Category: Government

On being Adults

I have always opposed hate crime laws on the grounds that the law should generally deal with our actions rather than our more difficult to determine motives. I am also saddened by the growing tendency of college students to turn to their in loco parentis administrators to protect them from the verbal challenges that should be part of their growing up experience. These two are related.

The ongoing discussion of transgenders’ use of bathrooms, locker rooms, and other public facilities has raised all kinds of issues. What if a “real” man pretends to be a woman and comes into the Lady’s room and molests some poor girl? Won’t laws allowing people to use the restroom that fits their sexual identity encourage such behavior, or at least open the door to it? No. Such behavior has been illegal forever without having to ask what reason or excuse was given for being in the Lady’s room. Comments from a reader of my “Public Bathrooms” blog earlier this week illustrates this sort of misguided thinking:

John Rohan: “The fear is not just transgender people attacking anyone…. The real fear is ordinary males taking advantage of the policy, which has happened on many occasions, so it’s not a “non issue”.

“This isn’t just about bathrooms with private individual stalls. It’s about locker rooms and showers, like in our schools. If the Obama administration had it’s way, biological males, with no surgery, hormone treatments, and without necessarily even informing their parents, should be allowed to use the girls locker rooms and showers.

“McCloskey goes on to ask: “How is it to be enforced? DNA testing by the TSA at every bathroom door?” Well, let’s flip that around. If you allow trans people to use their preferred facilities, how is that to be enforced? Asking for proof of hormone medication? A doctor’s note? Then what?”

It is the transgenders who have the difficult and sometimes wrenching decisions to make about what facilities to use at each stage of their transition. Common sense will and normally has prevailed on everyone’s part. When truly offensive behavior occurs (e.g., an assault) for what ever reason, the laws already exist to punish it.

There are times when we need the state to punish unacceptable behavior and to protect the weak, but the trend toward reliance on Big Brother to deal with more and more of the things we don’t like bods ill for our liberties and our society. Big Brother has a habit of having a mind of his own (or of his best placed buddies) the imposition of which we don’t always like. Of equal importance is the weakening of our personal strength to deal with the real world from turning too often to the state to deal with what we should be able to deal with ourselves.

This leads to my second concern, which is the subject of an excellent op-ed by Catherine Rampell in this morning’s Washington Post: “College Students run crying to Daddy Administrator” https://www.washingtonpost.com/opinions/college-students-run-crying-to-daddy-administrator/2016/05/19/61b53f54-1deb-11e6-9c81-4be1c14fb8c8_story.html

In her column Ms. Rampell says: “I applaud students who want to create a diverse, welcoming atmosphere on campus. I admire their drive to make the world around them a better, more inclusive place. What puzzles me, though, is this instinct to appeal to administrators to adjudicate any conflict.

“Rather than confronting, debating and trying to persuade those whose words or actions offend them, students demand that a paternalistic figure step in and punish offenders.

“Adult students, in other words, are demanding more of an in loco parentis role from their schools. And administrators appear ready and willing to parent.”

Political correctness, as opposed to good manners, reflects a worrying propensity to turn to and give over to authorities things we should develop the capacity to deal with ourselves. I have written about this several times before but the disease is still with us: https://wcoats.wordpress.com/2015/11/11/what-is-wrong-with-pc/

The Market vs. the State

It is in our natures to serve our personal interests first and those of others second. The interests of others include not only those around us in need but also our children and future generations in general, which are served by far sighted policies that might entail short-run and immediate sacrifices. Communities and societies that have instilled in each generation the values that promote and serve such longer-run interests will flourish relative to those with more narrowly “selfish” values.

Adam Smith famously explained in The Wealth of Nations how an individual’s pursuit of his personal gain benefits society at large. In the marketplace the fruits of our labors enjoy the greatest profit the better they meet the desires and needs of our customers at the lowest possible cost. While we might like to cut corners and raise our prices if we could get away with it, competition in the market prevents us from doing so.

Free trade and the international agreements that promote it is an example of the trade off between personal and community or national interests that I am raising. The Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) will further extend the freedom to trade among the countries signing up to them while raising the standards for working conditions, intellectual property protection, and conflict resolution.

I began an article on free trade written a year and a half ago with: “World per capita income didn’t change much from the time of Christ to the founding of the United States ($444 to $650 in 1990 dollars), a period of 1,790 years. But in the following 320 years it jumped to $8,080. And about half of that jump came over the last 50 years. What explains this fairly recent explosion of well being? Many things, of course, but central to this explosion of wealth was trade.” free-markets-uber-alles As the most disheartening and distressing U.S. presidential campaign in my lifetime has made clear, the huge gains from freer trade as with the huge gains from technical advances have not been evenly shared thus highlighting the trade off between personal and community interests I am exploring.

We have long accepted that economic progress should not be stopped because it would make a particular set of skills or tools less valuable. When someone developed cheaper and better ways of providing us with music than the old 78 inch vinyl record—itself an amazing technological feat in its time—those producing the old records were forced to learn new skills. We should debate whether society (family, church, community governments, etc.) should help those adversely affected by technological progress and how best to do it, but few would want to prevent such progress from which almost everyone in the world has eventually benefited enormously.

