The Real Dropout Economy

Terrance Heath

We’re living in a “Dropout Economy,” and it’s not the post-apocalyptic, Mad Max Beyond Thunderdome fantasy that seems to fuel conservative dreams of a government-free utopia. This Dropout Economy comes at a huge cost in lost wages and lost revenue.

A new study provided to Whispers from the American Institutes for Research finds that for just one year—2002—some 40 percent didn’t graduate, costing the federal income $566 million in potential taxes, state governments another $164 million and the students themselves $3.8 billion in lost income over their life.

Just multiply that by the average dropout rate of many more college classes and the cost of not graduating skyrockets. Those losses, said the report, “represent only the tip of a very big iceberg.”

…Low graduation rates also squeeze the taxpayer, said the report, because state and federal spending on them to support colleges and through grants and scholarships are wasted. A 2012 AIR report, said states spend more than $1.3 billion per year on students who drop out in their first year while the Feds drop another $300 million per year.

And it’s especially hard on states that are budgeting for higher incomes from college graduates. The biggest losers, said AIR, are California, New York, Texas, Pennsylvania and Illinois.

The report doesn’t say much about why so many college students drop out, but the things some students are doing to pay tuition is a clue. High tuition causes many students to drop out because they “have other bills that mom and dad don’t pay,” and the stress of working to support themselves and going to school at the same time becomes too difficult. (As one who worked my way through college, I can attest to that difficulty. I did manage to graduate.)

And, as Nathan Birnbaum pointed out, the Republican agenda isn’t likely to do much about the real “Dropout Economy,” or its costs.

Consider this, though: A two-thirds cut to government-funded items like Pell Grants would mean that close to 7 million low-income students would no longer be able to afford a college education. Tuition increases have long risen ahead of the rate of inflation: a two-thirds cut to state education funds could prevent that middle class kid from taking advantage of public universities.

A two-thirds cut to industry safeguards would allow corporations to pollute our air, land and water, spelling disaster for environmental and human health. A two-thirds cut to unemployment benefits would throw our parents who can’t find a job out onto the streets.

And the kicker: A two-thirds cut to federal discretionary non-security spending would sink job creation and plunge our economy back into a recession. Think you have a hard time getting a job or finding a way to pay for graduate school now?!

The GOP has a message for us: If you can’t afford to go to college anymore, tough. If your lungs have to act as the filters for coal plants and increased carbon emissions, buck up. If our bridges just happen to collapse while you’re driving on them, good luck getting compensation from the government. It’s a dog-eat-dog world out there, kiddies, and the GOP is coming your way bearing its teeth.

The future of low income students, at least the one the GOP envisions, isn’t much brighter.

Like most right-wing political action in recent memory, the Republican push to cut Pell grants is informed less by a judgment of whether it is effective policy than it is by ideology: the frenzy to eliminate government for the sake of it. Meanwhile, the GOP has stood staunch alongside the for-profit college industry, which you couldn’t avoid finding evidence of committing wrongdoings if you tried.

Looking for spending cuts is a worthwhile task. But a program that makes small investments in low-income students who in turn will use their educations to earn higher wages and pay more taxes doesn’t seem quite right as the first place to start slashing.

If nothing else, the low-wage jobs being created in this recession don’t require, and dropouts who are facing still face huge costs for dropping out may have even more an incentive to take them, since the jobs they were educating themselves for have been hollowed out, with most of the job growth at the low-income and high-income extremes.

And, lest we forget, the real “Dropout Economy” isn’t just lost income from college dropouts. It includes workforce dropouts — the long-term unemployed who have been unemployed for six months or longer (44% of unemployed Americans), and have just given up. An April 2010 Pew Charitable Trust report spelled out the costs of the long-term unemployed “dropping out” of the workforce, by ceasing to even look for employment.

Long-term unemployment also affects the federal budget on the other side of the fiscal ledger by reducing income tax revenue and the amount of money flowing into the unemployment insurance pool. UI benefits are taxable, but people on the unemployment rolls are receiving only a fraction of the income they would be getting if they were working. As a result, they are paying only a fraction of the taxes.

…Consider a hypothetical worker earning $50,000 in 2009. After a personal exemption of $3,650 and a standard deduction of $5,700, he would owe $6,356 in federal income taxes (excluding all other credits and deductions). But if the worker lost his job on July 1 and received UI benefits that replaced half of his wages for the remainder of the year, his annual income would decline to about $37,500. ARRA exempts the first $2,400 of Ui benefits from taxes. With the personal exemption and standard deduction, he would only owe $3,449 in income taxes—$2,907 less than if he had been employed for the entire year.

Moreover, a spell of long-term unemployment can depress a person’s wages in future jobs. When a worker is out of a job, he or she loses out on the opportunity to gain work experience and accumulate skills. This “unemployment scarring” can have

A dramatic effect on future income. one study found that on average, U.S. workers who lost a full-time job between 2001 and 2003 and found a new job by the time they were interviewed in 2004 earned about 17 percent less per week than they would have earned if they had retained their old job.

Many media reports have focused on the human toll of long-term unemployment, particularly its impact on individuals and families. Far less attention has been paid to the fiscal impact of this problem. It has been substantial: The government has spent tens of billions of dollars to help the unemployed, and it is likely to spend billions more before the economy fully recovers.

The talk in Washington seems to be all about what “we can’t afford,” and in that context “what we can’t afford” are Pell Grants, unemployment benefits, and spending to create jobs. We somehow “don’t have the money” for such things. (But somehow we can afford and do have the money for $1.2 trillion in loans to big banks.) What we truly can’t afford, and don’t have the luxury to do nothing about, is a growing “Dropout Economy” that threatens to doom hope of recovery anytime soon.

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