No, the Interest on Your Student Loan Isn’t Too High. In fact…

It seems like more often than not I’m opening these blog posts with an apology for a multi-week hiatus. Since nobody’s emailed to check on my well-being, I can only infer my readership has gotten on fine without my wonk-Jr. takes on public policy and other matters of high import. Fair enough; but don’t think your demonstrated lack of interest will spare you from a quick update.

Actually, it’s all good news: I’ve been having fun learning R (a statistical language), looking for a new apartment, and testing the limits of a 27-year-old liver. I saw Chance the Rapper and a Pirates game in Pittsburgh, which was awesome. The last article I wrote had some real success and was republished in several places, even earning a shout-out from John Stossel:

The big update is that my stint as a (purely) freelance writer has mercifully drawn to a close; I now write for a non-partisan public policy group. In fact, this very blog was one of my strongest selling points, according to my manager. It just goes to show you, kids: if you toil in anonymity for two years, eventually something will go your way.

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Okay, enough about me. Let’s talk about a topic close to the heart of many millennials: student loans. More specifically, I want to talk about the interest rates charged on undergraduate student loans.

That interest rates are too high is, unsurprisingly, a common gripe among borrowers. If I had a nickle for every twenty-something I’ve overheard complain that the federal government shouldn’t profit off student loans…well, it still wouldn’t cover one month’s interest. However, this sentiment isn’t limited to overqualified baristas; popular politicians like Elizabeth Warren and Bernie Sanders–and even unpopular politicians–have publicly called for loans to be refinanced at lower rates and decried the “profiteering” of the federal government. From Bernie Sanders’ website:

Over the next decade, it has been estimated that the federal government will make a profit of over $110 billion on student loan programs. This is morally wrong and it is bad economics. Sen. Sanders will fight to prevent the federal government from profiteering on the backs of college students and use this money instead to significantly lower student loan interest rates.

Under the Sanders plan, the formula for setting student loan interest rates would go back to where it was in 2006. If this plan were in effect today, interest rates on undergraduate loans would drop from 4.29% to just 2.37%.

It makes no sense that you can get an auto loan today with an interest rate of 2.5%, but millions of college graduates are forced to pay interest rates of 5-7% or more for decades. Under the Sanders plan, Americans would be able to refinance their student loans at today’s low interest rates.

As one of those debt-saddled graduates, and one of the chumps who took loans at a higher rate of interest, I would obviously be amenable to handing over less of my hard-earned money to the federal government. But as a person concerned with the larger picture, I have to say this is a really bad idea. In fact, rates should be higher, not lower.

First of all, the progressive case for loan refinancing or forgiveness only holds up under the lowest level of scrutiny. Such a policy would overwhelmingly benefit borrowers from wealthy families, who hold the majority of student loan debt. Conversely, most defaulters hold relatively small amounts of debt. Fiddling with interest rates shouldn’t be confused with programs that target low-income students, like the Pell Grant, which are another matter entirely and not the subject of my criticism.

More to the point, the federal government probably isn’t making any money on student loans. Contrary to the claims of Senators Warren and Sanders, which rely on estimates from the Government Accountability Office (GAO) and put federal profit on student loans at $135 billion from 2015-2024, the Congressional Box Office (CBO), using fair-value estimation, shows student loans costing the federal government $88 billion over the same period.

The discrepancy between the CBO and GAO figures comes from the former’s inclusion of macroeconomic forecasts. Essentially, the CBO thinks the risk of default on student loans is higher than the GAO does, due to forces beyond individuals’ control.

Evidence suggests it’s unwise to underestimate the risk associated with student loans. According to a study by the liberal think tank Demos, nearly 40% of federal student loan borrowers are in default or more than 90 days delinquent. Add to that the fact that student loans are unsecured (not backed by collateral or repossessable assets, like a car or house), and they start to look like an incredibly risky venture for the federal government, and ultimately, taxpayers.

