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Sunday, July 01, 2007

Review of Strapped

Finally, I have reviewed Strapped. Tamara Draut’s book, with the subtitle Why America’s 20- and 30-Somethings Can’t Get Ahead, posits that college loans, a more difficult job market, credit card debt, home costs, and the expense of children conspire to make it more difficult for today’s young adults to get ahead. The author works for a liberal think tank.

I’ll admit up front that I’m the person who most contradicts everything in Draut’s book:
1. While I was fortunate enough to graduate with no college debt, thanks to my parents, I had a full scholarship option at one college I applied to, and schools I didn’t apply to could have provided other scholarships.
2. I entered college with a career in mind, took the courses I needed, and graduated in four years. I could have graduated in three years.
3. My career is most commonly entered with just a bachelor’s degree. A master’s degree is generally less important than exams, and is typically attained only by foreign students.
4. Because my career has a system of professional exams for accreditation, these exams provide a clear career path, including significant raises, for those who pass.
5. My career has had consistently strong demand over the years, with an active system of recruiters.
6. I pay off my credit card bills monthly. I don’t buy items on credit, other than one car and one home.
7. I live in an inexpensive area. The money saved in rent or mortgage can fund many vacations to New York City to experience culture, if desired.
8. I put away money into work-sponsored retirement accounts, personal IRAs, other investments, and also pay down those two debts mentioned above.

We are introduced to a number of individuals and couples who are struggling to make ends meet.
1. A woman unable to get scholarship money or financial aid, got her associate’s degree, hoping to get a teaching degree
2. A couple who got into financial trouble with twin babies and a failing business
3. A couple with three kids, college debt, and a layoff
4. A woman whose parents couldn’t afford college, so she went to night school, and is described as supporting an unemployed boyfriend and a child
5. A woman who decided she didn’t like her expensive private college after attending a semester, then attended art school
6. A woman who, while attending college, chose waiting tables over internships in order to earn more money, majored in French, studied abroad, and graduated in a bad job market
7. A couple, both with masters degrees, one who was laid off, the other working in a position that does not require a masters degree
8. A woman who chose to leave one job to be with her husband, to leave another job without a backup plan because of the work environment, lost a job in the tech bust, and didn’t file for unemployment
9. A woman who moved out at 18 because of relationships with her mom, left a full-time college after one semester, and went to art school
10. A man who got sick
11. A woman who lives in New York City, and studied screenwriting at NYU
12. A high school graduate who bounced around jobs, with a wife and child, and three high-interest loans, despite a decent credit rating
13. Working as a restaurant manager and a medical assistant
14. A social worker
15. A woman who shuffled countless balances among credit cards during college, and continues to use them for purchases now, after “studying abroad in Scotland, flying to Paris, having the perfect wedding”
16. A couple with a load of pre-marriage debt who feel they have to spend money taking themselves and their two kids to visit relatives
17. A couple who emptied a 401(k) for a down payment on a house
18. A high school guidance counselor with two kids
19. A couple with a daughter, unwilling to leave New York City because he loves the people and fast pace
20. A divorced woman, her ex-husband stressed by 9/11, who quit work because of the divorce and moved home with her parents
21. A woman who moved in with a friend in Boston, decided she didn’t like it, and so returned home to Washington D.C. most weekends
22. A teacher in California
23. A couple earning $160,000 per year in a half million dollar house in the Connecticut suburbs of New York City, staying close to family
24. A divorced mother, trying to find stable child care
25. A married couple, also looking for child care, specifically child care that doesn’t require full-time enrollment

Now, for one of these couples, who earns considerably more than I, there's a simple solution. GET THE HECK OUT OF THE NEW YORK CITY METRO AREA. You are paying a high price for high culture, and that should be considered as much a luxury as $4.00 lattes and $50.00 dinners for two.

In general, though, I see a lot of bad choices and bad luck, and decisions I wouldn’t choose when financially struggling, but nothing like a system that is fundamentally broken.

Credit Card Debt


Draut rails against how students are bombarded with credit card ads. Like the mythical guns that kill people without any human responsibility, credit cards are tools that can only hurt their users if they choose to use them in a hurtful manner.

I think it's terrible that so many people make poor choices, don't bother learning about revolving debt, and end up with huge credit card balances. But what’s the solution? We shouldn't bail people out. It’s not right. That is a fundamental unfairness that is seen, for example, when we experience floods.

1. People who live in flood plains are supposed to buy flood insurance from the federal government, to protect themselves
2. When they don’t, and the river floods, the government bails out the people without flood insurance anyway.

We need to avoid programs that reward irresponsibility.

It would not surprise me if many of the people arguing that students aren't mature enough to avoid being taken advantage of by fiendish credit card companies are also arguing that students are mature enough to handle alcohol and marijuana.

In describing the expenses for young adults, she mentions travel. "An out of town wedding is a huge expense for young adults, one that contributes to the steady accumulation of credit card debt among twenty-somethings. To beg off is to lose a friend."

