Economy


Class War Continues

wage

Can a maximum wage help bridge the income inequality gap?  

There’s been an increase in discussion on minimum wage which is a positive step for movements such as Fight For 15. However at the other end of the spectrum sits maximum wage, an idea rarely brought to the table. One reason is that there is little research into implementing such a policy, though proposals have been brought forward in unions (advocating for a 1:100 pay ratio) and in Switzerland (1:12) among a few other countries and individual companies.

One model to look at is the NBA where salaries are capped and the ratio currently stands at about 1:20. This has shifted the incentives from making the most financially to other factors like teammates and chances at a championship. It’s also been shown to help mid-range players; since teams are restricted from spending too much on one player, other players see their offers increase.

Others believe that increasing income taxes would serve as a de facto maximum wage. Researchers have looked back at the post-WWII era when taxes were 90 percent for high wage earners and compared it with post-Reagan numbers. They found that productivity was higher and that the distribution of gains was more equitable pre-Reagan. Rectifying income inequality may also actually help the overall economy which is still recovering. A report by Standard & Poor’s Ratings Services found that the income gap is stunting economic growth. Beth Ann Bovino, the chief U.S. economist on the report said, “What disturbs me about this recovery —which has been the weakest in 50 years—is how feeble it has been, and we’ve been asking what are the reasons behind it. One of the reasons that could explain this pace of very slow growth is higher income inequality.” The report points out that the affluent are more likely to save money rather than funnel it back into the economy and that they have the ability to use their financial power for political gains.

Another idea that is gaining favor, especially in the tech industry is an open salary system. One company that has utilized this is Buffer, a social-sharing site which has developed a salaries formula and even published their employees’ salaries (at the highest is the CEO who brings in $158,800 and at the lowest is a team member who makes $70,000). Proponents of such an arrangement say it instills a sense of transparency and trust.  

Photo by timothy.actwell, licensed under Creative Commons.

Private Equity Firms: Drowning in Profit

Private Equity Firm

Reprinted with permission from TomDispatch.

Security is a slippery idea these days—especially when it comes to homes and neighborhoods.

Perhaps the most controversial development in America’s housing “recovery” is the role played by large private equity firms. In recent years, they have bought up more than 200,000 mostly foreclosed houses nationwide and turned them into rental empires. In the finance and real estate worlds, this development has won praise for helping to raise home values and creating a new financial product known as a “rental-backed security.” Many economists and housing advocates, however, have blasted this new model as a way for Wall Street to capitalize on an economic crisis by essentially pushing families out of their homes, then turning around and renting those houses back to them.

Caught in the crosshairs are tens of thousands of families now living in these private equity-owned homes. For them, it’s not a question of economic debate, but of daily safety and stability. Among them are the Cedillos of Chandler, Arizona, a tight-knit family in which the men work in construction and the oil fields, while the strong-willed women balance their studies with work and children, and toddlers learn to dance as early as they learn to walk. Their story of a private equity firm, a missing pool fence, and the death of a two-year-old child raises troubling questions about how, as a nation, we define security in housing and why, in the midst of what’s regularly termed a “recovery,” many neighborhoods may actually be growing increasingly vulnerable.

A Buying Frenzy

In early August 2013, the Cedillo family threw a pool party at their house in Chandler. It was the sixth birthday of Brenda Cedillo’s son, Jesus, and the family gave him a Batman-themed celebration, complete with a piñata in the driveway and a rented waterslide for the small pool in the backyard. Brenda, her brother Bryan, and her sister Christine had signed a one-year lease on the two-story structure three weeks earlier, which made the party special. It was the first family celebration that could be held in a house.

“We’ve always lived in apartments, apartments, apartments,” said Christine.

The three of them were excited to find a place they could afford that was big enough for their children, Christine’s partner Javier, and their parents Olga and Jesus. Christine’s oldest daughter, two-year-old Zahara, was so close to Brenda’s son that the two called each other brother and sister.

The only worry during the party was the pool, carefully monitored by the adults. Being unfenced, it had been a source of stress since they moved in. Repeated requests to the management company overseeing the property that one be installed had resulted in nothing. The Cedillos had no idea that the house’s real owner was a private equity firm called Progress Residential LP.  It had been founded in 2012 by Donald Mullen, a former Goldman Sachs partner, and Curt Schade, a former managing director at Bear Stearns, an investment bank that collapsed in 2008. Progress was financed by a $400 million credit line from Deutsche Bank.

The same month that the family rented the house at 1471 West Camino Court, Progress Residential purchased more homes in Maricopa Country than any other institutional buyer. Nationally, Blackstone, a private equity giant, has been the leading purchaser of single-family homes, spending upwards of $8 billion between 2012 and 2014 to purchase 43,000 homes in about a dozen cities. However, in May 2013, according to Michael Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business at Arizona State University, Progress Residential bought nearly 200 houses, surpassing Blackstone's buying rate that month in the Phoenix area.

The condition and code compliance of these houses varies and is rarely known at the time of the purchase. Mike Anderson, who works for a bidding service contracted by Progress Residential and other private equity giants to buy houses at auctions, was sometimes asked to go out and look at the homes. But with the staggering buying rate—up to 15 houses a day at the peak—he couldn’t keep up. “There’d be too many, you couldn’t go out and look at them,” he said. “It’s just a gamble. You never know what you’ve got into.”

The House on West Camino Court

The two-story house that would soon become the Cedillo family’s home was in fine structural condition when the family signed the lease. It hadn’t sat vacant for long. Earlier that year, the former owner, Lloyd Carter, sold the house to avoid foreclosure after realizing that he owed $100,000 more on his mortgage than the house was worth. (“I didn’t even know who they sold it to,” Carter told me. “The title agency just sent the documents with the courier and met me at a Starbucks.”)

There were a number of small rehab issues: a cockroach infestation, oil that had spilled in the driveway, and a sloppy paint job. Christine recorded some of these problems and others on a walk-through inspection, but she wasn’t overly troubled. “All I was looking for was a place big enough for us to be together,” she said. Until then, she had been living in her parents’ apartment in Tempe with Zahara and her younger daughter Elysiah.

