House Speaker Nancy Pelosi holds a press event at the Capitol to commemorate the 75th anniversary of the Social Security Act. Photo: Pete Marovich, ZUMApress.com

This summer, Social Security – the government program that provides a steady check for seniors – turned 75. In Washington, lawmakers celebrated its platinum anniversary not with champagne, but with a heated argument over whether to reform the costly entitlement program by slashing benefits or raising the retirement age. Indeed, with the national debt over $13 trillion and the government running at a $1 trillion a year loss, the Obama administration created a deficit commission — the bipartisan National Commission on Fiscal Responsibility and Reform — to find ways to return the country to the black. In anticipation of its report, and in anticipation of possible changes to the program, lawmakers have started discussing how to reform Social Security.

After running a surplus for years and building up a sizable trust fund, Social Security now runs in the red. Though the program is far from bankrupt, more money is pouring out than going in. Economists project that the trust fund will be emptied by 2037. From there, opinions diverge on how far into debt the program will fall if nothing is done.

“Social Security is not in immediate trouble. There’s been a lot of exaggeration of that problem,” says Alice Rivlin, senior fellow at the Brookings Institution and a member of the deficit commission. “It is not on a solid basis for the long run, however. The sooner we act, the less we have to do.”

The problem is, there’s no consensus on what form that action should take. And many of the most commonly discussed tactics for stemming the flow of red ink would disproportionately impact lower-income Americans, the segment of the population that depends on Social Security the most.

One idea that comes up frequently is raising the retirement age. House Minority Leader John Boehner (Ohio), for instance, proposes lifting it to 70; some economists have suggested lifting it to as high as 75.

The idea sounds good: People are living longer, so it makes sense they will be working longer as well, right? But raising the retirement age will not necessarily keep people in the workforce longer, says Dean Baker, co-director of the Center for Economic Policy Research. For lower-income Americans, it would often just consign them to a retirement of lower benefit checks.

Already, around two-thirds of non-disabled workers elect to begin receiving smaller checks at 62 rather than full payments at 65. The hardship of raising the retirement age falls disproportionately on low-income workers who work in physically demanding professions, jobs they may not be able to continue through their seventh decade. According to Baker, 45 percent of workers over the age of 58 hold physically demanding jobs. Among those who lack a high-school diploma, that percentage skyrockets to around 75 percent. “If the hope is that people will work longer, that’s a very difficult thing for low and moderate income Americans to do,” Baker says.

Moreover, though the average lifespan has increased since Social Security’s creation, those extra years aren’t enjoyed equally by all Americans. Overall, Americans are living about 7 years longer. But the poorest 20 percent of Americans are living just two years longer – coinciding with that increase in retirement age. Baker notes that minority Americans fare even worse. “Even at 65, there’s a gap of about two years in lifespan. Also, on average, they have much lower wealth at retirement, so they’re much more dependent on Social Security.”

Center and right-leaning policy experts say another way to limit Social Security expenditures is to change the baseline for the benefits calculator from a wage index to a price index. Since the price of goods tends to grow more slowly than wages do, this shift would reduce the amount the program would have to pay out in the future. Supporters of this proposal say that because the benefits will still increase along with price inflation, seniors won’t suffer a shortfall in real-dollar terms.

This logic works in theory. But in practice, it would seriously impact lower-income Americans. Why? Seniors spend differently than average-aged workers: They buy more healthcare goods and services. And healthcare costs are skyrocketing well above the average inflation rate, so lowering benefits would make it more difficult for retirees to cover their costs. The more economically strapped the American, the more it would hurt.

Other plans would have less impact on those least able to shoulder the burden. One idea would be to reduce benefits for wealthy retirees. The idea is that “Bill Gates doesn’t need social security,” says Brookings’ Rivlin.

The problem is deciding where to set the bar: Too low, and you ensnare middle-class families, too high, and you only earn the ire of the superrich without contributing much to the bottom line. Some experts, including Rivlin, think the political cost probably wouldn’t be worth the impact on the bottom line. Polls show that even wealthy Americans want their Social Security, and are willing to pay for it. The government might net a little more money, but it would lose the public support and buy-in of wealthy (and thereby influential) citizens.

“U.S. benefits relative to earnings are low by comparison with those in other wealthy nations,” says Henry Aaron, senior fellow at the Brookings Institution. “I don’t think there’s a strong case for cutting benefits on the merits of the idea. In my view, the bulk of the fix should come from the revenue side.”

Many economists on the left share that sentiment. “It makes sense to fix social security by increasing revenues and making sure a good chunk of those revenues come from the high end of the income distribution,” says Monique Morrissey, an economist at the Economic Policy Institute.

Raising the payroll cap is one popular idea. Currently, the first $106,800 an American makes is subject to the Social Security tax; above that, the earner pays nothing. “If you eliminate the cap, you’re probably getting very close to eliminating the entire Social Security deficit for the next 75 years,” says Christian Weller, senior fellow at the Center for American Progress. “The more common proposal is to raise the cap so 90 percent of earnings are subject to the tax, which would eliminate about a third of the deficit.”

Another idea under consideration is raising the payroll tax rate by a fraction of a percentage point. Although the flat rate of this tax is inherently regressive, some left-leaning experts say it’s preferable to a cut in benefits, especially when the prospect is discussed in conjunction with other modifications like a minimum benefit, as described in a recent report by the Urban Institute.

Not everyone thinks adding to the payroll tax rate is the way to go, though. “It seems to me that raising the payroll tax is the least desirable way to try to move the program towards solvency,” says Will Marshall, president of the Progressive Policy Institute. “It’s a tax on work and makes it more expensive for employers.”

