FARAI CHIDEYA, host:
The federal stimulus package is one of those places where politics meets economics. Now that the president is poised to sign the bill, what will shake out for you and your family and how are investors reacting to the volatile stock market?
For more I'm joined by Bill Spriggs. He's a professor and economics chair at Howard University. Hi, Bill.
Professor BILL SPRIGGS (Chair, Economics, Howard University): Hi. Thanks for having me today.
CHIDEYA: Well, this so this week the president plans to sign this economic stimulus bill. It could give wage earners up to $600 plus parents up to $300 per child. So how will this affect people in the short run and the long run?
Prof. SPRIGGS: Well, in the short run it will help to shore up the economy. We saw that consumers weren't making retailers very happy last month. They shied away from the stores. This money puts right in the pocket of folks who are going to spend something to help them to get through this tough time.
It's necessary because of the drop in consumption.
CHIDEYA: When the government is spending over $150 billion on a stimulus bill like this, will that have a long run effect on how every person gets a check has to pay out their taxes in the future, has to deal with the realities of how much service the federal government can give in the future? I mean, will there be a sort of back-end re-tax for people who might get a cut in the short run?
Prof. SPRIGGS: I wouldn't put it that way. The problem is in the short run will people be much worse off and will they be able to recover from that? Because during a recession it's not unusual for families to lose two or three percent of their income. So the issue is do you want to lose that two or three percent because in the future you don't want to get a tiny tax increase to balance the budget.
So I think you have to think about what's the potential loss in income, which can be huge if we have a severe recession, or even a mild recession like the one we had in 2001.
CHIDEYA: Well I guess conversely then, I mean, if you are looking at the perspective of how much a recession could hurt, which is certainly, you know, the biggest factor here, is this enough? Is a $600 check enough? If you have a family, for example, where you qualify for two $600 checks for the parents and two $300 for kids, is that enough to really forestall a recession if it's looming?
Prof. SPRIGGS: Well, you have to add in your aggregate. So it gets back to the big number, the 150 billion, and whether putting 150 billion into the marketplace is going to really offset the potential drop that we may have. In the long run we will have some other problems.
If firms continue the trend of not creating jobs, if over the last month we saw jobs lost, if they continue to cut jobs, then we're going to have some other problems. We have to look at unemployment insurance, something that the president and Republicans in Congress totally denied was an issue. This past quarter, the third quarter of 2007, there were about 650,000 Americans who exhausted their unemployment benefits.
We've also seen that the long-term unemployed, people unemployed more than 26 weeks, because those are the ones who will exhaust their benefits. That trend has been going up, the share of unemployed workers, unemployed for more than 26 weeks. So with job cuts we're going to see more long-term unemployed, we're going to see more people exhausting their unemployment benefits, and those are folks you have to get money to right away.
CHIDEYA: You mentioned unemployment, and that was something that was originally in one version of the stimulus package and it was left on the cutting room floor as people made their compromises. Do you think that that's going to, the failure to add more unemployment insurance, is going to really undermine the efforts to keep the economy afloat?
Prof. SPRIGGS: Oh, I think it will. It was a necessary compromise because the president and the Republicans in Congress don't seem to think there's a recession coming and we're very reticent to do anything. So the compromise was trying to get as much money into the hands of middle class working Americans to make sure that we could keep the economy afloat.
But in the end we're going to have to revisit the unemployment insurance system, which is the bulwark of our automatic safety net. It kicks in if Congress will be willing to act by letting Congress extend the benefits.
CHIDEYA: What about the whole impact of race in this socioeconomic equation. There's many times when black Americans are viewed as the canary in the coal mine. And you see unemployment's number rising faster in the black community than you do in America at large. What is happening now and what is going to unfold, do you think, in African-American communities?
Prof. SPRIGGS: Well, we could see continued spikes on the black unemployment rate. African-Americans are the one who are more likely to exhaust unemployment benefits because we are more likely to have long-term unemployment. So this is a real strain coming up for the African-American community if we continue to see job cuts take place.
The unemployment rate for blacks tends to spike early on when job growth slows and then we tend to be the last hired. And then when jobs actually start being cut, we start to lose because we tend to also be the first ones fired.
CHIDEYA: Give me some examples of what might happen in a place like Washington, D.C. You know, you're at Howard University, you're in the heart of Washington, D.C. and it's a very, in some ways, very much a typical African-American community-based city, in other ways completely diverse both socioeconomically and racially. How do you see the poor African-American neighborhoods in the District being affected potentially by some of the trends in jobs and some of the trends in the economy?
Prof. SPRIGGS: Well, D.C. is (unintelligible) because we have the federal government, which tends not to go into recession as badly. But this region has become much more prominent with the private sector, particularly the information technology industries which heavily hire African-Americans here on the East Coast and in the D.C. corridor. So, it is very likely that those companies may see some job layoffs. And because African-Americans are equally represented in information technology industries - both Web pages and telephone communications and all of those types of things, and they are a big part of the private sector here in D.C. - we will see some pain in the suburbs of Washington.