That conclusion is deeply unpleasant, but not really surprising if you think about it. Ever notice how the interest rates on private student loans–approximately 10% of the market–are much higher? That’s not because private lenders are greedy; it’s because they can’t lend at the rate of the federal government without losing money.

This is all important because the money that finances student loans has to come from somewhere. Be it infrastructure upgrades, federal support for primary education, or Shrimp Fight Club, the money spent on student loans isn’t available for competing priorities. This is even more important when you consider the loss the federal government is taking on these loans, the cost of which is passed onto future taxpayers in the form of higher taxes or lower spending. Since higher education is only one among infinite human desires, we need to decide how much of our finite resources to devote to it. Properly set interest rates are one way (probably the best way) to figure that out.

The irony, of course, is that doing so would require the government to act more like a private lender–the very thing it’s designed not to do! Our student loan system ensures virtually anyone who wants to study has the money to do so, regardless of the likelihood they’ll be able to repay. One of the nasty side effects of this indiscriminate lending is a large amount of distressed borrowers, who now find themselves in the uncomfortable position of digging out from under a mountain of debt they likely shouldn’t have been able to take on.

More so than other forms of government spending, student loans have specific, discernible beneficiaries: the students who get an expensive education financed by the taxpayer at below-market rates. Sure, you can argue there’s some spillover; society does benefit from having more highly-trained workers. But most of the time, highly skilled labor is rewarded with higher wages. That being the case, is it really too much to ask for borrowers to pay a level of interest that reflects the actual cost of issuing their loans?

Yes, this would be discouraging for some: particularly those who want to pursue non-remunerative fields of study. That’s not such a bad thing; higher interest rates would steer people away from obtaining degrees with low salary expectations, which would–by my reckoning–reduce rates of delinquency and default over the long term. They would also help mitigate some of the pain of defaults when they do happen.

But–you might protest–you can’t run the government like a business! And sure, a lot of the time, you’d be right. However, I really think this is one area where doing so is appropriate–even desirable. Hear me out.

When the government can fund itself through profitable investments rather than zero-sum transfers, it should. If we’re going to have a government of any size (and few suggest that we shouldn’t), then we need to pay for it. Which sounds like the preferable way for that to happen: voluntary, productive, and mutually beneficial investments in society; or the forceful appropriation of private resources? I’m not suggesting the former could entirely replace the latter, but when it can, I think it absolutely should.

Astute readers will realize if the government decides to lend profitably, it will have to compete with private lenders, which would cut into its margins and make its presence in the market redundant. So maybe it’s just a pipe dream. But if profitable lending isn’t possible, the federal government should at least try to minimize losses. One way or another, that means higher interest rates.

Insurance Coverage Numbers Are Important, But Not All-Important

Whether you’re into this sort of thing or not, you’ve probably been hearing a lot about healthcare policy these days. Public debate has roiled as Republican lawmakers attempt to make good on their seven-year promise to repeal and replace the Affordable Care Act (ACA). As the debate rages on, one metric in particular appears to hold outsize importance for the American people: the number of Americans covered by health insurance.

Analysis by the Congressional Budget Office, which showed that 14 million more Americans could lose coverage by 2018 under the Republican replacement, caused intense public outcry and was frequently cited as a rationale for not abandoning the ACA. There is immense political pressure not to take actions that will lead to a large loss of coverage.

But here’s the thing: the relevant metric by which to judge Obamacare isn’t insurance coverage numbers. To do so is to move the goal posts and place undue importance on a number that might not be as significant as we imagine.

The ultimate point of health insurance, and the implied rationale for manipulating insurance markets to cover sicker people, is that people will use insurance as a means by which to improve their health, not just carry a plastic card in their wallets.

Health Insurance ≠ Health

The impulse to use insurance coverage as a proxy for health is misguided but understandable. For one thing, it’s a simple, single number that has dropped precipitously since the implementation of the ACA; that makes it a great marketing piece for supporters. For another, health insurance is the mechanism by which most of us pay for most of our healthcare.

And yet in 2015 the uninsured rate fell to 10.5% (down from 16.4% in 2005) while age-adjusted mortality increased for the first time in a decade.