Marshall supports ideas more commonly embraced by the right to make up the shortfall, including an increase in the retirement age and a downward adjustment on the formula used to calculate benefits.

Some Republican politicians are still pushing for privatization, pointing to the rise of the stock market over the long term. Mike Tanner, senior fellow at the Cato Institute, asserts that even if a retiree cashed out at the trough of the market in 2009, he or she would have still experienced a growth in wealth. Given the wariness with which many Americans bruised by a drop in their 401(k) and home values now view the stock market, though, privatization may be a tough sell at least until the current bear market fades from our collective memory. “A lot of Republicans seem to view private investment as some kind of panacea, which I don’t think is correct,” says PPI’s Marshall. “That wouldn’t solve the underlying structural problems.”

Right-leaning experts tend to paint a bleaker view of the Social Security situation in general. Cato’s Tanner explains that the difference is that they include in their calculation of upcoming obligations the cost to be borne by the Treasury when the program cashes in its trust fund bonds. Obviously, that money will have to come from somewhere, but progressive economists like CAP’s Weller, counter that it’s disingenuous for the right to say those bonds pose an economic risk when the Social Security surplus is one factor that was used to justify Bush-era tax cuts in the first place.

Experts of all stripes like to point out that Social Security reform should be a snap compared to changing more complex programs like Medicare. In a strictly economic sense, that’s true. But the discussion around Social Security often threatens to collapse under the metaphorical weight lawmakers have conferred on the program. “It’ll probably be more politically determined than substantively determined,” PPI’s Marshall concedes. “Right now neither side wants to come out of its assigned place.”

The Commerce Department tweaked China recently when it slapped a 99 percent tariff on Chinese-made oil field pipes entering the U.S. The move was but the latest volley in a long-running skirmish over a wide variety of imports. To the extent that most people think of tariffs at all, it’s usually in a context like this. Tariffs are perceived as little more than an obscure negotiating tactic for trade disputes. But thanks to the large number of imported goods Americans consume on a regular basis, tariffs actually play much more of a role in average Americans’ lives — and household budgets — than they may realize.

Most people take for granted that they know how much an item will cost them when they look at the price tag and figure in the amount of their local sales tax. But low-income Americans end up paying extra for necessities like clothes and shoes — victims of an outdated, inefficient tariff system that inadvertently penalizes the poor. Even proponents of reform, though, acknowledge that the byzantine nature of the tariff code and the low priority it’s generally assigned by lawmakers makes the prospect of changing this entrenched system unlikely.

Luxury goods have very low tariffs, while cheap clothes, underwear, shoes and household products have much higher rates, said Edward Gresser, senior fellow and director of trade policy at the Progressive Policy Institute. “The people who are paying for the tariff system don’t know they’re paying for it,” he said.

“It’s the dirty secret of the U.S. tariff code,” said Daniel Griswold, trade policy expert at the Cato Institute. “It’s our most regressive tax that the federal government imposes.”

The country’s trade policy is a quilt of special interests, trade group bargaining chips and concessions, some pieces of which date back to an era when the manufacture of household goods was a booming part of the domestic economy.

“[It’s] usually for no good reason other than the political influence of a domestic group or for retribution against some other country that placed a high tariff on one of our exports,” said Barry Bosworth, an economist at the Brookings Institution.

The disparities are staggering. In his research, Gresser found that the tariff rate on a cashmere sweater is 4 percent; the rate for one made of much cheaper acrylic is 32 percent. A silk brassiere has a tariff rate of less than 3 percent, but the rate on a polyester one is slightly less than 17 percent. The tariff rate on a snakeskin handbag is just over 5 percent but climbs to 16 percent for one made of canvas. Similar variations occur when it comes to household goods. Drinking glasses that cost more than $5 each have a tariff of 3 percent, while those that cost less than 30 cents each have a rate of 28.5 percent. A silk pillowcase has a rate of 4.5 percent; this goes up to nearly 15 percent for one made of polyester.

Overall, clothes and shoes contributed nearly $10 billion in tariff revenue in 2009, while higher-cost items including audiovisual equipment, computers and even cars added less than $2 billion. Gresser contends that the $10 billion is disproportionately borne by people who can’t afford to buy luxury goods. What’s more, when customers pay sales tax on these products, that amount is also higher than it would otherwise be thanks to the tariff that drives up the retail price.

In spite of this evidence, Gresser has had an uphill battle gaining support for his cause. Trade groups and politicians don’t want to lower a bar to foreign importers without getting some kind of concession in return. From their perspective, dropping a tariff that adds 32 percent to the price of a cheap men’s shirt amounts to giving away a valuable bargaining chip. Other groups — including, it should be noted, some prominent left-leaning think tanks — say dropping tariffs will cost jobs we can ill afford to lose in this economy.

While apparel and footwear manufacturing has largely moved offshore, there are still a few hundred thousand U.S. workers in those industries, according to Robert Scott, an economist with the Economic Policy Institute, who says removing tariffs on cheap clothes and shoes would put these (generally low-income) Americans out of work. He also contends that even the high tariffs aren’t as onerous as they appear.

“If you look at expenditures as a share of total consumer spending for the bottom quintile of Americans, it still ends up being a fairly small number,” only a small fraction of a percentage point more than the average for all Americans, he said. Scott added that the globalization of trade, along with the resulting downward pressure on prices, has hurt low-income Americans more than it has helped them.

Griswold of the Cato Institute says this worry is overblown, sometimes deliberately for political gain. “Less than one-third of one percent of workers make clothing of any kind in the U.S.,” he said. “The self-interest of these producers and trade organizations gets wrapped up in rhetoric about saving jobs, which appeals to public perceptions. It’s much harder to visualize the benefits to families able to buy more affordable shoes.”

