Tag Archives: political economy

When Government Competes with Private Enterprise

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This is an example of the failure that is the inevitable outcome of “competition” from Government, a competition that just as inevitably dooms the private enterprise.

Amazon.com Inc and Wells Fargo & Co had teamed up to offer student loans at discounted interest rates to members of Amazon.com’s “Prime Student” facility.  But the Federal government and others favoring Big Government objected to this free market entry into Government’s lucrative business.

TICAS [The Institute for College Access & Success] called the partnership “a cynical attempt to dupe current students who are eligible for federal student loans with a record low 3.76% fixed interest rate into taking out costly private loans with interest rates currently as high as 13.74%.”

Never mind that this was access that wouldn’t otherwise have been available, or that no one was forcing the prospective students to choose amazon.com-Wells over the government.  The government’s lower rates should have been an effective competitive factor, but Government didn’t want any competition.  Of course, Government caps how much a student can borrow, even if the allowed borrowing doesn’t cover the student’s total college costs—limiting the student’s ability to repay even that much by limiting his ability to finish school and get the requisite job making, thereby making the borrowing done a waste of money.  Maybe those higher rate loans might have been competitive after all.

Critics of private student loans claim they are riskier for borrowers than federal student loans, which charge the same fixed interest rate to all borrowers regardless of how low their credit scores are.

Government made this claim, too, as it moved to interfere with the amazon.com-Wells hookup to the point they ultimately were forced dissolve the partnership and the offering.  The claim is either completely disingenuous or breathtakingly ignorant of the realities of economics and of risk.

Charging all student borrowers the same interest regardless of the quality of that borrower is…suboptimal.  A student borrower’s ability to repay is not governed solely by the student’s current financial status, unlike, for instance, a mortgage borrower.  A student borrower’s ability to repay also is governed, and more strongly so, by the prospective future financial status of that student borrower, which is driven by whether the student is pursuing a course of study likely to lead to a job with an income capable of supporting loan repayment.

The likelihood of inability to repay when every borrower is charged the same interest rate independently of risk simply drives up the interest rates for all: other, lower risk, borrowers are simply forced to subsidize the higher risk borrowers’ loan costs.

With Federal student loans, that higher cost is borne by us taxpayers.  Higher cost, despite the lower face rates on the loans?  Yes, because we’re all paying the taxes that support these otherwise uneconomical loans.  And when a student defaults on his loan, we’re the ones who pay.  But Government doesn’t care about that.

The regulatory and political opposition to private student loans has had an effect. Private student loans are among the smallest volume-producing categories of consumer loans.

Indeed.  Which is what Government has wanted.

Because Sit Down, and Shut Up

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Apple Inc’s aggressive response to a €13 billion ($14.5 billion) tax ruling by the European Commission shows the U.S. technology company doesn’t understand the moral obligation on big companies to pay taxes, according to the leader of the eurozone’s finance ministers.

Because it’s terrible that a company which has played by all the rules should see its money confiscated—or the attempt made—anyway.

Jeroen Dijsselbloem [President of the Eurogroup, the collection of Eurozone finance ministers] said Apple had “failed to grasp” the public outcry over tax avoidance by large companies.

Perhaps Dijsselbloem has failed to grasp the public’s dismay over excessive taxation and Europe’s refusal to allow competition—especially on taxes.

And just to emphasize Dijsselbloem’s disingenuousness, there’s this comment by him:

The Apple response shows that they don’t grasp what’s going on in society and they do not grasp what’s going on in the public debate.  This is a very strong moral issue and large companies, even if they’re this large, can’t say “this is not about us, there’s no problem here.”

American companies or any company that uses all these different tax plans and at the end of the day pays no tax, that’s not fair.

No, the moral issue is the EU bureaucracy’s demanding to impose its concept of morality in place of the morals of sovereign peoples’.  What’s not fair is being punished even though all the rules, all these different tax plans, have been satisfied.  What’s not fair is demanding all these different tax plans to be normalized in accordance with an EU bureaucracy’s diktats, in complete disregard of constituent nation sovereign imperatives.

