Unscheduled staff absence due to illness or other reasons can be very costly for employers, official statistics and survey data reveal. In the UK it was reported by the Health and Safety Commission that 36 million days of work were lost due to sickness absence in 2006 and 2007, and the Chartered Institute of Personnel and Development (CIPD) estimated the annual cost of sickness absence to UK employers to be £659 per employee. An earlier study by the Institute of Employment Studies (2001) had put the potential costs much higher at between 2% and 16% of the total salary bill, or up to £2,271 per employee. This study found that employers significantly underestimated the costs to their organizations of unplanned absenteeism.
In the United States, the 2007 Mercer National Survey of Employer-Sponsored Health Plans, which covered 455 employers, found that the equivalent of around 9% of total salary costs were incurred due to unplanned absence. However, the costs of unplanned absenteeism in the U.S. vary considerably between different types of organizations, being much higher in the U.S. public sector than in the private sector, for example, due to a higher rate of sickness absence among government employees. Illness is by no means the only reason for unplanned absence – the CCH Inc. 2000 Unscheduled Absence Survey found that sickness absence accounts for only around 40% of all unscheduled absenteeism, followed by family factors which account for 21% and “personal needs” accounting for 20%. However, there is international evidence of a worrying increase in sickness absence, especially long-term absence, which is related to stress and other mental health problems. In the UK, a study by the Sainsbury Centre for Mental Health puts the total cost to UK employers of sickness absence due to mental health problems at £8.4 billion, with an average of 21 days leave being taken by each employee suffering from mental health-related sickness.
Overall patterns of sickness absence are quite similar between different countries, being higher among women than men and among older rather than younger employees. However, there are also considerable variations in overall levels of sickness absence between countries, which may be attributable in part to legislation regarding sick pay benefits. In many countries, employers are required to provide employees with a minimum number of paid sick leave days per year, and there is some evidence that levels of absence are higher where benefits are generous, as in Sweden. On the other hand, other countries such as France also have good sick pay benefit systems but considerably lower rates of absence, so the relationship is not a straightforward one.
The United States is quite unusual among developed countries in that employers are not generally required by law to make sickness absence payments, and it has been reported that many workers, especially in lower-paid and part-time jobs, have no provision at all for paid sick leave. Moreover, there has been a recent trend for employers who previously paid employees for sick leave to reduce the maximum number of days payable, or to replace paid sick leave with “time off” programs, in which each employee can take a specified maximum number of days off in a year for the purpose of vacation, sickness or other reasons. A countervailing recent trend, however, is for state and city governments to introduce paid sick leave legislation to protect workers. Some argue that the costs of paying sick leave benefits if required to do so by law will just encourage employers to compensate by cutting back on salaries and other employee benefits.
Absenteeism vs. Presenteeism
However, there are some hidden costs of not providing paid sick leave. For one thing, there are likely to be reduced productivity costs associated with sick employees attending work rather than losing pay, a phenomenon sometimes referred to as “presenteeism,” not to mention the knock-on costs of reduced productivity or absenteeism among coworkers if contagious illnesses are involved.
Employers can take steps to reduce the overall costs of sickness absence and other forms of unplanned absenteeism by proactively looking after the health of their employees and providing employment conditions which facilitate a healthy work-life balance. For example, they might introduce health screening programs for employees, ensure that working conditions do not contribute to stress or mental health problems or introduce working time arrangements which help for employees to combine their work and family responsibilities. Studies have provided considerable evidence that preventative measures like these can have a significant impact on reducing unscheduled absences.
Anonymous (2001). Absence makes the business run slower. The Journal of Business Strategy 22, 1, p.3.
Anonymous (2008). Leave Benefits in the United States. Medical Benefits 25, 17, p.3-4.
Barmby, T., Ercolani, M. & Treble, J.G. (2002). Sickness Absence: An International Comparison. Economic Journal, 112, pp. F315-F331.
Bevan, S. & Hayday, S (2001). Costing Sickness Absence in the UK. Institute for Employment Studies report 382.
CCH Inc. (2002). 2002 CCH Unscheduled Absence Survey. Available from http://www.cch.com/press/news/2002/20021016h.asp.
Chartered Institute of Personnel & Development (2008) Annual Report 2008: Absence Management. Retrieved from http://www.cipd.co.uk/NR/rdonlyres/6D0CC654-1622-4445-8178-4A5E071B63EF/0/absencemanagementsurveyreport2008.pdf.
Dewis, P. & Bevan, S. (2002). Counting the Cost. Occupational Health. 54, 11; pp. 21-23.
Health and Safety Commission (2007). HSC/E publishes Health and Safety Statistics for 2006/07. Retrieved from http://www.hse.gov.uk/press/2007/c07020.htm.
