Wednesday, August 10, 2011

The Market and You

Since we are now all invested in the stock market, even if it is indirectly, it is important to understand certain key aspects of how Wall Street functions today. One aspect is that while many people are invested through pensions and 401k plans, few people understand how the market works, and many do not have any control over their own investments. Moreover, although the media often says things like, “the market went down today on news of the debt deal,” the market is not a single entity speaking with a single voice; however, dominant players in the markets often follow each other, and the result is that large movements can occur based purely on a herd mentality.

Some people are now asking why the markets have gone up the last couple of years, while the economy appears to be doing very badly. One reason for this disconnect between the real economy and the financial economy is that the Federal Reserve has sought to strengthen the banks by essentially allowing them to borrow money for free. The idea behind this policy is that during the fiscal meltdown of 2008-9, the banks stopped lending money, and there was a real credit crunch that cut off the flow of cash to major corporations and financial institutions. The Fed also felt that if they gave money to the banks, and the banks lent money to corporations, the companies would start hiring people and stimulate the economy. However, it is now clear that companies and banks are sitting on trillions of dollars, and they have shown that they would rather make money through financial transactions than through producing new jobs.

Another reason why Wall Street has gone up while Main Street has gone down is that Wall Street rewards companies for shedding jobs because this increases the profit margin. There is thus an inherent push for companies to cut their labor costs and increase compensation for people at the top, and many banks and corporations have used their profits and debt to buy their own stocks and increase bonuses for their top earners.

Another powerful player in the markets are the private equity firms that often use borrowed money to take over companies (leveraged buyouts) and make these corporations more profitable by laying off workers and selling parts of the companies. These takeovers often go bad because the bought company has to take on so much debt, while it reduces its productivity. Moreover, Mitt Romney, who is now running for president, made much of his money through his private equity firm, Bain Capital, and so it is possible that our next leader will pursue the leveraged buyout model on a national level.

While many people in our federal government now feel that the key to a healthy economy is to put more money in the hands of the banks and large corporations, it is clear that our multinational companies and financial institutions have no incentive to invest in job creation. In the past, corporations knew that they needed to produce well-paying jobs in America so that there would be enough people with cash to buy their products, but now in the global economy, multinational corporations often look around the world for consumers. There is thus little incentive for companies to hire more workers or provide a good wage for Americans.

The only solution is a national job policy or industrial plan that would push companies to use their savings to increase employment. However, the only way to do this would be massive subsidies, tax breaks, trade tariffs, or penalties for exporting jobs. Of course, the other solution is to have the national government feed money into new industries like green technology. Yet, not only is the Congress blocking this type of program, but the move against government spending means that more jobs will be lost through the reduction of federal and state budgets.

Adding to this employment problem is the growing power of the bond raters and bond buyers who believe that the key to economic health is reduced taxes and a reduction of governmental spending. These financial players are not interested in job growth or stagnant wages; in fact, bond raters often reward companies that fire workers or eliminate benefits.

Only a strong national leader can reverse this course, but it appears that the president and Congress have bought into the idea that we must follow the demands of the markets and the raters. It is clear that we must organize against these forces to rebalance the economy and take back our jobs from the financial raiders.

Thursday, August 4, 2011

UC Crushed by Debt Deal

The University of California will certainly be a big loser in the debt deal recently signed by President Obama. In fact, what most commentators have missed is that in the first round of budget cuts triggered by the debt deal, graduate students will be forced to pay more for their loans, and they will also have to pay earlier.

While the first round of cuts protected Pell grants and federal research grants, the next round will most likely cut deeply into both of these programs. Moreover, as George Skelton shows, future and present cuts to Medicaid will force states to shift more funds away from state-supported programs as they seek to pay for escalating healthcare costs. In other words, when the federal government cuts social programs, the states have to make up for the losses, and the result is that discretionary programs like higher education are reduced.

If we combine the future federal cuts to Pell grants and research grants with the increased burden on states to fund social welfare programs, we are left with a significant decline in funds for university research and graduate education. Ironically, these cuts to the UC system are occurring during a time when the Academic Council is asking President Yudof to accept more graduate students and discontinue the tuition derived from nonresident graduate students. Part of this new funding model asks the state to increase its support for UC research and expensive graduate programs during a time of diminishing state funds.

Next week, I will dissect the Academic Council plan, but for now, I just want to stress that the only real solution is for the Senate faculty to realize that UC should move to a model where it only accepts graduate students it can fully fund. While this would reduce the number of graduate students, it would increase the quality, and it would counter-act the increased costs of student loans and the loss of research grant money. Furthermore, it is important to stress that UC is one of the biggest producers of PhDs in the world, and there is a growing number of unemployed and under-employed people with PhDs. Although the UC argues that more graduate students are needed in order to staff large undergraduate courses, it is clear that one of the reasons why our PhD students cannot get jobs after they earn their degrees is that there are so many graduate students teaching undergraduate courses. Moreover, by staffing courses with people lacking PhDs, the message is sent out to administrators that anyone can teach undergraduate courses, and so there is no need to hire new professors.

My argument here is not to denigrate or downgrade graduate education; rather, I am arguing that we have to protect graduate students who are often forced to live in poverty as they await a chance to compete in the academic job lottery.