Government, which represents an exercise of our collective will, is meant in part to give primacy to our concerns for the interests of others and/or the long run over our individual, immediate personal well being. The American constitution was all about trying to do that without the government becoming captive of the self-interest of those running it. Our natures, whether we operate as private individuals constrained by the market place or as public officials constrained by the law and a broadly agreed public purpose, remain a mix of self-interest and public interest. The fundamental difference between our behavior as private citizens or public servants is in the external constraints that impact our behavior. Our natures otherwise remain the same.

The power of government can be exploited to thwart the discipline of competitive markets on the dominance of self-interest over the common interest. Preventing government from being captured by the self-interest of those running it or those who seek special privileges from it is no easy task. To that end our constitution strictly limited what government could do (the enumerated powers) and encumbered it with checks and balances. The dangers of such capture posed by the military industrial complex of which President Eisenhower warned, is well known and real (e.g. $400 billion F-35 Joint Strike Fighter that few believe we need), but the same is true of most other intrusions of government into private affairs, such as all of our many wars (on drugs, terror, poverty, etc.) as well.

Sadly our government has expanded well beyond its necessary functions into every nook and cranny of our personal lives with increasingly pernicious and alarming results. The abuses of its ever-expanding powers for personal and partisan benefits are exemplified by the scandal of asset forfeiture,the-abuse-of-civil-forfeiture/, which alarmingly continues, the long and bipartisan history of political abuse of the IRS, irs-tea-party-political, and most recently the legal attack on companies questioning the climate change forecasts of the Intergovernmental Panel on Climate Change (IPCC) by the AGs United for Clean Power using the Racketeer Influenced and Corrupt Organizations (RICO) Act in an effort to silence criticisms of UN climate studies. prosecuting-climate-chaos-skeptics-with-rico. Such a blatant government attack on free speech is truly shocking. These are but a few examples of growing government tyranny and corruption.

The most effective defenses against such corruption are to limit the scope of government as much as possible (i.e. subject individual actions to the discipline of the market as much as possible) and to strengthen public insistence on adherence to the rule of generally applicable law. As trade has moved beyond the village and nation, so must the rule of law.

Following World War II the United States led the establishment of international arrangements and laws governing trade (WTO) and financial (IMF and WB) and diplomatic (UN, NATO) relations among nations. The U.S. was the natural leader of this globalized world not only because it had the largest economy and the largest military, but because it was generally respected for its commitment to the rule of law. More than any other country the U.S. was seen as committed to the longer run prosperity of the world above short run tactical benefits for itself.

In an April 12, 2016 interview by Steve Clemons in The Atlantic, U.S. Treasury Secretary Jacob Lew observed that “In the 21st century, the world needs the United States to be a North Star. The world wants us to be the North Star. I really do believe that. I am amazed at how other countries want to hear our advice and what we think makes sense. Sometimes we may have the habit of lecturing too much. We have to be careful not to do that.”

In recent years American leadership has been slipping. Rather than draw China more tightly into the global rule based trading system, we have pushed them away. After the United States convinced the IMF’s European members to accept a reduction in their share of votes in the IMF in order to bring the voting shares of China, India, and some other emerging economies more in line with their economic size, it took the U.S. Congress more than five years before it approved the amendments to the IMF Articles of Agreement needed to implement this agreement. In the mean time China set up its own international lending organization. US-leadership-and-the-Asian-Infrastructure-Investment-Bank

Rather than strengthen cooperative, diplomacy based relationships the U.S. has launched a series of generally failed wars to promote “democracy,” (Gulf War 1990-91, Somalia 1992-5, Haiti 1994-5, Bosnia 1994-5, Kosovo 1998-99, Afghanistan 2001 – to date, Iraq 2003-11, Libya 2011). These have weakened respect for American leadership.

On the economic front the United States has imposed hugely costly anti-money laundering (AML) and global tax reporting (FACTA) requirements on the rest of the world without regard for their cost and despite the lack of any evidence of benefits.  Operation Choke Point   These are serious abuses of American leadership that will produce a growing backlash. But it is not just misguided arrogance that is undermining our role in the world, it is the growing perception that our leadership is increasingly motivated by the selfish personal interests of crony capitalists rather than the high principles that have serviced us and world so well in the past.

Consider the example of the FATCA (Foreign Account Tax Compliance Act). Badly designed corporate and income tax laws in the United States have pushed an increasing number of companies and wealthy people out of the U.S. Rather than clean up its tax laws, the U.S. attempts to tax the income of Americans where ever they earn it and where ever they might live. The only escape is to renounce U.S. citizenship. The Obama administration is now proposing an exit wealth tax for American’s giving up their citizenship. It reminds me of the measures the Soviet Union took to prevent its citizens from leaving. Have we really fallen so low?

The use of off shore, tax minimizing structures by American companies and individuals (i.e. legal tax planning measures) as well as illegal efforts to hide income have been met by increasingly intrusive efforts by the U.S. to find and tax such income. Quoting from the introduction of the Wikipedia article on FATCA: “The Foreign Account Tax Compliance Act (FATCA) is a 2010 United States federal law to enforce the requirement for United States persons including those living outside the U.S. to file yearly reports on their non-U.S. financial accounts to the Financial Crimes Enforcement Network (FINCEN). It requires all non-U.S. (foreign) financial institutions (FFI’s) to search their records for indicia indicating U.S. person-status and to report the assets and identities of such persons to the U.S. Department of the Treasury.”

