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“They’re Stuck With The Mess”: Why Ordinary People Bear Economic Risks And Donald Trump Doesn’t

Thirty years ago, on its opening day in 1984, Donald Trump stood in a dark topcoat on the casino floor at Atlantic City’s Trump Plaza, celebrating his new investment as the finest building in Atlantic City and possibly the nation.

Last week, the Trump Plaza folded and the Trump Taj Mahal filed for bankruptcy, leaving some 1,000 employees without jobs.

Trump, meanwhile, was on twitter claiming he had “nothing to do with Atlantic City,” and praising himself for his “great timing” in getting out of the investment.

In America, people with lots of money can easily avoid the consequences of bad bets and big losses by cashing out at the first sign of trouble.

The laws protect them through limited liability and bankruptcy.

But workers who move to a place like Atlantic City for a job, invest in a home there, and build their skills, have no such protection. Jobs vanish, skills are suddenly irrelevant, and home values plummet.

They’re stuck with the mess.

Bankruptcy was designed so people could start over. But these days, the only ones starting over are big corporations, wealthy moguls, and Wall Street.

Corporations are even using bankruptcy to break contracts with their employees. When American Airlines went into bankruptcy three years ago, it voided its labor agreements and froze its employee pension plan.

After it emerged from bankruptcy last year and merged with U.S. Airways, America’s creditors were fully repaid, its shareholders came out richer than they went in, and its CEO got a severance package valued at $19.9 million.

But American’s former employees got shafted.

Wall Street doesn’t worry about failure, either. As you recall, the Street almost went belly up six years ago after risking hundreds of billions of dollars on bad bets.

A generous bailout from the federal government kept the bankers afloat. And since then, most of the denizens of the Street have come out just fine.

Yet more than 4 million American families have so far lost their homes. They were caught in the downdraft of the Street’s gambling excesses.

They had no idea the housing bubble would burst, and didn’t read the fine print in the mortgages the bankers sold them.

But they weren’t allowed to declare bankruptcy and try to keep their homes.

When some members of Congress tried to amend the law to allow homeowners to use bankruptcy, the financial industry blocked the bill.

There’s no starting over for millions of people laden with student debt, either.

Student loan debt has more than doubled since 2006, from $509 billion to $1.3 trillion. It now accounts for 40 percent of all personal debt – more than credit card debts and auto loans.

But the bankruptcy law doesn’t cover student debts. The student loan industry made sure of that.

If former students can’t meet their payments, lenders can garnish their paychecks. (Some borrowers, still behind by the time they retire, have even found chunks taken out of their Social Security checks.)

The only way borrowers can reduce their student debt burdens is to prove in a separate lawsuit that repayment would impose an “undue hardship” on them and their dependents.

This is a stricter standard than bankruptcy courts apply to gamblers trying to reduce their gambling debts.

You might say those who can’t repay their student debts shouldn’t have borrowed in the first place. But they had no way of knowing just how bad the jobs market would become. Some didn’t know the diplomas they received from for-profit colleges weren’t worth the paper they were written on.

A better alternative would be to allow former students to use bankruptcy where the terms of the loans are clearly unreasonable (including double-digit interest rates, for example), or the loans were made to attend schools whose graduates have very low rates of employment after graduation.

Economies are risky. Some industries rise and others implode, like housing. Some places get richer, and others drop, like Atlantic City. Some people get new jobs that pay better, many lose their jobs or their wages.

The basic question is who should bear these risks. As long as the laws shield large investors while putting the risks on ordinary people, investors will continue to make big bets that deliver jackpots when they win but create losses for everyone else.

Average working people need more fresh starts. Big corporations, banks, and Donald Trump need fewer.

 

By: Robert Reich, The Robert Reich Blog, September 21, 2014

September 22, 2014 Posted by | Bankruptcy, Plutocrats, Student Debt | , , , , , , | 1 Comment

“The Lifetime Framework”: The Devastating, Lifelong Consequences Of Student Debt

America has gone through a rapid social experiment over the last 20 years. We have created a system, in large part through public disinvestment, where our young people take on large amounts of student debt in order to achieve a college degree. The sea change has been so quick it’s been difficult to gather even basic, solid numbers on it, making the consequences of such massive student debt subject to intense debate.

