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How the University of California Helped to Create the Global Fiscal Meltdown

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In their recent study "California, The Pivot of the Great Recession," Ashok Bardhan and Richard Walker show how the Golden State contributed four central elements to the global financial meltdown: subprime mortgages, escalating housing costs, growing wealth inequality, and massive debt: "First, California has long been the biggest player in U.S. mortgage markets, and its banks engaged in some of the worst excesses of the housing bubble. Second, California boasts the largest housing sector among the fifty states and its housing is the most unaffordable -- making borrowers more vulnerable and susceptible to mortgage overreach. Third, the state is the country's largest sub-economy, accounting for roughly 13% of national output, and has long been at the forefront of industrial change, technological innovation, and globalization, but it also manifests some of the most troubling elements of industrial decline of the United States. Fourth, it has the largest state and local government budgets in the country and has suffered the worst fiscal crisis of any state."

Not only does this report argue that California set the trends for the American economy, but this study also affirms that the combination of growing income inequality and increased housing costs in the state helped to issue in the viral spread of shady loans and dispersed risks. However, what these two Berkeley professors do not reveal is that at the center of this economic perfect storm, we find the University of California.

As Ashok and Walker stress, the key to the global financial meltdown was the combination of economic globalization, income inequality, stagnant wage growth, excessive debt, and deceptive financing. While it would be easy to blame everything on Wall Street and its exotic financial instruments, these tools of speculation depended on the giant American hunger for credit, and this need to take on high levels of debt was itself generated by declining wages and the escalating costs of housing, education, and healthcare. In short, the majority of people were making less and spending more, and so they were forced to engage in risky credit deals.

Inflated Costs and Risky Borrowing

The central role of the University of California in this mess can be shown by looking at four factors: 1) the UC is the top or one of the top employers in every city that it is located (San Diego, Los Angeles, Santa Barbara, Irvine, Riverside, Santa Cruz, Davis, San Francisco, Berkeley, Oakland, and Merced); 2) housing and rents skyrocketed in all of the areas surrounding the campuses; 3) there has been a dramatic growth in income disparity for UC employees; and 4) the university, its students, and workers have taken on tremendous levels of debt. Moreover, now that the global bet on subprime mortgages has gone bad, we are seeing high rates of home foreclosures and unemployment in the areas surrounding the UC system; meanwhile, the university has engaged in its own austerity measures that include layoffs, salary reductions, and massive fee increases.

While the UC rightly claims that it is an engine of economic growth in California, it is important to look at how the combination of increased housing costs and stagnant wages forces UC employees to take on large debt burdens. For example in Santa Barbara County, UC is the largest employer, and the county has one of the highest average home prices in the country. Since faculty, students, and staff need to find a place to live near the campus, they are often left with no choice but to take out subprime loans in order to finance million dollar single-family homes. Moreover, the salaries of employees at UCSB are some of the lowest in the university system, while the rents for campus housing and rentals in the surrounding area have shown a constant increase. Due to the high price and small number of available apartments, UC employees and staff have to take out huge loans to live anywhere near the campus.

It just so happens that most of the UC campuses are located by the coast, and the combination of desired geography and employment opportunities has helped to generate the type of housing distributions that Ashook and Walker examine: "The wealthier households began moving to city centers along the coasts in droves by the 1990s. This pushed up prices and squeezed out families with modest incomes (Fulbright 2007, Lees et al. 2008). Even in medium-sized cities, surging gentrification spread from well-known enclaves to new unexpected neighborhoods. Low-income and first-time buyers sought refuge in the far exurbs, where new housing was being added rapidly and prices appeared to be a bargain by comparison with urban centers; many of these poorer and younger first time buyers were targeted by subprime marketers" (12). Through this rippling effect, the inflated housing costs near the campuses pushes out the non-wealthy who then seek "deals" in the surrounding communities.

This same pattern of high rents, low salaries, and heavy borrowing is replicated in all of the counties that house a UC campus. Likewise, as Ashok and Walker highlight, these same locations were home to some of the biggest players in the subprime mortgage business (19). Of course, these banks were making questionable loans to many people outside of the UC system, but it is my contention that due to its captured market of students, faculty, and staff, the University of California was a major driver in both the high demand for expensive housing and the depression of real wages.

