April 2015

The Leyendecker View

The Conversation No One Wants to Have

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Publisher: Douglas Leyendecker
 Managing Editor: Kelly Griego

Welcome to The Leyendecker View
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When we think of what divides America these days, the media would have us think it’s the 1% versus everyone else. If not that, then surely it is the racial divide. But if you look closely at the data, the real divide today is class.
Robert Putnam, former dean of Harvard's Kennedy School of Government and known liberal, recently published a book called Our Kids: The American Dream in Crisis. In it, he explores the depending class divide and particularly “the inequality of opportunity” for kids raised in poor families compared to those raised in wealthier families. While wealth is a factor in children’s eventual attainment, the jarring revelation of Putnam’s book is the havoc being wreaked by the breakdown of the American family.
The traditional family is alive and well among the college educated: less than 10% of births to female college graduates of all races occur outside of marriage, a figure that is more or less the same as it was in 1970. Among women of all races with just a high school degree, 65% of their births are out of wedlock.
Race does factor in: 2% of births to white college graduates are outside of marriage. By contrast 80% of births to African Americans with no more than a high school degree are out of wedlock. Neither of these figures has changed materially since the 1970s.
What has changed today? Births out of wedlock among high school educated whites has quadrupled to 50% since the 1970s. For college-educated blacks, non-marital births have fallen by a third to 25%.
The racial gap is shrinking while the class divide grows.
The key difference between parents with and without a college degree is the level of nurturing their children are provided at home. In the homes of college grads, regardless if one or both parents work, parents routinely engage kids in conversation that helps them learn how to think critically and independently. College-educated parents read to their kids regularly. They drive their children to soccer, dance, piano and all manner of extracurricular activities. And for the most part, these parents also have a spouse to help them share the enormous burden of constantly nurturing their kids.
In families where parents have no more than a high school education, this “Good Night Moon time,” as Putnam calls it in his book, doesn’t happen. Generally, these kids are being raised by one working mother. And generally, this sole parent is in survival mode. In the great majority of cases, she doesn’t have the same time or resources for her kids that educated parents do.
The Economist featured an article looking at some of the stark data in Putnam’s book. The article closes with these thoughts:
“There are no obvious villains in this story…Mr. Putnam sees ‘no clear path to reviving marriage’ among the poor. Instead, he suggests a grab-bag of policies to help poor kids reach their potential, such as raising subsidies for poor families, teaching them better parenting skills, improving nursery care and making after-school baseball clubs free.”
Ok. Let’s call this what it is: a cop out. To suggest no one is responsible, paired with Putnam’s suggested solutions, is to address only the symptoms, not the disease.
Having an honest conversation about this situation—which we must, if we want any hope of our poor finding a path out of the cycle of poverty—requires talking about lots of touchy things.
No one wants to indict single mothers or appear unsympathetic to their plight or, worse, appear to be indicting just one race. No one wants to be harangued for “blaming the victim.” No one wants to look like they don’t care about the poor or are in favor of denying help to innocent kids. No one wants to have a conversation about family values because inevitably it becomes about the “traditional” family, which becomes a conversation religion, gay marriage or about people making poor choices. Everyone’s afraid of being called a racist or a bigot or rich and out of touch, while everyone also seems ready to cry racism, bigotry or rich and out of touch.
Our choice is to avoid the uncomfortable conversation and be without a root cause to target with a productive course of action. Or, we can have the uncomfortable conversation and search for solutions that get to the heart of the matter.
So what’s at the heart of this matter?
Many point to the Great Society, President Lyndon B. Johnson’s 1964-65 flagship program from his War on Poverty campaign, as the reason behind the breakdown of the African American family by instituting welfare programs that incentivized childbirth out of wedlock.
To be able to evaluate this claim, we first need to understand the Aid to Dependent Children program created by the Social Security Act in 1935. The original intent of this program, which would change its name to Aid to Families with Dependent Children (AFDC) in response to criticism that it discouraged marriage, was to offer aid to white single mothers who were, at the time, not expected to work. Black mothers, who had generally always been in the workforce, were excluded from the program’s benefits.
It was through President Johnson’s War on Poverty that the AFDC entitlement for single mothers expanded to include black mothers. Through what is referred to as “the man out of the house” rule, poor, single mothers were entitled to larger welfare payments than poor, married mothers.
The Center for Disease Control didn’t begin tracking births out of wedlock for African Americans until 1969, just a few years after AFDC was issued to black mothers. At that time, 35% of black mothers were unmarried, compared to 10% of white mothers. One could argue that unmarried childbirth was already an issue when the Great Society came into play. By 2000, 70% of black mothers were unmarried, compared to 33% of white mothers. Did the Great Society exacerbate issues? Without pre-1969 data, hard to say. Did it help? Obviously not.
And then, enter technology and globalization.
Starting in the 1970s new technologies began wiping out factory jobs, eliminating employment and earnings prospects for mostly male workers. In general, these factory jobs only required a high school degree. Technology cheapened the value of their limited skill set. The jobs they were qualified to do did and continue to disappear, either through overseas outsourcing or outright replacement by automation. The result has been more males having to take lower-skill, lower-paying jobs or, worse, chronic underemployment or unemployment.

