Saturday, June 12, 2010

Time Warp and Inflation: Where Does the Money Go?

I want to take a little journey back in time, all of the way back to 1965. But first, I'm going to tell you what prompted my decision to look back. First, Al the Aviator told us about how the Greek government has averred that, despite the current fiscal crisis, education and health care will be spared any cuts. Then came Basil's post about education in general.

Each post struck a chord with me. First, Al. Now, I'm an investor and whether I want to ignore it or not, Greece and other European nations are having a great impact on my personal finances these days. It's apparent that some of these nations have really screwed the pooch, to the point where I guess Americans can no longer be viewed as the poster children for irresponsibility. I never paid much attention to Greece until earlier this year; now I know I should have—specifically because it's clear that Greece is a totally dysfunctional nation. My financial adviser is a native Greek; she emigrated to the U.S. at the age of 16, but still goes every year to visit family and assist them financially. She's related some horror stories about the underground economy and the Greek aversion to paying taxes—she mentioned a recent Wall Street Journal article citing the fact that some 800 or so homeowners in Athens admit to having swimming pools (which are taxed separately) where in fact satellite photography identified something like 8,000 pools. Don't hold me to these numbers; I'm too lazy to look them up. According to my financial adviser, tax evasion and baksheesh are the national sports in Greece; she would never advise a client to have anything to do with Greece.

Not picking on Al here. Just saying. And wondering if he's not being a little naive in believing these Greek government "pledges" about sparing education, etc. From where I sit, and watching the financials, it's my sense that Greece is about to embark on a period of extreme austerity, to the point where nothing will be spared. The Germans and the rest of Europe won't have it any other way.

The point of my look at Greece and then my visit to Basil's excellent post about education—which brings us back home—is that every developed nation on earth is in the same boat. Al says the Greeks won't cut education. Al thinks they're somehow superior to us or somehow immune to fiscal realities. I'll bet the Greeks do cut education. Just like we are, which is what's gotten Basil into his current fix. In fairness to Al, as I develop my thought here, I suspect I’ll show some figures that somewhat substantiate his argument.

Now we get to the time warp, which is, as noted, occasioned by some thought about education, dollars and quality. Thinking of the whole education mess, I did some research into various budget figures from the past. I wanted to use 1962 as the base year because that's the year of my high school graduating class. In Los Angeles. Yeah, L.A., the city that's the poster child for dysfunctional education. But L.A. wasn’t always the way it is now. In 1962, California had the best schools in the nation and L.A. was the top city school system in the land. “Oh, yeah, but L.A. wasn’t the mega-city it is now,” you say. Guess again. In 1960, the population of Los Angeles was right about 2.5 million. There were lots of immigrants—yes, they’ve always come from Mexico—in L.A. and in the schools, yes there was a lot of crime, yes, there were gangs, minorities, etc., yet, somehow, most kids learned the three R’s. It’s amazing as I think back, and then contrast how it was for me in big city schools in the 1960s and how it is today, even in small city schools.

I ended up with one hell of a fine education in L.A public schools. Was it money that did it? I wondered, so I went back in time, courtesy of Google, to look at budget figures. As noted, I wanted to use 1962, but as it turned out, the budget programs I found only went back to 1965. That’s close enough. Here’s what I found. The California state budget in 1965 was $4 Billion. I couldn’t find a breakdown of how much of that went to the K-12 schools, but it couldn’t have been even half. Recall this was the era of great projects, road building, etc., in California, a time when somehow the state always had a balanced budget. And speaking of education...California state colleges were free. Free! All of this on $4 Billion. Imagine. Berkeley for free.

In 1965, public school teachers lived a normal middle class life. I don’t know what they made, but they weren’t in penury. They bought homes, cars, all of the rest. Shit, nobody made a lot of money in those days. It’s my sense that teachers made a decent living, although most did work during the summer—because the salaries were geared to what was not quite a full time job.

Now I’m going to crank in inflation. It’s somewhere between 7x and 8x from 1965 to 2010. What this means is that merely keeping pace with inflation the $4 Billion California state budget of 1965 would be in the neighborhood of $28-32 Billion in 2010. The 2009 California budget is $118 Billion, with a multi-billion dollar shortfall, which California is trying to address with all kinds of budget and accounting tricks. I don’t have a specific figure, but everything I’ve seen indicates that the public schools get about half of the total budget, or somewhere upwards of $50 Billion.

