For the first time in at least 50 years, a majority of U.S. public school students come from low-income families, according to a new analysis of 2013 federal data, a statistic that has profound implications for the nation.
The Southern Education Foundation reports that 51 percent of students in pre-kindergarten through 12th grade in the 2012-2013 school year were eligible for the federal program that provides free and reduced-price lunches. The lunch program is a rough proxy for poverty, but the explosion in the number of needy children in the nation’s public classrooms is a recent phenomenon that has been gaining attention among educators, public officials and researchers.
“We’ve all known this was the trend, that we would get to a majority, but it’s here sooner rather than later,” said Michael A. Rebell of the Campaign for Educational Equity at Teachers College at Columbia University, noting that the poverty rate has been increasing even as the economy has improved. “A lot of people at the top are doing much better, but the people at the bottom are not doing better at all. Those are the people who have the most children and send their children to public school.”
The shift to a majority-poor student population means that in public schools, a growing number of children start kindergarten already trailing their more privileged peers and rarely, if ever, catch up. They are less likely to have support at home, are less frequently exposed to enriching activities outside of school, and are more likely to drop out and never attend college.
It also means that education policy, funding decisions and classroom instruction must adapt to the needy children who arrive at school each day.
“When they first come in my door in the morning, the first thing I do is an inventory of immediate needs: Did you eat? Are you clean? A big part of my job is making them feel safe,” said Sonya Romero-Smith, a veteran teacher at Lew Wallace Elementary School in Albuquerque. Fourteen of her 18 kindergartners are eligible for free lunches.
She helps them clean up with bathroom wipes and toothbrushes, and she stocks a drawer with clean socks, underwear, pants and shoes.
Romero-Smith, 40, who has been a teacher for 19 years, became a foster mother in November to two girls, sisters who attend her school. They had been homeless, their father living on the streets and their mother in jail, she said. When she brought the girls home, she was shocked by the disarray of their young lives.
“Getting rid of bedbugs, that took us a while. Night terrors, that took a little while. Hoarding food, flushing a toilet and washing hands, it took us a little while,” she said. “You spend some time with little ones like this and it’s gut wrenching. . . . These kids aren’t thinking, ‘Am I going to take a test today?’ They’re thinking, ‘Am I going to be okay?’ ”
The job of teacher has expanded to “counselor, therapist, doctor, parent, attorney,” she said.
Schools, already under intense pressure to deliver better test results and meet more rigorous standards, face the doubly difficult task of trying to raise the achievement of poor children so that they approach the same level as their more affluent peers.
“This is a watershed moment when you look at that map,” said Kent McGuire, president of the Southern Education Foundation, the nation’s oldest education philanthropy, referring to a large swath of the country filled with high-poverty schools.
“The fact is, we’ve had growing inequality in the country for many years,” he said. “It didn’t happen overnight, but it’s steadily been happening. Government used to be a source of leadership and innovation around issues of economic prosperity and upward mobility. Now we’re a country disinclined to invest in our young people.”
The data show poor students spread across the country, but the highest rates are concentrated in Southern and Western states. In 21 states, at least half the public school children were eligible for free and reduced-price lunches — ranging from Mississippi, where more than 70 percent of students were from low-income families, to Illinois, where one of every two students was low-income.
Carey Wright, Mississippi’s state superintendent of education, said quality preschool is the key to helping poor children.
“That’s huge,” she said. “These children can learn at the highest levels, but you have to provide for them. You can’t assume they have books at home, or they visit the library or go on vacations. You have to think about what you’re doing across the state and ensuring they’re getting what other children get.”
Darren Walker, president of the Ford Foundation, was born in a charity hospital in 1959 to a single mother. Federal programs helped shrink the obstacles he faced, first by providing him with Head Start, the early-childhood education program, and later, Pell grants to help pay tuition at the University of Texas, he said.
The country needs to make that same commitment today to help poor children, he said.
“Even at 8 or 9 years old, I knew that America wanted me to succeed,” he said. “What we know is that the mobility escalator has simply stopped for some Americans. I was able to ride that mobility escalator in part because there were so many people, and parts of our society, cheering me on.”
“We need to fix the escalator,” he said. “We fix it by recommitting ourselves to the idea of public education. We have the capacity. The question is, do we have the will?”
The new report raises questions among educators and officials about whether states and the federal government are devoting enough money — and using it effectively — to meet the complex needs of poor children.
The Obama administration wants Congress to add $1 billion to the $14.4 billion it spends annually to help states educate poor children. It also wants Congress to fund preschool for those from low-income families. Collectively, the states and the federal government spend about $500 billion annually on primary and secondary schools, about $79 billion of it from Washington.