Mercer (2008). 2007 National Survey of Employer-Sponsored Health Plans. Available from http://www.mercer.com/ushealthplansurvey.
Parsonage, M. & Grove, B. (2007). What are the costs of mental ill health at work? What can we do about them? The Sainsbury Centre for Mental Health. Retrieved from http://www.publicmentalhealth.org/Documents/749/Bob%20Grove.pdf.
Tanner, L. (2004). Paid time off offers greater flexibility. Dallas Business Journal. 28, 4, p. 29.
Can you imaging inventing something new and refusing to patent it? We game theorists are a greedy lot. While not doing anything actually illegal, we show no mercy when it comes to an opportunity to make lots of money. In this latest nefarious article, I am going to demonstrate how it is in your best interests to keep silent about your latest invention when it suits you.
First we must understand a key concept in game theory called a “holdup.” A holdup is a situation where you are able to demand almost any amount of money from a person because they have no choice but to pay you or suffer incredible losses. This isn’t just restricted to extorting money at a petrol bunk. Holdups are frequently seen in businesses.
For example, suppose all the pilots in a particular airline decide that they’re not getting paid enough. All they have to do is to go on a collective strike and ask for a 300% raise. Assuming that there are very few pilots around, such a strike will have a compelling power. The reason is twofold. First of all, being a pilot is a specialized skill. And second, the cost of paying a pilot is minimal compared to the cost of maintaining an airplane. So if the airline stops operating because of the pilot strike, they can hardly save any money by not paying the pilots since their fixed costs on machines, etc., is sky high anyway. The pilots are trying to “holdup” the airline company.
Image Credit: Ismael Olea
In fact, the threat is so real, that certain governments have imposed rules on how long skilled labor such as pilots can go on strike.
Such a strike would not work in McDonald’s for the reasons mentioned. The labor is pretty unskilled, and a strike would hurt McDonald’s much less since McDonald’s would save on employee fees which are pretty high. So if the employees threaten to strike (remember that the more people who strike, the more difficult it is to maintain the strike since a strike is like a cartel), McDonald’s would simply fire them and hire more workers since they are easy to replace. Thus, an attempted “holdup” of McDonald’s would not succeed.
Patent law gives inventors the potential to holdup companies that rely on the patent. Wouldn’t it be nice if I had a patent on the technology used to create integrated circuits (IC)? Every single chip company in the world would pay me money, and I would be a rich man with no worries (financially at least).
But suppose I’m a manufacturing company, and I have several ways to manufacture a particular product. I must check beforehand whether any of the steps involved in a particular method have a patent on them. If they do, then I must either come to an agreement with the patent holder to pay her a reasonable sum of money before I Invest heavily into it or choose another method.
If I’m foolish enough to blindly set up my manufacturing plant in a way that utilized a method that has a patent on it, the patent holder can holdup my firm. They can demand outrageous fees for allowing me to utilize that method since it will cost me millions of dollars to set up a new plant that avoids that step.
But suppose I do the research beforehand and find that no one holds a patent for a particular step, and I build my factory around it. After this, a clever inventor reveals that he has just now got a patent for a particular method that my plant utilizes, and I’m screwed. The crafty inventor had purposely delayed his patent on that technique so that when I did a check, nothing showed up. Now after my plant is complete, he has completed the process and obtained a patent. He is now in a position to hold up my firm.
So if you’re thinking of obtaining a patent, it is worthwhile for you to hold off a little bit and wait till a firm invests heavily into a product or process which utilizes your invention. Then you must strike and obtain a patent and keep holding up the hapless firm! I can well imagine professionals having dozens of unpatented inventions, keeping a keen lookout for an opportunity to pounce on a company that will utilize one of their inventions.
Yes, we game theorists are crafty. Nothing wrong in that, is there?
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Some people have suggested that one way to prevent the wasteful costs of healthcare is to have a menu of treatment options, with their costs, that is presented to the patient. For example, when you are admitted to the hospital as an inpatient, the physician typically orders tons of tests, medications, and nursing orders. Most often you will likely have an intravenous fluid running, be on a stool softener, multivitamins, pain medications, daily blood work, etc. But all of these treatments and medications have a cost.
When I was a resident we had an attending on rounds who always would ask us if we knew what the costs were of every drug or treatment that we ordered. Most of the time we did not know. We ordered what was commonly ordered. We did not typically try to find out the cheapest alternative. Occasionally we would have a patient who insisted to know the cost of every medication they were receiving and all of the cheaper alternatives. Wouldn’t it be great if we could provide a menu of treatment options and their costs to every patient and allow them to direct their care?
