held builder operating in 12 states, says the moderate, year-to-date pace is a good reflection of what he’s seeing.

Weekley’s construction starts were up 10% in April from a year earlier. Mr. Johnson said the Houston-based builder’s sales have improved in each month so far this year.

“I think it’s that people feel comfortable about buying,” said Mr. Johnson, whose company sold 3,000 homes last year. “It’s just a good, steady market—about what we expected.”"

Summing Up

The new normal is a fixture of this slow going and debt ridden U.S. economy. We can anticipate that new home construction will remain below the 2007 peak for many years to come.

A substantial part of the reason for the lower than historical new home starts is that 50% of U.S. college graduates require continuing financial support from their parents. See Half of college graduates expect to be supported by their families.

Thus, for many new adults, home ownership, marriage and families will have to wait, as student debt, other burdensome debt levels and few high paying jobs are facts of life in this new normal slow growth economy.

So while it's nice to see a rebound in housing starts for the month of April, let's not get carried away.

That's my take.

Thanks. Bob.

Free Choice and Education in Baltimore ...Teachers Unions and Politicans Team Up to Make Sure the Kids Don't Have a Chance to Succeed

The so-called blue states have big cities that are usually governed by a cozy partnership of Democratic officials and their co-managers, public sector union leaders.

As a result of this joined-at-the-hip relationship, too many American cities have lots of very big problems, including financial and educational. Baltimore, Chicago, Detroit, New York, Washington, D.C. and several California cities immediately come to mind. See Chicago's Mayor Faces Fresh Hurdles for an overview of the critical financial issues facing that city and its citizens.

But today let's zero in on what's happening in Baltimore and its schools. As we said in yesterday's post, education and jobs are very much in need of a lasting solution if the poverty stricken areas of America are ever going to improve. What we're doing and have done for far too long is insane.

Bad Deal in Baltimore is subtitled 'Progressives and unions gut a charter-school reform:'

"The Baltimore riots produced national lamentations about urban poverty, but don’t expect much to be done about it. Witness how the Maryland legislature gutted a charter-school reform that could have offered an escape for poor children.

Baltimore schools are some of the worst in the country. According to the 2013 National Assessment of Educational Progress, a mere 14% of Baltimore fourth graders and 16% of eighth graders were proficient in reading. One in four students fails to graduate from high school. This is a disgrace.

Many states have used charter schools as an alternative to let educators operate without the rules that favor teacher tenure and other protections over student learning in failing schools. But Maryland’s chartering law is one of the stingiest. It makes local school boards the sole chartering authority, and they see charters as competition. The state also limits the freedom of charter schools to innovate and demand high performance. . . .

The tragedy is that last week Governor Larry Hogan signed a bill that leaves the city’s relatively few charter schools under the sway of the teachers unions. The new Governor’s original plan would have allowed charters to operate outside union collective-bargaining agreements, given charter operators greater autonomy over staffing and improved the state’s funding formula.

Those goals died at the hands of Democrats who dominate the state legislature, in particular state senator and former teachers union member Paul Pinsky. One of the first reforms killed was a measure to give charters the choice of participating in a collective-bargaining agreement. So charters must continue to answer to unions for work rules, tenure, even pay. . . .

Meanwhile, the Center for Education Reform notes that the law takes away much of the State Board of Education’s power to review local school-district actions on charters and makes it harder for the Governor to shape policy through appointments to the board. Under the new law, no plan for a charter school “may be construed to take precedence over an agreement of a local bargaining unit in a local school system.”

All of this reflects the power that government unions have over Democrats in Maryland, one of the country’s most left-leaning states. It also reveals the disconnect between the left’s rhetoric on poverty and its refusal to change the policies and practices that destroy economic opportunity. Look for another generation of education failure in Baltimore, and more riots down the road."

Summing Up

America is all about the exercise of personal freedoms and individual choice --- except when it isn't.

In our nation's biggest cities, public sector union officials and their joined-at-the-hip Democratic political allies are in charge of public education. But it wasn't always that way.

In fact, Democratic President Franklin Delano Roosevelt in 1937 said the following about public sector unions, "The process of collective bargaining, as usually understood, cannot be transplanted into the public service." He was right about that.

So here's the question du jour --- Are politicians elected to serve all the people, including our children and their parents, or just those who align with public sector unions?

