Category: public policy

Indiana School Finances

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Indiana state school funding will decline for the next 3 years.  The current 5% expense reduction is just the first step.   School districts need to take bold actions to reduce their underlying cost structures.  Other organizations are reducing costs by 10% and increasing labor productivity by 5-8%.  Innovative schools can achieve the same financial gains while improving the quality of education.  These 20 ideas may be infeasible, but they might help to generate some creative solutions.

  1. Rank order career & technical programs and eliminate the single least effective one.
  2. Replace some career and guidance counselors with web resources and volunteers from local civic group partners.
  3. Assign administrators to jointly teach 1 FTE of classes in a technical field.
  4. Employ technology for teaching and testing and eliminate 1 staff/department.
  5. Carefully define “special needs” education and obtain separate funding or sponsorship.
  6. Double the fees for extracurricular programs to cover all costs, including coaching supplements and subsidies for low-income students.
  7. Maximize the use of capital budgets and bond funding for capital maintenance expenses.  Refinance bonds and use savings for capital maintenance.
  8. Reduce employee benefits by one-half for the first 5 years of employment.
  9. Add an additional teaching period for tenured staff.
  10. Assign a mentee to tenured staff and provide incentives for retention/progress.
  11. Provide teachers with a financial incentive in years 3-6 to remain in place.
  12. Eliminate future degree/credit hours based compensation increases.
  13. Outsource transportation, IT, HR, marketing and financial services.
  14. Extend textbook lives by 2 years.
  15. Move to a used computer strategy, recycling the 3-year-old units from local businesses.
  16. Consolidate library/AV staff and resources with community libraries.
  17. Reduce the cost of transportation by increasing the share of walkers, reducing the number of stops and limiting extra services.
  18. Move discipline problem students to countywide alternative programs after 3 strikes.
  19. Collect fees for AP and dual credit programs.
  20. Increase the use of teacher’s assistants when they can cost-effectively increase classroom sizes while providing quality education.

All changes have costs and benefits.  In a world of 10% less funding, schools that are able to identify the areas where the greatest cost reductions can be found with the least negative impact will be the ones that best serve their students, teachers and communities.  Schools should reach out to their communities for help in generating solutions to the coming crisis.

Where Have All the Dollars Gone?

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Economists enjoy the sense of security provided by the “National Income Accounts” where Gross Domestic Product, the value of all goods and services produced domestically, is always equal, by definition, to Consumption plus Investments plus Government plus Net Exports.  Reviewing the changes in the share of economic activity in the components of C+I+G+NX goes a long way towards explaining our current and future economic predicament.  The economy has changed dramatically since 1960. which will serve as a baseline for the post-war era.

During the bright days of Camelot, Consumption was 63%, Investment 15%, Government 21% and Net Exports +1%.  In 2008, Consumption was 70%, Investment 15%, Government 20% and Net Exports -5%.  In simplest terms, we are consuming 7% more thanks to the generosity of other exporting nations! 

Investment averages 16% of GDP: 11% business and 5% residential.  Business investment has reached peaks of 12-13% in 1978-85, 1998-2001 and 2007-08.  It experienced troughs of 9-10% in 1960-64, 1991-93, and 2003-04.  Business investment responds to tax and market opportunities, adding a pro-cyclical boost to the recovery.  Residential real estate follows its own pattern, reaching 5-6% peaks in 1962-64, 1972-73, 1977-79, and 2004-06, alternating with 3-4% troughs in 1966-67, 1975, 1981-82, 1990-93, and 2008.  The 3.3% share in 2008 is the lowest in the period, followed by an even lower share in 2009.  Residential real estate experienced an unprecedented 13 year run without a down cycle.  The over expansion in 2004-2006 means that the usual residential real estate recovery will be delayed for a few years.