There have been many times in my career where I felt that was the case. However, being in the hospital and seeing a menu of medications and their costs is not like going out to dinner and choosing off of a menu. Even though we describe the patient as the “consumer,” they really are not the consumer. They are the patient. They must consent to treatment and can choose treatment options, but they cannot “direct” their own care. If they could direct their own care then doctors would not be needed. As I’ve mentioned previously doctors are licensed to practice medicine and usually are board certified in their specialty. They have been trained for at least a decade to become licensed. Thus they direct patient care. Patients can choose treatments, but doctors ultimately are responsible for what happens to the patient.
In many ways, a doctor is a parent and a patient is the teenager. The teenager is almost a fully functioning adult, able to make their own decisions, but they are not old enough to be independent from the parent. A good parent makes decisions with consultation from the teenager. And ultimately the parent is responsible if anything bad happens to the teenager. There are many adult concepts a teenager cannot understand without extensive explanation. Even after such explanation they still may not understand. Thus it is not feasible to explain the pros/cons of every treatment or medication, the potential side effects, sequelae, the recent literature on outcomes, and the whole volume of information out there on every treatment and drug. Doing so would be unacceptable, and, even if you did do this, the patient may still not understand everything.
While a menu of treatment options and their costs may sound attractive in theory, it simply is not feasible and would clearly highlight that the patient is a patient and not a consumer.
The cost of oil has only recently dropped after more than a year of bank-breaking prices. While it has decreased from $140 to $65 per barrel, the future of oil prices remains obscured. To alleviate the pressure of finding solutions to our oil dependency without funding tyrants overseas or drilling holes in our eastern seaboard, Dr. Jay Keasling at the University of California, Berkeley, is pioneering a new way. Keasling, a synthetic biologist, and others at the Joint BioEnergy Institute (JBEI) are trying to artificially generate some of the compounds found in fuels such as gasoline.
Keasling has already accomplished this type of thing once with an antimalarial drug. Keasling was able to engineer bacteria and yeast to produce artemisinin. This is an expensive compound normally from plants. With Keasling’s system, however, plants are no longer needed to help manufacture artemisinin, but rather, huge batches can be generated with the bacteria and yeast. Artemisinin is essentially a hydrocarbon that the bacteria and yeast are genetically altered to make. In the October 24 issue of Science, Keasling says, “Artemisinin is a hydrocarbon…we’re just trying to engineer organisms to produce different hydrocarbons.” These other hydrocarbons are what he hopes can be used to artificially reproduce gasoline, jet fuel and plastics.
While Keasling believes this technology “is just…the beginning”, it is still too expensive to beat the price of conventional oil, even with prices as high as $140 per barrel. Even so, several companies both small and large are looking into the possibilities. In fact, some companies have decided to begin manufacturing fuel, regardless of its more expensive cost. The hope is that although the price is high now, advances in the technology will deflate the cost to be competitive with conventional products. Optimistically, it could also become possible for conventional oil to become an option, rather than an imperative.
One of the first goals Keasling hopes to accomplish is to shift the public’s desire for ethanol. The Renewable Fuels Association reported in 2007 that 50 billion liters of ethanol was produced. Unfortunately, debate surrounds ethanol since it is derived from corn in the U.S. Opponents of this method contend that using corn for fuel increases the cost of food. Furthermore, they believe the progress made by using the environmentally friendly fuel is absorbed by the conventional gas and oil needed to grow, harvest and convert the corn. Ethanol is also problematic since it cannot be distributed through the pipeline infrastructure already in place for oil. For all of these reasons, Keasling and others like him believe the true answer lies in artificially generated fuel.
While Keasling believes the technique of using bacteria and yeast to produce fuel is promising, it is still far from perfect or practical on a large scale. When his group was working to make artemisinin, it required 50 changes to the bacterial DNA. By adding certain genes, Keasling was able to turn the bacteria into millions of little manufacturing plants. Initially, however, the bacteria were only able to produce small amounts of the antimalarial compound. Through optimization of his method, Keasling was able to increase the yield of artemisinin by a million fold. While this brought the production price down to competitive levels with the conventionally produced compound, accomplishing the same task with fuel will prove more of a challenge. While they were able to reduce the cost of artemisinin to $1 per gram, this same price for artificially generated oil would equal $125 per liter. Keasling has already started to increase the bacteria-produced hydrocarbon yield. At a meeting in September, he reported a method that has amplified the yield 77-fold.
Keasling isn’t the only one getting involved. In San Francisco, bacteria are being manipulated to produce renewable petroleum and biodiesel. Gregory Pal, the senior director for corporate development at LS9, stated in Science that they have already made several hydrocarbons that could be used for fuel and that they are currently scaling up production. Although a pilot fermentation experiment is currently being conducted, if all goes as planned, a small fuel production plant could be operational by 2010.