It turns out a nominal increase in the amount of insured Americans doesn’t necessarily translate into improved health outcomes for those individuals. A newly released paper from the National Bureau of Economic Research (NBER) finds that while the ACA has improved access to healthcare, “no statistically significant effects on risky behaviors or self-assessed health” can be detected among the population (beyond a slight uptick in self-reported health in patients over 65).

These results are consistent with other studies, like the Oregon Medicaid Experiment, which found no improvement in patients’ blood pressure, cholesterol, or cardiovascular risk after enrolling them in medicaid, even though they were far more likely to see a doctor. There were, however, some notable-but-mild psychic benefits, such as a reduction in depression and stress in enrollees.

In short, despite gains in coverage, we haven’t much improved the physical health of the average American, which is ostensibly the objective of the ACA.

Why Not?

To be fair, the ACA is relatively young; most of its provisions didn’t go into effect until 2014. It may well be that more time needs to pass before we start to see a positive effect on people’s health. But there are a few reasons to think those health benefits may never materialize–at least, not to a great extent.

A lot of what plagues modern Americans (especially the poorest Americans) has more to do with behavior and environment than access to a doctor. Health insurance can be a lifesaver if you need help paying for antiretroviral medication, but it won’t stop you from living in a neighborhood with a high rate of violent crime. It won’t make you exercise, or change your diet, or stop you from smoking. It won’t force you to take your medicine or stop you from abusing opioids, and it certainly won’t change how you commute to work (that’s a reference to the rapid increase in traffic deaths in 2015).

Here’s something to consider: A lot of the variables that correlate to health–like income and education–also correlate to the likelihood of having health insurance. If we want healthier Americans, there may be more efficient ways to achieve that than expanding insurance coverage, like improving employment and educational opportunities. Maybe something creative, like Oklahoma City’s quest to become more walker-friendly, could yield better results?

Of course, all things being equal, more insurance coverage is better. But nothing comes without cost, and as a society we want to be sure that benefits justify costs. So far, that’s not clear. This poses an existential question about our current pursuit of universal coverage, and, by extension, the relevance of coverage as a metric for the success of healthcare policy: If insurance isn’t the cure, why are we prescribing it with such zeal?

The CBO Feels the Love

The Congressional Budget Office isn’t known for its awesome marketing or pithy statements. It’s never been recognized by Buzz Feed for its social media use. Nevertheless, the Congressional Budget Office (CBO) is enjoying an unusual amount of love on Twitter.

Here’s how you really know they’ve made it: The title of yesterday’s National Review Morning Jolt was, “The Congressional Box Office is Very ‘In’ Right Now.”

Two nights ago, it tweeted a four-word message with a link to its analysis of the American Health Care Act (AHCA) that has received far more attention than is normal for the CBO twitter account. As of writing this post, the tweet in question has racked up 62 responses, 846 retweets, and 542 likes.

That might not sound like a lot; the truth is, it isn’t. Donal Trump’s tweets, for example, often receive tens of thousands of ‘likes.’ But relative to the usual engagement on the CBO’s tweets, it’s absolutely ridiculous.

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Since January first of 2016, the CBO has tweeted 120 times. The median numbers of responses, retweets, and ‘likes’ to those tweets were respectively 0, 3, and 2. In fact, this latest tweet is responsible for nearly half of all the reactions garnered by the CBO’s account over that time period.

So what does this tell us?

The most obvious insight is that people are paying more attention to the CBO since the administration change. That’s not surprising; the CBO evaluates economic and budget proposals, and there are quite a few shakeups going on in that department right about now. The agency has been firing on all cylinders to keep up with demands from Congress, doubling the frequency of its tweets since Trump took office (.48 tweets/day compared with .24 tweets/day during the previous year).

In the final year of Barack Obama’s presidency, the CBO only averaged 9.5 ‘retweets’ per tweet–and that’s including a January 17th tweet that was responsible for 405 retweets alone (if you exclude that post, the account averaged 5 retweets per post). Since the beginning of the Trump administration, that average has jumped to 39.6 (7.6 if you don’t include the latest viral tweet).

