Note: this a cross-post from my group blog, the Realignment Project.

“Education, then, beyond all other devices of human origin, is the great equalizer of the conditions of men, — the balance-wheel of the social machinery. I do not here mean that it so elevates the moral nature as to make men disdain and abhor the oppression of their fellow-men. This idea pertains to another of its attributes. But I mean that it gives each man the independence and the means by which he can resist the selfishness of other men. It does better than to disarm the poor of their hostility towards the rich: it prevents being poor.”

– Horace Mann, 12th Annual Report to the Massachusetts State Board of Education (1848)

In my previous post about education, I mentioned that the education reform debate has largely skirted the problem of affordability of higher education, preferring to direct their attention more towards college preparation and the K-12 system. As I said at the time, one of the things that unsettles me about the “Educational Equality Project” type of education “reformer” is the extreme economistic trend of their thought – education is about getting jobs and making the workforce more production, hence the extreme emphasis on reading, writing, math, and science, as opposed to anything about art and music, or history. I may be overly broad here in my description, and if I am, I apologize, but it's to a point. The purpose of public education is not to meet the needs of the labor market – it is to meet the needs of democracy.

Obama's recent proposal to pump an additional $12 billion over the next ten years into community colleges speaks to something of this tension. On the one hand, he makes the economic argument that “We will not fill those jobs, or keep those jobs on our shores, without the training offered by community colleges;” on the other, he ties the public investment in education to the broader goal of democratizing the economy. “Time and again, when we placed our bet for the future on education, we have prospered as a result …that's what happened when President Lincoln signed into law legislation creating the land grant colleges, which not only transformed higher education, but also our entire economy.  That's what took place when President Roosevelt signed the GI Bill which helped educate a generation, and ushered in an era of unprecedented prosperity.  That was the foundation for the American middle class.”

Background:

Obama's invocation of the Morrill land grant colleges and the GI bill should remind us that one of the great American virtues, almost from the beginning, is a faith in the virtue of democratic education. George Washington was a lifetime proponent of a National University, the purpose of which, he said, was “the education of our Youth in the science of Government. In a Republic, what species of knowledge can be equally important? And what duty, more pressing on its Legislature, than to patronize a plan for communicating it to those, who are to be the future guardians of the liberties of the Country?” In his repeated addresses to Congress on the topic, Washington linked the establishment of a national public institution of higher education with the future of the Union itself: “In the general, juvenile period of life, when friendships are formed and habits established that will stick by one, the youth from different parts of the United States would be assembled together and would, by degree, discover that there was not just cause for those jealousies and prejudices, which one part of the union imbided against one another.”

The Morrill Land Grant Act of 1862 was not merely about establishing agricultural programs. Co-written by a merchant's clerk who never attended college and a schoolteacher and signed into law by a President who had perhaps one year of formal education at a time when only the sons of gentlemen attended college, it was also an aspirational statement about the kind of society that the party of “free soil, free labor, and free men” wanted to build – one where higher education would be “accessible to all, but especially to the sons of toil.” In its own way, too, the City College of New York, the oldest free public institution of higher education, was a radical institution from the very beginning. Its founder called upon the state of New York to “Open the doors to all… Let the children of the rich and the poor take their seats together and know of no distinction save that of industry, good conduct and intellect;” its first president summarized CCNY's mission thusly – “The experiment is to be tried, whether the children of the people, the children of the whole people, can be educated; and whether an institution of the highest grade, can be successfully controlled by the popular will, not by the privileged few.”

And of course, in 1960, Governor Pat Brown's Master Plan for Higher Education in California grounded its call for a revolutionary three-stage system of the University of California, California State University, and Community Colleges on the principle that “state colleges and the University of California shall be tuition free to all residents of the state.”

The point of this extensive exegesis is that the purpose of public higher education has always been about, contrary to Obama's speech, more than even just democratizing the economy.  It has always been about making a more democratic society, whether it be forging a national identity, abolishing social distinctions, state provision of a universal public good, or providing a vehicle for the children of the poor to seek their education freely.

Current Situation:

So where does this noble legacy of democratic education stand today? Well, two weeks ago I received the following email from UC President Mark Yudof, effectively sending out a fiscal SOS to the UC community:

“In the past 20 years, the amount of money allotted to the University through the state budget has fallen dramatically: General Fund support for a UC student stood at $15,860 in 1990. If current budget projections hold, it will drop this year to $7,680.