As the world attempts to comply with American extra territorial demands, the United States itself is not. Such reporting requires knowledge of the beneficial owners of companies. Most companies established in the United States, such as those incorporated in Delaware, are not required to provide the identities of beneficial owners. The U.S. seems to have no intention of requiring its companies to comply with what it demands from other countries.

The decline and fall of the “American Empire” seems to be underway. It doesn’t need to be.

A Modest Proposal—Helicopter Money and Pension Reform

It is possible to fix the bankrupt Social Security System and the Federal Reserve’s failure to achieve its inflation target painlessly. Yes, really.

The Fed has failed to raise inflation to its 2% target because over regulated banks can’t find over regulated firms wanting to borrow and invest. As a result, the increases in the Fed’s base money from its Quantitative Easing and other efforts to stimulate the economy has piled up as bank excess reserve deposits at the Federal Reserve Banks.[1] If the Fed pushes too hard (e.g., by lowering the interest it pays on these bank reserves, potentially even to negative levels) it feeds asset price bubbles (stock and housing prices), which do great damage when they burst.[2] If the Fed just printed more money and sprinkled it around to the general public—what Milton Friedman called helicopter money—there is no doubt that the public would spend more and drive up prices.

Leaving aside whether it is really a good idea to create a steady 2% rate of inflation, there is an easy way of doing it that would also facilitate badly needed reform of the government’s retirement system. Contrary to the myth that our Social Security pensions reflect what we paid in (saved) to the system, Social Security pension payments are now fully pay as you go. This means that the revenue from payroll taxes approximately matches the outflow for current pensions, i.e. nothing is being saved for the future. As our population continues to age and the number of retired pensioners increases relative to the shrinking number of workers paying into the system, the modest amounts that have been accumulated in the Social Security “Trust Fund” will be drawn down to zero in about 15 years at which time the government will not be able to meet existing promises.[3]

The following proposal combines helicopter money sufficient to bring the inflation rate to its target with badly needed reform of our government pension system. Under this proposal all individuals will receive a minimum government guaranteed pension for life whether they paid in anything or not. This might be implemented as part of a Friedman like negative income tax and other badly needed tax reforms,[4] or stand alone. Before retirement, individuals who are working but with incomes below the poverty level (to be politically established) will not pay a wage tax as they do now. The subsequent pensions of such people will be paid with helicopter money (the Federal Reserve will print the money to buy government bonds sufficient to finance these expenditures). All workers with incomes above the poverty level will be required (as they are now) to set aside the amount of income needed to finance their minimum guaranteed pension on a fully funded basis. They are free to save more if they would like a higher pension. The funds set aside must be invested in government licensed and approved private pension funds chosen by each worker rather than in the almost fictitious Social Security Trust Fund.

This would establish the three pillars of good pension policy proposed by the World Bank in 1998: a means tested minimum pension financed by the government’s general revenue, a mandatory minimum pension paid for and privately invested by all working individuals, and additional, optional, supplemental retirement saving privately invested. Such a model was first adopted in Chile over 35 years ago with great success. Central and Eastern European countries have adopted similar models as part of their transition from centrally planned to market based economies. Financing income subsidies to the poor from general revenues (via printing money), and a user fee approach to mandatory saving (mandatory saving matched to the actuarial value of the pension received), conforms more closely to the principles of good tax policy.[5] The alternative sometimes proposed of raising the income cap on the payroll tax is closer to general revenue financing (if the government guaranteed minimum is only paid to the poor), but leaves out non-wage income and thus fails the good tax criteria.

As new workers would be truly saving for retirement, their savings would not be available to finance those currently retired, as is now the case with our pay as you go system. Thus transitional arrangements will be needed (for several decades) to deal with existing unfunded promises. If the promises remain unchanged, the money to pay for them will have to come from somewhere (higher taxes or reduced defense or other expenditures). Usually, in such cases the government spreads the burden around (burden sharing). Two simple and sensible changes to the current promises would absorb the greater part of the shortfall. The first is to adjust the pensionable retirement age to the fact that the average person lives much longer than when the current retirement ages were fixed. People are living longer and can (and most would like to and do) work longer. The other is to change the index to people’s pensions from a wage index (which generally increases pensions in real terms over time) to the cost of living (CPI), which would preserve their real value against any inflation over time.

For today, this means that the wage tax on the poor would be abolished and paid for with new Fed money that would thus be put in the hands of those who would spend it, increasing employment (though we are really at full employment now) and/or wages and prices. It would both raise inflation a bit and launch a genuine, long over due pension reform.

[1] “US Monetary Policy–QE3” Cayman Financial Review, January 2013

[2] “The D E Fs of the Financial Markets Crisis” CATO Institute, September 26, 2008.

[3] https://wcoats.wordpress.com/2008/08/28/saving-social-security/

[4] http://www.compasscayman.com/cfr/2009/07/07/US-federal-tax-policy/

[5] http://www.compasscayman.com/cfr/2013/07/12/The-principles-of-tax-reform/

What is wrong with PC?

Almost five years ago I wrote about political correctness (PC, politeness and caondor): https://wcoats.wordpress.com/2011/01/11/pc-politeness-and-candor/. In short, I said that what would normally be considered “good manners,” — values and behavior of free individuals– was becoming a stifling imposition of expected behavior by various authorities, another manifestation of the nanny state. Given our laudable propensity to generally rebalance excesses in one direction or another, I assumed that PC would be fading by now.