When are we going to collectively demonstrate seriousness of purpose with respect to the enormous financial and educational problems of our biggest cities and America as a whole?

I wonder about how much harm our politics is doing the future opportunities for our children. What's going on today is simply not fair.

That's my take.

Thanks. Bob.

Race, Class, Immigration, Education, Globalization, Competition, Jobs and Income Inequality

First, let's stipulate that, unlike most nations, America is a racial melting pot. Traced back far enough, we're all immigrants.

That said, whatever our race when we begin life, it never changes. If we're born to the Indian, Caucasian, African, Asian, Hispanic or any other race, that's where we stay throughout our lives.

Now let's stipulate that, unlike most nations, America is an exceptional nation whose values embrace a 'classless' land of opportunity. Thus, whether our starting point on the economic ladder is lower low, upper low, lower middle, upper middle, lower upper or upper upper class, where we finish is largely independent of where we start. America economically has long been a land of opportunity where we can begin life with a little or a lot in the way of financial resources and end at the other end of the spectrum or somewhere in between.

By 2040 we'll be a society where minorities are in the majority. Already today more people from China and India are entering our country than are people from Mexico.

Despite all this history, or perhaps because of it, things still aren't going well on the racial front or, for that matter, the class front either, at least according to the pundits and politicians. With that background in mind, let's briefly examine for ourselves what's fact and what's fiction.

To repeat, our race throughout life is determined at birth, whereas the economic classes to which we belong from time to time are not. Rather they are a function of what happens to us and what we do after birth.

However, all opportunity is not perfectly equal, of course, never has been and never will be. Inequality is inevitable, and we're all painfully aware of what's happening in our inner city neighborhoods and schools today. So let's expand the race and class discussion to income inequality and educational opportunities as well.

And regarding educational and employment opportunities, it's not just the impoverished black kids who are suffering. Many poor white, Hispanic and other kids are getting the short end of that educational and jobs stick as well. 

Race, Class and Neglect provides much to think about, so let's consider what it has to say:

"Every time you’re tempted to say that America is moving forward on race — that prejudice is no longer as important as it used to be — along comes an atrocity to puncture your complacency....

 

And the riots in Baltimore, destructive as they are, have served at least one useful purpose: drawing attention to the grotesque inequalities that poison the lives of too many Americans.

 

Yet I do worry that the centrality of race and racism to this particular story may convey the false impression that debilitating poverty and alienation from society are uniquely black experiences. In fact, much though by no means all of the horror one sees in Baltimore and many other places is really about class, about the devastating effects of extreme and rising inequality....
 

It has been disheartening to see some commentators still writing as if poverty were simply a matter of values, as if the poor just mysteriously make bad choices and all would be well if they adopted middle-class values. Maybe, just maybe, that was a sustainable argument four decades ago, but at this point it should be obvious that middle-class values only flourish in an economy that offers middle-class jobs.

 

The great sociologist William Julius Wilson argued long ago that widely-decried social changes among blacks, like the decline of traditional families, were actually caused by the disappearance of well-paying jobs in inner cities. His argument contained an implicit prediction: if other racial groups were to face a similar loss of job opportunity, their behavior would change in similar ways.

And so it has proved. Lagging wages — actually declining in real terms for half of working men — and work instability have been followed by sharp declines in marriage, rising births out of wedlock, and more.

As Isabel Sawhill of the Brookings Institution writes: “Blacks have faced, and will continue to face, unique challenges. But when we look for the reasons why less skilled blacks are failing to marry and join the middle class, it is largely for the same reasons that marriage and a middle-class lifestyle is eluding a growing number of whites as well.

 

So it is, as I said, disheartening still to see commentators suggesting that the poor are causing their own poverty, and could easily escape if only they acted like members of the upper middle class....

The point is that there is no excuse for fatalism as we contemplate the evils of poverty in America. Shrugging your shoulders as you attribute it all to values is an act of malign neglect. The poor don’t need lectures on morality, they need more resources — which we can afford to provide — and better economic opportunities, which we can also afford to provide . . . ."

Summing Up

Educational opportunities are a big deal --- perhaps the biggest deal if we want to create an upwardly mobile, globally competitive, entrepreneurial workforce.

When it comes to economic success or failure, education coupled with stick-to-it-iveness are the critical determinative factors with respect to our economic lot(s) in life.