For William Marshall, president of the Progressive Policy Institute, the argument that lowering or abolishing tariffs on low-cost products will cost jobs speaks more to the need to invest in training programs for low-skilled American workers. “It’s a challenge to protectionists. It does redistribute the pattern of job creation,” he acknowledged. But the genie is already out of the bottle when it comes to globalization, he said, and companies have already moved the bulk of their labor-intensive production offshore. Leaving high tariffs on cheap imported goods isn’t going to stop them from appearing on discount and dollar-store shelves, it’s just going to penalize the consumers who buy them.

“It’s easy to overlook, easy to ignore because people without political voice or power are the most affected,” he said.

Refund anticipation loans, or RALs, promise near-instant refunds, but the catch is that they’re very short-term and very expensive loans, according to Christopher Kukla, senior counsel for government affairs at the Center for Responsible Lending. “In terms of APR, these things carry a rate of 50 up to 1,000 percent,” he said, adding that the rate is often hidden in a bevy of ancillary fees. Watchdog groups have been waging a policy battle against RALs for years, working with agencies like the IRS and the Office of the Comptroller of the Currency. The government has been slow to respond to concerns, despite an ever-growing body of evidence about the harm these loans cause low-income filers.

Groups including the National Consumer Law Center and the Consumer Federation of America have mounted multifaceted campaigns to remove refund anticipation loans from the marketplace, but reform efforts have only crept forward. The OCC, which oversees many of the banks that provide the loan funding — including industry giants like HSBC and JPMorgan Chase — issued internal guidance for its examiners back in 2007 pertaining to the training and supervision of third-party tax prep firms, but it wasn’t declared public policy until this year. The office also waited until this year to issue a consumer advisory about RALs. “This was in direct response to the advocacy we’ve been doing, but it’s still really weak,” said Dory Rand, president of the Woodstock Institute.

The IRS has previously examined whether or not it should be legal for tax preparers to sell financial products. This January, though, in a move that frustrated watchdog groups, the agency decided to establish a task force to study RALs and the legality of allowing tax preparers to share filers’ financial information with lenders. Advocates like Jean Ann Fox, director of financial services for the Consumer Federation of America, are unhappy with the longer timeline creating this task force will entail. “We were disappointed this is as far as they went,” she said. “The IRS could have dealt with this to put a stop to it.” The IRS also announced plans in January to regulate the tax preparation industry, requiring tax preparers to follow ethical guidelines, undergo professional education and testing. Creating and implementing these standards will take a few more years, despite the six months’ worth of research that preceded the January announcement.

The stakes are so high because RALs prey on the most disadvantaged Americans. Groups like the Neighborhood Economic Development Advocacy Project, which offers assistance to low-income New York City residents, says RAL providers deliberately target poor, uninformed recipients of the Earned Income Tax Credit, many of whom are outside the realm of mainstream banking and rely on lightly regulated fringe products. In 2007, more than 80 percent of RALs in New York City were made to low-income citizens, and more than 60 percent went to EITC recipients. In some low-income neighborhoods, close to one in five taxpayers took out a refund anticipation loan. “These areas are some of the lowest-income areas in the country,” said Alexis Iwanisziw, NEDAP program associate. “This money should really be staying in the community and staying with the families.”

The primary concern is that tax preparers, especially independent shops, can play fast and loose with the facts they give consumers because they never come under scrutiny from the banks making the loans. According to the Woodstock Institute’s Rand, Chase, the bank responsible for supplying the loans to some 13,000 mom-and-pop tax prep outfits, only instituted a mystery shopping program this January, in response to Woodstock Institute queries about compliance with the OCC guidance.

In 2008, mystery-shopping programs conducted by watchdog groups found that customers received incomplete and sometimes inaccurate information about RALs and the costs they would incur. While new requirements on disclosures, marketing terminology and customer education have all been announced by the OCC, the agency is giving tax preparers another year to comply with these new regulations. Even the new disclosure requirements aren’t foolproof, points out Chi Chi Wu, staff attorney at the National Consumer Law Center. “The problem with any sort of written disclosures is they’re not that useful when [a customer] gets a RAL,” she said. “They get another piece of paper in the stack. It may not be something they look at right away.” By the time the tax filer looks through his or her paperwork, the charges have already been applied against their refund.

The big appeal of these loans, the Woodstock Institute’s Rand points out, is the prospect of instant money. Already, taxpayers who e-file and elect to receive their refund via direct deposit generally get their returns within two weeks. If the IRS sped up its payments to taxpayers outside the mainstream banking system and allowed them to receive that money on a debit card similar to those used for other benefits, the appeal of RALs would be diminished. “These improvements the IRS could make would eliminate a need for refund anticipation loans,” Rand said.

“We think as a federal policy change, one very obvious thing that needs to happen is that the EITC should be prohibited from being used as collateral in a loan,” said Sarah Ludwig, co-director of NEDAP. This practice is prohibited when it comes to other federal benefits like Social Security, and Ludwig says Congress should extend this prohibition to the EITC. “If that loophole was closed, it would to a large extent cut off RALs at the pass,” she said. The Consumer Federation’s Fox says legislation that would limit interest rates to 36 percent would protect taxpayers, but it has stalled in Congress. There is stiff resistance not only from fringe lenders but from mainstream financial services firms against a federal usury cap inclusive of fees and surcharges, since this would apply to other types of loans, such as credit cards, as well.