In 1964 at the University of California at Berkeley, I participated with other students from the far left to the right (University Conservatives and Young Republicans– we didn’t have far right students at Berkeley) in demonstrations AGAINST the University administration’s efforts to limit our freedom of speech. This was the famous Free Speech Movement. Thus I am shocked to read that today’s students are demanding restrictions on speech by the authorities. What is going on here?

On November 9 the WSJ reported that: “On Oct. 28 Yale Dean Burgwell Howard and Yale’s Intercultural Affairs Committee blasted out an email advising students against ‘culturally unaware’ Halloween costumes, with self-help questions such as: ‘If this costume is meant to be historical, does it further misinformation or historical and cultural inaccuracies?’ Watch out for insensitivity toward ‘religious beliefs, Native American/Indigenous people, Socio-economic strata, Asians, Hispanic/Latino, Women, Muslims, etc.’ In short, everyone.

“Who knew Yale still employed anyone willing to doubt the costume wardens? But in response to the dean’s email, lecturer in early childhood education Erika Christakis mused to the student residential community she oversees with her husband, Nicholas, a Yale sociologist and physician: ‘I don’t wish to trivialize genuine concerns,’ but she wondered if colleges had morphed into ‘places of censure and prohibition.’

“And: Nicholas says, ‘if you don’t like a costume someone is wearing, look away, or tell them you are offended. Talk to each other. Free speech and the ability to tolerate offence are the hallmarks of a free and open society.’

“Some 750 Yale students, faculty, alumni and others signed a letter saying Ms. Christakis’s ‘jarring’ email served to ‘further degrade marginalized people,’ as though someone with a Yale degree could be marginalized in America” Read the whole sickening story: http://www.wsj.com/articles/yales-little-robespierres-1447115476

It is hard for me to grasp that some Universities now carve out limited spaces within which students may freely express their opinions on controversial issues. Charles Murray’s reaction resonates with me: “Safe space. That’s the POINT of a university. To be a safe space for intellectual freedom in a world largely hostile to that concept.” FACEBOOK, Nov 10, 2015.

It is a good thing that today’s students are more sensitive to bad behavior among their peers and hopefully better behaved themselves. However, the swing from students demonstrating to defend free speech to students demonstrating to restrict it represents, in my view (as correctly noted by the brave Mr. Christakis in the above article) a swing from each or our personal responsibilities to exhibit, defend and promote good manners to a wide ranging state—big brother—to oversee and enforce all that in its wisdom we should believe and do. We will be a weaker and more subservient country as a result.

Keystone XL pipeline madness

By his own admission President Obama’s rejection of the Keystone XL pipeline project is political rather than scientific.

Two environmental concerns have been raised. The first is that the emissions of greenhouse gases are about 17% higher for oil from oil sands compared to conventional sources. However, the rejection of the pipeline proposal will not materially change the production and consumption of Canada’s oil shale crude, which will now be transported to market by more expensive means. “Rail transport has expanded to carry oil sands to the United States, soaring from just 16,000 barrels in 2010 to 51.2 million barrels in 2014 before dropping somewhat this year. But rail transport is more expensive than pipeline transport…. Royal Dutch Shell’s chief executive, Ben van Beurden, said last year that the company had bid for space on another pipeline to move its oil-sands crude to Canada’s east coast and from there to world markets, including Gulf Coast refiners. ‘We’re covered. I’m good,’ he said in an interview. He said that ‘the argument that Keystone is a bad idea because it will somehow enable development of resources in Canada is to some extent flawed,’ adding that other alternatives would emerge.” (This and other quotes are from today’s Washington Post in the article linked below)

The second environmental concern arises from the possibility of oil spills from breaks in the pipeline. This possibility needs to be compared with the possibility of spills from rail accidents or breaks in alternative pipelines.

Because the pipeline would cross international boundaries it must be approved by the State Department. As the application was being reviewed, then Secretary of State Hillary Clinton stated on October 15, 2010 that the department was “inclined” to approve project. “We’re either going to be dependent on dirty oil from the Gulf or dirty oil from Canada,” she said. On August 26, 2011 the State Department issued its final environmental impact statement determining “there would be no significant impacts to most resources along the proposed project corridor.” And again on March 1, 2013 the State Department issued another environmental review that raised no major objections to the Keystone XL oil pipeline saying that other options to get the oil from Canada to Gulf Coast refineries were worse for climate change.

Canada’s new liberal Prime Minister, Justin Trudeau, supported the project. “TransCanada’s president and chief executive, Russ Girling, issued a statement saying his company was ‘disappointed. Today, misplaced symbolism was chosen over merit and science — rhetoric won out over reason,’ Girling said…. Terry O’Sullivan, general president of the Laborers’ International Union of North America, said Friday that ‘Obama has also solidified a legacy as a pompous, pandering job killer.’” (same Post article).

“As Obama rode from the White House to the campus [Georgetown on June 25, 2013, he], said he would approve Keystone XL only ‘if it does not significantly exacerbate the climate problem.’” But his own State Department found that it does not. So what is going on?

“By late 2013, Obama and Kerry had concluded that the pipeline failed their climate test — not because blocking it would guarantee that Canada’s fossil fuels would remain in the ground, but because denying the permit would strengthen America’s position in international climate negotiations…. ‘The reality is that this decision could not be made solely on the numbers — jobs that would be created, dirty fuel that would be transported here, or carbon pollution that would ultimately be unleashed,’ Kerry said in a statement. ‘The United States cannot ask other nations to make tough choices to address climate change if we are unwilling to make them ourselves.’”