By the 1970s, more women—of all races—were giving birth out of wedlock. We know from Putnam’s book that most of these births were to people with just a high school degree. At the same time, many fathers began losing their reasonable-paying industrial jobs and had to take lower skill, lower paying jobs. And then there happened to be policy in place that allowed single mothers to earn more in benefits if the father to their children was out of the house. One could call this a perfect storm.
Backlash to welfare in general reached fever pitch in the 1990s. In 1996, President Clinton signed the Personal Responsibility and Work Opportunity Act (PRWOA), intended to, as Clinton promised, “end welfare as we have come to know it.” PRWOA ended AFDC, replacing it with the Temporary Assistance for Needy Families (TANF). Under TANF, recipients (single mothers) were required to find a job within 24 months of receiving benefits, and there was a 60-month lifetime limit on TANF benefits.
For PRWOA to dramatically reduce the amount of benefits available to single mothers, it would have to balance this by expanding child support collection efforts. (Unwed parents are also liable for child support.)
States were required to implement computer tracking systems, centralized payment and dispersal systems and unprecedented interagency and private business reporting on the financial affairs of all American citizens ordered to pay child support. The federal government threatened to withhold federal funds to states that failed to implement this monitoring system.
To impel state participation, the federal government put in place a bonus system. States would receive 1% to 6% in federal funds for every dollar of support funds collected. It didn’t take long for states to realize that the more child support money they collected, the more federal bonus money they could get. This resulted in a first-time spike in enforcement of middle-class parents.
The government also broadened available support collection techniques. Fathers who failed to pay support could now be incarcerated, they could lose their drivers licenses, assets could be seized, wages could be garnished. This has the effect of punishing at least some fathers for being poor.
Technology was reducing higher paying blue-collar jobs while government was increasing child support collections. One result? In order to make ends meet, many fathers had to work extra hours or moonlight, eating into the time available to spend with their children.
Finally, in some states, when the father spends more time with his kids, it could mean he owes less child support. Mothers could then find themselves incentivized to keep the father from his kids or, worse, the state could surreptitiously mandate less paternal custody. The children – who we claim we are trying to help most – are then pawns in a game for exploiting as much money as possible from fathers, who often don’t have that money in the first place.
Did PRWOA help single mothers get the support required of her children’s father? In many cases, it did. Did it ultimately help reverse the rate of childbirth out of wedlock? Not at all. Did it help diminish poverty amongst parents? Not at all. Did it encourage dysfunctional parenting and less time with dad? Just ask any divorced dads you know.
So where are we now? Systems remain intact to disincentivize marriage and to disincentivze the traditional nuclear family – the environment where children receive the most productive parenting. The result seems to be poor educational outcomes, which eventually lead these children to a life of low-paying jobs, and, thus, the need for more government support.
We have an upper class that is getting wealthier, better able to afford all kinds of developmental opportunities for their children. As these children secure their fate for high-paying jobs, their poor counterparts fall exponentially behind.
Is a lack of marriage the culprit? Not completely, as the issue remains primarily about poverty – although admittedly, this is a bit of a chicken-egg scenario.
Can marriage have a positive impact on poverty? Absolutely – two incomes are more than one, and two parents improve the economic prospects of their children.
But are there enough high-paying, upwardly mobile jobs to incent marriage among those susceptible to the economic incentives of choosing welfare over having dad in the house? Not at the present time. But if there were, do people have the skills to get these jobs? Probably not. Is it about fathers? Yes, but not always; it can be about the policies they’ve been pushed into. Is it about race? Not anymore. Is it about education? To a big degree, yes. But can we afford to send everyone to college? No. Should everyone go to college? Probably not. Is the 1% to blame? Doesn’t seem so. Are the poor to blame? What are people who live day-to-day to do?
Can we blame the government? We certainly can’t credit them for successfully fixing these issues. Are there politicians who advocate for entitlements as a means to win votes? Absolutely. Are there politicians who support social programs out of a sincere desire to help those less fortunate? Absolutely.
