conversableeconomist

Average College Student, Average Loan

There are two kinds of news stories about student loans. One group of stories emphasize the huge total of student loans. Calculations from the New York Fed for the end of 2011 find: \” The outstanding student loan balance now stands at about $870 billion, surpassing the total credit card balance ($693 billion) and the total auto loan balance ($730 billion).\” The Student Debt Loan Clock, which for illustrative purposes continually updates the total student loan debt outstanding, is on the verge of crossing $1 trillion.

The second group of stories emphasize the problems of particular students who have large loans and great difficulties in paying them back. For example, this New York Times story tells of a New York University graduate (class of 2005) who took out more than $100,000 in loans while completing an interdisciplinary major in religious and women\’s studies. By 2010, she was earning $22/hour working as a photographer\’s assistant–and going to night school so that she could defer the loan payments.

However, neither counting the great mass of student loans nor revisiting the extreme cases of those who have overborrowed offers much guidance for average students wondering whether they should take out the average loan. Sometimes student loans pay off; sometimes not. What facts and concerns should the average student thinking about such loans be keeping in mind?  Christopher Avery and Sarah Turner tackle this question in \”Student Loans: Do College Students Borrow Too Much—Or Not Enough?\” in the Winter 2012 issue of my own Journal of Economic Perspectives. Here are some of the issues raised in their discussion:

Most students are borrowing amounts that are within standard loan guidelines
\”Leaving aside extreme cases, are student borrowing levels assumed by the majority of undergraduate students consistent with their capacity to repay these loans? There is little evidence to suggest that the average burden of loan repayment relative to income has increased in recent years. The most commonly referenced benchmark is that a repayment to gross income ratio of 8 percent, which is derived broadly from mortgage underwriting, is “manageable” while other analysis such as a 2003 GAO study set the benchmark at 10 percent. To put this in perspective, an individual with $20,000 in student loans could expect a monthly payment of about $212, assuming a ten-year repayment period. In order for this payment to accrue to 10 percent of income, the student would need an annual income of about $25,456, which is certainly within the range of expected early-career wages for college graduates. Overall, the mean ratio of student loan payments to income among borrowers has held steady at between 9 and 11 percent, even as loan levels have increased over time …\”

My own guess is that part of what is happening here is that larger loan burdens are being offset by lower interest rates, so the overall ratio of loan payments to income has risen by less than one might otherwise expect. 

The median level of student borrowing isn\’t excessively high.
\”Borrowing among students at the median is relatively modest: zero for students beginning at
community colleges, $6,000 for students at four-year public colleges, and $11,500 for students at private nonprofit colleges. Even at the 90th percentile, student borrowing does not exceed $40,000 outside of the for-profit sector. Examples of students who complete their undergraduate degree with more than $100,000 in debt are clearly rare: outside of the for-profit sector, less than 0.5 percent of students who received BA degrees within six years had accumulated more than $100,000 in student debt. The 90th percentile of degree recipients starting at for-profits have $100,000 in debt; so a nontrivial number of students at for-profits accumulate this much debt, but the situation is still far from the norm.\”

Students thinking about loans should also think seriously about their risk of not finishing a degree–especially at for-profit and less selective institutions.
\”Only 55 percent of dependent students who anticipate completing a BA degree actually do so within six years of graduating high school, while more than one-third of them do not complete any postsecondary degree within six years. Similarly, more than half of dependent students who anticipate completing an associate’s degree do not do so within six years of graduating high school … [A]among students beginning at four-year colleges, private for-profit colleges have dramatically lower average graduation rates (16 percent) for dependent students than do public (63 percent) or private not-for-profit (68 percent) colleges. In addition, there is substantial variation in graduation rates within each
college category, with more-selective colleges typically having higher graduation rates.\”
What are the average employment and wage prospects for your planned major?

Students considering loans should think about the typical employment and pay prospects for that major. 
I do think that many students agonize a little too much over their major, while not agonizing enough over the extent to which they are building a skill set. That said, different majors have different payoffs.
Avery and Turner offer some evidence on this point, and in this post of January 11, 2012, I discuss some basic evidence on \”For What Majors Does College Pay Off?\” In that post, I summarized it this way: \”[W]hen looking at unemployment rates, along with the architects, those who  majored in humanities or in in the arts have relatively high rates, while those who had majored in health and education had relatively low unemployment rates. When it comes to income, the highest income levels are for those who majored engineering, computer science/mathematics, life sciences, social sciences, and business. The lower income went to those majoring in arts, education, and psychology/social work.

