How Economists Hired By Hedge Fund Maniacs Justify Shafting Puerto Rico's Students

Diane Ravitch points us to yet another example of how the very wealthiest in this country are pushing the idea that their having to take a haircut on their investments is a greater threat to our American way of life than schools having enough money to educate poor kids:

The New York Times reported in June that hedge funds invested heavily in Puerto Rico, feeling sure that the Puerto Rican government could turn the economic crisis around. 

Now that the debt crisis has worsened, hedge funds are advising the government of Puerto Rico to save money by closing some schools, laying off teachers, and cutting university budgets. Most people think of education as the seed corn of future growth, but not the hedge funds. They want their debts repaid. Maybe they will propose bringing the African model of cheap, for-profit schools to Puerto Rico, which will cut costs considerably while opening new investment opportunities. (See here.)

A side note: as Diane points out, the Times reported that one of the hedge funds with an interest in Puerto Rico has a special place in the annals of New Jersey education "reform":

Hedge funds like Appaloosa Management, Paulson & Company and Blue Mountain Capital gathered in a conference room at the Barclays offices in Midtown Manhattan last September to talk about what was then the hottest trade: Puerto Rico. 

An hour into the conversation, however, it became clear that if things started going bad, not everyone in the room was going to get along. Some had wagered on real estate, while others had bought up the debts of the central government and its troubled electric utility. [emphasis mine]

Appaloosa was, of course, founded by David Tepper, one of the two sugar daddies funding the reformy exploits of B4K. As the Star-Ledger's Tom Moran loves to tell us, Tepper can be trusted on education policy, because only conspiracy theorists would ever believe he has a personal stake in the outcome. I admit I don't know what Appaloosa's position is related to Puerto Rico, but no matter what, try to reconcile Moran's contention with the rest of this post.

Diane points us to a CNN Money piece about how these hedge fundies are prescribing some awfully bitter medicine for Puerto Rico:

Puerto Rico went into default Monday for the first time in its history. The island's governor, Alejandro Garcia Padilla, has announced a "working group" to figure out a plan by the end of the summer. 

But a group of 34 hedge funds, led by Fir Tree Partners, already have a recommendation. They funded a report by three economists that calls for Puerto Rico to close some schools, reduce university subsidies and fire teachers so it can pay back its debt.  

It might sound cruel, but the hedge funds have a point. One of the central criticisms of Puerto Rico's debt crisis has been the government's tendency to spend and borrow way beyond its limits. 

It's the default position of the media when reporting on economic policy, folks: it's always the fault of the leeches who force the government to grow, and never the people who are accumulating insane piles of capital. Greece, Iceland, Argentina, America... always blame that voracious, socialist, government juggernaut. And the head of the beast, naturally, is those horrible, overspending schools:

Consider this: Puerto Rico's student population has declined 25% -- or almost 200,000 students -- between 2004 and 2013. But government spending on schools rose 39% -- or $1.4 billion -- during that time, according to the report sponsored by the hedge funds and authored by three former International Monetary Fund economists.  

That math doesn't work out. Neither does this: between 2004 and 2013, the island's population declined by 212,000 people. But total government spending jumped up 29% over the same time, according to the report.

In Douglas Adams's So Long, and Thanks For All the Fish, Ford Prefect encounters a "working girl" on a planet with a degree in social economics. She makes her living salving the guilty consciences of the rich: "It's OK, honey, it's really OK, you got to learn to feel good about it. Look at the way the whole economy is structured..." Quite an apt description of that group of economists who make their daily bread by justifying the shafting of poor children in the service of "efficiency."

This report, written by a trio of economists with impressive freshwater degrees and ties to the IMF, does call for more revenue collection, but mostly through increased compliance. Of course, they also want to move income taxes to a flat rate. But their main recommendation for cleaning up Puerto Rico's debt mess is to drastically cut social service spending, starting with education. They helpfully include this graph to justify the carnage:

Nothing like double y-axes to make a case for the "failure" of education spending efficiencies, huh? This one (so far as I can tell given the incredibly poor documentation of methods found in this report) doesn't even report spending figures in constant dollars -- but that's a minor concern. What's missing is any context for us to determine whether Puerto Rico is so profligate in its education spending that we should buy into the argument of these hedge-funded economists that it's well past time to cull funds from those overfed schools and send the savings back to Wall Street.

Well, let me present a few graphs of my own. Fair warning: these will come with many caveats attached to them. Comparing Puerto Rico to the 50 states isn't like comparing New Jersey to California, for many obvious (and not so obvious) reasons. Still, I think we'll find this issue isn't nearly as simple as our slash-and-burn friends imply it is.

Let's start by looking at how much Puerto Rico actually has spent to educate its students:

I've seen some try to make the case Puerto Rico is spending upwards of $11,000 per student, but I have no idea where those figures come from. NCES, the research arm of the USDOE, gives the historical figures above, adjusted so they are in 2011 dollars. Clearly, Puerto Rico is far behind the rest of the US in the amount its spends to educate its children. Yes, things have improved over the last couple of decades or so: a difference of $4188 in 1996 shrank to $3228 in 2011 (in 2011 dollars).

