Author: Michael Sykuta

Regulating The (FTC) Regulators — TOTM Symposium

My colleagues at Truth on the Market are hosting a blog symposium today on the topic of regulatory restraint. From Geoff Manne’s introductory post:

Last month, FTC Commissioner Josh Wright began a much-needed conversation on the FTC’s UMC authority by issuing a proposed policy statement attempting to provide some meaningful guidance and limits to the FTC’s authority. Meanwhile, last week Commissioner Maureen Ohlhausen offered her own take on the issue, echoing many of Josh’s points and further extending the conversation. Considerable commentary—and even congressional attention—has been directed to the absence of UMC authority limits, the proper scope of that authority, and its significance for the businesses regulated by the Commission.

There is a great line-up of participants and the symposium is sure to spark some interesting debates and insight. Definitely worth following for the next couple days.

Truly Investing In A College Education

Monday I wrote about a proposal in the State of Oregon to adopt an investment-style model for financing college costs at Oregon’s public universities that would allow students to attend with no up-front cost, but would require students to commit to paying a percentage of their future earnings over a number of years. In that post I highlight some concerns about how such a program would/should be structured, but don’t confuse that with thinking the program is a bad idea. In fact, it’s a proven concept–at least when the people running it have a strong incentive to make sure it works.

There is actually at least one for-profit business that provides exactly the kind of college investment funding that the Oregon proposal considers…and it has been operating for over a decade.The company (Lumni) was highlighted in a May 2011 New York Times op-ed along with a follow-up piece. Moreover, Lumni has thus far proven a financial success for students and for investors (yes, it’s an actual investment company), despite the fact that it focused primarily on investments in Latin America, where one might expect it to be more difficult to enforce long-term investment contracts, particularly of the “venture capital” type. Lumni now also offers contracts in the US.

I am not endorsing Lumni and I would caution anyone to do their homework before entering into such a contract with any company, but the longevity of the company suggests that such an investment model for college costs is not only viable, but viable for the private sector. Which may beg the question of whether a State or its universities should be trying to manage such an investment operation themselves.

An Investment Model For College Tuition

As I wrote in a previous post (here), financing college costs is best thought of as an investment in human capital: What’s the cost of college? What’s the cost of financing? What’s the expected return on investment? Does it make sense to finance so much many for such a return? Sadly, too few parents and colleges help students seriously consider those decisions–nor the consequences of choosing poorly. (Of course, it’s in the college’s best interest not to.) Consequently, college grads in the US have over $1 trillion in outstanding student loan debt–and for many, little realistic hope of getting out from under it before their own children, or grandchildren, are college-age.

The State of Oregon last week passed a proposal that could radically change the way students pay for public colleges in that state, using an investment model in the human capital students develop. It looks like it could be a great step in a helpful direction…but a step with some serious potential flaws depending on how the actual program is put together. Continue reading “An Investment Model For College Tuition”

CAFE: Serving Up A Killing Of A Deal Since 1975

The July 2013 issue (hot off the ether-presses) of American Economic Journal: Applied Economics includes a study by Mark Jacobsen on the safety effects of corporate average fuel economy (CAFE) regulatory standards. (The paper was originally distributed as a National Bureau of Economic Research working paper in April 2012.)

CAFE standards were first introduced by the Energy Policy and Conservation Act of 1975 with the goal of reducing fuel (gasoline) consumption. The standards require auto manufacturers to meet certain fuel economy thresholds in each model year’s sales fleet, with different standards for cars and light-duty trucks and for “domestic” versus imported fleet vehicles. While innovations in engine technology and auto design contribute to fuel economy improvements, auto manufacturers have long achieved the biggest gains by producing smaller, lighter vehicles which are arguably less safe in the event of a collision. In fact, a 2002 National Academy of Sciences report concluded that downsizing related to fuel economy improvements between 1975 and 1993 resulted in roughly 2,000 additional fatalities in 1993, between 13,000 and 16,000 additional debilitating injuries, and between 97,000 and 195,000 total injuries.

Calculating the safety impact of CAFE is a little tricky because the composition of vehicles on the road plays a large role; a small car colliding with another small car has less risk of fatality than a small car colliding with a large car or truck. A significant contribution of Jacobsen’s analysis is that he takes into account both US fleet composition and unobserved driving behavior and vehicle selection (certain kinds of drivers choose certain kinds of vehicles for a reason, and different vehicles have different fatality effects). Continue reading “CAFE: Serving Up A Killing Of A Deal Since 1975”

The Student Loan "Crisis" In Context

I’ve been doing some long-over-due cleaning out of old files and papers the past week or so (call it the flooded-basement stimulus program). Among the documents I rediscovered were my student loan payment records. (You’d think that etched stone tablet would be hard to miss, right?) Yes, I did actually pay off my student loans–ahead of time, even. But what struck me was the interest rate I was charged on my subsidized federal student loans: a whopping 8%.