Are there villains in this story of the class divide?
This is one of the most complex, sensitive and important issues we face as a country today. The issue dates back to eighty-year-old policies. Since then, several players have been involved. Several new layers of policy have been implemented. Several changing social and economic forces have had their impact. Is it really fair to blame one social subset? One president? One Congress? One government agency?
It seems the culprit is this: our persistent need to try to socially engineer ourselves out of problems.
The thing about social engineering is that no matter how pure the intentions, social engineering programs are devised in a moment in time. But nothing stays the same.
When Johnson’s team was building the Great Society, even they didn’t have the ability to predict that within just ten years, male employment and wages would start falling, pushing more single mothers to choose welfare benefits over an intact family.
Socially engineered programs emerge from a certain set of circumstances. They then endure for decades, while the social, economic, psychographic and global dynamics around them dramatically change. There is no way to account for these changes when drafting policy. And there is no way to know how the future might create a whole host of counterproductive, intention-killing, unintended consequences. And, ultimately, there is no way to wholly control human behavior.
It is social engineering that must be indicted, must come under scrutiny, must be subject of an honest conversation. Constant attempts to use policy to rout out large social problems may be our biggest problem.
Before we do as Putnam suggests—“a grab-bag of policies to help poor kids reach their potential, such as raising subsidies for poor families, teaching them better parenting skills, improving nursery care and making after-school baseball clubs free”—we should speak honestly about what exactly the road to hell is paved with. Not to mention, from where would the money come to support these new programs? Can any government program ever replace the nurturing of the nuclear family?
We don’t have the answers. But we do feel that this topic of the class divide, the breakdown of the American family and all the many forces and factors around it deserves an enormous amount of non-partisan and honest dialogue. Please see more below on the conversation no one wants to have. We invite your thoughts, ideas and reactions. But more than anything, we invite you to have this conversation with those around you.
General Economic Perspectives
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A friend sent over an article suggesting that the recent contraction in oil and gas investment was not going to affect our national economy as greatly as the contraction in technology investment did after 2000. The article concluded that there isn’t much to fear from the end of the oil and gas gold rush. But what this article failed to point out was that during the 1990s technology boom, US GDP was growing around 4%. Yet during the oil and gas boom, the best we could muster was barely 2%.
The oil and gas boom didn’t waterfall across our national economy nearly as broadly as technology did in the 1990s. Okay, that’s recognized. But what is going to drive our economy now, housing and auto sales?
Housing and auto sales have been considered leading national economic indicators for a good number of years. The more houses we sell, the more waterfall growth we experience in consumer sales for everything that must go into those houses. Auto sales are not nearly as stimulative as houses, but of course the more autos we sell the better our economy does. But why do people buy more houses and autos?
Maybe we buy more houses and autos because there is something else in the economy that is stimulating worker earnings and confidence. During the 1990s, it was a technology boom. Over the last few years, it has been an oil and gas boom. (Outside, of course, the massive monetary and fiscal stimulus created by the Federal government since Lehman’s demise.) So, what boom is next? Where is the next economic catalyst that will waterfall across economy and drive housing, auto and all manner of additional consumption?
The stimulus behind both booms was really a huge increase in capital investment. For the 1990s, it was building factories to manufacture and/or assemble those fax machines, PCs and cell phones, as well as the building out of Internet distribution systems. For the oil and gas boom, it was drilling new wells, manufacturing all those tools to meet that drilling demand and then building more pipelines, storage and processing assets. Capital investment always creates jobs. Consumption may or may not. If Budweiser is going to sell more beer, do they need to build more beer factories?
