Wednesday, December 31, 2008

The Good, the Bad & the Ugly About Infrastructure-Driven Job Creation

The risks? Time. Underplanning. Waste. But necessary. At the beginning of this month, Mr. Obama addressed the nation, talking about upgrading government buildings, building out the fiber network that carries the Internet, and generally expanding and repairing our infrastructure: “We will create millions of jobs by making the single largest new investment in our national infrastructure since the creation of the federal highway system in the 1950s… We'll invest your precious tax dollars in new and smarter ways, and we'll set a simple rule – use it or lose it. If a state doesn't act quickly to invest in roads and bridges in their communities, they'll lose the money.” His program, he noted, has set a goal of 2.5 million new jobs by 2011. There was no estimated price tag for this effort.

By December 20, that jobs number moved up 500,000 to 3 million total saved or newly created jobs… as economists suggested that at current rates, the unemployment rate could easily top 9% in 2009 (almost 17% if you add in full-time job seekers only able to generate part-time work and people who have just plain run out of places to look for work). If that terrible number hits, we would be losing an additional 4 million jobs, still falling 1 million short of where we are now, and it is virtually impossible to ignite new infrastructure employment fast enough to fill even a quarter of those jobs by the end of 2009.

According to the December 26 Wall Street Journal, if the holiday retail picture is any indication of employment (where sales fell, compared to last year, from a paltry 2% for online shopping up to 27% and 35% for appliances and luxury items, respectively… auto sales are even worse), we are in for a rough couple of quarters. Engaging people for infrastructure and educational work, creating new jobs and holding old ones, unfortunately will not happen overnight, even if Congress acts quickly.

Except for needed repair work on the simplest of these projects, infrastructure growth and repair efforts are often complex, multiyear projects. If this were a short “recession,” it would be over by the time most structures became heavily invested. Not to worry… looks like we are going to be here awhile. These projects usually take years to complete. But we can also look at the lesson in Japan from the 1990s, a nation that held back, waited to implement much-needed infrastructure upgrades, drizzled the money slowly into their system, and managed to remain in a recession for a full decade. The good news is that if properly implemented, infrastructure development does create long term sustainable values – it’s more of an investment than a pure expense. The President-Elect seems to be on that page.

Mr. Obama had also listened at the governor’s conference earlier this month, and their message was clear: have a plan, do it right, it will take time, but we desperately need the money really soon. Sure, many of these projects have been engineered, budgeted and prepared to go… put on hold by obvious economic pressures. But this is not a “we can get this done this year” solution. According to the December 3 Washington Post: “[L]ess than half of the $136 billion in projects [that the states] said were ready to go could get underway within the next six months, according to the National Governors Association. And choosing among those projects could prove politically difficult, some governors said.” For most projects, they would get only a quarter of the way through a major construction program even in a year.

The “other” infrastructure project – education – doesn’t have a price tag yet, but the December 20 New York Times noted: “For education, besides money to build and renovate schools, Mr. Obama will call for money to train more teachers, expand early childhood education and provide more college tuition aid.” The success will be in the planning. For those states getting old world infrastructure grants, the new administration is letting local governments set the pace, at least initially, but I suspect the guidelines for rebuilding our educational system will have a more federally-directed tone.

We know what spending quickly without direction is like: Treasury’s Trouble Assets Relief Program (TARP) produced a bailout policy that seemed more like dragging your feet on the ground to stop a speeding car. With pressure to have at least $675-$775 billion (perhaps larger) stimulus package on President-Elect Obama’s desk when he takes office in January, the “easy” button seems dangerously familiar. According to an article reported on December 31st by the Associated Press: “Government officials overseeing [the] $700 billion [TARP] bailout have acknowledged difficulties tracking the money and assessing the program's effectiveness.. The information was contained in a document, released [Dec. 31], of a Dec. 10 meeting of the Financial Stability Oversight Board. The panel, headed by Federal Reserve Chairman Ben Bernanke , includes Treasury Secretary Henry Paulson and Securities and Exchange Commission chief Christopher Cox.”

