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Crystal Ball: 2012 Elections Predictions: Romney, Obama, Boehner, McConnell

In 2012 Elections, Hispanic Voting Patterns, Mitt Romney, Occupy Wall Street Protests, President Obama on December 31, 2011 at 3:36 pm

Happy New Year!

Today’s post is my prediction for the 2012 Election season.  I have made a habit of doing this in the past with friends but this is my first locked for eternity in cyberspace.  I formally put forward my election predictions on New Year’s Eve the past couple of elections.  For 2008, I predicted Obama would beat Hillary and McCain would beat Huckabee and Romney, and Obama would win the Presidency.  In 2010, I was probably as lucky as prescient in emailing my friends Dec. 31, 2009 the GOP would win a net +62 in the US House, +6 Senators and +7 Governors.  I was off by just one in the House (+63)!

Now that I have raised the bar to an improbable level that I will probably regret in 11 months, let the predictions begin.

PRESIDENT:

In the GOP Nominating Contest, I continue to think Mitt Romney will overcome all competition.  If he wins Iowa, it is probably all but over, barring a major misstep on his part.  Someone else, e.g. Ron Paul, may win Iowa but Iowa winners tend not to win the nomination, just ask Presidents Gephardt, Harkin, Muskie or Huckabee about Iowa.  Iowa may winnow out some of the also-rans, especially amongst the most conservative.  Romney has the money, the organization and the poise to likely pull off the nomination.  Few seem to discuss the many delegates available in ‘blue’ states like Illinois, New Jersey, Maryland, California, New York or Massachusetts that I expect Romney to win, just as McCain did in 2008.  Obama did something similar in 2008, winning the most delegates in a lot of states he had no prayer of winning in the fall (e.g. Texas and Montana).  I expect Romney will win a fair amount of cross-over moderate Democrats and independents in states, like Illinois, with open primaries.  Gingrich somehow managed to not get on the ballot in important Virginia.

I just have a hunch Florida Senator MARCO RUBIO will be Romney’s VP choice.

Obama will be the Democratic nominee and despite idle talk, he will not dump Biden for Hillary Clinton.

We will get to the Presidential winner below. 

Congressional elections tend to follow the direction at the top of the ticket, meaning a Romney or Obama landslide win could mean coattails below for their respective parties.

US HOUSE:

Some of my Democratic friends have made up their minds the Republicans will lose the House.  History is not on their side.  The Democrats need to win at least 25 net House seats.  All 435 are up for reelection each year so anything is possible.  Not once in the modern era has a President been reelected with significant House gains, not even Reagan in 1984.  Why?  I think the answer is simple: a landslide reelection for a President only happens when the public is very happy with the status quo.  If the public feels the country is doing swimmingly well, the President will be reelected and whoever is currently in Congress will largely be returned.  Wave elections in the House happen against the party in power (e.g. 1974, 1994, 2006, 2008, 2010).  If a wave happens in 2012, it will be against the Democrats, not in their favor.

Another quirk to 2012 is Reapportionment and redistricting.  Declining states are generally Democratic ones, so some of the lost seats necessarily come from Democratic states with meager population growth like Connecticut or Massachusetts and winning states include Utah, Washington, Georgia, Arizona, Florida (+2) and Texas (+4).  Republicans controlled more states’ new maps than ever before and look to protect their 2010 gains in many states and squeeze out Democrats in places like North Carolina, Missouri and Indiana. 

Democrats controlled the Illinois map, which was unusually aggressive in targeting as many as eight Republican seats.   Illinois is huge in Democratic Congressional dreaming.  I live in Illinois and have followed the new map, which reportedly came from the national DNCC not local sources.  I think the Democrats overreached and will end up winning only a handful of GOP seats, most likely two in the Chicago suburbs and by spreading out Democratic voters as they did, they inadvertently forced one of their own, Jerry Costello, to announce his retirement [1] and the GOP has a 50/50 shot of winning that district, possibly offsetting a suburban Chicago loss.  Besides Illinois, the Democrats best shot is in California where the new map jumbles up many Members and the Democrats might win as many as a net five seats.  The Texas map was ultimately drawn by a Court and Democrats will probably win half of the four new seats and have a halfway decent shot at one incumbent Republican near San Antonio.

One of the underreported stories of 2010 is how the Republicans beat a lot of aberration Democrats who had managed to hang on in small town America years after the areas had trended Republican at the Presidential level, places like rural northwest Florida and Waco, Texas.  The GOP did not win very many urban or ‘tough’ suburban seats except a small number around Chicago, Orlando, Phoenix, Palm Beach, Columbus, Philadelphia, New York and the aforementioned San Antonio seat.  The Democrats will have to win in rural areas in states like Michigan, Ohio, Wisconsin, Pennsylvania and New York to make a deep dent into the GOP 2010 gains.  Only an Obama landslide would do that.