Both the number of RALs and the total cost of obtaining these loans has dropped slightly in recent years, in part due to market forces that made borrowing money everywhere harder to do. In 2006, 8.7 million RALs were issued at a cost of $833 million, which dipped to 8.4 million and $738 million in 2008. Fox says while this is heartening, leaving these loans on the marketplace makes too many taxpayers vulnerable to exploitation. “The volume’s been dropping over the years, but it’s time to take care of this at the policy level. This is deviating taxpayer money. Do you want to give part of your tax refund to a big bank?”

President Obama. Photo: WDCpix

WASHINGTON — With the unemployment rate hovering just shy of 10 percent and Washington focused on job creation, President Obama this month called on Congress to approve a plan that would take $30 billion in repaid TARP funds and make it available for small banks to lend to small businesses.

“We’re going to start where most new jobs do – with small businesses,” Obama said at a town-hall event in New Hampshire.

There’s just one problem: there’s little indication that these banks need the money — or that making it available would stimulate lending. Further, experts from both the left and the right express concern that the funds could be lost to waste or mismanagement without ever contributing to the nation’s job rolls.

Small banks, which write more than half the nation’s small business loans, have wanted their own pool of stimulus money for a while, though they shunned TARP because of executive pay restrictions and reporting requirements they claimed would be too onerous.  But with outrage building throughout 2009 over the behavior of the nation’s largest financial institutions on everything from failing to execute mortgage modifications to hiking credit-card interest rates and paying top executives outsized bonuses, the small banks saw an opportunity.

Members of the Independent Community Bankers of America, which represents nearly 5,000 community banks, met with the president in December to lobby for a pool of money that came without the strings attached by TARP. The group appeared to get what it wanted with the White House plan, which would allow banks with less than $10 billion in assets to borrow up to 5 percent of their asset base from the Small Business Lending Fund. They could be charged as little as 1 percent in interest if they increased their lending to small businesses by 10 percent.

The problem is, these banks aren’t hurting for funds. “The assumption seems to be that banks lack the capital, but in fact, that’s not the case,” said Bert Ely, owner of Ely & Company, a financial consulting firm. “Smaller banks are well-capitalized and have plenty of liquid funds. The problem is finding credit-worthy borrowers.”

According to the Federal Reserve Board’s Senior Loan Officer Opinion Survey released last month, banks did tighten their small-business lending; banks with total assets of less than $20 billion reported cutting off credit to a greater degree than their larger counterparts. Analysts like Ely say small banks’ greater-than-average exposure to potential commercial real-estate losses could be driving this pullback. However, the Fed survey also cited a decrease in demand for loans, leading some analysts to worry that dangling an unnecessary incentive in front of small banks will tempt them to loosen their lending standards too far and make risky loans.

ICBA president and CEO Camden Fine seemed to back up this assertion, telling The Washington Post just two months ago, “We’ve got plenty of money to lend.” The problem, he told the paper, was a lack of demand from businesses.

Where did all the good borrowers go? Blame two closely related factors for the dearth of credit-worthy small businesses: The length of the recession and the commercial real-estate crash. By now, even business owners who had the foresight to build up their equity during the boom years have burned through that cushion. Those who own real estate have to deal with the fact that this collateral is now worth a whopping 40 percent less than it was in 2007, according to a new report from the Congressional Oversight Panel.

“The intent of the policy is for banks to lower their lending standards, but of course no prudent bank wants to do that,” said Joseph Mason, a professor of finance at Louisiana State University. Mason pointed out that most of the tepid economic growth the country has seen in recent months comes from manufacturing companies replenishing inventory levels, betting on an as-yet-unrealized turnaround. As a result, he said, “A loan to one of these companies is inherently very risky.”

The administration initially indicated it would only make the program funds available to healthy banks, but the ICBA’s leader is already challenging that, calling on the president this month in The Washington Post to allow what he characterizes as “less well-capitalized banks” to participate. Critics counter that this would only mean more taxpayer funds will be irretrievable if any of these banks fail and are placed into receivership by the FDIC, and many are doubtful that Congress — which would be tasked with crafting the small-business fund legislation — will acquiesce to this plea.

Opening the door to all small banks regardless of health is a risky proposition, says Gary Burtless, senior fellow in economic studies at the Brookings Institution. Burtless points out that the health of small banks correlates closely to their local commercial real-estate markets. With economists predicting that commercial real estate still has further to fall, it’s almost certain that more small banks in hard-hit parts of the country will succumb.

What’s more, the very reason small banks are as well capitalized as they are today is that they exercised caution during the go-go years, Burtless adds. These institutions passed up a quick buck in favor of what seemed at the time to be old-fashioned lending and underwriting practices. “What worked for these banks is being cautious,” he said. “Are you going to make that zebra change its stripes?”

LSU’s Mason labels the program as a cynical political move aimed more at assuaging voter anger over big bank bailouts than actually helping small banks lend or small businesses hire. “If these guys are going to go to the polls having done nothing for small banks, they really can’t evade the charge that they were a part of the large bank-centric policy that’s at the heart of this crisis,” he said. The plan is about little more than appearances, he charges. “They’re trying to throw a bone here, not a very economically effective bone, to give the appearance of a balanced policy after the fact.”

Supporters of the small-bank plan say the nation’s regional and community banks are better equipped to handle an influx of small-business loan requests than the Small Business Administration. Although Mary Landrieu (D-La.), chair of the Senate Committee on Small Business and Entrepreneurship, spoke positively of the president’s plan to increase SBA funding in a post-State of the Union release, she pointed out that this aid comes after eight years of cutbacks the SBA sustained during the Bush administration.