Monday, August 1, 2011

The Big Audit Question

While the UC administration has tried to portray the state audit as a wasteful use of taxpayer dollars that came up with nothing important, the university will not be able to just walk away from some of the auditor’s finding. In fact, UC is required to report on their compliance with the audit’s recommendations, and one of the biggest issues still remains how the system redistributes tuition dollars and state funds to the campus. As the audit explains, “Because the Office of the President does not provide all money in the general funds and tuition budget to the campuses on a per-student basis (for example, it provides funding for specific research and public service programs to individual campuses), we understand that differences likely will exist. However, we would also expect that the university would be able to identify the reasons for any differences in the per-student base budgets provided to the campuses. The Office of the President stated that variation in base budgets is the cumulative result of decades of budget decisions by the regents and past presidents to achieve the university’s mission of teaching, research, and public service, and that quantifying the impact of these decisions would require an extraordinary amount of analysis by budget staff. The Office of the President believes that such an analysis would not be a good use of limited administrative resources.” Perhaps it would be difficult to document the history behind the redistribution of funds, but it should not be hard to simply explain the current method.

After all, the UC now claims that it will allow the campuses to keep all of the funds they generate on their own, and what they are working on is how to distribute state funds. Yet, in my analysis of several documents generated by the Academic Council and various Senate committees, I have discovered that a battle is being fought between the wealthy and the poorer campuses, and there are many loopholes to the redistribution of state funds and tuition dollars. Even though the campuses will keep their tuition revenue, the new system is supposed to be “revenue neutral,” which means that the current system of covert redistribution will remain.

As the audit indicates, the wealthier campuses are resisting any move to fund the campuses on an equal basis: “The Office of the President further stated that it is a goal of the university that all campuses achieve the level of excellence in teaching, research, and public service achieved by the Berkeley and Los Angeles campuses, although each in its own unique areas, and that while other campuses receive a lower amount of funding per student due to the factors discussed previously, without a significant increase in investment from the State, it would be problematic to equalize funding. It further stated that the university does not wish to jeopardize the achievements of the Berkeley and Los Angeles campuses by shifting funds away to other campuses in an effort to provide an equal amount of the general funds and tuition budget per student.” I quote this passage at length because it reveals the current battle being waged among the different campuses. After all, the UC has always been divided internally between the quest to allow some campuses to be superstars and the countering desire to make sure all campuses flourish. Obviously, the UC cannot have it both ways, and so the tradition is to muddle through and keep everything hidden and non-transparent.

Funding Streams
If we now turn to UCOP’s new policy on funding streams, we learn that, “Beginning in 2011-12, all campus-generated funds will be retained or returned to the source campus. Current policies and practices that distribute a share of fee funds, indirect cost recovery funds, patent revenues, Short-Term Investment Pool earnings, and application fee revenues to the systemwide budget and/or other campuses will be eliminated. Implementation of this principle will require “un-pooling” of General Funds revenues, which will be conducted in a manner that is largely revenue-neutral to campuses upon implementation.” Once again, it is hard to imagine how the new policy will allow the campuses to keep all of their funds, while it remains “largely revenue-neutral.” Perhaps the idea is that the wealthy campuses will make up for any losses by increasing their number of high paying nonresident students and professional students.

The new UCOP policy also indicates that some type of redistribution will still occur through financial aid: “Funding of the undergraduate University Student Aid Program (USAP) will be handled separately and will be an exception to the overarching principle. Each year, campuses will be directed to allocate a specified share of fee revenues to USAP. As needed, campuses may be assessed a specific amount for redistribution to other campuses in order to achieve the Education Financing Model goal of equal loan/work levels across the system.” Thus to pay for the financial aid on the campuses with a high level of aid-eligible students, the campuses with a lower percentage of lower-income students will have to transfer funds to the low-income campuses. It is hard to predict what kind of perverse incentives this new system will produce.

It is important to stress that while UCOP objected to the auditor’s implication that the current system subsidizes wealthier campuses by taking funds away from the campuses with more under-represented students, the new policy report does justify the practice of cross-subsidization: “The high tuition charged to nonresident undergraduates may help fund fellowships for graduate students. Student fee revenue derived from lower-cost disciplines may subsidize instructional equipment purchases in other areas. Student fees for general campus instruction may subsidize the health sciences, while indirect cost recovery on health science research provides a complementary subsidy for general campus activities.” Of course it would be impossible to eliminate the tradition of cross-subsidization, but the question remains whether the university can actually account for who is sending money to whom.

In one of the most clarifying passages, UCOP actually admits that subsidization is occurring between campuses: “When student fees were modest, this consequence was not a major concern. Over the last decade, with student fees rising to levels approaching the level of per-student support from the State, concern has been expressed about the fairness and appropriateness of using student fees derived at one campus to fund increases in faculty salaries and other costs at another campus.” As I have been arguing now for a few years, this type of covert subsidization is the central problem: undergraduate students are subsidizing research faculty on other campuses and parents, students, and taxpayers were never told about this practice.

UCOP can now claim that it is changing this covert funding system, but there are so many loopholes in their new policy that I fear very little will change. Not only has the system failed to determine how to distribute state funds, but it looks like it will be allowing campuses to set their own revenue and enrollment targets: “While these adjustments are intended to be revenue-­‐neutral upon implementation, campuses will experience budget increases if revenues rise. Likewise, campuses will be responsible for addressing budget shortfalls if revenues decline.” This final sentence begs the question of what does a campus do if it cannot attract more high-paying nonresident students or professional students.

Ultimately, it appears that very little will change, and the highest-ranked campuses will continue to receive more funding, while the poor campuses will become poorer. This sounds a lot like America writ large.