The one serious problem was the lack of that pool fence. Before the family moved in, Christine asked the Golba Group, the property management company hired by Progress to lease and maintain many of its houses, to install one. As she recalls, Lacey, the property agent, left for a moment and when she returned “said they weren’t going to put it up.” Christine offered to cover the cost and was informed that the family could install their own barrier, but only if it didn’t affect any of the landscaping and wasn’t fixed to any permanent structures, which to Christine sounded impossible.

The next week, the family moved in, increasingly nervous about the fenceless backyard, especially since they were unsure what steps they could legally take as renters. Christine’s father began collecting wood to build a barrier on the patio and the family agreed on a safety plan: both front and back doors were to remain locked at all times, and multiple adults had to supervise the children if they were outside. Christine says she called the company another time to ask for a fence, again offering to cover the cost.

Golba claims it has no record of these requests. Lacey (who declined to share her last name) said she doesn’t remember the Cedillos, no less whether they requested a fence. “If you knew the amount of properties we had,” she told me by phone. “It was over a year ago.”

The Private Equity Business Model

Global private equity firms have not been, historically, in the business of dealing with pool fences and the other hassles of maintaining single-family houses. But following the housing market collapse, the idea of buying a ton of these foreclosed properties suddenly made sense, at least to investors. Such private-equity purchases were to make money in three ways: buying cheap and waiting for the houses to gain value as the market bounced back; renting them out and collecting monthly rental payments; and promoting a financial product known as “rental-backed securities,” similar to the infamous mortgage-backed securities that triggered the housing meltdown of 2007-2008. Even though the buying of the private equity firms has finally slowed, economists (including those at the Federal Reserve) have expressed concern about the possibility that someday those rental-backed securities could even destabilize—translation: crash—the broader market.

Since Wall Street was overwhelmingly responsible for the original collapse of the housing market, many have characterized these new purchases as a land grab. In many ways, Progress CEO Donald Mullen is the poster-child for this argument. An investment banker who enjoyed a brief flurry of fame after losing a bidding war to Alec Baldwin at an art auction, he was the leader of a team at Goldman Sachs that orchestrated an infamous bet against the housing market. Known as “the big short,” it allowed that company to make “some serious money“ when the economy melted down, according to Mullen’s own emails. (They were released by the Senate Permanent Subcommittee on Investigations in 2010.) As Kevin Roose ofNew York magazine has written, “A guy whose most famous trade was a successful bet on the full-scale implosion of the housing market is now swooping in to pick up the pieces on the other end.”

A Child’s Death

Unlike her cousin Jesus, two-year-old Zahara was afraid of the pool. She was much more likely to be found dancing in front of the television, or eating vegetables, which were—to her family’s surprise—her favorite food. She loved ketchup, and once disgusted her aunt Brenda by dipping her entire hand into the ketchup bowl at a restaurant and licking the condiment off her fingers. Describing herself as someone who “loves firsts,” Christine saved everything about her daughter’s life from her positive pregnancy test to the certificate she received for volunteering at Zahara’s Early Head Start program.

Tod Stewart, Christine Cedillo’s lawyer, remembers being shocked by the number of keepsakes the family had collected over Zahara’s short life. “I asked her for some pictures of Zahara,” Stewart told me, “and Christine sent me 1,200 photos.”

About a week before Zahara’s death, Christine reached out to her daughter’s Head Start teacher to inquire about swimming lessons. The girl still showed an extreme aversion to the pool, but Christine wanted to be careful. That birthday party weekend was, according to family members, the moment when her fear of the water must have evaporated, because that following Wednesday, while Christine was at work and Zahara was at home recovering from a fever with her grandmother Olga, the toddler crawled out through a doggie door and found her way into the pool.

“I literally went into shock,” says Christine after she got a call from Olga at the Subway outlet where she and Brenda worked. “I took off my apron and sped off to the hospital.”

Multiple Violations

As far as legal liability goes, Arizona pool laws are not very complicated. 

If a property is out of compliance with city or state codes, the responsibility for possible injuries or death, such as a drowning, falls on the owner of the property—especially when the injured party is a minor. Reviewing photos of the West Camino house taken by the police and investigators, Doug Dieker, a personal injury lawyer in Scottsdale, explained that the place was clearly “in violation of city code.”

If an interior fence around a pool is lacking, city code requires one of three precautions: the doors with pool access need to be self-latching and self-closing; there needs to be a power cover for the pool; or there needs to be audible alarms on all the doors. None of these three things existed at the house at the time of the drowning, according to both photo evidence and testimony from the family.

Dieker, who has worked on a similar wrongful death case in which a 16-month-old child drowned in a pool in neighboring Glendale after crawling through a doggie door, explained, “Anytime you rent to a family with small children, the duty under Arizona law is that the landlord needs to take the precautions of a reasonably prudent person.”

As he reviewed the photos, he added, “The outside fence is in violation of city code, also.”

Not “Traditionally Correct” Practices

When Christine arrived at the hospital, Zahara was hooked up to a breathing tube and her stomach was dramatically inflated. Javier, who works in construction, was out of town on a job. Christine called to tell him to come home, now. The doctors informed her that even if they could get Zahara to breathe again, she would have suffered serious brain damage. Christine said she just wanted her daughter alive, so the doctors continued trying to resuscitate her.

“They were pressing and pressing on her and I said, ‘Just leave her alone,’” was how Christine described her daughter’s final moments. “We said a prayer and the priest blessed her body and I just fell on the floor and started crying.”

The family returned from the hospital and began a nine-day mourning period, but Christine didn’t stay idle for long. Brenda remembers that her sister almost immediately began attending to the preparations for her daughter’s funeral. In the process, as Christine tells it, she called Golba to let the company know what had happened. Rather than receive condolences, she was told to submit a police report.

Christine began researching the city building codes and laws on the subject, only to find herself shuttled from one agency to the next. “On the City of Chandler website, I looked up code enforcement,” she recalled. “I called a couple of times. It was very confusing; when I called code, they said to call [the Department of] Buildings. And when I called Buildings, they told me to call code.”

Finally she went down to the code office and told one of the inspectors how her daughter had died. She wanted to know if there was a violation at the house and, if so, how to report it. The inspector took her number and scheduled a time to come inspect the house. Instead, he called back that afternoon and left a voicemail suggesting that Christine call the Department of Buildings. When she recounted the exchange with Golba and the frustration with the city to the funeral director at Zahara’s service, Christine was advised to find herself a lawyer.

