College Rent-Seeking and the Meteor

I am a frequent lurker and occasional poster on a chat board for my favorite college hoops team. On that board, some of the chatters refer to games between two of our rivals, or teams we just don’t like, as “meteor games” — contests where instead of having to choose between two evils, we root for a meteor to come crashing down and obliterate the whole arena.

Well right now, on a slightly different college court, there’s just such a game shaping up.

According to an article in today’s Inside Higher Ed, there’s a battle brewing between, on one side, financial aid officers and lenders who want the federal government to bail out banks that make truly private — as opposed to federally backed — student loans, and, on the other side, student and other higher education advocacy groups who hate private lenders because they try to make evil profits. Activist students especially think that making money off of them is unconscionable, and whatever loans they get should have to have very generous terms backed directly — as opposed to indirectly through a bailout — by you, the taxpayer.

A pox — or meteor — on all their houses! In this battle of the utterly shameless rent-seekers, the only good outcome would be for both sides to lose.

Another Drug Raid Death

FBI agent Sam Hicks was killed this week when he and other police officers tried to serve a warrant at 6 am on the husband of Christina Korbe. Korbe says she thought criminal intruders were trying to break into her house. She called 911 and retrieved her handgun. Hicks was shot shortly after he entered the house. 

This will provide an early test for the incoming Obama administration. Will it matter what Korbe really thought under those circumstances? Or will Obama and incoming attorney general Eric Holder simply cave into the pressure to line up behind the police agents and throw the book at Korbe no matter what?

For related Cato work, go here.

Should We Blame Greenspan?

Alan Greenspan, once regarded as a Maestro, and so admired that people actually believed a New Republic article by Stephen Glass and Jonathan Chait claiming that a Wall Street financial firm had a literal shrine to him, is now being blamed for the worst financial crisis since the Great Depression. Is that fair? Did Greenspan’s Fed create the dot-com boom, the dot-com bust, the housing boom, and/or the housing bust and the ensuing financial crisis?

Two weeks ago Cato published a paper by David Henderson and Jeffrey Hummel with the now-controversial and counterintuitive thesis that “although Greenspan’s policies weren’t perfect, his monetary policy was in fact tight, and his legacy is one of having overseen low and stable inflation and a striking dampening of the business cycle.”

This week Cato published a paper by Lawrence H. White with a very different perspective. White argues that after the dot-com bust, the Greenspan Fed held interest rates extremely low for several years, setting off what Cato senior fellow Steve Hanke called “the mother of all liquidity cycles and yet another massive demand bubble.”

Back in May, Gerald P. O’Driscoll Jr. had also sharply criticized the Greenspan Fed in a Cato Briefing Paper. He wrote that the Fed had been creating asset bubbles and moral hazard by its implicit policy of intervening to keep asset prices high.

More perspectives were heard this week at Cato’s Annual Monetary Conference. Video of the conference can be found here, and the papers will eventually be published in the Cato Journal.

When Can You NOT Sue a School?

It seems you can sue a school — and win — if you are a custodian who falls off a stepladder on the job (due, apparently, to having received insufficient training in the use of stepladders).

You can apparently file a suit because your daughter didn’t make the cheerleading squad

But a federal appeals court has just ruled that you CANNOT sue your school district for failing to inform you of the modest school choice rights you are supposedly guaranteed under the No Child Left Behind Act. It isn’t that the suit was filed and lost. The court has ruled that parents do not have standing to sue for their “rights” under NCLB in the first place.

There is another approach to running and funding schools under which everyone would have meaningful choices for their kids, and no one would have to sue anyone to get it.

Skidmore’s Weak Defense of Social Security

University of Missouri-Kansas City political scientist Max Skidmore recently criticized as “add[ing] nothing” Cal-Berkeley economist Konstantin Magin’s arguments in support of Social Security personal accounts. Let’s examine some of Skidmore’s arguments in favor of the current system:

Magin seems almost to promise guaranteed, risk free returns. Even if this were correct, it is irrelevant. Social Security is not an investment scheme; it offers more than retirement benefits, and its low administrative expenses make it more efficient than any private scheme.

Skidmore’s focus on just administrative costs misrepresents the program’s true costs, which includes distortions in saving and work effort in the economy. The payroll taxes that fund Social Security — to the extent that they are perceived as unrelated to future benefits — reduce worker incentives and, at the same time, Social Security retirement benefits induce workers to exit earlier from the work force. Those effects are well-documented by economists David Wise (Harvard) and Jonathan Gruber (MIT). Tax-financed benefits reduce personal saving (as demonstrated by Harvard’s Martin Feldstein), and the program’s institutional structure — the Trust Fund’s investment restrictions — means the program’s surpluses are not truly saved and invested (as argued by Penn’s Kent Smetters and Stanford’s John Shoven). Thus, overall the program reduces national saving. Those resource costs should be added to obtain a true picture of how costly Social Security is.