Moreover, it now appears likely the UC system, in this current fiscal crisis, will be ordered by Sacramento to absorb yet another $800-plus million in additional cuts. Its 2009-10 core budget will be reduced by an estimated 20 percent. This will bring the amount of state investment in the University down to $2.4 billion – exactly where it was in real dollars a decade ago.”

This then is the bitter fruit of the compact signed between Governor Schwarzenegger and then-UC President Dynes, which supposedly at the time was going to “bring the promise of renewed fiscal stability for public universities in California.” The ultimate result, however, has been a near-perfect execution of Shock Doctrine, effectively destroying a decade's worth of efforts to improve and expand public funding for higher education – a slow-motion privatization, if you will. At the same time that the U.C has been struggling with one funding crisis after another, despite the promises of the compact, the result has been a massive shift of economic burdens from the state and the university onto the student body. As I noted previously, the cost of attending the U.C has now doubled, from the less than $4000 per year in 2003 to more than $8000 in 2009. At the current rate of progress (10% increase in tuition per year), the U.C's in-state tuition will be indistinguishable from the private university average in twelve years. In my eyes, this constitutes an enormous tax on the student body and their families.

And this is hardly just a California story. As this article points out, the University of Washington's 26% cut also drops its state funding back by a decade, the University of Illinois' fee increases are on-pace with the U.C's, and SUNY is even outpacing the U.C with a 14%. The larger problem is that the limited fiscal capacity of states to deal with recessions, the Federal inattention to the cost of higher education for the last eight years, and the broader anti-tax politics that have gripped this nation have meant tha public university is an easy target. State and federal legislators looking to make cuts-only budgets see institutions that can raise private funds and increase fees and hand down cuts that would be unthinkable in other areas, banking on fund raising and tuition hikes to keep the public universities running.

This crates two larger problems. The first is the privatization of the public university – a public university is a public trust, a place that is supposed to cultivate democratic citizenship, to create the expertise that governments can make use of in making public policy decisions, and a place which embodies the ideals of a better society. The second is ever-increasing inequality –  as the burden of education increases on students, the result is a generation whose future life choices are increasingly determined by the pressures of ever-mounting debt, and increasing class inequality between those whose families can pull the full freight and those who must support themselves. As research has shown, the children of the affluent go to college at a higher rate than the children of the poor – even when the children of the poor perform higher academically than the children of the rich. Compare, for example, the difference in attendance rates between the 4th quintile (highest-achieving) students from families making less than $20k a year and students from the 3rd or 2nd quintiles from families making more than $100k a year. Clearly, it is better to be born lucky than smart.

Solution:

While the gross disparities between the richest and the poorest ought to shock the conscience of any American who cherishes our national mythos of opportunity, egalitarianism, and meritocracy, it's also true that people everywhere often show a less sharp concern for the plights of others than their own misfortunes. But take a second look at that chart, and you see than class inequality goes all the way down the line, with the children of the merely affluent doing less well than the children of the rich, and the children of the middle class less well than the children of the affluent, and so on – even with children of roughly equal ability and achievement. Rarely have I seen a more clear case for a cross-class community of interest.

So how do we move, as it were, forward to the past?

Morrill 2.0 – Universal, Public Higher Education for All:

