Monday, April 30, 2012
To help start this conversation I want lay out a framework for how to think about Social Security and Medicare spending. This framework revolves around thinking about these two programs as wealth redistribution from the relatively wealthy to the relatively poor.
Over the last 250 years or so in the U.S. and in most of Western Europe, each generation has been wealthier than the last. That is each generation has had on average higher levels of consumption, lower levels of physical labor, more leisure time, and increased income mobility. With this in mind it is easy to see that what Social Security and Medicare are doing is transferring wealth from the relatively wealthy generations of X, Y, and the Millenials, to the relatively poorer Baby Boomer generation. So in many ways the inter-generational wealth transfers that take place through Social Security and Medicare are no different than the intra-generational transfers that take place through the income tax system, welfare, food stamps, etc.
When thinking about either intra or inter-generational transfers, the question that has to be asked by society is, does the marginal benefit of a dollar going to the relatively poorer party exceed the marginal cost of a dollar being taken from the relatively wealthy party? If it does not, then the transfer should not take place.
I think that most people are willing to engage in some inter-generational wealth transfers. The problem that I see with the current levels of spending on Social Security and Medicare is that we have passed the point where the marginal benefit is greater than the marginal cost. To be more clear, I think that the marginal benefit to society of another federal dollar spent on senior citizens is less than the marginal cost to society, especially younger generations, of another dollar being added to the deficit. Even if you don't agree with me, and I am sure many older people don't, it is certainly not clear that the reverse is true.
Regardless of what you believe, and hopefully some empirical work will be done that can shed some light on the proper position, it is important that people think about the two programs within some sort of cost benefit framework. The one presented here, in which society chooses a proper level of spending based on the marginal benefit vs. marginal cost rule, is just one such framework, though I think it is a good one.
Sunday, April 29, 2012
Land Banks and In-Kind Payments: An Analysis of the Sandusky, Oh. Mow-to-Own Program
Dick Durbin (D-IL) and other democratic senators are introducing legislation (link above) that will allow students to declare bankruptcy to get out of student loan debt.
From John Conyers (D-MI):
“There is no principled justification to treat private, for-profit student loan debt differently from other kinds of unsecured debt such as credit cards, payday loans, or personal loans under bankruptcy law. Yet, by not allowing private student loan debt to be discharged in bankruptcy, except in the most extreme circumstances, current law is working against these borrowers.”
John Conyers and the rest of the democrats supporting this bill are (shocker) not thinking things through. Or maybe they are and just don't care. Assuming the former, I will try to enlighten them.
1. Unlike credit cards, student loan debt can be very large and is completely unsecured. If you declare bankruptcy on a credit card, assets bought with that card can be reclaimed by the lender to compensate them (assuming you didn't run up the bill with a trip Thailand). Lenders cannot reclaim the human capital bought with student loans. Also, because credit card debt is still relatively unsecured (see Thailand trip) compared to home loans and such, unsafe borrowers face high interest rates and low credit limits. How much help would a $1000 loan at 19% provide to someone who is trying to pay their tuition? My guess is not much. But these are the kind of terms that payday loans and credit cards get. And this is what Mr. Conyers thinks the student loan market should aim for?
2. So maybe congress can cap interest rates right? If they do that and banks can't make money on student loans, no private student loans will be offered and then students who need the money will really be screwed. Talk about limiting their ability to go to college.
3. Say all of this works out and there is some way that banks still make loans that some people can afford and banks find profitable. The threat of bankruptcy is still going to increase interest rates on student loans since interest is determined by the risk of default. With bankruptcy as an option that risk has surely increased. So the students who do repay their loans and are responsible borrowers will have to pay higher interest rates to make up for the losses that the banks will incur when other less responsible borrowers declare bankruptcy. Obama and the democrats are always talking about not wanting to screw people who play by the rules, so why are they screwing the students who pay back their loans?
This is just another example of politicians pandering to the people who do not think things through. Allowing people to declare bankruptcy on unsecured loans like student debt leads to higher interest rates and less supply. If you want to limit the ability of financially strapped kids to go to college I can think of no better plan than Mr. Durbin's.
More recent WSJ article on student loan reform
Sunday, April 15, 2012
I do not recall ever, as an adult, failing to be mystified whenever I encounter another adult expressing confidence in politicians – confidence either in an individual politician (say, confidence in Ronald Reagan or in Barack Obama) or confidence in politicians as a group. Successful politicians – and particularly those who are successful on national stages – are, with exceptions too few to matter, master con artists.
Whatever is the reason why so many grown people respect holders of political office is, as it has always been, beyond my comprehension. I just don’t get it. Practitioners of no other profession are accorded more honor, respect, and (most importantly) power while at the same time being held to such low standards of ethical behavior. Actions that, when committed by the family dog, properly elicit scolding or muzzling or even eviction from the premises are, when committed by an elected official, greeted with oohs, aahhs, applause, and re-election to powerful office.
I cannot encounter a politician’s image or words without being repulsed. Nor can I encounter any of the incessant instances of publicly expressed admiration and respect for politicians without being (on good days) befuddled or (on most days) sickened.
Bob Higgs feels much the same way as I do. Here’s a slice of his latest post:
So, the questions naturally arise: Why does anyone place any confidence in anything a politician says? Why does anyone expect anything but deception and predation from these dishonest reprobates? Why does anyone seek social improvement or economic salvation from the programs these ne’er-do-wells devise and implement? Why, indeed, do people continue to tolerate politics at all? (This last question presupposes, of course, that those who wish to use the political process to commit a de facto crime—that is, an act that, if committed privately, would be seen as plainly criminal—will be entirely in favor of politics because using the government as their agent-perpetrator offers a way to legalize their crimes. My question pertains to the noncriminal element of the population.)
Well said Mr. Boudreaux
Wednesday, April 4, 2012
Tuesday, April 3, 2012
Apparently King Obama thinks that the role of the supreme court is to rubber stamp everything that Congress passes.
“Ultimately, I’m confident that the Supreme Court will not take what would be an unprecedented, extraordinary step of overturning a law that was passed by a strong majority of a democratically elected Congress”
A democratically elected congress passed several abortion restrictions too, but I don't hear Obama saying that the Supreme court screwed up the Roe v. Wade decision. And what about Brown v. Board of Education? That case overturned democratically elected state legislative laws. Why is Obama not rushing to defend democracy in that case? Or is it only Federal laws that get a pass from all judicial scrutiny?
“For years, what we’ve heard is the biggest problem on the bench was judicial activism or a lack of judicial restraint, that an unelected group of people would somehow overturn a duly constituted and passed law. Well, there’s a good example, and I’m pretty confident that this court will recognize that and not take that step”
Notice the bold. So Obama gets to decide what is constitutional now? Well why even have a supreme court when we can just let Obama make all of the calls himself!
I feel sorry for the students in Obama's constitutional law class. I don't see how they could have learned anything from someone who so completely misunderstands the roles of the 3 branches of government. It would be like learning economics from Karl Marx.
The U.S. is a nation of laws, not of men, which is why we need each of the branches to check the others. Obama can privately disagree with the case and ultimately the decision all he wants, but to publicly speak out against the supreme court now takes a level of brazenness that is unbecoming of a President and in my opinion appalling.