Students considering loans should consider that any major leads to a widely dispersed range of employment and pay outcomes.
When you look at pay out of college, there is considerable inequality–and the range of inequality has been generally increasing over the last couple of decades. Thus, the median pay is a better guide to expectations than the average. Especially if you have been a middle-range or lower-middle-range student all through high school, it would be unwise to assume that you are likely to be at the top of the income range after graduation.

Students should look to their high school experience for some guidance as to how they will fare in college. 

About 60% of high school students go on to college. For the purposes of a quick-and-dirty estimate, let\’s say that it\’s the top 60% by academic qualifications. Thus, if you are at, say, the 70th percentile of your high school class, you are in the middle of those going on to college. Given that many of those who go on to college don\’t finish a degree, being at the 70th percentile of your high school class may mean that you can expect to be ranked in the bottom quarter of those who complete a college degree. Sure, some students will improve dramatically from high school to college, but it\’s a statistical fact that half of college graduates will be below the median, and one-fourth will be in the bottom quarter, and especially if you are advising a large number of high school students, it\’s unrealistic to tell each of them that that they can all end up in the upper part of the college distribution.

Some students borrow too little: for example, they don\’t take advantage of the the subsidy implicit in the student loans for which they are eligible, or they run large credit-card debts when it would be much cheaper to use student loans to borrow.
\”[O]ne in six full-time students at four-year institutions who are eligible for student loans do not take up such loans—thus forgoing the subsidy … Another possible sign of the underuse of student loans is that a number of students are carrying more-expensive credit card debt when they could instead be borrowing through student loans. Among students who entered college in 2004, 25.5 percent of those who were still enrolled in 2006 and 37.7 percent of those who were still enrolled in 2009 reported that they had credit card debt. But between one-third and one-half of these students (45.6 percent of students with credit card debt in 2006 and 38.5 percent of students with credit card debt in 2009) had
not borrowed from the Stafford loan program. Carrying credit card debt without maximizing Stafford borrowing burdens students with unnecessarily inflated interest rates—a choice that can interfere with a student’s ability to finish a degree.\” In addition, there are a number of students working more than 20 hours per week, and at least some of them might have a better chance of finishing their degree if they borrowed more and didn\’t try to work many hours.

Clearly, some of this advice would, if taken seriously, discourage some students from taking out loans to attend college. Given the price of higher education, I think that hard choice needs to be faced. Several decades ago, it was a low-risk option to spend a few years working part-time and attending a big public university: if it didn\’t end up in a degree, at least you didn\’t rack up much or perhaps anything at all in loans and you could learn something and have a good time and grow up a little along the way. But at current prices, that part-time job won\’t pay the higher education bills at most institutions. Sending a message that all students should try a few years of college, even if it requires taking on tens of thousands of dollars in loans, is borderline irresponsible.

Before students take on a heavy weight of loan burdens that could loom over their financial life for several decades, they need to confront some legitimate questions:

  • Are you attending a college–especially a for-profit–with a high drop-out rate?
  • Are you planning on a major (or a set of classes that will build real skills) so that you have good employment prospects?
  • How strong is your personal motivation for attending classes and finishing a degree?
  • Does your high school class ranking give you reason to believe that you have the ability to succeed?
  • If your higher education experience doesn\’t turn out as you hope, and you don\’t finish the degree, or you don\’t end up with a job that pays substantially less with the median in your field, will you feel OK with the loans you have taken out?
  • Are you taking out an average amount of loans, so that you will be committing no more than about 10% of your income to repaying them? 