• Federal/State Endowment Assistance – given the many failures of the existing per-student assistance system and the way that it has bogged us down in a patchwork of student loans and aid, and the vulnerability of this system to economic shocks, instead we should establish a system whereby the Federal governments and the states collaborate to provide a one-time $5 billion addition to the endowment (to be held in long-term T-Bills, no investing the money in derivatives or other fashionable ventures) of each state university, gradually phasing it in university by university over the next ten years (yearly cost – $25 billion). This money should be based on a guarantee of tuition-free education based on in-state rates, with modest fees for out-of-state students.
• Independent Financing of State Universities – along the same lines,  moving the state universities from a miserly yearly appropriations to a steady source of public funds, one alternative that presents itself is A.B 656 in the California state legislature (or whatever version of A.B 656 might become a proposition), which proposes an oil excise tax to fund higher education in California, similar to the way that oil taxes fund the University of Texas. Obviously, not all states have major oil revenue, but most states do have some industry that is the center of the economy, and it is only fair for the industry in question to kick in some money to pay for the education of the college graduates it needs. Hence, I could see a small tax on stock transactions to fund SUNY, since Wall Street needs huge numbers of college grads, and so on and so forth. This industry excise tax should also be balanced with a guarantee to keep tuition low and enrollment expanding (as well as the number of campuses) to maintain access to public higher education.
• Exporting the Brown Model – the evolution of the Morrill land grant colleges has meant that, in a country supposedly dominated by federalism, we actually have a rather standard pattern of having a single state university that more often than not is a large, Research 1 institution. However, I would argue that we need to, over the long term, popularize the three-tier system of state universities, state colleges, and a unified system of community colleges across the 50 states, if we are to truly expand higher education to all students who are ready and interested in furthering their education.
• Higher Education Means Vocational Education Too – in my previous post, I talked in general terms abou the lack of attention paid to vocational training and technical education and the somewhat veiled contempt that some education reformers seem to have for non-academic higher education. Simply put, not everyone wants to go to college or will ever be happy in college, and while generally our economy is becoming more reliant on education, it would be a mistake to assume that we are going to move to 100% of the population with a college diploma and a white-collar job. To begin with, the current situation masks the extent to which problems with our K-12 education system has led employers to use bachelor's degrees to substitute for high school diplomas in straining their candidate pools for people who are literate, numerate, and know how to do basic tasks like use a computer, write a memo, operate a spreadsheet, read technical documents, give a presentation, etc. Secondly, as the American economy develops, we are going to need more and more skilled labor  that require some form of certification that is not college-oriented – as we develop a “green economy” based on “alternative energy,” we're going to need a lot of electricians to install new grids, new wiring systems, solar panels and wind farms, and so forth, and you don't go to a traditional 4-year college to learn to be an electrician. Hence, I would recommend extending our guarantee of higher education for all to be a guarantee to technical education, vocational education, and apprenticeship/job training programs, paying the way at, say, state college or community college rate for any student who agrees to stick through the program. But the point is that the choice to go into academic or technical education should be freely chosen, without the consideration of cost.

“Unemployment compensation, as we conceive it, is a front line of defense, especially valuable for those who are ordinarily steadily employed, but very beneficial also in maintaining purchasing power. While it will not directly benefit those now unemployed until they are reabsorbed in industry, it should be instituted at the earliest possible date to increase the security of all who are employed…”
– Report to the President, Committee on Economic Security (1935)

In a previous post, I discussed the need to improve the payroll tax, and noted that one of the reasons we need to do this is to fix the unemployment insurance (UI). Our current UI system is fundamentally broken. As I wrote on the 12th, “at a time when nearly one in ten American workers are unemployed, only half of them qualify for Unemployment Insurance, to the extent that the program no longer adequately functions either as a safety net or an “automatic stabilizer.””

If I didn't have the time and the space to say it at the time, let me say it now. The fact that a majority of workers are no longer protected, nearly seventy-five years after the passage of an act that was meant to protect every worker from” one of many misfortunes” of economic life, is a moral failure of the highest order. The idea that governors in America would reject stimulus funds in the middle of a recession because those funds would make it easier for temporary or part time workers to gain access to UI suggests the total moral bankruptcy of the American conservative movement. Not for nothing did FDR say:

“Governments can err, presidents do make mistakes, but the immortal Dante tells us that divine justice weighs the sins of the cold-blooded and the sins of the warm-hearted on different scales. Better the occasional faults of a government that lives in a spirit of charity than the consistent omissions of a government frozen in the ice of its own indifference.”

Background:

Seventy-five years ago, UI was probably the most important, the most important, and legally and politically the most difficult piece of FDR's agenda that the Committee on Economic Security (CES) wrestled with. The sheer burden of the task was daunting – twenty million Americans were living on Federal relief, so demand for UI would be high, but unemployment was still at 14% and wages had been badly hammered so where would the funds come from to establish a reserve? Politically, the right thundered against creeping socialism and an un-American dole and the left visions of plenty if we “shared the wealth. Legally, the Supreme Court had set its face like thunder against the New Deal and all its works. And the progressive movement was split.

