Mitch Daniels did a big pitch for making student loans more complex and more profitable for the financial industry in a Washington Post column today. The basic story is that he is pushing “income-share agreements” where students contract with lenders to pay them a fixed share of their income for a number of years after they graduate college in exchange for a student loan.
My bet is that good students will be able to figure out ways to get much of their income after the end date on the ISAs, but that is the lender’s problem. The more obvious problem is that Daniels is making a pitch for special government assistance for his friends in the ISA business.
He wants Congress to pass a law that will make the ISA loans exempt from bankruptcy. This means that if a student has a serious illness that makes him or her unable to work or falls on really bad economic times, he can be harassed for the full term of his contract by ISA lenders. This can be 25 or 30 years after graduation (or possibly not graduating).
That may not sound like such a great way to help our young people deal with college costs, especially since there are much simpler alternatives, like the income-based loan repayment plans initiated by the Obama administration or other proposals to reduce the cost of college. Daniels rejects such plans by telling readers:
“It is fallacious to term such an approach “debt-free”; borrowed by an already bankrupt federal government, the money will be all debt, merely shifted to taxpayers, including these very same students as they enter their working years. Already facing $57,000 per person in federal debt, incurred not for their future but almost entirely for the current consumption of their elders, the last thing today’s young people need is another massive federal entitlement program.”
Sorry folks, but anyone who thinks the federal government is “bankrupt” should be treated like a ranting nut, because this is utter nonsense. If Daniels had access to the business pages, he could see that the United States government can now borrow long-term for an interest rate of less than 2.1 percent. Private sector lenders do not lend money to “bankrupt” borrowers at less than 2.1 percent interest.
If Daniels could take off his tin hat, he might notice that the $57,000 in debt per person corresponds to hundreds of thousands of dollars in assets in the form on infrastructure, technology, natural resources, and the education of its population. In Daniel’s calculation, our children would be better off if we stopped paying for their education altogether to get down the $57,000 debt that he thinks is burdening them.
If anyone wants a serious assessment of the debt burden on the federal government, at present interest payments, net of refunds from the Federal Reserve Board, are less than 0.7 percent of GDP. By contrast they were over 3.0 percent of GDP in the early 1990s.
Mitch Daniels did a big pitch for making student loans more complex and more profitable for the financial industry in a Washington Post column today. The basic story is that he is pushing “income-share agreements” where students contract with lenders to pay them a fixed share of their income for a number of years after they graduate college in exchange for a student loan.
My bet is that good students will be able to figure out ways to get much of their income after the end date on the ISAs, but that is the lender’s problem. The more obvious problem is that Daniels is making a pitch for special government assistance for his friends in the ISA business.
He wants Congress to pass a law that will make the ISA loans exempt from bankruptcy. This means that if a student has a serious illness that makes him or her unable to work or falls on really bad economic times, he can be harassed for the full term of his contract by ISA lenders. This can be 25 or 30 years after graduation (or possibly not graduating).
That may not sound like such a great way to help our young people deal with college costs, especially since there are much simpler alternatives, like the income-based loan repayment plans initiated by the Obama administration or other proposals to reduce the cost of college. Daniels rejects such plans by telling readers:
“It is fallacious to term such an approach “debt-free”; borrowed by an already bankrupt federal government, the money will be all debt, merely shifted to taxpayers, including these very same students as they enter their working years. Already facing $57,000 per person in federal debt, incurred not for their future but almost entirely for the current consumption of their elders, the last thing today’s young people need is another massive federal entitlement program.”
Sorry folks, but anyone who thinks the federal government is “bankrupt” should be treated like a ranting nut, because this is utter nonsense. If Daniels had access to the business pages, he could see that the United States government can now borrow long-term for an interest rate of less than 2.1 percent. Private sector lenders do not lend money to “bankrupt” borrowers at less than 2.1 percent interest.
