political economy – Page 3

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:

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.
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!
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:

(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).
(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.
(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.

Oh SNAP! An Organizational Failure

As Congress attempts to work out a new farm bill, at the center of the debate between the House and Senate is the Supplemental Nutrition Assistance Program (SNAP), more commonly known as food stamps. SNAP has grown significantly over the past few years, rising from $37.6 billion in 2008 to $78.4 billion in 2012 according the USDA. Of the roughly $1 trillion expected to be spent over the next decade under the anticipated farm bill, about $800 billion is for nutritional assistance programs.

(One may wonder why food stamps and school lunch programs are part of the farm bill. They have been pretty much since World War II, when farming states found a national security reason (under-nourished draftees) to boost demand for excess agricultural production by channeling more food through elementary and secondary schools. It also makes a nice urban-rural quid pro quo; legislators from urban areas with many more SNAP-eligible voters have incentive to support sending money to rural areas to support farmers, and vice-versa.)

Not surprisingly, the Democratic-controlled Senate wants to “rein in” SNAP spending by $4 billion over the next decade—or about 0.5%–while the Republican-controlled House is looking at a “catastrophic” cut of $20 billion—or less than 3%–over the same time. That’s 3% off a program that has more than doubled in the past five years. (You might sense the sarcasm here).

One of the reasons SNAP has grown so tremendously to begin with—in addition to the economic situation (it has still grown 10%+ the last two years)—is an organizational failure in the way SNAP is administered. Continue reading “Oh SNAP! An Organizational Failure”

The "Laws" of Economics

Economics has few “laws”. The most notable is the Law of Demand, which simply states that there is an inverse relationship between the price of a thing and how many units people are willing to buy (i.e., when the price goes down (up), people buy more (less)). The Law of Demand is basically just the culmination of the most basic observations of human behavior; specifically, The Basics with which I started this blog.

There are a few other things that sometimes get labelled as “laws” in economics textbooks. The “law of supply” only applies to things still actively produced, for which the necessary inputs are available; but in general, the more people are willing to pay for something, the more of it producers will try to produce. The “law of diminishing returns”–typically applied in the context of production–assumes there is at least one fixed input that constrains the marginal productivity of the rest. It’s more a rule of thumb than a “law.” But it is also analogous to Rule #3 in The Basics: More more is less better.

Whether we consider them “laws” or not, one thing is for certain: when we ignore these basic principles, we do so at our own peril. And that brings me to the motivation for this post; namely a recent blog post by “The Edgy Optimist” (aka Zachary Karabell) at Reuters.com titled “The ‘laws of economics’ don’t exist.” Continue reading “The "Laws" of Economics”

New POLCON Data Set Released

Witold Henisz (Wharton) has just released the latest update to his POLCON (political constraint) index, which includes data up through 2012. The previous (2010) release included data only up through 2007. The POLCON data uses a spatial modeling technique to synthesize a number of variable characterizing the structures and ideological alignments of countries’ political system, including the number and types of veto points and the party control (and fractionalization) of different government bodies.

The data are made available for no fee except the promise of an appropriate citation. The 2013 release is available for download in both STAT and Microsoft Excel formats and a code book is provided.

This index is an excellent resource for scholars interested in cross-country comparisons that take into account political uncertainty, and Henisz has been doing the academic community a great public service in maintaining and updating this resources since its inception.