Uncategorized – Page 11 – Michael Sykuta

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:

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”

A Missed Opportunity To Lower Health Care Costs

A couple of weeks ago I posted on the problem of price transparency–or lack thereof–as one of the major problems in the health care market (here). The other major problem I referred to in that post was “the fact that consumers of health care typically don’t pay the bills directly, so they generally don’t take cost into account when deciding whether to consumer health care services”.

My colleague, Thom Lambert, has a great post over at Truth on the Market illustrating the problem very poignantly with his own health care saga. When consumers don’t take price into account, health care service providers don’t worry about competing on price, which means higher prices for everyone. Thom goes on to explain how tax policies and the Affordable Care Act make the problem even worse. Excellent read!

Misguided Student Loan "Solutions"

ABC News is reporting that Congress is set to take up a student loan fix, but it’s difficult to fix a problem you have yet to define–much less understand. But when has that ever stopped Congress before?

What is the “student loan problem” to be fixed? The immediate issue is that the interest rate for new federally subsidized loans is set to double on July 1, from 3.4% to 6.8%. Republicans are offering a plan that would keep rates from going up as much in the short-term, but could potentially increase several years down the road (assuming Congress wouldn’t step in to stop it then…as they’re trying to now). Democrats, on the other hand, simply want to extend the current 3.4% rate…ostensibly for just two years, while working on a long-term fix (a familiar tune). Democrats believe that, by keeping the price of student loans artificially low, they are helping the average person or family better afford college.

And this is the point where economic reality (and the real student loan problem) is promptly ignored. Continue reading “Misguided Student Loan "Solutions"”