At the core of the CES's divisions over UI was a struggle between two halves of the progressive spirit -on one shoulder, its conservative, sober, evolutionary side, wary of government handouts, suspicious and somewhat fearful of an unruly working class, and confident in the ability of educated regulators to force the market into acting morally;  on the the other, its visionary, expansive, and radical side, impatient with the old nostrums of laissez faire and limited government, firm in their faith in the liberatory capacity of an activist state, and deeply hostile to all malefactors of great wealth. From each side came a plan:

• The Wisconsin Plan – the Wisconsin Plan was the result of one of the most creative and productive experiments in state-leel progressivism in American history, marked by the political and policy alliance between progressive economists at the University of Wisconsin lead by Professor John R. Commons and the LaFollete political dynasty, including the legendary “Fighting Bob” LaFollete and  his sons, Progressive governor Philip LaFollete, and  Senator Robert LaFollete Jr. In 1932, Wisconsin adopted the first unemployment insurance system in American history, drafted by John R. Commons. Under the Wisconsin Plan, each corporation was required to build up its own UI reserve, paid for out of a payroll tax. The rate of the payroll tax would vary company by company depending on how successful the company was in maintaining a stable level of employment and not resorting to layoffs – in this manner, the Commons school of economists hoped to tame the business cycle by re-shaping employer's incentives, making it good business to be a good employer.

• The Ohio Plan – the Ohio Plan was established the same year as the Wisconsin Plan, but differed from it in two regards. First, the Ohio plan instead of setting up individual factory plans established a single, statewide plan, which pooled contributions from all employers, thus allowing the strong and the big to subsidize the weak and the small. Second, the Ohio plan, unlike the Wisconsin Plan, required contributions from both employers and employees (the Wisconsin Plan only taxed employers). The kernel of the Ohio plan was picked up by several progressive economists, including Abraham Epstein of the American Association for Old Age Security, future Senator Paul Douglas of the University of Chicago, and I.M Rubinow of Columbia University.

In the political struggle within the CES, the Ohio plan was easily defeated. Frances Perkins, the Secretary of Labor and Chairwoman of the CES appointed a number of Commons-trained Wisconsin economists to staff positions, including Edwin E. Witte (later called “the father of Social Security”) and Arthur Altmeyer (the future first chairman of the Social Security Board. Under their leadership, and with the political support of many other New Dealers, the CES was persuaded to support a system whereby a re-funded Federal payroll tax could be used to push other states into establishing Unemployment Insurance systems on the lines of the Wisconsin Plan. The advocates of the Ohio Plan, shut out from direct participation by their Wisconsin rivals, lobbied the CES' Advisory Board on behalf of a single, national pool run by the Federal government.

In the end, neither side totally won out. The UI system would be state-run, in part merely to get around objections from the Supreme Court, but on the other hand, the insurance pools would be single, state-wide, and not the factory-level plans envisioned by John R. Commons. In this way, however, a deadly weakness was built into the system.

Situation:

The fact that only 46% of workers are eligible for UI is not an accident. The more workers are eligible for unemployment insurance, the higher a payroll tax must be levied to cover them, and thus states perversely compete to lower coverage to attract employers with their low cost of doing business. The fact that the majority of gubernatorial opponents to taking the stimulus and the attached strings of UI reform come from low-wage, low-tax, Republican/corporate dominated, Southern states shows the way in which the politics and economics of state-run unemployment insurance combine. If you've been paying attention to the news, not only would you see that some governors had to be bullied into doing what is not merely morally right but economically necessary in a recession, but you would also note that many states have drawn down their UI reserve funds to the point where they are a few months or a few quarters away from running out of money.

This is simply untenable. We have nearly 10% unemployment. Our recoveries are becoming increasingly long and jobless recoveries. We have to have a functioning unemployment insurance, and we need it now.

Solutions:

So how do we get this done?