Republicans on the Hill, still smarting over the misapplication of TARP funds by a Republican administration, are fighting to slow the next bailout process down: “Concerned by Democrats' push to enact the massive bill into law within days of Obama's Jan. 20 inauguration, Senate Minority Leader Mitch McConnell (R-Ky.) and House Minority Leader John A. Boehner (R.-Ohio) issued calls for a lengthy vetting of the stimulus proposal, whose price tag could top $850 billion when it is completed next month.” (Washington Post, December 30). The process could slow passage by a month or more. But the nation is in immediate pain; there is no simply right answer.

Not to mention the battles among federal agencies over who has jurisdiction over infrastructure projects – and then there is issue of how to deal with State politics. The battles between the Department of the Interior and the Army Corps of Engineers alone could fill lengthy books. Add the Department of Commerce, the Department of Labor, the Department of Energy, the Department of Transportation, the Environmental Protection Agency… well, you get the point.

There does seems to be a need for a domestic program rebuilding czar, a super-cabinet position to make sure that jurisdictional battles do not thwart much needed and well-directed educational and job funding. A big misstep at this point and 1929 might produce a big sister.

I’m Peter Dekom, and I approve this message. Have the best New Year you can!

Tuesday, December 30, 2008

Zero Tolerance – We Call It the Middle East

Israel is a very useful country if you need to rally voters, arouse passions or raise money. It’s equally advantageous whether your intention is to stir feelings of national pride, or extreme hatred. It can be a convenient rallying cry whether used in an American election or if you happen to be a Middle Eastern politico. Egyptian President, Gamal Abul Nasser learned that lesson well in the 1950s, congealing political power around him and pulling his regional constituency into a “blaming rage.” If you want to understand the battle ground between Israel and Hamas going on right now in and from Gaza, where hundreds and hundreds have been and are being killed as shells and rockets fly back and forth, a little dash of history can’t hurt. This is an exceptionally abbreviated version, but perhaps it will make a point.

Nasser’s overpopulated, under-resourced nation (no oil) with very little arable land needed to find an excuse for failure. “Zionism” was a convenient scapegoat (Hitler wasn’t enough?), although the impact of Israel’s existence literally had to be marginal at best on the lives of most Egyptians, even though the nations shared a common border. Nasser made sure that Palestinians were kept in camps and not assimilated into the nations that harbored them. They were raised on hate and on a mantra that their only mission in life was to recapture their homeland, lost in Israel’s 1948 declaration of independence. This hatred and mission were handed down from generation to generation of Palestinian children.

Wars between Israel and her Arab neighbors followed, in 1967 and 1973 – Israel expanded into the West Bank and Gaza, absorbing Palestinians along with the hate they felt for their new conqueror. Jerusalem, a holy city to Christians, Jews and Muslims, had once been split in half, but was now entirely in Israeli hands. 1987-1993 and again 2000 saw the Intifadas (Arabic for uprisings or shaking-off) against Israeli rule, suicide bombings, as the Palestine Liberation Organization worked through parties like Fatah towards orchestrating an end of “Israeli occupation” of the Palestinian territories.

Fatah’s opposition party, Hamas (which is on America’s list of terrorist groups), pressed for driving Israel into the sea and considered Fatah a corrupt and powerless organization more focused on its leaders’ own economic well-being than any concern for the Palestinian people. As Israel permitted some limited autonomy for the Palestinian territories they had conquered, Fatah came into power – and was actually finally considered relatively “moderate” in Western and Israeli eyes. Fatah ruled until its own corruption cost it control of the Palestinian Parliament in 2006. Up till then, Israel had withdrawn significant military forces from the Palestinian regions and seemed to be working towards a more permanent disengagement and autonomy for the conquered regions.

The legitimacy of the 2006 Hamas victory clearly rubbed both U.S. and Israeli governments the wrong way – the majority of party diehards still cried for the destruction of Israel (more moderates were willing to accept the pre-1967 borders), and neither Israel nor the U.S. wanted much to do with this radical, terrorist faction. Following a battle in Gaza, the elected Hamas government was ousted from positions of authority in the West Bank in 2007 (and replaced with the Fatah moderates), but Hamas continued to mount a strong counter-offensive campaign from Gaza.

Why in a world that is crashing down in a flurry of economic chaos would Hamas choose now to provoke Israel by raining rockets randomly into Israeli towns and villages? Look at the response: Israel mounted a massive counter attack; ships, tanks, planes descended on the border and troops plunged across into Gaza. Rocket and artillery fire raged. Civilians and combatants died by the truckload.