In a phone interview, Scott Golba, cofounder of the Golba Group, claimed that issues like drownings or code violations are not common at the investor-owned homes his company has managed. (Pool drownings in Maricopa County, it should be noted, are remarkably common; 10 children have drowned there so far in 2014, according to Children’s Safety First.)

Golba did, however, suggest that Progress’s need to achieve a high rate of returns for its investors had brought a financial pressure previously unheard of to the single-family rental market. “Institutional owners want to know, 'How much money did I make on every single square foot? How much money did I have to put in capital wise, and how much money did I make on that capital?'... It’s all about spreadsheets when it comes to institutional owners.”

For Progress and other institutional investors, so far the returns on their single-family rental homes haven’t always proved to be a happily-ever-after story. Last summer, another private equity firm, American Homes 4 Rent, fired a number of its employees after posting losses. In February, data showed that the rents Blackstone was collecting from 3,207 houses that together made up the collateral for the first-ever “rental-backed security” had declined by 7.6 percent. “Single-family landlords have struggled to turn a profit while acquiring homes faster than they can fill them with tenants,” Bloomberg News reported last August.

Scott Golba explained that sometimes this gap between anticipated profits and actual ones led companies like Progress to skirt the rules to increase returns. “Initially they have to sell to their stockholders a certain dollar amount, and if it doesn’t come to that, when everything’s said and done, if they can’t make that much money out of the home, they have to explain that to their stockholders or the bank they lend to.”

“On the negative side,” he continued, “they’ll try to raise the rents or do something that isn’t traditionally correct to save money—or I should say, to make more money out of the property.”

The Fence

In the spring, while Christine and Javier were still coping with their grief, the Cedillos moved out. “We’ve got to learn to live without her for the rest of our lives,” Christine told me.

Zahara’s death affected other family members as well. Olga remained heartbroken, while Brenda felt the stress of keeping the family together, even as she held down a full-time job, finished her junior year of college, and cared for Jesus, who grew increasingly withdrawn and angry at school.  At the cemetery, Christine remembers the six-year-old exclaiming, “It’s just so stupid! Why couldn’t they just put up a fence?”

In fact, more than three months after the drowning, Progress did finally approve and pay for the installation of a fence at the house. But even that didn’t go according to plan because the fence was initially installed next door, at 1461 West Camino Court. (That home’s owner, Michael Hoard, remembers returning home to find an unexpected barrier in his backyard. “I got back Saturday, went outside, and there was a pool fence that I hadn’t asked to be installed. Two or three days later, I got back from work and it was gone.”)

Christine and Jesus are now preparing to file a wrongful death suit against Progress. So far, they’ve refused to put down a dollar amount on the compensation they would accept. Instead, they want to see local laws enacted that would require institutional investors like Progress to have their houses inspected to ensure that they are in compliance with local ordinances. “I just want this not to happen to someone else,” said Christine. Employees from Progress's Scottsdale office did not return repeated requests for comment.

Rob Call, a graduate student in the department of Urban Planning at MIT, has researched institutional investor homes in Atlanta. What he’s found is that the sort of vulnerability experienced by the Cedillos is a distinguishing feature of the wave of private-equity ownership. “I see it as a business model that is anti-community control.” He sees the logic behind the private equity push into the rental market—essentially using housing as a “wealth extraction tool” from communities—as similar to the one lenders and mortgage companies employed in the years leading up to the 2007-2008 crash.

“If Wall Street is involved and willing to dump $20 billion into something, it’s because they think they can, and they plan on making a bunch of money on it,” he says. “Last time they got involved in housing, that’s exactly what they did. And then everything came crashing down.”

In the meantime, the Cedillos tend to a grave instead of a child, sad proof of what might be called “rental-backed insecurity” in a new American housing world.


TomDispatch regular Laura Gottesdiener is a journalist and the author of A Dream Foreclosed: Black America and the Fight for a Place to Call Home. She is an editor for Waging Nonviolence and has written for Playboy, Al Jazeera America, RollingStone.com, Ms., the Huffington Post, and other publications.

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Shareable Cities

Babies Share
Can the Sharing Cities Network fuel a people-powered economy?

On the verge of 2014, the economic outlook of the common folk appears—at first glance—grim. The 1 percent has turned a years-long recession in its favor, gaining wealth and political power. Meanwhile, the rest of us watch as our job prospects and bank accounts dwindle.

One thing that hasn’t diminished, however, is hope. While many cling to a last shred of optimism that the economy will magically right itself, others have begun to hope for something else. Keeping a wary eye on Wall St., these innovators have turned their focus away from the stock market, toward a different kind of economy—one focused on sharing the resources and skills we do have.

In Santa Cruz, New Orleans, and Portland, people are sharing fruit harvests. Folks in Richmond, California started a seed library, and the citizens of Ithaca, New York have enjoyed a successful community currency since 1991. Rather than watch others make the rules, these people are building alternative systems with their own rules—rules that bring abundance to the entire community.

Now imagine a city that did all of the above, and more. A city with worker-owned cooperative businesses, public banks (or credit unions), tool libraries, hackerspaces, community gardens, and bike kitchens. Most of all, a city with a network of engaged and caring people sharing the abundance they’ve helped to create.

It’s already happening, but so far sharing projects have been eeked out, trial-and-error, in small slots of time between low-wage work and life’s obligations. What if, instead, there was a catalyst: a collective pool of knowledge, resources, and inspiration? There could be.

For years, the website Shareable has been tracking and encouraging the sharing movement, spreading word about cool ways to collaborate, old and new. Now it has a vision to actively broaden and strengthen sharing networks across the U.S. through a Sharing Cities Network. Shareable’s goal is to nurture 100 grassroots sharing movements in 100 cities. Each local network will be different, but the broader network will help scale up and replicate successful projects from city to city.

“We are not protesting, and we are not asking for permission, and we are not waiting. We are building a people-powered economy right under everyone’s noses,” says Shareable co-founder Neal Gorenflo in the video below.

To learn more or contribute to the Sharing Cities Network, go to shareable.net/contribute.

Photo by Ben Grey, licensed under Creative Commons.

Happy Birthday, Rolling Jubilee

Medical Debt is a Hard Pill to Swallow
Rolling Jubilee is one year old—what’s happened so far?