Optimistic economists will say that current demographics are favorable to growth in housing and auto consumption; there are presently a lot of young people at the right age for creating households and families. But if the data behind this month’s TLV is correct, the number of new households in need of houses and cars may not really be growing. Today’s “households” are often dysfunctional. Can they create a functional housing market? Add in enormous growth in temporary and low paying jobs and near lack of growth in mid-paying jobs, and we may not have the organic momentum to meet everyone’s wish for 2% GDP growth. As if 2% GDP growth is even something to crow about. Remember, the tech boom led us to growth around 4%.
The Hiring Market
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Let’s just go out on a limb. National employment is peaking and unemployment is getting very close to turning over. Why?
To begin with, monetary policy in the US is turning restrictive. Quantitative easing has ceased. Interest rates are close to their lows. There’s just not a whole lot more wiggle room for monetary policy to affect either more economic activity or more employment. And as the dollar rises, it puts pressure on exports.
Outside of enormous government monetary and fiscal stimulus, the oil and gas gold rush has been the primary driver of employment growth over the last few years. All economy begins with natural resources. Nothing gets made or transported without natural resources. Consequently, when you have a natural resource boom, you will also experience a general economic boom.
But now our natural resource investment is contracting significantly. And as we point out below, the discretionary income falling into people’s pockets from lower gasoline prices isn’t showing up in consumption. It’s going towards savings, for another good reason that we outline below.
There is always an overall economic and employment lag effect to dramatic changes in our economy. Gold rush economic waterfalls create ancillary economic activity (e.g. higher home and auto sales) that will continue for a while after the bust. But at some point within the next 12 to 18 months, we may find unemployment growing and our economy back into a period of stagnation. Might the uncertainty in our current stock market be a canary in the coal mine?
Managing the Modern Day
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There is nothing like prosperity to numb the mind of self-discipline.
As we ponder the enormous poverty challenges, the breakdown of the nuclear family and our children’s future, maybe what we should consider is that prosperity itself has a major part in this play. One logically might suggest that it takes self-discipline to create prosperity. But then once we are prosperous, we may just lose that self-discipline. It is easy to assume prosperity will continue once it appears well in hand. This creates fertile ground for complacency.
The loss of self-discipline is not just an individual phenomenon. It can also happen to a country. If our current class problem has developed because we lost our self-discipline, then we may be able to project that sometime soon America will experience its next “Greatest Generation.” But let’s not expect those future American heroes to show up out of nowhere. The only way to obtain Depression Era values is by actually living through a depression
BLS Corner
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Falling gasoline prices lead to lowest inflation since 2008
The BLS released a Beyond the Numbers report about how falling gasoline prices suppressed overall consumer product price changes. The U.S. All Items Consumer Price Index posted its smallest increase since 2008, attributed primarily to the sharp drop in gasoline prices in the second half of 2014. Shelter and food price indexes are the anomaly, as their indexes showed acceleration in 2014.
Follow the link for a closer look at how declining gasoline prices generally mitigated price increases across the board.
Chart of the Month
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Percent of Childbirths out of Wedlock: 1940 – 2000*
* The big asterisk here is the trouble we ran into due to incomplete data; data around unwed black mothers was not tracked until 1969. We’ve also included data of Hispanic mothers, which was not tracked until 1990.
In 1969, just a few years after AFDC entitlements extended to include single black mothers, 35% of black childbirths were outside marriage, compared to 10% for white women. One could argue that unwed childbirth was already an issue in the black community. Without prior data on unwed black mothers, it is difficult to grasp the true impact the Great Society had on the African American family. Could you reasonably deduce by looking at the chart below that the rate of black childbirths out of wedlock accelerated in the 1960s and on? Probably.
It’s clear that unmarried childbirths to white women also saw a steep uptick in the 1960s. We’d be plain remiss not to acknowledge the impact of the changing views of premarital sex that emerged in the 1960s. What was that mentioned in Managing the Modern Day about complacency? 


