Income distribution, education, health care, and oil prices.
David Henderson rushes in where few right-of-center economists dare to tread. He talks about the income distribution.
The average number of earners per family for the top quintile is 2.16, almost three times the 0.76 average for the bottom quintile.
He has the temerity to suggest that high earners work hard.
For higher education, Kevin Carey and Frederick M. Hess suggest indentured servitude.
What if, instead of borrowing, students could arrange for investors to pay their college bills in exchange for a fixed percentage of their future income… Students would shift the financial risk to lenders who could pool that risk and then package their students bonds into bundled securities that could be sold on the open market. Regulators and investors would set bond parameters—the period of repayment and percentage of earnings—based on certain key criteria. For example: a student with a 2300 SAT score, straight A’s, and an aptitude for computer programming could expect favorable terms, just as he or she would be more likely to receive a scholarship or merit aid today.
Of course, lenders would also be interested in… separating the value added by a given institution from the attributes of its entering students.
If I were an investor in this market, I would be inclined to make Black Swan style bets. Philosophy majors, for example. Sure, a lot of them will end up as pathetic adjunct professors. But some of them will eventually apply their intellect and creativity to business.
I would not invest in any student whose major is something that ends in “studies.”
On health care, Michael Leavitt says,
I believe the key to health care reform in our nation is Medicare reform. Successfully changing Medicare will trigger the rest of the health care sector to follow. That would be better news if changing Medicare were not so politically and bureaucratically complicated.
As the famous Pogo cartoon strip put it, “We have met the enemy, and he is us.”
Having essentially admitted that government is the problem, not the solution in health care, he goes on to offer solutions that strike me as lame.
On oil prices, Ariel Cohen and Owen Graham say,
Massive infrastructure and construction projects generate a heightened demand for oil in China and India, as they did in the United States in the last century and Germany and Japan after World War II.In terms of vehicles on the road, China will surpass the United States by 2015, becoming the largest automotive market in the world.Rising demand, however, is not isolated to East and South Asia.
The oil thirst is mounting in the Persian Gulf and within other major oil-exporting nations due to booming construction projects, growing populations, and government fuel subsidies, which are increasing demand for gasoline.
…Equally important, plans to increase supply through exploration and production between now and 2030 are being frustrated by heightened political risks and mismanagement, including anti-competitive national energy policies in the oil-producing countries.
My question is, how is this news? Did we not know six months ago that India and China were growing? Did we not know six months ago that the oil supplying countries are not exactly models of capitalist efficiency? Yet six months ago, oil prices were a lot lower than they are today.
Jun 13 2008 at 4:49pm
“I would not invest in any student whose major is something that ends in ‘studies'”…or “science”. Real science majors don’t feel the need to advertise that fact in their name.
Jun 13 2008 at 5:07pm
My question is, how is this news? Did we not know six months ago that India and China were growing? Did we not know six months ago that the oil supplying countries are not exactly models of capitalist efficiency? Yet six months ago, oil prices were a lot lower than they are today
But you still believe futures markets contain valuable information?
what do they know that the spot market does not know?
Michael F. Martin
Jun 13 2008 at 5:10pm
Your analogy to indentured servitude isn’t quite apposite.
I would say that the current system of bankruptcy-proof student loans is more like indentured servitude.
The equity-sharing scheme they’re describing is actually more like a joint venture — or just a corporation.
And we already have an institution whereby “investors” can pay a student’s education in exchange for an equity stake in future earnings. It’s called a “family.”
Jun 13 2008 at 6:35pm
The college investment idea is brilliant. It’s also far more progressive than our current system of student loans. With an equity stake, the high earners end up subsidizing the low earners. This should be a dream come true for progressives. Also, under the loan system colleges have a huge incentive to oversell the benefits of college and convince people to take an unhealthy amount of debt. An equity investor would have much more aligned incentives.
For the oil issue, I think Nick Szabo nails it. The collapse of the housing market has led investors to seek other other hard assets to invest in. Thus a lot of money has ended up in commodities.
Jun 13 2008 at 7:06pm
Yale had “income contingent” loans in the 1970s where people paid .4% of their income for a long time. I believe the experience was believed to be unsatisfactory for both the school and the students and the program was eliminated.