Another insight: Negative feelings about the AHCA are driving the CBO’s recent popularity surge. The only two tweets with significant activity in the past year (look at the spikes in the graphs above) were about the AHCA and the effects of repealing the Affordable Care Act (ACA). A cursory glance through the responses to both tweets reveals that most of the commenters are detractors of the current administration who oppose changes to the ACA.

It would be a mistake to use this as a proxy for national consensus on the AHCA, however. Twitter often skews liberal.

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For the record, the CBO writes a killer blog (I use the term loosely, for obvious reasons). It’s a great source of unfiltered information about economic ideas from Washington. You can sign up to receive email updates from it here. And, if the CBO is reading this, don’t forget about us when you get famous.

Science Has a Reproducibility Crisis

If your Facebook feed is anything like mine, you may have recently heard about how Bill Nye–the Science Guy himself–“slammed” Tucker Carlson on the latter’s evening show on Fox. THIS. (If you live somewhere else you may have been treated to an equally smug reaction from people claiming that Carlson “won.”)

However you feel about it, the timing, coupled with Nye’s reliance on scientific consensus as a proxy for objective correctness, is somewhat serendipitous. Mounting evidence that the results of scientific studies are often not replicable has caused Nature, a prolific scientific journal, to very publicly tighten its standards for submissions as of its latest issue.

In May of 2016, a survey by Nature revealed that over two thirds of researchers surveyed had tried and failed to reproduce the results of another scientist’s study. Over half of them had been unable to reproduce their own results. Fifty two percent of researchers polled said there was a “significant crisis” of reproducibility.

This is a big deal. The ability to replicate the results of studies is crucial to both scientific integrity and progress. Clinical researchers, for example, depend on reliable results from prior trials to form the building blocks of new drug advancements. In the field of cancer biology, merely 10% of results from published literature were found to be reproducible. Meanwhile, the credibility of scientific literature is understandably compromised by dubious, often sensational findings.

The root of the problem, according to Dame Ottoline Leyser, director of the Sainsbury Laboratory at the University of Cambridge, stems from today’s scientific culture. As quoted in BBC, she cites “a culture that promotes impact over substance, flashy findings over the dull, confirmatory work that most of science is about.”

Others blame a pressure to publish. There has also been, in recent years, doubt cast on the integrity of the peer review process, especially with regard to climate science.

Whatever the culprit, plans to combat issues of reproducibility are emerging. Nature has developed a checklist to serve as guidelines for authors submitting writing to the publication. Efforts shouldn’t end there, the journal argues. Reform at all levels of the scientific process could go a long way:

Renewed attention to reporting and transparency is a small step. Much bigger underlying issues contribute to the problem, and are beyond the reach of journals alone. Too few biologists receive adequate training in statistics and other quantitative aspects of their subject. Mentoring of young scientists on matters of rigour and transparency is inconsistent at best. In academia, the ever increasing pressures to publish and chase funds provide little incentive to pursue studies and publish results that contradict or confirm previous papers. Those who document the validity or irreproducibility of a published piece of work seldom get a welcome from journals and funders, even as money and effort are wasted on false assumptions.

Tackling these issues is a long-term endeavour that will require the commitment of funders, institutions, researchers and publishers. It is encouraging that NIH institutes have led community discussions on this topic and are considering their own recommendations. We urge others to take note of these and of our initiatives, and do whatever they can to improve research reproducibility.

What’s Up with U.S. Public Education?

*I wrote this a while ago, but didn’t publish. I was on vacation–sue me. I know the internet has the attention span of a five-year-old, and people aren’t really talking about DeVos anymore, but I’m hoping this is still interesting to someone.

The confirmation of Betsy DeVos as Secretary of Education was perhaps the hardest-won victory of President Trump’s nascent administration. Opposition to the DeVos ran deep enough to require Vice President Pence to cast a historic tie-breaking vote.