Congressional retirements announced thus far strongly favor the Republicans [2] with a number of Democrats like Dan Boren of Oklahoma [3] giving the GOP highly probable pick-ups.

Some of my Democratic friends also are hoping Tea Party challenges will knock off some moderate GOP candidates, leading to fall defeats.  It is possible, but the overall impact will be slight, at most a seat or two.  This works the other way, too, as union or leftist netroots organizations could defeat a moderate Democrat or two, leading to fall defeats in centrist districts.

If Romney is the nominee and wins handily, I foresee the GOP winning some suburban seats they have come close to winning but not been able to crack in recent years, in places like Fairfax County, VA, Orange County, CA, suburban New York City and especially in Massachusetts.

Obama Health Care Speech to Joint Session of Congress.jpg

PREDICTION:  GOP HOLDS HOUSE, NET GOP HOUSE GAIN +1

US Senate:

Sobering for Democrats: 23 seats in play with retirements creating open seats in states like Nebraska, North Dakota, Wisconsin, Virginia and New Mexico.

Sobering for Republicans: need +13 to get to a filibuster-proof Senate.

At most, two Republicans are at risk (Brown in MA and Heller in NV).  I give Brown 60/40 odds, which are a little better with Romney on the ticket.  Heller is 70/30 solid.  A Giffords campaign for the open GOP Seat in Arizona would be promising for Democrats but appears not to be happening.

On the Democratic side, incumbents have their work cut out in Missouri, Montana and Florida.  The open seats are the biggest problem, especially in North Dakota and Nebraska, where GOP gains are going to happen. 

The GOP will get the +3 to even up the Senate, possibly even if Obama wins narrowly, but the question is if the GOP can be competitive in enough states to get near 13 if Romney wins?  The answer oddly is, yes, it is possible.  If the GOP runs the table on the open seats above and is able to win open seats in Connecticut or Hawaii (former Governor Lingle gives GOP an unusual Hawaiian opening), hold their own, and then beat some Democratic incumbents in industrial and purple states, then, it could be a GOP landslide.  The Democrats are also defending Florida, Ohio, Pennsylvania, and Michigan and the GOP looks to have credible challengers for all.  Beyond that, West Virginia is fertile GOP territory but moderate Dem. Sen. Manchin should hold on and the GOP would need to run strongly in places like New Jersey, Minnesota and perhaps Washington state.  They would need a Romney solid win to get those coattails.

What about the Tea Party?  Again, my Democratic friends pretty much have it in the bank that credible GOP candidates will be knocked off by Tea Party unknowns in primaries.  It might happen though where is important.  A Tea Party challenger is never going to win in California but probably will win, anyway, in Indiana or North Dakota.

111th US Senate class photo.jpg

PREDICTION: GOP NET +5 in Senate, taking control.

GOVERNORS: GOP net +1.

PRESIDENT:

Most people seem to be unable to discuss this rationally because their emotions clog their analysis.  I have friends who guarantee an Obama landslide win and others guarantee an Obama landslide loss.

First off, I make no secret I’d like Obama to be defeated, but that doesn’t matter for my analysis.  Can he win?  Of course.   He’d benefit from the most conservative and least experienced GOP nominee and above all, from better job performance.  Strong employment gains, housing price gains and high GDP growth would improve his chances.

How much does ideology matter in a Presidential election?  Quite a bit.  See Nate Silver’s recent, excellent piece on Obama’s prospects [4] to see how statistical models do suggest the further a candidate is from the political center, the tougher it is for them to win the General Election.  This is not to say someone more ideological cannot win (e.g. Reagan in 1980 or Obama in 2008) but they tend to win only with strong anti-Washington, throw the bums out winds at their backs.  Thus, Obama will have more trouble with Romney than Santorum, Paul or Bachmann (none of whom has a prayer of being the nominee). 

The flip side of the coin nearly everyone fails to see is it also matters for Obama, does he run from the center or Left?  All indications are he is going to run a populist campaign from the Left.  The goal is to shore up his base and try to get to 51%.  Anecdotally, I know a lot of independents and soft Republicans who tell me, often in hushed tones, they voted for Obama in 2008 and they are hoping the GOP nominates someone not “too extreme” so they can vote against Obama in 2012.  The risk to Obama is alienating these successful private sector workers as he tacks to the Left and rails against economic success.  Again, the GOP nominee will be very important in determining who these centrist voters flock to.

Obama starts with the benefit of incumbency.  People tend to stay with who they know unless they are unhappy with the results.