Source: Center for Disease Control

The Conversation No One Wants to Have
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Minding the nurture gap: More on Robert Putnam’s Our Kids
Putnam’s book is chock full of interesting charts and data, but the following chart, recreated by The Economist, stands out:

This chart tell us that kids in the poorest quartile of families that earned the highest 8th grade test scores are as likely to graduate college as kids in the richest quartile of families who earn the lowest test scores. In other words, family background is a greater predictor of college gradation than school performance is. Worth noting: we are not talking about the 1%. We are talking about roughly the upper third of Americans whose children are getting enormous advantages, while poor children fall further behind.
The terrible loneliness of growing up poor in Robert Putnam’s America
This article takes a close and in depth look at Putnam’s new book, Our Kids: The American Dream in Crisis. He also speaks to his research in this brief video clip:

David Brooks: The cost of relativism
In his New York Times column, David Brooks, also referencing Putnam’s book, highlights some of the truly hard to stomach aspects of American poverty: child abuse, violence, crime, murder and the uncomfortable reality that in many cases, parents are unfit. Brooks’ solution to this is not policy, but a conversation about values and morals, which is all but gone in modern America. That we no longer have a moral standard is, according to Brooks, the consequence of a culture of nonjudgmentalism (political correctness). First we need a moral vocabulary, Brooks says, and then a system of accountability.
What happens when dad is not around
Daniel Patrick Moynihan was a social scientist and democratic New York State Senator from 1997 to 2001. Before that, he served in the administrations of four successive presidents, from JFK to Ford. He was the Assistant Secretary of Labor under Johnson and was integral in devising the Great Society. As part of his research into how to improve poverty and the lives of black Americans, Moynihan authored the report “The Negro Family: The Case for National Action,” which became known as “The Moynihan Report.” Not intended for public consumption, the report was leaked in July of 1965.
Moynihan wrote of the “tangle” of pathologies that contributed to the absent father, which included how generations of men were not socialized to be fit fathers. And he saw a disturbing trend: a house without a father resulted in a son unfit for productive fatherhood, a situation that would only multiply exponentially if not addressed. For saying this, Moynihan was called a racist who “blamed the victim.”
His fears proved accurate.
Father involvement has been shown to have a positive impact on academic achievement and social and emotional well being. It has also proven to have a mitigating effect on problem behaviors like risk taking and delinquency. Newer research shows that boys in particular suffer when dad is absent. Interestingly, girls benefit from quality of time with a father or father figure, while boys benefit from quantity of time. For both boys and girls, bad behavior declined if moms simply spent time “doing things” with their kids.
The Prescience of the “Moynihan Scissors”
In the 1960s, as Moynihan continued to track and analyze data as part of the War on Poverty effort, he noticed something peculiar, something that would became known as “the Moynihan scissors”: two data lines crossing like scissor blades. A descending line charted the decline in male minority unemployment, while an ascending line plotted the concurrent rise in welfare cases. 


