Archives: 05/2013

It’s Obvious Student Aid Is Driven by Politics. But Not This Obvious

Federal aid for college students, it’s really no secret, is driven by what works politically, not what’s best for students. While logic and evidence strongly suggest that aid mainly enables colleges to raise their prices at breakneck speeds, politicians talk nonstop about aid making college “affordable.” Financial reality simply does not trump appearing to “care.” But on Friday, the Obama administration appears poised to take aid exploitation to a new level.

Tomorrow, the President will host what sounds like will be a textbook, campaign-style event featuring lots of no doubt somber – but oh-so-grateful-to-the-President – looking college students. With the photo-op thus set up, Mr. Obama will demand that Congress do something to stop the impending doubling of interest rates on subsidized federal loans from 3.4 percent to 6.8 percent.

But the GOP-led House has done something, and it is largely along the lines of what the President has called for. Last week, the House passed legislation that would peg student loan interest rates to 10-year Treasury bills, and would even cap rates at 8.5 percent or 10.5 percent, depending on the type of loan. It’s not exactly what the President wants – rates will vary over the life of the loan rather than being set at the origination rate, and the add-on to T-bill rates is higher – but the plans are still pretty close.

At this point, you’d think the President would be negotiating, not grandstanding. But then you wouldn’t understand federal student aid (or, really, almost anything government does). It is first and foremost about politicians – who are normal, self-interested people – getting what they need: political support, not sane college prices. And you get a lot of that support by appearing to want to “help people” more than the other guys.

If ever there will be a blatant, inescapable demonstration of what really drives federal aid policy, it will be the event we are likely to witness tomorrow. Let’s hope the public will get the right message: Politicians aren’t primarily driven by a desire to make college affordable. They’re driven by a desire for political gain. And that’s why we need them to get out of the student aid business.

CBO’s Tax Expenditure Report Uses Wrong Benchmark, Overstates Loopholes

As a long-time advocate of tax reform, I’m not a fan of distortionary loopholes in the tax code. Ideally, we would junk the 74,000-page internal revenue code and replace it with a simple and fair flat tax - meaning one low rate, no double taxation, and no favoritism.*

The right kind of tax reform would generate more growth and also reduce corruption in Washington. Politicians no longer would have the ability to create special tax breaks for well-connected contributors.

But we won’t get to the right destination if we have the wrong map, and this is why a new report about “tax expenditures” from the Congressional Budget Office is so disappointing.

As you can see from this excerpted table, CBO makes the same mistake as the Tax Policy Center and assumes that there should be double taxation of income that is saved and invested. As such, they list IRAs and 401(k)s as tax expenditures, even though those provisions merely enable people to avoid being double-taxed.

Likewise, the CBO report assumes that there should be double taxation of dividends and capital gains, so provisions to guard against such destructive policies also are listed as tax expenditures.

CBO Tax Expenditure List

With Advocates Like These…

A story in Reuters today offers a good reminder of why the focus of trade negotiators is so often at odds with what really matters when it comes to opening markets at home and abroad.

The proposed U.S.-EU preferential trade agreement (called the Trans Atlantic Trade and Investment Partnership) is being subject to two days of hearings from various groups with an interest in the negotiations. The article implies that most of the witnesses (at least, those who have testified so far) are wary of the deal, on the grounds that various “protections” offered to consumers will be undermined by opening markets to trade and investment:

Since tariffs between the United States and the EU are relatively low, the most difficult part of the upcoming talks will be reducing regulatory and other “behind-the-border” barriers that impede trade in sectors ranging from agriculture to chemicals to autos to finance.

That worries consumer groups such as Public Citizen, which says the United States and the EU have different regulations because the concerns of their citizens are not the same. For example, EU consumers have voiced stronger objections to genetically modified food than their U.S. counterparts.

“Trying to eliminate a big swath of regulatory differences via a trade deal would have a democratic cost because you’re taking away a power from the electorate,” said Ben Beachy, research director at Public Citizen’s Global Trade Watch.

The reason why we have protectionism, when the case for free trade is clear and relatively uncontroversial among economists, is that the powers who gain from closed markets are organised and those, like consumers, who would gain from open markets are diffuse, hard to organise, and have little individual incentive to lobby.

But this article shows us that even those who think of themselves as consumers’ advocates, and are organized ostensibly to argue their case, often agitate against freer trade. Rarely do I hear of a “consumer group” giving support to the lower prices and greater variety that international trade brings; they’re too busy fighting the agreements based on some warped sense of “democracy” or because they want to limit consumers’ choices. It’s no wonder that trade liberalization is such a hard slog.

Speaking of consumer protections, and how they can be abused by more self-interested lobby groups, a reminder to read the paper written by Bill Watson and me on the rise of regulatory protectionism.

Sears v. Butler: SCOTUS Considers A Washing-Machine Class Action

So here’s the sequence: 

1. Government strong-arms production of new designs of environment-friendly front-loading washing machines.

2. The new front-loading washers turn out to have novel maintenance issues. In particular, they may develop musty smells unless owners practice some combination of leaving doors open to vent, wiping down surfaces, and other steps. Some consumers are irritated at this and regret the purchase, others not.

3. Trial lawyers sue all the major makers in class actions on behalf of all purchasers saying the new designs are defective, even though Consumer Reports rates the new category of washer “best in class” despite its drawbacks.

4. One of these class actions lands before Judge Posner at the Seventh Circuit, and he rules for letting it go forward on a theory of “predominance” (do these plaintiffs all belong in the same suit, when many are experiencing no problem at all?) that varies interestingly from what people assumed the Supreme Court’s thinking was on that subject.

