By Stephen Glass and Jonathan Chait
Amazon.com calls itself "Earth's Biggest Bookstore," and the media, online and off, have accepted that claim uncritically. "The toast of cyberspace" is the Economist's accurate characterization of this Internet book-ordering service, which was founded in 1995. Time rated Amazon one of the 10 best Web sites of 1996. The Washington Post called Amazon a "megawarehouse." The New Yorker pointedly compared Amazon's claimed inventory of 1.1 million books with the mere 170,000 titles available at a Barnes & Noble superstore.
In fact, Amazon's "megawarehouse" in downtown Seattle contains just 200 or so titles. Any other book must be obtained from a wholesale distributor or the publisher. This is exactly what any traditional bookstore does when it doesn't have a book in stock. The difference is that traditional bookstores start out with a lot more than 200 titles in stock. "Earth's Biggest Bookstore"? More like "Earth's Smallest."
How does Amazon get the books it doesn't have in its warehouse? According to Jennifer Cast, vice president for marketing, it uses several big distributors--including the Ingram Book Co., one of the largest--and sometimes, it calls the book's publisher directly. She says that in certain cases, it has even called the authors. And how do less advanced booksellers do it? At Politics and Prose, a small local bookstore in northwest Washington, D.C., one employee told us, "We try Ingram first, ... and then call the publishers." At a northern Virginia outlet of Borders Books, the superstore chain, an employee said: "It's no secret we try Ingram. ... If all that fails, I guess we go to the publishers."
So why shop at Amazon? Cast gives four reasons: "One, we have a lower price. Two, we have a better selection. Three, we're probably much faster. And we're definitely more convenient." We conducted an experiment to test these claims. On Dec. 16 we ordered the same two books from Amazon, Politics and Prose, and Borders. All three were told to gift-wrap and ship each book as soon as possible. One book was Scott Turow's newest novel, The Laws of Our Fathers, the kind of best seller that even Amazon actually has in stock. The other was an obscure psychology text even Borders wouldn't carry, chosen from the catalog of the State University of New York Press, called The Ego and the Dynamic Ground: A Transpersonal Theory of Human Development (second edition), by Michael Washburn.
How did the three booksellers compare by Amazon's own standards?
Selection? We've covered that. If you define "inventory" as any book a store can special-order for you, as Amazon does, then the selection is identical at almost every halfway-decent bookstore in America. At Amazon, you can browse through all the titles and authors--and through some descriptive material--by computer. At a conventional bookstore, you can pick up and leaf through actual books, but fewer of them.
Convenience? For ordering, Politics and Prose was by far the easiest. Heidi answered the phone on the first ring. She was chatty, but professional. The store had "many, many, many" copies of the Turow on hand, and she promised to send one out "right away, tomorrow morning at the very, very latest." When asked about the psych text, Heidi apologized ("sorry, sorry") for not carrying it, and offered to order it. Estimated time of arrival: four weeks. She took a name, address, credit-card number. The entire phone call took 2 minutes and 38 seconds.
Borders was slightly less helpful. When asked to send the Turow, Drew groaned at our lowbrow taste, but quickly said he'd send it the next day. The second selection's obscurity didn't cheer him up: "Ugh, can't do you the Washburn book." When pressed, he said it could be ordered, but would probably take two weeks. Borders' system is that when the book arrives, you are sent a postcard asking you to come to the store and pick it up. Can't they just send the book? "We prefer people do it this way," Drew said, but then he gave in and agreed to send it. Total phone time: 9 minutes and 32 seconds.
After calling the stores, we connected to Amazon using Netscape Navigator 3.0 and a 28,800-baud modem. Amazon has a special page dedicated to the Turow book, complete with a picture of the cover and some unenlightening amateur commentaries from other Amazon users. The psychology text, not surprisingly, was listed with no description and no commentaries. Amazon said it would take one to two weeks to order.
After clicking your purchases into a "shopping cart," you are directed to a "secure Netscape server" that will encrypt your credit-card information. After this is done, you are told: "Finalizing Your Order Is Easy." Nothing could be further from the truth. Lower down in the verbiage, Amazon concedes, "Though we have tried hard to make this form easy to use, we know that it can be quite confusing the first time." Amazon users have to page through screen after screen of details about shipping charges, refund rules, and disclaimers about availability and pricing. Then you are told to allow between three and seven days for delivery after your book leaves Amazon's warehouse. "Upgrading to Next Day Air does NOT [their emphasis] mean you'll get your order the next day."
Total online time from when we accessed Amazon's home page to when we completed the book order: 37 minutes and 12 seconds. It would be shorter once you got the hang of it.
Speed? Turow's book arrived in three days from both Borders and Politics and Prose, in plenty of time before Christmas. Politics and Prose wrapped the book perfectly. Borders wrapped it attractively, but left the receipt inside. The Turow didn't arrive from Amazon until Dec. 27--more than a week after the conventional stores. Furthermore, the wrapping looked as if it had been done by a fourth grader. However, it came bundled with the obscure psych book (which still hadn't arrived from the conventional stores as of New Year's Day). Eleven days for that one is pretty good. As for the Turow, we had checked a box asking that each book be sent separately, as soon as possible--so, either Amazon ignored these instructions or it really needed the full 11 days to get the Turow to us.
By the way, let's not forget that in a conventional bookstore, you can also--if you choose--acquire books in zero days, by "going to" the store in the pre-Internet sense of actually going there.
Price? Amazon and Borders both offered the Turow for 30 percent off the list price. Politics and Prose offered 20 percent off. All three wanted full price for the psych book. Amazon charges $3 plus 95 cents per book for standard shipping. Borders charged $4 to ship the Turow, and Politics and Prose, $3.50. Amazon charges $2 a book for gift-wrapping, which is free at the other two stores, but Amazon accidentally charged only $2 for wrapping both books. Finally, stores with local outlets must charge sales tax on shipped items; Amazon does not (unless you live in Washington state). In all, the Turow cost $23.72 from Borders and $26.30 from Politics and Prose. If Amazon had sent it separately as we had instructed, it would have cost $24.82. Gift-wrapped and sent separately, the psych text would cost more at Amazon than at the other two; unwrapped and bundled, about the same.
There is a third category of books (besides those that everyone has in stock and those that no one has in stock). These are books that Amazon doesn't have in stock, but a normal bookstore does. (Barnes & Noble's 170,000-strong inventory, sniffed at by The New Yorker, is a good example.)
This category is Amazon's greatest weakness. It includes hardly obscure current books that aren't best sellers, like The New Our Bodies, Ourselves, produced by the Boston Women's Heath Book Collective. Borders' had three copies on the premises. Amazon needs two to three days to obtain this one, plus between three and seven days to send it to you. Likewise for a classic like the Penguin paperback of Charles Dickens' A Tale of Two Cities, which any Borders or Barnes & Noble will have on hand.
Then there's a semiobscure book such as Robert Marr Wright's Dodge City: The Cowboy Capital and the Great Southwest. This hardcover book about cowboys is on Borders' shelves. At Amazon it is listed as a "special order," which means it might be available to be shipped in four to six weeks, but, our computer informs us: "PLEASE NOTE that it might not be available at all. Publishers do not always notify the book community about changes in the availability of their titles." Not available? So much for the pretense that Amazon's list of 1.1 million books makes it "Earth's Biggest Bookstore" in even a metaphorical sense.
Saturday, June 21, 2008
Mrs. Colehill thanks God for private Social Security
Policy Review, May/Jun 1997
by Glass, Stephen
Opponents of plans to privatize the Social Security system often exploit the fear of the unknown. Testifying before the House Ways and Means Committee in October 1994, for instance, union official Gerald Shea criticized such privatization plans as too risky. Over and over again, the employee-benefits director for the AFL-CIO said there is no evidence that privatization is better, no evidence that workers will save up more money, no evidence that workers will be protected if they become disabled, and no evidence that they could carry their savings from job to job.
Conjuring up images of senior citizens standing in line at soup kitchens, he said that passing privatization reform would eventually force a future Congress to reintroduce Social Security. "No private insurance product," he said, "can offer such protection."
Three weeks before Shea's testimony, in an equally passionate speech over the grave of her husband, Wendy Colehill offered just such evidence. A sanitation worker in Galveston, Texas, for 12 years, Bill Colehill had died in a car accident while driving Wendy and their three-year-old son home from the beach. He was 38. "I am normally a quiet person, but not at that cemetery I couldn't be," Wendy says. "I did what Bill would have wanted me to do. I thanked God that some wise men privatized Social Security here. If it wasn't for them, if I had regular Social Security, I'd be broke when he diedeating cat food or something." Within days of Bill's death, Wendy Colehill had received a death-benefit check for $126,000. With that money, she paid both for her husband's funeral and, since she could not raise Bill Jr. on a cashier's wages from Burger King, for her tuition at paralegal school. If Wendy Colehill had instead been relying on Social Security benefits, she would have received a check for a mere $255.
A Lucky Loophole
When Social Security was established in 1935, a loophole allowed states and municipalities to exempt their public employees from the federal retirement program. In a handful of states, governors and unions set up smaller versions of Social Security for teachers. They were virtually identical to the federal program. But in 1981, three counties in eastern Texas quietly withdrew from the Social Security system and set up their own privatized retirement program. Fearing a severe drop in Social Security tax revenues if others followed, Congress closed the loophole two years later. But the Texas experiment shows that Americans have nothing to fear from privatization.
The Texas program makes more money. It offers greater benefits to the disabled. It follows the worker from job to job. And upon the death of the beneficiary, it functions as a generous lifeinsurance policy, paying the survivors a minimum of $50,000. "For years, critics have been able to argue with computer projections and models against privatization, but this is real life," explains Merrill Matthews Jr., an analyst at the National Center for Policy Analysis, in Dallas. "And real life shows us it works even better than anyone expected."
In 1979, Bill Decker was serving an uneventful term as Galveston's county attorney. As the county official responsible for personnel administration, however, he started to become concerned about all the newspaper reports of Social Security's looming insolvency. So he asked a financial analyst to design a program that would protect the county's workers. Don Kebodeaux, the president of Houston's First Financial Capital Corp., proposed privatization.
Under Kebodeaux's plan, the 5,000 public employees of Galveston, Brazoria, and Matagorda counties are still taxed 6.13 percent of their pay,just like employees everywhere, and the county kicks in an equal amount. But the money doesn't go to Washington. Instead the fund works like a private annuity. Every year, the counties ask large insurance companies to bid against each other for the right to manage their retirement funds for one year. Each insurance company offers the counties a guaranteed rate of return on their investments, and the counties choose the highest bidder.
The results have been far superior to Social Security. In some years, the guaranteed annual return has been as high as 12 percent. Since 1981, it has averaged 6.5 percent. By contrast, Social Security's mean annual return on investment is 2.2 percent for a typical worker born in 1950. Burt Jamus, a Galveston County employee, voted against privatization, but now says it was "a blessing from God." The 40-year-old middle manager says that, under current projections, he will receive $5,474 a month after he retires, compared with $1,042 under Social Security.
How It Works What happens if the stock market falls? The insurance company assumes all the downside risk. Although the guaranteed rate of return deprives county employees of some of the fruits of bull markets, it also protects them from losing their retirement funds when markets drop.
County employees are vested immediately. They also own their retirement account, and can take it with them if they switch jobs. Employees are allowed to increase their contribution, which is all tax-deferred, to 20 percent of their income. When they retire, they can choose to receive a monthly check for the interest on their account (leaving the principal untouched, perhaps to be passed on to heirs), or receive all or part of the principal in a taxable, lump-sum payment (and reaping monthly interest on any principal they leave in the account). By contrast, Social Security benefits are paid by taxing current workers; since it isn't based on investments, beneficiaries never accrue any principal.
Among the features of the private system that county employees particularly love is its life insurance and disability benefits. Before landing an annual contract, a winning insurance company must agree to fund a richer version of Social Security's life insurance and disability benefits. While Social Security pays a one-time death benefit of $255, the private plan pays triple the worker's salary up to $150,000, but not less than $50,000.
Likewise, the private plan's disability insurance pays the worker 60 percent of his salary until recovery or retirement. Workers need not fear insurance companies will put up too many regulatory hurdles, because the private plan requires little more than a doctor's approval. "Our disability plan is designed to be easy," Kebodeaux says. "Under this program you will always get equal or better benefits than under Social Security. That's just not up for debate."
Most current proposals to privatize Social Security would allow direct investment of payroll contributions in the stock market. The investments would be managed by a government board or by the workers themselves. Hence critics say that privatization carries at unacceptable risk in pursuit of higher returns. The Texas model, however, increases returns over the current system substantially without tremendous risk. Since insurance companies have to guarantee a fixed rate of return in advance, the workers' principal is not subject to the winds of the market.
They Just Don't Get It Despite improved benefits and investment returns, however, the private plan was actively opposed by top brass at the local chapter of the American Federation of State, County, and Municipal Employees (AFSCME). At debates throughout the three counties, union officials predicted all the money would be squandered in bad investments. Union officials urged their members to change jobs if the private plan passed so they wouldn't lose their retirement.
After a series of debates on the plan, the union's rank-and-file voted 78 percent to 22 percent in favor of privatization. "There seemed no logic to the union's leadership stance," one union member says. "It's clearly better for us. This is precisely what they should be advocating we get. They should like us getting more money. It seems basic."
Not so, according to Faye Cole, the executive director of the AFSCME local that represented the employees. Cole says that despite the system's guaranteed returns, one must be wary of the private sector. She says she will oppose any expansion of privatization because it's too risky. "Just because they have always gotten more money doesn't mean they're better off," Cole says. "Don't buy into that logic."
Maybe so, but union loyalists chuckle when they recall the debates over privatization back in 1979. This past January, Policy Review interviewed Meredith Kansan, a retired county worker who died several months later. Before the vote, Kansan had worked in clerical jobs for more than 31 years. "I remember crying in my living room the day they voted to change to private," she said, pausing to laugh. "Can you believe that? I believed all that hooka that my retirement money was going out the window."
Twelve years later, Kansan retired. Although she worked for more than twice as long under the Social Security system as under the private plan, her private benefit check was twice as large. Kansan, who had no family, moved to Arizona and used the extra money to open a yarn shop. "I love to knit and that's my dream," she said. "I had just given up on the idea of opening the store. Privatization was no nightmareit was a pure miracle."
by Glass, Stephen
Opponents of plans to privatize the Social Security system often exploit the fear of the unknown. Testifying before the House Ways and Means Committee in October 1994, for instance, union official Gerald Shea criticized such privatization plans as too risky. Over and over again, the employee-benefits director for the AFL-CIO said there is no evidence that privatization is better, no evidence that workers will save up more money, no evidence that workers will be protected if they become disabled, and no evidence that they could carry their savings from job to job.
Conjuring up images of senior citizens standing in line at soup kitchens, he said that passing privatization reform would eventually force a future Congress to reintroduce Social Security. "No private insurance product," he said, "can offer such protection."