The amount spent on each student can vary wildly from state to state. States with high student-poverty rates tend to spend less per student: Of the 27 states with the highest percentages of student poverty, all but five spent less than the national average of $10,938 per student.
Republicans in Congress have been wary of new spending programs, arguing that more money is not necessarily the answer and that federal dollars could be more effective if redundant programs were streamlined and more power was given to states.
Many Republicans also think that the government ought to give tax dollars to low-income families to use as vouchers for private-school tuition, believing that is a better alternative to public schools.
GOP leaders in Congress have rebuffed President Obama’s calls to fund preschool for low-income families, although a number of Republican and Democratic governors have initiated state programs in the past several years.
The report comes as Congress begins debate about rewriting the country’s main federal education law, first passed as part of President Lyndon B. Johnson’s “War on Poverty” and designed to help states educate poor children. The most recent version of the law, known as No Child Left Behind, has emphasized accountability and outcomes, measuring whether schools met benchmarks and sanctioning them when they fell short.
That federal focus on results, as opposed to need, is wrongheaded, Rebell said.
“We have to think about how to give these kids a meaningful education,” he said. “We have to give them quality teachers, small class sizes, up-to-date equipment. But in addition, if we’re serious, we have to do things that overcome the damages of poverty. We have to meet their health needs, their mental health needs, after-school programs, summer programs, parent engagement, early-childhood services. These are the so-called wraparound services. Some people think of them as add-ons. They’re not. They’re imperative.”
“Everybody thinks volatility helps trading, but in the short term, banks were out of position.” http://www.bloomberg.com/news/2015-01-15/bofa-profit-drops-11-as-fixed-income-trading-revenue-declines.html
(Reuters) – The number of Americans filing new claims for unemployment benefits last week increased to the highest level since early September, but the underlying trend continued to point to a strengthening labor market. Initial claims for state unemployment benefits rose by 19,000 to a seasonally adjusted 316,000 for the week ended Jan. 10, the Labor Department said on Thursday. Economists polled by Reuters had forecast claims falling to 291,000 last week. The prior week’s data was revised to show 3,000 more claims received than previously reported. The four-week moving average of claims, considered a better measure of labor market trends as it irons out week-to-week volatility, rose by only 6,750 to 298,000 last week. It has remained below 300,000, which is associated with a firming labor market, for 18 weeks. Last week’s unexpected increase in claims likely does not indicate a material shift in the jobs picture. Employment gains have exceeded 200,000 in each of the last 11 months, the longest stretch since 1994. Nearly 3 million new jobs were created last year, the strongest annual increase since 1999. The strengthening labor market suggests the Federal Reserve will raise interest rates this year, having kept its short-term lending rate near zero since December 2008. But wages, which have yet to catch up to faster growth, will likely determine the timing of the first rate hike in nearly a decade. The claims report showed the number of people still receiving benefits after an initial week of aid fell by 51,000 to 2.42 million in the week ended Jan. 3. (Reporting by Lucia Mutikani; Editing by Paul Simao) Source
It’s true! America is literally on a teeter totter ending in one of two disastrous ways. With the economy heading in a downward spiral and oil prices declining something major is without-a-doubt headed our way.
For More Information See:
Zheng Liu, Mark M. Spiegel, and Bing Wang, Federal Reserve Bank of San Francisco
The retirement of the baby boomers is expected to severely cut U.S. stock values in the near future. Since population aging is widespread across the world’s largest countries, this raises the question of whether global aging could adversely affect the U.S. equity market even further. However, the strong relationship between demographics and equity values in this country do not hold true in other industrial countries. This suggests that global aging is unlikely to create additional headwinds for U.S. equities.
Demographic patterns have a strong historical relationship with equity values in the United States (Liu and Spiegel 2011). In particular, the ratio of those people who are the prime age to invest in stocks to those who are the prime age to sell has historically served as a strong predictor of U.S. equity values as measured by price/earnings (P/E) ratios.
Research suggests one reason for this close relationship is a person’s life-cycle pattern of investing. An individual’s financial needs and attitudes toward risk change over the years. As retirement approaches, individuals become less willing to tolerate investment risks, so they begin to sell off stocks. Thus, the aging of the baby boomers and the broader shift of age distribution in the population should have a negative effect on capital markets (Abel 2001). In theory, global demographic changes may further impact U.S. equity values. For example, Krueger and Ludwig (2007) demonstrate that U.S. returns can import the adverse impact of population aging in other countries.