If Daniels could take off his tin hat, he might notice that the $57,000 in debt per person corresponds to hundreds of thousands of dollars in assets in the form on infrastructure, technology, natural resources, and the education of its population. In Daniel’s calculation, our children would be better off if we stopped paying for their education altogether to get down the $57,000 debt that he thinks is burdening them.
If anyone wants a serious assessment of the debt burden on the federal government, at present interest payments, net of refunds from the Federal Reserve Board, are less than 0.7 percent of GDP. By contrast they were over 3.0 percent of GDP in the early 1990s.
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In a blogpost Paul Krugman picked up on a discussion by Rex Nutting of the Carter presidency. Nutting points to many of the positive accomplishments of the Carter years, including the fact that, by many measures, the economy actually performed quite well.
Krugman picks up on this theme and uses a chart of median family income to show that the typical family was actually better off in 1981 when Carter left the White House than they had been in 1977 when he took office. Krugman argues that the problem for Carter’s re-election prospects was that income was declining in the last years of his presidency, which is what people had in their minds when they went to vote.
While this point is undoubtedly accurate, there is another complication when we try to get a sense of people’s perceptions when they went to vote in November of 1980. The measure of inflation that is used to derive real median income in Krugman’s chart is the CPI-U-RS. This applies the methodology that we use today to construct what the CPI should have been in prior years. This gives a very different and much lower measure of inflation than the CPI that the Bureau of Labor Statistics was using at the time.
Here is how the two compare for 1978-1981.
CPI CPI-U-RS
1978 9.0% 7.8%
1979 13.3% 10.7%
1980 12.5% 10.7%
The cumulative difference for these three years is 5.6 percentage points. (Yes, this is just adding and I should be compounding, but let’s keep this simple.) This means that folks going to vote in 1980 would have been seeing in the data a 5.6 percent greater drop in real income by 1980 than what Krugman has in his chart. The question is whether this error in the data would have affected people’s perceptions of their well-being or whether we should only care about what we might think of now as the “true” rate of inflation.
I would argue for the importance of the errors in the data. First, none of us really have a clear idea of the true rate of inflation. It’s based on a basket of goods and services that none of us literally buy. There is a big weight for large purchases, like cars, that we may buy at five year intervals, or even longer. Also, the prices are quality adjusted. Is the typical person’s assessment of the rate of the quality improvement in a cell phone or computer the same as the BLS’s assessment? It’s very likely that if she pays more for a car or computer than for her last purchase, she sees that as a price increase, even if BLS has determined that the quality adjusted price has fallen.
On the other side, back in the late 1970s many contracts were legally tied to the CPI. This meant that workers had reason to know the inflation rate shown by the CPI since it would determine their pay increase that year. This was often true of rents as well. As a result, if the BLS said the rate of inflation was 13.3 percent in 1979, it is likely that many people thought the inflation rate was 13.3 percent, even though our methodology now tells us that the rate of inflation was actually just 10.7 percent.
There is more to this story of mis-perceived inflation—could mis-measured inflation lead to actual inflation? I’d argue yes, but we’ll leave that one for another day. For today, I’ll just say that it was not only Paul Volcker’s Fed that doomed Jimmy Carter’s re-election prospects, but also the mistakes made by the folks at BLS.
In a blogpost Paul Krugman picked up on a discussion by Rex Nutting of the Carter presidency. Nutting points to many of the positive accomplishments of the Carter years, including the fact that, by many measures, the economy actually performed quite well.
Krugman picks up on this theme and uses a chart of median family income to show that the typical family was actually better off in 1981 when Carter left the White House than they had been in 1977 when he took office. Krugman argues that the problem for Carter’s re-election prospects was that income was declining in the last years of his presidency, which is what people had in their minds when they went to vote.