Obama will have more money, perhaps upwards of $1 billion for his campaign.  Money helps but does not win elections per se.  Just ask President Kerry about money.  Obama’s money will buy an unprecedented amount of negative campaign ads.  No matter your ideology, I predict you will be turned off by the tone of the 2012 campaign.  It is a general rule of thumb in elections that you campaign positive (Reagan’s 1984 “Morning In America”) when the voters are happy with you but you run a negative campaign when they are not.  Obama’s economic track record means this will be a highly negative campaign.  That is not to imply it cannot work (see the unpopular Harry Reid’s 2010 Senate win).  Unfortunately, I fully expect Obama’s campaign to play up “racism” as if that were the reason people were down on the deficit, unemployment and the growth of government.  I doubt it is very effective with whites though the real goal will be to drive black turnout, which heated accusations of “racism” may produce.

Much is written about demographic changes.  It is absolutely true the country is becoming more Asian, more black and above all, more Hispanic.  I’ve seen projections the 2012 electorate will be as many as 2 points more Latino, which some have argued is a huge plus for Obama.  As I discussed in a recent post [5], the Hispanic vote varies widely by state and the 2008 Latino vote for Obama was 56% in Arizona, 57% in Florida, 61% in Colorado but 76% in California and 78% New Jersey.  This is inefficient from the Obama perspective.  Additional Hispanic voters in California, New York, New Jersey and Illinois will not change the outcome in those states Obama will be winning anyway.  On the other hand, southern and southwestern states like Florida, New Mexico, North Carolina, Virginia and Colorado are states Obama needs to win.  Since Obama’s share of the Hispanic vote will almost certainly decline from 2008, he may not be doing much better than splitting the incremental new Hispanic voters in many of those states.  A Marco Rubio VP nomination may even mean an outright GOP win of Florida’s Hispanic vote.

I suspect Obama will struggle to match his 2008 stong performance with blacks, college students and Jews in 2012.  The exceptionally high underemployment/unemployment rate for people in their twenties suggests the 2008 turnout will not be replicated.  In fact, I expect Obama to face a chasm of lack of excitement from Democrats, the mirror image of 2008 when people literally quit their jobs to work full-time on his campaign.

That said, it is splitting hairs to focus too much on how this or that subgroup will vote.  In the end, large macro effects drive all the subgroups in one direction or another.  I am seeing consensus economic forecasts of rather lousy GDP growth of 1.7% in 2012, with continued high unemployment and home prices still dropping or flat at best.  If so, Obama will be hard-pressed to win.  Nate Silver’s model suggests GDP is key and an economy near zero growth makes a Romney win highly probable, whereas he projects Obama squeaking it out at 4% GDP growth.  Mr. Silver is very good and I would not lightly dismiss his reasoning.  I agree GDP and unemployment and a general sense of wealth (especially housing values) are important, more so than a lot of the “debating skills” sorts of things that matter, but only at the margins.  As shown in polls, Obama’s major legislative achievements are unpopular with voters (Health Care/”ObamaCare” and the Stimulus).

What of Third Parties?  Usually much overrated, third parties and independent campaigns could, if well-financed, impact the campaign.  More likely than not, none will be.  A Trump or Ron Paul third-party run might be Obama’s best bet.  I am unconvinced a Bloomberg run would necessarily help Obama so much, perhaps even having an unexpected impact of making some states like Connecticut, New Jersey, Maine, Oregon, Washington and Massachusetts more competitive for the Republicans.  That said, a billion dollar run by someone like Bloomberg would certainly stir things up.

Another factor might be the Occupy movements, which petered out with the cold but will probably return in the Spring.  The Occupy movements turned violent with vandalism and police confrontations near the end.  I fear they will be more violent and destructive if they gear back up because in the odd calculus of media attention just camping out gets old for the TV news.  The pressure to do something outrageous grows and mentally imbalanced Occupy participants may take the most heated rhetoric to terrible extremes.  If I know the American voter, political violence always backfires and thus, an Occupy shooting of say, an oil executive or man in a suit in New York City will hurt politicians like Obama who embraced Occupy.  Fingers crossed it never comes to this.

Thus, baring an unexpected post-Labor Day scandal (e.g. Obama or Romney sex scandal) or massive exogenous shock (e.g. major October terrorist attack), I think it will be ROMNEY defeating Obama in November.

Of course, this is all my judgment based on today and I might be wishing I never wrote this in a matter of months!  Happy 2012 and turn off that TV lest you be bombarded with ads!