But even left-leaning analysts like Dean Baker, co-director of the Center for Economic and Policy Research, are skeptical that the banks would be more efficient distributors of these funds intended for small businesses. “The bank’s goal, of course, isn’t job creation,” he says, expressing concern that the real goal here — reducing a jobs gap some analysts have put as high as 11 million — could be fall by the wayside in pursuit of profits. “What you worry is, can this be gamed?” he said. “I’m not very confident that you could police it.”

Photo: iStockphoto

While the national unemployment rate of 10.2 percent is a sobering reminder of the depth of this recession and the protracted timeline a recovery will take, the challenges posed by long-term unemployment are far greater.

“We are breaking every record post-Great Depression on long-term unemployment,” said Heidi Shierholz, an economist with the Economic Policy Institute. Right now, around 35 percent of those without jobs have been unemployed for more than six months, a figure that adds up to 3.6 percent of our country’s labor pool.

The result is a crisis unlike anything seen since the 1930s. “The numbers are unprecedented,” said John Challenger, CEO of Challenger, Gray & Christmas, a human resources consulting firm. “What it suggests and it bears out in reality is that as people become long-term unemployed, they become damaged goods in the job market.”

While economists are divided about the best way to combat this growing problem, most agree on how it happened. The current recession exacerbated an ongoing economic shift from manufacturing to a service base. Troubles faced by Detroit’s Big Three automakers fanned the flames, rendering the skills of many workers obsolete. Even as local economies withered on the vine, workers were rendered immobile, locked into their homes by the real estate crash.

Long-term unemployment is dangerous because it can have a snowball effect, says Kevin Lowden, managing economist at the Milken Institute. The longer someone is out of work, the more likely he or she is to default on his or her mortgage, even low-risk borrowers at the time when the loan was originated.

“You also see significant issues in terms of the effect on consumer demand due to the dramatic increase in savings rate,” he said. While this increase in savings is good for the economy long-term, right now that frugality comes at the expense of consumer spending that could lead to employers hiring more workers.

This epidemic of long-term unemployment also puts an added burden on government coffers. “This is direct drain on budgets in two ways,” said Dean Baker, co-director of the Center for Economic and Policy Research. Government doesn’t collect income tax on laid-off employees, and when these workers go onto unemployment or disability rolls, this creates an additional drain on the system.

For instance, the increase in workers applying for disability has shot up. Currently, some 7 million adults are on disability, an influx so overwhelming that the trustees of the Social Security program predict that the disability fund will be emptied by 2017 if nothing changes.

This mass migration to disability status is primarily a function of our employer-based health care system, according to Lawrence Katz, a professor at Harvard University. “If you have a pre-existing condition, even if you get another job there will be problems with your coverage,” he said. “The one place you can go is disability, where you get onto Medicare. And once they go on, they basically never come off.” Health plans currently under debate in Congress would subsidize low-income citizens and families, which would include the unemployed, as well as ban insurers from eliminating pre-existing conditions, which make going off disability feasible. Currently, those jobless for a long period of time have nothing to fall back on after their COBRA benefit expires.

Even if those who have been unemployed long-term make it back into the workforce, their future earning power suffers. There’s some evidence that post-layoff retraining can mitigate this, but only under certain circumstances. A study out of the University of Chicago’s Harris School of Public Policy Studies found that attending one year of community college gave displaced workers a 5 percent wage boost. Unfortunately, the vast majority of workers enrolled in such programs don’t stick around for even a semester, let alone a whole year.

However, for workers that stick it out and specialize in vocational training, science or mathematics, the returns can be even greater. The study’s authors found a 10 to 15 percent jump in wages for this subset of workers, as well as higher returns for those who already had some degree of college education prior to their participation in the program.

To this end, much of the work that is being done to combat long-term unemployment focuses on retraining workers so that their skills are more in alignment with today’s service-based economy. “The economy has changed fundamentally and our workforce system has not,” said Andy Levin, Michigan’s chief workforce officer, who runs that state’s No Worker Left Behind program. “Most people who lose their jobs can’t replace their standard of living without getting significant training because of the rapid and ongoing march of technology and globalization,” Levin said.

No Worker Left Behind began operating in August 2007 and is funded primarily by the Workforce Investment Act, which was created in the 90s and received $1.25 billion in stimulus funding to help dislocated workers. Since then, No Worker Left Behind has trained 102,000 at-risk or jobless Michigan residents for jobs in growing industries like health care, technology and transportation.

Levin has put into place bureaucratic efficiencies, such as standardizing which types of jobs are eligible for training subsidies throughout the state and streamlining the process that lets jobless workers continue to receive unemployment benefits while pursuing additional education. When the program conducted a survey this April, they found that nearly half of the workers who had completed training had landed a job, 86 percent in a field that related to their training.

Other economists say that programs such as No Worker Left Behind, while helpful, don’t do enough to address the root of the problem: the overwhelming lack of jobs. Although the pace at which companies are laying off workers has slowed, companies aren’t rehiring, which means there are still too few jobs to go around. Traditionally, small businesses are the first to hire when the economy picks up steam after a recession; however, small-business financing has dried up due to the credit crunch, preventing entrepreneurs from expanding and adding employees.

“The crisis is just so big at this point with 10.2 percent unemployment that we’re thinking about new direct job creation proposals because the scale of the problem is so large,” said Allegra Baider, senior legislative associate at the Center for Community Change. That group, along with a host of other advocacy and labor organizations, recently released a joint statement calling for new investment in job creation in fields such as infrastructure and education.

“A top priority ahead of job training is we’ve got to fix the labor market and start generating jobs,” said the Economic Policy Institute’s Heidi Shierholz. The Obama administration plans to hold a jobs summit next month examining incentives like tax credits to encourage businesses to hire new workers.

