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David Brodwin's blog

Millennials' Modern Debtor Prison

Even as unemployment falls and wages firm up, more young adults are moving back with their parents and staying there. This trend was reaffirmed recently in a Goldman Sachs report, which confirmed earlier data from Pew. Upwards of 36 percent of 18 to 31-year-olds now live with their parents (or in college dorms at their parent’s expense), significantly more than a decade ago, and breaking a 40-year record.

Many commentators misunderstand this trend. Some attribute it to the recession and the difficulty of getting decent jobs. But the recession is now more than five years behind us, and the number of millennials returning to their parents’ home continues to rise. Other commentators mistakenly put the issue in moral terms: The scolds suggest that today’s youth are too lazy and undisciplined to get a job and move out.

But the inability of millennials to move out has nothing to do with self-indulgence, and not much to do with the Great Recession. It’s part of a chain of dominoes that starts with anti-tax radicalism and ends with economic stagnation. We need to know how each domino knocks over the next if we are to help millennials get to where they can start families, spend money and stimulate economic growth.

To understand what has happened, let’s back up one step at a time. The main reason millennials can’t move out is that they owe too much money on their student loans. Student debt is rising with stunning speed. It has almost tripled over the last 10 years, and the average amount owed per person has gone up by 70 percent. Total student debt in the U.S. is now roughly $1 trillion. To put this in perspective, total student debt is now greater than both the total auto loans outstanding and total credit card debt.

Many young people move back home simply because that’s the only way they can pay off their loans. A staggering proportion of youth are having trouble making their payments. Delinquency rates have doubled from 9 percent to 18 percent ( an all-time high) and only 39 percent of borrowers are current and are making regular payments. These loss rates make the 2007-08 mortgage crisis look benign.

Moreover, many millennials have little confidence in their ability to earn enough money to pay off their loans. 48 percent of 25 to 34-year-olds consider themselves unemployed or under-employed, and many are still paying student loans well into their 30s and 40s.

Now let’s take a step back and ask why millennials are struggling with so much debt.

The main thing driving the skyrocketing debt is skyrocketing tuition, particularly at state colleges. (For the moment, let’s forget about expensive private colleges where nominal tuition and actual tuition can be worlds apart.) Average in-state tuition at four-year state colleges and universities went up 73 percent from 2004-05 to 2013-14. Student debt has risen practically in lockstep with tuition hikes.

But why has tuition gone up so fast? Isn’t it to pay for fancy new football stadiums, college presidents’ salaries and excessive overhead?

In a word, no. Across American’s public universities, the average spending per student per year has hardly budged. It costs no more to turn a high school graduate into a college graduate now than it did 10 years ago. What has changed is that the states have drastically reduced how much money they provide to their public colleges and universities, and tuitions must pick up the slack. From 2001 to 2012, state spending per student fell by about 38 percent. State spending is now setting new record lows going back 50 years or more. Tuitions went up 73 percent in response.

So now let’s take the final step back. Why did the states cut support so drastically for higher education?

The answer is simple. The states had no choice. Greying populations and pensions for state workers pushed state expenses upwards. Two recessions back-to-back wiped out reserves. And tax cut fever slashed revenues and made it impossible to fix the shortfall. So the states slashed so-called “discretionary” spending, and in state budget jargon education is considered discretionary, as if a modern economy is feasible without higher education.

What does this mean for the future?

Annoying as it might be for young adults to return home, and as annoying as it might be for their parents to have them home, that’s the least of the problem. The real challenge for the economy is the loss of young people’s spending and earning power. These young adults are delaying buying cars. They are delaying buying homes. They are delaying getting married and starting families. Far fewer of them are taking entrepreneurial risks and starting companies. In short, these young people are supposed to be driving the economy forward, but they’re not. Worse, their reduced birth rate contributes to the greying population and further weakens America’s productivity and competitiveness.

