Across the Great Divide

How Do Communities Thrive: By Maximizing Wealth or Redistributing it?

The comments at This Road is Designed to Kill You have drifted a bit off topic — from the safety effects of traffic roundabouts to incentives for people to live closer to work to flight from city schools to the influence of school district size on student achievement. (Go ahead and read them if you haven't. I won't make many explicit references here.)

Running through the discussion is a divide that often surfaces here, and in fact simmers under most of what passes for debate in politics today. Whether the topic is health care, schools, the economy, taxes or infrastructure, it boils down to the merits of government intervention versus free market solutions as ways to solve big problems.

Another, less common way to put it is this: Communities thrive by redistributing wealth or by maximizing opportunities to accumulate wealth.

For example, Mark and Jeff had a back-and-forth over whether a single, large school district that allocated dollars first to lagging schools would help improve student performance, especially in inner city schools.

Mark says: "Turn all contiguous metropolitan areas into a single school district, with funding prioritized so as to deal with the lowest performing schools first."

Jeff responds: "The measure that shows the greatest correlation with school performance isn't funding, and it isn't class size. It's school district size. Kids in smaller school districts do far better."

Jeff is correct that studies show smaller school districts tend to have better student achievement, but size matters only insofar as it negatively affects the factors that really produce learning outcomes.

It's worth noting that school districts usually are large because a) they were formed to encompass large city boundaries with their diverse populations and the education challenges that go with them. Or b) they were consolidated from smaller districts experiencing enrollment declines, substandard offerings or funding issues that led them to seek economies of scale. In both cases, upsized districts are a consequence of factors other than pure pursuit of improved student achievement.

Mark is talking about disparity of income between districts, not size; a super district would be just one way to redistribute money to aid lower-performing schools. Of course, a similar move — giving more responsibility for school funding to the state — was tried and then has been slowly dismantled by Gov. Pawlenty. But redistributing school aid dollars isn't really the whole answer, either. Living in economically advantaged communities tends to be accompanied by other factors that relate to school performance, and these advantages are more difficult to export — or to benefit students who are bused in to those communities.

Growth & Justice delivered a research-based report last year that summarized three factors that were most critical for getting students from pre-K all the way through college. Each of these has financial implications, not necessarily tied to what we think of as "school funding."

Quality academic preparation and alignment. Children receiving sustained quality instruction, rigorous curriculum, and meaningful, ongoing assessments are more likely to succeed at the next education level.
Social supports. Relationships between children and adults in early childhood, school, and non-school settings are significant to academic success. Parents contribute to a child’s educational success when they are involved with care providers, teachers, mentors, and tutors.
Access and financial support. Access to quality providers, programs, and institutions places children and students in a position to take advantage of learning opportunities. But limited financial means can be a barrier to access. Subsidized childcare, preschool, and post-secondary tuition grants expand access to quality learning experiences for students at all income levels.

To over-simplify my point, I'd say the education discussion drifted toward comfortable positions for Mark and Jeff, but got richer as they shared the research and the complexities became more evident.

In another post, I'll discuss one other angle their discussion raised — taking personal credit for successes and blaming government for failures.

Large Donors Analysis Understates Business Tilt.

Smart Politics has an analysis of individual donor giving to Minnesota's U.S. House members, based on the latest Federal Election Commission (FEC) reports. Large donor individual donations accounted for $827,881 — about half the money contributed for the most recent quarter.

We can be thankful for Eric Ostermeier's willingness to do the scut work of combing the data and presenting it, but we should be leery of concluding that his findings represent the full impact of business owner and executive giving. He states:

Not surprisingly, most large donor contributions to the Minnesota U.S. House delegation came from business owners and executive officers, tallying 35.1 percent of such donations.

[...]

However, a significant amount of large donor contributions came from retired individuals (#2, 10.6 percent) and homemakers (#4, 7.5 percent). Donations by these individuals were directed overwhelmingly towards Minnesota's Republican representatives.

No duh.

Another useful bit of analysis would have been to match "homemaker" names and addresses with other donors. I have a hunch many of those large donor contributions might align with business owners and executives.

Further, I suspect that many retirees making donations, particularly in this economic environment, might also derive their discretionary income from business ownership or CEO retirement packages. Then throw in the 5.7 percent who listed "finance/investors/banking." The total for the four categories is 58.9 percent.

Certainly, based on how the FEC reports categorize donors, the data surely understates the influence of business executive interests. Ostermeier's post tells the story, but he doesn't come right out and say it.

Friend of the Debt Collectors Comes Under Fire.