“Our message to the 1 percent is: We don’t owe you anything,” says Thomas Gokey, one of the minds behind Rolling Jubilee. It’s the first anniversary of this “bailout of the people by the people,” which kicked off last November 15th with a People’s Bailout telethon.

The basic idea behind the bailout? Buying bad debt on the secondary market for a fraction of the amount owed, then forgiving it. The effect is dual, relieving everyday people of burdensome debt while exposing systems that cause debt and those that profit from it. If someone gets cancer and can’t hold down job, then recovers but can’t pay the medical bills, is the debt fair? If students take out loans on the advice of their parents, then graduate and can’t find living-wage jobs, is it their fault they can’t make the monthly payment? These are the kind of questions Rolling Jubilee prompts us to ask.

62 percent of all bankruptcies are due to medical debtSo far, Rolling Jubilee has focused its efforts on dispelling medical debt. This revival of jubilee, an Old-Testament-era practice, sprang from the Occupy movement. After leaving Zuccotti Park, a crew of Occupiers started Strike Debt and hatched a plan for the Rolling Jubilee. The anniversary date is significant, says Gokey. “It’s the one year anniversary of this project, but it’s the two year anniversary of the eviction of Zuccotti Park.”

While it took some time to work out the logistics behind raising money and eradicating debt, Strike Debt’s jubilee gives the lie to anyone who claims Occupy fizzled. The original goal was to raise $50,000 and abolish $1 million in debt. A year in—with the recent purchase of two portfolios amounting to $13.5 million in debt—they’ve freed thousands of debtors across the country from a total of $14.7 million.

Talking to Thomas Gokey, I get the impression that this is just the beginning. “The true measure of success for Rolling Jubilee,” he says, “is whether we can spark a large-scale debtors’ movement. While buying up the debt eliminates the profit for lenders, it’s not a real solution.”

A debtor’s movement would mean more people questioning their debt and, ultimately, refusing to pay. One thing anyone can do, says Gokey, is dispute their debt. “Debt should not be treated as a commodity, and we have no moral obligation to pay an investor who bought our debt for pennies on the dollar. This debt is not just morally illegitimate, it’s often legally fraudulent. When forced to prove it in a court of law, nine times out of ten the debt buyer cannot prove the debt is actually owed. We encourage everyone to dispute every debt.”

Get Wall St. Out of Health CareEventually, Gokey and others hope Rolling Jubilee can branch beyond medical debt to student and housing debt. Already, the San Francisco Bay Area chapter of Strike Debt is using eminent domain to seize underwater mortgages and prevent foreclosures. In New York, Strike Debt is operating a debtors’ clinic where people can get advice specific to their debt. Across the nation, but especially in New York and the Bay Area, Strike Debt is working to find solutions to student debt.

To mark the anniversary of Rolling Jubilee, Strike Debt chapters in Portland, New York, and the Bay Area are hosting celebrations and debtors’ assemblies. Why join in? “We need to band together to evict Wall Street from our lives,” says Gokey. “No one can do this as individuals, we need to work collectively.”

Read an interview with Thomas Gokey about Rolling Jubilee’s start or watch Jeff Mangum and Guy Picciotto play the People’s Bailout.

Photos by The All-Night Images, licensed under Creative Commons.

Socially Responsible Investing: Why DIY?

Love Is Greater Than Money
SRI funds make feel-good investing sound easy, but for the most impact you’ll want to do it yourself. 

Back in 1971, when Methodist do-gooders Luther Tyson and Jack Corbett set out to change the stakes of the investment game with $101,000 and a novel concept—investing with a conscience—socially responsible investment (SRI) funds probably sounded like a hippy’s peace-pipe dream. Decades later the company they started, Pax World Funds, has become the cornerstone of a booming sustainable investment industry. But more and more, it’s looking like the pipe-dream part was true.

Investing in ecologically-conscious, fair-minded companies turned out to be a popular idea—unfortunately, it’s easier said than done. Still, Tyson and Corbett tapped a previously-unseen market and when others saw the dollar signs, they wanted in. By 1995, the U.S. had 55 SRI funds with $12 billion in assets, says the Forum for Sustainable and Responsible Investment, and by 2012 those numbers had grown to 333 and $640.5 billion, respectively.

Much of this growth happened in spite of evidence that many funds aren’t living up to their claims of social responsibility. In 2003, “23 SRI funds had shares in Halliburton,” wrote Terry Fiedler in a 2005 report for Utne. “The fast-food juggernaut McDonald's, which has been linked to America's obesity epidemic, was included in 41 funds. And ExxonMobil, a perennial environmental threat, was represented in the portfolios of some 40 SRI funds.” At the time, the vice president of social research for Pax World Funds, Anita Green, pointed out that SRI funds use shareholder power to advocate for positive change from within the company. While this does lessen the blow, Green’s claim contained more than a little deceit.

In 2006, Pax World Funds stopped calling its investments “socially responsible”—since SRIs have strict rules on what they won’t invest in (weapons, petroleum)—and changed its investment philosophy to “sustainable investing.” The new terminology allowed Pax to invest in companies regardless of how they make their money, as long as they’re sustainable or socially conscious relative to other businesses in their industry.

Given the hazy new definition, we probably shouldn’t have been surprised when the company was caught investing in businesses that profited from Pentagon contracts and petroleum in 2008. Pax claimed the investments were an oversight (how could they have possibly known that Anadarko Petroleum wasn’t eco-friendly?) and paid a $500,000 fine. But the SRI industry’s reputation was tarnished. The real problem, wrote Ron Lieber for the New York Times, “is the sheer impossibility of finding any companies to invest in that are truly pristine.”

Still, investing in entities less ghastly than Halliburton or Anadarko remains possible. It takes a little legwork, but here are some tips and resources:

Invest in municipal bonds
These bonds are issued by city, county, and state governments, as well as nonprofits like universities, hospitals, and energy firms. A team of authors at GreenMoney Journal writes, “Municipal bonds are, by definition, investments in the public good and ideally achieve some measure of positive social outcome.” While muni bonds aren’t completely immune to default, they are relatively low risk. And many states offer tax-free municipal bonds for in-state investors.

Invest in your community
Slow Money members who have created local investment clubs are seeing returns of roughly 3 percent, and the benefits to the community—strong local relationships, a robust local economy, and healthy food—are invaluable.