[1] http://thehill.com/blogs/transportation-report/aviation/185349-rep-jerry-costello-will-not-seek-re-election

[2] http://thehill.com/homenews/campaign/195795-retirements-hit-dem-aspirations-for-a-house-takeover-in-2012-elections

[3] http://thehill.com/blogs/ballot-box/house-races/165111-oklahoma-rep-boren-wont-seek-reelection

[4] http://www.nytimes.com/2011/11/06/magazine/nate-silver-handicaps-2012-election.html?_r=1&pagewanted=all

[5] https://econscius.wordpress.com/2011/11/30/recent-drop-in-immigration-will-not-impact-growth-in-hispanic-turnout-in-2012/

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Who Are the Top 1%? Most Aren’t In Finance, Fewer Still In Mortgages

In Finance, Occupy Wall Street Protests, Top 1% on November 17, 2011 at 2:17 am

Some chant “We Are The 99%”.  But who are the “1%”? 

The income cut-off for the Top 1% of earners is $343,927 of income, using 2009 IRS data. [1]   The 1% is a rather broad category.  While $344,000 is certainly a good salary, the “1%” metric lumps a $324,000 earner in with a film star earning $30 million each movie.

The Top 5% begins at $154,643.

The Top 10% starts at $112,124.

The Top 25 kicks in at $66,193 and the Top 50% cut-off is $32,396.

We hear often the 1% are Wall Streeters who “caused” the recession.  Occupy Wall Street is specifically organized as the “99%” vs. “1%” (Wall Street).  That is wrong.

A recent paper by Bakija-Cole-Heim show only one out of seven 1%’ers even work in Finance.  [2]  Larger proportions are corporate managers and executives or doctors and dentists.   The chart below shows the breakdown:

Profession Share of the Top 1% of Income: 2005 Data  
Executives, managers (non-finance) 31.0%
Medical 15.7%
Financial Professions (incl. Management) 13.9%
Lawyers 8.4%
Computers, Math, Engineering (non-finance) 4.6%
Not working or deceased 4.3%
Skilled Sales (non-finance, non-real estate) 4.2%
Blue collar or misc. service 3.8%
Real Estate 3.2%
Business Operations (non-finance) 3.0%
Entreprenuers not otherwise classified 2.3%
Professors and scientists 1.8%
Arts, media, sports 1.6%
All Other 2.2%
Chart by Author  
Source: see note [2] below.   

The vast majority of the Top 1% do not work in finance or banking, and of those who do, only a tiny percentage have anything to do with mortgages.   We are long past most people seeing a member of a minority group commit a crime and then extrapolate the crime as if every member of that minority group were somehow involved.  It is just stereotyping when people say ‘the top 1% caused the crisis’.  Surgeons, media celebrities and corporate executives at widget makers are no more guilty of causing the financial crisis than any average American.

When we think of high pay financial employment, what comes to mind?  Corporate finance managers like Controllers and CFOs, Wall Street stock analysts, investment bankers, stock brokers, venture capitalists, private equity principals, hedge fund managers, financial consultants, investment managers, mutual fund managers, stock market floor traders, commodity brokers and the like.  Not very many ever touch securitized mortgages or supervised the people who do.  Mortgage securitization included a very small group of people, some of whom worked at government sponsored enterprises Fannie Mae and Freddie Mac.   It is very probable some of those who actually worked in that corner of the financial world are unemployed or underemployed today, and a lot less likely to be in the Top 1%, Top 5% or even Top 10% of earners.

Occupy Oakland 99 Percent signs.jpg

The average age of the “1%” is 47.  [2]  This is not surprising as those are typically peak earning years.  It is worth noting some of the “1%” of the Reagan or Clinton boom years are retired or even deceased now because it often takes decades of schooling and experience to reach the upper echelons of income.  The “1%” of a pre-crisis year like 2007 is certainly a bit different than today’s “1%” on account of retirements, 2008-9 downsizing and the fact high earners often have highly variable income.   MC Hammer was a millionaire one year, bankrupt the next.  A full 26% of the Bakija-Cole-Heim sample own a closely held business (a/k/a entrepreneurs). [6] 

It is also interesting to look at the 1%’s marital status.  An atypically high 81% are maried.  About half of those have working spouses. [3]  Of the married top earners, 31% of the spouses are executives, supervisors and managers (non-financial), 21% of spouses are in Medical professions, 17% are blue-collar and miscellaneous service, and 14% work in government, teachers and social services. [2]   This shows very clearly people are marrying people from similar socioeconomic status (doctors marrying each other).  This is one probable cause of greater income inequality in recent decades.  As more women have entered the workforce, they have tended to marry men of similar socioeconomic status.  If workers marry similar workers at each level of income (e.g. $30,000 worker marries a $29,500 worker, $100,000 manager has a $99,000 manager spouse, etc.), it has the impact of doubling the differential between the families because of the second working spouse.  The impact is even more pronounced when comparing married upper earners (e.g. two $250,000 doctors) with a $30,000/year single parent. 

