An Economic Compact for the Young

As the other articles in this special report have made clear, the economic deck is stacked against America's young. For a quarter-century, policies that once promoted entry into the middle class, such as affordable college tuition and support for first-time homeownership, have been battered by ideological and fiscal assault. Social investment has not kept up with changing social realities, and the remnant of America's welfare state is tilted toward the other end of the age spectrum. The solution is not, as some have suggested, to remove supports from the elderly. Reliable pensions and Medicare are also on the defensive. The remedy is to enlarge social investment for the young, to expand economic pathways to secure adulthood.

With the exception of the generation born between roughly 1880 and 1910, whose members lost so much as adults in the Great Depression, there has never been an extended period of generational downward mobility comparable to this one -- and it is all the more remarkable for occurring during a period of general economic growth. The post-Depression generation enjoyed a long, equitably distributed boom that raised living standards as children grew into adults. Some of their economic good fortune was the result of random luck -- a steady increase in housing values and the insulation of American industry from global competition. But much of that older generation's rising prosperity over the life course reflected government policies that deliberately promoted a secure middle class. By contrast, today's young adults enjoy neither the lucky timing nor the supportive public policies to counteract inclement market forces. The acute Great Depression lasted 12 years; the current era of slow generational downward mobility is far more gradual, but it has already lasted 30 years.

A prime democratic deficit of this era is that issues that should be understood as deeply political have been substantially removed from political debate. In the realm of social policy, questions of who gets what are profoundly political: who gains access to affordable higher education, whether it is possible to reconcile obligations of work and family, whether good health insurance is available at acceptable cost to young adults, the upwardly tilted pattern of subsidies for homeownership, and the pervasiveness of predatory lending practices. Yet a vicious circle is at work. Because too few political leaders function as teachers on these issues, because government delivers so little to young adults, and because the same economic stresses leave the young with little time for politics, there is often a sense of resignation about whether politics and government can make a difference. But as this special report suggests, that passivity is beginning to change for the better.

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What might government do, going forward, to make an economic compact with the young? The first thing to recognize is that this enterprise will require serious social investment. It cannot be accomplished with token gestures that make little practical difference. Some of the measures needed are regulatory, such as constraints on predatory lenders, but most will require public money.

The second thing to appreciate is that these measures will pay serious economic dividends. Investing in the young will produce a more productive America and will help them to become more effective parents of their own young. And the third important truth is that these expenditures are not welfare outlays to promote dependency but investments in self-reliance, upward mobility, and just rewards for hard work.

Affordable Education. One of the most insidious aspects of the conservative counterrevolution of the past 30 years has been the increased financial obstacles to higher education. State legislatures faced with right-wing tax revolts, flat or declining revenues, and dwindling federal aid have placed a disproportionate share of the cost on reduced appropriations to public higher education. This withdrawal of public support has combined with cuts in the value of Pell grants, rising private-college tuition costs, the shift from grant aid to loan aid, and the cynical diversion of financial-aid funds to "merit" aid intended to attract affluent students with high board scores. The cumulative result has raised barriers to college education for the children of the non-affluent. Offspring of the elite can attend college without the distraction of part- or full-time jobs, and can graduate without the millstone of college debt. So this historic shift has dramatically narrowed life chances and hardened class lines.

A program of affordable higher education would include several elements. First, the wasteful subsidy to private lenders should be eliminated in favor of direct federal tuition loans. Second, a dramatic increase in Pell grants is necessary so that the program covers the 77 percent of costs at four-year public universities that it did when it got underway in 1979-980. (Today, the average grant covers just 36 percent.) Third, we need some strategy for containing the arms race among colleges and universities to game the rankings system by diverting financial aid to students who have no financial need for it. As tax exempt institutions, colleges and universities might be required to limit the percentage of aid awarded based on criteria other than need. Finally, we need some version of the "baby bond" program that has been proposed in these pages. [Bruce Ackerman and Anne Alstott, "$80,000 and a Dream," TAP, December 2002.] This would allow all children to begin life with a nest egg, which would accumulate during childhood and provide a substantial share of college costs at age 18.

A good example of a smart policy package is the Contract for College, proposed by De¯mos. The Contract would unify the existing three strands of federal financial aid -- grants, loans, and work-study -- into a coherent, guaranteed financial-aid package for students. Grants would make up the bulk of aid for students from low- and moderate-income families. The Contract recognizes the important value of reciprocity -- so part of the Contract for every student will include some amount of student loan aid and/or work-study requirement.

Universal Health Care. The perverse linkage of health insurance to employment falls disproportionately on two groups -- the near-poor and young adults (who are often the same people). Middle-aged Americans are more likely to have jobs that still provide decent health insurance. The poor qualify for Medicaid, and the elderly for Medicare. But young adults are far more likely to work at jobs that either provide no health insurance or inferior and unaffordable coverage, where the employee pays all or most of the premium cost and high deductibles and co-pays perversely dissuade people from seeing the doctor except when conditions become dire. This pattern adds up to a hidden tax on the young.

A seamless system of universal, government-organized heath insurance would solve the problem in a stroke, both for young adults and for their own children. Jacob Hacker and the Economic Policy Institute have demonstrated that because of all the inefficiencies in the present system, shifting to universal insurance could be accomplished for an initial net federal cost around $50 billion a year, and with a net cost savings to the health system as a whole because of the more efficient allocation of medical resources.

First-Time Homeownership and Affordable Rentals. In the period after World War II, government acted to dramatically increase home-ownership among young adults through the GI bill and FHA-insured loan programs. In the 1930s, as part of its efforts to avert a mass crisis of foreclosure, government sometimes made direct mortgage loans passing along the government's own low-borrowing rate. In the late 1960s and early 1970s, government briefly sponsored a below-market mortgage program for first-time homebuyers. Government also had several programs for increasing the supply of affordable rental housing.

