Tuesday, August 18, 2015

Equal time for the Donald

There are too many Presidential candidates for me to pick on every policy proposal that is grounded on less than sound economic logic.  Because college loan debt is so poorly understood, I jumped on the Clinton proposal yesterday.  But I do not want anyone to think that the Democratic frontrunner has a monopoly on economic nonsense.  So let me quickly flag two items from the Republican frontrunner that came to my attention yesterday.

My gut tells me that Trump is the frontrunner because he has played the age-old "blame all of society's troubles on [fill in the blank: immigrants, religious minorities, ethnic minorities]" ploy very successfully.  In an era when the whole world is becoming more tightly connected because of declining costs of communication and transportation, Trump wants to turn the clock back 100 years.

Case 1: immigration.  Trump's position paper argues we should build a wall on the Mexican border, invest significantly more in border patrols and employment verification, and force employers to hire all the unemployed before any more green cards get issued.   The facts: more Mexicans are now leaving the US than entering.  Although most illegal immigrants come from Mexico, as many as 50 percent of all illegals from all sources get here by overstaying their visa.  Perhaps Trump will have the immigration office put chips on each visitor to the US, so we can trace them and escort them out if they stay too long?

Case 2: monetary policy.  Trump is a big fan of currency devaluation to enhance economic competitiveness.  As this WSJ column shows, there is a long history of countries trying this approach and it is a history of failure.  If currency devaluation were the road to riches, Argentines and Mexicans would be on top of the world.

Monday, August 17, 2015

On the Clinton college affordability plan

Imagine a new federal investment that would cost $350 billion over the first ten years.  How could such funds be invested for the highest social ROI?  Lots of candidates: health care, transportation infrastructure, carbon reduction, and the like.  In the education arena, Nobel prize winning labor economist James Heckman has argued for significant increases in spending on pre-kindergarten so that all children would start school on a more equal footing.

Former first lady, US Senator, and Secretary of State Hillary Clinton came out last week for spending $350b on debt relief for college students and alums.  A political stroke of genius, no doubt.  But who wins from this?  College graduates tend to come from upper income households and earn, on average, 60 percent or more over their lifetime as high school graduates.  Most of the spend would go to those who would have attended college anyway.  Why would debt relief for this crowd be such a high priority?  Recall the much more serious mortgage debt crisis in 2008 and how few politicians advocated federal intrusion into the mortgage business.

And what would colleges do?  To be eligible, they would have to show they are taking steps to control costs and that their students repay their loans.  But how many schools would be cut off from participating in the program if they do not make their numbers?  The feds have run a very loose ship on this front for decades.  In basic microeconomics, subsidies lead to more output and higher costs of operation.

As for Clinton's claim that the plan would be financed through higher taxes on the rich, be wary.  Congress is really good at coming up with new entitlements, not so good on coming up with ways to pay for them.

Bottom line: a new entitlement for the upper income brackets at a time when there are many, many higher priorities for public investment (if such investments can be wisely made in light of the other commitments our society already has).  The proposal also ignores some of the fundamental problems in the student loan market, especially the universal availability of loans regardless of odds of repayment.

Sunday, August 16, 2015

First year MBAs get a taste of the market

As part of orientation, all 10 teams of first year, full-time NC State Jenkins MBAs participated in Marketplace.  Each team was given $100 and had two weeks to come up with a product or service that they would sell in an actual market.  They could use up to $100 of their own funds as well.

The Marketplace event happened last Friday at HQ Raleigh.  NC State Jenkins MBA students, alums, and staff attended along with invitees from the local startup community.  Each visitor had 50 "MBAbucks" that they could spend.  Entrepreneurship professor Lewis Sheats and a panel of judges picked a winner.

1) Many of the products were food-related, including ice cream, snow cones, popsicles, popcorn, fresh organic produce.  Some people are always hungry, right?
2) Pricing strategies were interesting to say the least.  I paid 7 MBAbucks for a small scoop of ice cream and 3 MBAbucks for a quart of fresh organic tomatoes.  In a real marketplace the tomatoes would have cost more.
3) The winners: Jenkins PopCo -- flavored popcorn in appealingly designed bags.
4) The biggest challenge to most students I talked to was coming up with a concept on such a tight deadline.  Welcome to the world of business.

For more details, see this article in Triangle Business Journal.  Kudos to Claire Jefferies, Lewis Sheats, the MBA office, and the student teams for pulling off this great event.

Wednesday, August 12, 2015

A chance to refinance your student loan

Recent WSJ piece reports that some private sector lenders are now offering refinancing options to college graduates with student loans.  The offers are selective, going to those with sound credit scores and well-paying jobs.  One student was able to lower her interest rate from 7.2 to 4.7 percent.  Lenders mentioned include Social Finance, CommonBond, Citizens Financial, Earnest Operations, and Darien Rowayton.

The economic logic behind this market: the feds (and a few private lenders) offer one-size-fits-all terms for student loans -- an interest rate around 7% and a repayment period around 10 years.  These same terms are available to all borrowers, regardless of their ability to repay the loan.  After graduation private lenders can identify which students are good bets to make repayments and can profitably invest in those who appear to have great career prospects.  In today's credit markets, 4.7% repayment options are very attractive.

This changes the mix of the risk pool for the feds.  If the best repayment bets increasingly move to private sector funding, guess who remains in the pool?  And guess who will eventually have to cover a rising percentage of bad loans in that pool?  The parallels to the health insurance market are uncanny, with the private sector being more than willing to cover those with good health prospects while at the same time leaving the government to cover everyone else.  It would be naive to think that the federal government will allow the private sector to have a free hand in the student loan market for an extended period of time.