Three weeks before Shea's testimony, in an equally passionate speech over the grave of her husband, Wendy Colehill offered just such evidence. A sanitation worker in Galveston, Texas, for 12 years, Bill Colehill had died in a car accident while driving Wendy and their three-year-old son home from the beach. He was 38. "I am normally a quiet person, but not at that cemetery I couldn't be," Wendy says. "I did what Bill would have wanted me to do. I thanked God that some wise men privatized Social Security here. If it wasn't for them, if I had regular Social Security, I'd be broke when he diedeating cat food or something." Within days of Bill's death, Wendy Colehill had received a death-benefit check for $126,000. With that money, she paid both for her husband's funeral and, since she could not raise Bill Jr. on a cashier's wages from Burger King, for her tuition at paralegal school. If Wendy Colehill had instead been relying on Social Security benefits, she would have received a check for a mere $255.
A Lucky Loophole
When Social Security was established in 1935, a loophole allowed states and municipalities to exempt their public employees from the federal retirement program. In a handful of states, governors and unions set up smaller versions of Social Security for teachers. They were virtually identical to the federal program. But in 1981, three counties in eastern Texas quietly withdrew from the Social Security system and set up their own privatized retirement program. Fearing a severe drop in Social Security tax revenues if others followed, Congress closed the loophole two years later. But the Texas experiment shows that Americans have nothing to fear from privatization.
The Texas program makes more money. It offers greater benefits to the disabled. It follows the worker from job to job. And upon the death of the beneficiary, it functions as a generous lifeinsurance policy, paying the survivors a minimum of $50,000. "For years, critics have been able to argue with computer projections and models against privatization, but this is real life," explains Merrill Matthews Jr., an analyst at the National Center for Policy Analysis, in Dallas. "And real life shows us it works even better than anyone expected."
In 1979, Bill Decker was serving an uneventful term as Galveston's county attorney. As the county official responsible for personnel administration, however, he started to become concerned about all the newspaper reports of Social Security's looming insolvency. So he asked a financial analyst to design a program that would protect the county's workers. Don Kebodeaux, the president of Houston's First Financial Capital Corp., proposed privatization.
Under Kebodeaux's plan, the 5,000 public employees of Galveston, Brazoria, and Matagorda counties are still taxed 6.13 percent of their pay,just like employees everywhere, and the county kicks in an equal amount. But the money doesn't go to Washington. Instead the fund works like a private annuity. Every year, the counties ask large insurance companies to bid against each other for the right to manage their retirement funds for one year. Each insurance company offers the counties a guaranteed rate of return on their investments, and the counties choose the highest bidder.
The results have been far superior to Social Security. In some years, the guaranteed annual return has been as high as 12 percent. Since 1981, it has averaged 6.5 percent. By contrast, Social Security's mean annual return on investment is 2.2 percent for a typical worker born in 1950. Burt Jamus, a Galveston County employee, voted against privatization, but now says it was "a blessing from God." The 40-year-old middle manager says that, under current projections, he will receive $5,474 a month after he retires, compared with $1,042 under Social Security.
How It Works What happens if the stock market falls? The insurance company assumes all the downside risk. Although the guaranteed rate of return deprives county employees of some of the fruits of bull markets, it also protects them from losing their retirement funds when markets drop.
County employees are vested immediately. They also own their retirement account, and can take it with them if they switch jobs. Employees are allowed to increase their contribution, which is all tax-deferred, to 20 percent of their income. When they retire, they can choose to receive a monthly check for the interest on their account (leaving the principal untouched, perhaps to be passed on to heirs), or receive all or part of the principal in a taxable, lump-sum payment (and reaping monthly interest on any principal they leave in the account). By contrast, Social Security benefits are paid by taxing current workers; since it isn't based on investments, beneficiaries never accrue any principal.
Among the features of the private system that county employees particularly love is its life insurance and disability benefits. Before landing an annual contract, a winning insurance company must agree to fund a richer version of Social Security's life insurance and disability benefits. While Social Security pays a one-time death benefit of $255, the private plan pays triple the worker's salary up to $150,000, but not less than $50,000.
Likewise, the private plan's disability insurance pays the worker 60 percent of his salary until recovery or retirement. Workers need not fear insurance companies will put up too many regulatory hurdles, because the private plan requires little more than a doctor's approval. "Our disability plan is designed to be easy," Kebodeaux says. "Under this program you will always get equal or better benefits than under Social Security. That's just not up for debate."
Most current proposals to privatize Social Security would allow direct investment of payroll contributions in the stock market. The investments would be managed by a government board or by the workers themselves. Hence critics say that privatization carries at unacceptable risk in pursuit of higher returns. The Texas model, however, increases returns over the current system substantially without tremendous risk. Since insurance companies have to guarantee a fixed rate of return in advance, the workers' principal is not subject to the winds of the market.
They Just Don't Get It Despite improved benefits and investment returns, however, the private plan was actively opposed by top brass at the local chapter of the American Federation of State, County, and Municipal Employees (AFSCME). At debates throughout the three counties, union officials predicted all the money would be squandered in bad investments. Union officials urged their members to change jobs if the private plan passed so they wouldn't lose their retirement.
After a series of debates on the plan, the union's rank-and-file voted 78 percent to 22 percent in favor of privatization. "There seemed no logic to the union's leadership stance," one union member says. "It's clearly better for us. This is precisely what they should be advocating we get. They should like us getting more money. It seems basic."
Not so, according to Faye Cole, the executive director of the AFSCME local that represented the employees. Cole says that despite the system's guaranteed returns, one must be wary of the private sector. She says she will oppose any expansion of privatization because it's too risky. "Just because they have always gotten more money doesn't mean they're better off," Cole says. "Don't buy into that logic."
Maybe so, but union loyalists chuckle when they recall the debates over privatization back in 1979. This past January, Policy Review interviewed Meredith Kansan, a retired county worker who died several months later. Before the vote, Kansan had worked in clerical jobs for more than 31 years. "I remember crying in my living room the day they voted to change to private," she said, pausing to laugh. "Can you believe that? I believed all that hooka that my retirement money was going out the window."
Twelve years later, Kansan retired. Although she worked for more than twice as long under the Social Security system as under the private plan, her private benefit check was twice as large. Kansan, who had no family, moved to Arizona and used the extra money to open a yarn shop. "I love to knit and that's my dream," she said. "I had just given up on the idea of opening the store. Privatization was no nightmareit was a pure miracle."
Who Needs the SBA?
by Stephen J. Glass
Last June at the White House Conference on Small Business, President Clinton praised the U.S. Small Business Administration (SBA). The loan-guarantee program of this small federal agency, he said, is the best way to get venture capital into the hands of America's entrepreneurs. The SBA followed up with a report identifying the most "small-business-friendly" banks in the country. Among the nation's very best: First Capitol, in York, Pa.
But First Capitol is no example of how the federal government builds what Clinton called tomorrow's Intel, Apple, and FedEx. Instead it shows how banks can boost small business better without government help.
With three branches in central Pennsylvania, First Capitol has lent more than $50 million to local small businesses -- 15 percent of which are headed by women or minorities. Their loan default rate is a meager 1.5 percent. By contrast, the default rate on SBA loans in the area is 6.2 percent. The SBA default rate nationwide is even higher.
First Capitol's clients include high-tech startups, construction companies, retail franchises, and mom-and-pop grocers. They write business plans for their clients and meet with the entrepreneurs monthly, if not weekly. All this made First Capitol the fastest-growing bank in the region, boosting assets 16-fold from $5 million to more than $90 million in just eight years.
And First Capitol does it without allowing the SBA or any government agency to guarantee its loans. "Why should we?" asks Tom Capello, First Capitol's president. "We pick winners."
Since the bank was founded in 1988, it has specialized in loans to small business start-ups. When Thom Anstadt showed up on First Capitol's doorstep with a proposal for his Colorgraphics Inc., a high-quality color printing firm, he had been turned down for a loan by countless banks. The reason: According to Anstadt's own proposal, Colorgraphics would lose money for at least one-and-a-half years because of its high start-up costs. Most scoffed. It was a loan, some bankers said, that the SBA would never guarantee.
But First Capitol did. The now-profitable printing firm has 22 employees and $2 million in yearly revenues. It not only has met every loan payment, but it has borrowed three additional times to expand. Anstadt's story is typical of First Capitol. York, according to a top city official, is having "a small-business renaissance because of that bank." How does First Capitol do it? By counting on character.
Unlike other banks, First Capitol doesn't get Washington to guarantee its loans. At other banks, if the small business fails, most of the lost money is reimbursed by government. These banks make money just by making loans. First Capitol only makes money if the start-ups succeed. And First Capitol has found the best way to determine if a business will succeed is to evaluate the owner's honor. While his competitors talk about the "two C's" of lending (credit and collateral), Capello has added another: "The first 'C' is character."
To this end, Tom Sauer, the bank's chief loan officer, personally reviews each application. He and his staff spend hours talking with each applicant about their business. He even meets with their families to make sure they'll have the necessary emotional support.
Most important, Sauer was not trained as a banker. Before coming to First Capitol, he had managed a local munitions factory. Although Sauer modestly says his background ensures he "won't bump into the machines" when he tours businesses, it also means he understands them. "The other [banks] I applied to just looked at my numbers," says a local grocer who got a loan from First Capitol. "That doesn't tell them much. [Sauer] would smell the fruit to make sure it was fresh. He walked the aisles. He knows what I'm about."
Ultimately, each loan applicant also meets with Capello. First Capitol has found that by letting even the smallest applicants meet with the bank's president strengthens their commitment to meeting the payments.
It works. Since March 1994, more than three-fourths of the bank's loans have gone to small businesses. In that same period, the bank's stock has risen more than 60 percent. And, the trend is upward: Profits in the third quarter were the best ever -- 48 percent better than 1995.
First Capitol thrives, not in spite of their SBA-free policy, but because of it. The rigidity, paperwork and snail's pace of SBA's textbook loans often invite failure in the real world. At First Capitol, flexibility and emphasis on character rather than business experience pays off. Even President Clinton has conceded that the SBA is holding small business back. Small businesses, he said, needed less paperwork and less regulation to thrive.
Banks like First Capitol prove small businesses can get what they need, without the SBA's help, in the private sector.
This essay by Stephen Glass is adapted from his article in the current issue of the Heritage Foundation's magazine Policy Review: The Journal of American Citizenship.
Last June at the White House Conference on Small Business, President Clinton praised the U.S. Small Business Administration (SBA). The loan-guarantee program of this small federal agency, he said, is the best way to get venture capital into the hands of America's entrepreneurs. The SBA followed up with a report identifying the most "small-business-friendly" banks in the country. Among the nation's very best: First Capitol, in York, Pa.
But First Capitol is no example of how the federal government builds what Clinton called tomorrow's Intel, Apple, and FedEx. Instead it shows how banks can boost small business better without government help.
With three branches in central Pennsylvania, First Capitol has lent more than $50 million to local small businesses -- 15 percent of which are headed by women or minorities. Their loan default rate is a meager 1.5 percent. By contrast, the default rate on SBA loans in the area is 6.2 percent. The SBA default rate nationwide is even higher.
First Capitol's clients include high-tech startups, construction companies, retail franchises, and mom-and-pop grocers. They write business plans for their clients and meet with the entrepreneurs monthly, if not weekly. All this made First Capitol the fastest-growing bank in the region, boosting assets 16-fold from $5 million to more than $90 million in just eight years.
And First Capitol does it without allowing the SBA or any government agency to guarantee its loans. "Why should we?" asks Tom Capello, First Capitol's president. "We pick winners."
Since the bank was founded in 1988, it has specialized in loans to small business start-ups. When Thom Anstadt showed up on First Capitol's doorstep with a proposal for his Colorgraphics Inc., a high-quality color printing firm, he had been turned down for a loan by countless banks. The reason: According to Anstadt's own proposal, Colorgraphics would lose money for at least one-and-a-half years because of its high start-up costs. Most scoffed. It was a loan, some bankers said, that the SBA would never guarantee.
But First Capitol did. The now-profitable printing firm has 22 employees and $2 million in yearly revenues. It not only has met every loan payment, but it has borrowed three additional times to expand. Anstadt's story is typical of First Capitol. York, according to a top city official, is having "a small-business renaissance because of that bank." How does First Capitol do it? By counting on character.
Unlike other banks, First Capitol doesn't get Washington to guarantee its loans. At other banks, if the small business fails, most of the lost money is reimbursed by government. These banks make money just by making loans. First Capitol only makes money if the start-ups succeed. And First Capitol has found the best way to determine if a business will succeed is to evaluate the owner's honor. While his competitors talk about the "two C's" of lending (credit and collateral), Capello has added another: "The first 'C' is character."
To this end, Tom Sauer, the bank's chief loan officer, personally reviews each application. He and his staff spend hours talking with each applicant about their business. He even meets with their families to make sure they'll have the necessary emotional support.
Most important, Sauer was not trained as a banker. Before coming to First Capitol, he had managed a local munitions factory. Although Sauer modestly says his background ensures he "won't bump into the machines" when he tours businesses, it also means he understands them. "The other [banks] I applied to just looked at my numbers," says a local grocer who got a loan from First Capitol. "That doesn't tell them much. [Sauer] would smell the fruit to make sure it was fresh. He walked the aisles. He knows what I'm about."
Ultimately, each loan applicant also meets with Capello. First Capitol has found that by letting even the smallest applicants meet with the bank's president strengthens their commitment to meeting the payments.
It works. Since March 1994, more than three-fourths of the bank's loans have gone to small businesses. In that same period, the bank's stock has risen more than 60 percent. And, the trend is upward: Profits in the third quarter were the best ever -- 48 percent better than 1995.
First Capitol thrives, not in spite of their SBA-free policy, but because of it. The rigidity, paperwork and snail's pace of SBA's textbook loans often invite failure in the real world. At First Capitol, flexibility and emphasis on character rather than business experience pays off. Even President Clinton has conceded that the SBA is holding small business back. Small businesses, he said, needed less paperwork and less regulation to thrive.
Banks like First Capitol prove small businesses can get what they need, without the SBA's help, in the private sector.
This essay by Stephen Glass is adapted from his article in the current issue of the Heritage Foundation's magazine Policy Review: The Journal of American Citizenship.
Happy Meals
By Stephen Glass
Every morning for seven years, Linda Desrosiers packed her lunch before heading to work as a high-school cook. "I wouldn't touch the food they had us make," she says. "People looked at it and smelled it, but no one ate it."Have It Your Way
Every morning for seven years, Linda Desrosiers packed her lunch before heading to work as a high-school cook. "I wouldn't touch the food they had us make," she says. "People looked at it and smelled it, but no one ate it."
School janitors in Woonsocket, Rhode Island, an impoverished textile-mill town, confirm Desrosiers's stories of platefuls of grayish green beans and "beef surprise" winding up in the dumpster. One janitor said he changed the high school's industrial-sized garbage bags at least twice in each of the three lunch periods.