While this point is undoubtedly accurate, there is another complication when we try to get a sense of people’s perceptions when they went to vote in November of 1980. The measure of inflation that is used to derive real median income in Krugman’s chart is the CPI-U-RS. This applies the methodology that we use today to construct what the CPI should have been in prior years. This gives a very different and much lower measure of inflation than the CPI that the Bureau of Labor Statistics was using at the time.
Here is how the two compare for 1978-1981.
CPI CPI-U-RS
1978 9.0% 7.8%
1979 13.3% 10.7%
1980 12.5% 10.7%
The cumulative difference for these three years is 5.6 percentage points. (Yes, this is just adding and I should be compounding, but let’s keep this simple.) This means that folks going to vote in 1980 would have been seeing in the data a 5.6 percent greater drop in real income by 1980 than what Krugman has in his chart. The question is whether this error in the data would have affected people’s perceptions of their well-being or whether we should only care about what we might think of now as the “true” rate of inflation.
I would argue for the importance of the errors in the data. First, none of us really have a clear idea of the true rate of inflation. It’s based on a basket of goods and services that none of us literally buy. There is a big weight for large purchases, like cars, that we may buy at five year intervals, or even longer. Also, the prices are quality adjusted. Is the typical person’s assessment of the rate of the quality improvement in a cell phone or computer the same as the BLS’s assessment? It’s very likely that if she pays more for a car or computer than for her last purchase, she sees that as a price increase, even if BLS has determined that the quality adjusted price has fallen.
On the other side, back in the late 1970s many contracts were legally tied to the CPI. This meant that workers had reason to know the inflation rate shown by the CPI since it would determine their pay increase that year. This was often true of rents as well. As a result, if the BLS said the rate of inflation was 13.3 percent in 1979, it is likely that many people thought the inflation rate was 13.3 percent, even though our methodology now tells us that the rate of inflation was actually just 10.7 percent.
There is more to this story of mis-perceived inflation—could mis-measured inflation lead to actual inflation? I’d argue yes, but we’ll leave that one for another day. For today, I’ll just say that it was not only Paul Volcker’s Fed that doomed Jimmy Carter’s re-election prospects, but also the mistakes made by the folks at BLS.
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That’s what millions of people are asking after reading a NYT article contrasting the “bombastic” Donald Trump to Jeb Bush who is described as “the wonky son of a president.” Bush has repeatedly said that he can generate 4.0 percent GDP growth during a Bush presidency.
The baseline projection for the years 2017 though 2025 from the Congressional Budget Office is 2.1 percent. Raising this to 3.0 percent would be a remarkable accomplishment. There is no remotely plausible story that would raise growth to 4.0 percent. It would be sort of like predicting a baseball team going undefeated through 162 game season. It would be difficult to take seriously a team manager who confidently made such predictions. The same should apply to a presidential candidate boasting of 4.0 percent GDP growth.
That’s what millions of people are asking after reading a NYT article contrasting the “bombastic” Donald Trump to Jeb Bush who is described as “the wonky son of a president.” Bush has repeatedly said that he can generate 4.0 percent GDP growth during a Bush presidency.
The baseline projection for the years 2017 though 2025 from the Congressional Budget Office is 2.1 percent. Raising this to 3.0 percent would be a remarkable accomplishment. There is no remotely plausible story that would raise growth to 4.0 percent. It would be sort of like predicting a baseball team going undefeated through 162 game season. It would be difficult to take seriously a team manager who confidently made such predictions. The same should apply to a presidential candidate boasting of 4.0 percent GDP growth.
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It might have been worth a few sentences calling attention to the seeming irony in the industry’s objections to proposed regulations that would limit emissions of methane gas. The NYT article noted that a large share of greenhouse gas comes from such methane emissions. At the same time, the industry has promoted fracking as a way of developing a bridge fuel, that emits less greenhouse gas than the coal it replaces, until renewable energy becomes cheaper.
If the net effect of fracking is to reduce emissions, then regulations that ensure this outcome should not pose a problem for the industry. The regulations should only be a major issue for the industry if it turns out that methane gas emissions largely or completely offset any reductions in carbon dioxide emissions.