Think local and cooperative
Keep investments in a member-owned or nonprofit brokerage firm. The Times’ Lieber suggests Vanguard, USAA, or TIAA-CREF. Bank and save through your local credit union.

Keep tabs on your SRI fund
In a 2004 report, entrepreneur-turned-author Paul Hawken and the Natural Capital Institute (now WiserEarth) knocked SRIs for investing in many of the same organizations as conventional funds. But Hawken didn’t intend to take the industry down—he wanted people to demand clearer criteria and more transparency. Still, trying to change the industry might be more work than investing outside of it.

Resources

The Coalition for Environmentally Responsible Economies (CERES)
A nonprofit trying to rally investors, businesses, and public interest groups for a sustainable society. The website assembles news and opinion on environment and economy from around the internet.

Forum for Sustainable and Responsible Investment (USSIF)
This nonprofit association is technically for professionals, businesses, and organizations involved in socially responsible investing, but the website has a wealth of information anyone can access.

Green America
Formerly Co-op America, this nonprofit membership organization offers a detailed guide to socially responsible investing.

GreenMoney Journal
A quarterly newsletter focused on making business, investing, and the economy more sustainable. Articles are also available online. The writing can be a bit technical, but is typically thoughtful and informative.

Investor Responsibility Research Center (IRRC)
Objective research, analysis, and portfolio screening on companies worldwide.

Natural Investment Services (NIS)
If you want to build your own portfolio but don’t know where to begin, the people at NIS can help.

SocialFunds
Though the website looks as if it hasn’t been updated since 1999, it is in fact a source of relevant news and resources offered up by the SRI World Group.

Social Investment Organization (Canada)
A Canadian trade organization for socially responsible investing.

Image by FeiticeiraRose, licensed under Creative Commons.

Federal Student Loan Sharks

Occupy Student Debt
The government is profiting off of young adults across the nation, and the new law on student loan rates only makes things worse.

This article originally appeared at The American Scholar.

Education, Thomas Jefferson believed, should be free. Its universal availability was at the center of his vision for the republic. In the wake of the Constitution’s drafting in Philadelphia, he remarked in a letter to James Madison, “Above all things I hope the education of the common people will be attended to, convinced that on their good sense we may rely with the most security for the preservation of a due degree of liberty.” In 1778, Jefferson proposed to the Virginia legislature a bill for the “More General Diffusion of Knowledge.” The bill’s preamble reads, “those entrusted with power,” in all forms of government, “have perverted it into tyranny,” and “the most effectual means of preventing this would be to illuminate, as far as practicable, the minds of the people at large.” When Jefferson thought about the nation’s education system, writes Merrill D. Peterson in Thomas Jefferson and the New Nation (1970), he “projected three distinct grades of education—elementary, middle, and higher—the whole rising like a pyramid from the local communities.” Elementary schools would freely educate all children in reading, writing, and other basics. The middle and higher schools would be selective and charge tuition, except for poor students who passed rigorous examinations and received state scholarships. From its opening in 1825 until 1860, Jefferson’s University of Virginia charged a tuition of $75 per session.

Perhaps it won’t surprise you to hear that we have very few Jeffersons in the 113th United States Congress, but then we don’t have any in the White House or the Department of Education. Congress spent the summer bickering over whether the rates for student loans for higher education would double on July 1, from 3.4 to 6.8 percent. They did double through congressional inaction; but at the end of July, Congress passed a Senate compromise that fixes rates annually to the 10-year U.S. Treasury note plus 2.05 percent, capped at 8.25 percent. This year’s rate will be 3.9 percent for undergraduates and 5.4 percent for graduate students, who have traditionally paid a higher rate. In the press, the new bill was hailed for decreasing rates and saving students significant amounts in interest. But of course the bill actually increases rates by half a percentage point from what it had been before July 1. The federal government is in effect levying a new tax on college students in a program that already raises an obscene amount of money for the Treasury and is jeopardizing the financial future of a whole generation of young Americans. Our third president, it’s fair to say, would be disappointed if not disgusted.

In his 2010 State of the Union address, our 44th and current president proposed to “finally end the unwarranted taxpayer subsidies that go to banks for student loans.” We all agree with that; but what should we have done next? For starters, the government could have stopped being so greedy and instead made direct loans to students at its cost. With the current cost of funding at 0.7 percent, that approach would have put student loans at around one percent. President Obama apparently never considered that course—by continuing the same high rates, the same high profits go to the government instead of to the banks.

Government loans are wildly profitable. If you borrow at 0.7 percent and lend at 3.9 or 5.4 percent, you have what’s called a favorable spread. The Congressional Budget Office reports that the government makes 36 cents on every dollar lent to undergraduates and 64 cents on every dollar lent to graduate students and parents. The loans cannot be absolved through bankruptcy except under extreme conditions, and the government can, without even a court order, garnish wages, disability payments, and Social Security. Indeed, the only certain way to beat the government is to die without any assets—an extreme course of action.

The original student-loan program followed Jefferson. Passed in 1958, as part of the National Defense Education Act—a response to Sputnik—it provided for Treasury loans to students at three percent. The government’s borrowing rate was 3.1 percent in 1957. The program gave priority to “students with a superior academic background” who expressed an interest in teaching elementary or secondary school, and to students with a “superior capacity” for “science, mathematics, engineering, or a modern foreign language.” Loans were limited to 10 years and were forgiven if the student went into public school teaching.

In 1965, as part of President Johnson’s Great Society program, Congress passed the Higher Education Act. The law introduced the government-guaranteed bank loan, which today has grown to more than $1 trillion in student loans outstanding—an amount greater than credit card debt and second only to mortgage debt. The guaranteed loan program created the student aid industry, led by the banks and the government-sponsored entity Sallie Mae. The industry has enjoyed significant profits from high interest rates on riskless loans. Sallie Mae stock rose more than 1,900 percent between 1995 and 2005. Its CEO, Albert Lord, made $225 million between 1999 and 2004.

As the industry attached a giant siphon to students’ lifetime earnings, the nation began an experiment not in illuminating young minds or upholding the Jeffersonian educational ideal but in finding out what would happen if our college graduates started their working lives with a large negative net worth.