In recent months, liberals led by President Clinton have argued that the federal school lunch program "ain't broke" and shouldn't be fixed. They argue, persuasively, that kids who are hungry won't learn. But they also make the false assumption that students actually eat the meals that the government subsidizes. Rhode Island is proving that students' nutrition levels can improve dramatically when subsidies for school meals are slashed.
This academic year, the state of Rhode Island radically reformed its school-lunch program by dumping a quarter-century of centrally planned purchasing, hiring, and cooking. The state cut its $11-million school-lunch appropriation to less than $200,000 and fired all but 11 of the 780 workers who administered, cooked, and served the lunches. Now, private food-service contractors like Marriott and ARA Corp. plan the menus and feed the students. The school districts still get reimbursement from Washington, but the federal money is sent directly to the local districts on a per-meal basis. As a result, combined federal and state subsidies have fallen from more than $23 million in 1993-94 to $12 million—a 48 percent cut.
The result: Kids are eating better. In the past seven months, student participation in school-lunch programs has soared, nutrition levels have risen to among the best in the nation, and poor school districts like Woonsocket are generating a profit.
Brandon Powers, a sixth-grader at Woonsocket Elementary School, says the only downside of the privatized system is that it has put an end to daily "school-slop sculpture contests." "Now the food is pretty good," he says, "so people prefer to eat it rather than build with it." Even Desrosiers, now a cook for Marriott, eats it every day.
Students at North Smithfield High School now eat their hamburgers instead of conducting experiments on the effects of mustard, catsup, and relish on burger flight. And students at a magnet high school in Providence no longer request extra gravy with their mashed potatoes just to provide greater contrast for finger-painting with their food.
School officials back up students' claims that they are eating more. Since a private contractor took over Woonsocket High School's lunch program, janitors haul away 75 percent less garbage from the school cafeteria. Irene Scripsack, the business manager for the North Smithfield school district, says her janitors only collect 5 percent as much garbage as they used to. Scripsack won't say how often she ate the state's food, but admits it was "quite rare."
"The state-run program suffered from what I call 'orange-ravioli syndrome,'" says John Caparco, the principal of Woonsocket High School. "Just providing food students should eat does not mean they'll eat it. They were simply out to lunch when it came to making the food appealing." Caparco admits even he didn't eat the old food. "Now I get it all the time."
Ellen McKenna, a junior dietetics major at the University of Rhode Island, demonstrated that plate waste was cut dramatically at schools that used private contractors. For instance, she found that most of the hot-food trays were "completely cleared of food" before they were emptied in the trash at Marriott's Potter-Burns Elementary School cafeteria in Pawtucket, where 32 percent of the students are eligible for free or reduced-price meals. Likewise, at ARA's Central Falls Elementary School, where 89 percent of the students qualify for free or reduced-price meals, students ate almost all of their carrots, breads, burritos, and sandwiches.
At the state-run cafeteria at Lonsdale Elementary School in Lincoln, a wealthier community where the state-administered program had not yet been phased out, students were "picking at their food," rather than eating it. On the majority of the trays, most or all of the rice, bread, and fruit had been left uneaten. McKenna reports that students had difficulty identifying the food, and tended to push it around the tray rather than eat it. For instance, one student said he couldn't identify his ham-salad sandwich. McKenna described it as a "pink mush on a roll."
After privatization, not only are students eating more of the meals on their trays, but more of the kids are buying meals. In Woonsocket, for instance, where more than 77 percent of the students qualify for free or reduced-price meals, participation has soared under Marriott's direction. During the 1991-92 school year, this "severe-need" district served 2,652 lunches a day. Now it averages 3,486 lunches daily—a 31 percent increase. Similarly, under the state-run system, Woonsocket only served 288 breakfasts daily; now it serves 597—a 107 percent increase.
Woonsocket is the rule, not the exception. In Providence, where more than 70 percent of the students receive free or reduced-price meals, participation has increased 22 percent since a private vendor took over the cafeterias. And wealthy school districts, like North Smithfield, have recorded 25 percent more students eating school lunches since the state system folded.
Between bites of a chicken-patty sandwich, Pauline Goin says she and her friends rarely bought lunch when the state ran the cafeteria, because the food was always a mystery—in both appearance and taste. "The other stuff was, you know, welfare food, and it tasted like it," the sixth-grader says bluntly. "This stuff is regular food—you know, for humans."
Greater participation seems to improve discipline during the once-raucous lunch period. Woonsocket's Caparco says that the time his office spends handling discipline problems has been cut by about 20 percent. "If the kids are eating, it's harder to be fighting," Caparco notes.
Ruth Eshelman, a nutrition professor at the University of Rhode Island, says that options are essential to students' satisfaction. "If I have a choice, I am much more likely to eat what I choose," Eshelman said. "If I have to eat carrots, they will be terrible, but if I pick carrots over green beans, the carrots might be wonderful."
The state-run school lunch program offered no choice. Each week, newspapers across the state printed the upcoming menu with a total of five listings—the entire state had one option each school day. Private vendors, on the other hand, offer about 20 alternatives daily. Woonsocket High School students, for instance, can now choose from five meats, several cheeses, and two kinds of bread in the deli line. They can also pick from a list of three or four hot sandwiches, two salads, and a pasta dish. In addition, the menu offers pizza and burritos. Even if the student tires of these regular items, several specials are offered each day. Students also choose from a selection of fresh fruit and vegetables at every meal. And parents are sent a monthly menu describing each day's choices and their nutritional value.
Private vendors also increase participation by using name brands: Pizza is supplied by a local Domino's franchise, and burritos are cooked according to a Taco Bell recipe. The name-brand packaging and advertising raise the likelihood that students will actually like the meal.
Private vendors recognize that student involvement is vital to customer satisfaction. In Woonsocket and Providence, groups of students and parents meet monthly with Marriott's food-service directors. Dina Dutremble, Woonsocket's business manager, says the state never responded to local concerns; private contractors, on the other hand, conduct weekly taste-tests.
Sandra Caron, a senior at Woonsocket High School who is a vegetarian, says that these meetings have allowed her to buy her lunch at school for the first time. After explaining to the food-service director that she and several other students would be willing to buy lunch if vegetarian entrées were more readily available, the company promised to look into it. "I suspected they would do what had always happened. Nothing ever happens," Caron says. "But within two weeks, there was a vegetarian item on the menu every day."
Ellen Haas, a USDA official who supervises the school lunch program from Washington, doesn't trust the private sector. She insists that devolution to local districts, like Rhode Island's privatization initiative, will lead to "short-term malnutrition and a lifetime of serious and costly health problems." Her fears were echoed by House Minority Leader Dick Gephardt, who equated devolution to "a dagger pointed at the hearts of our children." But a careful review of nutritional data demonstrates that Rhode Island's new, private programs outperform its state-run lunches. Haas's office did not return several phone callls.
Current USDA regulations require that school lunches provide at least a third of the Recommended Dietary Allowance (RDA) of seven nutrients—ranging from vitamins A and C to iron and thiamin. Rhode Island's state-run school-lunch program, however, did not meet these minimums. Bethany Algier, a nutritionist with Rhode Island's Department of Health, notes that a 1991 nutritional audit of the school-lunch program found that the state's program fell short in vitamin C and iron and did not meet the target for calories. Plus, this audit assumed implausibly that the students were eating everything on their trays. Although liberals can speak of the value of mandating nutrition levels, Rhode Island demonstrates that these mandates are not even enforced, and it is impossible to ensure the students will even eat the food.
The private vendors, however, combat both these flaws by providing more nutritious meals that the students actually want to eat. According to the Department of Health's nutritional audit, Marriott's menus exceed the state's program by at least three-fold in each of the RDA's seven nutrient categories. In fact, the private-sector program provides students with more than double the RDA of vitamin C, protein, and vitamin A—600 percent of the federal minimum for school lunches.
In addition to the RDA nutrients, the private vendors' meal plans have less fat, cholesterol, and sodium and more fiber than Rhode Island's state-run program. Over a 10-week period, the average Marriott lunch contained 33 percent less fat, 40 percent less cholesterol, and 40 percent less sodium than the state's lunches. Marriott's average lunch contained only half the saturated fat and twice the fiber of a government lunch.
Desrosiers and other cafeteria workers don't find these numbers surprising. In the private kitchens, fruits and vegetables rarely come from the can, since the two leading companies, ARA and Marriott, can use their buying power to get price breaks on more nutritious fresh and fresh-frozen produce. In North Smithfield, the independent school-lunch program has promised parents that it will never deep-fry a single item it sells; it even uses low-fat mozzarella cheese on its pizza. This district's hamburger meat contains about 15 percent fat, while the state-run program never used beef with less than 30 percent fat.
Most remarkable, however, is that private vendors don't just provide healthier meals that students will eat, they do it at a profit. Like discount book chains, Marriott and ARA make money selling a high-quality product cheaply by counting on high volume. The per-meal federal reimbursement formula gives the contractors an incentive to provide nutritious meals that kids will like, because the more meals they induce kids to buy, the greater their margins beyond fixed costs. So far, the strategy has paid off.
The secret to making it all work is the plan's clever payment system. The complicated arrangement provides the private contractor with an incentive to feed more students and allows the school district to keep most of the profits. School districts pay the contractor an annual fee to run the program. This fee pays for everything from capital improvements to salaries and food. The school district then keeps all the money the students pay. In addition, the district keeps all of the per-meal subsidies Washington sends it. If these revenues fall short of the district's payment to the private contractor, the contractor assumes the loss. This way, the district can't lose money and the contractor has an incentive to keep costs down while serving more meals. If the district turns a profit, the contractor gets a small cut.
Dutremble, the business manager for the Woonsocket School District, says that the school lunches were a daily headache under the state-run program. While the state provided all of the workers, menus, and food, her district had to pay for high-priced food-service equipment out of its local operating budget. These costs were often so high that some school districts could not afford "sneeze guards" in their serving lines.
Under Marriott's direction, the program is self-sufficient and has already turned a $42,000 profit this year, most of which the district keeps. In Woonsocket, the money is being used to purchase a new $30,000 dishwasher and a truck to deliver meals more efficiently to the elementary schools. Providence's program will profit by more than $100,000 this year, and North Smithfield was $5,000 in the black as of January 1.
In addition, fears that poor or small school districts would be ignored by private vendors are unfounded. In fact, poorer school districts—such as Woonsocket and Providence—are considered more desirable contracts for private vendors. These students are less likely to bring a lunch than their more affluent peers and therefore participation rates rise more dramatically when the food improves. Small school districts in Rhode Island joined together to negotiate joint competitive contracts. Lastly, the state limits the threat of corruption by putting the program out for bid frequently. Rhode Island prohibits school-lunch contracts of more than a year, and limits the number of renewals.
Rhode Island's experiment with privatized school lunches is the brainchild of a state legislator, Paul Crowley. A restaurant owner, Crowley was appalled to discover wages in state-run cafeterias were more than $4 per hour higher than at private restaurants, while nutrition levels were substandard.
For years, Crowley's efforts to privatize the program were blocked by state-employee unions. Two years ago, however, Crowley found that the Providence school board had conducted a study showing that a private vendor would save the district more than $600,000 a year. School officials there said they abandoned plans to privatize their program under union pressure. Crowley said the unions even sent busloads of lunch workers to their meetings. After public hearings, Crowley amended the state's Fiscal Year 1995 budget to phase out the school-lunch program this school year. Under the new system, local school districts—rather than the state—are reimbursed directly from the federal government. As in all states, students pay some, all, or none of the lunch cost depending on their parent's income; Washington coughs up the rest.
"We should be in the business of teaching, not feeding," Crowley says. "If other people make a better mousetrap, it makes more sense to buy theirs than build your own."
Although school-district officials universally praise the private-sector lunch program, some are concerned about the GOP's block-grant proposal. Providence officials, for instance, expect the district-wide student body to increase by at least 800 kids next year, and fear that the block grant will not cover extra meals. But Crowley claims the program will still thrive under the block grant proposal. As a district's population increases, more students will buy meals. Since private contractors get paid on a per-meal basis, a larger student body would compensate for a reduction in per-student dollars.
Rhode Island is evidence that converting federal funds to block grants can only improve the nation's school-lunch program. Given full responsibility for the programs, Crowley predicts more states will turn to innovative private alternatives that cost less and maintain higher standards.
In fact, Crowley believes if school lunches had been devolved years ago, Rhode Island would have privatized sooner. "We have found that local districts are best off when they handle this on their own," Crowley said. "Blockgranting can only help us continue on this path."Hire Education
By Stephen Glass
Speaking in Galesburg, Illinois, in January, President Clinton proposed a federally funded job-training program "to keep the American Dream alive in the 21st century." Cost to American taxpayers: $3.5 billion a year.
If he had driven about an hour north, Clinton could have visited a college campus that proves his program is unnecessary. DeVry Institute of Technology, headquartered in Oakbrook, Illinois, makes a handsome profit by offering a first-rate technical education to working-class students. This little-known school shows how private businesses outperform government in providing good job training.
On 13 campuses from Atlanta to Los Angeles, more than 15,000 students--35 percent of whom are black or Latino--are earning their bachelor's of science degrees at DeVry. Ninety-four percent of the school's graduates land jobs in their fields of study within six months, with an average starting salary exceeding $24,000 a year.
DeVry's alumni enjoy cutting-edge technical careers. At Hughes Communications, the nation's largest satellite company, 22 of the 30 engineers responsible for orbit maintenance are DeVry graduates. KLA Instruments, which designs quality-control systems for the manufacture of microchips, boasts that a fifth of its 1,000 employees graduated from DeVry. All this at an annual cost per student of $2,500 less than similar state-run programs.
And DeVry posted a $12-million profit on revenues of $211 million last year to boot.
Selling Job Opportunity
Since its founding in 1931 by Herman DeVry, the inventor of the portable motion-picture projector, the institute has specialized in technical training that leads to lucrative careers. DeVry, which grants accredited bachelor's degrees, is a for-profit venture whose stock trades on the NASDAQ exchange. In short, it sells job opportunity.
Five years ago, when Zaneta Rizzo graduated from a small high school in rural Louisiana, she "knew less than nothing" about computers, thought DOS was pronounced "dose," and was terrified of automatic-teller machines.
After two years of bouncing among jobs in fast-food restaurants, Rizzo enrolled at DeVry's Dallas campus. Recently she graduated with a bachelor's degree in computer information systems and is deciding between several job offers with computer-training firms. Before DeVry, Rizzo's salary peaked at $760 a month. Her current offers are for $25,000 a year--a 275 percent pay hike.
When Jeri Gomez graduated from high school near Fresno, California, she enrolled in a local community college to study the health sciences and dance, but classes were constantly being canceled, so she enlisted in the army. After serving in Desert Storm, Gomez enrolled at DeVry's Pomona campus. She is now deciding among several job offers in software programming that pay more than $30,000 a year.
Rizzo's and Gomez's stories are typical of DeVry students, many of whom field multiple job offers before their commencement. In fact, more than 95 percent of engineering and accounting majors are placed in their fields within six months of graduation--a success rate many of the nation's top schools never approach. How does DeVry do it? By running the college like a business.
