The Latest Student-Loan Charade

Having induced $1 trillion in debt, Democrats now want to write it off.

WSJ Editorial. Excerpts:

"Pay As You Earn program. This gift from taxpayers caps monthly student-loan payments at 10% of a borrower's discretionary income, regardless of how much the borrower owes. Even better, the borrowers have their debts entirely forgiven after 20 years—or merely 10 years if they work in government or nonprofits."

"The program used to be closed to people who borrowed before October 2007, or who have not borrowed since October 2011, but now Mr. Obama is by regulatory fiat opening the giveaway to older borrowers too.

And whereas the White House budget said expanding Pay As You Earn would cost more than $7 billion in the first year, White House domestic policy director Cecelia Munoz said Monday on MSNBC that expanding the program will now save money."

"Elizabeth Warren's bill to allow borrowers to refinance their old federal or private loans into new government loans at lower rates.

The Congressional Budget Office says the Warren bill would increase federal spending by $58 billion over a decade. But as CBO has repeatedly warned, its official scores by law must underrate the risk of defaults in such federal loan programs, so who knows what this latest election-year pander to young voters will ultimately cost. 

Ms. Warren aims to pay for the new spending with one more tax increase—in this case the " Buffett Rule," which seeks to make Americans earning more than $1 million in income pay at least 30% of it to the IRS. Never mind their legal deductions or charitable contributions."

"the common political secret of the Obama and Warren proposals—they aren't aimed at aspiring college students hoping to matriculate but rather at former undergrads who are now suffering the economic hangover from Mr. Obama's previous policies."

"student debt outstanding has nearly doubled since 2007 to more than $1 trillion."

"among recent college graduates age 22-27, a full 45% were underemployed in 2013,"

"when the cost of defaults and debt forgiveness finally comes due, it will be paid by all taxpayers, including those who didn't go to college."

Book Review: 'Why Government Fails So Often' by Peter H. Schuck

Government's best practice is to set goals and arrange incentives so society's knowledge can be put to use by its dispersed possessors.

WSJ review by Yuval Levin. Excerpts: 

"Examining a vast array of federal policy disappointments from the early republic to today (with an emphasis on our present welfare state), Mr. Schuck argues that the endemic failure is a consequence of the nature of modern government."

"it is evidence about human beings living together and so must be analyzed with an appreciation of the diversity of social forms and the complexity of human motivations. That appreciation allows Mr. Schuck to avoid the twin temptations of social science: nostalgia and utopianism.

To be successful, he argues, a public policy has to get six things right: incentives, instruments, information, adaptability, credibility and management. The federal government tends to be bad at all of these. Take Medicare, a popular program. By paying a set fee for each service, it creates perverse incentives for doctors to perform more of them. Then, by using the instrument of price controls to limit costs, it creates shortages. By setting those prices administratively, it denies itself the information that only the interplay of supply and demand can offer. By imposing a mid-1960s insurance model on American medicine, it makes the health-care system inflexible. By relying on payment cuts that Congress routinely puts off, it makes a joke of its own fiscal projections. And by abiding billions in fraud, it invites waste and abuse."

"Especially insightful are his discussions of the fundamental dysfunction of the federal bureaucracy. Mr. Schuck argues (echoing Hayek) that it is essentially impossible for centralized managers to consolidate information to the degree necessary to manage complex social systems, and bureaucracies respond to failure by demanding even more power. This assertion of authority, precisely because it is poorly informed, further distorts the system, making it even harder to control. Think of the unintended consequences of airline and trucking rules before the late 1970s deregulation, for instance, or of what ObamaCare is now doing to the health-insurance system. The proper sphere of the central government, Mr. Schuck argues, is to set goals and arrange incentives so that society's knowledge can be better put to use by its dispersed possessors."

""When one compares government and market provision of essentially the same services," he writes, "the inescapable conclusion is that the market almost always performs more cost-effectively.""

"private companies are often an important cause of government's failures by, for instance, drawing away the best managers, using political contributions to influence policy or devoting their efforts to simply staying several steps ahead of regulators.

Alongside a lengthy list of federal failures, Mr. Schuck points to some notable successes—from the Homestead Act (1862) and the GI Bill (1944) to the interstate highway system (1956), the earned income tax credit (1975) and welfare reform (1996). What unites them is that they did not try to manage success so much as establish the circumstances for it."

"But without a doubt, Mr. Schuck's survey will make painful reading for American progressives. Their worldview depends on a degree of government competence that is simply unattainable. "The relationship between government's growing ambition and its endemic failure," he concludes, "is rooted in an inescapable structural condition: officials' meager tools and limited understanding of the opaque, complex social world that they aim to manipulate.""