While these two groups and others are manipulating different metabolic pathways of the bacteria to produce the desired results, the consequences will be the same, and relatively soon. By using an organism as easy to grow as the bacterium they have chosen and manipulating it, it is possible these scientists have opened a new door for energy solutions. With continued advancements, families in the future may be saved from facing the personal economic stresses they have struggled with for more than a year in areas such as gas for the family vehicle, food and air travel.
Service, Robert. Science, 322 (5901): 522-523 (24 October 2008). Eyeing Oil, Synthetic Biologists Mine Microbes for Black Gold.
In 2003, at age 94, Peter Drucker, widely considered the world’s most influential expert on management, granted Jeffrey Krames a daylong interview about his management principles, his 38 books, and the leaders he had advised over the years. Upon his death in 2005, the Washington Post credited Drucker for influencing “Winston Churchill, Bill Gates, Jack Welch and the Japanese business establishment.” Krames, currently editorial director of Portfolio/Penguin, showcases what he learned from the interview in his latest book, Inside Drucker’s Brain, which was published on October 16. In an email interview yesterday with Cheryl Grey, Krames shares a glimpse into the mind of a fascinating man.
The advent of the Internet has created a whole new corporate ballgame. Based on your knowledge of Drucker’s insights and management ideas (Drucker’s brain), how would he approach the management of a virtual company staffed by telecommuters such as yourself? Without management by sight, how would Drucker handle such aspects as human resources, personal relationships, etc? (By this, I mean a company without any central, brick-and-mortar location, with all communication and work performed via the Internet.)
What a great question! Drucker believed a great deal in responsibility and accountability. He once said, “All development is self development,” meaning that it is the responsibility of each and every person to make sure they got whatever training was necessary to excel in their jobs. If Drucker was the head of this virtual organization, he would take a great deal of time in each and every hire to make sure that he was hiring people with the strengths required for each position. He would also put in metrics to make sure that there was a way to measure the performance of each individual.
Lastly, he would hire a manager who had what it took to manage people from a distance (he told me he was “the world’s worst manager,” so he would hire someone else to manage the unit). This would be someone who had the maturity to care more about what was right than who was right, an individual who could make what he called the life and death decisions (know who to hire, fire, and who to promote).
Considering the trying times businesses are facing—tight and tightening margins, shrinking international markets, credit markets slowly coming out of the deep freeze, stock market wealth vanishing without a trace—what Druckerisms specifically apply to this market? What can companies do to survive while staring down the barrel of 1929? And how can they position themselves to take the offensive, not only now but as the recovery progresses?
What a timely question. Drucker felt that management was a “foul weathered job.” He felt that the leader’s most important job was to guide his or her organization through any kind of disaster: “The most important task of an organization’s leader is to anticipate crisis. Perhaps not to avert it, but to anticipate it. To wait until the crisis hits is already abdication,” asserted Drucker.
To get by in these difficult times would involve certain strategic moves. First would be a review of all product lines to make sure they still make sense for the business: Too many organizations have a hard time figuring out what to grow and what to abandon, as Drucker explained in 1982: “…a growth policy needs to be able to distinguish between healthy growth, fat, and cancer ― all three are ‘growth,’ but surely all three are not equally desirable.”
Drucker was telling managers to exercise careful judgment by abandoning the marginal: “Yesterday’s breadwinner should almost always be abandoned on a fairly fast schedule,” explains Drucker. It still may produce net revenue. But it soon becomes a bar to the introduction and success of tomorrow’s breadwinner.”
Which corporate heads strongly influenced Drucker in the development of his theories? And were any of those mentors later torn down to make way for newer theories?
As for practitioners, Drucker’s greatest influence was Alfred Sloan, the head of General Motors for a good part of the first half of the 20th century. Drucker spent most of two years studying GM in the early to mid-1940s, which led to Drucker’s first business book, Concept of the Corporation (1946). Drucker called Alfred Sloan the first “professional manager,” and credits Sloan’s segmentation strategy with unseating Henry Ford and his Model Ts. Sloan was a leader with character, maturity, and commitment, and made General Motors ─ which had been a bunch of smaller businesses strung together ─ one of the world’s greatest companies. Only in recent years has GM really faltered by continuing to make large gas guzzling SUV’s while Toyota ate their lunch with hybrids like the Prius. As a result of the recent financial meltdown, GM is in deep trouble and in stunning fashion, their stock has recently hit a 50-year low!
Laying aside your editorial and publishing background, what specific personal qualifications made you the best person to write this book?