Government consumption expenditures, excluding transfer payments, declined from 21% to 20% of GDP across the period.  Direct federal government, non-defense expenditures remained flat and immaterial at 2.5%.  National defense started at a high 10% in 1960 and remained at that level as late as 1968 before declining after the Vietnam conflict wound down.  The peace dividend allowed defense spending to fall to 6% for 1977-80.  Defense spending rose again in the waning years of the Cold War, reaching 7.4% in 1985-87, before sliding to as low as 3.8% from 1998-2001.  The terrorist response has triggered an increase to 5.1% of GDP by 2008.  Delivering the “Great Society” initiatives, state and local government spending grew from 9.5% in 1961-63 to 12.5% in 1974-76.  State and local government declined to 11% in 1983-85, remaining at 11.3% as late as 1998 before growing to 12.2% in 2002-03.  State and local government spending will act as a drag on the economy for at least 2 years.  Defense spending shows no clear trend.  Federal government spending on stimulus measures may be 3-5% of GDP in 2010.  The expected decline in stimulus spending will act as a drag on the economy in 2011.

Across 50 years the United States rejoined the world economy after the unusual post-war period of self-sufficiency and high global demand for U.S. goods.  Exports of services tripled from 1.3% to 3.9% of GDP in this period.  Exports of goods doubled from 4% to 8%, reaching 8.8% in 2008.  Total exports increased from 5% to 13% of GDP.  On the other hand, service imports doubled from 1.4% to 2.9%.  Goods imports increased five-fold, from 3% to 15% of GDP.  This 12% of GDP change has outpaced the growth in exports. 

A 2-3% trade deficit was experienced from 1984-88.  The competitive response reduced the deficit to an average of 1% for the next decade.  The deficit rapidly grew to 4% in 2000 and a high of 5.7% in 2005-06.  As pundits have noted, no nation has ever been able to run a 5% trade deficit for decades.  The unique situation of the US as the world’s currency and safest investment home, plus the growth of China’s economy and its willingness to finance the trade deficit has allowed this to continue.  In the long-run, the US dollar will fall relative to China’s currency and trade will rebalance.  There is no way to predict the timing of this change.  For a decade, the U.S. has consumed 5% more than it produced.  Consumption will fall.

Consumption is the 800 pound gorilla of GDP accounting.  Its rise from 63% to 70% of GDP is the counterbalance to the trade deficit.  Durable goods production held its own, maintaining 9% of GDP through 2003, before falling to 7.6% as the auto recession began in 2008.  Non-durable goods production dropped from 25% to 16% of GDP by 1995 and maintaining that level through 2008.  The 9% decline in non-durable goods production has been replaced by an increase in services from 30% to 47% of the economy. 

The service share was 30% as recently as 1969, so this 17% switch occurred in just 40 years.  The service share reached 45% in 2001 and has inched up slowly since then, reflecting the “jobless recovery” of the 2000’s.  Durable goods production will recover from its low level as autos and equipment age.  The trend in non-durable goods moving to import sources is likely to continue.  Without changes in the health care industry, this part of services is likely to keep growing: a short-term benefit for jobs and GDP.

Government budget, trade and savings deficits need to be repaid.  The retiring Baby Boomers need to be replaced in the labor force at high productivity rates.  Some form of improved health care market, incentives or rationing is required to limit the growth of this sector.  The U.S. has significant economic challenges to be faced.  The transition from Keynesian fiscal stimulus and easy money to a sustainable course is a necessary first step.  U.S. economic productivity, competitiveness and innovation have not been undermined by the Great Recession.  The business cycle provides a natural boost to recovery from inventory replenishment, capital spending and durable goods demand as we are already seeing.  Let’s hope that the president can have a real meeting of the minds with Congress and begin to address the long-term structural challenges faced by the country that go far beyond the 2010 and 2012 elections.

A Rising Tide Lifts All Boats

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“A rising tide lifts all boats”.  When economic progress is steady, or at least not interrupted for too long, this saying seems to hold true.   When everyone benefits from progress, people invest their effort into getting ahead.  Today we face the greatest economic disruption in 75 years.  Without a clear path forward, people of all political views are turning their thoughts enviously towards the boats others.  International trade, labor, spending, health care and tax policies are all being reviewed through the lens of protecting current advantages or redistributing funds.

The classic focus of redistribution is on the “rich” and the “poor”.  Bankers and corporate executives have lost the “entrepreneurial” and “value added” shields of the last 30 years.  Citizens are now concerned about the distribution of income and are willing to consider tax and regulatory changes that would have been unthinkable a decade ago.

The share of income captured by the top 1% of earners receives the most attention.  From 1917-1941, through boom, bust and preparation for war, the top 1% earned 15% of all income.  This changed dramatically during WWII and afterwards, leading to a 35 year period from 1953-1987, where income at the top was cut in half, with 8% of the total going to the top 1%.  Top 1% income grew rapidly in the late 1980’s, reaching 13% and then 15% by 1999 and 17% by 2007. 

