Page 3 of 3 The hard and simple maths of crisis
By Julian Delasantellis
Consider University City, the West Philadelphia neighborhood
surrounding the University of Pennsylvania. In an effort to improve the area,
the university committed funds for a new elementary school. The results? At the
time of the announcement, in 1998, the median home value in the area was less
than $60,000. Five years later, according to The Philadelphia Inquirer, "homes
within the boundaries go for about $200,000, even if they need to be totally
renovated". The neighborhood is otherwise pretty much the same: the same
commute to work, the same distance from the freeways, the same old houses. And
yet,
in five years families are willing to pay more than triple the price for a
home, just so they can send their kids to a better public elementary school…
This phenomenon is not new, but the pressure has intensified considerably. In
the early 1970s, not only did most Americans believe that the public schools
were functioning reasonably well, but a sizable majority of adults thought that
public education had actually improved since they were kids. Today, only a
small minority of Americans share this optimistic view. The majority believes
that schools have gotten significantly worse.
Oh. It's that.
If you're not from America and can't read between the lines here, what Warren
and Tyagi are saying is that white America with kids has allowed itself to be
baited into a bidding frenzy for places for their children in predominantly
white schools. Since, in the vast majority of cases, American children go to
school in the community in which they live, that means that the rise in US
house prices, according to Warren, is all due to competition to get into those
overwhelmingly white classrooms.
Warren is quick to note that this does not mean that everyone coming out of a
white school is destined for Harvard, and not everyone out of a black school
destined for San Quentin. There are extraordinary black-majority-enrollment
schools, just as there are lackluster and uninspiring white-majority schools.
It's just that white American parents (and a much smaller number of upper
income black parents) are playing the percentages. They see the racial and/or
ethnic character of their communities changing in a manner not to their liking
and they're not waiting around to see if the resultant schools are one of the
few that are extraordinary, or the many that fail both their students and
communities.
How did this situation come about? Education has always been funded locally in
America, from local property taxes. This means that wealthier communities have
always been able to fund a better education, featuring newer biology labs or
faster computers, much easier than poor communities.
The administration of president Lyndon B Johnson's "Great Society" attempted to
equalize school funding across rich and poor. These efforts were eviscerated in
the anti-tax fervor of the Ronald Reagan revolution, and have never really been
resuscitated. In 1974s Milliken vs Bradley US Supreme Court case, the
justices upheld the sanctity of school district lines that separated white
suburbs from black inner-city cores, banning mandatory busing, as well as an
accompanying mixing of rich and poor communities' school finances, to achieve
racial integration between the two.
As the black family and community disintegrated into a miasma of illegitimacy
and crime in the 1970s, white parents were left on their own. They had to find
a way to get their kids into those better schools and communities. The first
solution was to bring all hands up on deck. According to Warren and Tyagi:
Family income rose ... because millions of mothers decided to enter the
work force. Over the course of a few decades, the change has been
revolutionary. As recently as 1976, a married mother was more than twice as
likely to stay home with her children as to work full-time; by 2000, she was
half as likely. Today, mothers are going back to work much sooner after their
children are born. A mother with a three-month-old infant in 2001 was more
likely to be working outside the home than a woman with a five-year-old child
in the 1960s. And in 1965, only 21% of working women were back at their jobs
within six months of giving birth to their first child. Today that figure is
higher than 70%.
But, like an arms race, eventually all the
wives were working, so no one family could gain a competitive advantage in
bidding for a house in a desirable community just by sending the missus out
into the workforce. A new source of ammunition for the bidding wars had to be
found. That, of course, was through leverage-borrowing.
The old standard that families should spend no more than 25% of their monthly
income on mortgage and other housing related expenses got blown out early; by
the top of the housing boom in 2006 reports of families spending 50% or more of
monthly income on mortgage payments were not uncommon.
When the house piggybank was emptied there was always plastic. According to
Warren and Tyagi:
A generation ago, the typical family owed about 5% of
its annual income in consumer debt - non-mortgage debt such as car loans and
credit cards. Today such debts add up to more than a third of total annual
income.
This was how the extraordinary 2006 360% total US
public and private debt to GDP ratio was generated. This metric had been
relatively stable in between 140 and 180 from about 1940 to 1985. After that
(probably around the time that the last wife entered the workforce) it began
its meteoric rise, as US families with children jousted with plastic swords
containing magnetic stripes on the back to get their kids in into the most
desirable suburban schools.
Then, two years ago, the money flow stopped, the deleveraging of all that
credit card and other debt commenced, and everything went into reverse - just
as many of those said same parents were hoping to unsheathe the home equity
loan and/or plastic one last time to finance junior's education at just the
"right" private college.
And there's the easy explanation for the financial crisis - the money to keep
the debt pyramid growing and expanding to ever and ever more far-flung suburbs
just wasn't there anymore.
Looking back on the whole enterprise, it might have been better had the 1970s
parents, instead of packing up and running into the virgin suburban woods,
stayed on and fought to make their communities better. Yes, things might have
been better, and certainly easier, had not the American cowboy spirit of
freedom and cantankerous independence called them for a round-up way out there
beyond the last circumferential highway. Very few Americans know what
communitarianism is; if pressed, they'd probably say it was something dirty, as
if you could get venereal disease from it or something.
Over there in Beijing, David X Li must view the whole matter with delicious and
exquisite serendipity. Twice now in his life he's witnessed the mad
irrationality of rampaging mobs. First, as a child, during the Cultural
Revolution, he witnessed crazy mobs who believed that all society's problems
stemmed from education and organization. Later, he witnessed a mob of American
homeowners, aided and abetted by a separate, irrational mob of Wall Street
financiers (using Li's Gaussian copula) who believed all would be right just
one more suburb over the horizon.
Julian Delasantellis is a management consultant, private investor and
educator in international business in the US state of Washington. He can be
reached at juliandelasantellis@yahoo.com.
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