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Education Gap May Lead to Income Gap for the US June 28, 2006


A lot has been written up about the American education system failing our kids, while Europe and Asia’s education system is churning out many more Ph.D.s and M.D.s than the US education system. (Google some news stories on the US Education System). But what about the economic consequences of our failing schools? On a personal income level, workers with a high-school diploma earn on average $18,734 a year, according to the Census Bureau, while high school graduates earn $28,000 a year. The average worker with a bachelor’s degree earns three times as much as a high-school dropout.
On a macro level, if there’s a widespread difference between the US students and the rest of the world, the lack of qualified workers will slow our economy. What’s the difference between US and Chinese students? NY Times’ Nicholas Kristof writes in his column from yesterday:

…In math, science and foreign languages, the Chinese students were far ahead.

My daughter was mortified when I showed a group of Shanghai teachers some of the homework she had brought along. Their verdict: first-grade level at a Shanghai school.

…One reason Chinese students learn more math and science than Americans is that they work harder at it. They spend twice as many hours studying, in school and out, as Americans.

Chinese students, for example, must do several hours of homework each day during their summer vacation, which lasts just two months. In contrast, American students have to spend each September relearning what they forgot over the summer.

…only 13 percent of American high school pupils study calculus, and fewer than 18 percent take advanced biology.

Yet if the Chinese government takes math and science seriously, children and parents do so even more. At Cao Guangbiao elementary school in Shanghai, I asked a third-grade girl, Li Shuyan, her daily schedule. She gets up at 6:30 a.m. and spends the rest of the day studying or practicing her two musical instruments.

So if she gets her work done and has time in the evening, does she watch TV or hang out with friends? “No,” she said, “then I review my work and do extra exercises.”

A classmate, Jiang Xiuyuan, said that during summer vacation, his father allows him to watch television each evening — for 10 minutes.

The Chinese students get even more driven in high school, as they prepare for the national college entrance exams. Yang Luyi, a tenth grader at the first-rate Shanghai High School, said that even on weekends he avoided going to movies. “Going to the cinema is time-consuming,” he noted, “so when all the other students are working so diligently, how can you do something so irrelevant?”

…Now, I don’t want such a pressured childhood for my children. But if Chinese go overboard in one direction, we Americans go overboard in the other. U.S. children average 900 hours a year in class and 1,023 hours in front of a television.

You say it can’t happen? Bill Gates and Warren Buffett are worried enough to donate $60billion of their money into the Bill and Melinda Gates Foundation to focus on education and global health. If we don’t do anything to improve graduation rates and education in the US, our kids and grandkids’ incomes will drop.

Source:
Chinese Medicine for American Schools, NY Times (subscription required)
By Nicholas D. Kristof
Published: June 27, 2006

Gut-check: Economy vs Personal Finance in America June 13, 2006

Here’s a non-technical analysis on what’s going on now. According to this CNN/Money article, net household wealth hits record high, but debt rose at the fastest rate since 1986, the Federal Reserve said on Thursday. At the same time, America has a negative savings rate. So let’s summarize the household financial status this year,

Here’s the economic environment we’re in today:

From what I’ve seen out there, there are a lot of nervous economists out there…not to mention us people who are doing our best to support our families. Do the figures above say anything about Americans?

Source:
News Release: Personal Income and Outlays, Department of Commerce, Bureau of Economic Analysis (BEA), May 2006
Consumer Price Index Summary, April 2006

Lazy Spendthrift Generation Y? But Who Spends All of the Gov’t Revenue? May 15, 2006

A day after Hillary Clinton lashed out on Generation Y’s work ethic, her daughter, Chelsea, called to complain. Clinton apologized and didn’t mean to convey the impression that they don’t work hard.

Backing away from her assertion that the current generation is lazy, Senator Hillary Rodham Clinton said on Sunday that she simply wanted to “set the bar high” when she told an audience last week that young people today “think work is a four-letter word.”

Flexo of Consumerism Commentary mentioned that Chelsea is a Gen Y’er that worked hard for that money, just like every other child of super-popular people. Maybe not the super-popular (Paris and Nicole come to mind), but there seem to be plenty of Generation Y of the super-rich that work hard. Both Bill Gates and Warren Buffett (number 1 and 2 richest people in the world) vow that their children will not receive an inheritance to encourage them to make their own way in the world as are Gen Y’ers like Chelsea Clinton, Jamie Johnson and Nicole Buffett. It’s good to see that there are rich people who want to raise hard working, responsible citizens of the world.

‘IRA’ of Inchoate Random Abstractions, also posted about Gen Y’ers working hard. Although some Gen Y’ers have a sense of entitlement, but I have to agree that we (Gen X and Y) will have to pay for the boomer genration’s over-spending habits. Who’s going to end up paying for the $9trillion National Debt?