Since in America it's largely up to each of us what happens throughout life, the harder we work, the luckier we are likely to be.

Our shared American goal must always be that the doors of opportunity are always open and that abundant opportunities for success are there for any 'hyphenated' American willing to put in the required time and effort.

That's the American dream. As former NBA slam dunk champion and 5'7" Spud Webb put it about doing the seemingly impossible, "If you can dream it, you can do it."

And that's my completely American take as well.

Thanks. Bob.

Are Homo Sapiens Really Wise Men? ... Why Smart People Do Dumb Things

Homo sapiens are supposed to be wise. In fact, Homo sapiens is Latin for 'wise men.'

Wise men are supposed to think things through and make rational judgments when deciding which course of action to take.

In the law, the objective or 'reasonable man' test is extensively used to assess behaviors and decide cases and controversies. The theoretical reasonable man standard is invoked to compare an individual's behavior to what a reasonable or rational person should do when faced with the same or similar facts and circumstances.

And interpersonally most of our subjective judgments about the behavior of others are based on this objective test. The only problem with all this reasonable stuff is it's not the way we're wired. The plain fact is that we 'Homo sapiens' frequently don't act rationally, let alone wisely. Put another way, common sense isn't very commonly used.

So whether it's the marshmallow test of accepting a less valuable immediate reward instead of choosing to wait for a much larger, albeit deferred, gratification (see Keenan's recent May 15 post titled 'Shoes and Stocks ....' or mine of February 25, 2012 titled 'Current vs. Delayed Consumption ....'), doing poorly in school vs. studying and making good grades, excessively borrowing for student loans or credit cards, poor physical exercise habits, prematurely buying that expensive car or new house in lieu of developing a habit of saving and investing, taking unaffordable trips or vacations, or any other number of regular occurrences which violate common sense 'reasonable man' standards, we highly flawed Homo sapiens frequently and habitually tend not to do the wise, reasonable or rational thing.

That said, we can train ourselves to study hard, show up and act right, not unduly penalize tomorrow's benefits for the pleasures of today, and many other things which would result in better self treatment as we go through life. We just have to make a conscious and concerted long term effort to overcome our human tendency to act emotionally instead of rationally.

It's not easy, but it is simple, and it definitely can and should be done.

How Homo Economicus Went Extinct should be required reading for all Americans. Its subtitle is 'Consumers and investors don't act rationally, but for generations economists have acted as if they do:'

"I have long been amused by economists and their curiously delusional notion of the “rational man.” Rational? Where do these folks live? Even 50 years ago, experimental studies were demonstrating that people stay with clearly wrong decisions rather than change them, throw good money after bad, justify failed predictions rather than admit they were wrong, and resist, distort or actively reject information that disputes their beliefs. In recent years, a new field has emerged—“behavioral economics”—to propose an alternative to the rational man of traditional economics. . . .

As the offspring of traditional economics and experimental social psychology, behavioral economics shows remarkable hybrid vigor, and Richard Thaler, one of the new field’s founders, acknowledges its debt to psychological science throughout his highly enjoyable intellectual autobiography, “Misbehaving.”. . . Humans do a lot of misbehaving” — thus the book’s title.

The problem, Mr. Thaler argues, is that although economists “hold a virtual monopoly” on giving policy advice, the very premises on which that advice rests are deeply flawed. . . . Mr. Thaler calls for an “enriched approach" . . . .

The book’s organization is both chronological . . . and topical, devoting long sections to findings from four areas of particular interest to him. These are “mental accounting” (with chapters on bargains and sales, sunk costs, budgets and gambling), self-control (the difference between people who plan and people who impulsively act), finance (including the irrationality of people’s behavior in the stock market), and fairness games (why people often prefer fairness to self-interest). In a two-person game in which one person must allocate, say, $50, most recipients would prefer to walk away with nothing than accept an offer they consider “unfair” (such as $5).

Dense with fascinating examples, each of Mr. Thaler’s topical areas tells, in a way, the same story: Traditional economics predicted X; evidence failed to confirm X and indeed often contradicted X; establishment explained away the evidence as an anomaly or miscalculation. . . .

One article directly attacked the . . . notion that people make good choices, and certainly better choices than anyone else could make for them.” By empirically demonstrating that consumers often do precisely the opposite, because rationality and self-control are bounded by human perceptual distortions, their paper undercut this principle. . . .