The Minnesota attorney general's office filed suit yesterday against National Arbitration Forum, saying the company violated state consumer fraud, deceptive trade practices and false advertising laws.

[Attorney General Lori] Swanson said that credit card companies, banks, retail lenders and cell phone companies increasingly place mandatory arbitration clauses in the fine print of their consumer agreements. [Note: So do securities dealers.] The consumer agrees -- often without realizing it -- to have any dispute resolved by an arbitrator chosen by the credit card company or another creditor, waiving the right to have it heard in a court of law.

In bringing together consumers and creditors to settle credit-card debts, the company purports to be independent, but the AG's office says National Arbitration Forum has hidden its ties to debt-collection law firms.

In a separate lawsuit, the city of San Francisco said the company arbitrators ruled in favor of consumers in just 30 of 18,075 credit-card cases over a four-year period.

That's the way it works all over. Poor and debt-strapped people pay higher interest rates and are nicked constantly by fees and charges, while I earn miles and get a free float each month. We both deserve what we get, right?

And if you think that's not fair, just ask my friends here.

When I heard about the suit yesterday, two conservative political affiliations immediately came to mind. One was Minnesota First Lady Mary Pawlenty, who, to her credit, quit after a month, declaring the job not to be a good fit.

The other, which was not reported, was between Edward C. Anderson, managing director and chief executive officer of the National Arbitration Forum, and Mitch Pearlstein's Center of the American Experiment. Anderson sits on the conservative think tank's Board of Directors.

In March, CAE sponsored a symposium entitled, "How Can Conservatism Better Allay the Economic Fears of Working-Class and Middle-Class Americans?" [PDF]

The only advice on this topic I could glean is that low-income people should manage their money more like I do.

Tales of Corporate Efficiency.

Years ago my mother followed the suggestion of some investment advisor to give her grandchildren gifts of stock in consumer companies. The idea was that owning a piece of some recognized brands would get them interested in the market and grow up to be more savvy investors.

As a result, my son came into a few shares of K-Mart, Pepsi, Wendy's and Tim Hortons, which Wendy's spun off a few years back. I can attest it had none of the desired effects.

Today, two quarterly dividend checks came to him from Wendy's Arby's Group — one for 84¢ and one for 38¢.

And yes, they arrived in separate envelopes with 44¢ postage. 

I think we may have sold off the other stocks, but the small lot programs of Wendy's and Tim Hortons still haven't rolled up his shares. We have no particular interest in selling a small amount of stock or wasting our time to stop the company from barely breaking even (or even losing money after printing the checks and paying the transfer agent) on the tiny dividend checks. And the company apparently would rather do it this way, too. 

If somebody tells you this is a cute and inexpensive way to turn kids into investors, forget it. 

Greed is Good. Lax Oversight is Better.

Former Labor Secretary Robert Reich says the Obama administration "should stop worrying about Wall Street. Worry about American workers."

Every lost job has a multiplier effect throughout the economy. For every person who no longer has a job and can't find another, or is trying to enter the job market and can't find one, there are at least three job holders who become more anxious that they may lose their job. Almost every American right now is within two degrees of separation of someone who is out of work. This broader anxiety expresses itself as less willingness to spend money on anything other than necessities. And this reluctance to spend further contracts the economy, leading to more job losses.

*****
Compensation experts say

“Congress has gotten into the business of dictating executive pay now, and they shouldn’t be in that business. What they should be doing is turning the light on the [company board] committees.”

Boards of Directors, through their compensation and governance committees, are responsible for setting executive pay as well as their own. But much of the work is done by internal executive comp departments and external consultants, who frequently justify pay packages by linking them to the levels at "peer companies" of similar size or scope.

Even if Chairmen and CEOs aren't actively pressing for higher pay, there are plenty of influences within the company and among relationships on the Board that encourage these overseers to be good Germans. I wrote about this during the William McGuire options backdating furor.

The "market for executive talent" provides some of the rationale for out-sized pay, independent of performance. Then, as each board bumps up pay for anything remotely resembling average performance, the executive compensation tide rises for the next analysis by the consultants — and all yachts are lifted some more.

And, Board members who are active CEOs are subject to such reviews back home. So their actions as directors to raise executive pay indirectly benefit them, too.

*****
Frank Rich compares the parallels between General Motors and Wall Street firms like Citigroup, where former Treasury Secretary Robert Rubin took home $126 million in cash and stock for eight years as a Citigroup director, advisor and chairman of its executive committee. During the period when he combined oversight and management duties, the bailed-out bank lost more than 70 percent of its value.