5. The U.S. Supreme Court decides (coming up momentarily) whether to grant certiorari in Sears v. Butler.

There isn’t actually a strong logical chain linking 1) through 5); it’s kind of happenstance that the case threw up an issue involving predominance that the Supreme Court may find worth its attention, as opposed to merely presenting an overall profile of “hasn’t the whole system just become a crazy way to enrich lawyers?” Because “hasn’t the whole system just become a crazy way to enrich lawyers?” doesn’t count as a well-formed question for certiorari. [Background: Ted FrankmoreDaniel Fisher]

[cross-posted in slightly adapted form from Overlawyered]

How to Tell If the Government Has Taken over Health Care

From the Washington Post:

Hedge fund executives and other investors are increasingly interested in the timing and nature of health-policy decisions in Washington because they directly affect the profits and stock prices of pharmaceutical, insurance, hospital and managed-care companies…

[Former Centers for Medicare & Medicaid Services] director Thomas Scully, who served during the Bush administration…said he thought that it was useful for CMS officials to have more communication with Wall Street investors as a way for regulators to learn and “explain what an $800-billion-a-year agency” does with its money.

So long as someone is still making a buck, it’s not socialized medicine…right?

Traversing Beijing: Whither the U.S.-China Relationship?

I’m in Beijing, having completed a brief conference on China’s development and U.S.-China relations.  The event was organized by the Communist Party’s International Department. Before our visit the department, which plays an important role in formulating China’s foreign policy, hosted a delegation from North Korea, the results of which were of great interest to the United States.

The American contingent contained people with a range of political views, but all agreed that it was imperative for the two nations to maintain good bilateral relations.  The existing super power must accommodate the rising regional, and potential global, power. 

My point of reference is the late 1800s, when Great Britain faced both the United States and Germany as rising powers.  Britain adjusted to the first, making America a friend and ally for decades to come.  Britain resisted the second, helping trigger two global wars.  Whatever the momentary disagreements and problems between the United States and China, the two governments must resolve their differences peacefully.

We finished our official sessions with a meeting with Wang Jiarui, Minister of the International Department of the Communist Party Central Committee and Vice Chairman of the Chinese People’s Consultative Conference.  He promoted the idea of a new kind of relationship between great powers.  He was friendly, but demonstrated the gulf between United States and Chinese policy when he talked about North Korea. 

He reported favorably on Pyongyang’s recent mission to his country and viewed as positive the North’s promise to return to the Six Party Talks.  Alas, few in Washington expect any serious results from any new round of talks. 

Minister Wang also treated as equally provocative routine U.S.-South Korean military maneuvers in the South and the North’s recent flurry of promises to nuke the United States and South Korea.  Although the former are unnecessary—in fact, American forces should be brought home, since the Republic of Korea could defend itself—the operations reflect a history of North Korean aggression, advanced military deployments, and constant saber-rattling.  It is Pyongyang’s behavior that generates the allied response which Beijing criticizes.

The best chance of transforming the so-called Democratic People’s Republic of Korea—or, at least, ending its nuclear ambitions—is closer cooperation between the United States, its allies, and China.  However, that would require Washington to address Beijing’s interests. Particularly, the United States needs to respond to China’s fear of a North Korean collapse and its opposition to a unified Korean nation allied with America.  Developing a strategy that might attract Chinese support will be the subject of my next Cato Policy Analysis.

Beijing Rising: The New Nation that Is China

I’m in Beijing for a conference organized by the International Department of the Central Committee of the Communist Party of China. We have a short but intensive program, with several American and Chinese scholars as well as Chinese political officials. I just hope I will be semi-conscious, since the 12-hour time difference means a flip of day and night.

As we drove into the city I was reminded how much the country has changed over the last two decades or so since my first trip here.  We flew in on Air China, which is fully competitive with Western airlines. The airport is modern. Some of the passport clerks actually smile.

Once clearing passport control, there are no further barriers to entry. No one questions you as you head out of customs on to your next flight or into the Beijing.  A freeway leads into what looks like a modern city. Colorful advertising showcases Western as well as Chinese products and styles. Kentucky Fried Chicken and Pizza Hut make their appearance.

Some of the office buildings sport their names in English as well as Chinese. We are staying at an older hotel, the Wanshou, which was originally built in 1966 to house foreign guests. It retains the overall feel of old communist construction but has been refurbished, making it quite comfortable. The Wanshou passed my test of serving Diet Coke, but the gym opens at 9—which suggests it doesn’t have a lot of Western guests.

However, quibbles aside, Beijing is a modern city. It was moving in that direction 20 or 25 years ago, but it’s now there.

Perhaps the most dramatic and obvious change is the traffic. Chinese cities once were renowned for their swarms of cyclists, who weaved in and out of what appeared to be constant chaos on the roads. Today the swarms are made up of automobiles. To reduce traffic, Beijing actually bars residents from driving certain days depending on their license plate numbers, but, noted one of my hosts, more Chinese are wealthier and therefore can afford a second car—and thus a second license plate.

Rural China remains poor and underdeveloped, but even that is changing.  China poses a serious geopolitical challenge to America, but it is important to keep two basic factors in mind. 

First, hundreds of millions of people who once would have died in immiserating poverty now enjoy much better lives.  Second, while one should never underestimate the appeal of nationalism, all Chinese now have much at stake in a peaceful regional and global order.  While the future remains uncertain, there are good reasons to hope for, and even expect, a productive and cooperative future.

On to the conference!