In short the President lied (not an uncommon practice among politicians, but we might hope for a higher standard from American Presidents). But apparently not. The Obama administration has authorized the selling of coal owned by the U.S. government that would not meet our C02 emission standards to third world countries, which helps our emission record but not the world’s. https://www.washingtonpost.com/world/us-exports-its-greenhouse-gas-emissions–as-coal-profitable-coal/2015/10/08/05711c92-65fc-11e5-bdb6-6861f4521205_story.html

“The Washington Post’s editorial on the pipeline today began: “President Obama rejected the Keystone XL oil pipeline on Friday, ending an unseemly political dispute marked by activist hysteria, GOP hyperbole, presidential weakness and a general incapability of various sides to see the policy question for what it was: a mundane infrastructure approval that didn’t pose a high threat to the environment but also didn’t promise much economic development. The politicization of this regulatory decision, and the consequent warping of the issue to the point that it was described in existential terms, was a national embarrassment, reflecting poorly on the United States’ capability to treat parties equitably under law and regulation.”

https://www.washingtonpost.com/blogs/post-partisan/wp/2015/11/06/obama-ditches-evidence-to-capitulate-on-keystone-xl/

https://www.washingtonpost.com/news/post-politics/wp/2015/11/06/obama-set-to-reject-keystone-xl-project-citing-climate-concerns/

Two approaches to American governance–The case of higher education financing

Hillary Clinton deserves credit for setting out her positions on individual policy issues so that we can have an intelligent discussion of their pros and cons. She is nothing if not a tireless policy wonk. Think of her exhaustive but failed effort to “fix the provision of health care in America” during her husband’s presidency. While the Clinton’s are Democratic Party centrist, they still embrace a top down government/regulatory approach to dealing with many of societies challenges/problems. Mrs. Clinton’s plans to make college affordable provide a recent example of this approach. It is thoughtful and balanced from a left of center, regulatory approach perspective. I prefer a difference, right of center, more market oriented approach.

I have not read Mrs. Clinton’s detailed proposal and rely completely on the following Washington Post summary: http://www.washingtonpost.com/news/wonkblog/wp/2015/08/10/clinton-proposes-a-350-billion-plan-to-make-college-affordable/

Background

Americans believe in equality of opportunity rather than equality of outcomes. We are not egalitarians. There is nothing we can do about the fact that each person is born with different predispositions and capabilities. But it has been a long-standing, broadly shared principle that everyone should have access to the education she is capable of. We have lived up to this goal very imperfectly. Tuition vouchers and school choice are moving us closer to this goal for K-12 by making the state’s financial contribution to education more equal for each student and subjecting schools to greater competition in producing good results. Unlike primary and secondary education, however, which in the United States is financed by the states (generally by municipalities), college is not for everyone. An important public policy issue is who should pay for higher education for those who do go.

When the government began to supplement private universities and colleges with state run, public ones, it generally funded the cost from tax payers charging only nominal tuitions, if any, to those attending. Milton Friedman and others pointed out that this resulted in a perverse redistribution of income from lower to higher income people. University graduates enjoy incomes two or three times the average of non-college graduates. In response to this criticism, state colleges and universities in recent decades have raised their tuitions in order to finance more of the cost of the education by its beneficiaries.

It is desirable for those from low-income families with the intelligence and desire to pursue careers requiring a college education to have that opportunity. This accords with our belief in providing an equal opportunity to all and increases our individual and national wealth by facilitating the maximum productivity of every citizen. But how can we best accomplish this goal without perversely redistributing taxpayers’ money to the better off? Along with higher tuitions, many universities offer financial assistance to such students in order to attract and graduate the best students. Having the best graduates enhances their reputations. A number of private organizations provide fellowship to promising low-income students. America is renowned for its extensive private charities. Many companies do the same, generally for the children of their employees. These have the substantial advantage over government bureaucrats of being closer to the beneficiaries of their largesse and thus better able to determine who in their communities will benefit the most from such assistance.

Determined students often work while studying and/or borrow from their families and friends (this was my approach). In business, future benefits from current investments are normally financed with borrowed money or by giving investors a stake in the outcome (selling shares in the hoped for profits). Unless they are family or friends, lending to someone with potential future human capital as collateral (i.e. lending to a student based on the expectation that she can repay out of higher future income) is a riskier proposition than, say lending to someone with a job to buy a car or a house (both of which can be use as collateral). So bank lending to college students was rather limited and expensive (interest rates high enough to cover the higher risks to the lender) until the government began to guarantee such loans.

Solutions

To address this problem, and building on the experience with financing college for veterans of World War II in the “GI Bill” of 1944, Congress adopted what became known as Pell Grants, financial aid to low-income students in undergraduate college programs, in the Higher Education Act of 1965. This Act also provided limited government loans, which over time expanded in various ways to include students from middle-income families (Middle Income Student Assistance Act of 1978) and studies at graduate and professional schools. Over time the scope and terms of government assistance continued to expand. Grad PLUS was added by that spend thrift George W Bush in 2006 to help finance graduate education. “For the first time, it gave professional and graduate-school students unlimited access to below-market-rate loans from the government, which, of course, borrows the money to begin with.”[1]

This has enabled more American’s to go to college– a potentially good thing. The increased demand for places in colleges is likely to increase the cost of supplying more (higher salaries for college professors in order to attract more into teaching), but hardly justifies what has happened. According to The Economist “Tuition fees have doubled in real terms in the past 20 years. Student debt has trebled in the past decade, to $1.2 trillion.” Seventeen percent of these loans are now in default or seriously delinquent. Many of these students have dropped out of school or not found the jobs they were trained for.