Unlike most colleges, DeVry receives no direct government money or alumni gifts. Nearly all revenues, and therefore profits, come from tuition. And DeVry has found that the best way to attract more students--over half of whom are the first in their families to attend college--is to secure high-paying jobs for graduates. Dennis Keller, DeVry's chief executive officer, says the school avoids anything that doesn't help students find careers.
To this end, DeVry maintains an enormous placement system with more than 100 staffers and a database of thousands of employers. While most other schools in the country assign placement officers to handle a broad spectrum of careers, DeVry has found that employers prefer to communicate with staffers who understand their particular needs. For this reason, each officer is trained in a specific field. For instance, Motorola-- which is based near DeVry's DuPage County campus in northern Illinois--works closely with staffers specializing in telecommunications. The payoff has been tremendous. When the electronics giant was planning a major expansion in Illinois, it consulted DeVry placement officials in advance to secure an educated labor force.
DeVry also edges out the competition by studying labor trends, nationally as well as in the local markets near each campus. DeVry does not depend on the federal government's research, which is mostly retrospective; its researchers analyze new and growing fields. Using data from interviews with small and large employers, annual alumni surveys, and more than a dozen local-industry advisory panels, DeVry graduates can target rapidly emerging areas that traditional schools miss. Relying on data from the Bureau of Labor Statistics, for instance, most colleges until recently paid little attention to the cellular industry. DeVry officials, on the other hand, adjusted their telecommunications curriculum eight years ago to include this technology, and subsequently launched the careers of many graduates. "Health care is the next big one," says Norman Metz, a senior vice president at DeVry. "We are currently focusing on the medical-equipment industry that will handle the graying of America."
Despite these unsurpassed placement results, the Clinton administration has frowned upon for-profit schools like DeVry, insisting the capitalist model leads to a useless education. At a 1993 press conference, Labor Secretary Robert Reich told journalists to be wary of these institutions, claiming that they mismatch thousands of students, and that there is no market for their degrees. Reich's warning was reiterated by the media, including the Cleveland Plain Dealer, which urged some for-profit schools to carry "warning labels" detailing prospective students' chances of finding employment after graduation. In fact, if many state schools had to publish such information, students would likely flock to DeVry.
Blood, Sweat, and Jobs
Some for-profit trade schools, to be sure, are little more than diploma mills that give gullible students a shlock education. These schools usually go bankrupt when students catch on that their degree leads nowhere. But for an institution that is in business for the long haul, producing high-quality education for satisfied customers is essential to growth and profitability. Keller believes that every graduate represents the school: If an employer is unsatisfied with the quality of a single graduate's work, he is unlikely to hire from DeVry in the future. That would ultimately harm the bottom line.
To that end, the school maintains a demanding curriculum that students call "brutal" and Keller calls "tough love." It is a no-frills, lots-of-sweat education. The rigorous process begins even before the classes start. Although the school accepts SAT and ACT test scores--applicants average at the 45th percentile--all students are required to take DeVry's admissions test in math. About 14 percent of the applicants fail the exam. Of the remaining students, about a quarter are admitted on the condition that they take remedial classes. Applicants are also required to take a College Board English test that determines their placement in humanities courses.
From the first day, students follow the curriculum in lockstep. There are no electives. Students immediately choose a major from among five fields: electronics- engineering technology, computer information systems, business operations, telecommunications management, or accounting. Each major requires eight or nine semesters, and can be completed in three years with summer school.
Students and DeVry's senior management both prefer this inflexible system. Like a manufacturer, the school desires a reputation for providing a consistent "product"; students say they enjoy receiving firm direction. "This gets rid of a lot of the time- wasting filler classes, like underwater basket-weaving, that people take elsewhere," recalls Rose Huening, a 1986 graduate.
Heavy Lifting
Here there is no time to waste. Each term, DeVry students take at least four classes, plus labs, often exceeding a conventional courseload by four to six credit hours. The first-year courseload for computer information systems is typical: five computer- science classes, four computer labs, two math courses and a math lab, two English courses with one writing lab, an economics course, a psychology course, and a business course. In addition, since many of the students have never before been pushed to work so hard, all freshmen enroll in a class on "success strategies," which teaches study skills and time-management techniques.
George Dean, the vice president for educational planning, believes that many traditional colleges waste a great deal of energy embracing new teaching methods. DeVry doesn't mandate teaching methods--professors can choose whatever textbooks they want--but the level of academic expectations is set at the head office, and it's set high. "At the end of the course, the students have to be able to do x and y and z," Dean says. "If it works better at the Columbus campus to teach it z then y then x, it doesn't bother me."
Dean is comfortable giving the professors ample latitude because they are required to gain real-world experience in their field, and so tend to prefer the most practical methods. Although some students earn money for tuition by assisting faculty members, they are prohibited from teaching, and are usually limited to grading papers.
Unlike trade schools that teach specific skills (many of which become obsolete as technology changes), DeVry's curriculum focuses on teaching students how to reason. In many ways, DeVry offers the liberal-arts version of a technical education: students learn how to solve technical problems. They are drilled thoroughly on the basics, and required to spend countless hours in the lab to build an educational foundation. On exams, students are rarely asked straight-forward mathematical questions; instead, they are usually given detailed descriptions of real-world problems, including information they must recognize as extraneous. Dean claims that this education prepares students to operate efficiently in the business world. Furthermore, teachers will fail students whose lab reports are not written in proper English, regardless of the experiment's outcome. DeVry doesn't shortchange the humanities, because these non-technical abilities will be vital to the students' careers. Alumni routinely tell Dean that the technical skills get them hired and the reasoning skills get them promoted.
A student with a grade point average below a "C" is placed on academic probation, and prohibited from taking a relaxed schedule. If the student's g.p.a. remains below a "C" average the following semester, he or she is expelled. Every year, 20 percent of the student body flunks out. DeVry does not pamper its students en route to the diploma. "We have hard classes, but if that is not met with enough commitment to be successful, then it is detrimental to this company for that student to stay," Keller says. Huening's class is a perfect example: of the 325 students who started, only 94 graduated on time.
Just as auto manufacturers are constantly reviewing the efficiency of their cars, DeVry maintains strict quality control. About a decade ago, DeVry was reviewing each course every three years, which was considered swift compared to traditional schools. Now it rewrites each course at least once a year. During the summer term, faculty members visit hundreds of employers across the nation and find out what their needs will be in five to 10 years. Together with information offered by industry leaders on DeVry's dozen or so curriculum-advisory boards, the school sets new course requirements. For instance, a few years ago most computer-programming courses only taught a programming language called COBOL, but professors noted that firms near some of their campuses were switching from mainframes to desktop-based systems that require C language. After DeVry adjusted its curriculum, businesses responded by hiring more of its graduates. Although industry does not dictate DeVry's curriculum, the school must measure success and failure by its placement rate.
The institute's educational audit is exhaustive. DeVry's central headquarters evaluates randomly selected writing samples from students on every campus twice a year in order to ensure that writing skills remain high. The institute also administers standardized tests in electronics to be certain that technical skills are not dropping. Finally, administrators also investigate courses with unusual grade distribution.
The best evidence of the quality of DeVry's curriculum is the on-the-job success of its graduates. Bill Buglewicz, a senior manufacturing manager at KLA Instruments, recruits at six of the campuses every year. "DeVry students have a great work ethic, higher motivation, and initiative," Buglewicz says. "The courseload, in particular the exhaustive lab work, makes them wonderful thinkers and troubleshooters."
Gary Nuzzi, a 1983 graduate, says the lab work helped him and 1963 graduate Bill Blethen develop a revolutionary lighting system that won an Academy Award for technical achievement last year. The portable strobe light allows movie cameras to capture detail at high speed. "The education was, at times, very challenging, but very practical," Nuzzi adds.
The Bottom Line
Most remarkable, however, is that DeVry makes a profit. By defining its mission narrowly, the school has perfected its product and minimized waste. DeVry's cost-saving efforts are immediately evident. There are no ivy-laden academic halls or rolling greens. Rather, each DeVry campus holds its classes in an office building that is usually surrounded by a parking lot. In such a modern facility, little space is wasted, maintenance costs are moderate, and classrooms can accommodate professors from various departments. And the school runs three cycles of classes--morning, afternoon, and evening--to use the space more efficiently. The institute does not own any dormitories. Instead, DeVry leases housing near its campuses from local landlords and sublets it to the students at a modest profit.
DeVry also holds down costs by maintaining a narrow academic focus. DeVry does not fund any sports teams or clubs that are not directly related to job placement; on some campuses, students independently run intramural leagues by securing outside sponsors. "We are not trying to be all things to all people," says Kathy Perdue, head of the accounting department at the Atlanta campus. "We figured out what we do best, concentrating on the academics to get jobs, not filling social needs."
The school does not grant tenure to any of its professors, allowing it to respond quickly to fluctuating enrollments. Moreover, DeVry is not a research or publishing institution, so faculty members carry teaching loads two to three times that of other college professors. Finally, since the school operates at full capacity, even in the summers, professors are expected to work as they would in private industry: year-round.
DeVry maximizes tuition revenue by actively recruiting students through television and newspaper advertising, direct mail, and recruiters. A traveling sales force of 200 visits high schools and Army bases throughout North America, while another 100 salespeople respond to applicants who call DeVry in response to advertising. DeVry's $15-million advertising campaign promotes its focus on careers, profiling graduates with senior positions in prominent companies like Coca-Cola.
The individual cost-saving measures add up. The price tag of a DeVry education is $6,015 for two semesters, or $26,730 for the complete degree. By comparison, a four- year degree at public, non-research universities in the same states where DeVry operates costs much more in tuition and taxpayer subsidies: $40,148 in California, for instance, and $35,440 in Georgia.
As an accredited school, DeVry participates in all the same financial aid programs as public schools. DeVry's loan default rate is 17 percent--better than many for-profit trade schools and far below the government's intervention zone of 25 to 30 percent. Industry analysts note that the institute's job placement record and bachelor's degree program distinguishes it from trade schools.
For-profit schools such as DeVry are a model for the future of university education. As more adults return to school later in life, they will find they prefer the no- nonsense DeVry degree, which can be finished in three years. Currently the average age of DeVry students is 26. In addition, the number of high-school graduates is expected to keep rising through 2013. Combine that statistic with downsizing in the military, for- profit education's top rival for high-school graduates, and DeVry seems to enjoy a rosy outlook. In fact, the results are already beginning to show: Enrollment was up 4 percent this year, and the company added two new campuses. "Frankly, the demand is growing quicker than our ability to supply it," says Norman Levine, DeVry's chief financial officer. And two other for-profit college-education companies announced initial public offerings this year.
Despite DeVry's proven track record in securing jobs for working-class students, bureaucrats may prevent the school from expanding. In New York City, for example, the state's department of education has not yet approved DeVry's 1993 accreditation application. Once the department okays the school's academic standards, government analysts will determine DeVry's impact on established local schools. Every college in New York City will be invited to comment on DeVry's entrance into the market. If area schools fear DeVry will steal students from their tuition rolls, they can urge the department to reject the application. The Education Department's Bureau of Planning will also analyze whether the local job market can accommodate the future DeVry graduates. Department officials note that, due to understaffing, it normally takes several years for a school's 300-page application to be approved.
Even skeptics of for-profit education concede that public schools and private non- profits are unable to expand to meet the growing demand. Public universities would require greater tax subsidies to support a larger student base, and private non-profits would have to raise even more through alumni giving. "Time and time again, we have seen that the healthiest and best systems in the world involve private enterprise competing," says Keller. "We're the future of education."
Speaking in Galesburg, Illinois, in January, President Clinton proposed a federally funded job-training program "to keep the American Dream alive in the 21st century." Cost to American taxpayers: $3.5 billion a year.
If he had driven about an hour north, Clinton could have visited a college campus that proves his program is unnecessary. DeVry Institute of Technology, headquartered in Oakbrook, Illinois, makes a handsome profit by offering a first-rate technical education to working-class students. This little-known school shows how private businesses outperform government in providing good job training.
On 13 campuses from Atlanta to Los Angeles, more than 15,000 students--35 percent of whom are black or Latino--are earning their bachelor's of science degrees at DeVry. Ninety-four percent of the school's graduates land jobs in their fields of study within six months, with an average starting salary exceeding $24,000 a year.
DeVry's alumni enjoy cutting-edge technical careers. At Hughes Communications, the nation's largest satellite company, 22 of the 30 engineers responsible for orbit maintenance are DeVry graduates. KLA Instruments, which designs quality-control systems for the manufacture of microchips, boasts that a fifth of its 1,000 employees graduated from DeVry. All this at an annual cost per student of $2,500 less than similar state-run programs.
And DeVry posted a $12-million profit on revenues of $211 million last year to boot.
Selling Job Opportunity
Since its founding in 1931 by Herman DeVry, the inventor of the portable motion-picture projector, the institute has specialized in technical training that leads to lucrative careers. DeVry, which grants accredited bachelor's degrees, is a for-profit venture whose stock trades on the NASDAQ exchange. In short, it sells job opportunity.
Five years ago, when Zaneta Rizzo graduated from a small high school in rural Louisiana, she "knew less than nothing" about computers, thought DOS was pronounced "dose," and was terrified of automatic-teller machines.
After two years of bouncing among jobs in fast-food restaurants, Rizzo enrolled at DeVry's Dallas campus. Recently she graduated with a bachelor's degree in computer information systems and is deciding between several job offers with computer-training firms. Before DeVry, Rizzo's salary peaked at $760 a month. Her current offers are for $25,000 a year--a 275 percent pay hike.
When Jeri Gomez graduated from high school near Fresno, California, she enrolled in a local community college to study the health sciences and dance, but classes were constantly being canceled, so she enlisted in the army. After serving in Desert Storm, Gomez enrolled at DeVry's Pomona campus. She is now deciding among several job offers in software programming that pay more than $30,000 a year.
Rizzo's and Gomez's stories are typical of DeVry students, many of whom field multiple job offers before their commencement. In fact, more than 95 percent of engineering and accounting majors are placed in their fields within six months of graduation--a success rate many of the nation's top schools never approach. How does DeVry do it? By running the college like a business.
Unlike most colleges, DeVry receives no direct government money or alumni gifts. Nearly all revenues, and therefore profits, come from tuition. And DeVry has found that the best way to attract more students--over half of whom are the first in their families to attend college--is to secure high-paying jobs for graduates. Dennis Keller, DeVry's chief executive officer, says the school avoids anything that doesn't help students find careers.
To this end, DeVry maintains an enormous placement system with more than 100 staffers and a database of thousands of employers. While most other schools in the country assign placement officers to handle a broad spectrum of careers, DeVry has found that employers prefer to communicate with staffers who understand their particular needs. For this reason, each officer is trained in a specific field. For instance, Motorola-- which is based near DeVry's DuPage County campus in northern Illinois--works closely with staffers specializing in telecommunications. The payoff has been tremendous. When the electronics giant was planning a major expansion in Illinois, it consulted DeVry placement officials in advance to secure an educated labor force.