Of all the forms of social outlay, none has taken steeper cuts beginning in the Reagan era than housing. What's left is mainly the mortgage interest deduction, a tax expenditure tilted upward, which now costs the Treasury about $76 billion a year. On the rental housing front, direct federal subsidies for new construction have all but disappeared. The main remnant is a voucher program that serves only a fraction of those who qualify on the basis of income, and mainly serves to bid up existing rents and subsidize landlords. The other implicit federal subsidy to rental housing is another tax break, which allows for-profit developers to syndicate the value of tax shelters and trade them for cash. Much of the tax loss to the Treasury goes to developers and to financial middlemen rather than renters.

Today a local developer of affordable rental housing has to cobble together whatever state, local, and philanthropic funds are available, try to capture some of the tax breaks, use the leverage of federal or state consumer regulation to induce banks to provide slightly below-market mortgages, and extract a tithe from luxury housing to subsidize moderate-income housing. In 1960, renters paid on average 19 percent of their incomes in rent; in 2005, they paid 29 percent. And, from 1960-2005, the percentage of Americans paying more than a third of their income in rent grew from less than a quarter to almost a half. The toll, once again, has fallen disproportionately on the young -- but not all the young. Among the upper middle class and the elite, it has become normal for parents to help young adults acquire their first homes. It's only a problem if you don't have affluent parents.

Into the vacuum of federal housing policy have come friendly, predatory lenders. The sub-prime mortgage crisis can be understood as a failure of deregulation, but also as a massive failure of housing policy. Back when sub-prime lenders still enjoyed some credibility with financial markets and with public opinion, they promoted themselves as serving a social mission -- helping people of moderate means acquire their first homes. As events have now revealed, the true intent was to make as much windfall gain as possible, by offering bait-and-switch mortgages. High hidden prepayment penalties made it unaffordable for borrowers to refinance even if they otherwise qualified. A disproportionate share of the victims, now at risk of losing their homes, are young adults.

If the goal is to promote homeownership among young adults whose incomes and credit histories just barely qualify them for mortgage loans, the worst possible policy is to turn them over to the tender mercies of sub-prime lenders who charge above-market rates. Rather, we need a government program that combines below-market rates with disinterested credit counseling. And for those who can't qualify for homeownership, government needs to resume its historic commitment to affordable rental housing.

In the short run, we also need a much bolder and more direct strategy to brake the downward spiral of mortgage foreclosures. As millions of homes go into foreclosure, there will be a general loss of household net worth and consumer purchasing power. A government forbearance and refinancing program could both protect recent homeowners from losing their nest eggs and homes and use new first-time homeownership opportunities to repopulate vacant houses and shore up housing values generally.

Living-Wage Jobs. The trajectory of lifetime income gains has dramatically worsened over the past 30 years. Young adults, except those with advanced degrees, are likely to have lower starting salaries adjusted for inflation than their parents did, and to have less income growth over time. The whole society needs more jobs that pay a living wage -- and young adults would benefit disproportionately.

The policy instruments to promote a high-wage path for America will be the subject of a future Prospect special report. However, the broad instruments are evident. They include a restoration of the right to organize unions and bargain collectively, more effective regulation of labor markets through higher minimum wages, and the use of public outlays to generate better-paid and professionalized employment.

For example, a national commitment to professionalize human service work would create several million good jobs that could not be exported -- caring for the young, the old, and the sick. This would reinvent human service work more on the model of northern Europe, where jobs working in early childhood, home care, and institutional care of the elderly are part of national professional systems with good career paths. These new opportunities would especially help young adults from lower-income backgrounds, for whom the health-care sector currently offers mainly low-wage job opportunities and few pathways to good careers.

Our Children and Their Children. The failure of public policy to keep pace with changing social realities has not just shortchanged young adults as economic beings but has impaired their capacity to be effective parents and stunted their own children. The Prospect's most recent special report, Life Chances (December 2007) explored all the ways that public policy fails to reconcile the stresses of work and family, and what a family-friendly set of national policies could do to help both young parents and their children.

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A candidate who took seriously the economic plight of the young would be rewarded with a rekindling of the political engagement of the young and the revival of progressive politics. Just as the generation that came of age during and after the Great Depression became what Robert Putnam termed "the long civic generation," a reawakened cohort of Americans now of high school and college age and slightly older would become lifelong supporters of a progressive social compact that improved economic opportunity and security. The Depression generation was disproportionately civic because of the constructive role of government in its life experiences. The New Deal saved tens of millions from destitution. Social Security and later Medicare provided vivid and tangible evidence of government's ability to make a positive difference in basic economic well-being. Many of that generation served in World War II -- the "good war" -- and many more experienced civic solidarity serving on the home front. Shortly afterward, the same generation got additional practical help from government from the postwar GI bill, which made it possible for millions to be the first in their families to attend college or own homes. Not all older Americans are liberals, of course, but it's no surprise that today's most senior citizens are more likely to have a friendly view of government.

The young need to pay very careful attention to politics this year, because politics will affect their lifelong economic futures. Although the campaign has been ripe with stirring rhetoric, creating a true social compact for the young cannot be done on a smile and a shoeshine; it will take serious outlays. Young America can be the leading edge of a new progressive politics -- or it can retreat into private pursuits. In this fateful election season, we will either witness an intensified privatization of economic distress and a further turning away from politics or we will see leaders rise to the occasion and a new long civic generation take shape.

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