Who came up with the idea that anyone should profit from student loans? Would it be a surprise to hear that the banks and the lenders were involved? When Congress created the guaranteed bank loan in 1965, Sen. Wayne Morse, a Democrat from Oregon, said,

The loan program that we have worked out in this bill is the result of prolonged conferences with the representatives of financial institutions of this country, the banks, and the loaning agencies, the Treasury, the Bureau of the Budget, and with the Department of Health, Education, and Welfare.

The switch from direct loans to guaranteed loans was an accounting fiddle: direct loans showed as a budget expenditure, and the guaranteed loans did not. The Johnson administration was seeking to keep overall budget numbers down in view of its heavy expenses for the war in Vietnam. No one mentioned that a parasitic industry had been created, one that could make money without risk.

The program not only became a profit center, first for the banks and Sallie Mae and then for the federal government, but it also became the main support for a profligate American higher education system. In 2011–12, the program pumped $113 billion into colleges and universities, which amounts to about 35 percent of the total tuition bill. Private colleges and universities typically receive an estimated 60 percent of their tuition from student loans; law schools, 80 percent. The student-loan program is growing bigger and bigger. It has already increased almost 10 times since 1989–90 ($12 billion), tripled since 1999–2000 ($33 billion), and doubled since 2004–05 ($55 billion).


One sign from the 2011 Occupy Wall Street protests read, “Borrowed $26,400, Paid Back $32,700, Still owe $45,276.” As the sign implies, there is no escape from student-loan debt. If a student defaults, he is headed, as financial-aid expert Mark Kantrowitz told Business Week in a metaphor mash-up, “for a trip through hell with no light at the end of the tunnel.”

A 10-year loan can almost double because of debt collection charges of nearly 20 percent. The federal government paid collection agencies $1.4 billion in 2011. Those who predict that student loans are a bubble about to pop note that the increasing cost of tuition and the increased debt load carried by students are similar to housing debts in 2007. But student loans are forever: unlike a house, a student loan can’t be abandoned. The students owe their soul to the company store. And the biggest cost of the student-loan fiasco may not be the crushing debt to the individual graduate but the deflation of that entrepreneurial spirit that distinguishes the United States from much of the rest of the world.

Debt is silent. It creeps along, but once it is incurred, the obligation is as strong as death. Two-thirds of graduates leave college with student loans, owing on average $26,600. A dependent student (one under 24 who is still supported by parents) can borrow up to $31,000 at 3.9 percent over a five-year term by taking out Stafford loans. An “independent” student can borrow as much as $57,500 at the same rate. Parents can borrow further at 6.4 percent. About 90 percent of law students graduate with debt averaging more than $100,000. Each year a graduate student can borrow $138,500 at 5.41 percent and an additional amount up to the “cost of attendance,” say, $54,000 at 7.9 percent.

Up to 3.7 million former students owe over $54,000 and 1.1 million owe more than $100,000. Over two million Americans 60 or older still have outstanding student loans. The miracle of compound interest works against the student. A loan at six percent interest doubles in 12 years—at three percent, it doubles in 24 years. The government, universities, and bankers have captured a substantial part of the student’s future income stream.

Real people exist behind these figures. Consider the example of Alan Collinge, who attended the University of Southern California, taking out $38,000 in loans for his undergraduate and graduate degrees in aerospace engineering. He got a job at Caltech and repaid $7,000 before leaving his job. He could not find a new one and stopped paying Sallie Mae after it refused any forbearance of his debt. He eventually owed $100,000 and couldn’t get a military contractor job because of his bad credit. In 2008, the U.S. Department of Education offered to waive his accrued interest and fees, according to The New York Times. He is now an activist on the subject of student-loan debt. Fortune magazine reports that in the early 2000s, Sallie Mae charged one student at Katharine Gibbs, a for-profit school, 28 percent interest—a stated 14 percent and a supplemental fee. Angelica Gonzales did not graduate from Emory University but owes $60,000 on student loans and is earning $8.50 an hour as a clerk in a furniture store.


Since World War II, there has been a sharp increase in the percentage and number of high school graduates who enroll at colleges and universities. In 1958, 24 percent were enrolled; in 1980, 45 percent; in 2010, 68 percent. (The total number of students doubled between 1980 and 2012, to 19.7 million.) Since 1964, the student-loan industry has financed the increased demand.

The Economist from December 1, 2012, reports that the cost of higher education per student since 1983 has risen by five times the rate of inflation. In comparison, medical costs have gone up twice the rate of inflation. Between 2000 and 2010, tuition rose 42 percent at public institutions and 31 percent at private ones.

Before the era of student loans, college tuition was substantial, but it didn’t threaten a student’s long-term financial health. A college kid could contribute a good part of the cost by working summers and holidays. But very few summer jobs pay well enough to make a dent in a $40,000 tuition bill. To pay tuition, room, and board for four years at Harvard today, at about $65,000 a year, parents need to earn (assuming a 50 percent tax cost) in the neighborhood of $520,000 in pretax money—a pretty exclusive neighborhood. Harvard’s tuition was $1,520 in 1960. Adjusting for inflation, that amount would still be only $11,990 today, but the actual price is $40,016. Tuition at Columbia University cost $1,450 in 1960, which would be $11,438 today, but the current cost is $46,846. State schools have also dramatically increased what they charge. In-state tuition at the University of Virginia cost $490 in 1960, which would be $3,865 in today’s dollars, but the current cost is $12,458. Although the government has piles of studies denying it, student loans appear to have induced, or at least facilitated, the astonishing rise in tuition.

Admittedly, it seems counterintuitive that student loans, intended to make college more affordable, have fueled skyrocketing tuition. But as education policy consultant Arthur M. Hauptman wrote in Inside Higher Ed in 2011, “There is a strong correlation over time between student and parent loan availability and rapidly rising tuitions. Common sense suggests that growing availability of student loans at reasonable rates has made it easier for many institutions to raise their prices.”

It is hard to understand how higher education can be so expensive. Harvard says tuition pays only half its cost; the rest comes from its considerable endowment. Why does it cost $80,000 for nine months of education? Science courses require some expensive equipment, but most courses are taught in large lecture format, often by assistant professors if not by graduate student teaching assistants. Cost, of course, may have nothing to do with it—the schools look to be charging what they can get, not what they need to operate.