DeVry also edges out the competition by studying labor trends, nationally as well as in the local markets near each campus. DeVry does not depend on the federal government's research, which is mostly retrospective; its researchers analyze new and growing fields. Using data from interviews with small and large employers, annual alumni surveys, and more than a dozen local-industry advisory panels, DeVry graduates can target rapidly emerging areas that traditional schools miss. Relying on data from the Bureau of Labor Statistics, for instance, most colleges until recently paid little attention to the cellular industry. DeVry officials, on the other hand, adjusted their telecommunications curriculum eight years ago to include this technology, and subsequently launched the careers of many graduates. "Health care is the next big one," says Norman Metz, a senior vice president at DeVry. "We are currently focusing on the medical-equipment industry that will handle the graying of America."
Despite these unsurpassed placement results, the Clinton administration has frowned upon for-profit schools like DeVry, insisting the capitalist model leads to a useless education. At a 1993 press conference, Labor Secretary Robert Reich told journalists to be wary of these institutions, claiming that they mismatch thousands of students, and that there is no market for their degrees. Reich's warning was reiterated by the media, including the Cleveland Plain Dealer, which urged some for-profit schools to carry "warning labels" detailing prospective students' chances of finding employment after graduation. In fact, if many state schools had to publish such information, students would likely flock to DeVry.
Blood, Sweat, and Jobs
Some for-profit trade schools, to be sure, are little more than diploma mills that give gullible students a shlock education. These schools usually go bankrupt when students catch on that their degree leads nowhere. But for an institution that is in business for the long haul, producing high-quality education for satisfied customers is essential to growth and profitability. Keller believes that every graduate represents the school: If an employer is unsatisfied with the quality of a single graduate's work, he is unlikely to hire from DeVry in the future. That would ultimately harm the bottom line.
To that end, the school maintains a demanding curriculum that students call "brutal" and Keller calls "tough love." It is a no-frills, lots-of-sweat education. The rigorous process begins even before the classes start. Although the school accepts SAT and ACT test scores--applicants average at the 45th percentile--all students are required to take DeVry's admissions test in math. About 14 percent of the applicants fail the exam. Of the remaining students, about a quarter are admitted on the condition that they take remedial classes. Applicants are also required to take a College Board English test that determines their placement in humanities courses.
From the first day, students follow the curriculum in lockstep. There are no electives. Students immediately choose a major from among five fields: electronics- engineering technology, computer information systems, business operations, telecommunications management, or accounting. Each major requires eight or nine semesters, and can be completed in three years with summer school.
Students and DeVry's senior management both prefer this inflexible system. Like a manufacturer, the school desires a reputation for providing a consistent "product"; students say they enjoy receiving firm direction. "This gets rid of a lot of the time- wasting filler classes, like underwater basket-weaving, that people take elsewhere," recalls Rose Huening, a 1986 graduate.
Heavy Lifting
Here there is no time to waste. Each term, DeVry students take at least four classes, plus labs, often exceeding a conventional courseload by four to six credit hours. The first-year courseload for computer information systems is typical: five computer- science classes, four computer labs, two math courses and a math lab, two English courses with one writing lab, an economics course, a psychology course, and a business course. In addition, since many of the students have never before been pushed to work so hard, all freshmen enroll in a class on "success strategies," which teaches study skills and time-management techniques.
George Dean, the vice president for educational planning, believes that many traditional colleges waste a great deal of energy embracing new teaching methods. DeVry doesn't mandate teaching methods--professors can choose whatever textbooks they want--but the level of academic expectations is set at the head office, and it's set high. "At the end of the course, the students have to be able to do x and y and z," Dean says. "If it works better at the Columbus campus to teach it z then y then x, it doesn't bother me."
Dean is comfortable giving the professors ample latitude because they are required to gain real-world experience in their field, and so tend to prefer the most practical methods. Although some students earn money for tuition by assisting faculty members, they are prohibited from teaching, and are usually limited to grading papers.
Unlike trade schools that teach specific skills (many of which become obsolete as technology changes), DeVry's curriculum focuses on teaching students how to reason. In many ways, DeVry offers the liberal-arts version of a technical education: students learn how to solve technical problems. They are drilled thoroughly on the basics, and required to spend countless hours in the lab to build an educational foundation. On exams, students are rarely asked straight-forward mathematical questions; instead, they are usually given detailed descriptions of real-world problems, including information they must recognize as extraneous. Dean claims that this education prepares students to operate efficiently in the business world. Furthermore, teachers will fail students whose lab reports are not written in proper English, regardless of the experiment's outcome. DeVry doesn't shortchange the humanities, because these non-technical abilities will be vital to the students' careers. Alumni routinely tell Dean that the technical skills get them hired and the reasoning skills get them promoted.
A student with a grade point average below a "C" is placed on academic probation, and prohibited from taking a relaxed schedule. If the student's g.p.a. remains below a "C" average the following semester, he or she is expelled. Every year, 20 percent of the student body flunks out. DeVry does not pamper its students en route to the diploma. "We have hard classes, but if that is not met with enough commitment to be successful, then it is detrimental to this company for that student to stay," Keller says. Huening's class is a perfect example: of the 325 students who started, only 94 graduated on time.
Just as auto manufacturers are constantly reviewing the efficiency of their cars, DeVry maintains strict quality control. About a decade ago, DeVry was reviewing each course every three years, which was considered swift compared to traditional schools. Now it rewrites each course at least once a year. During the summer term, faculty members visit hundreds of employers across the nation and find out what their needs will be in five to 10 years. Together with information offered by industry leaders on DeVry's dozen or so curriculum-advisory boards, the school sets new course requirements. For instance, a few years ago most computer-programming courses only taught a programming language called COBOL, but professors noted that firms near some of their campuses were switching from mainframes to desktop-based systems that require C language. After DeVry adjusted its curriculum, businesses responded by hiring more of its graduates. Although industry does not dictate DeVry's curriculum, the school must measure success and failure by its placement rate.
The institute's educational audit is exhaustive. DeVry's central headquarters evaluates randomly selected writing samples from students on every campus twice a year in order to ensure that writing skills remain high. The institute also administers standardized tests in electronics to be certain that technical skills are not dropping. Finally, administrators also investigate courses with unusual grade distribution.
The best evidence of the quality of DeVry's curriculum is the on-the-job success of its graduates. Bill Buglewicz, a senior manufacturing manager at KLA Instruments, recruits at six of the campuses every year. "DeVry students have a great work ethic, higher motivation, and initiative," Buglewicz says. "The courseload, in particular the exhaustive lab work, makes them wonderful thinkers and troubleshooters."
Gary Nuzzi, a 1983 graduate, says the lab work helped him and 1963 graduate Bill Blethen develop a revolutionary lighting system that won an Academy Award for technical achievement last year. The portable strobe light allows movie cameras to capture detail at high speed. "The education was, at times, very challenging, but very practical," Nuzzi adds.
The Bottom Line
Most remarkable, however, is that DeVry makes a profit. By defining its mission narrowly, the school has perfected its product and minimized waste. DeVry's cost-saving efforts are immediately evident. There are no ivy-laden academic halls or rolling greens. Rather, each DeVry campus holds its classes in an office building that is usually surrounded by a parking lot. In such a modern facility, little space is wasted, maintenance costs are moderate, and classrooms can accommodate professors from various departments. And the school runs three cycles of classes--morning, afternoon, and evening--to use the space more efficiently. The institute does not own any dormitories. Instead, DeVry leases housing near its campuses from local landlords and sublets it to the students at a modest profit.
DeVry also holds down costs by maintaining a narrow academic focus. DeVry does not fund any sports teams or clubs that are not directly related to job placement; on some campuses, students independently run intramural leagues by securing outside sponsors. "We are not trying to be all things to all people," says Kathy Perdue, head of the accounting department at the Atlanta campus. "We figured out what we do best, concentrating on the academics to get jobs, not filling social needs."
The school does not grant tenure to any of its professors, allowing it to respond quickly to fluctuating enrollments. Moreover, DeVry is not a research or publishing institution, so faculty members carry teaching loads two to three times that of other college professors. Finally, since the school operates at full capacity, even in the summers, professors are expected to work as they would in private industry: year-round.
DeVry maximizes tuition revenue by actively recruiting students through television and newspaper advertising, direct mail, and recruiters. A traveling sales force of 200 visits high schools and Army bases throughout North America, while another 100 salespeople respond to applicants who call DeVry in response to advertising. DeVry's $15-million advertising campaign promotes its focus on careers, profiling graduates with senior positions in prominent companies like Coca-Cola.
The individual cost-saving measures add up. The price tag of a DeVry education is $6,015 for two semesters, or $26,730 for the complete degree. By comparison, a four- year degree at public, non-research universities in the same states where DeVry operates costs much more in tuition and taxpayer subsidies: $40,148 in California, for instance, and $35,440 in Georgia.
As an accredited school, DeVry participates in all the same financial aid programs as public schools. DeVry's loan default rate is 17 percent--better than many for-profit trade schools and far below the government's intervention zone of 25 to 30 percent. Industry analysts note that the institute's job placement record and bachelor's degree program distinguishes it from trade schools.
For-profit schools such as DeVry are a model for the future of university education. As more adults return to school later in life, they will find they prefer the no- nonsense DeVry degree, which can be finished in three years. Currently the average age of DeVry students is 26. In addition, the number of high-school graduates is expected to keep rising through 2013. Combine that statistic with downsizing in the military, for- profit education's top rival for high-school graduates, and DeVry seems to enjoy a rosy outlook. In fact, the results are already beginning to show: Enrollment was up 4 percent this year, and the company added two new campuses. "Frankly, the demand is growing quicker than our ability to supply it," says Norman Levine, DeVry's chief financial officer. And two other for-profit college-education companies announced initial public offerings this year.
Despite DeVry's proven track record in securing jobs for working-class students, bureaucrats may prevent the school from expanding. In New York City, for example, the state's department of education has not yet approved DeVry's 1993 accreditation application. Once the department okays the school's academic standards, government analysts will determine DeVry's impact on established local schools. Every college in New York City will be invited to comment on DeVry's entrance into the market. If area schools fear DeVry will steal students from their tuition rolls, they can urge the department to reject the application. The Education Department's Bureau of Planning will also analyze whether the local job market can accommodate the future DeVry graduates. Department officials note that, due to understaffing, it normally takes several years for a school's 300-page application to be approved.
Even skeptics of for-profit education concede that public schools and private non- profits are unable to expand to meet the growing demand. Public universities would require greater tax subsidies to support a larger student base, and private non-profits would have to raise even more through alumni giving. "Time and time again, we have seen that the healthiest and best systems in the world involve private enterprise competing," says Keller. "We're the future of education."
A pension deficit disorder
Policy Review, Winter 1995
by Glass, Stephen
This year the largest number of teachers ever will become eligible for retirement. They're the lucky ones. With the help of teachers' unions, many of these instructors have won high salaries, small class sizes and seemingly generous retirement plans. Unions have fought long and hard for teacher benefits, and have emerged as the most important political advocate for the interests of public educators. That's why the vast majority of teachers join unions and pay steep annual dues. Aggressive lobbyists like the National Education Association don't deliver on the cheap.
However, when it comes to one of the most significant teacher benefits--employee pensions--the unions' performance is a matrix of betrayal. Unions have crafted a pension system that stymies teachers' career advancement. By penalizing educators who change districts, instructors and their families are forced to give up job opportunities and stay put, or jeopardize their retirement security.
Just ask John Kahle.
Kahle landed his first job in Overland Park, Kansas where for three and one-half years he taught writing to high school and junior high students. Like many teachers, the young instructor decided he needed to complete more graduate work to excel. He enrolled in a master's program in Nebraska and resumed teaching in Lincoln.
But shortly after his move, Kahle discovered that his pension wasn't portable: he lost all the money put in by the state, and some of the money he put in himself. One year later, Kahle's wife was accepted into the graduate history program at the University of Minnesota. Kahle now teaches seventh-grade English at Eden Prairie Central Middle School and once again he lost some of his pension when his family moved north.
"The inability to take my pension with me has been one of the most frustrating parts of being a teacher," Kahle added. "Teachers can feel trapped in a specific location since they lose if they move."
Or ask Clementina Duron, a principal in one of Oakland's roughest Latino neighborhoods.
After nearly a decade working in the public school system, Duron had a dream of starting a new school that would provide more educational opportunity for Latino students. So when the California legislature paved the way last year for publicly funded independent schools, called charter schools, Duron was one of the first to sign up.
In the year that has followed, Duron has jumped through countless hoops to get the 120-student Jingletown Middle School off the ground. Without any startup capital she has leased a school building, hired maintenance staff, developed a curriculum, and even has a waiting list of more than 30 students.
But Duron can't hire teachers from public schools.
It's not that she doesn't pay them well enough: The payscale surpasses the Oakland public school system. Nor are the medical benefits inferior: Jingletown's teachers have the same health plan as their public school counterparts.
According to Duron, non-portable pensions have been the silent obstacle to educational reform.
"I interview teachers who want to come here and we want to have, but pensions stop them, "Duron said, adding that the teachers prefer Jingletown's smaller class size and focus on academic basics. "It's hard to have any incentive when they will lose their pension."
These stories illustrate how pension systems have indentured educators by trapping them in jobs they don't want. Teachers' unions use pension politics to increase their own institutional power at their members' expense. In particular, this year teachers' unions demanded more representation on pension boards and increased social investing--despite their proven downward effect on investment yields. Moreover, the unions have vowed to fight all efforts to reform pension policies that would both increase mobility and eliminate underfunding.
STAGNANT PROFESSIONALS
Like doctors and lawyers, teachers consider themselves professionals, educated men and women who possess a universally applicable skill. An algebra instructor in Oregon would have no difficulty teaching the quadratic formula in Alabama. But unlike their professional counterparts, teachers cannot take advantage of a fluctuating market if they want to keep their nest egg intact: They are unable to move from state to state and in some case from a city to the suburbs. Teachers' unions have successfully lobbied all 50 state legislatures to create complex pension systems that severely punish mobility.
The typical teacher accumulates a pension over a 25-to 35-year period, as the teacher and the district/state jointly contribute to the statewide retirement system. Nearly all teacher retirement plans are defined-benefit systems where teachers are guaranteed a specific annual pension calculated as a percentage of their final salary. The state invests the contributions in order to pay future benefits.
The state/district contribution forms the bulk of teacher pensions; on average, the teacher contribution is about 6.5 percent of his annual salary, while the state typically contributes 12 to 13 percent, with some contributing more than 19 percent every year. Teachers are always entitled to their own contribution, but they can only receive the much larger state portion once they have become "vested," which requires working in the system for a specific number of years. Therefore, in order to safeguard themselves from losing the lion's share of their pension, teachers must remain in the same region until they are vested. In the private sector employees never have to wait more than five years to be fully vested, but state legislators have set longer waiting periods for teachers. Twenty states require teachers to work for 10 years before vesting and West Virginia requires teachers to work for 20 years before being vested in the system. In fact, only five states require less than the five year ceiling found in the private sector.