As an author I have always recognized the need to write books that boil down large bodies of work into smaller, bite sizes of information that are easy to understand. This was particularly important with Drucker since he wrote so many books (38), with so many of them being difficult to navigate (he sometimes is repetitive and his writing style is not the simplest to follow). If someone wanted to learn about Drucker’s greatest ideas, where would they start? That’s where I come in. I was able to provide that starting point and pull out the fifteen or so seminal ideas from all of his works so that readers get a real sense of Drucker’s classical concepts, ideas, and strategies. Lastly, because I spent a full day with him and corresponded with him briefly, I was able to humanize him in a way no writer had done before.
You can learn more about Inside Drucker’s Brain and Drucker himself at www.insidedruckersbrain.com or www.jeffreykrames.com. The book is now available for purchase at Amazon.com.
Now It’s Your Turn to Ask the Questions and Win a Chance to Get a Free Copy of Inside Drucker’s Brain.
Have a question that we didn’t ask? Here’s your chance to pick Jeffrey Krames’ brain. Also, by submitting a question in the comments area below, you’ll be automatically entered into a drawing for one of three free copies of Inside Drucker’s Brain. Please see our Book Giveaways page for complete rules and qualifications.
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Not so long ago, AIG was the world’s largest insurer. In the year 2000, its value peaked at over $265 billion, and just one year ago, the insurance giant was worth nearly $170 billion. But last month, facing bankruptcy, the once-proud AIG—now worth a mere $2.65 billion—became the largest welfare recipient in U.S. history, receiving a then-unprecedented $85 billion “rescue package” in money created out of thin air by the Federal Reserve.
All financial crises are either directly or indirectly caused by the Federal Reserve’s anti-market monetary manipulations. But the government can never blame itself or its central bank—it has to find scapegoats. And who better to blame than people and institutions who deal in private and voluntary financial exchanges outside of the government’s domineering and prosperity-killing regulatory scope?
It was the “speculators” who caused AIG to fail—or at least that’s the official government story. More specifically, it was the roguish brigands who deal in the unregulated market for credit-default swaps (CDS).
The Coming Political Shakedown
Credit-default what? The official story is all the more plausible since 99% of Americans (to be generous) have absolutely no idea what a credit-default swap is. And why would they? Most of them went to government-funded schools that teach statist myths about the cause of the Great Depression and the need for strong anti-trust regulation to thwart potential “robber barons.” The real robber barons, of course, have always been the men behind the curtain writing the very regulations allegedly intended to rein them in!
With this in mind, one has to wonder what financial interests are backing Senator Tom Harkin, the Iowa Democrat who has threatened that his party might not just increase regulation of CDSs but prohibit the market altogether. On October 14, Harkin—who is chairman of the Senate Agriculture Committee, which has authority over derivatives regulation—said that CDSs “increase the risk, the systemic risk, of the whole society.” Global warming, Islamic terrorism, and CDSs: mankind’s greatest threats.
CDSs: Among the Last Vestiges of the Free Market
What anti-capitalist congressmen hate most about credit-default swaps is that they’re completely unregulated. In the wake of the Great Depression, FDR’s New Deal added a backbreaking amount of new market regulations that have served to do nothing but provide investors with a false sense of security and, in some cases, discriminate against the non-affluent by making certain asset classes off limits for them.
Even if you believe we need an SEC and “Blue Skies” regulations to “protect the public,” a similar argument cannot be made for CDSs, which are private transactions between large financial institutions. The public only assumes liability for CDSs when the government steps in to bail out firms that made bad financial decisions. No bailout; no liability.
AIG made some bad bets in the CDS market. As a result, their stockholders were decimated and some of their CDS trading partners were left in the lurch too. That’s the way things work in a capitalist economy: every transaction carries its own risk. And financial markets cannot function when the government steps in to remove the element of risk—or more accurately, to socialize it.
How do Credit-Default Swaps Work?
A credit-default swap is a pseudo-insurance agreement made between two counterbalancing traders. The reason CDSs are considered “pseudo-insurance” instead of actual insurance—something AIG might have actually known something about—is in effort to avoid the onerous regulations the government puts on official insurance products. Regardless, anything that two consenting adults do behind closed doors is their business, and the same philosophy should apply to financial institutions.
An example of a typical CDS agreement would involve one firm (Company A) with a lot of money invested in the bonds of a third party (say, GM). Company B would offer to sell Company A insurance protection against GM’s default. Perhaps Company A would agree to pay $265,000 a year to insure its $10 million in GM bonds. The terms of the agreement would spell the circumstances under which Company B would have to pay Company A and how much, but typically, payment is triggered by formal bankruptcy or failure to pay bond interest. In such a case, Company B would buy the bonds from Company A at a premium or pay Company A the difference between the bonds’ current market value and their par value.