The chant “we are the 99%” rings false.  A $325,000/year lawyer is in the top 2% but honestly can say she is in the “99%”.  Should that $325,000 lawyer really stand at the edge of her cubicle and scream “I am the 99%!” to the (presumably oppressive) $345,000/year lawyer in the next cubicle?  The difference between the 2nd percentile and the 100th percentile is vast; it is the difference between our $325,000 lawyer and a minimum wage teenager who works part-time after school.

Despite claims to the contrary, top earners have actually been getting poorer during the last four years of IRS data.  The Top 5%’s income declined each year 2007 to 2010, dropping by more than 10% between 2006 and 2010 in inflation adjusted dollars. [4]  No surprise here because the wealthier have more variable incomes (e.g. self-employment business income, stock capital gains, bonuses, etc.), doing better than average in economic booms but drop by greater percentages in recessions.

Most of the “1%” do not work in finance.  Even of the 13.9% of  the “1%” who work in finance, most had nothing to do with subprime mortgage lending.   The idea of punishing today’s “1%” for mistakes made by the government and those few who worked in mortgage securitization in the 2000’s is just plain wrong.  The top 1% paid 38% of all federal income taxes and the top 1% paid more than the entire bottom 95% of taxpayers in 2007. [5]  Paying a “fair share” is subjective but it cannot be argued, as it often is, that the rich ‘do not pay taxes’ because they actually pay most of the income taxes.

For more on income inequality in New York City, please see my recent posts https://econscius.wordpress.com/2011/10/28/which-city-has-the-most-inequality-new-york-or-salt-lake/ and https://econscius.wordpress.com/2011/10/21/which-state-has-the-most-inequality-texas-or-new-york-why/.

 

[1] http://taxfoundation.org/publications/show/250.html

[2] Demographics on page 71 of http://web.williams.edu/Economics/wp/BakijaColeHeimJobsIncomeGrowthTopEarners.pdf.  Spouse data on page 52.  Occupation data on page 54.

[3] Page 59 of http://web.williams.edu/Economics/wp/BakijaColeHeimJobsIncomeGrowthTopEarners.pdf

[4]  http://cafehayek.com/2011/10/the-top-1.html

[5] http://economix.blogs.nytimes.com/2009/07/30/top-1-paid-more-in-federal-income-taxes-than-bottom-95-in-07/

[6] Sample metrics on page 69 of http://web.williams.edu/Economics/wp/BakijaColeHeimJobsIncomeGrowthTopEarners.pdf

 Pictures from Wikipedia Commons.

Occupy Wall Street Deposits At Bank Under FDIC Consent Decree For Falsifying Books

In FDIC, Financial Fraud, Occupy Wall Street Protests, Top 1% on November 9, 2011 at 12:21 am

Occupy Wall Street has raised over $500,000, depositing the money in a bank operating under a FDIC consent decree for falsifying its books – which is exactly the sort of bad banking behavior OWS claims to be protesting against on Wall Street. [1] [2] [3]

The FDIC enforcement action against Amalgamated Bank of New York, dated August 23, 2011, can be found here: http://www.fdic.gov/bank/individual/enforcement/2011-08-06.pdf.  The FDIC demands Amalgamated “shall take all steps necessary, consistent with provisions of this ORDER and safe and sound banking practices, to eliminate and correct unsafe or unsound banking practices, violations of law or regulation, all contraventions of regulatory policies or guidelines cited in the Report of Examination.” [4] 

OWS chose Amalgamated because it was the only union-owned bank in the United States [1], but Amalgamated recently sold a 40% position to, drum roll please, two billionaire investors, Wilbur Ross and Ron BurkleYes, OWS deposits are benefiting some of the very richest of the top 1%. [2] 

Day 14 Occupy Wall Street September 30 2011 Shankbone 49.JPG

Talking down the money raised thus far, Mr.Pete Dutro of the Occupy Wall Street finance committee said,”People see like $500,000 and they say ‘Wow that’s a lot of money’ but the reality is it’s not that much money.” [2] 

That is an interesting view coming from someone who is protesting the “1%” because many “1%” entrepreneurs would agree $500,00 is “not that much money”.  How much does it take to reach the top 1% of wage earners?  Just $343,927 pre-tax. [5]

Question: if Amalgamated Bank fails because of its bad loans and dodgy books, would Occupy Wall Street stand by its principles and oppose a bail out of Amalgamated depositors, including OWS itself, who hold funds in excess of FDIC insurance limits?