The spread of income within the center of the population has also broadened in the last 40 years.  In real 2007 dollars, average household income has increased 30% since 1967, from $40,000 to $52,000 per year.  Families at the 20th percentile have also seen a 30% increase, rising from $17,000 to $22,000 per year.  The dollar and percentage growth at the higher percentiles has been much greater.  Households at the 80th percentile have gained 55%, with incomes rising from $67,000 to $104,000.  Those at the 90th percentile have gained 66%, boosting incomes from $85,000 to $141,000.

There is no “natural” or “optimal” distribution of income.  The US has historically had a greater concentration of wealth or income than other economically advanced nations.  As shown by the top 1%, the concentration can change dramatically through time.  However, most economists agree that there is a level of marginal taxation on income, wealth, dividends and capital gains that significantly reduces incentives for hours worked, innovation, risk taking and entrepreneurship.  

Small changes to the taxation and incentive structure of the US economy are not likely to cause too much damage.  Significant tax increases could do significant short-term and long-term damage to the economy and to those at the lower end of the economic pyramid who depend upon the rising tide to lift their boats in the long run.

Good Riddance to Utopian Views of 2000

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Much of the anxiety being expressed in the political arena today stems from the discovery that the turn of the millennium consensus views of steady assured progress were exaggerated, or just plain wrong.  The events of the last decade have shown that simple, deterministic conclusions are usually wrong.  This is not the first time that western society has had its “progressive” bubble burst.  Even the recent triple play natural disasters (hurricane, tsunami and earthquake) have a parallel in the Lisbon earthquake of 1755, which lead Voltaire to attack the belief that man was living in “the best of all possible worlds”.

In 2000, we thought that representative government would prevail as an increasing number of countries became functional democracies and established democratic traditions.  Cuba was the special exception.  Even China was seen as a potential convert.  Progress was being made in Eastern Europe, Asia, Africa and Latin America.   We now see that China’s leaders intend to maintain power, that progress in Russia and Eastern Europe is fragile and that a new Bolivarian revolution justifies dictatorships.

In 2000, the division of state and religious spheres was clear and settled in Europe, allowing a variety of religions to work within a set of rules.  The Pope spoke out for radical changes to society, but had limited impact.  Some progress in conflict areas lead to hope for progress, as nations from Turkey to Indonesia to Ireland found solutions.  The “consensus” was an illusion.  Islam, Christianity and other religions are not content to work within the context a secular humanist state.  We now see that “true believers” do not fit within the tidy scheme.

In 2000, a decade after the fall of the “iron curtain”, the U.S. stood tall as the only superpower, even after cashing in the peace dividend.  The US, Europe and the UN began to make significant progress in handling the remaining “trouble spots”, in areas that seemed unfamiliar and insignificant.  We now see that Brazil, Russia, India and China would like to join the US, Europe and Japan in a multi-polar world.  The shifting alliances of earlier centuries are the model of our future.

In 2000, after dodging the ironic Y2K threat, the world saw an unlimited future of technological progress.  The older physics, chemistry and energy based economy continued to grow at a healthy pace.  Agricultural and biological innovations promised to feed the world and heal the sick.  Information technology continued to evolve through the internet, telecommunications and knowledge management.  Even the environment was improving, as 30 years of focus on clean air, clean water and eliminating toxic waste had a cumulative positive impact.  We’re still making progress, but concerns about energy and water shortages, Frankenfoods, genetic manipulation and climate change become greater with time, as no simple “solutions” have appeared.

In 2000, international economic progress was in full-stride.  Individual, regional and global trade agreements increased trade and cross-country investment.  International financial crises were managed and outlier countries were guided through an agreed upon recovery plan.  European economic integration continued to deliver benefits with each new step.  Today, we struggle to find common ground for major trade deals.  A variety of crisis recovery models seem valid.  Further European economic integration is possible, but the benefits are not so certain.  International sensitivity to trade, labor, environmental, property rights and investment differences is growing.