Jun 13 2008 at 9:20pm
After a quick search I was able to find an article that mentioned Yale’s contingent loan program:
The article is a little vague on the subject of why Yale discontinued the program, although in one passage it sounds as though it faced an adverse selection problem:
So, many students who think their earning potential will be high opt for more traditional loans, leaving a lot of low-earners who can never repay the expected return on the loan and a few high-earners to pick up the slack.
The article also mentions that the income contingent student loans are “apparently” successful in Australia, but doesn’t (so far as I could see skimming through the article) give details of how the program differs from the Yale program.
Jun 13 2008 at 9:41pm
1. A nice quadrifecta. I think it’s clear that the most important domestic issues for this election are (not necessarily in this order) the economy, energy prices, global warming, and health care.
2. Nice work by Henderson. Obviously the best way to measure household income is by income per worker, with some sort of factor for structural and frictional unemployment. But I think it’s clear that income distribution (i.e. envy) is not an issue unless people are worried about their own income security.
3. Obviously the best reforms for education would be the ones Charles Murray suggested in Losing Ground (school choice, and pre- and post-tests), but the reform suggested by Carey and Heiss is a good one — and it builds upon what Milton Friedman suggested in Free to Choose. (As far as I can tell, the only difference between Friedman’s proposal and this new one is that it would be an investment rather than a tax-deductible gift).
And effay, I agree with your improved version of Dr. Kling’s suggestion. 😀
4. On health care, I’m a bleeding-heart libertarian like you — and Charles Murray! I’d be happy for the government to provide health insurance for everyone by offering vouchers equal to the cost of providing that individual with the equivalent of Medicare or Medicaid. They could take those vouchers and select whatever private plan they wanted (or just stick with Medicare/Medicaid).
5. On oil prices, I’m very confused here. Do we have data to answer questions like whether demand in China and India has increased recently, and whether capital has shifted from housing to oil? Or is all this just speculation, at least for now?
Jun 13 2008 at 11:14pm
rpl and Flip-
From the looks of it, Yale’s plan had a couple major shortcomings. 1) it caps the payback to the original value of the loan. If you’re investing in an equity stake of someone’s life, the return should not be capped. One investment in Bill Gates will fund the education of 100 failed entrepreneurs. 2) The lender needs to give students valuations. An engineering major with perfect SATs might have to only pay back 1% of income. An English Literature major with a 1300 SAT might have to pay back 5% a year. Giving a valuation is the only way to counteract the adverse selection problem. Some might argue it’s not fair to the English literature major. But I don’t see why anybody has the right to a degree in English literature. It’s a luxury good that definitely should not be subsidized. And the current system of giving loans to people who are not cognitively talented enough to benefit from a college education is actually quite disastrous. If someone with a 1700 SAT gets a poor rate, it’s an indication they might be better off learning a trade.
I don’t think this plan will ever happen. Giving a valuation on someone’s life time earning potential would be appalling to the typical progressive educrat. It’s sad though, because it would be more humane than our current funding system, and it would help direct students to the course of study from which they would get the most bang for the buck.
James A. Donald
Jun 14 2008 at 1:18am
Arnold Kling asks:
Six months ago we did not know that Nigeria, formerly a major source of oil, was a failed state. Six months ago we did not know that the Democrats and both presidential candidates were going to kill development of shale oil. Six months ago, it would have been utterly absurd to suggest that Mexico was on the way to becoming a failed state.
These are huge, gigantic, news items that have pretty much transformed the future prospects of oil. As a result of these massive news events, every despot that looks like he might still be in power over the next decade or so is holding back oil in the confident expectation of even higher oil prices yet to come.
Jun 14 2008 at 9:09pm
I find this phrasing unnecessarily hurtful. If you mean to say “low paid” adjunct professors, that’s both less derisive and a more accurate description.
Jun 16 2008 at 10:25am
I remember thinking of the “percentage of your life income” back when some dumb high school kid put 1% of his future earnings on eBay in exchange for $200,000 now. And his entry was filled with typographical and grammatical errors. (I’m getting a lot of the details wrong so you probably can’t google based on what I’ve said.)
However, I could imagine a smart and qualified teacher offering to, say, become the private tutor for a child in place of his last two years of high school. It’s done for free, with the parents and student entering a contract to pay him 1% of income for 20 years or so. (Parents are jointly and severally responsible because the student is likely under 18.)
The math didn’t work out quite right, but I imagine it’s just a matter of tweaking, or taking on 2 or 3 students. And I’m sure there are a lot of students who could benefit from such a situation, with an older person who they know has a stake in their lives giving them wisdom.
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