To hear it from those on the Left, DeVos is uniquely unqualified for the position. Her lack of personal experience with the public school system, coupled with her one-sided approach to education and purported ignorance of education policy make her unsuited to the position, they argue.

On the Right, the response has been to call into question the political motivations behind opposition to DeVos. Teachers’ unions, after all, are some of the biggest spenders in U.S. politics and their economic interests are threatened by the kind of reforms DeVos’ appointment might foreshadow.

It’s hard to know if either or both sides are being overly cynical. I don’t pretend to have any deep knowledge of DeVos or her new mantle. But one thing seems empirically true: the status quo of public education isn’t above reproach.

More Money, Same (Math, Science, Literacy) Problems

According to data from the National Center for Education Statistics (NCES), per pupil spending on public education has increased roughly 1.7% annually since 1980. Student performance, however, has largely stagnated over the same period by various metrics. To somewhat immodestly quote myself:

The statistics are damning: Literacy rates among 17-year-old Americans peaked in 1971. Standardized testing reveals that math scores peaked in 1986. Test scores show a lack of improvement in math, science, and reading, in which respectively 25%, 22%, and 37% of American students are proficient.

This kind of stagnation isn’t typical among other nations; the United States showed much smaller levels of inter-generational improvement than other OECD nations. Up until about 1975, Americans were scoring significantly higher in math and literacy than Americans born before them. Since 1975, scores have plateaued, even adjusting for race and foreign-born status of students. As [Gallup’s] study states, this implicates the entire US school system.

Test scores aren’t the only indicators of educational dysfunction. Fully 60% of first-year college students need to take remedial courses in either math or English (to be fair, you might attribute this in part to college admission policies). Companies are also reporting longer vacancies for STEM positions and increasingly are forced to delay projects or look outside the U.S. for workers.

To be clear, it’s not that US public schools are producing particularly terrible outcomes (though they’re admittedly middling among the developed world). The real problem is spending on public education is becoming increasingly inefficient; we’re putting more and more resources into it and receiving little or no additional benefit. This is a long-term trend that should be addressed immediately to avoid throwing good money after bad.

In fairness, I have to point out that speaking of public schools in national terms risks obscuring that some public schools–usually found in high-income neighborhoods–perform incredibly well. However, unequal educational outcomes are often considered a bug, rather than a feature, of the public school system, which charter schools have in some cases been able to address with varying degrees of success (though there are charges that this is only possible because charters are given greater latitude in selecting their students).

The Status Quo Is Hard on Teachers, Too

There is a perception among some that public school teachers are profiting hand over fist as a result of teachers’ unions, to the expense of students. But the truth is a little more complicated.

On one hand, strong teachers’ unions have engendered some policies that arguably favor educators over students. Teacher firing rates, for example, are extremely low. This is especially true for tenured teachers, of which an average of 0.2 are dismissed per district for poor performance annually, according to the National Center for Education Statistics.

This is made possible (at least in part) by what effectively amounts to state-sanctioned local monopolies on education. Constraints on demand impede normal market mechanisms from weeding out inefficient suppliers (at least, that’s the theory embraced by school choice advocates). This isn’t illogical, and it explains the somewhat rare rift between black parents and the Democratic party line on school choice.

Consider a thought experiment: Imagine families were forced to shop for food only in their own neighborhoods. What might we expect to happen to the quality of food consumed by people in poor areas? What if we put limits on the amount of new stores that could open?

In this light, it might be accurate to say that policies that require students to attend schools in their district prioritize the school system over the scholars.

On the other hand, a lot of teachers are being harmed by the current system–particularly the young and good ones.

Under current agreements, teacher compensation rates are in large part determined by longevity, both within the profession and teaching district. Young teachers–especially women teaching young children–are often underpaid relative to other professions.