In 2000, a mixed capitalist economic model dominated.  There were two flavors, traditional European and Atlantic, but these were differences in style and degree, not in fundamental substance.  Success stories in all areas of the world indicated that this model could and would be replicated.  Today, there are several varieties of state capitalism (Russia, China, France, Japan, and Venezuela) that offer alternatives.

Finally, in 2000, there was a widespread belief that we had moved into a new economic model where the rough edges of capitalism had been tamed.  The business cycle could be managed through independent monetary policy (and a touch of fiscal policy).  Productivity, inflation and unemployment goals could all be attained.  Financial guidelines like price-earnings ratios had been superseded by a “new economy”.  And, risk and volatility had been tamed through portfolio theory, hedging and new financial instruments.

The world is not in worse condition today than it was a decade ago.  Only by moving past the unrealistically utopian views of the turn of the century can we make progress in addressing the challenges we face.

Indiana Redistricting Proposal Adds Value

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“For the want of a nail, the shoe was lost; for the want of a shoe the horse was lost; and for the want of a horse the rider was lost, being overtaken and slain by the enemy, all for the want of care about a horseshoe nail.”  —  Benjamin Franklin

 Now, more than ever, society must rely on real economic growth to make the pie larger and allow us to choose how to divide the pie.  In the hot policy areas – global warming, health care, unemployment, alternate energy, retirement security, national security, adequate food – all solutions depend upon our ability to grow the economy.

 The private sector, especially in the last 30 years, has demonstrated its nearly unlimited ability to create value.  The contrast between productivity growth in the competitive sectors (ag, manufacturing, distribution, communications, mining, transportation, media, banking, IT, services) and the others (government, social services, utilities, education, health care) is instructive.  About 60% of the economy delivers 3-5% annual productivity improvements, while the other 40% is stuck at 0-1%.

 The slow growth sectors are all in areas where market failure is the rule – sometimes because services are natural public goods and sometimes due to natural monopolies, externalities, or unequal information.  In each case, there is a key role to be played by the government in shaping these industries to pursue continuous improvement as happens naturally in other sectors.

 Unfortunately, our political system does not produce “philosopher kings” who cooperate to find optimal solutions.  In a two-party democratic system, the best that can be hoped for is that the two parties will define contrasting, yet centrist policies and employ politicians who can seek re-election by solving some problems rather than merely demonizing the other side.

 The gerrymandering of Indiana congressional, senate and representative districts every 10 years encourages a polarized political environment.  The party in power draws districts to maximize their representation by creating as many 55-60% safe districts as possible, while consolidating their opponents into as few 80-90% majority districts as possible.

 This process results in extreme left and extreme right candidates winning nearly all races.  Centrist candidates have no chance in stacked districts.  Centrist voters have no influence in stacked districts.  The political parties attract extremist candidates.  They attract extremist supporters.  Only in a small minority of districts do voters have a choice between two qualified centrist candidates who mainly differ by a modest degree on the political spectrum. 

 The Indiana Senate’s Republican Caucus, Secretary of State Todd Rokita and Carmel representative Mike Delph have floated various proposals to turn redistricting over to some form of non-partisan commission, required to take advantage of the computer software which can define boundaries to maximize the compactness of each district, without considering socio-economic, religious, racial or political factors. 

 A visual example of the current skewed districts versus neutral districts is shown at http://bolson.org/dist/IN/.

 Members of both political parties should be able to see that the skillful use of gerrymandering today is a recipe for failure.  Even California voters are now seeing that structures that lead to polarization can bankrupt a state.  Indiana voters who care about the future should pursue this “good government” initiative.

Civic Investment in Monuments

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I’ve noted a pattern in our local government investments.

CIB Conseco Fieldhouse, CIB Lucas Oil Stadium, Carmel Clay Parks Monon Center, Indianapolis Airport Authority Midfield Terminal, Carmel Regional Performing Arts Center and the CIB Convention Center Expansion seem to have the same issues.

They were built with public funds to meet public and private needs.  The bondholders are well secured by public revenue sources and commitments.  The operating revenues are less than what is required.  The users do not want to pay more.  Current political forces are criticizing historical decisions and current operations.  The public thinks that the politicians are incompetent and/or captured by special interests.  The public wants a simple solution that does not include more taxes.