Given the growing wage gap between those with a college degree and those without, it will make economic sense for lots of students to borrow, especially at today\’s rock-bottom interest rates. But with student loans, we\’re talking about young adults often in their late teens and early 20s making financial decisions that could be with them for decades to come. It\’s a transaction that should be made with caution and consideration.

conversableeconomist

Fading Private Health Insurance

Today, the U.S. Supreme Court is scheduled to start hearing the oral arguments over President Obama\’s signature health-care  reform legislation. I\’ll save you from my personal uninformed blathering about constitutional law–it will doubtless be easy to find such opinionizing elsewhere on the web. But as a backdrop, it seemed useful to note the basic fact that in the U.S., employer-provided health insurance is fading.

Here\’s a figure based on data from the U.S. Census Bureau (see Table HIB-1 here). The top line shows that employer-based health insurance covered 65% of the U.S. population in 2000, and 55% of the U.S. population in 2010. This decline seems to have accelerated since the start of the Great Recession, but it was well underway already. On the other side, the share of the U.S. population covered by Medicaid has risen from 10% in 2000 to 16% now, and the proportion of Americans without health insurance coverage has risen from 13.6% in 2000 to 16.3% in 2010. Other categories not shown in the figure have changed less. Direct purchase of private health insurance is down a bit, from 10.6% of the population in 1999 to 9.8% in 2010. Medicare and military health insurance have expanded a bit, with Medicare rising from 13.4% of the population in 1999 to 14.5% in 2010, and military health insurance rising from 3.1% of the population in 1999 to 4.2% of the population in 2010. 

The overall pattern of the Census Bureau figures are replicated by other data, like the phone surveys done for the National Institute for Health Care Reform, and reported in its March 2012 report \”Great Recession Accelerated Long-Term Decline of Employer Health Coverage,\” by Chapin White and James D. Reschovsky. As White and Reschovsky emphasize: 
\”The recent experience with employer-sponsored health insurance could be viewed as an acute illness aggravating a chronic condition. The acute illness—the sluggish economy and weak employment situation—likely will resolve at some point. But the underlying chronic condition—rising health care costs—likely will persist. Rising health care costs help explain why employers have become less and less likely to offer employer-sponsored coverage as a fringe benefit. Rising costs also have prompted employers to require workers to contribute a larger share of premiums and shoulder increased patient cost sharing at the point of service through higher deductibles, coinsurance and copayments. If health care cost increases continue to outpace wage increases, more workers are likely to conclude that health coverage is not worth the cost. … 
\”There has been vigorous debate about the effects of national health reform on employer-sponsored insurance. The best estimates project that health reform will have little net impact, but estimates vary widely. The debate, however, often misses a key point—employer-sponsored insurance is likely to continue to erode with or without health reform, especially among lower-income families and those employed by small firms. … Perhaps more central to the long-term future of employer-sponsored insurance is whether the health care delivery and payment system reforms, which are other important components of health reform, succeed in slowing the growth of health care costs and health insurance premiums faced by employers and employees.\”

It\’s worth remembering, for those who haven\’t read the history, that the predominance of employer-provided health insurance in the U.S. economy is an historical accident. Melissa Thomasson offers a nice overview in \”From Sickness to Health: The Twentieth-Century Development of U.S. Health Insurance,\” in the July 2002 issue of Explorations in Economic History, but that\’s not freely available on-line. However, Thomasson offers a brief overview at the Economic History Association website here.

Thomasson points out that the number of Americans with health insurance went from 15 million in 1940 to 130 million in 1960. Blue Cross/Blue Shield plans began to be established in the 1930s. Then in World War II, the fateful decision was made to encourage employers to provide health insurance, and not to tax individuals on the value of that health insurance they received. Here\’s Thomasson:

\”During World War II, wage and price controls prevented employers from using wages to compete for scarce labor. Under the 1942 Stabilization Act, Congress limited the wage increases that could be offered by firms, but permitted the adoption of employee insurance plans. In this way, health benefit packages offered one means of securing workers. … [I]n 1949, the National Labor Relations Board ruled in a dispute between the Inland Steel Co. and the United Steelworkers Union that the term \”wages\” included pension and insurance benefits. Therefore, when negotiating for wages, the union was allowed to negotiate benefit packages on behalf of workers as well. This ruling, affirmed later by the U.S. Supreme Court, further reinforced the employment-based system.