It might have been worth a few sentences calling attention to the seeming irony in the industry’s objections to proposed regulations that would limit emissions of methane gas. The NYT article noted that a large share of greenhouse gas comes from such methane emissions. At the same time, the industry has promoted fracking as a way of developing a bridge fuel, that emits less greenhouse gas than the coal it replaces, until renewable energy becomes cheaper.
If the net effect of fracking is to reduce emissions, then regulations that ensure this outcome should not pose a problem for the industry. The regulations should only be a major issue for the industry if it turns out that methane gas emissions largely or completely offset any reductions in carbon dioxide emissions.
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The Post has an interesting piece on a St. Louis Federal Reserve Bank study which shows that African American and Hispanics with college degrees have far less wealth than their white counterparts. (Stay tuned for CEPR study showing this story with wages.) The study also shows a large decline in wealth for African Americans and Hispanics with college degrees over the last two decades.
It attributes much of this decline to subprime mortgages pushed by lenders during the bubble years:
“But African American and Hispanics were often steered into high-cost home loans that many could not afford once the housing market crashed. Those who managed to stave off a foreclosure still watched the value of their properties took a nosedive, especially if they lived in minority neighborhoods.”
While a subprime loan made it more difficult for homeowners to keep their homes in the crash, the loss of wealth was due to plunging house prices. Even if an African American or Hispanic family bought a house with a traditional fixed rate 30-year mortgage they still would have seen a huge hit to their wealth when the housing bubble collapsed.
This point is important because the warning signs were everywhere for economists and policy analysts to see. However, they chose to ignore them and encouraged minorities to buy homes at bubble-inflated prices where they were virtually guaranteed to see large losses. Unfortunately, most of the people who were involved in setting housing policy during the bubble years are still in the same business today. Most do not appear to have learned much from the experience.
The Post has an interesting piece on a St. Louis Federal Reserve Bank study which shows that African American and Hispanics with college degrees have far less wealth than their white counterparts. (Stay tuned for CEPR study showing this story with wages.) The study also shows a large decline in wealth for African Americans and Hispanics with college degrees over the last two decades.
It attributes much of this decline to subprime mortgages pushed by lenders during the bubble years:
“But African American and Hispanics were often steered into high-cost home loans that many could not afford once the housing market crashed. Those who managed to stave off a foreclosure still watched the value of their properties took a nosedive, especially if they lived in minority neighborhoods.”
While a subprime loan made it more difficult for homeowners to keep their homes in the crash, the loss of wealth was due to plunging house prices. Even if an African American or Hispanic family bought a house with a traditional fixed rate 30-year mortgage they still would have seen a huge hit to their wealth when the housing bubble collapsed.
This point is important because the warning signs were everywhere for economists and policy analysts to see. However, they chose to ignore them and encouraged minorities to buy homes at bubble-inflated prices where they were virtually guaranteed to see large losses. Unfortunately, most of the people who were involved in setting housing policy during the bubble years are still in the same business today. Most do not appear to have learned much from the experience.
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In an interesting piece on the decline of the political center, E.J. Dionne wrongly lists globalization as a villain. He tells readers:
“Globalization weakens the ability of moderate governments of both varieties to deliver on their promises. Capital can flee easily to more congenial climes, undercutting a nation’s tax base and its regulatory efforts.”
Globalization should also have the effect of reducing inequality by making it easier to take advantage of lower cost professional services (e.g. physicians services, lawyers’ services, dentists’ services) except that the United States has acted to maintain or even increase barriers to trade in these areas. It should also make it easier to circumvent patent and copyright monopolies that redistribute income upward, except we have consciously pursued policies to strengthen these forms of monopolies to limit the extent to which developing countries might provide vehicles for avoidance (in contrast to tax policy).
