Apr 30

Wages, Productivity, and You

Assembly LilePerhaps the most underreported aspect of the past few decades, specifically the aftermath of the financial collapse, has been the extraordinary increases in worker productivity and the accompanying stagnation of wages. Whatever the profession or occupation, employers have been demanding more and more from employees and failing to compensate them for the increased output. The phenomenon is referred to as a “speedup.” Rather than hiring additional workers, employers have been capitalizing on workers’ fears of unemployment by requiring that they do more for less. Ultimately it is a case of supply and demand. A greater supply of applicants than open positions to be filled has allowed bosses young and old to pad their own purses at the expense of employees. It has represented a  near complete break from basic morality.

This is nothing short of a sea change. As University of California-Berkeley economist Brad DeLong notes, until not long ago, “businesses would hold on to workers in downturns even when there wasn’t enough for them to do—would put them to work painting the factory—because businesses did not want to see their skilled, experienced workers drift away and then have to go through the expense and loss of training new ones. That era is over. These days firms take advantage of downturns in demand to rationalize operations and increase labor productivity, pleading business necessity to their workers.”

Real wages and total compensation have also eked along just barely keeping pace with inflation recently, continuing a long term trend that has continued since the 1970′s. While it is true that when total compensation–wages plus benefits–is measured and adjusted for inflation, workers compensation has indeed grown more quickly than inflation, the ultimate effect is less money in the pockets of workers, fewer retirement options, greater debt, increasing number of multi-generational households, and a lower standard of living generally. It is also true that the employer foots the bill for much of the benefit cost, but the added investment ultimately benefits neither the employee or the employer.

Productivity has vastly outpaced real wage growth over the past two decades and the prediction going forward is that the downward pressure on wages will continue.

The income story in America is deeply troubling. Inflation-adjusted average hourly earnings for production and nonsupervisory workers (a category that encompasses 80% of the workforce and leaves out higher-paid managers and supervisors) rose by an anemic 0.1% a year from 1979 to 2007, according to the EPI. A potent combination of economic and social forces has conspired to keep wages down for most workers with the exception of a brief period of white-hot economic growth in 1995-2000. Private-sector unions have largely disappeared. Companies have outsourced all kinds of tasks to cheaper places overseas and low-cost contractors at home. The upward spiral in health-care costs has eroded wages.

What the downward spiral of real wage growth means for the economy is simple–stagnant growth. With less real buying power remaining after fixed costs, retirement savings, and debt service have been factored in, workers will not be able to purchase the necessary goods and services in order to sustain growth in the larger economy. The economy has shown evidence of this recently, with orders for durable goods down and recent manufacturing spurred by a short term need to increase inventories also now trending downward.

I do maintain a certain level of sympathy for employers however, as costs to provide medical insurance continue to outpace inflation by nearly 7% on average. Each dollar spent on inefficient and expensive health care plans is a dollar necessarily unable to be spent on wages employer sponsored retirement plans. While there is no guarantee that employers would pass along any health care savings to the employees should costs somehow be reined in, under the current system employers have not been provided with that option. Obviously, as labor supply outstrips labor demand, employers lack any real incentive to do so even if given the choice, but at some point the labor supply will more evenly mirror demand, yet it is unlikely that reductions in health care costs will have come to pass in the interim.

If you are like me you have a twitter account. If you are are interested in finance you probably also follow several respected economists using that very same twitter account. If you take the time to track back and read the vast majority of posts and links to all of the mind-numbingly dense economic data–charts, charts of charts, charts within charts clarifying other charts, bar charts, line graph charts, area charts, government labor data, Federal Reserve data, Census data, articles, studies, blogs, scholarly publications, and on and on–you will find a dearth of discussion concering real wage growth and inflation. You will be peppered with astonishing amounts of information concerning inflation, unemployment, productivity, compensation costs, among other data sets, but you will not find a bona fide widespread discussion among mainstream economists surrounding real wages and productivity.

Unfortunately the trend should surprise no one. It is a consequence of decades of deregulation, attacks on public sector workers, attacks on labor unions,  and above all an intense campaign by corporate American to manitain the myth of Horatio Alger and the American Dream. Look, I even capitalized it, “American Dream.” I am not certain that it is required, but my very first instinct was to make sure that everyone is able to distinguish the idea from each of the other meaningless words surrounding it. The fact of the matter is that as worker productivity has increases and wages have stagnated, the profits of the employers have not showed a correlative decrease. In fact, profits have increased, as has executive pay and compensation. In other words, corporate America has used your otherwise laudable American work ethic to pound you into dust.

You know the feeling–guilt for not completing a task or set of tasks, no matter how unreasonable. The feeling of anguish at the thought of calling in sick. The overwhelming barrage of conflicting information you are faced with when you dare demand to have a modicum of work-life balance. The idea that working two, three, or four jobs is admirable and worthy of respect and recognition. You’re a hero, because that is what Americans do–we get up every day to make someone else filthy rich and we’re damn proud of it. It has all been orchestrated to brainwash you into believing that you are a failure if you do not do whatever is required of you by your employer. Astonishingly, corporate America has been able to maintain this myth even as it demanded more and more from you for less and less in return. It’s wrong and it has to stop.