\”Perhaps the most influential aspect of government intervention that shaped the employer-based system of health insurance was the tax treatment of employer-provided contributions to employee health insurance plans. First, employers did not have to pay payroll tax on their contributions to employee health plans. Further, under certain circumstances, employees did not have to pay income tax on their employer\’s contributions to their health insurance plans. The first such exclusion occurred under an administrative ruling handed down in 1943 which stated that payments made by the employer directly to commercial insurance companies for group medical and hospitalization premiums of employees were not taxable as employee income. While this particular ruling was highly restrictive and limited in its applicability, it was codified and extended in 1954. Under the 1954 Internal Revenue Code (IRC), employer contributions to employee health plans were exempt from employee taxable income. As a result of this tax-advantaged form of compensation, the demand for health insurance further increased throughout the 1950s …\”

I have no insight into how the U.S. Supreme Court will rule on the Obama health care legislation. But the U.S. health care system continues to face severe problems: tens of millions of uninsured Americans with their share of the U.S. population rising, rises in health care costs that continually outstrip inflation, and the ongoing decline of employer-provided health insurance, the main mechanism through which a majority of Americans have received their health insurance in the last half-century. Whether the Affordable Care Act is ruled constitutional or not, it\’s abundantly clear that it won\’t be a final answer to these issues; indeed, it may well end up being a transitional piece of legislation that needs to be thoroughly revisited and reworked. For example, the Congressional Budget Office recently estimated that under the Affordable Care Act, after taking into account that some firms will expand health insurance coverage and others will contract or not offer it, by 2019-2022, about 3-5 million fewer people on net will have employer-sponsored coverage as a result of the law.

Note:  Thanks to Danlu Hu for putting together the figure on health insurance coverage.

conversableeconomist

Leverage and the Business Cycle

 Theories of leverage cycles have been around for awhile: to name a few examples, in the work of Irving Fisher back in the 1930s, Hyman Minsky in the 1970s, and John Geanakoplos in the last decade or so. Here, I\’ll offer a quick description of the theory of leverage cycles, and why it makes a plausible explanation for financial crises and at least some recessions. There has been some question about how well the data supported such a story. I\’ll offer some basic graphs suggest that the Great Recession in the U.S. economy can be interpreted (at least in part) as a leverage cycle. In addition, in a recent working paper called \”When Credit Bites Back: Leverage, Business Cycles, and Crises,\”  Oscar Jorda, Moritz Schularick, and Alan M. Taylor (no relation) present evidence on the importance of leverage cycles based on data from almost 200 recessions in 14 advanced economies between 1870 and 2008. If sharply rising leverage poses systematic macroeconomic hazards, it suggests that central banks and other policy-makers should be paying attention to this variable as the economy evolves.

 \”Leverage\” is the term that economics and finance people use for the extent of borrowing. To illustrate the theory of the \”leverage cycle,\” I\’ll first use an example from housing markets. Say that the housing market is using a general rule (with a few exceptions) that people need to have a 20% down-payment. But over time, housing prices seem to be stable or rising, so that 20% begins to seem overly stringent. More loans get made with a 10% downpayment, or no down-payment, or subprime mortgages to those who wouldn\’t have qualified to borrow earlier, and all the way to the infamous NINJA loans, made when the borrower didn\’t provide any financial information: that is, \”No Income, No Job or Assets.\” The greater ease of borrowing means more purchasing power to buy houses, and the rising price of houses that results makes it seem like even lower down payments make sense. The same logic leads people to increase their leverage by taking out bigger loans over longer terms, or  of the loan, or mortgages that reset with much higher payments.

But of course, as the down payments fall and leverage increases in these other ways, borrowers become much more vulnerable to a downturn in prices.  And a leverage cycle pops, not only borrowers but those holding the debt, like banks and financial institutions, are vulnerable as well.

Now extend the example of increase borrowing (\”leverage\”) for housing across all sectors of the economy. When the economy is going well, the risk of default looks low, and borrowing expands: that is, more borrowing for housing, for cars, for credit cards, for student loans. More borrowing by businesses and by financial firms. The greater borrowing pushes up the economy for a time, but borrowing can\’t stay on a rising trend forever. When the bubble bursts, those who have overborrowed still need to make their interest payments. Some will be unable to do so, and many will make the payments but retrench for a time, trying to minimize their borrowing and reduce their debt levels. Just as the climbing leverage in the upward part of the cycle supported an expanding economy, the falling leverage in the downward part of the cycle magnifies the downward effects.