To be fair to California, the population of the state has more than doubled since 1960, when it was 16 Million (1960 is used because it is a census year). So, a simple calculation tells me that, keeping pace with inflation and increasing along with population, the California state budget for 2009 should be somewhere around $75 Billion. It is $118 Billion, or about 60% higher than it would be if the state had been happy with keeping apace of 1965, a time when it was the envy of the nation for its public works system and its educational system.

In 1965, I was a 20-year-old single buck sergeant, making around $3K a year in base pay, almost none of which I could spend in the garden spot where I was at the time. Throw the inflation multiplier in and I was making $21-24K a year in today’s dollars, not too far off what today’s junior sergeant makes. This does not include quarters or rations, BTW. The Department of Defense budget was $61 Billion, or in today’s dollars, somewhere between $400-500 Billion. Leave out stupid wars and there’s not a huge increase there. The overall federal budget was $194 Billion, or somewhere around $1.5 Trillion in today’s dollars. That was for a population of around 180 Million. Today, with a population of more than 300 Million, we shouldn’t be surprised at a federal budget of well over $2 Trillion.

So what does all of this tell me? First, it tells me that the U.S. Government isn’t hugely out of whack when it comes to what it spends over the years. It’s actually pretty level over a 45-year span. Today’s sergeant doesn’t make significantly more than yesterday’s sergeant, nor does today’s field grade officer. Surprisingly, defense spending hasn’t gone up all that much, something that tells me that we were overspending for defense all of the way back in 1965—although we did have a little thing called a Cold War and a much larger military establishment. 1965 is a good year to use for comparison because that was the last “normal” year before Vietnam took off. The overall Fed? Well, take away the stimulus and the federal budget this year is pretty consonant with the 1965 budget.

So why are we hurting now? And why weren’t we hurting then? And where are we hurting?

If you look at the budget numbers from California and extrapolate them to all of the 50 states, it’s pretty clear that it’s the states—not the Fed—that somehow got off track and went on spending sprees. I mean, a 60% overrun is nothing to laugh at. And, then—and this is where Basil and Al—come in, the state increases in spending coincided with the spread of tax cut mania across the land. Sure, the Fed did it, too, but most of it was during the Bush years when the illogical and dishonest tax cuts were passed, and, face it, the Fed can run an unbalanced budget. The states can’t. Despite this, the citizenry of the states cheered for every politician who pledged to cut taxes, not realizing that in a zero sum game—which is what it is at the state level—real people and real programs will have to pay for those tax cuts. The Fed just prints more money.

Where I think Al is off the mark in trusting Greek government pledges to avoid cutting in certain sectors is that, in the European Community and tied to the Euro, Greece is not a sovereign state when it comes to financial matters. What the EC did in coming up with the Euro is put the member nations into the same position as the U.S. states: no sovereign money. This is why England did not sign up. Serious austerity measures are a must for Greece and other European nations; if they don’t do it, the money will dry up. This is what is happening to many of the U.S. states, California being the poster child.

We know why Basil and thousands of other teachers are losing their jobs. The money’s gone. What he and other teachers, along with all of the rest of us must do is take a hard look at this educational system at death’s door and ask where the money goes. Teachers aren’t getting rich, although it does seem that in some states, they, along with other public employees, have leveraged themselves into very lucrative benefits packages.

The states are broke. Education is broken. Yet, despite this, enormous sums of money continue to be spent on education. I haven’t even gotten into the problems educators face, what with a student population often reminiscent of Mongol hordes, a population made up of “minors,” who are all too adult in their outlook and in their attitudes, a population with way too many parents who don’t seem to care one bit about their childrens’ futures.

Tough times call for draconian solutions. Do away with all federal funding for education. Fire all of the school boards nation-wide. Do away with education majors. That’s a start.


  1. "'s my sense that Greece is about to embark on a period of extreme austerity, to the point where nothing will be spared. The Germans and the rest of Europe won't have it any other way."