Prior to 1965, welfare claims had tracked unemployment; as unemployment rose, so too did welfare claims, and as unemployment dropped, welfare claims dropped with it. Until 1965, when welfare claims began rising regardless of movement in unemployment. Moynihan discovered that these welfare claims were largely from single, black mothers.
This revelation shattered the idea that the government could manipulate economic growth and barriers to economic mobility – which are the social engineering tools in its toolkit – to reduce a cycle of poverty. What Moynihan began to suspect was that the family, not money, played the primary role in social outcomes and self-reliance. While advocating for some form of affirmative government intervention to help African-Americans, Moynihan warned of welfare policies that disincentivized marriage and further broke down families.
In 1992, as the debate over welfare was heating up, Moynihan penned a report in The Public Interest, in which he addressed the claim that the inner city poverty seen in the 1990s and the destruction of the black family were the “grim harvest of the Great Society.” He claims this is nonsense, as the breakdown of the American family was well underway in the 1960s, and welfare had long since existed. That said, Moynihan concedes that the Great Society failed in its mission to eradicate poverty. The data also shows that while employment rose sharply in the 1980s, it did nothing to reverse unwed childbirth or inner city crime. Full employment was deemed “necessary but not sufficient.”
To Moynihan, this is the true grim harvest of the Great Society – the realization that no one has a clue about how to make public policy sufficient.
A final thought
In politics for the last twenty-five years, silence or distortion has shaped the issue of race and urban America. Both political parties have contributed to the problem. Republicans have played the race card in a divisive way to get votes – remember Willie Horton – and Democrats have suffocated discussion of a self-destructive behavior among the minority population in a cloak of silence and denial. The result is that yet another generation has been lost. We cannot afford to wait longer. It is time for candor, time for truth, and time for action.”
The above quote is from the speech “Race and the American City” given on the Senate floor by then democratic Senator Bill Bradley (NJ). It reads like it could have been given today, but it was given in 1992.
We don’t know how to eradicate poverty in America, nor do we know how to stop the class divide from taking a yet more insidious hold on our society. We do know that first we must have an honest conversation about the limits of public policy. From there, we must be able to talk without fear of castigation about the very things Senator Bradley urged us to discuss 23 years ago. And we must be able to talk freely about the critical role that marriage and fathers play – for all races – in raising children who can once again lay claim to the American Dream.
News You Can Use: The Economy, Leadership & Management and the New America
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The Economy
America's fastest growing metropolis isn't pretty – but it's thriving
The Economist takes a look at how Houston’s economy is faring amid the oil bust. Patrick Jankowski, an economist with the Greater Houston Partnership, expects several small oil extraction machinery manufacturers and suppliers to close up shop. And while some oil firms, like Halliburton and ConocoPhillips, have announced job losses, Houston employment at large hasn’t felt its effects – yet. (See chart below.) The article suggests that there are signs that Houston’s growth will be slowed, rather than stopped, in this part of the oil and gas cycle. Read on for more detail on Houston’s current economic pulse.

Americans are saving, not spending, its gas savings
A recent Deutsche Bank note shows that Americans are saving their money from reduced gasoline prices. Gasoline prices have rebounded somewhat, to $2.45 from the January low of $2.04. But year on year, they are still down 29.7%.
 Leadership & Management
Why the best entrepreneurs come from dysfunctional families
Well, perhaps there is one positive side effect of the increasingly dysfunctional American family: they could produce children with a steadfast resilience that can sustain them through enormous setbacks and challenges, like those frequently faced by entrepreneurs. Serial entrepreneur and Silicon Valley veteran, Steve Blank, notes his observation that many entrepreneurs come from dysfunctional families that gave them a high tolerance for chaos and ability to handle ambiguity. Watch the clip for more of his thoughts on this notion.

Happy workers mean richer stock returns, study finds
Glassdoor, as job site that allows anonymous employee ratings of companies, routinely collects data about the best and worst places to work. A recent study found that the companies in the  “best places to work” category outperformed most other companies in terms of success and returns to shareholders. The report shows only correlation, not causation, but a correlation that can make sense – the more successful a company, the better employees it can attract and the better perks it can give, which in turn fuels employee satisfaction.
The New America
47% of American households save nothing
Another recent Deutsche Bank note revealed that nearly half of Americans save nothing from current wages. Couple that with the problems discussed in this TLV – the class divide, the decrease in middle class jobs and increase in low-paying jobs – and consider just how many people will require government assistance in the future.

Babysitters are expensive as ever
Care.com, an online database of babysitters, surveyed its members and found that the cost of babysitters has seen a sharp rise from 2009, when average hourly rate was $10.50, to today, with a $13.44 average hourly rate. One in four parents tip sitters on top of their hourly rate, and 25% of parents feel they pay sitters too much. Nearly 70% of parents let the sitter set the hourly rate, while others ask friends or payment calculator. Follow the link for more results from the survey.
Armchair Economics: Doug Leyendecker
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Two years ago, Doug Leyendecker published the Armchair essay, "Let's Raise Taxes!" It fits well with the subject of this month's TLV: can government do anything to positively influence our economic and class challenges? Follow the link below for the Armchair's view.
Let’s Raise Taxes!
We hope you find this essay of interest and value.
Thanks for reading The Leyendecker View. We hope you find these perspectives unique, insightful and valuable.

We at Leyendecker & Associates are committed to the highest standards of value creation. 
Doug Leyendecker Jim Ford David Prodoehl Kelly Griego