Accordingly, the final chapters of “Misbehaving” take on the key issue of nudging: “Could we use behavioral economics to make the world a better place? . . . Yes, he argues . . . . Because people make predictable errors, we can create policies and rules that lower the error rate, whether it has to do with reducing driving accidents, getting men who use public urinals to aim better or enticing people to save for retirement—and do it in a way that makes people themselves happier with the results."

Summing Up

We're all smart people, but we're all prone to do dumb things from time to time. 

In hindsight we come to recognize and accept that much of what we've done during our lifetimes consisted of things we would have been better off not doing.

And then we often wondered, if only to ourselves, why we had let ourselves do those dumb things --- but by then it was too late to do anything about it.

What we didn't do before acting in haste is take the time to think things through, make thoughtful decisions, and then proceed to act rationally. We didn't resist the ever present urge to act emotionally, and we paid the price for so doing. Often it was a needlessly high price to pay.

We should explicitly acknowledge this universal human tendency and commit to rewire our behaviors and strive ever harder to do the right things.

It won't be easy, but it can and should be done. At least the effort should be made, and the self awareness should be acknowledged.

That's my take.

Thanks. Bob.

The College Admissions Process ... Fair Play, Equal Opportunity, Preparation, Effort and Accomplishment

All of us as human beings are alike in many respects. That said, we're also very much unalike in our behaviors, expectations and accomplishments.

Take academics, for example. Facts are stubborn things.

Harvard Accused of Bias Against Asian-Americans has the story:

"A complaint Friday alleged that Harvard University discriminates against Asian-American applicants by setting a higher bar for admissions than that faced by other groups.

The complaint, filed by a coalition of 64 organizations, says the university has set quotas to keep the numbers of Asian-American students significantly lower than the quality of their applications merits. It cites third-party academic research on the SAT exam showing that Asian-Americans have to score on average about 140 points higher than white students, 270 points higher than Hispanic students and 450 points higher than African-American students to equal their chances of gaining admission to Harvard. The exam is scored on a 2400-point scale.

The complaint was filed with the U.S. Education Department’s Office for Civil Rights.
“Many studies have indicated that Harvard University has been engaged in systemic and continuous discrimination against Asian-Americans during its very subjective ‘Holistic’ college admissions process,” the complaint alleges.

The coalition is seeking a federal investigation and is requesting Harvard “immediately cease and desist from using stereotypes, racial biases and other discriminatory means in evaluating Asian-American applicants.”

Robert Iuliano, Harvard’s general counsel, said the school’s admissions policies are “fully compliant with the law.” The school says its admissions process takes into account a variety of factors besides academics, including applicants’ extracurricular activities and leadership qualities.

“Within its holistic admissions process, and as part of its effort to build a diverse class, Harvard College has demonstrated a strong record of recruiting and admitting Asian American students,” Mr. Iuliano said in a statement. He said the percentage of Asian-American students admitted to the undergraduate school rose to 21% from less than 18% in the past decade.

But the group that filed the complaint said that percentage should be much higher given the increasing numbers of Asian-American students that apply.

“There is a lot of discrimination, and it hurts not just Asian-Americans, it hurts the whole country,” said Yukong Zhao, a 52-year-old Chinese-American author who helped organize the coalition. He said there are longtime stereotypes of Asian applicants’ being “not creative enough or risk-taking enough, but that’s not true. Nearly half of the tech start-ups in the country were started by Asian-Americans. Every one is a great example of creativity, and risk-taking and leadership.”

The complaint argues that elite schools “that use race-neutral admissions” have far higher Asian-American enrollment than Harvard. At California Institute of Technology, for instance, about 40% of undergraduates are Asian-American, about twice that at Harvard."

Summing Up

To repeat, facts are stubborn things.

Income inequality is real in America.

And that's the way it should be in a free society of equals, assuming the unequal results are based on effort and accomplishment.

The plain truth is that equal opportunity is not being afforded to Asian-American applicants to Harvard and other institutions.

Let's stop dumbing down America and let's also stop lowering our expectations. Let's always aim higher.

Otherwise our future is not looking so bright.

That's my take.

Thanks. Bob.

Shoes and Stocks: A Neat Opportunity to Teach My Kids About Investing

By Keenan Mann

My kids both  like basketball and basketball shoes.  More specifically, they like Nike basketball shoes.  When I was their age I was the same way.  I'm actually that way now.