The greatest problem is that these facilities inherently serve BOTH private and public purposes.  The CIB facilities serve customers, but also the nearby local businesses and our collective sense of importance in hosting the undefeated Colts.  The airport serves passengers, but also economic development.   The Monon Center offers an alternative health club, but also provides subsidized recreational programs.  The CRPAC offers ticketed cultural events, but also subsidizes local arts groups and stimulates the hospitality and retail arts industry.

In each case, the public is confused because it is not clear what part of the capital and operating costs are due to private and public uses.  It is not clear what part of the costs are being paid by the users and what is being picked up by the public through current and future taxes.

Political and civic leaders would be well served to clarify these “buckets” of costs, benefits and responsibilities in the future.  It is not easy to do and any well-defined fence will be inherently arbitrary and sub-optimal.  However, the political costs of an ostrich approach are now apparent.  I’m sure that many local leaders decided that this “direct” communications style would be impossible, because well-informed Hoosiers would choose to NOT invest in any ventures where each did not personally receive an ROI.   I point to the overwhelming success of the Wishard Hospital campaign as a counterexample.  I point to the recent consensus that requires schools and other local groups to seek voter approval as a situation of “what’s good for the goose is good for the gander”.

State leaders should review these investments and outline a state review process that meets the public needs.  There is an inherent bias towards overinvestment by civic and political leaders.  Many constituencies benefit greatly in the short-run from major projects.  The operating deficits are often a decade away.  The positive ego benefits of creating 50-300 year monuments is too attractive.

Future capital projects should be required to clearly explain public and private benefits, costs and funding sources.  The projects should protect taxpayers at a level equal to bondholders.  Contingency funds should be included to handle the typical 5 year business cycles.   Even with these constraints, our local leaders will be able to justify investments in viable projects.

Value of Public Libraries

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The century old consensus regarding the value of public library services is increasingly
questioned.  Rising costs, anti-government sentiments, accountability demands, on-line
materials delivery, an increasingly individualistic and commercial society, and reduced
public funding combine to challenge libraries to clearly define their services, respond to
public demands and justify their very existence!
 
Libraries need to build upon their historical strengths to clearly define the value they
provide, measure ongoing progress and actively promote their value.
 
Libraries deserve public support because they deliver value:
 
1) Economic ROI of 200%+ compared with 10% returns for private capital.
 
2) Near-zero incremental cost personal growth with positive spillover benefits to the
community, leading to an improved quality of life for all citizens.
 
3) Libraries support the effectiveness of our democratic society, building universal
literacy, access to education, information and interaction opportunities.
 
4) Libraries serve as a physical embodiment of the community’s belief in itself.
 
1) Economic Returns
 
Materials can be used 30 times, rather than once.
Materials in all categories achieve targeted usage rates.
Services ensure that all age, socio-economic status and geographical groups benefit. 
Higher cost materials providing value to many patrons.
Lower demand materials are used by many individuals, schools and libraries.
Librarians maintain specialized knowledge of value to patrons.
Materials are professionally selected to be of highest value to patrons.
Short-term demands and long-term portfolio needs are balanced.
Libraries deliver highest demand services, creating a community asset.
 
2) Personal Growth Gains
 
Access to individual paced personal and career growth materials.
Develop a love of reading and learning in all students.
Facilitate an interest in life-long learning in adults.
Access to life-long professional growth.
Opportunities to explore materials of interest.
Opportunities beyond areas of mastery to explore diverse topics and cultures.
Provide adults with introductions, exploration and mastery level experiences beyond
careers, professions and economic progress.
 
3) Civic Benefits
 
Develop general, economic and political literacy.
Materials represent all sides of public policy issues.
Promote the core views of the American public, educating immigrants.
Offer diverse viewpoints, encouraging the general public to consider their views.
Sophisticated access to all materials and viewpoints.
Historical and contrary viewpoints on current issues to ensure full consideration.
Training and experience to evaluate claims from proponents of all views.
Encourage low income/resource individuals to use the library for personal growth.
 
4) Community Benefits
 
Spaces for community meetings.
Promotion of personal and community growth.
Common learning experiences unite diverse elements of society.
Opportunities for volunteers, donors, advisors, respondents and citizens.
Opportunities for intergenerational interaction.
A positive view of the future through progress.
 
Summary
 
Libraries face threats to their public funding.  By adapting programs, delivering value
and informing the public, libraries can continue to fill their vital value added role for
society.