In addition to elevated vesting ages, almost all state programs have been constructed as " cliff vesting" systems, in which employees cannot receive any of the state contribution until they have worked the stipulated number of years. In the private sector, on the other hand, many pension programs are graduated, allowing non-vested employees to receive a portion of the employer contribution.
WORSE THAN THE PRIVATE SECTOR
Also unlike the private sector, vesting- requirements don't protect teachers. Teachers who move are penalized by the states if they don't work in the system for a specific number of years.
Consider a typical case: A teacher takes an out-of-state teaching job after working for 16 years in New York state--six years after being vested. This teacher is four years short of the 20-years-of-service level required for retirement. While the state must pay this instructor a pension at age 60, along with other vested teachers, it penalizes the teacher five percent per year for each year short of 20 years. Hence, the teacher's pension is reduced by 20 percent.
"Simply stated, teachers who change systems experience a significant drop in their pension," says Bruce Cooper, a Fordham University professor of education.
A study published by Carnegie Forum on Education and the Economy, found that teachers who spend 20 years with one employer and then 15 years with another earn only 70 percent of the pension benefits that they would have earned had they remained with a single employer.
Teachers' unions--the supposed protector of the nation's educators--are the chief culprit in enslaving their own constituency. While the unions were extremely effective in starting pension programs decades ago, in recent years they have focused on advancing their own interests at the expense of the instructors.
SIMPLE REFORM
There is a simple pension reform that would permit teachers to move between districts, whether for family reasons or in search of greater opportunity. It is called a defined-contribution system.
Under this system, increasingly common in the private sector, teachers would each have their own, completely portable, pension accounts. When they retired, their pensions would consist of the states' and their own contributions plus the rate of return on their investments.
Michigan's Governor John Engler converted state employees, including teachers, from a defined-benefit to a defined-contribution system last year. Maine has also begun a defined-contribution system for new teachers.
In addition to their portability, defined-contribution plans offer enormous advantages for teachers. Teacher pension plans in 35 states and the District of Columbia are seriously underfunded--with promised benefits exceeding expected assets by a total of $63.4 billion. Only 38 percent of Maine's pension promises are funded, only 33 percent of Indiana's, only 9 percent of West Virginia's. The Oklahoma Teacher Retirement System is projected to run out of money in the 2015, leaving $800 million a year in unfunded obligations. The Oklahoma state legislature will then be confronted with two options: Raise taxes about $1,000 a year per family, or welch on their promise to retired teachers. The latter seems more likely.
A defined-contribution plan gives the teacher greater certainty, because pension security does not depend on future tax increases. Moreover, because each teacher owns his retirement assets, a defined-contribution system can prevent pension funds from being raided by state legislatures for non-investment purposes.
Teachers' unions, however, j are staunchly opposed to defined-contribution plans. The Michigan Education Association fought Governor Engler tooth and nail over his pension reform. "The unions wanted control and the new system also allows teachers to more readily move," Engler's press secretary John Truscott said. "The MEA tried everything to stop us." At its latest conference, the American Federation of Teachers endorsed a resolution calling for "stringent measures" to battle defined-contribution plans.
MORE UNION POWER, BUT LOSING MONEY
Why this resistance? One reason may be that control of retirement funds gives teachers' unions phenomenal financial power. Teacher pension assets now total $342 billion, an enormous pool of capital, and the unions go to great pains to ensure that their allies make investment decisions, even if it means jeopardizing the retirement income of their own members..
Consider Resolution 29, recently endorsed by the AFT's Retirement Issues Committee, which called for action against state legislatures which demand that pension fund trustees have some financial knowledge. Currently, many of the systems' board members are retired and active teachers which are often selected by the union. But, the Retirement Issues Committee resolved that efforts to set minimum qualifications for trustees, in order to ensure pension fund investments are decided according to established principles, are "unacceptable pre-conditions." The unions prefer to increase the number of teachers on pension fund boards and control which teachers will fill these positions.
Greater union involvement on pension fund boards is harmful to teachers. Olivia Mitchell, a professor of risk management at the University of Pennsylania's Wharton School, determined that low funding levels were correlated to increased employee representation on public pension system boards.
In a study of 168 public employee retirement systems, Mitchell found that raising the number of employees on pension fund boards by 10 percent lowers investment yield by 2 percentage points. Currently the average teacher pension board consists of ten members, six of whom are teachers. Therefore increasing the board by only one member will result in investment returns dropping from an average of between seven and eight percent to between five and six percent.
For instance, in 1993, Mississippi unions lobbied the state legislature to add another teacher to the Public Employees' Retirement System, bringing the total number of members to ten. Mississippi PERS, with assets of about $5.8 billion averages about an eight percent return on its investments annually. Thanks to the new teacher on the PERS board, according to Prof. Mitchell's calculations, the Mississippi pension fund is likely to make $116 million less per year on its investments.
PENSION RISKED TO STOP REFORM
Teachers' unions are now using their control of pension funds to try to deny capital to companies competing with public education. At its 1994 convention, the National Education Association adopted a resolution calling on state chapters to lobby retirement systems to divest from corporations that support the commercialization or privatization of public schools.
Simply stated, the NEA has risked its members retirement benefits in a political battle against educational reform.
In some cases, the union-dominated pension funds lose money because they make investments for political reasons. During the late 1980s, the Kansas Public Employees' Retirement System, which includes the state's teachers, invested heavily in a number of Kansas-based companies in the hopes that it would keep jobs in the state. Among those investments was a savings and loan association which later failed and left the fund with a loss of $65 million and a coal company which filed for bankruptcy. In total, KPERS has written off $200 million in investments targeted for political reasons.
Union officials insist that pension plans are in excellent fiscal shape. Even so, at the NEA's 1993 Retirement and Benefits Forum in South Carolina, a budget specialist was asked to explain how tax structures could be reformed to "assure adequate funding" of pension plans. Steven Gold of the Center for the Study of the States outlined several strategies including increasing income tax, increasing property tax, and increasing sales tax.
"It's really a matter of putting together a package of tax increases and designing it carefully," Gold told the union members, noting they should prepare now: "It is possible that in 1995, or some time before long, states will be able to raise taxes." Teachers looking at the strength of the tax-limitation movement in federal, state, and local elections in 1994 would be well-advised to consider whether they can rely on future tax increases to guarantee their defined-benefit plans.
Defined-benefit systems not only expose educators to unfunded liability risk, they also hamper educational reform. For instance, under a defined-contribution plan, Clementina Duron would have no trouble attracting teachers: Public school instructors could readily move in and out of the system.
Teachers' unions have always fought educational reform--from voucher and privitization efforts to charter schools. Lobbying to maintain outdated defined-benefit plans over defined-contribution plans has become one of the unions' tools in this ongoing educational war. Without teacher mobility, educational reform is impossible since each new system relies to some degree on schools competing for the best teachers.
A defined-contribution system will ensure educators' retirement security and will remove a stumbling block to educational reform. However, if teachers continue to follow their unions, past performance demonstrates that investment yields will certainly fall and teachers will find their silver years tarnished.
Stephen Glass is assistant editor of Policy Review.
by Glass, Stephen
This year the largest number of teachers ever will become eligible for retirement. They're the lucky ones. With the help of teachers' unions, many of these instructors have won high salaries, small class sizes and seemingly generous retirement plans. Unions have fought long and hard for teacher benefits, and have emerged as the most important political advocate for the interests of public educators. That's why the vast majority of teachers join unions and pay steep annual dues. Aggressive lobbyists like the National Education Association don't deliver on the cheap.
However, when it comes to one of the most significant teacher benefits--employee pensions--the unions' performance is a matrix of betrayal. Unions have crafted a pension system that stymies teachers' career advancement. By penalizing educators who change districts, instructors and their families are forced to give up job opportunities and stay put, or jeopardize their retirement security.
Just ask John Kahle.
Kahle landed his first job in Overland Park, Kansas where for three and one-half years he taught writing to high school and junior high students. Like many teachers, the young instructor decided he needed to complete more graduate work to excel. He enrolled in a master's program in Nebraska and resumed teaching in Lincoln.
But shortly after his move, Kahle discovered that his pension wasn't portable: he lost all the money put in by the state, and some of the money he put in himself. One year later, Kahle's wife was accepted into the graduate history program at the University of Minnesota. Kahle now teaches seventh-grade English at Eden Prairie Central Middle School and once again he lost some of his pension when his family moved north.
"The inability to take my pension with me has been one of the most frustrating parts of being a teacher," Kahle added. "Teachers can feel trapped in a specific location since they lose if they move."
Or ask Clementina Duron, a principal in one of Oakland's roughest Latino neighborhoods.
After nearly a decade working in the public school system, Duron had a dream of starting a new school that would provide more educational opportunity for Latino students. So when the California legislature paved the way last year for publicly funded independent schools, called charter schools, Duron was one of the first to sign up.
In the year that has followed, Duron has jumped through countless hoops to get the 120-student Jingletown Middle School off the ground. Without any startup capital she has leased a school building, hired maintenance staff, developed a curriculum, and even has a waiting list of more than 30 students.
But Duron can't hire teachers from public schools.
It's not that she doesn't pay them well enough: The payscale surpasses the Oakland public school system. Nor are the medical benefits inferior: Jingletown's teachers have the same health plan as their public school counterparts.
According to Duron, non-portable pensions have been the silent obstacle to educational reform.
"I interview teachers who want to come here and we want to have, but pensions stop them, "Duron said, adding that the teachers prefer Jingletown's smaller class size and focus on academic basics. "It's hard to have any incentive when they will lose their pension."
These stories illustrate how pension systems have indentured educators by trapping them in jobs they don't want. Teachers' unions use pension politics to increase their own institutional power at their members' expense. In particular, this year teachers' unions demanded more representation on pension boards and increased social investing--despite their proven downward effect on investment yields. Moreover, the unions have vowed to fight all efforts to reform pension policies that would both increase mobility and eliminate underfunding.
STAGNANT PROFESSIONALS
Like doctors and lawyers, teachers consider themselves professionals, educated men and women who possess a universally applicable skill. An algebra instructor in Oregon would have no difficulty teaching the quadratic formula in Alabama. But unlike their professional counterparts, teachers cannot take advantage of a fluctuating market if they want to keep their nest egg intact: They are unable to move from state to state and in some case from a city to the suburbs. Teachers' unions have successfully lobbied all 50 state legislatures to create complex pension systems that severely punish mobility.
The typical teacher accumulates a pension over a 25-to 35-year period, as the teacher and the district/state jointly contribute to the statewide retirement system. Nearly all teacher retirement plans are defined-benefit systems where teachers are guaranteed a specific annual pension calculated as a percentage of their final salary. The state invests the contributions in order to pay future benefits.
The state/district contribution forms the bulk of teacher pensions; on average, the teacher contribution is about 6.5 percent of his annual salary, while the state typically contributes 12 to 13 percent, with some contributing more than 19 percent every year. Teachers are always entitled to their own contribution, but they can only receive the much larger state portion once they have become "vested," which requires working in the system for a specific number of years. Therefore, in order to safeguard themselves from losing the lion's share of their pension, teachers must remain in the same region until they are vested. In the private sector employees never have to wait more than five years to be fully vested, but state legislators have set longer waiting periods for teachers. Twenty states require teachers to work for 10 years before vesting and West Virginia requires teachers to work for 20 years before being vested in the system. In fact, only five states require less than the five year ceiling found in the private sector.
In addition to elevated vesting ages, almost all state programs have been constructed as " cliff vesting" systems, in which employees cannot receive any of the state contribution until they have worked the stipulated number of years. In the private sector, on the other hand, many pension programs are graduated, allowing non-vested employees to receive a portion of the employer contribution.
WORSE THAN THE PRIVATE SECTOR
Also unlike the private sector, vesting- requirements don't protect teachers. Teachers who move are penalized by the states if they don't work in the system for a specific number of years.
Consider a typical case: A teacher takes an out-of-state teaching job after working for 16 years in New York state--six years after being vested. This teacher is four years short of the 20-years-of-service level required for retirement. While the state must pay this instructor a pension at age 60, along with other vested teachers, it penalizes the teacher five percent per year for each year short of 20 years. Hence, the teacher's pension is reduced by 20 percent.
"Simply stated, teachers who change systems experience a significant drop in their pension," says Bruce Cooper, a Fordham University professor of education.
A study published by Carnegie Forum on Education and the Economy, found that teachers who spend 20 years with one employer and then 15 years with another earn only 70 percent of the pension benefits that they would have earned had they remained with a single employer.
Teachers' unions--the supposed protector of the nation's educators--are the chief culprit in enslaving their own constituency. While the unions were extremely effective in starting pension programs decades ago, in recent years they have focused on advancing their own interests at the expense of the instructors.
SIMPLE REFORM
There is a simple pension reform that would permit teachers to move between districts, whether for family reasons or in search of greater opportunity. It is called a defined-contribution system.
Under this system, increasingly common in the private sector, teachers would each have their own, completely portable, pension accounts. When they retired, their pensions would consist of the states' and their own contributions plus the rate of return on their investments.
Michigan's Governor John Engler converted state employees, including teachers, from a defined-benefit to a defined-contribution system last year. Maine has also begun a defined-contribution system for new teachers.
In addition to their portability, defined-contribution plans offer enormous advantages for teachers. Teacher pension plans in 35 states and the District of Columbia are seriously underfunded--with promised benefits exceeding expected assets by a total of $63.4 billion. Only 38 percent of Maine's pension promises are funded, only 33 percent of Indiana's, only 9 percent of West Virginia's. The Oklahoma Teacher Retirement System is projected to run out of money in the 2015, leaving $800 million a year in unfunded obligations. The Oklahoma state legislature will then be confronted with two options: Raise taxes about $1,000 a year per family, or welch on their promise to retired teachers. The latter seems more likely.
A defined-contribution plan gives the teacher greater certainty, because pension security does not depend on future tax increases. Moreover, because each teacher owns his retirement assets, a defined-contribution system can prevent pension funds from being raided by state legislatures for non-investment purposes.
Teachers' unions, however, j are staunchly opposed to defined-contribution plans. The Michigan Education Association fought Governor Engler tooth and nail over his pension reform. "The unions wanted control and the new system also allows teachers to more readily move," Engler's press secretary John Truscott said. "The MEA tried everything to stop us." At its latest conference, the American Federation of Teachers endorsed a resolution calling for "stringent measures" to battle defined-contribution plans.
MORE UNION POWER, BUT LOSING MONEY
Why this resistance? One reason may be that control of retirement funds gives teachers' unions phenomenal financial power. Teacher pension assets now total $342 billion, an enormous pool of capital, and the unions go to great pains to ensure that their allies make investment decisions, even if it means jeopardizing the retirement income of their own members..
Consider Resolution 29, recently endorsed by the AFT's Retirement Issues Committee, which called for action against state legislatures which demand that pension fund trustees have some financial knowledge. Currently, many of the systems' board members are retired and active teachers which are often selected by the union. But, the Retirement Issues Committee resolved that efforts to set minimum qualifications for trustees, in order to ensure pension fund investments are decided according to established principles, are "unacceptable pre-conditions." The unions prefer to increase the number of teachers on pension fund boards and control which teachers will fill these positions.