That’s not so confusing, is it?
How CDSs Make the Financial Markets Safer
What is so sinister about such an arrangement? Nothing. Credit-default swaps let companies shift risk and efficiently allocate capital. What’s more, they work to keep the credit markets honest and to expose fraud or negligence on the part of bond rating firms like Moody’s.
For example, if a company’s credit-default swaps are trading at a high yield, and yet the firm is still rated as being credit-worthy by Moody’s, there may be a problem. Typically, the market can better assess a company’s financial health than credit-rating firms. Banning the CDS market, as some Democrats would like to do, would be a lot like the recent short-sale ban—it would merely shield unsound companies from having the reality of their situation exposed to the average investor.
Credit-default swaps emerged from the free market to meet a demand. Banning them would, like all financial regulations, only punish the honest and responsible participants in the market. Let the fraudsters go bankrupt and let the responsible parties pick up the pieces. This is the system of capitalism that served us so well for so many years—now is no time to turn our backs on that which made us great.
Will companies that issued derivatives based on bundled student loans be the next financial dominoes that will require a government “bailout”? The country’s long dedication to education makes it a virtual certainty.
The emphasis of the role of government in education predates the establishment of the United States as a country. As early as 1642, a year before the founding of Harvard, laws of the Massachusetts Bay Colony broke with English tradition of purely private education and introduced a role for the state. The law essentially suggested that the colony’s government would assume the duty of teaching children if parents failed to do so.
A century later, the new Congress of the United States enacted the Northwest Ordinance of 1787. It set forth the role and obligation of the state in education. Article 3 of the Ordinance stated that
Religion, morality, and knowledge, being necessary to good government and the happiness of mankind, schools and the means of education shall forever be encouraged.
Early in the 19th century, Horace Mann took a leading role in the advancement of public education. Both as a Senator from Massachusetts and later as Secretary of the State Board of Education in 1837, Mann was instrumental in establishing textbooks and libraries, doubling the wages of teachers, and securing state aid for education. He argued that the country’s wealth would increase by educating the public and should be borne by the taxpayer. He was immensely successful in the task. Mann ultimately became president of Antioch College in 1853, six years prior to his death.
The fundamentals for universal public education were established and accepted on both a private and state level. However, it took nearly three quarters of a century, in 1935, for direct federal government loans to be debated. First, government student lending began on the state level when Indiana initiated the waiver of fees to students who successfully competed in statewide tests.
By 1944, the Serviceman’s Readjustment Act (commonly known as the G.I. Bill) was passed. It was the first legislation to provide direct aid for students on the federal level. The bill was amended and expanded following the Korean and Vietnam conflicts. Now called the Montgomery G.I. bill, it forms a crucial benefit to men and women voluntarily joining the military services.
The next half century saw a rapid rise in various federal, or federally-guaranteed, student loans and grants. Loans are to be repaid at subsidized low interest rates, while grants are outright gifts, requiring certain criteria and qualifications.
Some examples include:
- National Defense Education Act was launched after Russia orbited Sputnik I in 1958. It was centered on science, mathematics and language. The federal program is now called the Federal Perkins Loan program for low-income students with ten years to repay at five percent interest.
- The Health Professions Educational Assistance Act 1963 for medical and health program students was later broadened to add scholarships in addition to loans.
- The most significant and sizeable is the Federal Stafford Loan Program. It was initially passed by Congress in 1965 as the Guaranteed Student Loan Program. The program used private banks and other lenders, guaranteed by the federal government.
- Outright grants, such as the 1965 Educational Opportunity Grant Program and the 1972 Basic Educational Opportunity Grant, now known as the Pell Grant, consist of outright gifts to students in low income brackets. Eligibility is based strictly on need.
Later yet, government educational funding started to be offered to middle and upper income families such as the 1978 Middle Assistance Act and the 1981 PLUS loans.
Finally, loan consolidations and the William D. Ford Direct Student Loan Program of 1993 expanded loans available directly from participating schools.
As the population increased, and students availed themselves of the increasing variety of grants and loans, so did defaults on student loans.
A report published in October 2007 by Education Sector, an independent non-profit, non-partisan think tank, shows that student loan default rates were approximately five percent. Twenty percent, the largest percentage of those defaulting, owed $15,000 or more after attaining a four-year undergraduate degree.
According to the report,
Black students who graduated in 1992–93 school year had an overall default rate that was over five times higher than white students and over nine times higher than Asian students. … Hispanic students’ overall default rate was over twice that of white students and four times higher than Asian students. (www.educationsector.com)
The current financial crisis offers some serious food for thought.