"crafting policies as simple and incremental as possible. As Alexander Hamilton put it in Federalist 70, "a government ill executed, whatever it may be in theory, must be, in practice, a bad government.""

Krugman's Misleading Post on Coal

By David Henderson of EconLog.

"There used to be a lot of coal miners, but not any more -- strip mines and machinery in general have allowed us to produce more coal with very few miners. Basically, it's a job that was destroyed by technology long ago, with only a relative handful of workers -- 0.06 percent of the US work force -- still engaged in mining 

So what is this fight about? There's capital invested in coal and coal-related stuff, hiding behind the pretense of caring about the workers. And there's also ideology, of which more soon. But the war on coal already happened, it had nothing to do with liberals and environmentalists, and coal lost.

This is from Paul Krugman, "The War on Coal Has Already Happened," June 7, 2014.

 As I've noted earlier, Paul Krugman is clever and crafty. He will write something that, if you read quickly, you will take one way and think he made a mistake. But if you read it more carefully, you will see that he covered himself and simply wrote something that misleads the majority of his readers.

The quote above is such an example. A reader reading quickly might think that it's no big deal for Obama to restrict coal-fired utilities because there are so few jobs at stake in coal mining. But Krugman has covered himself by pointing out that there is capital invested in coal and owners of capital have a stake in producing coal.

But wait. Isn't there another important player in the coal market, namely utilities that buy coal and will now need to turn to a more-expensive fuel? Don't they stand to lose and lose big time? Potentially, yes. So why didn't Krugman talk about them? Actually, he did. At least, I think he did. I think he was getting at coal-burning utilities when he referred to capital invested in "coal-related stuff." "Coal-related stuff" is not exactly a technical term. A reader would have to pause over that term before figuring out that it means coal-burning power plants.

And there definitely is one group that Krugman does leave out that many readers of his blog and of Econlog are probably in: namely, people who get electricity from utilities that burn coal. Isn't it interesting that this economist, who won his Nobel Prize for his contributions to understanding free trade, left out from his analysis a large group of beneficiaries of free trade, namely consumers?

The number of jobs in the coal industry is not the crucial variable. To see why, imagine that one person, working one very complex configuration of capital, could produce all the coal from one huge mine. Imagine that there are 500 such huge mines. Now imagine that the government bans use of coal. 500 people lose their jobs. Even if each of them is making a producer surplus of $20,000 a year, that's only a $10 million a year loss of producer surplus. But a huge amount of producer surplus, mainly in the form of gains to capital and gains to owners of the coal, would be lost and a huge amount of consumer surplus would be lost. This is what I'm getting at with Pillar of Economic Wisdom #8: "Creating jobs is not the same as creating wealth."
Note: I'm assuming, in the paragraph directly above, that when the government bans the use of coal, it doesn't get produced. In fact, of course, much of it would still be produced--and shipped to Germany or China or somewhere else"

A report from the Bakken oil fields, where the jobless rate is 0.9% and Walmart is paying 2.4 times the minimum wage

From Mark Perry of "Carpe Diem."

"

I took this photo today at the Walmart in Williston, North Dakota, where the economy is booming thanks to the gusher of shale oil being pumped from the prolific Bakken oil fields. Daily oil production in the Bakken is approaching one million barrels per day, placing it in an elite group of only ten super-giant oil fields in the world that have ever produced that much oil at peak production. In total, nearly one billion barrels of oil have now been produced in the Bakken oil fields, and all of that oil production and related activities have brought the unemployment rate in the Williston area down to below 1% in most months over the last three years. For the most recent month – April – the jobless rate here was 0.9%.

The photo above of wages at the Williston Walmart highlights some important economic concepts:

1. Walmart pays wages that reflect the economic conditions in a local market based on the supply and demand realities of the local labor market. In other words, Walmart can’t really set wages independent of market forces and it’s really at the mercy of the market in every local community. If Walmart offered the minimum wage of $7.25 per hour in the Bakken area, it wouldn’t be able to staff its stores.

2. The fact that Walmart is paying almost 2.5 times the minimum wage in Williston, ND is evidence that a single, national minimum wage for every city, county, labor market in the country can’t possibly make sense. Even proponents of the minimum wage have to agree that a single national minimum can’t be optimal for every labor market in the country. In that case, they would logically have to support thousands of minimum wages tailored to thousands of local communities, or maybe even more logically agree that minimum wages are unworkable.

3. You probably won’t be hearing anybody calling for a $15 per hour “living wage” in North Dakota, since the entry level wages at Walmarts there are already above that.

