A CONSENSUS ON TRADE TREATIES?

Most of the presidential candidates agree that past trade treaties have had negative effects on US workers and that future trade treaties need to take a different approach. This would appear to be bad news for the Trans-Pacific Partnership (TPP) and other trade agreements that are in various stages of negotiation and ratification. Bernie Sanders has been a long-standing opponent of the TPP, Hillary Clinton has recently converted to opposing it, Donald Trump appears to oppose it but with bluster and little substance, Ted Cruz has not been clear on where he stands, and John Kasich supports the TPP.

Support for the arguments against recent trade treaties has recently come from an unlikely source, Clyde Prestowitz, who served in a senior position in President Reagan’s Department of Commerce and as President Clinton’s vice chairman of the Commission on Trade and Investment in the Asia-Pacific Region. [1]

Prestowitz writes that after the 2001 agreement that let China join the World Trade Organization, our trade deficit with China soared from $80 billion to $370 billion. The best estimates are that imports from China have cost the US about 2.5 million jobs. This occurred despite assurances to Congress and the public that this agreement would dramatically reduce the trade deficit with China and create US jobs. These assurances were given by very senior members of the Bush administration including the Secretary of Commerce and the US Trade Representative.

The results of the US-Korea Free Trade agreement of 2012 are similar. Our trade deficit with Korea increased from $13 billion to $28 billion, costing the US roughly 90,000 jobs. However, the same promises of a reduced trade deficit and US job growth were made in promoting this trade deal.

Prestowitz concludes that “None of the trade agreements have eliminated [the trade deficit], or even reduced it, as promised, and none of them have come close to achieving other promised benefits.”

So, he poses the question of why both political parties and numerous well-educated officials have persisted in making and supporting these trade agreements, as well as using the same old arguments to sell them to Congress and the public. He gives two answers. The first is that the real reason for these trade agreements is to strengthen the US’s geopolitical position, not to improve the economic welfare of its workers. As an example of this, Prestowitz, to this day, defends the North American Free Trade Agreement (NAFTA) with Mexico and Canada as an appropriate step to counter the growing geopolitical influence of China and other Asian countries.

His second answer is that many experts base their analyses on a theoretical and outdated model of trade and globalization. This model assumes full employment, fixed exchange rates, no flow of investments across borders, no transfers of technology, and no costs due to displaced workers losing one job and having to find another one. In reality, the US has rarely, if ever (depending on the standard you use), been at full employment. Exchange rates have been floating and not fixed since the 1970s and some countries, notably China, systematically manipulate the exchange rates for their currencies. The flow of investments, of financial deals and money, across borders is greater today than the flow of goods (traditional trade). China and Japan, among others, have made the transfer of technology to their countries a condition of allowing access to their workforces and markets. And we know how painful the displacement of workers has been. New jobs have been hard to find and, for those lucky enough to get a new job, the pay and working conditions are typically far worse than they were with their previous job.

Another answer, that Prestowitz doesn’t present, is that large, multi-national corporations have great power in Congress and our federal government. They are the main beneficiaries of these trade treaties. Through campaign contributions (largely by their senior executives), lobbying, and the revolving door between them and positions in the federal government (including the executive branch and Congress), they have tremendous influence on trade and other policies.

It is encouraging to see that when the public is paying attention, as it does during a presidential campaign, and when there is at least one candidate who presents a strong position and argument against the TPP and other trade treaties, that other candidates will forego their allegiance to corporate power (and money) and take a position in opposition to the TPP. It will be our job, as voters and constituents, to make sure that the next president follows through on his or her campaign commitment to oppose the TPP and to work to ensure that trade treaties benefit US workers and the US economy.

[1] Prestowitz, C., 3/22/16, “Trading down and up,” The Boston Globe

TAX BREAKS: PROMOTING SAVING FOR RETIREMENT OR PERPETUATING FAMILY WEALTH?

Our income tax system provides incentives to save for retirement. Individuals can contribute up to $5,500 per year to an Individual Retirement Account (IRA) or $18,000 to an employer-sponsored retirement plan and not pay income tax on the amount saved. (These amounts are $1,000 and $6,000 higher, respectively, for those over 50.)