It has a mildly redistributive effect: workers who earn less receive a greater portion of their earnings in benefits than do those who earn more.

The redistributive effect is not mild at all when you consider its redistribution from younger and future generations toward older ones. There are any number of measures developed by well-respected economists — such as Alan Auerbach (Berkeley) and Larry Kotlikoff’s (Boston University) generational accounting measures — that document the massive intergenerational redistribution that the program imposes. That redistribution remains hidden because of the cash-flow budget accounting adopted by official scoring agencies. As the program’s shortfalls compel policy adjustments in the future, the true scope of the program’s redistributive force will become obvious — but it will be too late to avoid the negative economic effects of forced higher taxes and smaller benefits for future generations.

[I]nsurance against long life is very valuable, and private annuity markets appear to be quite costly[.]

But annuity markets are costly because we already live in a world with Social Security, which forcibly annuitizes retirement resources. And there is evidence that private insurance purchases do not fully unwind the forced annuitization via Social Security (Auerbach et al.). This is increasingly so as the intensity of desires to bequeath assets to children has eroded over time, as Kotlikoff and I have shown using data from the Federal Reserve’s Survey of Consumer Finances.

Social Security effectively monopolizes the annuity market and any residual purchasers on private markets are the high-risk ones — those likely to live longer than average. That explains the high cost of private annuities. If Social Security were altered by the introduction of personal accounts, private annuity sales would increase and broader risk pooling would lead to lower costs.

Nearly one third of all Social Security checks go to children, and to others younger than retirement age.

Children’s Social Security benefits as survivors and dependents could be replaced easily by independent insurance programs under a Social Security reform that establishes personal accounts.

Because of the independence it gives to seniors, young couples now rarely are required to support their elderly relatives, as documented by Kathleen Mcgarry and Robert Schoeni.

Again, this is an extremely shortsighted view. By encouraging independence among the elderly from their children, Social Security is destroying family cohesion and extended family links that are crucial for transferring human capital to the next generation. By increasing the costs for younger workers through the program’s excessively costly payroll taxes, it is also promoting lower fertility — thereby weakening a key growth-promoting factor in developing countries. Studies by Washington University’s Michele Boldrin indicate that, in countries with generous public pensions, fertility rates have declined.

Russell Roberts: A Novel Approach

Russell Roberts, of NPR, Cafe Hayek, and EconTalk fame, will talk about his new book The Price of Everything: A Parable of Possibility and Prosperity at a Cato Book Forum at noon on Monday, December 1.

Earlier this fall, George Will wrote of Roberts’ book in Newsweek

Improbable as it might seem, perhaps the most important fact for a voter or politician to know is: No one can make a pencil. That truth is the essence of a novella that is, remarkably, both didactic and romantic. Even more remarkable, its author is an economist. If you read Russell Roberts’s The Price of Everything: A Parable of Possibility and Prosperity, you will see the world afresh — unless you already understand Friedrich Hayek’s idea of spontaneous order. Roberts sets his story in the Bay Area, where some Stanford students are indignant because a Big Box store doubled its prices after an earthquake. A student leader plans to protest Stanford’s acceptance of a large gift from Big Box. The student’s economics professor, Ruth, rather than attempting to dissuade him, begins leading him and his classmates to an understanding of prices, markets and the marvel of social cooperation.

See for yourself on December 1, the Monday after Thanksgiving, with comments by reformed literature Ph.D. Nick Gillespie.


Dynastic Politics in Alaska

A year ago it looked like we might replace the son of a president in the White House with the wife of a president, while some Republicans grumbled that it was too bad the president’s brother couldn’t succeed him. I wrote then that Americans fought a rebellion to replace a monarchy with a republic, “in which men (and later women) would be chosen to lead the republic on the basis of their own accomplishments, not their family ties.” But

In a country formed in rebellion against dynastic government, some 18 members of the US Senate in 2005 had gained office at least in part through family ties, along with dozens of House members.

And the trend continues. Now Alaska, the Last Frontier, the state of rugged individualism, is going to be represented in the U.S. Senate by the daughter of a former governor and senator and the son of a former congressman. In a bit of a War of the Roses twist, Sen. Mark Begich’s father won his first congressional election by defeating Sen. Lisa Murkowski’s father.