So the next time you hear about a young adult who has had to move back home, don’t think about adolescent self-indulgence. Think about how we refused to maintain a tax base that could fund public colleges at reasonable levels. Think about how we’re dismantling the greatest education system in the world. Think about the 10 extra years it will take before that young person becomes a full-fledged adult participating fully in the economy. That’s the high cost of lower taxes.

David Brodwin is a Co-founder and board member of American Sustainable Business Council. This article appeared in U.S. News & World Report August 22, 2014.

Killing Market Basket's Golden Goose

One of Aesop’s classic fables describes a magical goose that lays a golden egg every day. After years of being cared for by a wise and patient owner, the unfortunate goose slipped under the control of new management. The new owners figured they could get rich quick by slaughtering the goose and getting a lot of gold all at once, but they miscalculated: All they got was one last golden egg and a plate of goose flesh. (O.K., a bit of foie gras, too.)

Businesses get slaughtered too, for the same short-sighted reasons. Slaughtering a business triggers a transfer of wealth between society at large (also known as taxpayers) and those who own the business at the time of the kill. The value of the business, which is captured when the business is killed, includes the public investment in infrastructure, education and services which helped the business to prosper. And slaughtering the business often imposes costs on society in the form of lost purchasing power, unemployment, lost property value, lost retirement plans, lost employee health care coverage and more.

The executives who slaughter their businesses can get quite rich in the near term, unlike in Aesop’s tale. But the slaughter takes a productive asset out of the economy, hurting future investors, consumers, workers and society as a whole.

The latest goose to be slaughtered is a supermarket chain in New England called Market Basket. (Its corporate name is DeMoulas Super Markets, Inc.) This closely-held company is wracked with labor unrest, which started when its popular CEO, Arthur T. Demoulas, was fired by the board of directors. The firing resulted from a fight between the CEO and a rival branch of the family headed by his cousin, Arthur S. Demoulas.

Arthur T., the fired CEO, was widely respected by employees, from entry level warehouse workers to most of the senior management. Under his leadership, Market Basket paid well, offered a bonus program and other benefits, kept prices reasonable, and ran an expanding business that created new opportunities. Its workers were loyal, productive and stable; its customers were loyal too, as far as we know. (It’s a closely-held company, so little financial information is available.) The support for Arthur T. has been astonishingly broad and deep; management and hourly workers have united against the board and its new board-appointed CEO. As the dispute has raged, the business has been severely damaged; shelves are nearly bare, and parking lots are empty.

The argument between Arthur T. and Arthur S. is mostly about money. (Though, from the documents that have been released, neither shows much tact or diplomacy in the boardroom.) Arthur S. and his allies saw the potential for a huge one-time payoff from the business: cutting benefits, slashing the bonus pool, lowering wages, raising prices and slowing capital outlays for expansion. With total revenues of $4.6 billion, the one-time payoff would probably be several hundred million dollars.

But taking this much cash out of the business would ravage its future growth prospects. The company would have an average work force of average motivation and average productivity. It would have no price or service advantage over competitors like Whole Foods or Trader Joe’s or Walmart. Its differentiation would be gone, and so would the potential for superior investment returns for future generations of owners.

This is a central challenge of capitalism. Any great business can be milked for a one-time payoff. Apple or Google or Facebook could cut salaries, slash benefits, reduce R&D and raise prices. And pretty soon they would be so-so companies that offer so-so products and services. But they don’t. That’s in large measure because they have visionary leaders who resist the pressure for the quick buck and have managed to retain a high degree of control over the business.

The notion that capitalism should be concerned with maximizing value needs to be tempered. We must ask “To whom?” and “Over what time frame?” Capitalism should be about the total return to the economy. And it should be about the company’s long-term ability to grow and keep creating value for current and future owners and others. Otherwise, all we have left is skin and feathers, which won’t nourish anyone.

David Brodwin is a Co-founder and board member of American Sustainable Business Council. This article appeared in U.S. News & World Report August 15, 2014.

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