The government (Secretary of Education Arne Duncan) has established a number of programs to help and Hilary Clinton “proposes capping the repayment of college loans at a maximum of 10% of income over 20 years. If a loan is not paid off by then the government will pick up the tab. The estimated bill for her scheme…, comes to $350 billion over ten years.”[2] This may be sensible within the context of government aid. But this top down government approach suffers from a number of weaknesses. One is the propensity for such programs to grow as different special interests succeed in getting added to the list: “Despite all the talk about the government’s $1.1 trillion student loan portfolio, and the burden it represents for college students, some 40 percent of the money is owed by graduate and professional school students — who make up only 16 percent of all student-loan borrowers.”[3] Another is the inferior ability of government bureaucrats, with no financial stake in the outcome, to evaluate the appropriateness of each individual loan or grant. A third is the limited incentive for government to find new innovative ways to deal with the problems that invariably arise.

The policy challenge in my view is to bring more effective competitive pressure on colleges and universities to deliver more for less, to facilitate more careful and better informed decisions by potential students of what education they need and will benefit from and the best place for them to get it, and insuring at the same time that initial poverty does not prevent them from getting it.

Leaving the GI Bill aside as a special case, the arrangements for financing college and advanced degrees that existed prior to the Federal government’s involvement worked pretty well. Those of us needing financial assistance paid a great deal of attention to the cost and value of the educations we sought. We were also more careful about whether and what sort of higher education would benefit us. I have no doubt that the incipient revolution of on-line courses, perhaps supplemented with class room discussions, will dramatically reduce the cost of higher education without significantly sacrificing its quality. Everyone’s professors can be the best that exist. Universities will be forced by such competition to exploit these new technological tools to dramatically reduce the costs of their offerings. The very best students will still pay the premium to attend the University of Chicago’s of the world (pardon my bias). Hopefully they will be the best and not just the wealthiest.

Market based financing innovations are also more likely to come from basically private funding of education. The suggestion made by Milton Friedman in 1955[4] and repeated in Capitalism and Freedom in 1962 for sharing the risk of investing in higher education between the borrowing student and the lender is now being explored in the private sector. “Enter income-share agreements ( ISAs ), which are essentially equity instruments for human capital. Investors finance a student’s college education in return for a percentage of their future income over a fixed period. ISAs are not loans and there is no outstanding balance. If students earn more than expected, they will pay more, but they also will pay less—or nothing—if their earnings do not materialize.”[5] Sharing the risk in this way insures a financial interest by both borrowers and lenders that collage choices maximize the expected return to both. A lender, (especially loans made or guaranteed by the government) is not well placed to determine the career intentions of the borrower leading to what economists call adverse selection. Income sharing agreements overcome this problem because the student being financed has a large stake in making the best choices.

Government always has an important role to play. The issue is what the nature of that role should be. Private contracts such as loans or the ISAs described above require a legal framework of enforcement. Such framework for ISAs is currently rather unclear. Sen. Marco Rubio (R., Fla.) and Rep. Tom Petri (R., Wis.) recently introduced the Investing in Student Success Act, which would set basic standards for ISA contracts. In addition their bill would provide for the collection and publishing of information on the cost and average earnings of graduates of different colleges and fields, which would help students choose where and how to invest in their futures.

Clinton’s and Rubio’s approaches represent very different concepts of how government can most constructively contribute to our flourishing. I prefer the approach of a more limited, legal framework role for government.

[1] Charles Lane, Washington Post Aug 26, 2015 https://www.washingtonpost.com/opinions/how-student-loans-help-keep-expensive-schools-in-business/2015/08/26/e7d7f83a-4c11-11e5-902f-39e9219e574b_story.html

[2] The Economist, August 22, 2015.

[3] Charles Lane op. cit.

[4] Milton Friedman, “The Role of Government

in Education,” in Economics and the Public Interest ,

  1. Robert Solo, (Rutgers: Rutgers University

Press, 1955).

[5]   Miguel Palacios And Andrew P. Kelly, “A Better Way to Finance That College Degree” WSJ April 13, 2015, http://www.wsj.com/news/articles/SB10001424052702303456104579485801253355622

Cayman Financial Review, Q3 2015

Dear Friends,

The Third Quarter issue of the Cayman Financial Review is now available on the web: http://www.compasscayman.com/cfr/. I am on the Editorial Board and have two articles in this issue that might interest you. The first discusses the continued decline of U.S. world leadership exemplified in the case of the new Asian Infrastructure Investment Bank located in China: http://www.compasscayman.com/cfr/2015/08/19/US-leadership-and-the-Asian-Infrastructure-Investment-Bank/

The second is the final installment of my series on the Kabul Bank scandal. The failure of Kabul Bank in Afghanistan was probably the biggest bank failure and fraud in history on a per capital basis.  As this final article looks at some of the legal issues and developments in recovering stolen assets held abroad and Afghanistan’s uneven struggle to strengthen its criminal justice system, Gary Gegenheimer, a lawyer who also worked in Afghanistan, joined me to write this third installment: http://www.compasscayman.com/cfr/2015/08/19/The-Kabulbank-scandal–Part-III/

I hope that you enjoy them.