This assertion is the most jaw-dropping one in the book. You must attend a friend's wedding to maintain their friendship, no matter the hardship to you? What's next?

Person A: "I'm sorry, I can't attend your wedding. It's held during our budget season, where we are prohibited from taking vacation time and have mandatory Saturday workdays."
Person B: "Your job isn't important. If you don't come to my wedding, you're not my friend."

If I invited a good friend to my wedding and he or she said "I just can't afford the travel costs," I would say one of two things:
1. "I understand. Your best wishes are all I ask for."
2. "I really want you at my wedding. Let me cover your plane ticket and hotel costs."

It makes me wonder: is this the way the popular clique lives? I'm thinking of the type of people who must wear the right clothes, listen to the right music, and hang with the right people, which is not how I lived. You are forced to give up your own style and abandon past friends to meet the requirements of the clique. That's the only type of person who would selfishly force you to endure hardships for their own benefit.

Housing Costs

Rents and housing prices are very high, particularly in major urban areas, and many young adults can only afford houses with larger mortgages. Draut excuses young adults for wanting to live there, citing that these cities are tops for several industries and, of course, tops in nightlife. But as far as I’m concerned, if you’re working the type of job where you need to be at the top companies, you should be well-enough compensated that housing costs aren’t a problem.

And one interesting comment in this section concerned battles between young and old residents, with communities knowing that the cost to support families (schools, etc.) is higher than the cost to support the elderly. Obviously, the communities aren’t considering the costs caused by elderly drivers. And here we see a golden example of how valuable diversity really is.

Policy Suggestions

Draut offers some policy suggestions. First, I must say she immediately loses credibility by suggesting that the funding for one of these proposals could be done by eliminating the 2003 tax rate cuts. People like her must first explain away why taxes collected increased when tax rates were cut, if we are going to believe that increasing tax rates will fund her proposals. She also claims that during the boom years of the 90s, states enacted tax cuts rather than save the money for a rainy day. No, states increased their spending far more than they cut taxes.

Her anti-Republican bias is also highlighted by including a table delineating the percentage of donations given to Republicans by election cycle. It rises, but hello? The Republicans took control of Congress. Business donates to the party in power.

And I can’t believe anyone would seriously refer to IRAs as tax breaks or foregone taxes. This money is eventually taxed.

Now, for the suggestions:

The Contract for College: The idea of unifying grants, loans, and work-study, and providing clear information to parents about the availability of these programs, is good. The rest is a matter of funding. Fundamentally, though, the problem lies with colleges, who follow the budget principles of government: the budget expands to fill the funds available. The mere presence of these loan and grant programs encourages these double digit tuition increases.

Career-ladder programs: Like traditional apprentice programs, these can help move workers from entry-level jobs to higher-paying, higher-responsibility jobs in the field. However, her love of unions shows. She endorses the idea that workers shouldn’t get a secret ballot to support or oppose a union. Rather, if the union thugs can intimidate enough workers to sign union cards, she wants that union recognized. If you’re honest with yourself, where do you think the expression of voters’ will will be strongest, in secret, or in public?

Home ownership: Making the mortgage tax deduction refundable (like the EITC) and capped at $10,000 won’t happen, due to the impact they would have on the housing market and the people currently benefiting from the system in place. A matching savings program, for funding down payments, is just welfare. Both of these might work, though the latter is not likely to be used by those most in need. And it costs money.

Retirement: Matching funds for contributions to retirement accounts may encourage savings, but runs into the same problem as the program for down payment savings. I don’t know why she insists on low-risk funds, since that’s not the best approach for long-term savings; allow those people who are comfortable with risk to choose higher-risk investments, as with a mutual fund.

And then Draut talks about Social Security, and she reveals her ignorance. Sorry, but you are not an actuary. The program is not funded in a sustainable manner, and the tax funding Social Security benefits is not regressive. On the first point, if it’s no big deal that the system will eventually exhaust the nonexistent trust fund and pay a reduced benefit, then why don’t we reduce the benefit RIGHT NOW? (Or reduce Draut's salary to 72% of its current level?) On the second point, though the Social Security tax is capped at a certain income level, now close to $100,000, benefits are not extended above this level either. Thus, a person earning $100,000 and one earning $10,000,000 pay the same Social Security taxes, and receive the same Social Security benefits.

But here’s the funny part: She repudiates the idea of putting Social Security benefits into personal accounts, but then proposes a system of personal accounts.

Child care: It’s basically all welfare. The same arguments can be used for and against these plans. Before you encourage too much European socialism, consider how good the French system is for the young adults, Draut’s target audience.

My ideas

This post isn't all about criticism. Now, I'll offer some of my own ideas.

1. A gradual shift from grants and loans to scholarships and work-study.

We should encourage children to learn responsibility early, including the important life skill of focusing on hard work first, pleasure later. Knowing that studying in high school could mean getting enough money to attend your preferred school will hopefully motivate students and parents, and build important skills that will serve students as adults. Work-study programs cost less, and teach students important time-management techniques.