This exemption from income tax is intended as an incentive to help low and moderate income individuals save for retirement. The tax exemption for IRAs is phased out as the adjusted gross income (AGI) on one’s tax return increases. The phase out varies by a taxpayers’ status (e.g., single, married, filing jointly or separately, with or without an employer retirement plan), however, for all taxpayers with an AGI over $200,000, there is no income tax exemption.

The contribution limits are sufficient to provide, along with Social Security, a modest, but reasonable retirement income even at the lowest of the contribution limits. For example, if one put $5,500 into an IRA every year over a 40 year career ($220,000) and invested it reasonably, earning a 5% – 6% annual return, one would have over half a million dollars ($500,000) saved at retirement. With an employer-sponsored retirement plan, one could save three times as much and have quite a comfortable retirement.

However, there is a loophole in our tax laws that allows highly paid executives and investment managers to avoid income tax by putting huge amounts of money into “retirement” accounts, called deferred compensation accounts. These wealthy individuals don’t need any tax incentives to save for retirement. And it makes no sense to allow them to avoid income tax on huge sums of money that far exceed what they will need in retirement.

For example, the CEO of Progressive Insurance last year put over $26 million into his deferred compensation account. He now has over $150 million in this account, which is enough to provide him with an income of $850,000 per month for the rest of his life.

The retirement savings of the top one hundred CEOs are equal to those of 50 million American families (41% of the population). Employees at some of these CEOs’ companies have no retirement plan or savings at all. Furthermore, about half of these CEOs have traditional pensions as well; something most American workers have seen vanish over the last two decades. The CEOs of the 500 largest corporations have $3.2 billion in their deferred compensation accounts and avoided roughly $78 million in income taxes in 2014 by putting almost $200 million more into their “retirement” accounts than regular employees would have been allowed to save in their retirement accounts. [1]

The tax incentives that are supposed to be promoting saving for retirement are poorly designed and inefficient. Most of the benefits go to a small number of individuals with very high incomes. [2]

This is one example of how the rich and powerful have bent our tax laws to their benefit. It is also one reason that economic inequality is growing. And it is a piece of the puzzle of why social class mobility is diminishing in the US. These wealthy individuals obviously won’t spend all of these huge tax-deferred savings during their retirements, so these “retirement” savings will be passed on to their heirs, ensuring that the next generation of these families remains part of the economic elite.

[1] Klinger, S., & Anderson, S. (10/28/15). “A Tale of Two Retirements,” Institute for Policy Studies (http://www.ips-dc.org/tale-of-two-retirements/)

[2] Morrissey, M. (3/3/16). “The state of American retirement: How 401(k)s have failed most American workers,” Economic Policy Institute (http://www.epi.org/publication/retirement-in-america/)

ISSUES WITH THE OPERATION OF CHARTER SCHOOLS

SUMMARY: Having looked at problems in our public schools and the problems with student selection, retention, and outcomes in charter schools, let’s take a look at some issues with the operation of charter schools. Charter schools:

Divert money, time, and attention from public schools;
Lack financial accountability and transparency;
Often have high administrative costs and salaries, but low instructional budgets and teacher pay; and
Subcontract with for-profit entities and ones with ties to senior administrators producing inefficiencies and conflicts of interest.

As a result, charter schools undermine our public schools and are not an effective strategy for improving our education system as a whole.

FULL POST: Having looked at problems in our public schools and the problems with student selection, retention, and outcomes in charter schools, let’s take a look at some issues with the operation of charter schools. Having charter schools means operating another system of schools in parallel to our public schools. This diverts money, time, and attention from operating and improving public schools. Members of the legislative and executive branches of government, as well as school system administrators, spend time and energy authorizing, overseeing, funding, and debating charter schools. Some of the money, time, and attention of parents, the public, and philanthropists is spent on charter schools instead of on our public schools.