I can vividly recall buying my first pair in the spring of my senior year in high school with money I'd earned bagging groceries on the weekends for tips.  The shoes, which cost me $100, were white leather high tops trimmed in blue and black.  They were called Revolutions.  Nike even had a big ad campaign  in which those shoes made a cameo appearance (see the 29 second mark in the video below for my shoes and enjoy a few seconds of the Beatles classic Revolution while you're at it).  I loved those shoes and wore them every day.  They were my school shoes and may play shoes.  But after about a year, they were only fit to cut grass in.  They weren't completely worthless, but they were close and getting closer with each yard work session.

I told my kids that story recently after they both asked if they could buy two pairs of shoes with money they had saved up from birthdays, Christmas, and allowance payments.  The shoes they're interested in are the signature offerings of the Michael Jordan, Lebron James, and Kobe Bryant collections.  As such, the total cost of two pairs would be somewhere around $500.

I should take a moment to explain why they asked for permission to spend their own money.  It was the result of my own crude little adaptation of the marshmallow test.  The essence of the test was captured is one of Bob's posts from a few years ago.  I've included it below in case anyone needs a refresher:

from an Arthur C Brooks writing in WSJ.com

"....There is a tremendous amount of research on the links among success, character and the ability to sacrifice. It all reaches the same conclusion: People who cannot defer current gratification tend to fail, and sacrifice itself is part of entrepreneurial success.

In one famous study from 1972, Stanford psychologist Walter Mischel concocted an ingenious experiment involving young children and a bag of marshmallows. He put a marshmallow on the table and told each child that if he (or she) could wait 15 minutes to eat it, he would get a second one as a reward.

About two-thirds of the kids failed the experiment. Some gave in immediately and gobbled up the marshmallow; videotape shows others in agony, trying to discipline themselves—some even banging their little heads on the table.

But the most interesting results from that study came years later. Researchers followed up on the children to see how their lives were turning out. The kids who didn't take the marshmallow had average SAT scores 210 points higher than the kids who ate it immediately. They were less likely to drop out of college, made far more money, were less likely to go to jail, and suffered from fewer drug and alcohol problems.

But the evidence goes beyond a finding that people who can defer gratification tend to turn out well in general."

So as a part of my Marshmallow test design, I put in a rule that said if they spent any of their savings, they would forfeit their monthly allowance for 6 months.  They would also forfeit any allowance matching funds, which could get as high as 50%.  I explained that purchasing a pair of shoes with those regulations in place could easily cost them 2 or three times the purchase price. That severe yet simple-to-grasp financial penalty has so far been enough to stave off their need for instant gratification.

In addition to being central to my experiment, the rules were also an attempt to introduce the idea of investing to them in a simple way.  When I was their age, I didn't know what investing was, and I didn't know what compound interest was, and I didn't know what a retirement account was and, sadly, I didn't know anybody who did.

If I had, I might have had a Nike revelation instead of a pair of Nike Revolutions.  Here's how the logic leading to my revelation might have unfolded:

At the time I bought my Revolutions, Nike's stock price was around $25/share.  Had I bought 4 shares of stock in 1988 instead of 2 shoes and held that stock until Tuesday of this week, when the price closed at $102.62 (after six 2 for 1 splits between '88 and '15), I would have around $13,300 to show for my original purchase instead of, well nothing. The compound annual growth rate (CAGR) of Nike over that period of time was around 19.7%.

I shared all this with my kids.  Of course there are lots of details yet to be grasped, but they understood the essence.  To hammer the point home though, I told them that if they each took their hypothetical $500 and bought Nike stock with it today and held on to it for 27 years and we assumed the same CAGR, their $500 would be worth somewhere around $65,000 (thanks to the magical rule of 72). They both laughed in amazement.

Then my daughter said, "But I don't wan't to spend all my money on stock."  To which I replied, "you wouldn't be spending it, you'd be investing it and it would always be there, available to you and growing, unless Nike went out of business.  To which she flatly replied, "Nike is not going out of business."  I smiled and said, "now you're getting it."

Be on the look out for updates to this story, it's going to be fun observing and writing about it, assuming they don't opt for the marshmallows.

KM

The Developing Good News about the Humongous American Personal Debt Hole ... We've Stopped Digging

Accumulating debt is much like drinking too much alcohol. While it can be lots of fun during the 'doing' stage, the hangover payback period, albeit temporary, can often be quite painful.