Source:
Chided by Daughter, Clinton Says Youth Are Not Lazy
By ANNE E. KORNBLUT and RAYMOND HERNANDEZ, NY Times

Info: Tax Bracket and Marginal Tax Rate May 11, 2006

I’ve mentioned before that in some cases the added tax you pay when your income goes up isn’t the same as your tax bracket. Some don’t realize that your tax bracket is the rate you pay on the “last dollar” you earn. As a percentage of your income, your tax rate is generally less than that.

For example, suppose your taxable income (after deductions and exemptions) was exactly $100,000 in 2005 and your status was Married filing separately; then your tax would be calculated like this:

( $ 7,300   -   0 )   x .10 :       $   730
( 29,700   -   7,300 )   x .15 : 3,360
( 59,975   -   29,700 )   x .25 : 7,568.75
( 91,400   -   59,975 )   x .28 : 8,799
( 100,000   -   91,400 )   x .33 : 2,838
    Total:   $ 23,295.75

This puts you in the 33% tax bracket; but as a percentage of your income, your tax is about 23.3%.

Yesterday’s announcement on the tax cuts in the US extends to 2010 the 15% tax rate on most dividends and capital gains, which benefits the wealthier tax payers, who would otherwise pay the 35%, which is the tax bracket for married earners of over $168,275 or single earner making over $336,550.

Related:
Common Tax Bracket Mistakes

Tax Bill Agreement Possible - Will It Help Us? May 10, 2006

Tax writers in Washington D.C. reached an agreement that would extend lower rates for investors and shield middle class (see entry on economic classes) taxpayers from the alternative minimum tax (AMT) for another year.

Here are the highlights:

With high earning taxpayers being allowed to convert their IRAs to Roth IRAs, the gains earned in those accounts would grow tax free, whereas in a traditional IRA they would have been taxed as income upon withdrawal. This will probably create some initial revenue for the government as people convert IRAs to Roth IRAs.

Source:
House GOP ready with $70B tax cut
By William L. Watts, MarketWatch

America’s Hidden Poverty May 8, 2006

When we were young, we were taught to help the poor, since we were American and privileged to be part of this great nation. We raised money, food and clothing to send through the Red Cross to countries such as India, Bangladesh, China, South America, and Mexico. Somewhere along the way, our nation neglected the poor among the Americans. An article in today’s NY Times about America’s Near Poor shows the vulnerability of middle and lower class Americans. Climbing poverty rates and rising level of debt suggests a deepening insecurity. More people work in jobs without health care or insurance. Because many of us, myself included, come from privileged backgrounds, we don’t notice the millions of Americans living in poverty. The article states:

About 37 million Americans lived below the poverty line in 2004, set at $19,157 a year for a family of four. But far more people, another 54 million, were in households earning between the poverty line and double the poverty line.

That’s a total of 91 million Americans earning $38,314 (double the poverty line) or lower. Our previous discussion of economic classes highlighted the growing gap between upper class and lower class. It’s sad to hear that approximately 1 out of 4 families earn less than $40,000. Americans are at a period of growth, but at the expense of the lower class. We still have the thought of kids with distended stomachs in India as the picture of poverty. But the tables have turned and it’s countries like China and India who are supporting Americans with our debt addiction. We can’t ignore/hide these problems in our own backyard.

Source:
America’s ‘Near Poor’ Are Increasingly at Economic Risk, Experts Say
By ERIK ECKHOLM
Published: May 8, 2006

US Addictions: Gasoline and Spending May 2, 2006

The USA is addicted. Addicted to gas and addicted to spending (i.e. not saving), and we are not making any sacrifices to fix these addictions. Last week’s story from the NY times on gas prices going up raised an eyebrow for me for one reason. So far, the $3 per gallon price has not persuaded many commuters to change their behavior. According to the article, there has been no increase in registration for a program that arranges carpools and vanpools for the county that includes Seattle and Bellevue. What are people are waiting for? At what price does gas have to be in order for people to start changing their habits? For all the anger and talk about “rediculous” gas prices and the fall of consumer oriented businesses, Americans aren’t sacrificing their bad habits.

This reminds me of Americans not sacrificing to save money for emergency funds thinking that there are other ways to get money, either by taking out more loans or tapping home equity to pay for emergencies. There’s no need to wait for hybrid cars to be more mainstream, for fuel cells or a new government fuel economy mandate when we can drive less, trade down to a more fuel efficient car, or carpool. We have the means to reduce our gasoline consumption NOW without expensive technology. We also have the means to adjust our standard of living without much sacrifice. When we realize that the World’s oil is tapped or our home equity is tapped, we won’t have the luxury of making more. Can we kick our bad habits??