Why did Hamas attack? Their honor-bound mission to fight and destroy Israel, the sacred vow of many Hamas members from birth, is their reason for being – in their eyes, their solemn obligation. And Hamas’ displeasure with the Fatah regime is profound. These attacks show that region is exceptionally unlikely to find a peaceful solution anytime soon. The December 30 New York Times: “‘It would be easier to dry the sea of Gaza than to defeat the resistance and uproot Hamas which is in every house of Gaza,’ the statement, from the military wing of Hamas, said.” And Israel, under pressure to accept a ceasefire, was equally strident in wanting to send a message to Hamas that its random attacks against Israeli citizens would be met with overwhelming force.

As the American President-elect watches this unfold before him, as the Secretary of State-designate prepares to assume her office, it is clear that while the economic world needs prompt attention, the world of politics cannot be ignored. Broadening the Secretary’s mandate to encompass too many economic activities necessarily requires that she spend less attention on the political quagmires that can sink the planet. Let her focus be clear; we need a Secretary of State who can drill down on the massive political risks that face us without distraction. There are enough other well-qualified new cabinet-level secretaries with the authority as well as the capacity to deal with economic mandate.

I’m Peter Dekom, and I approve this message.

Monday, December 29, 2008

Nixon and Education

Matt Miller (a senior fellow at the Center for American Progress) wrote an interesting Op-Ed piece in the December 27 Los Angeles Times. He was dealing with the consequences of that sacred American value – perhaps outmoded in a world of global competition where the failure to upgrade our national educational standards in public primary and secondary public has dire consequences for the country as a whole – local control of public schools.

In effect, a child in this system is saddled with the budget, quality and opportunity of whatever school district he or she happens to live in, particularly difficult in rundown, over-crowded, underfunded and even dangerous inner city schools, where the parent(s) often cannot afford to move away (or whose social and cultural limitations do not give them that choice). The great “leveling field of opportunity” that we believe our public school system to be is a myth.

Without even addressing the quality of the teachers themselves (which is essential), Miller notes that where an inner city school district might allocated $10,000 per pupil, a rich suburban district nearby might spend $17,000. Schools are normally funded by property tax, and it seems painfully obvious that many school districts are often plagued with low-valued real estate. It’s hardly a level playing field.

A further erosion of effectiveness lies in the massive mismanagement of certain school districts – Miller notes Newark and Washington, D.C. – where incompetent, overloaded bureaucracies, simply make bad choices and waste taxpayer dollars. Again, this reality stems from the notion that local control of schools is a necessity. While the No Child Left Behind Act actually rated school performance, its failure to provide even close to the required funding to address the issue has had spotty and very limited success, at best. But just “hiring” more teachers without more is not the answer.

Teachers with seniority often have the choice of the schools to which they are assigned, so dangerous and troubled inner city schools are thus often saddled with the least experienced educators. With a few exceptions, these neophytes simply cannot cope with the challenges. Not only do these teachers often quickly leave the system in frustration, but the students who need the most help get the teachers with the least ability. Poor performance is thus reinforced.

Enter the thoughts and plans of President Richard Nixon’s administration from more than three decades ago. Miller: “Nixon’s commissioner of education said publicly that the federal government should pay 25 percent to 30 percent of the cost of public education. His domestic policy staff considered a new national tax, with the proceeds distributed to states that drastically reduced state and local property taxes while closing the financing gaps among their school districts… In the end, of course, Nixon found he had bigger problems to deal with [the cost of the Vietnam War was crippling]. But he left a blueprint for Mr. Obama to follow. The federal government contributed just $45 billion of the $488 billion spent on primary and secondary schools in 2004 and 2005 (the most recent data available). That’s just nine cents of the nation’s education dollar.”

Meeting the recommendations of the Nixon administration today, which would effectively aid cash-strapped states and level off deficiencies between school districts, might cost us $100 billion a year, maybe more (and that is in addition to repairing and building schools under President-elect Obama’s infrastructure-jobs program), but as I have hammered home in previous blogs, given the rate that our national debt is growing to counter this managed depression, we need a productive work force to pay it back in the future or face staggering inflation and a concomitant decline in our quality of life. (To put the cost in perspective, we spend approximately $10.3 billion on the Iraq war every month.)