Since the study by Liu and Spiegel (2011), U.S. stock values have increased markedly. Between 2010, which is the end of their sample, and 2013, the Standard & Poor’s (S&P) 500 Index has increased by 47% and the P/E ratio has increased from around 15 to nearly 17. However, the bearish predictions in Liu and Spiegel (2011), which were based solely on projected aging of the U.S. population, have worsened. Indeed, extending the Liu-Spiegel model’s sample through 2013 suggests that the P/E ratio will decline even more, from about 17 in 2013 to 8.23 in 2025, before recovering to 9.14 in 2030.
In this Economic Letter, we investigate the implications of global population trends for U.S. stock values. Other industrial countries are expected to have similarly aging populations in the next two decades, in some cases even more so than in the United States. Given that equity markets are integrated across industrialized countries (see, for example, Chan et al. 1992), one would think that this change in foreign conditions might also have adverse implications for U.S. stock values. However, our results suggest that the tight historical relationships in the U.S. data are not mirrored in other countries. Thus, global aging is unlikely to add to the demographic headwinds facing the U.S. market.
Demographic trends in industrialized countries
Following Liu and Spiegel (2011), we use Bloomberg’s P/E ratio for the United States, which is the ratio of the end-of-year S&P 500 Index levels and the average earnings per share over the previous 12 months. We measure the age distribution using the ratio of “middle-age” people between 40 and 49 years—the group most likely to buy stocks—to those in the “old-age” group from 60 to 69 years—the prime age to sell. We call this measure the M/O ratio. Liu and Spiegel (2011) showed that this measure of the age distribution has been highly correlated with U.S. P/E ratios, outperforming alternative demographic measures, such as the ratio of middle-age to young adults studied by Geanakopolous et al. (2004).
We extend the Liu-Spiegel study by examining the historical correlations between the M/O ratios and the P/E ratios in other industrialized countries, specifically those in the Group of Seven (G-7). For these countries—Canada, France, Germany, Italy, Japan, and the United Kingdom—we construct the M/O ratios using United Nations (UN) population data and P/E ratios from Global Financial Data.
Figure 1 shows the M/O ratios in G-7 countries from 1954 to 2010, extended to 2013 for the U.S. sample. The figure also shows the projected M/O ratios through 2030 based on the UN population projections. The M/O ratios in most G-7 countries peaked by the mid-2000s and are expected to decline through at least the mid-2020s. For several countries, the declines are expected to be even larger than in the United States, which is projected to decline from 0.76 in 2013 to 0.60 in 2024. For example, the Canadian M/O is projected to decline from 0.82 in 2010 to 0.53 in 2024, and the German M/O is expected to decline from 0.90 to 0.48.
A notable exception is Japan, where the M/O ratio is expected to increase over the next 10 years, driven primarily by expected declines in the size of its old-age cohort. However, this surprising trend is limited to the specific demographic indicator we use in this study. If we broadened the indicator to the ratio of middle-aged to the combined middle- and old-aged, Japan’s pattern would also decline. Moreover, beyond 2024, population aging in Japan is expected to drop rapidly regardless of which demographic indicator is used.
Global demographics and equity values
In theory, the rapid aging of the global population is likely to have additional adverse implications for U.S. stock values. Ang and Maddaloni (2005) find that using the fraction of retired people in the population predicts excess returns in the four largest equity markets outside the United States. Evidence also suggests that U.S. and foreign markets are integrated. This implies that if a tight relationship exists between the M/O ratio and P/E ratios in foreign economies, their demographics are likely to impact U.S. equity values as well.
We examine the specification used in Liu and Spiegel (2011) for the remainder of the G-7 countries. In particular, we estimate the statistical relationship between the log of the P/E ratio and the log of the M/O ratio for each country.
Figure 2 summarizes these results, omitting Canada to conserve space and including the United States for reference. Although the U.S. figure confirms a strong positive statistical relationship between the P/E and M/O ratios, this relationship does not hold up well for the other G-7 countries. The positive correlations for France and the United Kingdom are modest and statistically insignificant, while Germany, Italy, and Japan yield negative correlations. We also used Ang and Maddaloni’s (2005) alternative demographic measure of the retired population to predict excess returns in international equity markets. Consistent with our finding using the M/O ratio as a demographic measure, the fraction of retired people in the population has a significant negative relationship with the P/E ratio for the United States, but not for the other G-7 countries. Therefore, the correlation between demography and equity values that holds tightly for the United States cannot be extrapolated to the other G-7 countries. Formal derivations of these results are available at: http://www.frbsf.org/economic-research/publications/economic-letter/2014/december/baby-boomers-retirement-stocks-aging/el2014-38-technical-appendix.pdf.