Source:
As Gas Prices Go Up, Impact Trickles Down
By THE NEW YORK TIMES
Published: April 30, 2006

Economic Classes in the USA April 25, 2006

Our family grew up in what I think is an upper class neighborhood. I had friends whose family had huge homes, nice cars (Ferrari, Porsche, Benz), and parents who owned businesses or were executives. Our family was comfortable, but we didn’t own the 6000 sq. ft. mansions, sports cars. In other words, I believed that we were upper middle class family in an upper class neighborhood. Our discussion about class in America prompted me to think about what class I am in. Although I knew that the lower class didn’t have much net worth or did not hold management-type jobs, I never thought about what made a family middle class vs upper class.

According to wikipedia, the US has no legally-recognized social classes. Elites exist, but are numerous and there is no universally recognized hierarchy of people. Generally, sociologists use a five class model:

  1. Upper class
  2. Middle class: Upper-middle classs
  3. Middle class: Middle-middle classs
  4. Middle class: Lower-middle classs
  5. Lower class
  Upper class Upper-middle classs Middle-middle classs Lower-middle classs Lower classs
Proportion 1% to 3% of the U.S. population 10% or so of the U.S. population 40% or so of the U.S. population 30% or so of the U.S. population 20% of the U.S. population
Net worth
(not including home)		 above $500,000 between $250,000 and $500,000 between $125,000 and $250,000 $50,000 to $125,000 $0 to $50,000

There’s a lot of fuzzy borders between the classes, and there are no clear cut answers, but this gives us some idea of the classes in America. It’s said that the wealth of the top 1% in the United States equals the wealth of the lower 95%. I belive that the spreading wealth gap is causing a smaller proportion of middle class in American society. The reason may be downsizing in some industries of the American economy, competition from lower-paid foreign workers and contractors, and the systematic elimination of unionized labor.

There’s also a lot of discussion on Oprah’s message boards about class in America where there’s some interesting perspectives. Do you ever think about what class you’re in? Do you worry about the widening income gap between classes?

Source:
Wikipedia - Social structure of the United States
http://federalreserve.gov/pubs/bulletin/2006/financesurvey.pdf

Women Shopping Habits and Class in America April 24, 2006

According to a Financial Times article today, lower-income women (with less than $45,000 annual household income) confined their weekly shopping to the mass merchandisers, super-centers, and dollar stores while high-income shoppers (with annual household income of more than $75,000) shopped in drug stores, department stores, specialty stores and warehouse clubs.

…women shoppers were “even more prudent and price conscious and even less willing to pay a premium for convenience” than two years ago. Their attitudes to shopping are all focused on saving money.

From what I’ve seen with friends and family, it seems that every family, regardless of economic class shops at discount warehouse stores (such as Sam’s Club or Costco) and are more conscious of prices. Perhaps the growing gap between low income and high income shoppers widening is a big reason that the lower, middle, and upper middle class are increasing in number.

Speaking of classes, The Oprah Show had an episode about class in America. Jamie Johnson, an heir to the Johnson & Johnson Pharmaceutical company, shares with Oprah some interesting and depressing facts about the rich and poor gap:

Do you think this lopsided wealth, concentrated on the top 1% of Americans is related to the topic of shopping habits above?

Source:
Shopping Habits Shift as Women Watch Their Wallets
by Lauren Foster of Financial Times

Tax Return Deadline and the End of Cheap Money April 14, 2006

Congratulations on Finishing your Tax Returns…That is unless you have yet to finish them. If you haven’t finished your tax returns, you have until Monday to send them off. Check out Bankrate.com’s 10 things to check before you send off your return. If you have completed them, congratulations! Take the weekend to relax, or go out for dinner.

Not to spoil your tax celebrations, but it looks like the era of cheap money may finally be nearing its end. Today’s NY Times article today shows why borrowers will soon be paying more on mortgages and home equity loans, even though economists have struggled to explain why long-term interest rates have remained relatively low, given the government pushing up interest rates by increasing its benchmark short-term rate, now at 4.75 percent.

Driven by a stronger economy and a nearly two-year money-tightening campaign by the Federal Reserve, the rising level of interest rates across the board is expected to have the biggest impact on people who took out home loans with low introductory interest rates that are set to adjust in line with market rates in the next few years…

The Mortgage Bankers Association estimates that the burden of higher interest costs would fall on about 7 percent to 8 percent of all homeowners. The rest have either paid off their mortgages or face no immediate increase because they took out fixed-rate mortgages or refinanced their earlier loans to mortgages that hold rates steady for 5 to 10 years.

At the same time, new homebuyers will be paying more.

The average national 30-year fixed mortgage interest rate was 6.43 percent last week, up from 6.21 percent at the start of the year and 5.71 percent at the start of 2005, according to Freddie Mac. The introductory interest rate on a five-year adjustable-rate mortgage was up to 6.11 percent, from 5.78 percent in January and 5.3 percent a year ago.


(mortgage chart courtesy of Bankrate.com, as of 4/14/06)

Source:
Treasury Rate Signals Burdens for Borrowers
By VIKAS BAJAJ, New York Times
Published: April 14, 2006

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