austerity
Our Converging Crises V: Weak Democrats and their Governing Boards Feed Austerity Budgets
That may be my worst title ever but it's an important point. So here we go.
Where are university budgets near the end of our bad policy summer? In a bad place -- a worse place than seemed likely during the weeks of activist government from mid-March to mid-May. In this post, I'll discuss the national issue, describe a flawed university budget discourse that makes universities more vulnerable, and link this to the failure of today's mainstream Democrats to accept the economic role of government.
The federal CARES Act was signed on March 27th, and sent universities $14 billion of the $46.6 billion they'd requested (with half of that going directly to students). Having gotten 1/6th of their stated need, higher ed advocates placed their hopes in a follow-up HEROES Act passed the House on May 15th, which Mitch McConnell, Senate Majority Leader, sat on throughout the summer. Thus the nation's schools and colleges planned for fall in a state of deep uncertainty and growing dread.
This past weekend, POTUS signed executive orders (mostly "memoranda") mandating supplemental unemployment benefits at $300 rather than CARES's $600 per week, with another $100 to come from the states. He extended student loan forbearance from September 30 to the end of the year. Even if these orders go into effect, there are no provisions for supplemental funding for education at any level, including nothing for the K-12 systems that POTUS and his Department of Education secretary have been trying to bully into opening. If the states are forced to pay part of the federal unemployment supplement, which some say they can't, that will mean even bigger state cuts to education.
The American Council on Education has a helpful summary of the current situation:
There are technically three bills under discussion in the COVID-19
emergency aid negotiations. The first bill is the HEROES Act written by
House Democrats and approved by the full House two months ago. The
second is the HEALS Act, which represents the ideas of Senate
Republicans and the White House. Finally, the Coronavirus Childcare and
Education Relief Act (CCCERA) is legislation introduced by Sens. Chuck
Schumer (D-NY) and Patty Murray (D-WA) that reflects Senate Democrats'
ideas about education spending in response to the pandemic. . . . The bills all include
emergency aid for students and institutions, but the levels of funding
proposed differ greatly. ACE has estimated that institutions have a
total of $46.6 billion in increased student financial need and lost
revenues, and will spend at least $73.8 billion on new expenditures to
reopen in light of the COVID-19 pandemic. While CCCERA provides a total
of $132 billion to meet these needs, the $37 billion provided for higher
education in HEROES and the $29 billion provided in HEALS fall far
short.
The federal bill that comes closest to meeting actual higher ed need--at $132 billion--has no chance of passing McConnell's Senate.
Republican control of key governing bodies has artificially induced massive state failure in suppressing SARS-CoV-2. The U.S. has the worst Covid-19 suppression record in the wealthy world, and, by failing to build public health infrastructure (see Jeneen Interlandi's superb overview), will continue to inflict massive suffering, disparately along lines of race and class, in all of the areas where common life should offer equal treatment, including education. The failure of public infrastructure is damaging the private economy that Republican-driven premature opening was trying to protect. Republican opposition to a new stimulus increases the odds of a new depression (see Hiltzik and Krugman for summaries).
Operating on this familiar political landscape, it's hard for people to maintain transformative ambition. I sketched one version at the end of April ("Our Converging Crises III"), which involved massive public spending for full Covid-19 suppression, full employment, and educational experimentation. The American self-conception is of a nation that leads the world into a better future. The reality, given our decrepit social infrastructure, is a vast majority focused entirely on getting by.
The Real Covid Budget Crisis
The same is true in higher education. There's been no follow-up on the early burst of federal effort, and higher ed is engaged in a new round of austerity, translated as operations cuts, layoffs, and program downsizing. The Cal State system threw in the towel early, announcing on May 12th that it would be all-online. This was at a time when most administrations assumed Covid-19 would be well in hand by fall; Cal State's Chancellor Timothy White could see pretty clearly that they didn't have the extra billion they needed for testing, tracing, isolating, cleaning, tent classrooms, and the rest. Since then, reopening plans have gone into full reverse, including at wealthy private institutions like Princeton and Johns Hopkins whose core value is small-scale face-to-face learning.