Or perhaps Dijsselbloem’s just pettily jealous of having been outgamed by a better man.  If Dijsselbloem, or his cronies in that EU bureaucracy, don’t like the gamesmanship here, they should work to eliminate the incentives associated: they should work to get the rest of the EU’s tax plans‘ tax rates reduced to competitive levels, so such gamesmanship becomes irrelevant.

But that’s inconceivable to folks like the Eurogroup, so all they have is their inchoate demand that dissenters just sit down, and shut up.

Central Banks’ Unconventional Policies

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Richard Barley had a piece in Monday’s The Wall Street Journal concerning the confidence gap that’s growing between Central Banks’ unconventional policies and the realities of the market place and the economy that underlies both.  He closed his piece with this:

But there are more valid worries. One is that while central bank efforts are proving enough to keep the economic show on the road, they aren’t doing more than that; the persistent downgrading of growth expectations and the constant refrain from policy makers themselves for politicians to take measures to boost growth sustainably are testament to that.

But, meanwhile, they are producing asset-price inflation. The fear is that the gap between asset prices and reality will close sharply as markets correct. It isn’t clear what might cause that or when: markets are still dancing to the tunes being played by central banks.

Unconventional policy in the immediate wake of the financial crisis undoubtedly helped to boost confidence in markets. But the longer unconventional policy persists, the less confidence it inspires.

That last paragraph introduces the point I want to make.

Unconventional policy helped in the immediate wake because it was new, and so novel, and came in the face of a strong and already discouraging economic dislocation—much like Keynesian stimulus is supposed to help in such a circumstance when it’s new, and so novel (I won’t here get into whether Keynesian stimuli actually do help in their necessarily zero-sum applications).  However, when the policy is no longer novel, when it becomes the steady-state condition, it loses its stimulative capacity—whether the policy is unconventional or Keynesian stimulus.

A Propos Missing Devices

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A report from cloud access security firm Bitglass analyzing all breaches of financial services firms since 2006 found lost and stolen devices [behind a registration wall] accounted for 25.3% of breach events

These missing devices only emphasize the incredible “excessive carelessness” of Democratic Party Presidential candidate Hillary Clinton’s utter negligence in her handling of her own devices.  The damage to which we’re exposed and the damage done by…careless…handling isn’t limited to national secrets or even to politics.

Employment and Interest Rates

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The US economy added 151,000 net new jobs in August, below consensus expectations for 180,000. Meanwhile, the labor force participation rate remained stable at 62.8%, as did the jobless rate at 4.9%, though it was expected to tick slightly lower to 4.8% for the month. The closely-watched U6 rate, or “underemployment” rate, which measures unemployed workers and those working part time for economic reasons, remained stuck at 9.7%.

The unemployment rate and the jobs numbers are misleading when taken out of context.  The context of importance here is the historically low labor force participation rate, from folks having given up looking for work, even though they’re perfectly viable potential employees rather than boomers who’ve retired (a number of whom actually have retired earlier than they wanted to and still would work, were there jobs).

Then there’s this, from Dan North, of Euler Hermes North America:

The most important part [of the report] is the weakness in hours and wages. That slammed the door on September [rate-hike chances].

I’ve said it before, and here I am saying it again: if the Fed wants 2% inflation, then it needs to stop chasing the market; it needs to stop focusing on jobs numbers, per se; and it needs to stop holding out for 2% inflation before it moves.  It needs to set its benchmark interest rates at levels historically consistent with 2% inflation and then sit down and watch.  Watch the economy recover, watch folks who’ve given up come back into the labor force, watch wage growth reappear, watch the labor participation rate, from that, recover to more normal levels; and watch the unemployment rate, still low, actually mean something.

And watch prosperity and productivity resume growing.