1. Fixing UI Means Nationalizing UI – the National Employment Law Project's proposal for a “New National Economic Security Plan for the 21st Century” is a good start: it combines state level reforms (coverage expansion, 12 weeks of paid family and medical leave, subsidized COBRA insurance, a home protection fund, and credits for education/training) with federal reforms (expanding trade assistance, a permanent Federal Extended Benefit system tied to national recessions, establishing disaster-related unemployment insurance, and creating “transitional jobs”). Ultimately, however, the state-run model of UI is simply outdated and ill-designed and needs to be replaced. From the beginning, the state-level program was created to get around Supreme Court doctrine against Federal economic intervention that is no longer good law. State-run systems create perverse incentives to deny coverage and underfund the system, and in general, states lack the counter-cyclical capacity to deficit spend in recessions that UI should enable. The current system, whereby supplementary Extended Benefits are passed by Congress during recessions, has shown itself to be too slow, too prone to political delays, and too limited in scope. Unemployment is a national problem, it requires a national solution. We already have the administrative structure in place to make the transition. There is no excuse for delay.
2. Wage Insurance Is NOT the Answer – there are some who counsel the creation of wage insurance as a means of dealing with the additional problem that, when the unemployed do find new work, often (especially in the case of older, skilled workers) their new jobs tend to pay much lower wages than the declining, industrial, and unionized jobs they once held. This is a fundamentally flawed and compromised idea, an undeclared recognition that the jobs being destroyed and created by free trade, globalization, and outsourcing are not of equal quality, and a surrender to the epidemic of wage stagnation that is the underlying cause of America's long-term economic weakness. Creating a system that pays 1/2 the difference of lost wages simply creates an incentive for employers to fire their workforce en masse, rehire them later at lower wage rates, let the Federal government pick up the tab, leaving workers to suffer continually if only gradually declining wages. We do not need Speenhamland for the 21st century.
   
3. Job Insurance IS – Luckily, we do have another way to deal with the shortcomings in UI, one that was designed within the Committee on Economic Security, present at the moment of creation. In addition to the Wisconsin and Ohio economists, there were also a group of policy advocates from  the Federal Emergency Relief Administration (FERA), who were busy designing what would become the WPA (of which I have often written). In a series of running bureaucratic battles, FERA staffers like Jacob Baker, Emerson Ross, Corrington Gill, Aubrey Williams, Alan Johnstone, Nels Anderson, Eveline Burns, and Josephine Brown argued for the establishment of a system of “job insurance” to replace the Wisconsin school's “unemployment insurance.” In a memo titled “A Public Work Program As a Means of Economic Security,” Emerson Ross proposed three different systems of “job insurance:” option one “involves the use of contributions for protections against unemployment for a work program — employment not restricted to those making the payments. This conception regards the funds collected as an additional source of revenue collected and is based on the belief that employees will willingly make payments in return for the protection offered them by a large work program when unemployed,” essentially replacing unemployment insurance altogether, while combining contributions from a payroll tax with general Federal funding. Option two contemplated “wages on a work program as a means of paying all unemployment benefits,” in which a public job would be “a matter of contractual right to…wages paid for work performed.” Option three envisioned a combination of UI with job insurance, in which workers who exhausted their limited UI benefits would then become eligible for a public job, dividing responsibilities between short-term and long-term insurance.

Either of the three proposals would be superior to our existing system of unemployment insurance. Critically, by establishing a separate and dedicated tax and reserve fund for job insurance, the Federal government could create a permanent fiscal structure for a jobs program, which would form the nucleus of a Federal commitment to full employment for all.

Pretty much all that needs to be said about the impact of deregulation has already been said. And quite a bit has been written about the government's refusal to regulate the new “shadow financial sector.” And if that were all there was to the story, it would be fairly easy to fix the financial sector.

The problem is regulatory capture and potential incapacity – regulatory capture seems to be nearly inevitable, as long as financial institutions can offer jobs to former regulators, contributions to electeds and party organizations, and financial experts to the regulatory agencies themselves; even if that weren't already a massive conflict of interest that allows financial institutions to game the system, you have the problem that even a completely honest regulatory watchdog might not have have the financial, personnel, legal, and expertise resources needed to actually regulate – and Congress certainly hasn't shown itself particularly interested in keeping the FDA up to scratch, let alone the SEC.