And if you've been on or anywhere near Planet Earth the past several years, you know the debt hole we've dug is a really big one. That's the bad news.  The good news is that many Americans are now starting to change behaviors. That said, we'll be paying the hangover price accompanying our current condition of excessive personal indebtedness for a long time.


It won't be easy to get our debt levels under control as individuals, and it will take a long time, but the process has begun. And as the old saying goes, we can't finish what we don't start. Now if only the government gurus would start doing the same thing for our society as a whole. At least we can dream.


Americans' Debt Levels Remain Flat has the developing good news story about getting our personal indebtedness under control as well as the bad news story about the related debilitating impact on economic growth and job creation during that multi-year but vitally necessary process:

"Americans are playing it safe this year when it comes to borrowing, with overall debt levels largely flat in the first quarter amid tight mortgage lending and hints that some consumers are using gas savings to pay down bills.

In a sign of this caution, more U.S. consumers are getting a better grip on their finances, prompting a drop in late payments on two fast-growing types of debt—car and student loans.

Household debt—including mortgages, credit cards, auto loans and student loans—inched up 0.2% between January and March to $11.85 trillion, new figures from the Federal Reserve Bank of New York showed Tuesday. That was the smallest increase since the second quarter of last year, when debt levels declined outright.

A big factor behind the muted increase: Mortgage balances—which make up the bulk of U.S. households’ overall debt—were largely unchanged last quarter at $8.17 trillion. Mortgage debt outstanding is up just $6 billion over the past year. By contrast, in just the last quarter, auto-loan balances grew $13 billion to $968 billion, while student loans outstanding rose $32 billion to $1.19 trillion.

The numbers show that, despite making progress fixing their finances since the recession, Americans are still in a decidedly cautious phase and facing difficulties obtaining credit, especially consumers with tarnished borrowing histories and first-time home buyers.

Overall, borrowing remains weak, which could constrain spending and economic growth....
All told, U.S. households’ overall borrowing tab of $11.85 trillion remains about 6.5% below its 2008 peak of $12.68 trillion, even before adjusting for inflation. . . .


But the tepid growth in credit isn’t all bad for the economy. A combination of lower gas prices and consumer caution may be helping Americans improve their finances. While the cost of gas has risen recently, it’s still cheap: Nationally, a regular gallon of gasoline costs $2.69, according to the U.S. Energy Information Administration, down about $1 a gallon from a year ago. Instead of spending this windfall from gas savings, some consumers appear to be saving more or paying off debt to avoid problems.

Credit-card balances dropped $16 billion in the first quarter, to $684 billion, though much of that could be seasonal: Americans tend to pay off debt early in the year after splurging around the holidays.

But fewer Americans are falling behind on car and student loans, too. . . . Mortgage delinquencies improved as well."

Summing Up


For too many Americans, working to get this huge debt hole under control will take at least several years.


And during this payback period, the general economy and jobs will remain weaker than otherwise.


On the other hand, we will also be building a strong foundation for a lasting and lengthy period of economic prosperity and stability.


This debt hangover is a doozy, but the party lasted way too long, and it wasn't all that much fun either.


That's my take.


Thanks. Bob.

A Message for those Graduating from High Schools, Trade Schools, Community Colleges, Colleges and Graduate Schools ... The Good, the Bad and the Ugly

It's graduation season. Congratulations to all those who have hung in there for many years and are now about to receive their college and graduate school degrees.  Congratulations as well to trade school graduates, community college graduates and high school graduates as well.


And if you're lucky enough to be an American, you're lucky enough. The world awaits you and you're free to make your own road as an adult. That said, you'll encounter plenty of potholes along the way, and it's important that you avoid the avoidable ones, not get discouraged and keep moving forward.


As Winston Churchill said in part to the graduating class of England's Harrow School in 1941, "Never give in, Never give in. Never, never, never, never . . . ."

Yesterday we quoted from a new book about the problems we oldsters are bequeathing to the young with respect to unfunded pension and Social Security obligations.

Today we'll look at what the authors have to say to this year's graduating classes in Dear Class of 2015, You're in Big Trouble:


"Over the next few weeks 3.5 million of you will graduate and try to find jobs. We’re sorry to tell you that achieving success will be more difficult than it was for your parents or grandparents. Not because you’re less intelligent, or lazier or less deserving of realizing the American dream. The primary reason why today’s graduates face a daunting future: Government is making life more difficult for you.