 

[1] http://www.fastcompany.com/1792790/for-some-financial-companies-occupywallstreet-is-a-great-marketing-hook?partner=rss

[2] http://www.teribuhl.com/2011/10/17/occupy-wall-streets-new-bank-under-fdic-enforcement-action/

[3] http://www.cnbc.com/id/44935914

[4] Page 20 of http://www.fdic.gov/bank/individual/enforcement/2011-08-06.pdf.

[5] http://www.taxfoundation.org/news/show/250.html

Occupy pictures from Wikipedia Commons.

I Am The 100%… 100% Paid In Full

In College Education, Loan Forgiveness, Obama Administration, Occupy Wall Street Protests, Student Loans on October 27, 2011 at 12:41 am

University of Chicago Quadrangle, photo by author

I am the 100%.   100% paid in full.

About $100,000 of college loans have been repaid between my wife and me.  A small portion of the loans still remain, which absolutely will be paid in full.

Loan forgiveness?  Thanks, but no thanks.

I am hardly unique; millions of us quietly repay our student loans.  We are not asking for a bailout.

Is repaying the education debt a burden?  Yes, paying it back was the “burden” President Obama and many pundits call student loans these days.  At times, things have been very tight financially.  Even in better times, that money would have been useful for many other things.  A hypothetical $100,000 of forgiveness might have meant a bigger house, a car better than a Corolla or fewer “staycations”. 

But I see no reason whatsoever, as a gainfully employed middle class person, to even consider foisting the loans off on other taxpayers (many of whom lack a college degree and, on average, earn a lot less than we the 28% who are college educated [see https://econscius.wordpress.com/2011/10/26/forgiving-student-loans-would-mostly-help-the-most-affluent/]).

In fact, like many of us, one of my degrees is from a public university.  I thank Illinois taxpayers for having made available an excellent, low cost education.  I will not complain about the comparatively small loan. 

Even my degree from an expensive private institution is a reason for thankfulness, not resentment.  Yes, I took on significant student loan debt.  But the benefit of the education is mine.  Many philanthropists have given generously to America’s private universities.  Without their support, private university tuition would be even more expensive.  Thank you John D. Rockefeller, Joe Mansueto, Dennis Keller, David G. Booth and countless others for your generous donations that have helped keep education costs down for folks like me. 

Mr. and Ms. Taxpayer, you do not owe me anything.  In fact, I owe you until I have finished the last dime of student loan repayment.  It is my pleasure to uphold my part of the student loan contract with you the American taxpayer.  Instead of an unecessary bail-out of the college educated, why don’t you lower the federal budget deficit instead?

Occupy Wall Street’s Forgiving Student Loans Is An Unforgiveably Bad Idea

In College Education, Loan Forgiveness, Occupy Wall Street Protests, Political Rhetoric, Student Loans on October 26, 2011 at 12:36 am

 

University of Chicago Quadrangle, photo by author

One “Occupy Wall Street” idea is across-the-board student loan forgiveness. [1]

It is one thing to offer temporary forbearance or deferment when someone is unemployed, but forbearance is already available to the unemployed. [2]  The “Occupy” concept is a totally different idea of total debt forgiveness.

How bad an idea is a blanket erasure of student debt?  Let us look:

(1) People with college degrees earn ~75% more than people without degrees. [3]   Loan forgiveness means asking lower-income people to write off loans made to their more affluent neighbors.

(2) The Census Bureau reports a mere 28% of Americans have college degree. [4]  Not all graduates have student loans, either.  A very small slice of the population would be receiving a windfall from the rest.

(3) The unemployment rate for people with a college degree is half the rate of the non-college educated. [3]

(4) There is a correlation between the cost of an education and the prestige of the offering institution. Degrees from Columbia or University of Chicago are much more expensive than those from smaller privates or directional state colleges.  The University of Chicago will set you back $56,640 a year (full disclosure:  there are several Chicago alums in my family, including me) and the Ivy League’s Columbia University runs $43,815 in tuition and fees alone. [5]   University of Chicago and Columbia graduates also earn more

A mass forgiveness would mean the greatest benefit would accrue to those who financed educations from the costliest (and most prestigious) schools who, on average, will earn more in their careers.  Thanks, but no thanks.

(5) Grants and tuition reductions are widely available to lower-income graduates, so those who take on the most debts generally will not be “poor”.

(6) The programs least likely to offer grants and tuition breaks are professional degree programs.  It also is true people with Masters and Doctorate degrees will necessarily have spent more years in college and take on more debt than an undergraduate.  As a result, many MBAs, doctors and lawyers graduate with huge, even 6-figure, student loans.  I personally took on a serious amount of student loan debt for my MBA.  Any mass forgiveness would disproportionately benefit those with advanced degrees:  lawyers, doctors, professors and MBAs, meaning many of the richest Americans.  The Top 1% of earners is disproportionately doctors, lawyers and business executives, many of whom hold MBAs. [6]  This is quite ironic, indeed, since Occupy Wall Street is so focused on the Top 1%.