John Challenger of Challenger, Gray & Christmas acknowledged that even if such programs succeed, many Americans will have to make adjustments. “One of the things that’s happening is a steady career at one large company or in a company town is no longer available, and people at all levels can no longer think of their careers as always progressing upwards in income.” Even as they learn new skills, employees also have to be taught how to be flexible so they can adapt to the twists and turns of the 21^st-century economy.

Martha C. White writes for the Washington Independent.

Photo: iStockphoto

Two new studies reveal that the rate of “underwater” mortgages — that is, where the mortgage debt outweighs the current value of the house — is higher than previously believed, and point to further increases in the coming months.

According to real estate data firm Zillow, 23 percent of all single-family homes are saddled with mortgages worth more than the present value. Moody’s Economy.com offers a similar number; according to that company’s research, 24 percent of all homes have underwater mortgages, up from 15 percent a year ago. Additionally, another 8 percent of homeowners, while not technically underwater, have mortgage amounts that cancel out their equity.

This adds up to some 16 million homes, according to Celia Chen, senior director at Moody’s Economy.com. “Home prices have increased in the last month or two but I think it’s too early to call an end to the downturn,” she said.

That not-terribly-optimistic assessment might turn out to be an understatement. Investment bank Deutsche Bank released a report earlier this month saying that 48 percent — nearly half — of all home mortgages in the country will be upside-down by early 2011. According to Deutsche Bank managing director and global head of securitization research Karen Weaver, the historical rate of mortgage defaults has been about 7 percent. “However, that experience is of limited relevance because it’s from a period of much more moderate home price declines and stricter lending standards,” she cautioned in an emailed response to questions. In today’s economy, it’s more realistic to expect up to 20 percent of borrowers to default.

“This is a slow-motion second shoe to drop on the economy,” said Christopher B. Leinberger, a visiting fellow at the Brookings Institution. ” My concern is that it could be the catalyst for a W, or double-dip, recession. Sure, there are some green shoots but there are also these economic depressants that have to be dealt with.”

New research out of Northwestern University shows that even some homeowners who can afford to make their mortgage payments choose instead to default when their homes plummet in value relative to their mortgages. The study, which surveyed homeowners across the country last December and again in March, found that 26 percent of all defaults are what researchers termed “strategic.” Essentially, this means the homeowner actually has the money to pay his or her mortgage and deliberately decides not to. In parts of the country where home prices have lost a significant percentage of their value, these borrowers decide it’s worth the hit on their credit score to walk away from homes that might never again be worth what they paid for them.

According to Northwestern professor Paola Sapienza, one of the authors of the study, even homeowners who said in a survey that they have a moral objection to walking away from a debt change their mind if the ratio of their negative equity balloons. According to her research, when homeowners’ negative equity hits 50 percent — a not uncommon number in certain communities — 17 percent of homeowners will default, even if they can afford their mortgage payments. Since lenders very rarely sue homeowners for defaulting, the consequences for defaulting are generally limited to a battered credit score for a period of years. The danger is that, since each foreclosure drags down the values of surrounding homes, the number of borrowers handing the keys over to their lender could snowball as homeowners watch their neighbors default.

Worse, negative equity creates a ripple effect that extends beyond the affected homeowners. Even among those not trying to sell their homes or in imminent danger of foreclosure, the lack of a financial cushion in the form of home equity puts a damper on consumer spending. “A lot of people were feeling good about their wealth position,” says Economy.com’s Chen. Now that there is no equity, it’s having a negative impact on consumer spending.” Lower consumer spending leads to decreased retail sales, manufacturing slowdowns and, ultimately, job losses or reduced income. This, in turn, can prompt a new round of mortgage defaults, starting the cycle all over again.

This hurts lenders as well as homeowners. Despite the injection of government capital into banks, financial institutions — especially smaller regional or community banks —aren’t out of the woods yet. The TARP Congressional Oversight Panel said in its August report that banks are likely to need billions more in government support. Even with this aggressive intervention, some banks will still fail. Small and medium-sized community banks, especially those centered in areas that have been hard-hit by the real estate downturn, are the most likely victims. “It’s obviously a negative for banks,” said Economy.com’s Celia Chen. “I expect there will be more banks that go under.” Future bank failures will tax the already-strained FDIC. The agency’s most recent quarterly report revealed that its reserve, which it uses to pay depositors when banks fail, is down to $10.4 billion. Last year, the FDIC’s reserve was $45.2 billion.

Even when the economy strengthens and employment increases, negative equity makes it prohibitive, if not impossible, for homeowners to sell their homes. This will hamper an eventual jobs recovery if workers can’t move to where employers need them to be. “It has cause a significant issue in the relocation industry. People are reluctant to move,” said Joe Benevides, chair of Worldwide ERC, a workforce mobility association. “Employers are finding that their first choice candidate is not able to take relocation for financial reasons.” The time frame for relocating an employee, which includes the time needed to sell the worker’s current home, purchase a new one and complete a move had jumped. The process, which used to take between 120 and 180 days, now stretches from 180 days to as much as a year.

There’s no single solution to the problem of burgeoning negative equity, but industry analysts and policy experts say both short- and long-term fixes are necessary. Mortgage loan modifications are still discussed, although existing programs have barely put a dent in the foreclosure crisis. Some critics say this is because modifications so far have targeted interest rates rather than principal balances. Modifications that target principals are a double-edged sword, though; Casey Mulligan, a professor at the University of Chicago’s Booth School of Business, points out that homeowners may be incentivized to stop making payments on their mortgages if they think the threat of foreclosure will force the lender to cut them a deal. Mulligan suggests a simple solution would be to modify all underwater mortgages, although he concedes that this solution probably wouldn’t pass muster with already-beleaguered lenders.