Greater union involvement on pension fund boards is harmful to teachers. Olivia Mitchell, a professor of risk management at the University of Pennsylania's Wharton School, determined that low funding levels were correlated to increased employee representation on public pension system boards.
In a study of 168 public employee retirement systems, Mitchell found that raising the number of employees on pension fund boards by 10 percent lowers investment yield by 2 percentage points. Currently the average teacher pension board consists of ten members, six of whom are teachers. Therefore increasing the board by only one member will result in investment returns dropping from an average of between seven and eight percent to between five and six percent.
For instance, in 1993, Mississippi unions lobbied the state legislature to add another teacher to the Public Employees' Retirement System, bringing the total number of members to ten. Mississippi PERS, with assets of about $5.8 billion averages about an eight percent return on its investments annually. Thanks to the new teacher on the PERS board, according to Prof. Mitchell's calculations, the Mississippi pension fund is likely to make $116 million less per year on its investments.
PENSION RISKED TO STOP REFORM
Teachers' unions are now using their control of pension funds to try to deny capital to companies competing with public education. At its 1994 convention, the National Education Association adopted a resolution calling on state chapters to lobby retirement systems to divest from corporations that support the commercialization or privatization of public schools.
Simply stated, the NEA has risked its members retirement benefits in a political battle against educational reform.
In some cases, the union-dominated pension funds lose money because they make investments for political reasons. During the late 1980s, the Kansas Public Employees' Retirement System, which includes the state's teachers, invested heavily in a number of Kansas-based companies in the hopes that it would keep jobs in the state. Among those investments was a savings and loan association which later failed and left the fund with a loss of $65 million and a coal company which filed for bankruptcy. In total, KPERS has written off $200 million in investments targeted for political reasons.
Union officials insist that pension plans are in excellent fiscal shape. Even so, at the NEA's 1993 Retirement and Benefits Forum in South Carolina, a budget specialist was asked to explain how tax structures could be reformed to "assure adequate funding" of pension plans. Steven Gold of the Center for the Study of the States outlined several strategies including increasing income tax, increasing property tax, and increasing sales tax.
"It's really a matter of putting together a package of tax increases and designing it carefully," Gold told the union members, noting they should prepare now: "It is possible that in 1995, or some time before long, states will be able to raise taxes." Teachers looking at the strength of the tax-limitation movement in federal, state, and local elections in 1994 would be well-advised to consider whether they can rely on future tax increases to guarantee their defined-benefit plans.
Defined-benefit systems not only expose educators to unfunded liability risk, they also hamper educational reform. For instance, under a defined-contribution plan, Clementina Duron would have no trouble attracting teachers: Public school instructors could readily move in and out of the system.
Teachers' unions have always fought educational reform--from voucher and privitization efforts to charter schools. Lobbying to maintain outdated defined-benefit plans over defined-contribution plans has become one of the unions' tools in this ongoing educational war. Without teacher mobility, educational reform is impossible since each new system relies to some degree on schools competing for the best teachers.
A defined-contribution system will ensure educators' retirement security and will remove a stumbling block to educational reform. However, if teachers continue to follow their unions, past performance demonstrates that investment yields will certainly fall and teachers will find their silver years tarnished.
Stephen Glass is assistant editor of Policy Review.
Yes we Kenosha: With can-do capitalism, a Wisconsin town busts out of the rustbelt
Policy Review, Fall 1994
by Glass, Stephen
Early in 1988 Kenosha, Wisconsin became the symbol for the media of all that is supposedly wrong with American capitalism. In January that year, the Chrysler Corporation announced that two days before Christmas, it would close the nation's oldest car factory, laying off 5,500 workers. The plant employed 40 percent of Kenosha's manufacturing workforce, and news accounts were universal in predicting doom for the rustbelt community.
A man dressed as the Grim Reaper paced somberly in front of the auto plant as CNN reported the closure. "This is a journey into misery, " an autoworker told the network. "God knows what will happen to this community," a state senator told the Milwaukee CBS affiliate.
Democratic presidential hopefuls rushed to Kenosha to attack this symbol of the "decade of greed." Jesse Jackson called for a "worker's bill of rights" and denounced the "economic violence" of Chrysler and the American economy under Ronald Reagan. Michael Dukakis wrote to Chrysler CEO Lee Iacocca asking him to save the plant. And Senator Paul Simon (D-IL) accused the corporation of raw profiteering.
But the liberal Democrats, and their friends in the national media, just didn't get it.
Today, six years after the last car rolled off the line, Kenosha has gone from bust to boomtown: Unemployment has been halved, per capita income is up, and new housing starts have soared. This community has become a testament to the resiliency of market capitalism, traditional values, and conservative economic policies. Kenosha is a special tribute to the tax-cutting policies of Wisconsin under Governor Tommy Thompson.
JOBLESS RATE HALVED
"There is no doubt in my mind that we're doing better," says Rick Nemeth, who bought his own tavern after he was laid off. "I have learned that initiative pays off. You're not going to make money overnight, but now I wake up every morning and I am happy with my life." During his 20 years on the assembly-line, Nemeth never made more than $24,000 in a year; today he earns more than $40,000.
And Nemeth is not an exception: Since Chrysler pulled out in December 1988, the unemployment rate has averaged 5.7 percent, less than half the mean of 11.6 percent during the five years preceding the shutdown. Moreover, average annual wages in the community have risen nearly $2,000 per person.
The turnaround came as no surprise to University of Wisconsin-Parkside economist Dick Keehn, who has studied the local economy for almost 25 years, and had predicted the coming boom. In fact, Keehn had urged the community to rid itself of the plant for nearly a decade in order to improve the rustbelt economy.
The economist's reasoning is simple: Since 1959, when the Simmons mattress company left Kenosha, the auto plant, which had been run by the American Motors Corporation (AMC) before being taken over by Chrysler in 1987, had single-handedly dominated the local labor market. In fact, the region's second largest private employers had hired only one-tenth to one-third the number of workers on the car company's payroll, which reached 16,000 under AMC in the 1960s and topped $130 million in the 1980s. This domination of the labor pool by a single company, whose payroll fluctuated dramatically, destabilized the entire region. Smaller companies frequently lost workers to the auto plant, which paid inflated union wages, and new companies were discouraged from moving to the unstable community.
SMALL BUSINESSES THRIVE
The excessive union wages in Kenosha, which in 1985 were $1.65 higher per hour than Chrysler workers across the nation and rated the "least competitive" in the industry, drove jobs away from southeastern Wisconsin. United Auto Worker (UAW) projections in 1988--that the plant closing would force 15,000 people out of work by 1990--were therefore grossly inflated. Instead, that year, only 3,100 people were jobless in the entire county; the shutdown had provided a market where small businesses could compete. Dashed as well were union predictions that 53 percent of dislocated Chrysler workers would be unemployed two years after the closing: Only one-fifth were jobless 27 months after the plant shut down.
Ted Schiess Sr. is one of the auto workers who benefited from the new businesses. Schiess had been a security guard at the Chrysler facility for 24 years when Lee Iacocca announced that the plant would be closed. He is now the safety and security supervisor at a high-tech ink company that moved to Kenosha County after the auto industry left. While Lawter International, Inc., expanded its payroll to 88 people when it moved to Wisconsin from Chicago, it is unlikely it would have been able to compete with the car plant for labor.
"I was the one who shut the lights out and locked the doors of the plant for the last time," Schiess said. "[I felt] Chrysler had used me, but now it has worked out." In fact, it has worked out so well that both of his sons have attended college and Schiess, who is earning a salary that is slightly better than at Chrysler, is saving for his retirement.
Just as inflated union wages drove away jobs, the unstable employer also stunted home sales; in the years since Chrysler left, however, construction firms have had difficulty keeping up with new building. Ken Davis, a local realtor since 1978, said Kenoshans would often rent a home for 20 years rather than buy, since they were nervous about the stagnant mono-economy. These fears are reflected in new home sales: From 1980 to the plant closing in 1988, the county granted an average of 401 new housing permits a year. In the years following the plant shut down the county has averaged more than 1,000 approved permits annually.
"We are much better off without the auto plant," Davis said. "This diversified economy is more stable and people aren't terrified to build homes." Whereas houses used to linger on the market for months, in 1993 the average house was sold within 90 days of being offered. It is clear that union-driven public policies, which tried to save the auto plant at any cost, undermined confidence in the local economy.
DOOMSAYERS SILENCED
The anticipated social costs of the shut-down, trumpeted by the Left, also failed to materialize. Union members said domestic violence, alcoholism, and suicide rates would increase when the plant closed. "It's a well-known fact that communities all over the country have experienced these tragedies with a loss of a major employer," United Auto Workers Local 2 President Rudy Kuzel said. "Kenosha would be unique if it didn't follow the pattern."
But research by University of Wisconsin-Parkside sociologist Anne Statham on hundreds of dislocated Chrysler workers demonstrates that just as the market adjusted for the job loss, area residents also adapted well to the closing. Rather than witnessing soaring domestic violence reports, Statham proved that despite being laid off, the dislocated workers had stable family lives: 89 percent reported "never" or "seldom" having tension with their spouse, and 93 percent reported "never" or "seldom" having tension with their children. Moreover, 97 percent of the dislocated workers said they "never" or "seldom" have problems with drinking too much, indicating that the alcoholism predictions were ludicrous.
Tom Dorff is in a position to know if suicide rates increased: He was Kenosha's coroner at the time of the plant closing. "I'm telling you, I didn't notice any difference at all," he said. "My business didn't pick up. It was all very normal."
Finally, Statham disproved the Left's social cost predictions when she asked dislocated Chrysler workers to evaluate their overall life satisfaction three years after they were laid off. Statham's research indicated that 4.9 percent of dislocated workers rated their "life as a whole" positively, while a similar Gallup poll found only 21 percent of Americans nationwide felt the same way.
The market, however, did not act alone in prompting this growth. Traditional values of self-reliance and a strong work ethic are prominent in the Kenosha culture. For instance, sociologist Statham found that 62 percent of the dislocated workers believe that "misfortunes result from the mistakes people make," while only 27 percent of the workers believe that "unhappiness in life is due to bad luck. "
Dave Guardiolo, a former paint-sprayer at the Chrysler plant, demonstrates this belief in personal responsibility. After the factory closing was announced, Guardiolo returned to school and earned a degree in criminal justice. He is now a corrections officer at a county prison where he earns comparable pay and enjoys the challenge of his new job.
In addition to responding generally about their values system, two-thirds of the dislocated workers indicated "there is a job waiting for me if I just look for it," while only a quarter said they believe finding a job is a matter of luck. Leota Boughn, a waitress at the Three Coins Diner, said this properly reflects the Kenosha climate. "There are jobs if people want to work. If you are not lazy, anybody can get a job," said Boughn, who raised her two children single-handedly. "Look at me, I have never been out of work for more than a week. "
Yale Professor Kathryn Marie Dudley can't understand Boughn's straight-forward logic. In Dudley's new book, The End of the Line: Lost Jobs, New Lives in Postindustrial America, the anthropologist relates stories of ruined Kenosha families. She blames the "culture of the mind"--white-collar, college-educated professionals that worked to draw new businesses to the community--for implementing "social Darwinism" and trampling the factory workers' culture. She glorifies their fight to keep the plant and is shocked that many members of the community are "cheerful" and "upbeat" about the benefits of the closing. "Nothing I'd read before starting my fieldwork on the Chrysler shutdown quite prepared me for the fact that a lot of people in and around Kenosha were happy to see the plant close."
Although Dudley can't comprehend the transition, the community has come to understand that fighting to keep the plant open is as absurd as workers wanting the Bain Wagon Works to stay in business 100 years ago. At the turn of the century, this horse-drawn carriage company was one of Kenosha's largest employers, building almost 12,000 buggies in 1890. Although it was the first southeastern-Wisconsin company to produce for more than the local market, by 1920 the firm had laid off all but 100 employees: There simply was no way to compete with the upstart auto plant.
A VICTORY FOR THE MARKET
While the closing of the auto plant in Kenosha allowed a conservative market-based economy to germinate, Governor Tommy Thompson's pro-business initiatives--specifically deregulation and tax reductions--provided the necessary fertilizer. By minimizing state control over utilities, Thompson allowed the Wisconsin Energy and Power Corporation (WEPCO) to build a $1.6 billion corporate park in Kenosha County, which is just 45 minutes north of Chicago. This reduction in government interference provided WEPCO with the ability to attract more power consumers to Wisconsin, and energy costs have subsequently fallen; they are currently 20 to 40 percent less than the rates in neighboring Illinois.
The low power and land costs have enticed 17 companies to relocate from Chicago to the Kenosha industrial park. And this protection from government has translated into significant savings which promotes ingenuity. For instance, Calumet Diversified Meats, Inc. developed one of the nation's most advanced pork processing facilities in Kenosha once it was freed from Illinois's expensive, highly regulated utility costs.
Likewise, Brooks Sausage, one of McDonald's three national suppliers of breakfast meat with sales of $30 million, saved $400,000 a year on power costs by moving from Chicago to Kenosha. These annual savings have allowed the company, which was recently ranked by Black Enterprise as one of the nation's 30 largest black-owned corporations, to enter the highly-competitive Japanese food market.
Unlike many of its neighboring companies, Nitro-Bar Inc. did not relocate from Chicago, but began in 1992 in the Kenosha industrial park, where it has since developed a high-tech method to remove chrome plating.
These companies embody the creative destruction inherent in Thompson's Wisconsin economic miracle. The 6 million-square foot Chrysler car plant was highly inefficient. Since it was originally intended to manufacture bicycles and mattresses, the factory was divided into two facilities 1.5 miles apart: the lakefront plant, which includes the painting facility, and the main plant where final assembly takes place. Smaller cars, such as the Omni and Horizon, had their frames built, trimmed, and painted at the lakefront facility and then were trucked to the main plant for assembly. The larger cars, such as the Fifth Avenue, were built at the main plant, sent to the lakefront plant for painting, and then trucked back to the main plant for assembly.
While liberals may think America's economy is faltering when an inefficient Chrysler plant closes, conservatives look at Calumet Diversified Meats, Brooks Sausage, and Nitro-Bar and know that America is thriving. In fact, since the Chrysler plant closed, Kenosha has gained 33 percent more employers.
THE WISCONSIN MIRACLE
Governor Thompson has promoted business throughout the state, and specifically in Kenosha, by advocating the creation of Tax Incremental Financing (TIF) districts, despite significant liberal opposition. TIF districts allow businesses to more readily develop infrastructure. For instance, one of the attractions of Wisconsin for Illinois companies is lower land costs. If an industrial park had to pay for infrastructure improvement, this advantage would be readily lost: TIF districts allow the local governments to retire bonds for these improvements with a portion of the tax revenue that is generated by the new businesses.