The claim isn\’t that leverage cycles explain all recessions, but rather that they can help explain why some recessions–often those that also include a financial crash–can turn out to be so severe. The U.S. data on borrowing certainly suggests that leverage went through a leverage cycle. Here are two graphs from FRED, the ever-useful website run by the St. Louis Fed. The first shows total bank credit in proportion to GDP. Total bank credit was about 45% of GDP, give or take a bit, from 1975 through the mid-1990s. But then it starts rising, hitting 50% of GDP by about 2002, and then shooting up to about 67% of GDP by 2009. It has dropped since then, but is still above 60% of GDP.  But when leverage rises this fast, it has \”bubble\” written all over it.
 

A second table tells a similar story, but this time using total credit market debt owed–that is, including bank debt along with bonds and commercial paper and other forms of borrowing–divided by GDP. One might expect an economy\’s ratio of bank credit/GDP or total credit/GDP to rise gradually over time, as financial institutions in a country become more developed and sophisticated. But notice that it takes 28 years for total credit market debt to rise from 150% of GDP in 1975 to 300% of GDP in about 2003–and then just six years for it to rise from 300% of GDP to 400% of GDP. Also, notice that in earlier recessions, these measures of leverage flatten out, but don\’t drop off noticeably. The Great Recession looks like a time when, unlike other recessions in this time period, borrowers and lenders as a group felt a need to pull back dramatically. Indeed, that\’s one way to illustrate what a \”financial crisis\” means on a graph.

Jorda, Schularick and Taylor sift through data on nearly 200 recessions in advanced economies from 1870 to 2008. Some involved financial crises; many did not. They write:

\”We document a new and, in our view, important stylized fact about the modern business cycle: the
credit-intensity of the expansion phase is closely associated with the severity of the recession phase. In other words, we show that a stronger increase in nancial leverage, measured by the rate of growth of bank credit over GDP in the boom, tends to lead to a deeper subsequent downturn. Or, as the title of the paper suggests–credit bites back. This relationship between leverage and the severity of the recession is particularly strong when the recession coincides with a systemic financial crisis, but can also be detected in \”normal\” business cycles.\”

In particular, they find that when an expansion has been driven by a credit boom, the recessions that follow are more likely to involve a severe drop in lending, which in turn is felt most greatly in a decline in investment:

\”In a normal recession the drop in private loans mirrors the drop in real GDP per capita and the amount of leverage appears to have almost no eff ect. Thus at the six year mark, the cumulated drop is also about 5%. Contrast that with the severe contraction in lending during a nancial crisis recession. With average levels of excess leverage, lending activity drops by three times more than in normal times, about 15%. Measured against the decline in output during the same circumstances, the ratio is about 2-to-3. … [W]here is the drop in lending most acutely felt? … In normal recessions, the cumulative decline in the investment to GDP ratio is roughly on a par with the decline in output (but since we report the ratio, this naturally means that investment is declining faster than output). These declines are far more dramatic during fi nancial crisis recessions, almost three times as large in magnitude.\”

A key policy question from the Great Recession is what policy-makers should be looking at. Saying that it should be national policy to make sure that housing prices don\’t rise too fast or don\’t fall, or that the stock market won\’t fall, seems unrealistic and counterproductive in a market-oriented economy. (After all, part of what drives a leverage cycle is a belief that the danger of falling prices is so low.) But data on bank credit and total credit are available on a regular basis. At least a couple of years before the financial crisis first hit in late 2007, it would have been possible for the central bank and financial regulators to take various steps to slow the credit boom. Of course, it would have been politically unpopular at that time for them to do so! But as the economy staggers through a shaky recovery, with unemployment rates predicted to stay above 8% into 2014, maybe serious policy-makers can find the courage to forestall the next credit boom before it leads to such a devastating crash.

conversableeconomist

The Economics of Copyright

The basic tradeoff of copyright law is well-understood: It seeks to encourage investment in creation and dissemination of new works, by providing protection of intellectual property. But what is the economic evidence on whether the amount of protection provided correct and appropriate?  Ruth Towse provides a nice overview in \”What We Know, What We Don\’t Know, and What Policy-makers Would Like Us to Know About the Economics of Copyright,\” appearing in December 2011 issue of Review of Economic Research on Copyright Issues.

