Obama’s proposed plan for college education falls short

Posted by Shyam Moondra

Recently, President Barack Obama proposed a plan to make college education more affordable. The Obama plan has some good elements but overall it falls short of what is really needed to control the sharply escalating college tuition and fee. Aside from the ever increasing health care cost, the only other cost which is not showing any sign of slowing down is the cost of college education. The high cost of college education is affecting the finances of an increasing number of middle-class families that are not rich enough to be able to afford to pay ever increasing tuition and fee nor poor enough to qualify for financial assistance in any meaningful way.

The following are the reasons why the cost of college education is getting out of whack:

• In recent years, the compensation of the Presidents of colleges and universities has increased by a factor of 4-5, in line with the excessive compensation increases of the executives at the private sector corporations.

• The concept of tenure is making it impossible to fire non-productive faculty members whose compensation in recent years has increased at thrice the rate of general inflation, with some professors making more than $1 million a year. The guaranteed job security, irrespective of job performance, is not a prescription for achieving the best possible education per dollar of expenditure. Even presidents and prime ministers don't have a guaranteed job; their re-election is dependent on their job performance.

• More and more universities and colleges are spending more and more money on sports activities. Building new stadiums and showering athletic departments with lavish budgets have become fashionable these days. Now the desirability of schools is judged not based on academic standing but based on the popularity of their sports teams.

• The endowments of many colleges and universities have grown big enough to match the annual budgets of many countries running into billions of dollars, and yet these schools are spending proportionately less and less on financial aid.

Up to this point, the government has introduced tax credits and provided more funding for student loans to help many families pay for college education, but that's just the wrong approach. Rather than finding ways to pay for inflated tuition fees (which only encourages schools to increase the tuition even more), the government needs to find ways to roll back the artificially inflated tuition by at least 30%. The Obama administration and the Congress need to push for a higher education reform legislation that will have the following elements:

• Limit the compensation of the administrators of the colleges and universities.

• Craft the tax laws in such a way so as to penalize the institutions that increase the tuition fee in excess of the general inflation rate. The Obama plan withholds financial assistance to the schools that don’t control tuition increases, but that’s not quite the same thing as making them pay higher taxes.

• Impose hefty taxes on rich school endowments that do not spend a specified minimum portion of their incomes on helping needy students with financial aid. Those schools that fail to spend the required minimum amount must surrender those funds to the government to be used as part of its student loan program.

• Limit how much money educational institutions can spend on sports activities. This whole radical trend of sportization of educational system is forcing the schools to increase tuition fee to be able to cover the ever increasing budgets of their athletic departments.

• There are just too many universities and colleges, duplicating the administrative overhead and other expenses for common functions. We should find a way to encourage the institutions to merge to reduce common costs and pass along those savings to the students.

• A consideration should be given to regulate the tuition and fee of colleges and universities via federal or state-level Public Education Commissions, in the same manner as many utilities are regulated today via Public Utility Commissions.

While Obama deserves credit for focusing on the critical issue of affordability of higher education, his approach of throwing more money at the problem, at a time when the Congress is in no mood to add to the budget deficit, falls short of what is really needed to get the college education cost under control.

Market impediments dissolving - DJIA headed to 18,000

Posted by Shyam Moondra

The U.S. economy has been steadily gaining momentum with industrial production, retail sales, consumer confidence, productivity, and GDP, all gradually increasing. The corporate profit margin is at 18-year high and the corporate balance sheets show a record cash hoard of close to $3 trillion. The auto industry is selling vehicles near record levels with GM reporting the highest profits ever in the latest quarter. Even unemployment rate, currently at 8.3%, has begun to decline, albeit slowly.

The recovery from the 2007 recession has been slower than usual and economy is taking longer than usual to get back to the pre-recession level. There are many reasons for this sluggish recovery: first, the 2008 financial crisis led to credit freeze that caused the recession to be more severe than other recessions of recent decades; second, extraneous factors such as Japan’s tsunami devastation, Europe’s debt crisis, and political gridlock in Washington, DC on the question of extending the debt ceiling made it impossible for the U.S. economy to recover in a timely manner. Every time economy seemed to show signs of recovery, it would be knocked down again and again by extraneous factors.

The following trends suggest that all the pieces are now coming together and the pace of the U.S. economic recovery will become more intense and the financial markets will show sustained significant appreciation over the next 2-3 years, with the Dow Jones Industrial Average (DJIA) hitting an all-time record of 18,000:

• The political gridlock in Washington, DC is becoming less intense, as is evident from the recent rather quick agreement between the Democrats and Republicans on extending the payroll tax cut until the end of this year. Republicans learned from their contentious way of handling the debt ceiling debate, which led to the downgrade of the rating of the U.S. government securities from AAA to AA+, that they were losing public support in a big way with a disapproval rating of Congress hovering around 90%. This doesn’t mean that political gridlock is gone for good, but it does mean that Republicans would have no choice but to behave or else they will end up losing the general election in November. The tranquility on Capitol Hill is having a positive effect on the corporate confidence that has in recent weeks led to increased capital spending, brightening the job prospects.

• The on-again and off-again EU debt crisis has caused up-and-down movements in the U.S. financial markets. However, yesterday’s agreement on a second bailout for Greece is finally bringing some closure to this issue. The EU debt problem is by no means completely resolved, but the recent developments have brought more clarity and given some breathing space to deal with the problem in an incremental way over the next 2-3 years. The EU debt situation was a big impediment for the U.S. stock markets; so with the latest Greece bailout agreement, we can now expect the stock markets to move up.

• The Federal Reserve Board recently announced that they will maintain their low-interest rate policy through 2014. They also said that the Quantitative Easing 3 (QE3) remains on the table (although as the economy gains momentum, the chances of QE3 are eroding by day). Low interest rates combined with relatively low inflation are creating an ideal environment for stock markets to appreciate considerably. The up-tick in stock prices will lead to increased consumer spending, giving a big boost to the economic recovery.

• The signs are beginning to emerge about the bottoming out of the housing market. The recent $25 billion settlement between the major banks and the federal and state governments bode well to bring down foreclosures in the coming months. The home builders are expressing increased confidence and are now increasing the pace of new construction. Increased housing prices in the coming months will act like a stimulus to economy, thereby aiding the overall economic recovery.

• The present market valuations are too low and stocks look very attractive. The current S&P 500 has a PE of around 14 (recent peak in 2000 was 35). The forward PE is currently at 13, making the stocks very cheap at a time when corporate earnings are at an 18-year high. It’s remarkable that companies like Apple have continued to produce record profits during the current recession and yet the PE ratios remain at levels of 10 years ago. This shows that at current prices there is tremendous potential for stock price appreciation.

In spite of the above favorable trends, there are worrisome issues on the horizon that the government agencies such as SEC and CFTC need to address. The SEC needs to be more aggressive in dealing with the problems of market manipulation and insider trading. With the advent of high-speed computers, the big players have found ways to manipulate the markets via high-frequency trading and quote-stuffing that are turning off small investors, who question the integrity of the markets. The recent speculative oil price increases, at a time when seasonally we expect lower prices, point to the need of stronger measures by CFTC in making sure that commodity markets are not manipulated by speculators.