The youth unemployment rate for those between ages 20 and 24 is 9.6%, compared with 4.5% for those 25 and over. But America’s double-cross doesn’t start when you receive your diploma. It has been going on since elementary school, with too many American children badly educated at schools where ill-qualified teachers are protected by unions.


As a result, the U.S. has steadily dropped in international education rankings—to an estimated 27th in mathematics in 2012 among Organization for Economic Cooperation and Development countries, down from 23rd in 2003. For those of you who majored in education, guess what? When bad teachers can’t be fired, there are fewer job openings for you.


Harvard economist Raj Chetty has estimated that replacing a teacher in the bottom 5% of skills with a teacher of average quality results in an extra $9,000 in lifetime income per student. Replacing the bottom 5% of the nation’s 3.3 million public-school teachers would have collectively increased the lifetime income of 2015 graduates by $31 billion.


Seventy percent of you are graduating with student-loan debt, and your average debt is $27,000, according to the New York Federal Reserve. It is the current system of federal student aid that is raising your college tuition, and your debt will burden you for years after you graduate.


It gets worse. After an inferior education and taking on thousands of dollars in debt, you will find that state occupational-licensing requirements will stop many of you from starting a business. These rules are said to protect public safety, but instead they protect established businesses and hurt you....


Let’s say you do eventually find work. Then you will start paying taxes, mostly to subsidize government programs that increasingly benefit middle-aged and older Americans, many of whom have jobs and assets. The average household headed by an adult 65 or older has nearly 50 times the wealth of the average household headed by an adult younger than 35. In 1984, when the Census Bureau started compiling these statistics, the ratio was 10 to 1.


Yet programs to benefit older Americans, like Social Security and Medicare, increasingly are eating up the budget of a federal government that is $18 trillion in debt. Those two programs account for more than four dollars out of every 10 in the federal budget.


Oh, and many of you will pay taxes to help out state governments that are among those facing a collective $5 trillion in unfunded liabilities, mostly from unfunded promises made to government retirees.


You’ll even be expected to pay for the health care of older Americans with your higher health-care premiums under the Affordable Care Act, just so older people get to pay less. So considerate of you.


President Obama isn’t to blame for all of this (except for the higher health-care premiums and the vanishing of unpaid internships). Most of these destructive policies began long before the current administration. Protecting the entrenched interests of the old at the expense of the young is getting to be a U.S. tradition.


Ms. Furchtgott-Roth is a senior fellow at the Manhattan Institute, where Mr. Meyer is a fellow. Their book, “Disinherited: How Washington Is Betraying America’s Young,” is out this week from Encounter Books."

Summing Up

Times are tough. They always are. But times are good. They always are.

So is the glass half empty of half full? It's both.

Soon after I entered high school in 1957, the Russians and Sputnik grabbed the headlines and the race to space began.

In the following twenty years, lots of "stuff," both good and bad, happened. President John F. Kennedy was elected and assassinated, the Cold War raged on, nearby Cuba became a satellite of Russia, Martin Luther King rose to prominence and was assassinated, Robert .F Kennedy did the same, Civil Rights legislation was passed, the Vietnam War grabbed the attention of the world, and especially the young potential volunteers and draftees, Richard Nixon ran for President and lost , then ran and won, then was impeached and resigned the presidency in disgrace, John Glenn walked on the moon, OPEC quadrupled the price of oil, we had double digit unemployment, interest and inflation rates, wage and price controls, 55 MPH speed limits, and my Dad, sister-in-law and father-in-law all died too young. And too many to mention other noteworthy events also occurred.


Meanwhile, and despite the odds, I managed to graduate from high school, college and law school, get married, secure a good job, start a family, begin saving and learn to minimize borrowing.


The point of all this is that "Stuff Happens" to us throughout life. Some of the stuff we can control and some we can't. Recognizing the difference between that which we can control and that which is uncontrollable is critical to our individual health, success and well being.


As Americans we are free to pursue our dreams and opportunities as we so choose. What we make of them is largely up to us --- each of us. To me that's fair enough.


Even though equal opportunity is never really equal, it's 'equal enough' for me. I wish the same for you, fellow graduates.


That's my take.


Thanks. Bob.