As Towse writes: \”Governments the world over are looking for evidence on the economic effects of copyright law, the more so since the increased emphasis in government growth policy on the role of the creative industries has led to the justification of copyright as a stimulus to the economy. What they usually get in response to calls for evidence are persuasive statements from stakeholder interest groups that have sufficient funds for lobbying.\” Here are some lessons that Towse draws from the existing evidence:

Copyright terms are too long
\”Almost all economists are agreed that the copyright term is now inefficiently long with the result that costs of compliance most likely exceed any financial benefits from extensions (and it is worth remembering that the term of protection for a work in the 1709 Statute of Anne was 14 years with the
possibility of renewal as compared to 70 years plus life for authors in most developed countries in the present, which means a work could be protected for well over 150 years).\”

Extending copyright protection retroactively never makes sense
\”One point on which all economists agree is that there can be no possible justification for retrospective
extension to the term of copyright for existing works since it defies the economic logic of the copyright incentive, something that nevertheless has been enacted on several occasions. … Perhaps the most notorious case was the CTEA (Sonny Bono or Mickey Mouse) extension in the USA [the Copyright Term Extension Act of 1998] which was also followed up by the European Union, thereby handing out economic rents to the rich and famous of the entertainment world and, more likely, to their descendants.\”

Copyright is too one-size-fits-all
\”[T]he scope of copyright is very broad and nowadays covers many items of no commercial value that were never intended to be commercialized, as is the case with a great deal of material on social-networking sites. This raises the question of the incentive role of the scope of copyright since it offers the same ‘blanket’ coverage for every type of qualifying work. In general, the lack of discrimination in this ‘one-size-fits-all’ aspect of copyright is another subject on which economists are agreed: in principle, the incentive should fit the type of work depending upon the investment required, the potential durability of the work and so on – computer software and operas do not have much in common. This applies as much to the term as to the scope of copyright; some works retain their value over a very long period while others lose it very quickly. The rationale for this lack of discrimination, however, is that ‘individualizing’ incentives would be prohibitively costly both to initiate and to enforce. As it is, that copyright is recognized to have become excessively complex and therefore very costly for users and authors.

Copyright will often be managed collectively
\”For many rights, such as the public performance right, individual authors and performers cannot contract with all users and the solution is collective rights management. That minimizes transaction costs for both copyright holders and users of copyright material but introduces monopoly
pricing and blunts the individual incentive — another trade-off. … Most economists agree that collective rights management is necessary in those circumstances in order for copyright to be practicable.\”
 
Only superstars profit much from copyright
\”Research on artists’ total earnings including royalties shows hat only a small minority earn an amount comparable to national earnings in other occupations and only ‘superstars’ make huge amounts. Copyright produces limited economic rewards to the ‘ordinary’ professional creator; on the other hand, what the situation would be like absent copyright protection cannot be estimated.\”

Copyright can encourage protecting rents ahead of actual creativity
\”[E]conomists have long had concerns that copyright has a moral hazard effect on incumbent firms, including those in the creative industries, by encouraging them to rely on enforcement of the law rather than adopt new technologies and business models to deal with new technologies. … It is well-known that creative industries have spent huge amounts of money lobbying governments for increased copyright protection both through strengthening the law and stronger enforcement, not only
within national boundaries but also through international treaties.\”

A Policy Proposal: Renewable Copyright
\”Copyright could be become more similar to a patent by having an initial term of protection of a work, say of 20 years, renewable for further terms. …  The advantage of this is twofold: it enables a ‘use it or lose it’ regime to function and, more relevant to the economics of copyright, it enables the market to function better in valuing a work (the vast majority of works, as we know, are anyway out of print because they are deemed to have no commercial value while the  copyright is still valid); knowing that renewal would be necessary would also alter contractual terms between creators and intermediaries, thereby improving the efficiency of contracting and the prospect of fairer contracts.\”

