Topic: Regulatory Studies

How the CFPB Distorts the Facts about College Loans

Last month, the Consumer Financial Protection Bureau – a rogue creation of Dodd-Frank – released the first annual report from its private student loan “ombudsman.” And boy, does the report illustrate how far off the rails government has gotten.

Start with the focus: private student loans. These and for-profit colleges have gotten huge, damning attention from Washington – and much of the higher ed commentariat – over the last few years. But even if they were true devil’s spawn, private loans are absolutely not the main problems in higher ed.

Even at their very brief peak in 2007-08, private student loans constituted only 12.5 percent of total student aid. In 2011-12 they were just 2.6 percent. The vast majority of funds have always come from other sources, first and foremost the federal government. Yes, it is primarily “aid” from Washington that lets colleges raise their prices with impunity, and enables students to take on substantial debt for often less-than-substantial studies.

Government, not private lending, is the Lex Luthor here. But to be fair, private lending is the CFPB’s bailiwick, so you can’t blame the agency for putting out the report. You can sure as heck, though, blame politicians for creating a bureau whose job seems simply to be pointing fingers at private companies.

You can also blame the CFPB for the content of its report, which is simply a summary of complaints the bureau has received from disgruntled borrowers. Fairly early on it even states that “the report does not attempt to present a statistically significant picture of issues faced by borrowers” (as if its findings are empirical at all). Unfortunately, it goes on to say that the report “can help to illustrate where there is a mismatch between borrower expectations and actual service delivered.”

Actually, no it can’t. At least not reliably. All it can tell you is what people complained to the CFPB about. It can’t tell you if the complaints had bases in fact. It can’t tell you if complaint-lodgers were really just motivated by a desire not to pay. And it can’t tell you what the lenders’ sides of the stories are.

Okay, it probably could do the last thing, but it seems the ombudsman chose not to. There is not an ounce of response from any lender to the anecdotes that essentially are this report. In other words, the report seems to be doing exactly what the bureau’s opponents feared CFPB would do: functioning as an unaccountable propaganda machine against private companies. And don’t be surprised to hear this report invoked repeatedly by Sen. Tom Harkin (D-IA) and other profit-haranguers as damning proof that private student lenders are out of control.

Sadly, the prominent role of government in student lending is ignored even when it is obvious from data on private lending. As one table shows, 46 percent of complaints received were about loans connected to Sallie Mae, and 12 percent about loans from American Education Services, an offshoot of the Pennsylvania Higher Education Assistance Agency (PHEAA).

Sallie Mae, of course, is the student-loan cousin of Fannie Mae and Freddie Mac, the federal creations at the heart of bad mortgage lending. And PHEAA? “Created in 1963 by the Pennsylvania General Assembly, PHEAA has evolved into one of the nation’s leading student aid organizations.”

Yup, more than half of the complaints about ostensibly private lending were really about government-created lenders. But don’t expect to find even a footnote in the report hinting that government might be the real problem.

It’s hard not to conclude that the major goal of the CFPB is to bash private companies, and in so doing justify more and more government control of the economy. If that’s the case, and if this report is any indication, then the CFPB is doing its job. Too bad that job serves the public so poorly.

Cross-posted from SeeThruEdu.com

Hostess Bankruptcy: What Role Did Policy Play?

The demise of Hostess and Twinkies is not a national emergency, but it is certainly sad when a major business goes under and thousands of people lose their jobs.

If federal and state policymakers want to play a useful role here, they should study why Hostess couldn’t make a go of it. Were there tax or regulatory factors that stood in the way of the company earning a decent rate of return?

Unions were an important factor that pushed up the firm’s costs and reduced its operational efficiency. The policy reform here is obvious for people who appreciate market economics: repeal America’s coercive union laws. If policymakers don’t kill so-called collective bargaining, these rules will keep on killing companies.

Sugar apparently played a role in the demise of Hostess, as discussed in this excellent CSM article. Food manufacturers that use a lot of sugar are at a competitive disadvantage in the United States because federal import barriers on sugar substantially push up prices for that production input.

Perhaps taxes played a role as well. Income taxes may not have been a big factor if Hostess wasn’t earning profits in recent years. However, I suspect as a manufacturing firm, the company payed substantial property taxes. In this study, I discuss the anti-investment effects of state/local property taxes on U.S. businesses.

Some Democrats and Republicans may use Hostess as a political football, and some politicians will probably want to bail out the company. A more constructive response would be to find out what governments are doing that makes it so hard for some manufacturing firms to survive in this country.

States Shouldn’t Discriminate Against Out-of-State Retailers

The National Association of Optometrists & Opticians represents eyewear manufacturers and distributors in California, where state officials have been myopic with respect to business regulation.

Under California’s Business and Professions Code, state-licensed optometrists and ophthalmologists are allowed to conduct eye exams and sell glasses at their place of business, while commercial retailers—such as the national eyewear chains represented by the NAOO—are barred from furnishing onsite optometry services. Since consumers have a strong preference for “one stop shopping”—buying their glasses at the same place where they have their eye exams—California’s law gives instate retailers a crucial competitive advantage. Businesses that cannot co-locate their services have quickly vanished from the market.