Draut states that 24% of state aid is merit-based, which rose from 11%, and criticized that shift. I don’t think it changed enough. She complains that the merit-based scholarships go to those who can already afford test preparation courses and counselors to fluff up a college application. The former isn’t a problem, to me; we want to penalize focused hard work why? The latter could be remedied by more focusing on objective characteristics.

2. A total ban on government funding for any student needing remedial education.

If you don't know high school algebra or basic composition, you don't belong in college at that moment. Now, private institutions may be willing to admit you anyway, and I don't propose forcing them to change admittance standards. But the government should not be paying colleges to teach what they already paid for students to learn in high school. Let students first learn their remedial classes on their own, through the community college system, hopefully while working and learning time management skills and maturity.

3. Restriction of federal grants, loans, and scholarships to four years.

If the taxpayer is paying your way through college, you should be completing college in the minimum time, normally four years. So let's get students out of college in four years, or whatever the length of the normal degree is (for example, a five year pharmacy program). Pay for summer school and accelerated course loads, if necessary. Keep an appeal process for those students with legitimate hardship cases, but set the strong expectation that you are in college to learn, first and foremost.

At the same time, students would greatly benefit from college and career counseling, starting before the first semester’s registration. Talk about career and education goals, and spend your college time efficiently.

4. Practical financial and basic economic education.

At the high school level, it would be a good idea to teach youths about basic finance and economics. Some useful topics:
1. Mortgages: various types of mortgages, amortization schedules, mortgage insurance, tax benefits, what it takes to buy a house
2. Saving for retirement: savings needed to reach $X depending on when you start, the power of compound interest
3. Interest, inflation, and the risk-free rate of return and risk premiums
4. Basic information on how stocks and bonds work
5. Taxes, including teaching that all taxes are ultimately paid by individuals
6. Supply and demand, including how imbalances lead to shortages and hoarding
7. How credit cards and other loan programs work

I’d also like to see students learn a few examples of the law of unintended consequences. Just imagine the light going on over a young person’s head when they see that a government program that helps do X will cost a lot more than expected, since a whole lot more people will do X.

5. Setting realistic expectations for college

I read a column recently (I think it was by Thomas Sowell) that college is either an investment (education to score entry to a high-paying job) or an indulgence (getting a degree in art history and French because that's what you like). Given that assertion, why should someone else pay for it? We don't generally pay for you to get a certificate of deposit or a new BMW.

I won't go that far, since I agree with the author that college is the new high school, with a college degree often being used as proof of mastery of basic skills. But students should be counseled about job prospects and the value of their degree, so they aren't surprised that their art history degree will make repaying college loans difficult.

6. Staggered college tuition levels.

Here’s a radical idea: why should students pay the same for college? A student getting a law degree or MBA is expecting a return on his education, one that a master’s in social work will never do. A top university could charge $40,000 for students in the law school, but only $4,000 for students in the social work program. It’s harder to arrange such a plan at the undergraduate level, since people can and do change majors, but perhaps a program could be arranged for juniors and seniors who are taking the upper-level courses in social work or education.

The difference in costs could be managed by actual tuition changes, or by a “Sponsor Name-Big University Scholarship in Social Work.” The schools would get good feelings and positive attention for supporting these worthy courses of study, helping people later fill these valuable jobs without burdening them with loans.

But I suspect the university professors in these departments would oppose the idea, as a blow to their ego. How’s that saying go? The battles are so fierce, because the stakes are so low?

7. Advancement by accreditation

If a career finds itself so hard-pressed to identify the best candidate that it defaults to requiring a master’s degree for an entry-level job, perhaps a system of competitive exams for professional accreditation could be used instead. If it works for actuaries, why not other professions?

8. A huge money-making proposition for Draut!

If Draut believes that the primary reason today’s twenty- and thirty-somethings can't pay off their credit cards is because of credit card companies' increasing interest rates and onerous fees, then she has identified a veritable fount of wealth. All she needs to do is loan money to these men and women to pay off their credit cards, unsecured loans with, say, a 10% interest rate. For such a risk-free proposal, it beats anything else in the market.

This proposal is in jest, as if she had to put her own money on the line, I bet she wouldn't. Perhaps the higher interest rates reflect the higher risk that these people represent.

Statistics

Draut uses a lot of suspect statistics. From the introduction, you see the following:

“For college grads who land a job with an actual firm, it’s still far from sure that they’ll be offered health or retirement benefits. One out of three young adults—a full 17.9 million 18-to-34-year olds—don’t have health insurance….only 3 percent of young workers are uninsured because they decline available coverage.”

I’ve pointed out that these numbers just don’t add up here.

In general, her statistics may not accurately demonstrate the point she is trying to make.

She describes as a “bright side” to the increased need for advanced degrees that increasing percentages of minorities are getting the degrees. As normal for such affirmative action perspectives, she gives no reason why we should consider that to be good. But more interesting is her complaint that “[w]hite students still make up more than two thirds of enrollees at both graduate and law and medical schools.” That may be evidence of under representation for whites, who make up 75% of the population as of the 2000 census (though that figure includes Hispanics).

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