So what do you do if old regulations are gone, there aren't new regulations to deal with new problems, and the regulators either can't or don't want to regulate? This brings me to a point brought up by Matt Yglesias, when he pointed out that the failure of regulatory authorities to recognize and halt this crisis:

..leaves us with an appreciation of crude measures rather than hubristic efforts to get the regulations precisely right…The best you can hope from a regulatory regime is that it will be a satisficing [sic] solution wherein some fairly crude rule will improve on the outcomes generated by the unfettered market. When that’s not the case, we may as well let the market go unfettered even though that, too, will be somewhat sub-optimal.

What we don't need is to look to the newest fad in economics (behavioral economics, I'm looking at you) to give us a flawless model for predicting when market faiilures will happen. What we don't need is “regulation for the 21st century,” or for any new paradigm. What we need are regulations that work without regulators – automatic regulation.

Automatic regulation doesn't refer to some sort of sci-fi legislation that creates self-enforcing, self-aware regulatory cyborgs. Although a Wall Street Robocop would be a cool idea, I'm actually talking about regulation that establishes clear and transparent bright lines that any informed member of the public or the media can understand. The Glass-Steagall Act's separation between commercial and investment banking was virtually self-evident: if people could deposit their money in a bank, that bank wasn't allowed to underwrite securities (stocks and bonds); if a bank floated bond issues and acted as a broker in the securities market, it couldn't receive deposits. A reserve requirement, like the Fed's reserve requirement or the 1860s rules that required "national banks" to back their bank notes with T-Bills, is easy enough to check: you look at how much money the bank is circulating, and how much it's supposed to keep in reserve,  and if the two numbers don't balance out, there's a problem. Bob LaFollette, one of the forgotten heroes of American Progressivism, in his 1924 third party race for the presidency called for the breaking up or nationalization of all corporations with (either 9% ot 15%) of market share – a radical proposal, but one that would have been easy to administer.

Automatic Financial Regulation:

In thinking about how to create automatic regulation for the financial industry, three broad categories of regulation come to mind:

1. Bright Line Regulations – the proposed limitation of oil derivatives seems like a good place to start in terms of automatic regulation – extending these limits to other commodities such as electricity and waster might prevent a future Enron-like fraud-via-false-scarcity (such as befell California).  Another example of how one could establish an automatic regulation in finance would be to ban tranche-ing, preventing one step of the process by which uncertain assets can be repackaged into a more marketable form. Restoring transactions on margin, or establishing a small transactions tax would further reduce speculative bubbles, market “hurn,” and pump-and-dump schemes without restricting long-term investment. If these ideas seem a little scattered, and underdeveloped, I accede to that, but I would point out that all of them rely on relatively simple prohibitions or requirements, reducing the effort of oversight.
2. Competing Public Ratings Agencies – one major area of the financial sector whose inherent weakness has allowed bubbles to become more frequent in recent years is the fact that the major ratings agencies for stocks, bonds, derivatives, and so on are for-profit private institutions whose livelihood depends on a reputation for providing good ratings for their clients. In this, we see a parallel between virtually all of our recent financial scandals – in the Enron/WorldCom/etc. corporate scandals of 2003, it was accounting/consulting agencies who helped conceal the bookkeeping fraud that made most major American corporations seem more profitable than they really were; in the housing bubble, the subprime/securitization/tranching system wouldn't have functioned without housing evaluators whose conflict-of-interest-ridden valuations helped spiral real estate prices out of rational bounds. Hence, I would argue that one major systemic change that should be done is to create a number of public rating agencies for stocks, bonds, other securities, and real estate, who would be required to use common standards of valuation, and whose ratings would only be published as averages – complicating if not completely eliminating the process of agency capture.
3. Right of Private/State Suit to Enforce – arguably one of the most important elements in the civil rights bills of the 1960s were the provisions allowing private citizens to bring suit to protect their own rights (Title VII of the 1964 Civil Rights Act, and Section V of the Voting Rights Act), allowing enforcement to continue even when the government was hostile to civil rights enforcement. In recent years when the regulatory agencies have been captured by conservative ideologues, the use of state suits to force the EPA or similar agencies to enforce the laws have been crucial in preventing the total undermining of environmental and other regulations. Hence, one crucial factor in creating automatic regulation must be a clear mechanism to allow private groups, state attorneys general, and the U.S Justice Department to bring lawsuits against both regulators and the subjects of regulation to require that bright lines be enforced.