It got me wondering about the current “crisis” over student loan interest rates, which yesterday jumped to a fixed 6.8% (from 3.4%) for most subsidized loans in the coming school year, and how this new rate compared to historical student loan interest rates. A quick look at FinAid.org‘s report of historical student loan rates is very revealing:

  1. 6.8% is the fixed rate that Congress had originally approved for the 2006-07 and 07-08 academic years, before Congress started cutting it down to the recent fixed 3.4% rate. So the jump essentially restores the pre-recessionary interest rates.
  2. Prior to 2006, subsidized student loan rates were substantially lower, but were adjustable-rates, not fixed. Congress set the fixed rate for 2006-07 because the adjustable rate formula was resulting in higher interest rates that year (7.14% in 06-07 and 7.22% in 07-08). Congress apparently foresaw a future of higher interest rates, making a fixed 6.8% seem like a deal. Nice job, Congress!
  3. But then a funny thing happened on the way through the recession–all those adjustable rate loans from pre-2006 suddenly got a lot cheaper as Bernanke and gang pushed interest rates down. Just when Congress thought they “fixed” the student loan problem by fixing interest rates, they instead cost students (and taxpayers) millions of dollars in extra interest payments (or loan defaults, in the case of taxpayers). Students paying on loans made prior to July 2006 paid only 2.47% interest in 2010-11 compared to 4.5% for loans made that year….or 6.8% for loans made in 2006-08. FinAid doesn’t have numbers up for 2011-12, but given where interest rates have been it is a safe bet that the adjustable rate was still below the 3.4% for loans made that year. Nice job, Congress!

And therein lies the heart of the current debate: Continue reading “The Student Loan "Crisis" In Context”

Incentives Matter: ObamaCare Edition

Merrill Matthews has a great post on Forbes.com today about some “surprising” developments in response to the ObamaCare health insurance debacle. In short:

  1. (Not really news) The cost of most health insurance programs for young and/or healthy individuals is predicted to increase dramatically to cover the costs of coverage imposed by the law…to the point that many will have no incentive to purchase the coverage until they actually need its benefits (i.e., a perverse incentive created by prohibiting exemptions on pre-existing conditions which, ironically, also drives up the cost of the insurance to begin with).

  2. (Somewhat news) Since the IRS has no authority to proactively collect the fine/tax/penalty from people who refuse to buy insurance and can only withhold tax refund payments, smart taxpayers who opt out of health insurance will simply make sure they have no tax refunds coming by adjusting their withholdings accordingly–and pay little or no fine. If taxpayers start using this loophole in earnest, expect Democrats to attempt to pass legislation allowing the IRS to start beaming money directly out of your checkbook or seizing assets to pay for the non-tax-fine-“no, it’s a tax” penalty.

  3. (A truly entrepreneurial twist!) Some life insurance companies, which are not affected by ObamaCare, have begun offering policies that allow policyholders to receive pre-demise benefits from their life insurance for “critical illness” expenses. Kind of a “getting-close-to-possibly-dying” rider to the traditional life insurance policy. Beneficiaries can use the advanced payments to cover the medical bills (if they want) and the death benefit is reduced by the amount of the payment. Truly ingenious…exactly the kind of creative, market-driven genius that has fueled the American economy since before there was an American economy.

Matthews summarizes it quite well in a way that captures what this blog is all about:

See, that’s the amazing thing about markets.  They try to meet the needs of consumers rather than the wants and political aspirations of politicians.  And sometimes they can even undermine those political aspirations.

So Much News, So Little Time

The past couple weeks I’ve either been traveling, camping, or preparing for trips. Leave the keyboard for a couple weeks and all kinds of interesting things happen.

It’s SCOTUS season, with the Supreme Court handing down some long-awaited (and some less-awaited) decisions to close out the 2012-13 term. In one of them, Horne v. Department of Agriculture, the Court unanimously ruled that agricultural producers had the right to contest the marketing order set-asides as “takings” and sent the case back to the Ninth Circuit for further consideration. The SCOTUS ruling itself opens a potential host of legal challenges not just from agricultural producers, but any businesses that seek to challenge regulatory fines (see here). Now the Ninth Circuit will have to deal with the takings issue itself, which I discussed previously (here).

The SCOTUS also ruled on a land use property rights case that has potential implications for a wide range of businesses, including agricultural producers and agribusinesses. Koontz v. St. Johns River Water Management District expanded the scope of the Court’s rulings in Nollan v. California Coastal Commission and Dolan v. City of Tigard, which set limitations on the government’s ability to impair property interests with land use regulations. This case deserves a little more digging for those interested in land use restrictions and required environmental concessions.

And finally, the US House of Representatives showed that no political backscratching is exempt from ideological divides as it failed to pass its own version of the Farm Bill. Republicans who felt the programs contained in the bill needed to be cut further teamed with Democrats who believed the cuts were already too large to kill the bill. Most of the disagreement had less to do with farming, per se, than with food stamps and other nutritional subsidy programs. “Oh SNAP!” indeed!

Perhaps I’ll get some time to go back and look at each of these in a little more detail and write more on each–or at some of the other issues that have come up over the past couple week.