Best wishes,

Warren

Greece—how could they?

Today Greece is voting whether its government should accept the conditions required by the “Institutions” (EU/ECB/IMF) for the final installment of its second “bailout” package—a yes vote, or to reject them—a no vote. No one is quite sure what it all means. The program to which these conditions and the final installment of $8 billion applied expired on June 30 and those funds are no longer on offer. A yes vote would presumably indicate support by the majority of Greek voters for accepting the conditions (a modest primary budget surplus by the Greek government in coming years and structural reforms to improve the quality of government services and the productivity of Greece’s economy) likely to be offered for a third bailout program. The alternative—no more financial assistance from the Institutions—would force even greater “austerity” on the Greek government even after repudiating all of its external debt and thus saving the funds that it would otherwise needed to pay to service it. If Greek tax payers won’t cover the cost of the government’s promises and the market will no longer lend the shortfall, the government is likely to resort to augmenting its Euro tax income with IOU claims on Euros, i.e. introducing and inflating its own currency.

What were the Greek government and the Greek people thinking when they borrowed all that money in the first place, and it must be added, enjoyed spending it on an inflated, unsustainable lifestyle rather than investing it in a more productive future? But Greek politicians (and public) are hardly the only ones in the world to ignore future costs when making current promises they have no way to keep.

Take the United States, for example. For decades, the U.S. Congressional Budget Office has forecast ever-increasing deficits from American entitlement programs (Medicare, Medicaid, and Social Security) as expenditures increasingly outstripped revenue. This reflects both the growth in the generosity of these programs and demographics (increasing life expectancy and the baby boomer bulge in retired people relative to those working to pay for them—anyone who still thinks that the retired are receiving what they paid in while working just hasn’t been paying attention). I have written about this from time to time such as four years ago in: https://wcoats.wordpress.com/2011/04/23/thinking-about-the-public-debt/

The future unsustainability of Social Security promises has been the subject of public debate for at least fifty years. The “future” retirement of the WWII baby boomers and their pension expectations has been known since the end of WWII. But one congress after the other has kicked the ball down the road. Seven years ago I outlined the issues and the relatively simple solutions to Social Security deficits in: https://wcoats.wordpress.com/2008/08/28/saving-social-security/ Since then Medicare and Medicaid promises have only increased.

President Obama established the National Commission on Fiscal Responsibility and Reform (the so called Simpson-Bowles Commission) in early 2010 to develop bipartisan proposals for reducing future entitlement driven deficits. He ignored their modest proposals made in the Commission’s final report on December 1, 2010.

The Economist magazine last week reported that the assets available to cover U.S. public sector pensions covered only 75% of their obligations. In fact, the short fall is much greater than that because they are computed assuming a 7.6% return on their assets, which greatly overstates the actual experience of recent years. Private pensions are in much better shape. “But if public plans used the same discount rate as private ones, the deficit would increase to $3.9 trillion and the funding ratio fall to 45%.”

So what are our elected representatives thinking? “Deficits have eventually to be closed. That means lower benefits for the retired, bigger contributions from existing employees (a pay cut) or higher contributions from the employer—which means tax increases for state or city residents, or cuts to other services.

Why is it that our political representatives have such shorter policy horizons than does the public in general? The Economist provides a reasonable summary for the U.S..

“No wonder that no one is getting to grips with the problem. Unions do not like to draw attention to the deficits, for fear benefits will be cut. Politicians do not want to pick a fight with the unions, or increase taxes and annoy voters. Instead, states and cities tend to hope that rising markets will make the problem disappear.”

http://www.economist.com/news/finance-and-economics/21656202-betting-equities-has-not-eliminated-americas-pension-deficit-wishful-thinking?frsc=dg%7Ca

Baltimore—Saving a City

Few serious problems have a single explanation or cure. The decay of large parts of Baltimore is no exception. An interesting article in the Washington Post explores the diligent efforts of its former mayor, later the governor of Maryland, Martin O’Malley to fix it. http://www.washingtonpost.com/local/baltimores-blight-puts-omalley-on-defensive-in-bid-for-presidency/2015/05/29/9dffe1d0-0541-11e5-8bda-c7b4e9a8f7ac_story.html. The Baltimore mayor depicted in the TV series The Wire, Tommy Carcetti, was inspired by O’Malley. (I was surprised after watching five seasons of the Game of Thrones to learn that the actor who played Carcetti in The Wire, Aidan Gillen, is Littlefinger in the Game of Thrones. His O’Malley character in The Wire was much more interesting.)

O’Malley went after the usual suspects, improving transportation and other infrastructure, improving education, etc. – all of the things we look to government to provide in the name of equal opportunity for all. He also instituted tough policing inspired by the “Broken Windows” theory first expounded by James Q. Wilson and George L. Kelling in 1982. This introduced the intensive use of “stop, question, and frisk” of recent controversy in NYC. In retrospect, the approach alienated the police from the communities they were supposed to protect, and was much in the news when 25 year old African-American Freddie Gray died in April from injuries received while in police custody. His funeral in Baltimore was followed by riots that did much damage to the already impoverished neighborhood in which he lived.