(7)  Any mass forgiveness would be extraordinarily expensive at $1 trillion [7] and the federal budget is already deeply in the red. 

(8) It is good for people, who can, to foot some of the cost of their education. I believe things you pay for can be more meaningful. I also am certain a mass forgiveness would send a message of “don’t worry about the cost of college, have fun” to current students. College is fun, but it should not be perceived as free, lest people take even longer to graduate.

(9) A mass forgiveness would be very unfair even amongst college grads. A doctor who graduated in 2000 and lived simply so she could pay off her loans by 2010 would receive no benefit at all, while her profligate classmate who made minimum payments in preference of BMW’s and European trips might enjoy a $100,000 benefit. People who completed school in the 1970s, 1980s or 1990s would receive little to nothing in benefit because their student loans are already paid off, while those who happened to have graduated in recent years would benefit greatly.   Forgiveness is no panacea for all young people, either.  People starting college today would receive no benefit at all.

(10) Lastly, some argue a mass forgiveness would be a huge economic stimulus. [8]  A mass forgiveness would actually be a very inefficient stimulus because the loans are repaid over many years, even decades.  A doctor who was suddenly relieved of all debts would have some extra spending money and could look forward to a lighter burden in the years ahead, but the fact is only a tiny fraction of the total loan is payable in the present.  A 10 year loan with level payments has a mere 1/120th impact this month.

Student loan forgiveness is an idea that might sound good as a populist sound bite but would be patently unfair, concentrate the benefits amongst the rich and soon-to-be-rich, and would be extremely expensive.

Big Loans, Big Future Salaries. MBA Graduates, University of Chicago. Photo from author.

[1] http://www.cnbc.com/id/44879455

[2] http://studentaid.ed.gov/students/publications/student_guide/2009-2010/english/postponeloanpayment.htm

[3] http://www.nytimes.com/2010/09/21/education/21college.html

[4] http://chronicle.com/article/Adults-With-College-Degrees-in/126026/

[5] http://www.forbes.com/2010/10/04/americas-most-expensive-colleges-business-most-expensive-colleges.html

[6] http://economix.blogs.nytimes.com/2011/10/17/the-top-1-executives-doctors-and-bankers/

[7] http://www.usatoday.com/money/perfi/college/story/2011-10-19/student-loan-debt/50818676/1

[8] http://www.cnsnews.com/news/article/educated-liberals-say-forgiveness-student-loans-would-stimulate-economy

Johns Hopkins University photo from Wikipedia Commons.

Comments are welcome below.

Occupy Chicago Is Completely Wrong on CME Tax & Job Claims

In Illinois, Income Tax Rates, Job Creation, Occupy Wall Street Protests, Political Rhetoric on October 15, 2011 at 12:51 am

Occupy Chicago protesters rally Thursday in the Loop, echoing their Occupy Wall Street counterparts in New York. But how about a march on Main Street by the wealthy? That may be just the catharsis America needs.

I heard a theatre teacher from Occupy Chicago talk on the radio about the movement’s demands.  The various Occupy movements have been criticised in many corners for a lack of specific proposals, but Occupy Chicago has a specific demand.  A quick analysis shows the math does not work behind an Occupy Chicago idea and the concept is completely divorced from reality.

Occupy group Stand Up Chicago is demanding the City of Chicago place a 25 cent per trade tax on all contracts traded at the Chicago exchanges, of which the CME is the largest.   Occupy Chicago says this would earn $1.4 billion of fresh tax revenue, which it claims could be used to create 40,000 new City of Chicago jobs. [1] [2]

One sign of a complete lack of perspective and knowledge is how Stand Up Chicago’s statement demanding the tax calls the Chicago exchanges “giant casinos” it claims brought on the financial crisis.  Considering the financial crisis was caused by subprime mortgages going bad, it is quite curious to blame Chicago’s options and futures markets.  The CME and Chicago Board Options Exchange did not make loans nor did they bundle mortgages for securitization.   CME is the parent of the legendary Chicago Mercantile Exchange and iconic Board of Trade.  Clearly, Stand Up Chicago does not understand.

It just so happens the CME was already negotiating with Florida and Texas about relocating its operations.   Illinois raised its state income tax in January, becoming the 3rd highest in the nation.  [3] The CME then announced its attention to look at alternatives.  Illinois was desperately trying to keep the CME from leaving before Occupy Chicago’s idea of a fresh $1.4 billion tax came along.  Such a tax certainly is not going to stop the CME from leaving.