    Europe is separated in three parts.
    1) Southern deficit countries.
    2) Eastern deficit countries.
    3) British deficit countries
    4) France, Germany, Netherlands and Scandinavians

    The policy differences in the next years are going to be huge. The rebalancing in Germany has to take the opposite direction of rebalancing in the UK, for example.

  2. Separate in four parts, of course. I wanted to make it more simple at fist.

  3. Paul Krugman has visited this several times, usually with the observation that the Greek and Spanish troubles are a sort of coal mine canary for the very issues that the Euroskeptics kept bringing up; that although the single currency made capital extremely mobile through the EU very little of the rest of the political, economic and social structure of the Union was as fluid. So where before the euro the Spanish and Greeks could have taken steps like devaluation they're now trapped, as are the financially and fiscally more stable nations like Sven's Group 4.

    I'm not sure that there is a 1-1 lesson to be had to the U.S. here.

    Our issues, I think, stem from a combination of different social problems, particularly the shifting of the tax burden from corporations and wealthy individuals to a broader but less-taxed segment of the public, the effect of 30-40 years of intense lobbying by special interests, the relative contraction of manufacturing as a source of both public and private wealth, and the loosening of debt and lending rules that ended up with people mortgaging their houses for disposable income and making consumer spending 70% of the GDP...

    Equally problematic, equally likely to present a long-term, difficult-to-solve problem, but different in both the causation and the solution(s)...

  4. As for the education issue...

    1. I'm all in favor of removing the feds from education. But if you want to zero out the federal DoE budget, I'd suggest that you'd have to go through the CFR first and strip out all the legislation directed at education; i.e. you can't just take the money away and continue to force the states to meet federal requirements for things like special education and national testing.

    2. Local school boards are more of a local issue; in some places they may be a problem and I can see the point of trying something different. Here in Oregon, though, the local boards are kind of a joke. Our Measure 5, and a string of legal decisions mandating the leveling of spending across districts have essentially made the State legislature the state school board.

    I'm all for paring away at what I see as the top-heavy adminstrative burden of most school districts beginning with (what is here called) the Office of Public Instruction at the state level, proceeding to the ESD's (superregional education districts in charge of things like supplies, textbooks, and facilities) and then down to the local boards. But just whacking the boards? There does need to be SOME kind of overall boss there. Are you suggesting that it be an elected district superintendant of schools?

    3. Teaching is a tough job. You can't just jump in and do it. Okay, some people can, but most have some skills to learn. So I'd argue that SOME sort of training and assistance is required.

    But my experience informs me that the actual classroom instruction time is pretty small. You sure as hell don't need four years of college to teach a teacher.

    Instead, I'd argue that teaching is a craft, like carpentry or blacksmithing or seamanship. You do need some abstract knowledge of your raw materials - in this case, kids, parents, schools and classrooms. But that's just the course, not the winds; it's not the woodworking, it's just the tools. Like a carpenter, I'd argue that you can only learn to teach like a carpenter learns to build a chair; you work as an apprentice to a master and you spend several years working up to crafting you own work independantly.

  5. I wonder how much health care costs figure into all those missing inflated dollars? ISTM that we're paying a whole lot more (public and private) to the health care related mega-monopolies (insurance, hospitals and pharma). And many of those public dollars come from the state budgets. Or should I say, the state taxpayers and investing bond holders?

    Its not all education money.


  6. I don't understand.

    If the education system is broken, will de-funding it make it less broken?

    What is to tooth-tail ratio for teachers vs administrators? Has this changed in the last 30 years? Does it make any differences?

  7. It's the shifting of the wealth from the many to the few. How many millionaires were there in the 60's vs. billionaires today?
    How much has the cost of a house risen vs. the income of the owner. In 1960, there were a whole lot fewer two income families, but yet a single income could pay for a house, a car and 2.3 kids.

  8. Publius,

    Yeah, I've been trying to figure out where the money goes. Take a look at this chart on college tuition costs. Why? I remember when I was in college in the late 1980's that tuition increases at my school were 7-8% a year. It looks like that hasn't changed. I'm still looking for some hard data (here's a bit), but K-12 cost increases look similar. I think medical and pension benefits are part of it, but can't explain all the increase.

    On the subject of California, I ran across this while doing some research, which I found interesting.