Christopher Leinberger of the Brookings Institution believes some relief could come from public-transit investment. Since many of the most-troubled properties lie in far-flung exurbs of major urban centers, expanded public transit that makes it cheaper and more convenient for people to get to work in the distant city will increase property values. Leinberger says smart urban planning done around these transit hubs will also have a positive effect; in regions where tracts of single-family homes have been replaced by a mix of high-density residential units (such as apartment buildings) and retail space, property values go up and local tax rolls are bolstered by the presence of commercial property.

A major antidote will be the passage of time; many borrowers experiencing low to moderate negative equity will see investment in their homes pay off eventually. Unfortunately, there’s no way to create a fast-acting fix that mimics this effect. “For the most part, we have to let it happen. We needed a correction,” said Deutsche Bank’s Karen Weaver. “And, as we let the crisis play out, shore up the rest of the economy with low rates and government stimulus.”

Martha C. White writes about housing for the Washington Independent.

(iStockphoto)

WASHINGTON, D.C. – While the plight of homeowners affected by the real estate meltdown has been well-documented, renters too often fall under the radar. Although tenants’ advocacy groups credit recently passed national legislation for including some protections, they charge that the new law only scratches the surface.

The number of renters being forced from their homes is on the rise as foreclosures increase. “We’ve seen a mass increase. I would say it’s up by 50 percent,” said Arlene Bradley, housing advocacy director of Housing Rights Inc. in Berkeley, Calif., a group that provides legal advice and counseling to renters in the greater San Francisco Bay area.

Prior to the new legislation that went into effect last month, tenants were at the mercy of the lender, and the results could be very disruptive. Renters could be forced from their homes with a mere five days’ notice in the state of Arizona, said William Deegan, executive director of the Phoenix-based American Tenants Association.

Under the new rule, which was passed May 20 and took effect immediately, an addendum to a broader housing bill addressing the foreclosure crisis, a lender who takes possession of a property or a new owner who buys the building at auction has to let a tenant stay for 90 days or until their lease is up. The rules are a bit different if someone is buying the property to live in; in that case, they can terminate a lease with 90 days’ notice. “This guarantees 90 days,” said Ed Josephson, director of litigation for South Brooklyn Legal Services in New York. “Before the law they could throw you out in the middle of your lease.”

While those who work with renters across the country say the legislation is a vast improvement over the earlier status quo, they also call the law incomplete. Too often, renters are at the mercy of courts and a financial system ill-equipped to deal with their particular challenges. For one thing, a tenant is still more likely than not to lose his or her security deposit if the owner goes into foreclosure

“The problem is the bank isn’t interested in dealing with you and the old owner is long gone,” said Janet Portland, lawyer and author of Every Tenant’s Legal Guide. While a tenant can take a landlord to small claims court, if they’ve declared bankruptcy — which is common — the renter is probably out of luck when it comes to collecting on a judgment.

The ATA’s William Deegan said this is particularly troubling because renters are more likely to need that deposit when they go looking for a new place to live. “Tenants tend to be poor, young families, the elderly. They fall through the cracks.” Deegan wants a law that would order property owners to put security deposits in escrow and not co-mingle them in an account that can be bled dry.

Another issue is that of property maintenance; too often, renter advocates say, owners let cleanliness and even safety standards lapse, and the banks who tend to inherit the properties aren’t usually equipped to deal with these pressing needs. “Properties often go unmaintained,” said Arlene Bradley of Housing Rights Inc. “That’s an area that’s largely being left to state and local governments to deal with regarding local code enforcement. That’s a big gap right now.”

“If you feel the place is getting shabby but not unsafe, you’re pretty much stuck,” said Portland. While there is currently no requirement at the federal level for banks that take on foreclosed residential buildings to hire property managers, some say this is a necessary next step, especially because the number of large, corporate-owned apartment buildings in foreclosure is expected to rise as the commercial real estate market worsens.

Right now, most of the people uprooted by foreclosure are in duplexes, triplexes or other small-scale lodgings. Often, the home that is foreclosed on is the landlord’s place of residence, too. If larger properties start to fall, this means that potentially hundreds or even thousands of renters could be living in places that are owned by a bank or speculator who picked up the property for a rock-bottom price at an auction.

“This is the beginning of a wave,” said Ed Josephson of South Brooklyn Legal Services. In big cities like New York, many owners bought buildings when prices were at their peak and now can’t make their payments due to falling rents and can’t refinance because no credit is available. “You have a whole parallel world of multi-family crisis,” he said.

Legislating additional tenant protections is a tightrope walk, though. Although the 90-days’ notice provision passed through Congress successfully, other efforts have been challenged. Last month, Rep. Nydia Velázquez (D-N.Y.) added an amendment to a housing crisis bill that would have let the government step in, take over troubled apartment buildings and convert them to affordable housing. This move drew fire from the National Multi Housing Council, a trade group representing apartment building owners and developers.

Giving government the power to seize ownership of properties would choke off what little funding there is trickling into the market, charges Jim Arbury, senior vice president of the National Multi Housing Council. “There were no specifics regarding what would constitute overleveraging of a property,” he said, which would make lenders and developers reluctant to invest.

But there are 95 million renters in America, said Deegan, and they need more legal protection than the corporations that actually own their places of residence. “When you look at this whole economic turmoil, everyone’s jumping through hoops to help homeowners and nobody’s dong anything for tenants,” he said.

Martha C. White writes for the Washington Independent.