That said, the amount spent per pupil in Puerto Rico is still way behind the mainland. Of course, it's hard to make a direct comparison here, given the difference in the purchasing power of the dollar in the continental US (let alone the variation between the states). Before we get to that, however, let's consider another big difference:

Here's a quick-and-dirty graph showing the differences in school-aged poverty rates between the 50 states, DC, and Puerto Rico. Not even Mississippi or DC come close to matching Puerto Rico's 55 percent student poverty rate. It's extraordinary, and it's probably underreported. The entire island's child poverty rate is as high as Camden, NJ, America's poorest city.

But these guys want to cut funds to Puerto Rico's schools. Think about that.

As regular readers know, money does matter in schools, especially when it comes to poor children. So let's plot some slightly different spending figures against our poverty measures and see what we get.

Per pupil spending here is for 2011-12 from NCES (Table 236.75). In the US, the trend is actually opposite of what the research suggests we should do: lower-poverty states spend more per pupil. But that aside, Puerto Rico is near the bottom of the list in terms of governmental bodies' spending on education -- yet its poverty rate is much, much higher than any state's. Only Idaho, with a fraction of Puerto Rico's poverty rate, spends less per pupil on schooling.

Again, this comparison, no matter how instructive, is still inadequate. One issue is the difference in labor costs between states. Lori Taylor at Texas A&M has a Comparable Wage Index that many of us use when doing research; unfortunately, Puerto Rico is not included. But even if it were, we'd have to approach using it very cautiously.

The fact is that Puerto Rico isn't just another state: its language, its culture, its economics, and many other factors make comparing it to the rest of the US quite difficult. It is possible that the cost of obtaining comparable results to the states is significantly different in a way that can't be captured well by something like the CWI. But that doesn't mean we don't have some clues -- here's one:

This isn't precisely the staffing costs for schools, but it's a decent proxy for an initial investigation. Puerto Rico's education and heath workers are way less expensive than those in the states. But that doesn't mean they are living lives that are equivalent to the lives of middle-class teachers on the mainland. In fact, the dollar does not go very far in Puerto Rico:

Puerto Ricans in the United States bring home less money than the general population as a whole, but they also have to pay more for their housing. Out of 449,377 Puerto Rican homeowners with a mortgage, 48.5 percent spend more than 30 percent of their income on mortgage costs while 38 percent of the population as a whole pay more than 30 percent.

Puerto Ricans nationally have to do more with less,” said Carlos Vargas-Ramos, research associate at the Center for Puerto Rican Studies. “Their burden is higher than for the population as a whole.” 

Puerto Ricans have the lowest rate of homeownership when compared to other groups.

For those who own homes, the median monthly costs of owning their homes are also higher: $1,651 for Puerto Ricans and $1,496 for the population as a whole.

They also spend more for rentals, which is the primary housing market for Puerto Ricans. Costs are higher for Puerto Ricans who rent, $890, than for the total population, which is $855. [emphasis mine]

If you have the talent and the training to teach and you live in Puerto Rico, you'll make more money in the states, and your pay will go further. Why, then, would you ever stay? This is a critical question, because Puerto Rico really needs a strong teaching force:

As far as education, Puerto Ricans are notably overrepresented among those who have less than a high school education, 25 percent, and those underrepresented among those who have a college degree or higher level, 16 percent.

On a positive note, Puerto Ricans who graduate high school or have earned an associate’s degree have earnings almost as much to the population as a whole. 

I'm always hearing from reformy types that education is the pathway to the middle class (all others doing necessary work that doesn't require college are left hanging, however). Why, then, would hedge-fundies, who subsidize charter schools on this very premise, think it was a good idea to slash education in Puerto Rico when it really does return higher wages for the island's citizens? If you want to grow Puerto Rico out of its debt, why slash the one thing -- education -- that we know will grow the island's wages?

I know next to nothing about macroeconomics, but I understand that governments should not borrow with abandon without a clear plan for repayment, and without using their borrowings for investments that will generate economic growth. I actually don't think it's fair to shift the entire blame for Puerto Rico's woes on Wall Street, although they certainly deserve some of it.

It's clear to me, however, that forcing Puerto Rico to fully repay the hedge funds while cutting school spending is both stupid and immoral. This is an island that desperately needs a high-quality education system as part of a program of social rebuilding. From all early indications, Puerto Rico has been inexcusably stingy in funding its schools and paying its teachers.

There's much work to do to uncover the full story of education spending in Puerto Rico; I hope I'll get a chance to work on this some more. But there's more than enough evidence right now to put a halt to any notion that the island's schools are stuffed with cash and ready for a good slashing. Puerto Rico's poor and deserving students deserve far better than that.

You want to cut funding to their schools? Seriously?