Most significant is that, unlike mortgages, student loans have no underlying asset value. While defaults on mortgages have the backing of real estate – no matter if it has depreciated in market value – student loans are unsecured. Recourse to recover default payments may exist through attachment of wages and other measures, including tracking of an individual through IRS records, but has no tangible value except the student’s future earning power.
Despite the high-risk exposure, private firms in the student loan industry, such as SML Corporation, generally known as “Sallie Mae,” realized some $18.5 billion in derivatives sales in 2007. According to Bloomberg.com on October 22, Sallie Mae lost $185.5 million for the third quarter, compared to $344 million year-to-date. The company increased contingencies for bad student loans by some 31%. It also had extraordinary legal expenses in connection to a failed sale of the company to a third party. The stock declined from a high of $48.24 to close at $4.50 October 22, year-to-year.
According to Bloomberg, SLM “is partly insulated from the crisis because the company’s loan portfolio is 82 percent government guaranteed. The U.S. Department of Education is offering funding for those loans through July 2010.”
SLM Corporation owns or manages some 10 million student loans in addition to its ancillary businesses of college savings accounts and collection agencies. It was originally formed in 1972 as a “government-sponsored entity” similar to Fannie Mae and Freddie Mac. It became a totally independent company in 2004.
The question remains: if SLM Corporation’s management underestimates its potential student loan defaults and overestimates its cash and asset positions, will the federal government be in yet another “bailout” mode?
The history of government’s historic and stated position regarding education is clear. It remains for legislators to determine how best to reduce or eliminate student loan defaults. Don’t let the fear of college debt keep you from getting your degree. See the affordable degree options available at Belhaven College.
Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. If you would like Stephan to answer your economics-related questions, read his post “Got an Economics Question?” and submit your questions in the comments area there.
Why, oh why, did the biggest financial crisis since the Great Depression have to hit during a presidential election year?
The ‘Fear Index’, also known as the VIX (or, officially, the Chicago Board Options Exchange Volatility Index) is a financial tool that measures market swings or volatility. The higher the VIX goes, the scarier the market looks, and the more panicky investors feel. Until very recently, few people had heard of the VIX and even fewer cared about it, but ever since the credit crunch took hold a few weeks back, the VIX has been a staple number on nightly cable news channels. On October 17, it hit 70.3, the highest fear rating ever recorded since the VIX was first introduced in 1993.
I don’t know about you, but I don’t really need a VIX rating to convince me that people are scared. Insiders and investment specialists do have a practical use for an exact day-by-day volatility measurement. People like me, however, who write for economics blogs and read the financial sections of the major newspapers for sport, tend to get a general sense of the mood of the country simply by watching how many people in our own communities are completely melting down at any given moment.
Here’s a basic formula I’ve devised that any nonprofessional can use to measure financial fear:
1) Take the number of personal friends and family members who have lost at least 30% of their 401(k), and 2) divide that by the number of emotional outbursts about the economy that you have personally fallen victim to on the day you are measuring, then 3) multiply that final figure by the chocolate available in your household by 10:00 p.m. on any given weeknight, and 4) eat all the chocolate before someone else in your house gets to it.
Perform that equation and I guarantee you will discover that Americans are pretty scared right now.
Sadly, fear is a big stick that can be useful in political campaigns, especially with only days left until November 4th. Think you might need some help with that adjustable rate mortgage pretty darn quick? Socialist! What, do you think the government is supposed to wipe your chin and put you to bed! On the other hand, do you think you deserve the tax breaks you got under George W. Bush for finally, after 50 plus years, making it to a 50% income bracket? Fat cat! What are you, some kind of AIG executive or something? I’ll bet you eat homeless people for breakfast, you scoundrel!
The rhetoric surrounding the already significant economic mess is off the charts emotionally right now, and I submit it does not help the current situation one bit. What can we make of the term ’socialist’ in an environment in which the U.S. Treasury has just admitted it is considering nationalizing the banks? Which is more ’socialist’: a nationalized banking system, or a universal healthcare system? Don’t taxes by definition always redistribute wealth (unless we’re talking about a flat tax, which we aren’t)?
On a related note, if people who earn over $250,000 are actually about to be financially eviscerated by Barack Obama’s plan to rescind the Bush tax cuts, how is it that Cindy McCain paid just 20% of her 2007 income ($2 million of a total income of $10 million) but my household got stuck paying 27% on a microscopic fraction of that amount? OK, I know that question isn’t entirely logical, but it does beg a related question: Are taxes really the central issue here? Or do we just need access to much, much better accountants?