4. The energy sector is the strongest sector of the US economy, and is bringing wealth, prosperity, and high-paying jobs to places like western North Dakota and south-central and western Texas.

5 (New). From Jon Murphy in the comments:

Of course, what we also have here is a huge hole blown in the “we need minimum wage because businesses won’t pay good wages” argument.

Unfortunately, you’ll likely hear nothing about the fossil fuel milestones in America’s Economic Miracle State or $17.20 per hour jobs at the Walmart Williston when President Obama visits here this week. Instead of visiting the most prosperous part of the most prosperous state in the nation to recognize one of the most powerful engines of the US economy – the Bakken oil fields of western North Dakota – President Obama decided to visit the Standing Rock Sioux Indian Reservation about 250 miles from here in the southern part of the state, where the jobless rate is 86%. Go figure. When Obama lectures the Native Americans this Friday about jobs and economic development in their part of North Dakota, perhaps he should mention that there’s a labor shortage only a few hundred miles away, with hundreds, if not thousands of immediate openings for high-paying jobs in the oil patch."

Currency Chaos Reigns in Venezuela

Multiple Exchange Rates, Shortage of Dollars Keep Companies Guessing, Bracing for Write-Downs

Click here to read the WSJ article.

"Venezuela's prices on things as diverse as butter and flat-screen television sets are established without warning by the government, which also caps corporate profits at 30%. Any profits evaporate quickly, however, because inflation is almost double that.

And expanded price controls imposed by Venezuelan President Nicolas Maduro, who succeeded late leftist firebrand Hugo Chávez in April 2013, have exacerbated shortages of basic items such as corn flour and toilet paper, triggering violent street protests since February."

"At the official rate for companies that import essential goods, such as food and medicine, a U.S. dollar costs 6.3 bolivars. Companies invited by the government to participate in a middle-tier rate system can effectively buy a dollar for 10 bolivars. For companies in the next and newest tier, 50 bolivars fetch a dollar, leaving them to ponder the true value of their Venezuelan factories and inventories."

"For anyone unable to get dollars through official channels, the black-market rate is roughly 70 bolivars. The U.S. currency is vital to Venezuela, which imports as much as 80% of what it consumes; 96% of its exports are petroleum products."

"But for now, at least, companies face the quandary of which exchange rate to use when they close their books at the end of the quarter."

Piketty's Numbers Don't Add Up

Ignoring dramatic changes in tax rules since 1980 creates the false impression that income inequality is rising.

Click here to read the WSJ article by Martin Feldstein. Excerpts: 

"his thesis rests on a false theory of how wealth evolves in a market economy, a flawed interpretation of U.S. income-tax data, and a misunderstanding of the current nature of household wealth."

"the rate of return on capital—the extra income that results from investing an additional dollar in plant and equipment—exceeds the rate of growth of the economy. He then jumps to the false conclusion that this difference between the rate of return and the rate of growth leads through time to an ever-increasing inequality of wealth and of income unless the process is interrupted by depression, war or confiscatory taxation."

"His conclusion about ever-increasing inequality could be correct if people lived forever."

"They pass on some of their wealth to the next generation. But the cumulative effect of such bequests is diluted by the combination of existing estate taxes and the number of children and grandchildren who share the bequests."

"The result is that total wealth grows over time roughly in proportion to total income."

"Since 1960, the Federal Reserve flow-of-funds data report that real total household wealth in the U.S. has grown at 3.2% a year while the real total personal income calculated by the Department of Commerce grew at 3.3%."

"In 1981 the top tax rate on interest, dividends and other investment income was reduced to 50% from 70%, nearly doubling the after-tax share that owners of taxable capital income could keep. That rate reduction thus provided a strong incentive to shift assets from low-yielding, tax-exempt investments like municipal bonds to higher yielding taxable investments. The tax data therefore signaled an increase in measured income inequality even though there was no change in real inequality."

"The Tax Reform Act of 1986 lowered the top rate on all income to 28% from 50%. That reinforced the incentive to raise the taxable yield on portfolio investments. It also increased other forms of taxable income by encouraging more work, by causing more income to be paid as taxable salaries rather than as fringe benefits and deferred compensation, and by reducing the use of deductions and exclusions. 

The 1986 tax reform also repealed the General Utilities doctrine, a provision that had encouraged high-income individuals to run their business and professional activities as Subchapter C corporations, which were taxed at a lower rate than their personal income. This corporate income of professionals and small businesses did not appear in the income-tax data that Mr. Piketty studied. 

The repeal of the General Utilities doctrine and the decline in the top personal tax rate to less than the corporate rate caused high-income taxpayers to shift their business income out of taxable corporations and onto their personal tax returns."