What was almost totally missing from the Post article was the need for jobs. While the over all unemployment rate for metropolitan Baltimore is only slightly above the U.S. average (5.7% compared to 5.6%), black unemployment is dramatically higher. “For young black men between the ages of 20 and 24, the unemployment rate was an astounding 37% in 2013, according to the most recent data available from the U.S. Census Bureau. That’s compared with 10% for white men of the same age.” (CNN Money) Much of the city’s heavy industry and the jobs they provided (steel processing, shipping, auto manufacturing, and transportation) left Baltimore decades ago. Many workers moved with those jobs but some stayed. The increase in service economy jobs of recent years employs workers with different and generally higher level skills than did the lost manufacturing jobs. Johns Hopkins University and Johns Hopkins Hospital are now Baltimore’s largest employers. Baltimore’s population peaked at around 950,000 in 1950 and dropped to 622,000 in 2013. Improving Baltimore’s infrastructure for those who have stayed is pointless if they can’t find jobs.

It is not that infrastructure and education are not important. They are important both for the quality of life and for attracting enterprises that provide jobs. But they are only part of the package companies consider when deciding where to locate. The cost of providing and maintaining them relative to their quality is important as well, and education needs to be relevant for the jobs potentially attracted. Taxes, both state and local are an important port of the cost of doing business. When companies evaluate where to locate new facilities they will want the best bang for their buck. Maryland is an expensive state (35th from the top in CNBC’s list of the best states for doing business). During his term as governor of Maryland O’Malley:
• Raised the top personal income tax rate from 4.75 to 5.75 percent. With local taxes on top, Maryland’s top rate is 8.95 percent.
• Raised the corporate tax rate from 7.0 to 8.25 percent.
• Raised the sales tax rate from 5 to 6 percent and expanded the sales tax base.
• Raised the sales tax rate on beer, wine, and spirits by 50 percent.
• Raised the gas tax by 20 cents over four years, almost doubling the rate from 23.5 cents.
• Doubled the cigarette tax from $1 to $2 per pack.
• Imposed higher taxes on vehicle registration.
• Imposed a storm water mitigation fee on property owners, or a “rain tax.”
(Chris Edwards: Cato)

The quality of government services in Maryland, however, is also fairly high. Last year I incorporated my consulting business in Maryland as an LLC. It took me 30 minutes on line sitting in my office from start to finish, including the email delivery of the signed and sealed document of incorporation. In addition, the cost of property and labor in Baltimore is low. This is a natural market reaction to the loss of industry and residence. The city’s efforts to revive its poorer neighborhoods also need to focus on improving its competitive advantage as a place for businesses to locate.

Crony capitalism and the Export Import Bank

An important and fundamental principle of the rule of law is that laws should have wide or universal applicability to everyone. This principle is generally violated when governments subsidize specific activities. These subsidize might take the form of tax breaks, loans at preferential interest rates or even grants to favored enterprises or activities. The Export Import Bank is a government program for granting such favors in the name of promoting exports.

If the EX-IM Bank only provided information to American firms that helped them satisfy foreign requirements for selling their products abroad or to connect with services available for marketing such produces—following the model of the Small Business Administration or the Agricultural Extension Services provided by many states—their continued existence might be defensible. However, like so many government intrusions into the private sector, it provides huge subsidize to a limited number of customers (about 30% of the total to Boeing to subsidize the sale of its planes to foreign carriers) at the expense of others. American carriers like Delta complain that EX-IM Bank subsidies to Boeing benefit their foreign competitors, who are able to buy Boeing planes more cheaply than they are. “The Airline Pilots Association of America estimates that the bank’s subsidizing of Boeing airline purchases abroad has forced our domestic airlines to cut about 7,500 jobs – decreasing the airline workforce by almost 2 percent.” (The Blaze, May 29, 2015)

While the cost of the EX-IM Bank to U.S. taxpayers is trivial, it is one more drop in the growing pond of crony capitalist connections to the government. Boeing moved its headquarters from Seattle, where most of its production was traditionally located, to Chicago and has diversified its production and suppliers around the country precisely to have more representatives in congress with an interest in its well being. Like many other large companies seeking government favors, it has hired key people from government such as Kevin Varney, former chief of staff at the Ex-Im during Obama’s first term. The stakes for Boeing are large so you can be sure it is spending a lot of money one way or another to protect its interests. This is the nature of crony capitalism, which gradually diminishes real market competition and chokes productivity.

Creating programs that grant favors also creates strong incentives for less subtle and more overt, traditional style corruption. “For example, Johnny Gutierrez, an Ex-Im Loan Specialist, pled guilty on April 22, 2015 of accepting up to $78,000 in bribes in return for recommending the approval of unqualified loan applications to the bank, among other misconduct. During this period, Ex-Im gave Gutierrez nearly a 20 percent pay hike and paid-out thousands in performance bonuses. “ (Adam Andrzejewski, Forbes, http://www.forbes.com/sites/adamandrzejewski/2015/05/31/the-export-import-bank-and-the-art-of-picking-losers/ )

The Ex-Im Bank and dozens of programs like it are economically unsound and wasteful and politically corrupting. It and others like it should be killed when ever possible. Here is a rare case where congress can do good by doing nothing (i.e. by not renewing the Bank at the end of this month).