The slowest-growing expenditure in higher education is the cost of professors. From 1999–2000 to 2009–2010, the average salary for male faculty increased by five percent, adjusted for inflation—indeed, faculty salaries, adjusted for inflation, have increased only eight percent since 1970. The faculty-student ratio in colleges and  universities was 16.6 to one in 1976, and is 16 to one now. Costs for administrators and buildings, on the other hand, have shot up. In 1976, universities had 50 administrators to support 100 teachers; today there are 100 nonfaculty professional employees per 100 teachers. University presidents and administrators are highly paid. The president of Ohio State received $1.9 million, as well as $600,000 in expenses, before his resignation this summer. Yale’s former president earned $1.6 million in 2010.

From 2001 to 2011, debt levels doubled as America’s universities went on a Taj Mahal binge. Luxurious suites replaced dormitory rooms with common bathrooms. Plush physical education centers replaced gyms. Many universities added to building costs by making side bets with investment banks about the direction of interest rates. University presidents became so overconfident that they thought they could beat Goldman Sachs on interest-rate bets. The schools lost every bet. Harvard, Yale, Cornell, Dartmouth, Georgetown, and Rockefeller University have all paid substantial sums to escape from their bad bets. In 2004, Harvard, led by Lawrence Summers, former secretary of the Treasury for President Clinton and director of the National Economic Council for President Obama, entered into interest-rate bets with Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Bank of America. Harvard lost, and in 2008 the school spent $1.8 billion paying off its gambling debt.

The two fastest-growing student-loan programs—nonguaranteed private loans and student loans at for-profit schools—run together. Both are expensive and of doubtful value. Private loans—from bankers to students and parents without a federal guarantee—make up 15 percent of the $1 trillion in outstanding loans. The very existence of private loans to students is puzzling, since government guarantees were created only because private lenders would not lend to students with no credit history. But Congress changed the laws in 2005 when it decided that students could not get rid of the loans, as a practical matter, in bankruptcy. Private loans today offer the banks the best of all worlds: the loans can’t be erased in bankruptcy, but the banks can charge any interest rate or fees they want.

Why private loans should have this no-bankruptcy protection is not clear. The idea was first proposed in 1999 by Sen. Lindsey Graham, a Republican from South Carolina, who stated that his bill would “make sure that the loan volume necessary to take care of college expenses are available for students.” The 2005 statute, one section of a major bankruptcy revision, was enacted with no debate or discussion. President George W. Bush, on signing the law, made no reference to the provision. Proponents of preventing students from getting rid of their loans in bankruptcy testified at a 2009 House hearing, arguing that changing the law would lead to more bankruptcies and result in more losses for the system to absorb. Rep. Howard Coble, a North Carolina Republican, asked, “What lender is going to make student loans if the borrower can file Chapter 7 the day after graduation and thereby fully discharge the debt?” But this is equally true of mortgages and credit card debt, for which bankruptcy is allowed.

The inability of student borrowers to get free of their loan debt gives the lenders a lifetime lien on students’ earnings. The private loans can cause hardship to a co-signer because they—unlike government loans—are not discharged in the case of death or disability. There are a few forgiveness programs for government loans, but they are not available for private ones. With these special advantages, the private loan business took off. One-third of graduates in 2008 used private loans averaging $12,550. Sallie Mae is currently separating its guaranteed loan portfolio from its private loans, in the belief that the latter business can be a hot stock.

The for-profit schools, owned and operated as businesses, are growing very fast. Between 1998 and 2008, enrollment at not-for-profits increased by 31 percent, while enrollment at for-profits grew 225 percent. The federal government has financed for-profits since 1992, but the national interest served by doing so is far from apparent. The high-profit-margin industry created by federal support has attracted hedge funds, which now account for almost a quarter of all student loans. A 2012 Senate committee report noted that 76 percent of students attending the for-profits were enrolled in schools owned either by a corporation traded on a major exchange or by a private equity firm. The report estimated that in 2009, when all federal revenue sources are considered, the 15 publicly traded for-profit companies received 86 percent of revenues from Title IV sources. Title IV includes all federal loans and grants in aid of education.

The co-CEO of the for-profit University of Phoenix is paid $25 million a year. Congress, the Senate report notes, has failed to hold companies accountable to taxpayers for providing quality education. More than half of the roughly one million students enrolled in for-profit schools in 2008–2009 had left by mid-2010 without a degree or certificate. The for-profit schools in some cases double dip—they lend money to their students, profiting from the lending as well as from tuition.

More than 90 percent of students at for-profit schools are saddled with loans that, as the Senate report put it, “may follow them throughout their lives, and can create a financial burden that is extremely difficult, and sometimes impossible, to escape.” The students and the taxpayer bear all the risk, and the for-profit industry reaps all the rewards.


The Old Testament provides for a jubilee year every 50 years, when all debts are forgiven. The federal student-loan program does have three versions of jubilee year: debt is forgiven if you work for a federal, state, or local government for 10 years, make payments for 25 years, or pay 10 percent of your disposable income for 20 years. The debt forgiven can be a large number, easily as much as $250,000, since interest rolls up during forbearance periods—times when monthly loan payments are temporarily postponed or reduced because of hardship. Except in the case of government service, however, the Internal Revenue Code considers the canceled debt to be ordinary taxable income.

The federal government currently lends money to big banks through the Federal Reserve discount window at 0.75 percent but charges graduate students 5.4 percent. Sen. Elizabeth Warren, a Democrat from Massachusetts, notes that the government is charging students “interest rates that are nine times higher than the rates for the biggest banks—the same banks that destroyed millions of jobs and nearly broke the economy. That isn’t right.” She introduced a bill “to give students the same deal that we give to the big banks.” Senator Warren’s proposal, applied to new and outstanding debt, would be a major reform but has very little chance of passage.

President Obama seemed ideally suited to bring about fundamental reform of the student-loan program: “I know this firsthand—Michelle and I, we did not finish paying off our student loans until about nine years ago. And our student loans cost more than our mortgage. Right when we wanted to start saving for Sasha and Malia’s college education, we were still paying off our own college education.” The president pointed out that he had signed a law “that says you’ll only have to pay 10 percent of your monthly income towards your … federal student loans once you graduate … [so if] you want to go into a profession that does not pay a lot of money, but gives you a lot of satisfaction, you are still capable of doing that and supporting yourself.” He has also increased the amount available through Pell grants from $14.6 billion in 2008 to $40 billion in 2012. But President Obama’s major change has been to shift the student-loan program’s huge profits from the bankers to the government, which is no help at all to students.

