Tag: elizabeth warren

Elizabeth Warren Should Give Up Her Stake In A Bad Idea

Senator Elizabeth Warren’s “Plan For Economic Patriotism” is causing ideological convulsions on right and left. Yet one part of her controversial plan has so far largely gone uncommented upon: she wants taxpayers (read: government) to have stakes in companies utilizing government research and development.

Far from seeing knowledge and government R&D as some form of public good that can be freely commercialized by profit-making businesses, she wants government to benefit from its investments by being an equity investor in firms – being given shares in companies who utilize public research, retaining royalties on publicly funded innovation, or even keeping a golden share of patent revenue. The misguided idea here is essentially that there should be a return to taxpayers for their money being risked on government research projects.

Such a policy appears to have been lifted from Mariana Mazzucato’s The Entrepreneurial State. This book posits extensive evidence that public money has helped develop some of the technologies or advances that we see around us, including the internet, touch-screens, GPS, and, soon, the self-driving car.

Through its role in procurement, investments in national security technologies through DARPA, and direct support for research, government agencies no doubt have contributed to building knowledge that has then been successfully commercialized through products such as smartphones.

Are Child-Care Subsidies Actually “Good For The Economy”?

Commentators are already implying Democrat Elizabeth Warren’s new universal child-care plan will be “good for the economy.”

Moody’s Analytics reckons subsidies will induce more mothers into the labor market, raising growth rates by 0.08 percent per year over a decade. Others say that cheaper out-of-pocket child-care will reduce time spent out of the labor force by working mothers, and this greater maternal labor market attachment will boost recorded productivity and women’s earning potential. Combined, it is said the universal program will raise the economy’s productive capacity and thus recorded level of GDP.

Such claims about heightened measured economic activity are not crazy. But previous research for England has found that the effects are unlikely to be as great as proponents imagine.

The roll-out of free child-care for three-year-olds there induced 12,000 extra mothers into work (coming at an extremely high cost of around $84,900 per job). This suggests government subsidies resulted in substantial crowd out of other informal or paid care, meaning overall the substitution effects (the higher effective wage inducing more labor supply) only narrowly exceeded the income effects (the higher effective wage reducing labor supply as people took more leisure with their child-care cost savings). Along the way, there was substantial “deadweight” - subsidies going to people who would work or stay attached to the labor market anyway.

But let’s suppose the proponents of Warren’s scheme are correct about their estimates of bigger effects here. Does any boost to measured GDP mean child-care subsidies are “good for the economy”? The answer is “probably not.”

GDP should not be confused with general economic welfare. Economists generally start from the view that free action in the economic sphere - people acting on their own preferences - maximizes economic welfare except in cases when there are market failures present. It is not clear what markets failures exist in relation to female labor force participation and child-care. That means subsidies to make child-care free, or nearly free, mask the opportunity cost to the parent of putting their kids in daycare in a way that harms broader economic welfare.

The idea that non-attachment to the labor market is a market failure needing correction is particularly peculiar.

Every day we freely opt not to maximize time at work or our productivity. These are choices that come with a significant opportunity cost, not least of time, after all. Some men and women obtain more “utility” from dedicating themselves to family life. Others may decide to work in vocational jobs, or part-time, or on activities that give them substantial non-pecuniary satisfaction, even if this does not maximize their productivity or wages. Some people decide not to invest in their own human capital to boost their earnings potential; others to care for an elderly relative nearing their end of life.

Why should government act to incentivize greater parental attachment to the labor market through child-care subsidies but not, say, incentivize French teachers to train to work on Wall Street or as engineers?

If failing to reach your labor market potential is a cause for intervention, then what about subsidies to other groups, such able-bodied retirees or non-working partners in single parent households with no children?

If child-care costs are too high to allow parents to be as productive as possible, then what about out-of-pocket housing, transport or training costs that prevent other people from working where they would be most productive?

Once you think about it, the idea that the role of government is to maximize labor force attachment and recorded productivity is bizarre – with huge implications that justify a whole host of new interventions.