    This may be of interest to you and so should this and this.

    I think it was Al who previously talked about burden-shifting and there seems to be a lot of that going on. Increasingly, money raised at higher levels of government is allocated to specific initiatives and lower levels of government. So we see a lot of state and federal money spent on state and local education and initiatives, for example. It seems to me that raising tax money at one level of government and spending it at another level potentially carries some undesirable consequences, but I'm still thinking about that.

    Anyway, good post and comments - a lot of food for thought there.

  9. Ever since "Why Johnny Can't Read" ( Rudloph Flesch, 1956 ), accountability, testing, NCLB and AYP, court-mandated special ed, technology, schools do more and more stuff. Breakfast, lunch, etc.

    What I'd like to know, if our Publius is still around, is a piece on South Carolina. Joe Wilson, Alvin Greene, hiking up the Appalachian Trail, Sikh governesses.

    Inquiring minds . . . . .


  10. The explanation for "where did the money go?" is the inhomogenous development of productivity.

    Jobs that require a lot of labour have not progressed much in productivity (building & maintaining family housing), while very capital-intensive jobs did.
    "Some" labour-intensive industry jobs have been exported ("sweat shops") because capital-intensive jobs drove up the wage level so much that no-one would work for a fair payment (low productivity = low income) in the low productivity, low capital jobs.

    The problem is therefore the gap in development between jobs that have much technological progress (and jobs that leech on them, like finance) and others.
    The Western industrialized nations failed in the distribution of income, they didn't tame this gap either.
    It's not surprising that countries with the most laissez-faire approach have the worst results.

    So one normal income, car, house, 2-3 kids? No problem.
    All you need to do is to buy a low-tech car, not equip the kids with iPod and similar tech gadgets, live on low tech medical care and find workers for building/repairing your house who live in the same way of life (and thus don't ask for much money).

    Or, well, get a capital-intensive job where for strange distortions you earn more than you really "earn".

  11. "What I'd like to know, if our Publius is still around, is a piece on South Carolina. Joe Wilson, Alvin Greene, hiking up the Appalachian Trail, Sikh governesses."

    I watch most Daily Show episodes. SC really seems to work hard on a bad rep.

  12. To all,
    It depends what you call education, before you can even determine if it's broken.
    The fact is that most education these days is actually grinding out profit without any concern if the degrees so fabricated are profitable.
    We have an education bubble where the degrees are under water.

  13. Anonymous, the charts


    are all interesting, particularly the second one. It's a pie chart basically showing the distribution of wealth in 2007 America:

    - the bottom (50th percentile and below) 50% of the population owns 2.5% of the wealth

    - the 50th to 90th percentile own 26.0% of the wealth

    - the 90th to 99th percentile own 37.7% of the wealth

    - the top 1% own 33.8% of the wealth

    This explains a lot of things, including unequal distribution of money for education. Most education funding is generated by extremely regressive taxes (property, sales, and (dare I say it?) income taxes.

    Locations with higher incomes tend to have better schools (which at least ameliorates all the other problems in education. The wealthy can take advantage of these better schools or send their kids to private schools.

    Where does this leave the education of that bottom 50% of the population?

    Andy and I have gone around on this one more than once. Hi Andy... :)



  14. My apologies for going totally off topic but I am interested in your feedback on this story.

    It is the second ambush killing of a sheriff deputy in this particular county in the last 3 months. The sheriff is obviously unhappy.

  15. JP,

    No doubt income inequality has grown and that's certainly a concern. The question is, how to address it?

    The one issue I'd take with your link is that the poor have not gotten poorer - they've stayed the same while the rich have gotten richer.

  16. Has anyone the statistics about national income distribution between labour and capital ownership?

    A share of less than 65% labour income would indicate a bias for capital owners that could help to answer Andy's question (Germany has slightly less than the traditional about 70% and still the same middle class erosion effect).

    The adequate countermeasures would be
    a) manipulation of power asymmetries (~stroner labor unions)
    b) redistribution of net income by a more progressive tax system

    The statistic might be difficult to interpret becuase self-employed people (even hot dog sellers) might be counted as not getting labor income.

  17. Good question Sven. That's beyond my expertise.