University of California campuses are quietly joining Cal State's closures on a case-by-case basis. Berkeley announced all-online on July 21st. The other semester campus, UC Merced, will open August 26th with an unspecified ratio of remote and in-person. Among quarter campuses, which start a month later, UCLA has dropped its in-person proportion from the 15-20% announced in June to 8%. UCSB hasn't officially updated its mid-June description of fall quarter as "some face-to-face," but is heading toward basically closed. UC Irvine is keeping its students in the "most classes will start remotely" twilight zone. All sorts of intensive planning is going on behind the scenes. And so are planning for budget cuts when UC needs that same extra billion that Cal State needed to open safely.
Although dominated by liberal Democrats, the California state legislature put stable CSU and UC funding in the hands of Mitch McConnell at at time when he was already holding it hostage. In the final state budget, UC will get a 5% increase over 2019-20 if and only if California gets $14 billion in federal stimulus. If there's no stimulus, UC gets what UCOP calls an 8% cut from 2019-20.
In addition, the permanent state budget is cut either way: the federal stimulus money will be treated as a one-time backfill on the state cut. Even that was a bizarre combination of "augmentations totaling $212.9 million and reductions totaling $471.6 million." Rather than offering higher ed affirmation and stability during the pandemic, the legislature provided a changing combination of cuts and increases that, without an unlikely Senate backfill, gives UC and CSU a major cut.
How big a cut, actually? The legislature reduced the state allocation for UC from $3.938 billion in 2019-20 to $3.466 billion in 2020-21. This is a year-on-year reduction of 12.2%. Its a Covid cut of a size that a red-state legislature could brag about.
It's worth remembering all the way back to November 2019, when The Regents requested an increase of $422.1M in overall state funding, which would have brought state general funding to $4.360B (see the slide here minus $25M for the Riverside School of Medicine). Annual base cost increases at UC are a bit more than 5%, and since that's 5% on less than half the revenues of the core budget, which comes mostly from (long-frozen) tuition, 5% state increases put core funding further behind. Campuses have tirelessly tried all sorts of revenue workarounds, mostly involving overenrollment coupled with non-resident student growth, but it hasn't worked. (For the resulting long-term austerity, see "Three Essential Charts"). On top of its rather brutalist history, the California legislature now proposes to cut UC by $903.5M from its November request--barring a McConnell conversion like Saul's on the road to Damascus. The is a cut of 20.7% from the Regents's November request.
Remember too that even had that $903.5 million November increase been enacted, many campuses were projecting deficits in 2020-21 or the following year. That was not a luxury budget. To repeat: because of prior cuts by Govs. Schwarzenegger and Brown, years of tuition freezes, and sub-inflation state growth, the non-miracle state budget cut that now looks likely is a 20.7% cut from pre-Covid's home for UC semi-solvency.
This would be a disaster for UC (and CSU). And it's likely enough to be treated explicitly in plans for both budgeting and the University's political engagements.
Budget Idealism at the UC Regents
This brings is to the July 30th UC Regents meeting. The Regents have absolute authority over budgeting, revenue strategies like borrowing, as well as political advocacy. If alerted to a budgetary emergency, the Regents might be expected to instruct UCOP to mount a massive siege of Sacramento and Washington D.C., pulling in their contacts in the tech community as well as in national politics. But UCOP's budget presentation (see the July 30 afternoon session at the bottom of this page), rather than rallying the Regents, kept the real dangers behind the curtain. And Regental behavior encouraged this concealment.
UCOP presented the budget as in basically good shape. Medical losses for March-June 2020 are $1.7 billon rather than the earlier projection of $2.8 billion. UC Health VP Carrie Byington had already suggested that the med centers have learned so much about Covid treatment that they won't repeat spring's revenue losses during the current and future infection spikes.
Undergrad enrollments are "looking very strong," in the words of associate budget VP David Alcocer (11'47"). He said the same was true of international enrollments, in spite of a very turbulent policy picture on top of Covid travel problems. He basically claimed that enrollment targets would be hit no matter what. I'm also a bit of an optimist on enrollments because I'm a pessimist on the economy: even remote-college looks good compared to a nonexistent job market. Polling data suggest we're both wrong, and that colleges should expect a growing enrollment melt.