Generating Income Inequality

If we look at UC's payroll in 2008, we find 240,000 employees with a collective pay of just over $9 billion. At the tope of this compensation system, there were 3,600 people making over $200,000 a year for a collective pay of $1 billion; in other words, 1.5% made 11% of the income. At the other end of this spectrum, 166,600 employees made less than $40,000 a year for a collective pay of $2 billion. Although some of these employees may have had other jobs, the vast majority are students, workers, and faculty who often earn close to poverty wages, and while the top 1.5% have seen constant earning increases, the bottom 60% of earners have not kept up with inflation. This income disparity matches the national trends that Ashook and Walker highlight: "Two-thirds of the income gains between 2002 and 2007 went to the top 1% of U.S. households (Piketty & Saez 2009). It allowed the rich to bid up houses at the top of the market to astronomical heights and steered house-builders toward upper-end buyers (making for a surfeit of large houses and a shortage of modest homes) (Tully 2008, DeLara 2009, Hong 2009)" (12). Not only does income inequality make it difficult for low-wage employees to find housing without going into debt, but the wealthy earners end up driving up the prices for everyone else.

As employees with stagnant wages take out huge loans to support their inflated housing costs, students are forced to borrow millions to pay for their education; meanwhile, the university itself has over $14 billion of debt. There is thus a huge demand for credit that is generated by the university system, and this demand is often met by financial speculation. In fact, Ashok and Walker show that a major cause for the change in the California economy is the growth of the financial sector: "While it is difficult to gauge the magnitude of California-based lending as a whole, due to the geographical fungibility of financial flows, one indicator is the growth of financial employment. Although information technology and the business services both had a good run in the 1990s, neither of them recovered in the aftermath of the dot-com bust, whereas the financial industry went from strength to strength. Employment in FIRE (finance, insurance and real estate) skyrocketed between 1996 and 2006 to almost one million jobs, increasing by a remarkable 27%." The state of California's economy is now driven by finance, insurance, and real estate, and these markets themselves have been augmented by the University of California. Moreover, through its $60 billion investment portfolio, the UC is a heavy investor in real estate, private equity, and mortgage-backed securities, not to mention credit default swaps and collateralized debt obligations.

Driving Up Costs

Not only is the university a large borrower, speculator, and employer, but it dominates the healthcare market due to its highly successful medical centers. Once again, the university's participation in the medical industry is a double-edge sword: on the one hand, the UC helps to provide high quality care, and on the other hand, it drives up costs by rewarding huge compensation packages to its star administrators, researchers, and faculty. Not only do medical faculty and administrators often make between $400,000 and $1,000,000 a year, but their centers generate giant profits for the university. In turn, the university is a major purchaser of healthcare insurance for present and retired employees. While it should be possible for the UC system to use its market clout to force down the costs of healthcare premiums, the opposite has been the case, and the university now faces a multi-billion dollar healthcare liability for retirees.

Due to this dangerous combination of stagnant wages, escalating wealth inequality, and rising costs for housing, education, and healthcare, California has seen some of the highest rates of foreclosures. Furthermore, in the areas surrounding the University of California campuses, we witness thousands of people defaulting on their homes loans and student loans. Once again, while we cannot blame the UC system for the entire crisis, the university acts as a tipping point for both the inflation of costs and the deflation of wages.

Some Solutions

If the University of California is really at the heart of this fiscal mix of skyrocketing costs and stagnant wages coupled with high debt and risky borrowing, it should be able to provide a road map of how to stop the next bubble and bust. The first step is clear: there must be an effort to decrease the compensation inequality in the system. Not only does the stagnation of wages for the majority of employees result in the need to take on high levels of debt, but the escalation of wages at the top drives up the costs of healthcare, education, and housing for everyone else.

The next solution is to deflate the student loan bubble by capping tuition and fee increases. In just the last four years, the UC has increased student fees (tuition) by 100%, and these increases are pushing up student debt and pushing students out of the higher education system. Instead of raising fees and reducing enrolments, the university should decrease tuition and increase access.

Furthermore, the university can also reduce student debt and housing costs by reducing the number and the cost of dormitories. It appears that when the university builds new housing facilities and charges high rates, the campuses profit off of artificially inflated housing prices that have a ripple effect on the bordering neighborhoods. A better alternative would be to integrate students into surrounding areas and breakup the local university housing monopoly.

Finally, the university itself needs to find ways to reduce its own debt, and this can be done by greatly limiting new construction projects. Instead of duplicating functions at each campus, the UC needs to concentrate on fortifying the excellent programs it already has created. Moreover, the university should take a hard look at expensive research projects that drain resources and result in unnecessary borrowing for construction.