And that would only be looking at one part of the equation too. Large new subsidies would ultimately have to be financed by raising taxes, as Warren acknowledges. Raising them on incomes for some would reduce their return to work and so labor force participation and human capital investment. Raising them on wealth, as Warren suggests, will reduce the return to saving and investment – which could reduce productivity. It is not clear what the net effect of this would be overall.

So is there ever a case for child-care subsidies under a “neutral” framework that allows preferences to be realized? Perhaps.

In some cases, the provision of means-tested welfare benefits without work requirements may reduce the incentive for parents to work. Targeted assistance to rebalance this disincentive may be desirable for those on low incomes, and indeed already exists in the form of the earned income tax credit.

More broadly though, if governments want to act neutrally in relation to children they should either operate no subsidies at all or else support families with children through tax allowances or distributions available to all children.

That way, parents get to decide what is best for their child without warping the financial incentives and structure of the child-care sector itself.

Elizabeth Warren’s Universal Child-Care Proposal: The Starting Point For A Government Takeover Of The Sector

Senator Elizabeth Warren is right: Child care services in America can be extremely expensive.

In certain areas, child care can be difficult to find at all. High prices have perniciously regressive effects on low-income families, causing them to miss job opportunities, use unlicensed relatives to care for their children or else forego high amounts of their hard-earned income.

So the presidential candidate’s new promise of universal child care subsidies will no doubt resonate with many families. She would have the federal government cover the costs of child-care from birth to school age entirely for any family earning below 200 percent of the federal poverty line, provided they use government-approved local providers. Federal funding would also be available above that, with a cap on out-of-pocket spending on child-care at 7% of any family’s income. According to Warren’s explanation, this would come coupled with providers being held to government educational standards and a desire to push up pay for child care workers to levels seen for public school teachers.

This would have dramatic consequences for the child-care sector. A few observations:

  1. Warren’s plan will significantly reduce out-of-pocket costs for many families. It represents a huge new subsidy. Take care for 4 year-olds as one example; at the moment, data from Child Care Aware of America show just two states (Alabama and Mississippi) have average full-time care costs below 7% of median income. For infants, no state has average costs below 7% of median income. For families with 2 or more children in these care settings, the subsidy will be massive. Such a large, universal subsidy will bring significant deadweight (people using the scheme who would otherwise have paid for their own care anyway). But it is so generous that it will encourage many new users of child care too.
  2. This is significant, because state-level government regulations – not least on staff:child ratios and qualification requirements for carers – currently make providing child-care more expensive. This reduces the number of child-care facilities available in low income markets and increases prices for families. Warren’s subsidy response amounts to a classic case of government restricting supply through policy, on the one hand, and then labelling the resulting high prices a “market failure” that needs to be corrected. In fact, Warren’s plan would worsen the supply problem through its promise to raise pay rates for carers substantially. This would restrict supply further while the subsidies induce demand, raising underlying market prices – higher prices now overwhelmingly paid by taxpayers.
  3. In the U.K., child-care subsidies drove providers in some areas out of business. Why? The government-provided subsidy rates to deliver “free” care were often lower than market prices, meaning providers had to cross-subsidize government-guaranteed places by charging more for unsubsidized families. As “free” care expanded, the opportunity to engage in this cross-subsidization fell, and some companies found the government-funding rate uneconomic as it took over more of the sector.
  4. In the U.S., the average cost of child care varies dramatically by state. For a 4 year-old, the cost of full-time center-based care ranges from $5,061 in Alabama, right through to $18,657 in D.C. Warren’s plan would cap the proportion of income any family paid on child-care. But no government would put taxpayers on the hook for a blank check for any family’s spending habits. Otherwise providers would have every incentive to provide extremely luxurious care on the basis that taxpayers would foot the bill. Instead, the federal government would either likely try to fix rates to prevent over-spending (risking big distortions in certain markets through de facto price controls, as seen in Britain), control what services child-care facilities provide very prescriptively or else cap the overall amount any family could spend while still benefiting from the subsidy.