"These changes in taxpayer behavior substantially increased the amount of income included on the returns of high-income individuals. This creates the false impression of a sharp rise in the incomes of high-income taxpayers even though there was only a change in the legal form of that income."

"Mr. Piketty's practice of comparing the incomes of top earners with total national income has another flaw. National income excludes the value of government transfer payments including Social Security, health benefits and food stamps that are a large and growing part of the personal incomes of low- and middle-income households."

"Finally, Mr. Piketty's use of estate-tax data to explore what he sees as the increasing inequality of wealth is problematic. In part, this is because of changes in estate and gift-tax rules, but more fundamentally because bequeathable assets are only a small part of the wealth that most individuals have for their retirement years. That wealth includes the present actuarial value of Social Security and retiree health benefits, and the income that will flow from employer-provided pensions."

5 remaining problems for Thomas Piketty in the wake of the FT controversy

From historian Phil Magness.

"In the past few days Thomas Piketty and a number of his less scrupulous defenders have taken to declaring the data dispute around Capital in the 21st Century a settled matter since the publication of Piketty’s retort to Chris Giles of the Financial Times.

I submit that it is anything but settled, and would draw your attention to five specific areas of his work that remain unresolved.

1. Piketty has yet to provide a clear, transparent, and accurately sourced description of how he calculates his wealth inequality measurements for the United States.

As I’ve documented here and here, Piketty migrates quite freely between at least four different data sources when he assembles his widely acclaimed estimate for the United States. He also does so in ways that are evident in his raw excel sheets, but obscured or entirely missing from his annotation – particularly his switches between estate tax and survey-based estimates of inequality around the 1970s. Neither Piketty’s technical appendix nor his addendum in response to Giles address this discrepancy.

2. Piketty’s methods for estimating the top 10% of wealth distributions are simplistic and non-transparent.

Although imperfectly constructed, most of Piketty’s wealth data for the top 1% is obtained from other sources such as surveys or tax data. He often speaks of parallel estimates for the top 10% though, in some cases suggesting very pronounced trends. Examination of Piketty’s excel files suggests that most of his top 10% figures are directly derived from his top 1% calculations, though in generally opaque and amateurish ways that simply add in very rough estimates or that attempt to calibrate the upper figure to additional sources that are not clearly cited and explained.

3. Piketty is being methodologically inconsistent in his tolerance for divergent estimation techniques for the estimation of wealth inequality.

Wealth inequality is notoriously difficult to measure, though the two most common approaches attempt to estimate it from (a) tax data or (a) survey sampling. Piketty severely chastised the Financial Times for using a survey-based estimate of wealth distributions in the UK, which suggested less pronounced inequality trends than he claims in his book. He also strongly endorsed the methodological superiority of a tax-based estimate…for the UK.

Yet in constructing his own time series for the United States, Piketty quite freely migrated between tax-based and survey-based estimates by other scholars. He also displayed a preference-of-convenience for US survey data over US tax based estimates when the latter showed flat trend during a period where his argument anticipated an uptick. He has yet to address this seemingly glaring methodological inconsistency.

4. Piketty’s historical data is still full of basic factual errors,  unexplained gaps, and suspect methodologies. 

Errors of this sort are numerous and ubiquitous in Piketty’s book. They range from small errors and oversights in dealing with historical data to major errors of interpretive significance to his thesis. A partial list of these problems include:

• Erroneous representations of US income tax rates
• Missing historical data for US estate tax rates
• Erroneous representations of historical US minimum wage rates
• Made-up figures for 19th century US tax revenue receipts
• Faulty averages of UK wealth inheritance transfers that confuse (or possibly manipulate) estimates for the wrong decades

None has been addressed or corrected by Piketty as of this writing.

5. Piketty is severely overstating the support for his conclusions found in the work of other scholars.

Piketty has largely attempted to sidestep the aforementioned problems in his US wealth data by claiming vindication in the results of a more recent study-in-progress by his frequent collaborators Gabriel Zucman and Emmanuel Saez. Although Piketty and many of his supporters have already accepted the validity of this study, it has yet to be published or subjected to academic peer review. It presently only exists in the form of a PowerPoint slideshow.  A visual examination of its claimed results suggests a their model might be skewed by one or more exogenous factors relating to their interest rate data. And while it has gone virtually unnoticed by Piketty’s defenders, Wojtek Kopczuk - another leading scholar of inequality measurement (and sometimes Saez collaborator) who is more familiar with the unpublished Saez-Zucman technique than the public viewers of its PowerPoint – has recently suggested that it has an underlying methodological fault."