Emerging market economies
Our analysis has been focused on G-7 countries. What about other countries, especially emerging market economies such as China and Korea that are increasingly important globally? Indeed, M/O ratios in both China and Korea are projected to decline over the next decade.
When we repeat our exercise using the M/O ratios and P/E ratios in China and Korea, the results are mixed, similar to those for the G-7 countries. Korea has a negative correlation between the P/E and M/O ratios. Our estimate for China shows a positive and statistically significant correlation, but it is about half the size of the U.S. correlation. Moreover, our data are very limited for China due to its relatively recent development. We only have 24 years of data for China’s P/E ratios (from 1990 to 2013), and it is likely that the Chinese government imposed tight restrictions on private equity holdings during that period. Overall, it is unlikely that the strong relationship between demographic patterns and equity valuations that we have identified for the United States can be extended to the rest of the world.
In this Economic Letter, we revisit the relationship between the aging population and U.S. equity values. Noting that global population trends are even more ominous than those in the United States, we also investigate whether the rest of the G-7 countries are expected to experience adverse effects on future stock market values similar to the United States.
We first extend the U.S. sample studied by Liu and Spiegel (2011) to include more recent data, demonstrating that the projected declines in stock values based on these data have become even more severe. Our current estimate suggests that the P/E ratio of the U.S. equity market could be halved by 2025 relative to its 2013 level.
We then focus on international concerns. Populations in the rest of the G-7 countries are expected to age even more in the next decade. We examine whether this demographic trend has adverse implications for stock values in those countries and, given the international integration in equity markets, for values in the United States as well. Our results reveal that none of the other G-7 countries demonstrate the positive and significant relationship found for the United States. We therefore do not find evidence that foreign demographic trends should be an extra drag on future U.S. equity values.
Of course, factors other than demographics may play important roles in determining future U.S. equity values. For example, it remains unclear what implications capital account liberalization in China may have for U.S. equity values. While liberalization may reduce demand for U.S. assets by the Chinese government, private Chinese citizens may respond by acquiring larger amounts of U.S. stocks to diversify their current portfolios. The expected net impact on U.S. equity values is thus unclear. There is also considerable uncertainty about the prospects for U.S. productivity growth over the near term, with some researchers suggesting that trend productivity growth has returned to a slower pace (for example, Gordon 2012 and Fernald 2014). Furthermore, facing longer life expectancy, U.S. investors may choose to draw down their equity holdings more slowly (Poterba 2014). These other factors may have important independent implications for the future of U.S. equity markets.
Zheng Liu is a senior research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco.
Mark M. Spiegel is a vice president in the Economic Research Department of the Federal Reserve Bank of San Francisco.
Bing Wang is a research associate in the Economic Research Department of the Federal Reserve Bank of San Francisco.
Abel, Andrew B. 2001. “Will Bequests Attenuate the Predicted Meltdown in Stock Prices When Baby Boomers Retire?” Review of Economics and Statistics 83(4), pp. 589–595.
Ang, Andrew, and Angela Maddaloni. 2005. “Do Demographic Changes Affect Risk Premiums? Evidence from International Data.” Journal of Business 78(1), pp. 341–379.
Chan, K.C., G. Andrew Karolyi, and Rene M. Stulz. 1992. “Global Financial Markets and the Risk Premium on U.S. Equity.” Journal of Financial Economics 32, pp. 137–167.
Fernald, John G. 2014. “Productivity and Potential Output Before, During, and After the Great Recession.” NBER Macroeconomics Annual (forthcoming).
Geanakoplos, John, Michael Magill, and Martine Quinzii. 2004. “Demography and the Long-Run Predictability of the Stock Market.” Brookings Papers on Economic Activity 1, pp. 241–307.
Gordon, Robert J. 2012. “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds.” NBER Working Paper 18315, August.
Krueger, Dirk, and Alexander Ludwig. 2007. “On the Consequences of Demographic Change for Rates of Return to Capital, and the Distribution of Wealth and Welfare.” Journal of Monetary Economics 54, pp. 49–87.
Liu, Zheng, and Mark M. Spiegel. 2011. “Boomer Retirement: Headwinds for U.S. Equity Markets?” FRBSF Economic Letter 2011-26 (August 22).
Poterba, James M. 2014. “Retirement Security in an Aging Population.” American Economic Review 104(5), pp. 1–30.
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