The economic political waters are about as muddy as they can get right now, and that’s useful because confusion and rhetoric throws people back on their own fears and emotional prejudices instead of their capacity for rational analysis of the issues at hand.
I’ll be frank: I have no clue what is going to happen next.
There, I said it.
You know, there are people in the world who spend years and years in Zen meditation practice just to someday, hopefully, somehow, train their minds to live completely in the present moment. Here in America, we’ve suddenly been given that gift free of charge by means of a financial meltdown. If we want, we can choose to simply admit that we are at a completely unrecognized moment in historical time, that no one is certain how this is all going shake out, and then we can just wing it, as it were.
That’s what will ultimately end up happening anyway.
In Zen meditation, when practitioners get caught up in projecting what might or might not happen and in thinking so fast it starts to make a soft whirring noise inside their own heads, the Zen master will often come up behind that practitioner and whap him or her upside the head with a big stick to snap that person out of it. Right now I see an excess of stick wielding Zen masters and a shortage of humble practitioners. If one more Zen master starts in on my own head, seriously, I’m going to…
Well, I’m going to do exactly what I’m currently doing: baking lots of chocolate things and eating them while I still can.
Here’s the scoop (as I understand it): We are either in for the hardest, longest recession in U.S. history or a mild downturn of one to two years followed by complete recovery. We are either about to become a socialist nation with requisite neo-WPA posters in every heavily-taxed home, or else we’re about to give the obscenely wealthy all the rest of our money and stuff, whatever little we have left, even our cats. These dueling outcomes will destroy us by fire or ice, but the important thing for us to understand is that, either way, we will indeed be destroyed.
No wonder people are scared!
I submit we may soon be looking at C) None of the above.
In the meantime, keep your stick to yourself, would you please?
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In an earlier article of mine on the dependance of Windows on Piracy, I promised a discussion on whether or not software piracy should be considered as theft. Well, here we are, and I would like to demonstrate how piracy is not theft.
To start of with, let us define theft. The commonly accepted definition is “the taking of someone else’s property without their consent“. The two keywords that need to be looked at here are “taking” and “consent”. I am going to demonstrate in various different ways why software piracy does not come into the same category as theft. My first argument is with the word “take”.
First of all, the word “taken,” as it was originally used, was meant to imply that what you take is no longer there with the owner. In fact, the root of the word piracy itself betrays what it is supposed to mean. Pirates stormed ships forcibly, looted the occupants (not to mention murdered and God knows what else), and took away things that left the original owners without them.
This clearly doesn’t apply to piracy of music CD’s and software. If I download a song from a server, then the original copy is intact and nothing has been lost. To put a different spin on it, if I light a candle, and you (without my consent) light another candle from my flame and run away, can I charge you with having stolen my light? Is that piracy? I don’t think so.
Of course, all software companies and music companies have the right to make it as difficult as possible for people to copy and run their software. Which brings me to my second point as to why I don’t consider piracy as theft.
Image Credit: decoder72
I quite understand the meaning of the term opportunity cost. The primary gripe with piracy is that it causes lost sales. This assumption is dubious at best or remarkably overstated. For this argument to ring true, the assumption must be made that if a user illegaly downloads a song, he or she would have purchased it. If the user never intended to purchase the song, then downloading the song illegally has not caused any sort of lost sales.
In fact, this is much more often true than not. The overwhelming majority of people who illegally download software would never have bought it if they were unable to get if for free. So this argument falls flat.
My final argument is an extension of my earlier article on how to charge different prices for your products. Companies usually adopt pricing policies that confer an additional benefit to those who pay high prices. For example, business class passengers in airplanes have shorter lines. Conversely, they make it difficult for customers who are price sensitive and want to save money to ensure that only those who are willing to make some sort of a sacrifice can get the lower priced products. The example is that of discount coupons which force customers to go through all the hassle of cutting out and saving useless bits of paper in order to get a discount.
Piracy can be looked at in this light. It is never easy to download something illegally. You have to find a source, try and crack it, are in constant fear that updates will change something and render the software useless, etc. This is the reason why people pay money for software. They do it to avoid hassles. The very fact that people choose to buy software instead of trying to get it for free demonstrates this. The end result is this: People who would never have bought the software anyway are the ones who usually try and download music and software illegally. The others buy it to avoid the hassles of using non-genuine software.
The fact that people are still buying music and paying for software illustrates this principle. They pay for software even though they can get it for free. As long as companies make it as difficult as possible for their software to be copied illegally (it doesn’t have to be impossible), they will not lose sales since those to whom the software is worth the price will purchase it.
A lot of people of course, have different points of view on this, believe that you should go to an online store and purchase software, and they are most welcome to share with our readers why they feel that piracy is theft or provide further reasons as to why it is not.
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