The presentation noted that housing and dining revenues will be down, but UCOP did not quantify or tie these to different durations of Covid-related reductions. A bit later, UCLA chancellor Block offered some campus numbers, and in later questions a couple of Regents clarified that only single rooms will be offered in the fall, though without revenue numbers for system losses. New VP for Research and Innovation, Teresa Maldonado, gave a candid appraisal of major disruption to research, UC's distinguishing educational activity. She was particularly direct on the damage to women and early-career researchers. But this remained a matter of delayed research progress more than a fiscal crisis.
The presentation of the state budget was a delicate matter (starting around 7'40"; I'm not following UCOP slide order). Alcocer explained the numbers in the slide below (they are different from my calculations above). He noted that the final July budget has a better upside than the May Revise and a smaller potential downside.
He then went on to explain his right-hand column. He noted that "there's a lot of uncertainty here" because the range of outcomes is nearly half a billion dollars, or 5% of the core budget (9'20"). I can attest that the uncertainty has created in campus planning a somewhat toxic mixture of paralysis, wishful thinking, gloom, and fatalism about cuts. Uncertainty is actually encouraging austerity by making the early stages seem very mild.
But Alcocer's statement about uncertainty incurred an interruption from Chair John Pérez, who said,
I just want to push back on the way we characterize this uncertainty. And here's why. The way this reads to me, in simple terms, is "uncertainty is bad, and smaller uncertainty is better than greater uncertainty." When in fact the final budget, in both the worst-case scenario and the best-case scenario, are better for the University, than the May Revise. . . "Uncertainty" is inherently a bad term, so if we want to look at "range"--some other way to characterize it--because we don't want a negative connotation to the spread we see in the final budget, when in fact it serves us better than the May Revise does."
This intervention forced Alcocer to repeat what he had said two minutes before, which was that the upside was better in July than in May. It suggested to me that Pérez has no idea how uncertainty is weakening the campuses. It also suggested that he would not tolerate university officials criticizing the state legislature in even a polite and indirect way. Any campaign to get a reliably flat budget from the state (not conditioned on McConnell's conversion to St. Mitch), or an increased budget that could cover Covid costs, would never get off the drawing board under Pérez.
The misty aura of fiscal stability was punctured only by Berkeley chancellor Carol Christ, who projected a $340M deficit through fiscal 2021 (or more than ten percent of the campus's $3 billion or so in annual revenues). She read a version of her administration's July 15th statement, and stressed the dependence of the campus on tuition and state revenues. She stated that the latter were $100M below their 2008 level even though the campus enrolls 8200 more students today.
If the Regents had paused to take that in, they'd get a glimpse of the system's deep structural woes. Berkeley is historically wealthier per student than any campus except UCLA, so a responsible Board might wonder what its woes say about the rest of the system. This was the only time in living memory that a Berkeley chancellor has said point blank that privatization doesn't work and thus we need good state support. Actually Christ didn't say that, but she came closer than ever before to noting that the problem isn't just Covid but a flawed business model in which the University has let state funding massively decline.
Later, as Alcocer was about to move to UCLA chancellor Block for a campus view of losses in auxiliaries, Board chair Pérez interrupted to complain about how long the budget presentations were taking. "This was identified as a thirty minute discussion. . . . when an item is 30 minutes, the presentation is no more than half of that. We've now exceeded 35 minutes, before we've gotten a single Regent engaged in discussion." (32'30"). The obvious remedy would be to allocate more than a half-hour to analyzing what may be most important fiscal crisis in the University's history. The time overrun was entirely due to letting three chancellors say a few words about their campus finances outside of the UCOP PowerPoint story. Things got even more rushed after that--and even more superficial.
In questions, terribly delayed to minute 38, Regent Makarichian performed his solo role of asking for budget numbers, and guessed at overall losses by adding some numbers in his head. Pérez instructed CFO Brostrom to have those figures in the September meeting. I know Brostrom had versions he could have produced then, but who would dare try the Pérezian patience by pulling up another slide?
In the meantime, UC is covering its losses with borrowing. It floated a bond for $2.8 billion in July, with $1.5 billion in "working capital" and the rest for capital projects. (UC debt has doubled in a decade from around $10 billion in 2009-10 to $24.6 billion in 2018-19). The budget discussion ended with a hopeful wait-and-see good-case scenario which, as I've said, is translated on the campuses as cuts.