Under existing tax principles, students should be entitled to some relief. Current government interpretations, however, are not fair. Parents are not allowed to deduct tuition and related expenses paid for their children. Students themselves have had very limited success deducting education costs as a business expense. Existing tax law generally provides a deduction for the costs of producing income. Education is certainly a cost of earning income, but the Internal Revenue Service does not see it that way.

Properly, education cost should be viewed as if the student were constructing a building. If factory owners can depreciate their cost over the useful life of their buildings, why can’t students depreciate the cost of their education? And why not let students write off their cost as fast as they want? The reduced tax bill will let students make a dent in their outstanding student debt. A doctor or lawyer, with a student-loan debt of $125,000, might earn $150,000 and owe $50,000 in taxes. Under my proposal, the professional could use a $125,000 deduction to save $50,000 in taxes. It would help.

Professional school tuition should be a business expense because anyone who wants to pursue a career as a doctor, a lawyer, an architect, or any number of other professions cannot avoid paying it. College expenses may be harder to justify, but even these, I would argue, are legitimate business expenses, since an undergraduate degree is necessary to get into a professional school.

The country’s student-loan experiment is coming to a bad end—all the numbers are getting too big. Congress created a system with no checks; the only incentive for the industry and for schools has been to do more. More students means more profit. But for-profit universities and now traditional universities are facing a fall-off in the student population that has already made it hard for some schools to fill this year’s class. Even if the numbers weren’t falling, do we really want to perpetuate a system that hurts ambitious young people in the service of greed? Private lenders are greedy, the for-profits are greedy, and the federal government is greedy, too. The incentives need to be changed, returning the program to its Jeffersonian roots. What society will get back is an educated citizenry that can afford to put its education to use.

William J. Quirk is a professor at the University of South Carolina School of Law and a former contributing editor of The New Republic.

Photo by Andra Mhali, licensed under Creative Commons.

You Down With TPP?

The job-killing Trans-Pacific Partnership could pass by year’s end—unless the public stands in its way.

Looking around, it seems like our country’s in pretty bad shape. We’re broke, the environment’s trashed, and wars drag on. It’s hard to believe that in another decade we might be looking back on 2013 like this:

Spongebob makes a rainbow for Squidward.

You know, the good ol’ days before the Trans-Pacific Partnership—or TPP, as we’ll all be calling it in a few years. So far, the details of the proposed free-trade agreement have been shrouded in secrecy, but based on the little information that’s been leaked or offered, the TPP has a lot of people like this:

Scared Spongebob

There are a few reasons to worry. The Trans-Pacific Partnership, a huge free trade pact between the U.S. and 11 other Pacific Rim countries, would restructure our economy in dramatic and undemocratic ways. Everything from environmental regulations to net neutrality to food safety laws could come under threat if the TPP is signed. Oh, and it’ll make outsourcing your job much easier, which is why many people are calling it “NAFTA on steroids.”

NAFTA—a free trade agreement between the U.S., Canada, and Mexico—eliminated barriers like tariffs on trade and investment starting in 1994. It also expanded intellectual property rights to hold up across borders. Words like agreement and investment make it sound like these countries are doing this:

Spongebob and Patrick's epic hug.

 But what NAFTA looks like on the ground is more like:

Spongebob fish fry

It’s been bad for everyday people on both sides of the border. Mexican farmers who can’t compete against cheap, subsidized corn imports from the U.S. go out of business. And working-class Americans lose manufacturing jobs with decent pay when the companies they work for shift production to Mexican maquiladoras, where wages are lower.

For Yes! Magazine, Natalie Pompilio writes that passage of the TPP could prompt the few major manufacturing companies still in the United States to move production overseas. And when all the people who used to make socks or sweaters lose their jobs:

Spongebob sweater, "I made it with my tears."

Pompilio cites Michael Stumo, CEO of Coalition for a Prosperous America (a nonprofit advocacy group for working people) who says that of the people who lose their jobs, only about one-third will find a job of similar quality. The others? One-third will never work again, and the last third will find jobs like this:

Spongebob assembling krabby patties

“There will be much more poverty,” he says, “meaning your infrastructure suffers and the divorce rate goes up. This puts stress on kids and causes social problems.”

When most people hear this:

Spongebob buries himself in the sand.

And that’s understandable. The thing is, trade officials are trying to get the TPP passed by the end of the year.

Job loss is not the only problem with the TPP. On Democracy Now, the director of Public Citizen’s Global Trade Watch, Lori Wallach, said the TPP could limit the government’s ability to regulate food safety, finance, environmental standards, and policy surrounding energy and climate.

So pretty soon we all might look a little more like this:

Unhealthy Patrick, from Spongebob

Or this:

Songebob gets burned by the sun.

“It would be a big push for fracking,” says Wallach, “because it doesn’t allow us to have bans on liquid natural gas exports.”

As if that weren’t enough, the TPP is also bad news for the internet. The trade agreement would expand copyright law to severely restrict online sharing and remixing. It’s hard to know exactly how limiting the new rules would be because the public hasn’t been invited to the TPP negotiating table. But a chapter about intellectual property enforcement was leaked, and when advocates of internet freedom got their hands it:

Spongebob sounds the alarm.

In a video, the Electronic Frontier Foundation said:

While the public is shut out of the negotiating process, private corporate interests aren’t. In particular, big content industries are spending ginormous amounts of money lobbying to convince policymakers that more aggressive and draconian copyright laws will lead to more innovation, more creativity, and more jobs. But in reality that just isn’t the case.

Copyright encourages innovation to a point, but if licenses last too long or cover too much territory, copyright starts to stifle innovation—not to mention fun. When SpongeBob GIFs become a thing of the past:

Spongebob crying

That’s why Canada’s OpenMedia International is petitioning to end the secrecy surrounding the TPP and trying to crowdsource a set of fair copyright rules to offer as an alternative.

There’s not much time left, but groups like Expose the TPP and the Electronic Frontier Foundation are trying to raise awareness and stop passage of the agreement.

“There’s almost no part of your life or the things you care about that this agreement couldn’t undermine,” said Public Citizen’s Wallach. Sure that’s scary, until we remember that we have the power to stop it, and create the future that we want:

Spongebob and Patrick sparkle.







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