The NAOO thus sued California officials for discriminating against out-of-state retailers in violation of the “dormant” Commerce Clause, which prohibits states from imposing unjustifiable burdens on interstate commerce. The district court ruled in the group’s favor, concluding that the relevant statutes have a widespread and unjustified discriminatory effect that can’t be reconciled with Supreme Court precedent. The U.S. Court of Appeals for the Ninth Circuit reversed, however, holding that state-licensed optometrists and out-of-state retailers aren’t similarly situated competitors—even though they compete for the same customers in the same market.

On the case’s second round in the Ninth Circuit, the court scrutinized the California law under a more lenient balancing test and again upheld the ban on co-location by out-of-staters. Cato now joins the Opticians Association of America and five individual optometrists on an amicus brief urging the Supreme Court to take the case (supporting a petition for review filed by former solicitor general Paul Clement).

We argue that California’s laws are unconstitutional because their true purpose—as revealed through legislative history and the scheme’s hollow public health rationale—was merely to protect in-state business interests. California’s protectionist regime also has an adverse impact on poor and minority consumers, who confront increased costs and diminished access to eye care while also being disproportionately afflicted with visual impairments.

Not only does the Ninth Circuit’s ruling stifle competition, restrict consumer choice, and increase prices, it also encourages state and local governments to evade scrutiny of discriminatory regulations by relying on superficial distinctions between in- and out-of-state businesses that warp the meaning of “similarly situated competitors.”  The Supreme Court should intervene to prevent any further erosion of its dormant Commerce Clause jurisprudence and uphold the anti-protectionism principles envisioned by the Founders when they abandoned the Articles of Confederation in favor of the Constitution.

The Court will decide whether to take up National Association of Optometrists & Opticians v. Harris later this year or in early 2013.

Occupy Pennsylvania Avenue: How the Government’s Unconstitutional Actions Hurt the 99%

That’s the title of a new paper that Carl DeNigris and I just published in the Drake Law Review.  Here’s the abstract:

Economic freedom is the best tool man has ever had in the perpetual struggle against poverty. It allows every individual to employ their faculties to a multitude of opportunities, and it has fueled the economic growth that has lifted millions out of poverty in the last century alone. Moreover, it provides a path for individuals and communities to free themselves from coercive government policies that serve political elites and discrete political classes at the expense of the politically weak. Because of their relative political weakness, the poor and lower middle class tend to suffer the most from these inescapable power disparities.

Yet economic freedom — and ultimately, economic growth — is not self-sustaining. This tool of prosperity requires sound principles that provide a framework for cooperation and voluntary exchanges in a free society. Principles equally applied to all and beyond the arbitrary discretion of government actors; principles that provide a degree of certainty and predictability in an otherwise uncertain world. That is, economic freedom requires the rule of law, not men.

In this article, we discuss the corrosive effects that unconstitutional actions have on the rule of law, economic growth and, in turn, on the ability of the poor to improve their economic misfortune. We focus on the institutional dangers and adverse incentives that unconstitutional policies tend to create. These dangers are not just abstract or theoretical; this article shows how specific unconstitutional actions adversely affect the lives of poor Americans. And while Part IV shows that even constitutional violations by local governments can have disastrous effects, our central theme is that the federal government’s disregard for the U.S. Constitution has led to policies that kill jobs, stymie economic growth, and ultimately exacerbate the problems of those living in poverty.

The case studies we use to illustrate our argument are Obamacare, bailouts/crony capitalism, the Sarbanes-Oxley/Dodd-Frank financial regulations, and housing policy.  It’s truly stunning to see how the policies that the government pursues – unconstitutional ones at that – hurt the very people they’re designed to help.  Read the whole thing.

A Condom Conundrum: Private Parts in the Public Sphere

While they were turning out to the polls to help reelect President Obama on Tuesday, residents of Los Angeles County also approved a ballot initiative known as “Measure B,” requiring the producers of “adult films”—meaning porn, not Criterion Collection fare—to acquire a public health permit and adhere to a number of regulations, most controversially a mandate that performers wear condoms on the set. Prominent industry figures such as James Deen have opposed the measure on the grounds that it is unnecessary in light of the existing rigorous testing regime, counterproductive in the context of shoots that require performers to have intercourse for “nonstandard amounts of time,” and will ultimately be ineffective as filming will simply move outside Los Angeles County.

These are all compelling points, but the measure also raises some interesting theoretical questions in an industry where, as in journalism before it, new technology has blurred the once-sharp lines between amateur and professional content production.

While I will refrain from linking to any examples on this family-friendly blog, “traditional” professionally produced adult video now competes with an array of sites specializing in amateur or quasi-amateur sexual content. Some entrepreneurial couples and individuals launch their own personal sites, making home videos and live webcam streams available to subscribers. Other sites act as middlemen, purchasing home videos shot by amateur couples for online distribution. Still others serve as platforms on which individuals and couples can stream live sexual content from their home web cameras, earning revenue based on the number of viewers. While it seems clear that Measure B is not intended to target these amateur producers, they do seem to fall within the scope of the law’s definitions, strictly construed.