Thompson also created a 60-percent exemption for capital gains and eliminated inheritance taxes. In fact, over the past seven years, state taxes have been cut by more than $1 billion, and Wisconsin is still the only state to have had a balanced budget in each of those terms. Wayne Koessel, an official with WEPCO, believes these efforts have promoted a business friendly environment that encourages companies to move to, or expand within, Wisconsin. Cognetics, a Massachusetts-based economic think tank, agrees. In 1993 and 1994 the research group rated Wisconsin the best small business climate outside of the sunbelt.
Kenosha is not the only region to have benefited from Thompson's pro-business initiatives: From 1983 to June 1994 the entire state's unemployment rate has dropped from 10.4 percent to 4.3 percent. During the last seven years, Wisconsin created 44,600 manufacturing jobs while the nation lost 1.1 million. The Dairy State is a textbook example of conservative economics and disproves the liberal contention that government must raise taxes to increase revenue. The drastic tax cuts have resulted in a 39 percent increase in state revenue. Likewise, lower taxes have created jobs, and the state has realized a 19 percent decrease--the nation's highest--in welfare cases. In fact, every county has reported a decline in the number of welfare recipients since 1987 and 50 of the 72 counties report at least 30 percent less cases.
Kenosha is an illustration of the beau of American capitalism. While the Left tried to interfere in the market to prop up an inefficient plant, their failure--and the community's subsequent success--demonstrates the resilience of a conservative economy. The Chrysler facility was replaced by small-and medium-sized companies that were more suited to compete. Simultaneously, the unfettered market aided workers who realized higher wages and lower unemployment rates.
Doris Techert, 73 and a life-long resident of Kenosha, says that the people of Kenosha know the economy is healthy: "If you want to work here, I'll guarantee you can get a job. This is the American Dream."
STEPHEN GLASS is assistant editor of Policy Review.
by Glass, Stephen
Early in 1988 Kenosha, Wisconsin became the symbol for the media of all that is supposedly wrong with American capitalism. In January that year, the Chrysler Corporation announced that two days before Christmas, it would close the nation's oldest car factory, laying off 5,500 workers. The plant employed 40 percent of Kenosha's manufacturing workforce, and news accounts were universal in predicting doom for the rustbelt community.
A man dressed as the Grim Reaper paced somberly in front of the auto plant as CNN reported the closure. "This is a journey into misery, " an autoworker told the network. "God knows what will happen to this community," a state senator told the Milwaukee CBS affiliate.
Democratic presidential hopefuls rushed to Kenosha to attack this symbol of the "decade of greed." Jesse Jackson called for a "worker's bill of rights" and denounced the "economic violence" of Chrysler and the American economy under Ronald Reagan. Michael Dukakis wrote to Chrysler CEO Lee Iacocca asking him to save the plant. And Senator Paul Simon (D-IL) accused the corporation of raw profiteering.
But the liberal Democrats, and their friends in the national media, just didn't get it.
Today, six years after the last car rolled off the line, Kenosha has gone from bust to boomtown: Unemployment has been halved, per capita income is up, and new housing starts have soared. This community has become a testament to the resiliency of market capitalism, traditional values, and conservative economic policies. Kenosha is a special tribute to the tax-cutting policies of Wisconsin under Governor Tommy Thompson.
JOBLESS RATE HALVED
"There is no doubt in my mind that we're doing better," says Rick Nemeth, who bought his own tavern after he was laid off. "I have learned that initiative pays off. You're not going to make money overnight, but now I wake up every morning and I am happy with my life." During his 20 years on the assembly-line, Nemeth never made more than $24,000 in a year; today he earns more than $40,000.
And Nemeth is not an exception: Since Chrysler pulled out in December 1988, the unemployment rate has averaged 5.7 percent, less than half the mean of 11.6 percent during the five years preceding the shutdown. Moreover, average annual wages in the community have risen nearly $2,000 per person.
The turnaround came as no surprise to University of Wisconsin-Parkside economist Dick Keehn, who has studied the local economy for almost 25 years, and had predicted the coming boom. In fact, Keehn had urged the community to rid itself of the plant for nearly a decade in order to improve the rustbelt economy.
The economist's reasoning is simple: Since 1959, when the Simmons mattress company left Kenosha, the auto plant, which had been run by the American Motors Corporation (AMC) before being taken over by Chrysler in 1987, had single-handedly dominated the local labor market. In fact, the region's second largest private employers had hired only one-tenth to one-third the number of workers on the car company's payroll, which reached 16,000 under AMC in the 1960s and topped $130 million in the 1980s. This domination of the labor pool by a single company, whose payroll fluctuated dramatically, destabilized the entire region. Smaller companies frequently lost workers to the auto plant, which paid inflated union wages, and new companies were discouraged from moving to the unstable community.
SMALL BUSINESSES THRIVE
The excessive union wages in Kenosha, which in 1985 were $1.65 higher per hour than Chrysler workers across the nation and rated the "least competitive" in the industry, drove jobs away from southeastern Wisconsin. United Auto Worker (UAW) projections in 1988--that the plant closing would force 15,000 people out of work by 1990--were therefore grossly inflated. Instead, that year, only 3,100 people were jobless in the entire county; the shutdown had provided a market where small businesses could compete. Dashed as well were union predictions that 53 percent of dislocated Chrysler workers would be unemployed two years after the closing: Only one-fifth were jobless 27 months after the plant shut down.
Ted Schiess Sr. is one of the auto workers who benefited from the new businesses. Schiess had been a security guard at the Chrysler facility for 24 years when Lee Iacocca announced that the plant would be closed. He is now the safety and security supervisor at a high-tech ink company that moved to Kenosha County after the auto industry left. While Lawter International, Inc., expanded its payroll to 88 people when it moved to Wisconsin from Chicago, it is unlikely it would have been able to compete with the car plant for labor.
"I was the one who shut the lights out and locked the doors of the plant for the last time," Schiess said. "[I felt] Chrysler had used me, but now it has worked out." In fact, it has worked out so well that both of his sons have attended college and Schiess, who is earning a salary that is slightly better than at Chrysler, is saving for his retirement.
Just as inflated union wages drove away jobs, the unstable employer also stunted home sales; in the years since Chrysler left, however, construction firms have had difficulty keeping up with new building. Ken Davis, a local realtor since 1978, said Kenoshans would often rent a home for 20 years rather than buy, since they were nervous about the stagnant mono-economy. These fears are reflected in new home sales: From 1980 to the plant closing in 1988, the county granted an average of 401 new housing permits a year. In the years following the plant shut down the county has averaged more than 1,000 approved permits annually.
"We are much better off without the auto plant," Davis said. "This diversified economy is more stable and people aren't terrified to build homes." Whereas houses used to linger on the market for months, in 1993 the average house was sold within 90 days of being offered. It is clear that union-driven public policies, which tried to save the auto plant at any cost, undermined confidence in the local economy.
DOOMSAYERS SILENCED
The anticipated social costs of the shut-down, trumpeted by the Left, also failed to materialize. Union members said domestic violence, alcoholism, and suicide rates would increase when the plant closed. "It's a well-known fact that communities all over the country have experienced these tragedies with a loss of a major employer," United Auto Workers Local 2 President Rudy Kuzel said. "Kenosha would be unique if it didn't follow the pattern."
But research by University of Wisconsin-Parkside sociologist Anne Statham on hundreds of dislocated Chrysler workers demonstrates that just as the market adjusted for the job loss, area residents also adapted well to the closing. Rather than witnessing soaring domestic violence reports, Statham proved that despite being laid off, the dislocated workers had stable family lives: 89 percent reported "never" or "seldom" having tension with their spouse, and 93 percent reported "never" or "seldom" having tension with their children. Moreover, 97 percent of the dislocated workers said they "never" or "seldom" have problems with drinking too much, indicating that the alcoholism predictions were ludicrous.
Tom Dorff is in a position to know if suicide rates increased: He was Kenosha's coroner at the time of the plant closing. "I'm telling you, I didn't notice any difference at all," he said. "My business didn't pick up. It was all very normal."
Finally, Statham disproved the Left's social cost predictions when she asked dislocated Chrysler workers to evaluate their overall life satisfaction three years after they were laid off. Statham's research indicated that 4.9 percent of dislocated workers rated their "life as a whole" positively, while a similar Gallup poll found only 21 percent of Americans nationwide felt the same way.
The market, however, did not act alone in prompting this growth. Traditional values of self-reliance and a strong work ethic are prominent in the Kenosha culture. For instance, sociologist Statham found that 62 percent of the dislocated workers believe that "misfortunes result from the mistakes people make," while only 27 percent of the workers believe that "unhappiness in life is due to bad luck. "
Dave Guardiolo, a former paint-sprayer at the Chrysler plant, demonstrates this belief in personal responsibility. After the factory closing was announced, Guardiolo returned to school and earned a degree in criminal justice. He is now a corrections officer at a county prison where he earns comparable pay and enjoys the challenge of his new job.
In addition to responding generally about their values system, two-thirds of the dislocated workers indicated "there is a job waiting for me if I just look for it," while only a quarter said they believe finding a job is a matter of luck. Leota Boughn, a waitress at the Three Coins Diner, said this properly reflects the Kenosha climate. "There are jobs if people want to work. If you are not lazy, anybody can get a job," said Boughn, who raised her two children single-handedly. "Look at me, I have never been out of work for more than a week. "
Yale Professor Kathryn Marie Dudley can't understand Boughn's straight-forward logic. In Dudley's new book, The End of the Line: Lost Jobs, New Lives in Postindustrial America, the anthropologist relates stories of ruined Kenosha families. She blames the "culture of the mind"--white-collar, college-educated professionals that worked to draw new businesses to the community--for implementing "social Darwinism" and trampling the factory workers' culture. She glorifies their fight to keep the plant and is shocked that many members of the community are "cheerful" and "upbeat" about the benefits of the closing. "Nothing I'd read before starting my fieldwork on the Chrysler shutdown quite prepared me for the fact that a lot of people in and around Kenosha were happy to see the plant close."
Although Dudley can't comprehend the transition, the community has come to understand that fighting to keep the plant open is as absurd as workers wanting the Bain Wagon Works to stay in business 100 years ago. At the turn of the century, this horse-drawn carriage company was one of Kenosha's largest employers, building almost 12,000 buggies in 1890. Although it was the first southeastern-Wisconsin company to produce for more than the local market, by 1920 the firm had laid off all but 100 employees: There simply was no way to compete with the upstart auto plant.
A VICTORY FOR THE MARKET
While the closing of the auto plant in Kenosha allowed a conservative market-based economy to germinate, Governor Tommy Thompson's pro-business initiatives--specifically deregulation and tax reductions--provided the necessary fertilizer. By minimizing state control over utilities, Thompson allowed the Wisconsin Energy and Power Corporation (WEPCO) to build a $1.6 billion corporate park in Kenosha County, which is just 45 minutes north of Chicago. This reduction in government interference provided WEPCO with the ability to attract more power consumers to Wisconsin, and energy costs have subsequently fallen; they are currently 20 to 40 percent less than the rates in neighboring Illinois.
The low power and land costs have enticed 17 companies to relocate from Chicago to the Kenosha industrial park. And this protection from government has translated into significant savings which promotes ingenuity. For instance, Calumet Diversified Meats, Inc. developed one of the nation's most advanced pork processing facilities in Kenosha once it was freed from Illinois's expensive, highly regulated utility costs.
Likewise, Brooks Sausage, one of McDonald's three national suppliers of breakfast meat with sales of $30 million, saved $400,000 a year on power costs by moving from Chicago to Kenosha. These annual savings have allowed the company, which was recently ranked by Black Enterprise as one of the nation's 30 largest black-owned corporations, to enter the highly-competitive Japanese food market.
Unlike many of its neighboring companies, Nitro-Bar Inc. did not relocate from Chicago, but began in 1992 in the Kenosha industrial park, where it has since developed a high-tech method to remove chrome plating.
These companies embody the creative destruction inherent in Thompson's Wisconsin economic miracle. The 6 million-square foot Chrysler car plant was highly inefficient. Since it was originally intended to manufacture bicycles and mattresses, the factory was divided into two facilities 1.5 miles apart: the lakefront plant, which includes the painting facility, and the main plant where final assembly takes place. Smaller cars, such as the Omni and Horizon, had their frames built, trimmed, and painted at the lakefront facility and then were trucked to the main plant for assembly. The larger cars, such as the Fifth Avenue, were built at the main plant, sent to the lakefront plant for painting, and then trucked back to the main plant for assembly.
While liberals may think America's economy is faltering when an inefficient Chrysler plant closes, conservatives look at Calumet Diversified Meats, Brooks Sausage, and Nitro-Bar and know that America is thriving. In fact, since the Chrysler plant closed, Kenosha has gained 33 percent more employers.
THE WISCONSIN MIRACLE
Governor Thompson has promoted business throughout the state, and specifically in Kenosha, by advocating the creation of Tax Incremental Financing (TIF) districts, despite significant liberal opposition. TIF districts allow businesses to more readily develop infrastructure. For instance, one of the attractions of Wisconsin for Illinois companies is lower land costs. If an industrial park had to pay for infrastructure improvement, this advantage would be readily lost: TIF districts allow the local governments to retire bonds for these improvements with a portion of the tax revenue that is generated by the new businesses.
Thompson also created a 60-percent exemption for capital gains and eliminated inheritance taxes. In fact, over the past seven years, state taxes have been cut by more than $1 billion, and Wisconsin is still the only state to have had a balanced budget in each of those terms. Wayne Koessel, an official with WEPCO, believes these efforts have promoted a business friendly environment that encourages companies to move to, or expand within, Wisconsin. Cognetics, a Massachusetts-based economic think tank, agrees. In 1993 and 1994 the research group rated Wisconsin the best small business climate outside of the sunbelt.
Kenosha is not the only region to have benefited from Thompson's pro-business initiatives: From 1983 to June 1994 the entire state's unemployment rate has dropped from 10.4 percent to 4.3 percent. During the last seven years, Wisconsin created 44,600 manufacturing jobs while the nation lost 1.1 million. The Dairy State is a textbook example of conservative economics and disproves the liberal contention that government must raise taxes to increase revenue. The drastic tax cuts have resulted in a 39 percent increase in state revenue. Likewise, lower taxes have created jobs, and the state has realized a 19 percent decrease--the nation's highest--in welfare cases. In fact, every county has reported a decline in the number of welfare recipients since 1987 and 50 of the 72 counties report at least 30 percent less cases.
Kenosha is an illustration of the beau of American capitalism. While the Left tried to interfere in the market to prop up an inefficient plant, their failure--and the community's subsequent success--demonstrates the resilience of a conservative economy. The Chrysler facility was replaced by small-and medium-sized companies that were more suited to compete. Simultaneously, the unfettered market aided workers who realized higher wages and lower unemployment rates.
Doris Techert, 73 and a life-long resident of Kenosha, says that the people of Kenosha know the economy is healthy: "If you want to work here, I'll guarantee you can get a job. This is the American Dream."
STEPHEN GLASS is assistant editor of Policy Review.
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