Rich says "Detroit’s chief executive [Rick Wagoner] had to be beheaded so that the masters of the universe at the top of Wall Street’s bailed-out behemoths might survive."

Though [Wall Street character Gordon] Gekko’s most famous line is “Greed is good,” even more emblematic is his defiant summation of his brand of capitalism: “I create nothing. I own.” At least Wagoner, unlike the sultans of finance, created cars, clunkers though they often were.

But Rich also points out that GM was not just an auto company. It was part of "the larger financial culture."

GM's Board had overlap with boards of bailed-out banks. It financed its own auto sales through its financial affiliate, GMAC, which built large real estate sales and lending franchises that, through the late 1990s and early 2000s, helped hedge losses in car the business. Rich does not explicitly mention that a GMAC subsidiary, now called ResCap, was one of the major players in the mortgage securitization industry that contributed to the financial markets collapse.

The Flight of the Unseen Twenties: The Rest of the Story.

As I waited for news about the fate of my lost twenties, I began to consider my options for replacing the loaf of bread that I would not be able to buy for myself in 2027. Suppose I had it all to do over? Would it be smarter for me to buy 30 loaves today and freeze them for the future rather than save for retirement?

Given the energy required to maintain the bread inventory, perhaps the payback would be better if I bought at today's prices and withdrew a loaf every nine months, freeing up freezer space for more high-value foodstuffs. Or, I could practice bread-cost averaging, buying an additional loaf each year. Perhaps I should diversify and allocate some money to frozen, unbaked loaves, which would offer future freshness while better utilizing my freezer assets. Or I could simply spend it on beer and count on the free market inventing a bread substitute, eliminating the need to buy any bread in the future.

But that way lies madness.

The first response on www.itsyourmoney.com came from "Denise," who confirmed that she had snagged a twenty blowing through the library parking lot as she walked to her job at McDonalds. She had not yet spent the money, she said, but planned to apply it toward her college tuition at St. Cloud State in the fall, unless the promised reward stamped on the bill was for more than $20.

I told her education was its own reward and advised her to take an economics class.

Respondent number two was not technically the finder of the bill, but was responding on his behalf. She had been given the money with instructions to send it to the Norm Coleman Recount Fund, but was having trouble finding a mailing address. As for where the bill was found, she would only divulge: Vicinity of Golden Valley Country Club.

I pass several group homes on my way to the bank. An attendant at one of them found the bill plastered against the base of a Duluth Street bus stop bench. So he'd stopped at Walgreen's and bought bags of Peeps for the residents and a pack of Marlboro Lights for himself.

The next report had likely skipped a generation, since the respondent said the bill was passed to him through a car window at Lowry and Queen, which in case I didn't know, was still open for bidness.

A laid-off teacher found one in her yard and asked where she should return it. When told she was only supposed to report how she spent it, she said she'd have to let me know, but I never heard back.

As time went on, the five sets of serial numbers moved around the city and across the country. They purchased gasoline, porn videos, novels, frozen lasgna and haircuts. They were dropped in collection plates and on dinner tabs. They helped finance dental work and paid for the return of a lost cat. 

Once, I received a report from a bank teller informing me the bill would be destroyed because it had been defaced. And since I haven't heard about any of them for awhile, I suspect that's been the fate of all my  bills — not just the lost five, but every bit of cash that has come into my hands and under my stamp.

Which is as it should be, because no one will ever be able to spend my money better than I can.

Stewart Takesdown Cramer and the "Business News" Network.

Jon Stewart's Daily Show episode with CNBC's Jim Cramer last night was a worthy reminder of how so much of our business news is neutered — because of laziness and incomprehension, a preference to entertain and/or plain worship of money and power. And what a smart, impassioned interviewer can accomplish when he has a point of view and does his homework.

Cramer, who strikes me as the world's most high-functioning celebrity with Asperger's, came onto the set wearing his trademark blue dress shirt, sleeves rolled into donuts above his elbows. He should've brought  Randy "The Ram's" forearm pads.

Stewart brought preparation and sense of everyman outrage at the financial games Cramer and other supposed news analysts enabled. Yet his attack took down Cramer as a representative of the system rather than as a bad human being, allowing him to leave with a remaining shred of dignity.

Cramer plays a smart guy on TV, but he could only respond weakly to Stewart's onslaught. He probably took the only route available to him, admitting his shortcomings and not making too many excuses. When he tried — for instance, that the Bear Stearns CEO had lied to him about how healthy the company was — Stewart's comeback was immediate and withering.