Here’s a thought experiment: Imagine a couple who sometimes tape their sexual activity for—at least initially—their own private enjoyment. In the past, when money was tight, they periodically sold these videos to a subscription-based website that specializes in homemade fare, and they expect that they may do so again in the future as the need arises. At what point are they required to  register with the state and pay a permit fee if they wish to continue taping in their own bedrooms? If they fail to do so, are they later liable should they attempt to sell or self-distribute those recordings, either for a subscription fee or on an ad-supported website?

Now, realistically, I find it almost inconceivable that Los Angeles would seek to enforce the law against the imaginary couple I’ve described. I find it slightly more plausible that an L.A.–based couple who maintain their own site could be affected, and one can also imagine an aggregation and distribution site or platform being targeted—perhaps at the urging of traditional studios looking to eliminate the competition—though it is hard to see how such sites could feasibly comply with some of the law’s requirements. If a similar law were adopted nationally, or by many states—making it harder for professional studios to resume business by moving elsewhere—some of these scenarios become a good deal less far-fetched.

Again, given that the intent of the law is fairly clearly to regulate traditional professional porn studios, I expect that in practice they are likely to be the exclusive targets of enforcement for the foreseeable future, and those who wish to continue shooting scenes sans-latex will find plenty of nearby jurisdictions happy to welcome their business. Still, I think it’s an interesting class of hypotheticals to contemplate, because it problematizes the widespread view that there’s some sharp and clear distinction between the realm of private intimacy shielded from state interference and the realm of commerce subject to broad regulation. Here, it becomes especially clear that the commercial regulation inevitably implicates rights of personal sexual choice and bodily autonomy. But commerce has never really been some hermetically sealed domain, where rules that conflict with the values or preferences of workers and entrepreneurs somehow don’t count as impinging on personal autonomy, in contrast with the sacrosanct domain of the home where such intervention would be anathema. In a digital economy that makes “home” and “workplace” the same place for a growing number of people—where the boundary between personal projects and production for profit becomes increasingly blurred—that distinction seems likely to become increasingly untenable in more and more areas.

Why a Good Year for Peanut Farming Is Bad News for Taxpayers

The NY Times reports on how well peanut growing has gone this year:

In Georgia, where nearly half of the nation’s peanuts are grown, the annual fall harvest has yielded a record amount of big, shell-filling kernels that farmers say taste better than average.

“I’ll just say that the farmers of Georgia have been blessed with weather conditions,” said Armond Morris, who planted about 1,000 acres near Tifton, Ga., and serves as the chairman of the Georgia Peanut Commission.

“We had rain at the right time and didn’t have but three or four days that were 95 degrees,” he said.

Although the harvest is just winding down, the national peanut crop report from October showed that more than 6.1 billion pounds will be harvested this year, compared with about 3.6 billion last year. The yields are especially good in Alabama, Florida, Mississippi and Georgia, where the main crop is a variety called runner peanuts.

So that’s good news for taxpayers right?  No need to bail out struggling farmers whose crops have been ruined by drought?  A good time to end farm subsidies? Unfortunately, it’s quite the opposite:

… there is still a record supply of peanuts on the market, which means farmers will not see high prices to match their yields.

Although some early contracts assured growers of close to $700 a ton, those kinds of deals are long gone, said Patrick Archer, the president of the American Peanut Council, adding that growers will be lucky to get $400.

As a result, many farmers are likely to turn to the federal government to keep the bottom from falling out of the peanut market. Instead of selling their crops right away, they will store shelled nuts in refrigerated warehouses and take government loans, betting that prices will rise within nine months and that their peanuts will bring enough to repay the loans.

If prices stay low on the open market, the government will buy the peanuts for less than it cost to produce them but at a rate that will allow farmers to recoup some of their expenses.

Sigh.  Is there any market situation that doesn’t result in subsidies to agriculture?

If Oklahoma Wins Lawsuit, ‘The Whole Structure’ of ObamaCare ‘Starts to Fall Apart’

Oklahoma Attorney General Scott Pruitt has filed a lawsuit challenging the Internal Revenue Service’s unlawful attempt to impose ObamaCare’s taxes on exempt employers and individuals. (Jonathan Adler and I plumb this issue in our forthcoming Health Matrix article, “Taxation Without Representation: The Illegal IRS Rule to Expand Tax Credits Under the PPACA.”)

An article in the current issue of Business Insurance cites a couple of experts on the potential impact of the lawsuit:

While the ramifications of the suit pending in the U.S. District Court in Muskogee, Okla., are huge, the challenge brought last month has gotten little attention…

What is clear is that the outcome of the lawsuit could be crucial for the future of the health care reform law, observers said.

If premium subsidies are not available in federally established exchanges, “No one would go to those exchanges. The whole structure created by the health care reform law starts to fall apart,” said Gretchen Young, senior vice president-health policy at the ERISA Industry Committee in Washington.

“The health care reform law would become a meaningless law,” added Chantel Sheaks, a principal with Buck Consultants L.L.C. in Washington.

For more, read here, hereherehereherehere, here, and here.