Monday, July 01, 2019

A Neglected Variable

The Boy is trying to make money this summer to contribute to his college expenses this fall.  He’s an EMT, and he signed up with a local private EMT company to work for it. He has gone through orientation and training, and a host of hoops, but is still trying to get significant hours.  Another part-time job he holds, at a local trampoline park, gives him maybe four hours a week.

Absolute levels of pay are one thing.  Variability is another. In policy circles, we talk a lot about the former, but not nearly enough about the latter.  

Last weekend I finally read “The Financial Diaries” by Jonathan Morduch and Rachel Schneider,  a flawed but fascinating account of a project in which hundreds of families’ income and expenses were tracked for a year.  The families hailed from all parts of the country, but the findings were similar everywhere. In brief, they found that variability of income from month to month is as much of an issue for many people as the absolute level of income is. (As the authors put it, “the noise is the story.”)  A family that has “enough” income over the course of a year may have a couple of months in which it doesn’t. Those shortfall months cause deadweight costs of their own, as utilities get shut off and cost extra to get restored, or as unaffordable car repairs lead to late arrivals at work and eventual job losses.  Volatility is a cost unto itself.

The book includes portraits of occupations in which some variability is expected -- such as waiting tables -- along with some where it might not be, like fixing trucks.  

Variable income is a major issue for college financial aid.  The FAFSA and the programs surrounding it tend to assume relatively stable income over time.  “Means-tested” and “sliding scale” benefits do the same. If an income level doesn’t change much over time, it’s relatively easy to calibrate the required level of aid.  But if a weirdly flush month drives down the needed aid, and the aid isn’t there when a “short” month hits, the student may have to drop out. As the old unionized full-time factory jobs fade away, their predictable salaries do, too.  (Yes, overtime fluctuated, but it was on top of a solid baseline.) In some cases, abrupt windfalls can look like aid fraud, and actually generate penalties; the folks in those situations, reasonably, report feeling trapped. The book notes that volatility is fairly common at every income level, though it’s most common at the lowest levels, where it does the most damage.  

Financial aid refunds are typically disbursed in large lumps, contributing to volatility.  I’ve heard of “aid like a paycheck” programs, in which the refund for a given semester is divided into biweekly chunks and given out that way.  I hadn’t thought about it much, but it may help. (It also offers the institutional benefit of possibly reducing the “return to Title IV” -- R2T4, in the biz -- that colleges have to pay when students drop out mid-semester.)  The book notes a survey in which respondents are asked about their level of financial anxiety. When cross-tabulated with the time of the month the question was asked, respondents at the end of the month are far more anxious than respondents at the beginning.  

Economists like to point out that “over-withholding” of taxes, in order to generate a larger tax refund, is inefficient; it amounts to extending an interest-free loan to the government.  (These days, interest on savings is low enough to deflate that argument somewhat, but people still make it.) But people do it anyway, even knowing that, because they value the payout that forced discipline makes possible.  One woman the book follows put her “special” money in a bank an hour away and cut up her ATM card, specifically to make it harder to fall prey to temptation and spend it without reflection. (Forced self-restraint isn’t a new idea, as readers of The Odyssey know.)  A few extra dollars every two weeks would vanish down the rat hole, but a single big annual payout makes a perceptible difference. Aid like a paycheck could accomplish something similar in reverse. It would make it harder to blow through an entire refund quickly, but it would also offer reassurance that there will still be money at the end of the semester.  That way, even if a student’s part-time job shorts him some hours at some point, there will at least be a predictable baseline of income.  

The book leans harder than I would like on “there’s an app for that” solutions, spending much less time and focus on larger changes in the economy.  At a really basic level, it’s hard to save money you never saw in the first place. But as a reminder of the realities facing many of our students and families, it’s on-target.  

Ultimately, of course, income volatility is about more than “nudges” or mental math.  It’s about the larger political economy and the ways that we’ve allowed jobs to be organized.  The Boy is perfectly capable of the arithmetic required to hit a savings goal, but he can’t compel an employer to give him hours.  That’s a much larger problem than any one college can solve. But it’s useful for keeping in mind when wondering why students sometimes make the decisions that they do.