In short, instead of reducing the costs of providing care through much-needed supply-side reform, this new demand-side scheme will further drive up the market price of child-care, with taxpayers on the hook now for increased use of formal care.

Given the cost implications of capping the per income amount spent by any family, the federal government would inevitably have to circumscribe the nature of care, fix the rates taxpayers would finance or cap the total amount families could spend on child-care within the scheme. These would fundamentally change the types of care available or used in the sector.

 

The Warren Plan and the History of Corporate Chartering

Sen. Elizabeth Warren’s proposal for drastic changes to corporate governance, which I wrote about in this space last week, continues to draw thoughtful responses from commentators. Colleague Ryan Bourne notes that one study “found that German firms were 27 percent less valuable to their shareholders” because of the workers-on-boards co-determination laws Warren would have us emulate. Moreover, the value given up was not merely transferred to the firms’ workforces but was in part dissipated through inefficiency. At National Review, Samuel Hammond discusses how co-determination undermines the overall dynamism of a national economy (for example, by discouraging the transfer of capital to risky, high-value new enterprises) and also notes some of the problems with making “stakeholder” value a subject of fiduciary duty for investors.  

Now NYU lawprof and Cato adjunct scholar Richard A. Epstein, a leading libertarian voice on law, tackles the Warren plan in a piece for the Hoover Institution’s Defining Ideas series. Epstein’s piece is worth reading in its entirety for his analysis of (among other topics) the “stakeholder” mystique, the efficiency-friendly role of share buybacks and executive incentive stock, and the constitutional infirmities of the overall Warren scheme (citing the unconstitutional-conditions doctrine), as well as his warning that large-scale capital flight from the U.S. could ensue if investors mistrust the whims of a new federal charter regulator.

In the passage I want to highlight, however, Epstein makes a point often overlooked in other critiques. Writing on the popular and populist Left these days often romanticizes the idea that business charters should be revocable by some central authority for misconduct (“corporate death penalty”), although it is often not spelled out whether the assets of a giant bank or oil or pharmaceutical company hit by scandal should be taken into the public sector by some sort of confiscatory state authority, allowed to revert to shareholders, or perhaps transferred to a successor entity that would maintain the same brands and facilities and headquarters as before (leaving the question of what exactly is being accomplished by charter revocation). Epstein takes the broad historical view: 

…Warren wholly misunderstands the historical role and constitutional position of corporate charters. The last thing that any country needs for economic growth is a situation in which government officials decide which firms receive charters subject to what conditions. Does she really think that some public bureaucrat should have the power to refuse to issue Apple a corporate charter unless it puts community members or union members on its board, makes gifts to the Sierra Club, or adopts minimum minority hiring set-asides? And what should be done when thousands of firms balk at these conditions? Can they go to court, or does the federal board run the corporation directly?

Lest anyone forget, the great 19th-century corporate reform was the passage of general incorporation laws that allowed any group of individuals to form a corporation, with its attendant benefit of limited liability, so long as they met certain minimum conditions relating to their capital contributions, their ability to sue and be sued, and their board structures. The new legal regime ushered in sustained economic expansion by knocking out the political favoritism that had previously given some businesses corporate charters that gave them a huge edge over direct competitors denied similar authorization. It would be unsurpassed folly to re-open the doors to these abuses today.

Indeed, a key point about general incorporation laws was that they were egalitarian: you could launch an incorporated venture even if you were obscure, new in town, or out of favor with political influentials. Supporters of plans like Warren’s should be asked whether they really want some combination of political actors – very possibly appointees of Donald Trump or another President like him – to gain power to revoke Google’s or Amazon’s or Facebook’s charter to continue doing business unless the management agrees to cut a deal, perhaps involving private understandings with officialdom, to stave off such a penalty. 

(In)digesting the DeVos Confirmation Hearing

I got my dinner and a show last night. The dinner was fine, but the show? Not so great. Not much substance was covered in the DeVos confirmation hearing before the Senate Health, Education, Labor and Pensions committee, and when meaty issues were brought up they were too often smothered in gotcha questions and commentary rather than meaningful discussion.