Also, governments with their own currency (e.g. the United States, the U.K., and the euro zone collectively) need not be restricted by their tax take in terms of spending, as long as they are below full employment. The decision not to use fiscal policy to bring economies to full employment is due to superstitions, not actual limits imposed by globalization.
In an interesting piece on the decline of the political center, E.J. Dionne wrongly lists globalization as a villain. He tells readers:
“Globalization weakens the ability of moderate governments of both varieties to deliver on their promises. Capital can flee easily to more congenial climes, undercutting a nation’s tax base and its regulatory efforts.”
Globalization should also have the effect of reducing inequality by making it easier to take advantage of lower cost professional services (e.g. physicians services, lawyers’ services, dentists’ services) except that the United States has acted to maintain or even increase barriers to trade in these areas. It should also make it easier to circumvent patent and copyright monopolies that redistribute income upward, except we have consciously pursued policies to strengthen these forms of monopolies to limit the extent to which developing countries might provide vehicles for avoidance (in contrast to tax policy).
Also, governments with their own currency (e.g. the United States, the U.K., and the euro zone collectively) need not be restricted by their tax take in terms of spending, as long as they are below full employment. The decision not to use fiscal policy to bring economies to full employment is due to superstitions, not actual limits imposed by globalization.
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Paul Krugman had a nice blogpost outlining some of the key issues in the literature on optimal currency unions. The question is what happens in a currency union like the euro zone, which is not optimal for many reasons, if there is free mobility of labor.
Krugman points to the experience of Portugal and argues that mobility of labor actually makes the situation worse, not better. The story is that much of Portugal’s prime age labor force is emigrating to other countries in the European Union, leaving behind a population of retirees, without a working age population to pay their benefits. This is similar to the story with Puerto Rico, although as Krugman points out, due to the fiscal union with the rest of the United States, retirees in Puerto Rico can still count on their Social Security and Medicare, as well as other payments that flow from Washington.
It is worth taking another step with this one to think about Detroit. There we have a situation where the the downturn in the auto industry is a big hit to the city and the region. However, white workers were able to escape many of the bad effects by stepping over the city lines and move to the suburbs. Due to discrimination in housing and lending, African Americans find the move to the suburbs much more difficult, therefore leaving many of them stuck dealing with the effects of the loss of much of the city’s employment base.
This picture is clearly somewhat exaggerated. People can move to other cities and many African Americans have moved to Detroit’s suburbs, but the reality of discrimination, certainly in the very recent past and which undoubtedly continues to some extent into the present, has made it considerably more difficult for African Americans in Detroit to escape the fallout from the collapse of the auto industry than for its white population.
Paul Krugman had a nice blogpost outlining some of the key issues in the literature on optimal currency unions. The question is what happens in a currency union like the euro zone, which is not optimal for many reasons, if there is free mobility of labor.
Krugman points to the experience of Portugal and argues that mobility of labor actually makes the situation worse, not better. The story is that much of Portugal’s prime age labor force is emigrating to other countries in the European Union, leaving behind a population of retirees, without a working age population to pay their benefits. This is similar to the story with Puerto Rico, although as Krugman points out, due to the fiscal union with the rest of the United States, retirees in Puerto Rico can still count on their Social Security and Medicare, as well as other payments that flow from Washington.
It is worth taking another step with this one to think about Detroit. There we have a situation where the the downturn in the auto industry is a big hit to the city and the region. However, white workers were able to escape many of the bad effects by stepping over the city lines and move to the suburbs. Due to discrimination in housing and lending, African Americans find the move to the suburbs much more difficult, therefore leaving many of them stuck dealing with the effects of the loss of much of the city’s employment base.
This picture is clearly somewhat exaggerated. People can move to other cities and many African Americans have moved to Detroit’s suburbs, but the reality of discrimination, certainly in the very recent past and which undoubtedly continues to some extent into the present, has made it considerably more difficult for African Americans in Detroit to escape the fallout from the collapse of the auto industry than for its white population.
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