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Source: No Recovery, Gallup 2016

Additionally, collective bargaining agreements have led to pay compression (a narrowing of the pay gap between high and low performers) among teachers, which penalizes high performing teachers and benefits low performing teachers. Correspondingly, there has been a detectable decline in standardized test scores of new teachers since the 1960s.¹

The combination of longevity-driven pay and salary compression has made teaching a less attractive profession for the best candidates, who can earn more in other comparable fields. A 2014 survey by the American Federation of Teachers revealed merely 15% of teachers report high levels of enthusiasm about their profession, despite 89% feeling highly enthusiastic at the beginning of their careers.

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What might we say about an education system that grows increasingly expensive without improvement for students or teachers? We might say that it needs work and we should be open to new ideas, in whatever form they might come. It might also be wise to proceed with caution; for better or worse, this is the system we have right now.

I don’t know if Mrs. DeVos’ agenda will result in improvements. The divergent problems of climbing spending and poor teacher incentive could prove difficult to address simultaneously, especially in the current political climate. But we should all remember the true goal of an education system–public, private, or somewhere in between–is to efficiently increase human capital. How that happens should be of secondary concern.

  1. The study I cited found these results to be true only among female teachers. For some reason, scores of incoming male teachers improved slightly over this period. If anyone has any theories as to why this might be, I’d love to hear them.

Does Portland’s CEO Tax Indicate Progressive Shift to Local Focus?

Starting next year, publicly traded companies operating in Portland, OR will be subject to a new tax surcharge if their CEOs are compensated at a rate exceeding 100 times that of their median employee. Per a Dodd-Frank regulation approved in 2015, public companies must disclose details of CEO and worker compensation beginning in 2017.

Such companies will have to pay an additional 10% to the existing business income tax owed to the city, calculated as 2.2% of their net income less operating losses. Companies whose CEOs earn over 250 times more than their median employee will have to pay a 25% surcharge.

Officials from the city estimate the new tax will apply to about 550 companies and provide between $2.5 million and $3.5 million in new revenue to the city’s general fund, which funds basic public services.

The new measure is the first of its kind; proponents are describing it as an innovative step in countering growing income inequality–one that they hope other cities will adopt. Skeptics of the new tax, most notably the Portland Business Alliance, say  it won’t reduce income inequality and that the city government should instead try to work with local businesses to boost job growth.

Both parties have good points. In isolation, the surcharge isn’t likely to do much in the way of reducing inequality. For starters, under the new SEC law corporations are given wide latitude to calculate median worker earnings (it’s more difficult than it sounds when you have workers in multiple countries with varying types of employment). More practically, large corporations with highly compensated executives do relatively little of their business in Portland. The city, to its credit, seems to understand this and isn’t eager to overplay its hand, hence the relatively small amount of revenue being raised by the tax.

But if enough cities adopted laws penalizing high CEO-worker compensation ratios, it could conceivably make a big enough dent in corporate profits to spur a change (though this might look substantially different from what lawmakers envision).

That seems to be exactly what Portland’s government hopes to catalyze. “It falls to cities to do creative, progressive policymaking,” Mayor Charlie Hales said, “and this is exactly what this is.” The real story here might not be a change to Portland’s tax code, but instead a change to the arenas in which progressive politicians choose to fight for their policies.

Faced with a Republican-dominated federal (and in some cases, state) government, large cities, which overwhelmingly tend to elect Democratic leadership, could increasingly take it upon themselves to implement the changes that elude them on the national level.

In cases where progressives advocate for the expansion of existing laws, they could find it easier to achieve such policy at the local level. This is for two reasons: First, the politics and economics are more likely to align; second, doing so is largely consistent with our system of federalism that allows for local expansion of federal law.

Consider that many large cities have seen fit to implement minimum wages that exceed the levels set by the states in which they reside, which often themselves exceed the $7.25/hour wage set by the federal government.

Focusing on advancing progressive policy at the city level should, in theory, mollify conservative opposition that has long stressed the importance of local governance. However this doesn’t necessarily appear to be the case: two days after Birmingham raised its minimum wage to $10.10/hour, the state of Alabama passed a law retroactively denying cities and towns within the state the ability to set their own minimum wages. The law is being contested in court.