A Plausible Scenario for 2020-21
The Office of the President and the campuses are all doing projections, so I'm going to adjust some internal UC numbers to draft a plausible negative scenario. This is not a good case, but it's not a worst-case: for example, I optimistically assume that students who can enroll do enroll, and that all are willing to pay full tuition for mostly remote instruction. The nicer scenarios assume a return to mostly-normal after the fall term. Based on our country's failed-state approach to Covid suppression, I assume that full fall impacts last through the end of Spring 2021. I use the governor's January budget as a base for state funding, which was $220M less than the Regents' November budget.
The assumptions:
- Tuition: full undergraduate enrollment. Though 75% of admitted international students do not enroll, many are replaced by domestic non-resident and resident students. Waitlists and "appeal" lists are liberally used, maintaining overall totals.
- Housing is converted to singles, and dining does not return to normal, costing campuses 70% of normal revenues.
- Grad student enrollment. This falls 15%, slowing research, but it has little impact on revenues as campuses simply eliminate sections as necessary in remote courses, while canceled grad seminars free up some faculty to teach more undergraduates.
- Research continues to be affected by outbreaks made worse by shortages of tracing and isolation programs.
- Philanthropy is reduced by renewed turbulence in the markets, as is UC investment income.
- Medical center and clinical revenues recover from spring 2020 levels but don't get back to normal.
- The Republicans block higher ed stimulus funding in the Senate. Although the Democrats win back the Senate in November, President Biden wishes to govern from the center, and decides not to antagonize the 48 remaining Republicans by giving too much help to education. Like public universities everywhere,UC goes to its lower permanent state funding base.
Here's a rough estimate of what this would look like by standard budget category.
Scenario B
Budget Category
Decline $Millions
Negative % Change
2020-21 Base
39,738
Student Tuition and Fees
775
14
Auxiliary Enterprises
1165
61
Research Contracts & Grants
779
12
Philanthropy & Investment Income
555
19
Medical Centers
2279
15
Educational Activities (esp Clinical Rev)
521
12
State General Fund Appropriation
481
12
Total Losses
6555
16.6
Projected 2020-21 UC Revenues
32,823
Scenario B is a decent guess at one possible program for 2020-21: 17% revenue declines for the UC system overall, and 12% or so for the educational core. Cuts like these would cause major damage to teaching and research, and of course prevent meaningful Covid-19 suppression. If two things happen, first, Covid illness persists for several years, as some medical officials predict, and second, U.S. politics allows economic decline, then UC, like other universities, will be permanently downgraded.
The Governance Problem
The Republicans are obviously the biggest problem, but so are Democrats and their governing boards. The Republican donor base sees government as a potentially victorious competitor to business and finance in economic management (through equitable tax policy and regulation but also better social infrastructure and more productive investment). Weak government has enabled today's "plutonomy." Republican politicians logically oppose programs that will make government useful, effective, and popular and thus empower their direct rival.
But Democrats are also a problem when they reject both strong and weak Keynesianism. In the strong version, public agencies spend massively to reconstruct society on the principle of equal treatment. This would fund a Green New Deal in which, for example, some of our tens of millions of unemployed people would be paid by the government to insulate the country's housing stock, starting with those owned by low-income people. I pointed towards this kind of spending in an April post. Let's call it democratic-socialist Keynesianism, Sanders and AOC-style.
There's also weak Keynesianism, a very useful combination of FDR and LBJ, in which public agencies spend massive amounts to keep an unjust and unequal status quo economy from imploding. That would include the common-sense goal of keeping the education sector from shedding employees into a non-functional economy by giving schools and colleges stable funding. It would include the UK policy--enacted by the Conservative government--of covering 80% of the salary of laid-off employees so they can be furloughed rather than fired.
Mainstream Democrats don't exactly oppose this kind of thing. But they don't promote it as their bread and butter. They also don't clearly expose the urgent need for it, or encourage others to expose it. At times, liberal Democrats like John Pérez actively block the creation of a budgetary need for weak Keynesian spending by preventing the open declaration of a budgetary problem.
The current UC Board of Regents is chaired by the former Democrat Speaker of the Assembly. It includes the Democrat Lt.Governor, the husband of California's senior U.S. senator, and several former or current members of two Democratic governors' immediate offices. It also boasts several wealthy and prominent Hollywood liberals. There is really no reason for this group not to activate itself in centrist Keynesian fashion. They would then create an urgent obligation on the part of the state to sustain its educational workforce, infrastructure, and student population, whose lives are currently set to be permanently damaged by the Covid depression.