Gee, a corporate head lies to you, he said. Don't we expect news networks to try to figure out if people are lying before they report it as news?

The Flight of the Unseen Twenties.

Dear Readers:

Many years ago, after shooting a few of god's creatures and deciding I liked it only slightly less than the creatures themselves, I resolved to find some new entertainments. One of the most enduring has been making up stories, or, as I like to call it, seeing the unseen.

Over the coming days, I will tell you a story that goes something like this...

Once upon a time, I arrived at the bank to discover that my intended deposit was $100 short. As best I could reconstruct, it happened because my renter pays me in cash. He is one of those first-decile poor people who can't be counted on to pay taxes, so as you can imagine, collecting rent is an adventure, too, and when I do, it arrives in small bills.

You may want to ask why a relatively prosperous individual such as myself is taking money from a poor working man, but that is not my story, and you can't stick me to it. I am actually a quite honorable and generous soul who is trying to recoup what he can of a sunken investment.

But anyway, I did not secure my jacket pocket and, as I cycled to the bank, five $20 bills apparently escaped along my route, leaving me $100 poorer than when I started. Naturally, the first thing I did upon discovering the shortage was to blame it on the bank clerk who counted my deposit. Once I confirmed the money was indeed missing, I whipped out my TI Business Analyst Calculator to determine the true extent of my loss.

Since I was planning to put the money in my retirement savings, I was able to calculate almost instantly that in 2027 when I go to buy a loaf of bread, I will have to pay for it with other funds. I was distressed by this news, of course, but somewhat mollified by the fact that I had stamped each of the bills with this message:

Reward: Please go to www.itsyourmoney.com
and report what you did with this money.

After all, I had become very concerned about my money falling into the wrong, unworthy hands and thereby causing economic decline and perhaps an irreversible calamity. I'm sure you will be enlightened by the reports I received.

For Roots of the Crisis, Look at a Culture of Privilege, Not Just Greed.

There's an interesting interview with anthropologist Karen Ho, who studied the culture of investment banking and found that Wall Street capitalism tends to operate based on the culture, values and relatively privileged circumstances of the bankers — and not so much according to the even hand of the free market.

Ho says of the investment bankers, who are finally getting a taste of what they have wrought:

Investment bankers are structured toward the next bonus. They're compensated on how many deals they can push through, not on the quality of the deals or long-term strategy. Investment bankers have tons of job insecurity; they are a total revolving door. But what's interesting is that because of their fairly elite biographies and kind of privileged networks they move in, as well as their lavish compensation, the way they experience downsizing is very different from that of the average worker.

Restructuring and downsizing looks different when operating on a substantial social and financial cushion, she says:

They can say, "Hey look, I have a really risky job, but that's why I just got paid $1 million last year." They'll actually recommend this kind of churning for other workers who have a very different experience. This actually affects corporate America, how other industries are operating.

Ho's research adds more evidence that the financial meltdown was driven by compensation practices that rewarded quantity of deal making, not quality. She has a forthcoming book, some of which may be foreshadowed in her chapter in The Anthropology of Globalization, which contains this quote from Anna Tsing:

Several features attract and engage an expanding audience for imagining the globe: first, its futurism, that is, its ability not only to name an era but to predict its progress; second, its conflations of varied projects through which the populist and the corporate, the scientific and the cultural, the excluded margins and the newly thriving centers, all seem wrapped up in the same energetic movement; and, third, its rhetoric of linkage and circulation as the overcoming of boundaries and restrictions, through which all this excitement appears positive for everyone involved.

The world is flat, indeed.

Zombie Bank Money Crawl.

Paul Krugman said the N-word a few days ago — what Calculated Risk calls “preprivatization.”

Arguably, the only reason [Citibank and Bank of America] haven’t already failed is that the government is acting as a backstop, implicitly guaranteeing their obligations. But they’re zombie banks, unable to supply the credit the economy needs.

To end their zombiehood the banks need more capital. But they can’t raise more capital from private investors. So the government has to supply the necessary funds.

[...]

The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.

Can you imagine the howl from the GOP and the chihuahua chorus if Pres. Obama actually advocated nationalization as a way of stabilizing the banking system? And from the banks and their shareholders if they actually had to accept the consequences of the risks they took?

So given the choice between a big play and no play, the feds seem to be taking the middle play, which is pretty much a hope and a prayer while continuing to put money in the collection basket.

*****

Oh, yeah, and the banks aren't the only ones shielding their big investors.