A good part of the hearing was occupied by bickering over each committee member only getting one, five-minute questioning period, and whether or not that was committee tradition or an effort by the GOP majority to protect the witness. Maybe that’s insightful stuff if you care about the politics of all this—though I doubt it—but it doesn’t tell us one whit about where the nominee stands on the federal role in education.

The good news is that when DeVos was asked about her views on federal policy, she was deferential to states and districts. I don’t recall her stating resolutely that the Constitution leaves ed power to the states and the people—she stated little resolutely—but she hit the right notes. Included in that was telling committee chair Lamar Alexander (R-TN) that she would not use the power of her office to try to coerce school choice. She said she would try to convince Congress to push choice—an unconstitutional goal, but at least using the constitutionally correct process—but she would not try to do it unilaterally.

Student Loan Gifts Don’t Help

Today must be student loan day in President Obama’s “year of action” – also “year of midterm elections” – as the President announced he will expand eligibility for student loan repayment capping and forgiveness. In addition, this week the Senate is set to take up Elizabeth Warren’s (D-MA) bill to federally refinance student loans at lower interest rates, including truly private loans.

Let’s review the folly of such seemingly well-intentioned efforts:

  • Making student loans cheaper, which includes indicating that Washington will always soften your loan terms if politically possible, mainly encourages students to demand more stuff, and colleges to charge more. They’re called “perverse incentives.”
  • In the name of helping them, federal politicians, and many other people, massively oversell higher education to the detriment of students. Perhaps as much as half of people who enter college don’t finish; a third of people with a bachelor’s degree are in jobs not requiring the credential; underemployment is even worse for graduate-degree holders, and; cheap college has almost certainly fueled credential inflation, not major increases in knowledge or skills.
  • Decreasing what borrowers will repay means taxpayers – who had no choice in whether the loans were made – have to make up the difference. And there is a little matter of being nearly $18 trillion in debt already.
  • The Public Service Loan Forgiveness program encourages people to work for not-for-profit entities, especially government. As if government work were a major sacrifice, and things produced or operated for profit such as iPads, grocery stores, bicycles, door knobs, restaurants, books, airplanes, and on and on, didn’t make us better off.

Someday, I hope somebody’s “year of action” will finally deal with the crippling reality of federal student aid “help.” But that will only happen if the public gets tired of sweet-sounding “solutions,” especially in years of elections.    

No Big Deal. Just Taxpayers Getting Clobbered

According to Ben Jacobs at the Daily Beast, Sen. Elizabeth Warren (D-MA) will soon be introducing legislation to allow holders of federal student loans to refinance at lower interest rates. There’s no indication that the new rates would be in exchange for longer terms, or anything like that. Just lower rates because someone might have borrowed at 7 percent, rates for new loans are now at 3 percent, and, well, paying 7 percent is tougher.

According to Jacobs, the proposal “seems to encapsulate…free-market principles” because recent changes to the student-loan program connect rates on new loans to broader interest rates. Apparently, pegging interest rates to 10-year Treasuries is very free market-y.

Perhaps more concerning than the questionable use of the term “free-market principles,” however, is the article’s handling of my reponse to the author’s request for comment. Apparently, I was fine with Warren’s rough idea, except for one little thing. Writes Jacobs:

In fact, Neal McCluskey, a higher education expert at the libertarian Cato Institute, had difficulty finding objections to the concept of Warren’s bill though he cautioned that was without any legislation for him to read. Instead, he was agog at the issues involved with reducing government revenue through lowering interest rates because the lender has to pay for it and, in this case, the lender is the American taxpayer.

How much bigger an objection could there be to “the concept of Warren’s bill” than that such a move would leave taxpayers holding the bag? As I often try to emphasize, taxpayers are people, too. There are lots of other concerns – most centrally, easy aid fuels tuition inflation – but to gently paraphrase Vice President Biden, reducing revenue that’s already been budgeted is a big deal!

Let me rephrase that: It should be a big deal. But as proposals like this indicate, it’s not nearly as big as it ought to be.