Apr 25

Obama and Department of Education Outsourcing Student Loan Servicing

On April 15, 2012 I received a letter in the mail from EdFinancial, a so called “nonprofit” financial services company, informing me that it would be taking over the serving of my William D. Ford direct consolidation loan, effective April 5, 2012. First and most obviously, the letter was postmarked seven days after the effective date. Most upsetting, the notice arrived just three days prior to my payment being due. I received no contact from the Department of Education, who had been servicing my loans since I graduated from Law School. So, I was left with only a small window of time in order to determine on my own if the letter was legitimate, and then register on the new website and adjust my automatic payments accordingly.

The federal government through the Department of Education has been has been transferring large tranches of federal student loans to new loan-servicing companies for some time now. It has plans to continue to do so through the end of 2012 and beyond.

As our federally-owned loan portfolio continues to grow, we are ready to move to the next step in ensuring an efficient and effective multi-servicer, borrower-centric approach to servicing.  We will further expand our federal loan servicer team through contracts awarded under the HCERA/SAFRA Not-For-Profit (NFP) Servicer Program solicitation.  This solicitation offered NFP entities the opportunity to submit proposals individually or in teams for servicing borrower accounts on our behalf.  Whether individual or team award, our customers will know and face one servicer.  The Department will annually measure each servicer’s performance in the areas of borrower satisfaction and default management and use the results to assign additional volume when applicable.

I am left only to assume that not directly informing borrowers in advance that hundreds of billions of dollars in student debt will be transferred to private entities is an indispensable element of this new “borrower-centric” approach. I also assume that not informing me in a timely fashion of the transfer carries no penalty. I should say loudly that I was very happy with the past service provided by the Department of Education and found its staff to be knowledgeable, helpful, and responsive. Over the years I have had several questions and need for assistance, and each request was handled professionally. I have no doubt that the level of service provided previously will not be duplicated by the private entities paying lower wages and benefits, and providing no job security to its collection agents and staff.

The change was pushed by several nonprofit student loan corporations and their trade groups, including the Education Finance Council, during the health care debate in 2009 and 2010. The rule change was hidden away nicely as part of legislation passed concurrently with the Affordable Care Act. As has been true often during Obama’s tenure, an idea first floated to enable common sense reform, has been bastardized by moneyed interests. The motivation for the law was primarily to allow the government to break from guaranteeing loans offered through banks and credit unions and to begin lending directly to the public. The change made sense, and it has saved the federal government from having to pay fees to the large banks to originate and service the loans. It has also meant that the federal government would be forced into servicing a larger number of loans. However, the apparently influential nonprofit collection servicing business groups won a provision which guaranteed that its members would be granted the rights to service the loans.

As a consequence of the right hand helping while the left hand pummels, many borrowers have suffered problems during the transition. Many borrowers’ payments have been adjusted upwards or downwards without explanation. The vast majority of these same borrowers have since provided the new servicer with the requested information needed to correct the issue, but have not found a resolution. In my case I was simply notified in an unprofessional and untimely manner, although I am certain that additional problems will arise in the future.

I have some initial questions for the Department of Education. For example, how will loan forgiveness procedures be handled? Who will make decisions regarding public service loan forgiveness? How will borrowers’ payments be tracked for purposes of forgiving loan balances once the loans become eligible under the 25 or 20 year provisions? Are we to trust these private companies to keep accurate records and base decisions on government policies and interpret those policies accurately? What new collection rights, if any, will the servicers enjoy that the federal government did not? Will there be an oversight board set up to handle complaints from borrowers when these servicers ultimately engage in fraudulent behavior? Who will punish these entities if they begin to intimidate borrowers? At least six of the servicers that Uncle Sam has negoitiated these no-bid contracts with with have been involved in scandals in the past. How are we borrowers to have any confidence in this process?

The fact of the matter is that this type of government outsourcing never functions as planned. Just ask anyone who has run afoul of parking regulations in Chicago, or the folks who were recently renumerated for fraudulent fines and penalties paid to private operators of toll roads in California. This loan servicing outsourcing was a terrible idea and it will have terrible consequences. Unfortunately, it will be nearly impossible to unwind it.

It is a despairing situation because the President, I believe, had no intention of placing student borrowers into a precarious situation. In attempts to streamline the process he simply traveled down the path of least resistance, likely believing that the servicers’ nonprofit status would in some way shield borrowers from the type or predatory behavior that they had been subjected to by the large banks and private collection companies. In return, he was able to carve out a change that removed billions in fees from the large banks as the government became a direct lender to students. As I write this, the President is traveling around the country attempting to rally support for an extension of lower interest rates for student loan borrowers, and I believe he intimately understands the harm that will be caused by failure. However, outsourcing nearly a trillion dollars in student loan debt to ill-trained, ill-informed, ill-motivated private entities was a poor decision, and one that will likely adversely affect borrowers for decades.