I don't understand the complacency that demands the current UC budgetary vagueness in which nothing is true and everything is possible, until the only possibility becomes austerity. It feels like proleptic excuse making--"we didn't fail to act, because we didn't know." I don't understand the lack of ambition, even the bare ambition to keep the rising generation whole. We can obviously do that, but it will take much clearer budget work at the level of senior management and governing boards. It will take boards willing to support unprecedented mobilizations of political will for higher education, or at least willing not to block them,
Inequality breeds stress and anxiety. No wonder so many Britons are suffering | Richard Wilkinson and Kate Pickett
In equal societies, citizens trust each other and contribute to their community. This goes into reverse in countries like ours
The gap between image and reality yawns ever wider. Our rich society is full of people presenting happy smiling faces both in person and online, but when the Mental Health Foundation commissioned a large survey last year, it found that 74% of adults were so stressed they felt overwhelmed or unable to cope. Almost a third had had suicidal thoughts and 16% had self-harmed at some time in their lives. The figures were higher for women than men, and substantially higher for young adults than for older age groups. And rather than getting better, the long-term trends in anxiety and mental illness are upwards.
For a society that believes happiness is a product of high incomes and consumption, these figures are baffling. However, studies of people who are most into our consumerist culture have found that they are the least happy, the most insecure and often suffer poor mental health.
It's the demand, stupid! The role of weak demand on productivity growth
I couldn't resist the title.
Last week I was invited to give a short talk on what I thought was the most pressing policy issue facing the world economy today.
So I presented the findings from a very interesting paper entitled "Explaining Slower Productivity Growth: The Role of Weak Demand Growth" by Someshwar Rao and Jiang Li.
The paper examines the link between demand and productivity growth in both Canada and OECD countries. This issue has been an interest of mine ever since I read these lines in a book by Alan Blinder several years ago:
Economic slack...discourages business investment because companies that cannot sell their wares see little reason to expand their capacity. In consequence, the nation gradually acquires a smaller, older, and less efficient capital stock.
[A]lthough the state of the national is far from the only factor, who doubts that a booming economy provides a better atmosphere for inventiveness, innovation, and entrepreneurs than a stagnant one? As the cliché says, a rising tide raises all boats...From 1962 to 1973, our generally healthy economy experienced only one mild recession, an average unemployment rate of 4.7 percent, and productivity growth that averaged a brisk 2.6 percent per annum. [Between 1974 and the mid-1980s] the economy [was] frequently...out of sorts. We...suffered through two long recessions and one short one, with an average unemployment rate of 7.3 percent and a paltry average productivity growth rate of 1 percent. This association of high unemployment with low productivity growth is no coincidence.
Surveying these concomitants of high unemployment -- lack of upward mobility for workers, sluggish investment, lackluster productivity growth -- suggests an ironic conclusion: the best way to practice supply-side economics may be to run the economy at peak levels of demand. (1986:36).
This still makes lots of sense to me.
Verdoorn's Law
During my talk I described the paper as lending support to the well-known findings of economist Petrus J. Verdoorn, who several decades ago published research showing a positive relationship between labour productivity growth and real output growth.
In retrospect, I probably shouldn't have discussed this since it led to a number of questions on Verdoorn and his research, which shifted the focus away from the paper and the real purpose of my talk, which was to drive home the point that there is considerable evidence that productivity growth shouldn't be viewed as solely a supply-side phenomenon.
Specifically, the paper supports the -- in my opinion, common sense -- view that a slowdown in domestic and external demand is detrimental to growth in labour productivity, real incomes and economic activity because of the negative impact of weaker demand on scale and scope of economies, formation of physical and human capital, innovation and entrepreneurial activity.
Here are the paper's main findings:
Our major findings is that 93 percent of the fall in average labour productivity growth between 1981-2000 and 2000-2012 can be attributed to the drop in real GDP growth between the two periods...In addition, our new empirical research shows that a slowdown in growth of domestic and external demand also impacts negatively some of the key drivers of productivity growth, such as, gross fixed capital formation, M&E investment (including ICTs) and R&D spending, thus leading to lower trend labour productivity. (2013:14)
I concluded my presentation by discussing some of the policy implications outlined by the paper's authors. At this point, I was hoping my comments would get the attention of the government policy analysts and economists in the audience.