A new report from Beth Akers and Matthew M. Chingos of the Brookings Institution has further fueled that debate, arguing that the conventional story of escalating debt burdens due to student loans are overstated. Even though the number of young households with debt has increased from 14 percent to 36 percent between 1989 and 2010, the percentage of monthly income those people put toward their student debt payments is largely the same. Even though student loan debts are going up, they’ve been accompanied by rising incomes, largely balancing out the burden. The focus shouldn’t be on student loans broadly, and instead on more targeted solutions like focusing on those who drop out of college but still have debt.

But this study, like many arguments along these lines, suffers from a major problem: It focuses on a month-to-month comparison. When we look at the effects of a major economic change—whether it’s government debt, taxes, or replacing a system of publicly funded free colleges with a system of debt for a diploma—we can’t just look at what immediately happens. We need to also consider how people behave in the long run. And when we look at student loans from the point of view of a lifetime, the results are more worrisome.

How could this matter? An infamous study on student debt by Jesse Rothstein of the University of California, Berkeley, and Cecilia Elena Rouse of Princeton looked at the results of a highly selective university replacing loans with grants. It concluded “that debt causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose low-paid ‘public interest’ jobs.”

Let’s imagine two scenarios. In the first you have high student loans, so you work for a corporation in the private sector for high wages. And in the second you have virtually no student loans, and you work for less wages in a job focused on the public interest, say as an educator or at a nonprofit. In both cases your student loan payment would be the same as a percentage of your income. The Brookings result would hold. However your lifetime choices will have radically changed as a result.

We see this with other lifetime measures, such as how entrepreneurial people are. A recent study by Brent W. Ambrose of Pennsylvania State University, and Larry Cordell and Shuwei Ma of the Federal Reserve Bank of Philadelphia, found “a significant and economically meaningful negative correlation between changes in student loan debt and net business formation for the smallest group of small businesses.” This makes sense. You can keep your high student loan burdens low if you stay with an established employer. But if you strike out on your own, you’ll have less and more volatile income when you start. This is harder to manage with student loans, which also impacts your credit rating. Again, we can see the short-term student loan burdens staying the same, even though lifetime choices are much more limited as a result.

The lifetime framework also puts front and center something the Brookings study largely hand-waves: the rapid increase in how long people are paying off their student debt. Though the percentage of income that student-loan debtors pay stays the same, the length they are paying those loans is up 80 percent. What was once an average length of 7.4 years in repayment in 1992 is now 13.4 years. All things equal, a large increase in the length you will be paying student loans means you will dedicate a larger portion of your lifetime income to student loans. This burden goes missing by narrowly looking at a month-to-month basis.

This has major consequences for people’s ability to build wealth. Indeed, much of the current energy in analyzing student loan burdens are looking at this longer dynamic, and how it interplays with the ability for people to amass savings. As Richard Fry of Pew found, using the same data set as Brookings, “households headed by a young, college-educated adult without any student debt obligations have about seven times the typical net worth ($64,700) of households headed by a young, college-educated adult with student debt ($8,700).” Fry also finds that those who took out loans are less satisfied with their financial situation compared to people without loans. Similar results have been investigated and found by the Federal Reserve Bank of St. Louis.

This, in turn, has major consequences for how young people will ultimately transition into adulthood. According to Dora Gicheva of the University of North Carolina at Greensboro, student debt decreases the long-term probability of marriage by a significant amount. In a result that should make social conservatives gasp, Gicheva found that an additional $10,000 in loans decreases the probability of marriage by at least 7 percentage points. Meanwhile, the Federal Reserve Bank of New York found that young student debtors are retreating from those traditional markers of adulthood, homeownership and owning a car. These effects reflect the long-term consequences of student debt on a young person’s economic security just as much, if not more, than their monthly bill.

This system of student debt has happened so fast that proper analysis is hard to do. But what’s most interesting is research showing how student debt threatens fundamentally American ways of life. Student debt chips away at the ability to be a risk-taking entrepreneur, a homesteader who has amassed enough wealth to be self-sufficient, or someone who has dedicated their craft to working in our rich civil society. These are three very real versions of the American Dream, and contrary to what studies like Brookings’s might show over the short term, they are all being weakened by the way we saddle young people with student debt burdens.

 

By: Mike Konczal, a Fellow with The Roosevelt Institute; The New Republic, June 24, 2014

June 30, 2014 Posted by | Higher Education, Student Debt | , , , , , , , | Leave a comment

   

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