The idea of taxing the Chicago exchanges will not work.  Surely, the CME will leave and Chicago will end up with fewer taxpayers and thus fewer taxpayers as a result.  CME employs 2,000 in the Chicago area, but it has a large multiplier effect because of the numerous trading firms that reside in Chicago to be near the CME’s trading floors.  Banks and other financial institutions employ many who service the CME and trading firms.  Large private firms maintain traders and support staff, for example, meteorologists who predict weather patterns on behalf of agricultural companies’ hedging activities.  “Some estimates place the job count from the trading industry here, which includes the Chicago Board Options Exchange, at more than 60,000.” [3]

But Occupy Chicago’s ideas are even more outlandish than they seem at first blush.  Let us look at the math.  First, the CME had 2010 revenue of $3 billion, on which it earned a profit of $951 million. [3]    A $1.4 billion tax on a local industry where the primary firm, the CME, earned less than $1.0 billion is a very significant tax, indeed. 

Even if the CME were to stay in Chicago despite the special tax, there is nothing stopping aspiring exchanges in Singapore, London, Dubai, Mumbai, Hong Kong, Shanghai or Tokyo from working to steal away the CME’s business.  Since they are not in Chicago and thus not subject to a special tax, these international competitors would gain a significant opportunity.

Would $1.4 billion create 40,000 new jobs for the City of Chicago? 

No.

A quick check of the City of Chicago budget shows the City employs 32,922 employees at a cost of $3.3 billion.  [4]The average city worker earns about $75,000. [5]  The average worker costs about $100,000, including benefits.  That means a $1.4 billion tax, even if enacted and collected, would employ one-third of the claimed 40,000 but rather 14,000.  Adding 40,000 employees would more than double the entire City of Chicago workforce. 

Adding the 40,000 workers would require a tax of $4.0 billion, or more than 4X the entire profit of the CME.  As a reference for the relative size of a hypothetical $4.0 billion Occupy Chicago tax, consider that the entire city budget, serving 2.7 million residents and long known as one of the least efficient and most corrupt of municipal governments, is $6.2 billion. [6]

The cost of an employee is more than just payroll and benefits.  The 40,000 hypothetical workers will require new leases of office space, and expenses for business cards, computers, telephone connections, pens, staplers, and many other things, all costing money.  Any tax will hire fewer City workers because of these other overhead costs.

The Occupy Chicago tax idea and related job claims may make for good populist press, but they are so divorced from reality they must be dismissed out of hand.  Chicago’s financial industry is already at serious risk of leaving the city over the tax burden already in effect.  A $1.4 billion tax increase would certainly drive it out altogether, putting as many as 60,000 private sector jobs at risk.  The Occupy Chicago claims of 40,000 new City of Chicago jobs are triple what a $1.4 billion tax could realistically pay for.  [7] The Chicago exchanges are not in the mortgage business and did not cause the financial crisis.   Just as protesting capitalism will not create any jobs, excepting the occasional protester paid by a union to attend, a huge tax on financial transactions will cause Chicago to lose jobs, not gain them.

 

 

[1] http://articles.chicagotribune.com/2011-10-11/news/ct-met-take-back-chicago-20111011_1_protesters-demonstration-cboe-holdings

[2] http://www.chicagonow.com/chicago-muckrakers/2011/10/40000-jobs-for-25-cents-a-new-plan-for-job-growth-in-chicago/

[3] http://www.suntimes.com/business/5854347-417/cme-group-leaders-cite-illinois-taxes-in-threat-to-leave-chicago.html

[4] pg. 5 of http://civicfed.org/sites/default/files/ChicagoFY11BudgetAnalysis.pdf 

[5]  http://anthonytrendl.blogspot.com/2011/06/chicago-city-worker-salaries.html

[6] pg. 3 of http://civicfed.org/sites/default/files/ChicagoFY11BudgetAnalysis.pdf

[7] I take the $1.4 billion tax revenue claim at face value though it seems a bit rich.  The CBOE had 1.124 billion contracts trade in 2010 ( http://ir.cboe.com/releasedetail.cfm?releaseid=549018) and the CME approximately 3.0 billion contracts (based on daily avg. 12.2 million contracts (http://cmegroup.mediaroom.com/index.php?s=43&item=3088) multiplied by 250 trading days a year).  Apply 25 cents to 4.124 billion contracts and we only get $1.0 billion in tax.  There are a few other small, inconsequential exchanges.

Pictures from Wikipdia Commons, except Chicago protest from Chicago Tribune (credits embedded in picture).