I’ve suggested a number of ways to attract more young people to choose the teaching profession in the future, but eliminating federal (and even state) taxes on income derive from teaching (not administering) would be an easy step we could take to find teaching candidates right now. There are many qualified educators, currently working in other professions, who would be ready to get back to the classroom… if only a decent living was possible. The time for action is now; the clock is ticking on this time-bomb.

I’m Peter Dekom, and I approve this message.

Sunday, December 28, 2008

The Dead Horse that will Not Die

We watched as Harvard projected up to a 30% decline in its endowment fund by year’s end, Yale 25%, and the list goes on and on. Expansion projects have all but stopped, faculty searches stayed, and financial aid spiraling down. Syracuse even sent an anxious letter to alumni asking for $2 million to prevent hundreds of scholarship students from leaving for lack of funds. State schools have been slammed even harder as 36 states face genuine budget deficits, none even close to California’s massive debt (see my blog on this state), which threatens to raise tuition by a whopping 10% in these deflationary times.

As noted in earlier blogs, supporting education isn’t just a noble cause; it’s the key to our survival as a world power with economic growth. It is a productivity-enhancing hedge against the massive borrowings saddled onto the backs of future generations – the only way we have a shot of stemming the post-recovery, inevitable inflation that results from a huge national debt and limited productivity growth. It is the primary path to the research that will create those new technologies where jobs and prosperity are born. It is the training and skill-building that makes your labor force create value for the country.

As also indicated in an earlier blog, the shortfalls in the pool of technically, mathematically and scientifically trained workers requires us to open the immigration doors wider than is politically popular. I’ve illustrated in past blogs how these immigrants have created and sustained a disproportion number of American jobs. But wouldn’t it be even better if we made getting educated easier for our own citizens?

With families no longer able to rely on “cashing out” or borrowing against their home equity for college costs – the myth of the home as America’s savings account died hard in this economic meltdown – with primary and secondary education, particularly in this nation’s public school systems, deteriorating as education budgets are cut along with everything else, and with financial aid evaporating in our colleges and universities, many are simply dropping out. Young adults today are less educated than adults over 34. 42% of American adults read at a fourth grade level or less. Where is the required productivity-enhancement in these numbers?

On December 27th the Los Angeles Times looked at another anomaly among those students who braved the economic storm and chose debt as the path to higher learning. For those who did not qualify, exceed federal limits or otherwise could not secure a federally-backed student loan (6-6.8%), they had to turn to the private lender market (which is also contracting in this meltdown), where interest rates could reach 15% (even 18% if you count the fees), resulting in absurd post-graduation loan repayment levels that often exceed the graduates total earning power.

The Times: “About $15 billion in private student loans are expected to be funded this year, a 900% increase from a decade ago, according to the nonprofit College Board. Private loans are growing faster than federally guaranteed loans, which rose 59% over the same period, in part because of limits on how much students can borrow with the government's backing…Four years at a public university, including room and board, costs an average of $57,332, according to the College Board. The average tab for a private university is $136,528. Yet the maximum that can be borrowed under the federal loan program is $31,000.” Since 1982, college costs have increased by more than three times the increase in American earning power; the federal student loan limits simply have not kept up with that rise in costs.

In 1972, the federal government chartered Sallie Mae to administer federally-backed student loans. Eventually, Sallie was spun off as a publicly-traded lender (listed on the NYSE), making both federally-backed as well as the higher-interest, non-federal student loans. Many students approach this company for their loan package, assuming that since this is the source of federal-backed student loans, this is the best deal that they can get. It often isn’t. Other lenders abound, but no one is nearly as cheap as the federally-backed student loan.

It’s tough enough to understand this complex loan process as an experienced adult, but folks in their late teens or early 20s are probably the least qualified to understand the risks, not to mention that the information provided online (where students look for answers) often falls way short of full and accurate disclosure of costs, fees, and whether or not the rates can rise over time. In short, student loans are beginning to look a lot more like credit card debt than what most people who have not dealt with the system remember from days past.

What all of this means is that our current methods for funding education are broken, possibly irretrievably, even though education is the cornerstone of our survival. Whether it’s raw government grants combined with economically-appropriate loans, or the ability to pay for education by trading a pledge for government service or a few percentage points of lifetime earnings, if we do not solve this problem soon, we can watch as our national prestige plummets almost as fast as our standard of living. This is a RED ALERT! This is not a drill.

I’m Peter Dekom, and I approve this message.