In Massachusetts, for example, over $400 million annually comes out of local school funding and goes to charter schools. [1] At the same time, Boston is struggling with a $50 million shortfall in funding for its public schools for next year. The state provides some reimbursement to local school districts for students and funding lost to charter schools for the first few years after a student leaves, but at $80 million it doesn’t make up for the losses. [2]

Despite receiving substantial amounts of public money, charter schools’ finances typically lack the accountability and transparency of public schools. Part of the reason for this is that many facets of charter school operations are private. Most charter schools are governed by non-profit boards and many are operated by private education management organizations (EMOs). The EMO typically owns the furniture, equipment, and materials in a school and leases them back to the school. And it is common for the school’s teachers to be private employees of the EMO. A charter school’s building is often privately owned and leased or rented by the school. [3]

These contractual relationships with private entities offer multiple opportunities for private profit-making, sometimes involving governing board members or school management and, therefore, possible conflicts of interest. “A substantial share of public expenditure [for charter schools] … is being extracted inadvertently or intentionally for personal or business financial gain, creating substantial inefficiencies.” [4]

All of this adds up to a significant degree of privatization of education funding through charter schools. Some of the big players in the charter school business, “such as Imagine Schools, White Hat, and Charter Schools USA, are taking advantage of these opportunities in ways that are self-enriching and not in the public interest.” [5] These large charter school businesses, and others such as National Heritage Academies and Mosaica, are the dominant corporations in the field. However, they are not the ones that charter school advocates promote in the media, such as KIPP, Uncommon Schools, and Success Academy in New York City, which are all much smaller.

Charter schools tend to have very high administrative overhead expenses, including high salaries for heads of EMOs. In New York City, the CEO of Success Academy charter schools is paid over $475,000 annually. [6]

On the other hand, the vast majority of charter schools have low classroom instructional budgets. Teachers tend to be young and receive relatively low pay. In Pennsylvania, charter school teachers were found to have average salaries that were $18,000 lower than teachers in the local public schools.

Charter schools typically augment public funding with outside funding that may come from wealthy individuals, foundations, corporations, and even government grants. If this same outside funding were provided to public schools, they would be able to offer enhanced services that are often associated with charter schools, such as extended school days or years, tutoring and other academic supports, and enrichment activities. The outcomes of the public school students would presumably improve if these extra resources were provide to them.

A key measure for educational management, quality, and equity is spending per student. However, comparing spending per student between charter schools and public schools is difficult at best. First of all, as discussed in my previous post, students in the public schools, on average, present more challenges and therefore are more expensive to serve. Second, the costs of supportive services for charter school students, such as transportation, may be borne by the public school system. Third, the outside funding many charter schools obtain is often not clearly disclosed. Because the financial transparency of charter schools is typically much less than the complete openness of public school budgets, getting accurate data to calculate per student spending is difficult. Furthermore, because of their private nature, charter schools are often not responsive to Freedom of Information Act (FOIA) requests that would compel a public entity to release information. [7]

The bottom line is that charter school operations undermine our public schools, just as their student selection practices do. Their operations divert money, time, and attention from public schools, while their student selection practices divert the better students. Despite receiving substantial sums of public money, charter schools’ financial practices result in low instructional spending, high administrative costs, inefficiencies, and conflicts of interest. This is not an efficient strategy for improving our education system as a whole.

[1] Office of the State Auditor, Commonwealth of Massachusetts, 2014, “The Department of Elementary and Secondary Education’s oversight of charter schools,” Published by the author (http://www.mass.gov/auditor/docs/audits/2014/201351533c.pdf)

[2] Massachusetts Budget and Policy Center, 2/5/16, “Analyzing the Governor’s FY 2017 Budget,” (http://www.massbudget.org/report_window.php?loc=Analyzing-the-Governor%27s-Budget-for-FY-2017.html)

[3] Miron, G., Mathis, W., & Welner, K., 2015, “Review of separating fact & fiction,” National Education Policy Center (http://nepc.colorado.edu/thinktank/review-separating-fact-and-fiction) Note: This document is a rebuttal of an advocacy document from the National Alliance for Public Charter Schools entitled, “Separating fact & fiction: What you need to know about charter schools.” (http://www.publiccharters.org/wp-content/uploads/2014/08/Separating-Fact-from-Fiction.pdf)

[4] Baker, B., & Miron, G., 2015, “The business of charter schooling: Understanding the policies that charter operators use for financial benefit,” National Education Policy Center, page 3 (http://nepc.colorado.edu/files/rb_baker-miron_charter_revenue_0.pdf)

[5] Cohen, R., 12/22/15, “The charter school business,” The American Prospect, pages 2-3 (http://prospect.org/article/charter-school-business)

[6] Baker & Miron, 2015, see above.

[7] Miron, G., Mathis, W., & Welner, K., 2015, see above.