First, I suggested that it would be prudent for governments to ensure that deficit and debt reduction measures are gradual in nature so that their negative impact on domestic demand would not be excessive.
Then, I explained that it's always a good idea for governments to spend on productivity-enhancing public investment, even during a period of economic slowdown, as it contributes to both today's demand as well as future productivity growth.
References
Blinder, A., Hard Heads, Soft Hearts, (Mass: Perseus Books)
Rao, Someshwar and Jiang Li, "Explaining Slower Productivity Growth: The Role of Weak Demand Growth", International Productivity Monitor, Spring 2013.
Anthony Atkinson on the public debt and intergenerational equity
It's been a long time since my last post. Much of my spare time has been spent reading and thinking about the best way to think about the economy. In the end, I've come to the conclusion that it's the big picture that matters.
Take the question of the public debt. Much of the discussion in the popular press relating to the national debt focuses on the liabilities of the government and actuarial concerns (dealing with "how to pay it off"), but it rarely discusses the link between public debt and private wealth, wealth distribution and intergenerational equity.
Anthony Atkinson, I believe, summarized it best here:
Much of the rhetoric of fiscal consolidation is concerned with the national debt as a burden on future generations [...] One lesson of the public economics literature on the national debt is that we have to look at the full picture. We pass on to the next generations:
- national debt,
- state pension liabilities,
- public financial assets,
- public infrastructure and real wealth,
- private wealth,
- state of the environment, and
- stocks of natural resources.
We need to look at the overall balance sheet, where assets as well as liabilities are taken into account. This does not mean that the position is a healthy one. If we consider the difference between the assets of the state and the national debt, expressed as a percentage of the total national wealth, then in the 1950s the net worth of the [UK] state was negative, but it was becoming less negative, and turned positive in the 1960s [...]
The direction of change since the 1970s has however been in the wrong direction [...] In effect the process of privatisation, with the proceeds used largely to fund tax cuts, transferred wealth from the state to the personal sector. We saw that it was at the end of the 1970s that personal wealth began to rise faster than income. The worsening of the public balance sheet is the other side. Personal wealth has risen faster than national wealth since the 1970s because, in effect, assets have been transferred from the public to the private sector. We are passing on more privately to the next generation but less publicly.
Reversing this pattern can be achieved not only by reducing the national debt, but also by increasing public assets.
Now, to say that more wealth is being passed on privately rather than publicly does not mean that it's being passed on equitably.
For instance, when the government sells-off public sector assets such as parks and decommissioned military bases, the government can use the proceeds to pay down the debt, but the assets get transferred to the purchasers of those assets in the private sector, who, most of the time, don't have the same class and socio-economic profile as that of the whole population (i.e., the former "owners" of those assets).
So here's the bottom line: paying down the debt by selling off public assets to the financial interests has contributed immensely to the wealth inequality that is being discussed these days.
And the corollary to this statement is that there's still lots of wealth "out there" that could be used for public purposes and has the potential to be passed on to future generation in a more equitable manner. It hasn't disappeared, it's just changed hands.
Reference
Atkinson, A.B., "Public economics in an age of austerity", January 12, 2012
Impact of the US Payroll tax cut...and tax hike
This is a very informative (and short) piece by economists at the NY Fed on the effect of the 2011 US payroll tax cut and its recent expiration.
Here's a good summary:
Overall, our analysis suggests that the payroll tax cut during 2011-12
led to a substantial increase in consumer spending and facilitated the
consumer deleveraging process.
Based on consumers’ responses to our recent survey, expiration of the
tax cuts is likely to lead to a substantial reduction in spending as
well as contribute to a slowdown or possibly a reversal in the paydown
of consumer debt. These effects are also likely to be heterogeneous,
with groups that are more credit and liquidity constrained more likely
to be adversely affected. Such nuances may be lost in the aggregate
macroeconomic statistics, but they’re important for policymakers to
consider as they debate fiscal policy.
Reference
Zafar, B., van der Klaauw, W., My Two (Per)cents: How are American Workers dealing with the Payroll Tax Hike, Federal Bank of New Work, Liberty Street Blog.
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