CHIDEYA: Now, the stock market is volatile. Some investors expect that they may have safer bets if they're not investing in stocks. Some of - many of us if not most of us don't invest directly. But when you think about the options that are out there that are driving the economy at large, tell us a little bit about money funds.
Mr. SPRIGGS: Well, the money funds are not only fleeing the stock market, they're also fleeing the bond market. There are number of securities that people just aren't sure of, and they are trying to avoid those that are riskier. So, in addition to leaving the stock market, they're lowering the price of bonds, which is creating a bigger spread on a lot of these bonds.
It makes it harder for banks to hold those as assets. And once banks start to flow out of them, pension funds start to flow out of them - the way that most of us own these things indirectly is through pension funds. It creates a real ripple effect because the banks now put themselves in a position that's slightly less liquid.
CHIDEYA: Explain what you mean by slightly less liquid.
Mr. SPRIGGS: They have less money to loan. They are revaluing their assets down, and they can't loan as much money.
CHIDEYA: So when you take a look at this exodus of some money from the stock market and even from the bond market, how does it affect people who aren't directly investing, people who may have a 401(k) or a pension plan but who are not, you know, keeping track of what these big institutional banks are doing? What does that mean on a very grassroots level?
Mr. SPRIGGS: Well, during the last recession, billions - hundreds of billions of dollars went out of 401(k) funds, as well as pension funds, and it took us about three years to get that money back because of the drop in the stock market value of the assets that those funds invested. So, a similar decline means hundreds of billions of dollars gone. People who would be retiring now would face much lower benefits in retirement. They may have to do as they did in 2001 - hold on. We saw many people in their late 50s who did not retire in the recession of the early 2000s because they - their portfolios weren't worth as much money.
CHIDEYA: Let's move on to a final topic of the college loan industry. It could soon be under a microscope. And last week, the House passed legislation that would compile a list of the most expensive schools in the U.S. and how loan companies shop their services to those students. What impact would that have on student loan companies, if anything?
Mr. SPRIGGS: Well, it's going to make the business a lot more transparent, so that people can see if there are conflicts of interest between universities and the loans that they are presenting the students. The direct student loan program that the federal government itself does is, of course, the cheapest way, the most efficient for the government to support student loans. And this -putting sunshine on these relationships may, in fact, encourage people and encourage universities to try their best to use the direct student loan program.
CHIDEYA: What would be the conflict of interest? What kind of situations are we talking about that exist now that might be eliminated?
Mr. SPRIGGS: Well, we found in the last couple of months that there were a number of universities where the financial aid officers were actually getting kickbacks or rebates or other favorable treatment from the loan companies if they would make specific loan companies sort of the first loan that would be pushed at students. And that type of thing - I don't think parents would have imagined - was taking place, and agreeing to a loan would have been - you would have imagined - something that was just normal business.
Now, a number of the more expensive universities have huge endowments and have actually moved away from offering loans. The price of the college is kind of a misleading price, because at many of the leading institutions where the prices are very high, only a small share of the students actually pay that full sticker price. So you'll get some information by seeing what that price is, but it's really intended for the wealthiest people in the United States who pay full freight. But many middle-income and lower-income families won't ever pay that kind of amount at some of the more elite schools that have billion-dollar endowments.
CHIDEYA: So, when you take a look at what's shaking out for students, I assume that many people are really looking at this mix of, you know, Pell Grants and et cetera, et cetera, et cetera, but most people are still taking loans. Is that correct?
Mr. SPRIGGS: Well, if you're not one of those elite schools, students are still taking on loans in order to finance, and particularly if they are at state institutions. And one of the things that the bill tries to do is to reign in the movement that many states got into of pushing the cost onto the students and away from the states.
So, that's one of the more controversial provisions in this legislation, that states will no more longer be able to just make those cuts, assuming that students will pick up the bill.
CHIDEYA: When you look around a school like yours, Howard University, long-storied history, what has the school done, do you think, to make outreach to students who may not be able to pay full freight?
Mr. SPRIGGS: Well, we have a number of scholarships, and the university continues to be aggressive in trying to raise scholarship money. Howard is still a bargain when you compare it to other private universities here in Washington, much lower tuition than is common here in the Washington, D.C. area. And the university is very aware of the income difference between blacks and whites and understands that while it may be that the top one percent can pay Georgetown tuition, if we look at the white-income distribution, the top one percent is not the same thing for the black-income distribution
CHIDEYA: Bill, thank you so much.
Mr. SPRIGGS: Thank you.
CHIDEYA: Bill Spriggs is a professor and Chair of economics at Howard University. He spoke with me from our NPR headquarters in Washington, D.C. And next on NEWS & NOTES, why the Jena Six have lost some supporters, plus on Sunday's Grammy Awards, giving props to music with classic flare. That's in our Bloggers' Roundtable.