(WDCpix)

While the steady rise of the nation’s unemployment rate has become shorthand for the recession’s impact, many economists say the grim figures — 8.9 percent in April — don’t tell the whole story of Americans’ financial distress. While the plight of the jobless tends to dominate social policy conversations and media coverage, a less-exposed but equally vulnerable population is the millions of underemployed. This diffuse, often poorly tracked cross-section of citizens who bear the individual and collective challenges living on the economic fringes often go overlooked by policy makers and elected leaders.

“The number of people under economic stress is much bigger than the official unemployment rate,” said Chad Stone, chief economist at the Center on Budget and Policy Priorities. Who are these people? The Bureau of Labor Statistics takes a stab at quantifying these people to create a more comprehensive picture of who’s not working and why not. The Bureau identifies categories of Americans it labels as “marginal,” meaning that they are unemployed and have looked for a job in the past, but not recently, and “employed part time for economic reasons,” referring to workers who would take full-time schedules if they could. Once these groups are added to the base unemployment rate, the number climbs all the way up to 15.8 percent in April, the highest number since the BLS began tracking these sub-groups in 1994.

Yet there are some who say even these numbers don’t tell the whole story. Progressive think tanks talk about “skill underemployment.” “It’s the computer engineer who lost [his] job and is now working at 7-11,” said Heidi Shierholz, an economist with the Economic Policy Institute. “They show up as employed, not as a bad labor market outcome,” she said. In reality, though, these workers, are both earning and contributing far less than their potential — one definition of underemployment. The labor bureau’s data-collection also doesn’t take into account the millions of Americans who have had their hours or wages cut in recent months.

There’s no single agency that tracks the underemployed, so researchers have to cobble together data from all corners of the economy to come up with an estimate on disenfranchised workers. According to Philip Harvey, a professor of law and economics at Rutgers School of Law, the United States is short by nearly 23 million jobs, a far greater number than the 13.7 million of officially unemployed workers.

Gertrude Goldberg, chair of the National Jobs for All Coalition, says that lowballing the number of distressed workers leads to an inadequate response. “By under-defining it you reduce the notion of a mass of people at risk in terms of tomorrow,” she said. And while they may disagree on precisely how to count underemployed Americans, nearly all agree that their growing numbers could lead to problems both in the short term as well as in the future.

“When you have productive people that can’t get the hours they need, that represents a huge contraction for the economy,” said Heidi Shierholz of the Economic Policy Institute. Lower paychecks in the case of forced part-time employment means less money going into federal, state and city tax coffers, at a time when many local governments can ill afford a shortfall.

Social Security also takes a hit, according to Shierholz. “To the extent that people paying into Social Security are paying a percentage of their income, as people are seeing their hours reduced, that reduces their weekly paychecks, so that will reduce the amount they pay into Social Security.” In reference to recent concerns about the longevity of the Social Security trust fund, she said, “it is absolutely a contributor to this.”

As bad as this sounds, the damage to individuals’ own retirement accounts is even greater. “One of the biggest factors for having larger 401(k) balances is continuous participation in a plan,” said Craig Copeland, senior research associate for the Employee Benefit Research Institute. Since 401(k) contributions grow from stock market gains, workers who are laid off even briefly miss out on the chance to invest while the stock market is low. Companies are allowed to impose a one-year waiting period on new hires’ participation in retirement plans, so the unemployed who return to the workforce face a “time out” period that could cost them dearly in the long run.

The workers classified as involuntarily part-time by the Bureau of Labor Statistics face even greater hurdles. According to EBRI research, in 2007, only18 percent of male and 26 percent of female part-time workers participate in employer-offered retirement benefit plans. The reason for this is twofold, said EBRI’s Copeland. These employees are less likely to have the extra income to invest in a retirement plan. In addition, most companies don’t even offer retirement benefits for those who work fewer than 20 hours a week.

Underemployment also means that a worker’s Social Security benefits could be reduced when he or she collects them in retirement. This combination of reductions in private and public income streams means that when these potentially millions of underemployed Americans exit the workforce, the government could be facing a crisis of underfunded retirees.

Implications for health insurance are also troubling. Elise Gould, health economist at the Economic Policy Institute, says that in 2007, the most recent year for which statistics are available, only 55 percent of part-time employees had employer-sponsored health insurance, as compared to 74 percent of their full-time counterparts. It’s likely that these numbers have dropped further since then, she added. “There’s been a downward trend in these since 2000, and I would expect these to have only gotten worse.”

This health care gap has serious consequences, according to David Dooley, chair of the department of psychology and social behavior at the University of California, Irvine. Dooley studied the mental-health effects of underemployment as compared with unemployment. Rates of depression, alcohol abuse and other markers were similar for both groups. “The general patterns is that we get the expected adverse effects of complete job loss with inadequate employment,” he said.

However, while programs such as Medicaid and COBRA exist to help the unemployed, there are no comparable health care alternatives for underemployed workers. “If people show signs of depression or increased drinking, they’re not going to have the resources for early intervention,” said Dooley. “If they’re in a downward spiral there’s not going to be anyone to slow it down.”

Despite these troubling clues, though, people like Gertrude Goldberg of the National Jobs for All Coalition say the government hasn’t been aggressive or inclusive enough in designing stimulus programs that help out the underemployed as well as the unemployed. Although the federal government has extended unemployment benefits and given states money to boost the benefits by a nominal amount, none of this helps the employee forced to work a four-day week or take a part-time job to replace lost full-time employment.

Heidi Shierholz of the Economic Policy Institute says not to count on the promised job creation benefits of the stimulus either. “By the time the stimulus package was implemented it was already behind,” she said. “It was only expected to create between three and five million jobs. By the time it got off the ground we were seven million jobs in the hole.” She and others warn that if the underemployed are allowed to slip through the cracks, economic recovery will be all the more elusive.