In my own Journal of Economic Perspectives, Hal Varian wrote a nice article on \”Copying and Copyright\” in the Spring 2005 issue. Hal discusses useful insights about the appropriate height, width, and length of copyright, and how the existence of copyright affects pricing decisions. I found especially memorable and amusing his pocket overview of the U.S. history of copyright: that is, ignoring foreign copyrights through much of the nineteenth century, because there were relatively few U.S. authors with an international reputation to protect, and pirating works from the United Kingdom was free. Here\’s Varian (footnotes omitted):

\”The U.S. Copyright Act of 1790 was modeled on the Statute of Queen Anne, and it offered a 14-year monopoly to American authors, along with a 14-year renewal. Note carefully the emphasis on American. Foreign authors’ works were not protected by the American law. In contrast, many other advanced countries, such as Denmark, Prussia, England, France and Belgium, had laws respecting the rights of foreign authors. By 1850, only the United States, Russia and the Ottoman Empire refused to recognize  international copyright.

\”The advantages of this policy to the United States were quite significant: it had a public hungry for books and a publishing industry happy to provide them. A ready supply of market-tested books was available from England. Publishing in the United States was virtually a no-risk enterprise: whatever sold well in England was likely to do well in the United States. 

\”American publishers paid agents in England to acquire popular works, which were then rushed to the United States and set in type. Competition was intense, and the first to publish had an advantage of only days before they themselves were subject to competition. As might be expected, this unbridled competition led to very low prices: in 1843, Dickens’s Christmas Carol sold for six cents in the United States and $2.50 in England.

\”However, there were some mitigating factors. Publishers sometimes paid well-known English authors for advance copies of their work, since priority was critically important for sales, and, according to Plant (1934), some English authors received more money from American sales, where they held no copyright, than from English sales, where copyright was enforced.

\”Throughout the nineteenth century, proponents of international copyright protection lobbied Congress. They advanced five arguments for their position: 1) it was the moral thing to do; 2) it would help stimulate the production of domestic works; 3) it would prevent the English from pirating American authors; 4) it would eliminate ruthless domestic competition; and 5) it would result in better-quality books.

\”The rest of the world was far ahead of the United States in copyright coordination. In 1852, Napoleon III issued a decree indicating that piracy of foreign works in France was a crime; he was motivated by the hope of reciprocal arrangements with other European countries. His action led to a series of meetings, culminating in the Bern conventions of 1883 and 1885. The Bern copyright agreement was ratified in 1887 by several nations, including Great Britain, France, Germany and Spain—but not the United States.
It was not until 1891 that Congress passed an international copyright act.

\”The arguments advanced for the act were virtually the same as those advanced in 1837. However, the intellectual climate was quite different. In 1837, the United States had little to lose from copyright piracy. By 1891, it had a lot to gain from respecting international copyright, the chief benefit being the reciprocal rights granted by the British. On top of this was the growing pride in homegrown American literary culture and the recognition that American literature could only thrive if it competed with English literature on an equal footing. Although the issue was never framed in terms of “dumping,” it was clear that American authors and publishers pushed to extend copyright to foreign authors to limit cheap foreign competition—such as Charles Dickens.

\”The only special interest group that was dead opposed to international copyright was the typesetters union. The ingenious solution to this problem was to buy them off: the Copyright Act of 1891 extended protection only to those foreign works that were typeset in the United States! This provision stayed in place until 1976.\”

conversableeconomist

How Has Structured Finance Evolved?

As Mahmoud Elamin and William Bednar of the Cleveland Fed point out: \”Structured finance has been vilifi ed as the culprit behind the worst recession since the Great Depression. Every aspect of its design has been disparaged: faulty underlying loans, bad incentives for originators, dubious AAA ratings and mispriced risks.\” In the March 2012 issue of Economic Trends, Cleveland Federal Reserve, they update the story by asking: \”How Is Structured Finance Doing?\”

Start with defining terms: \”Structured finance securities are debt instruments collateralized by a securitization pool of loans. The pool’s cash inflow supports the cash outflow to pay the securities off. The securities are divided into multiple tranches characterized by their seniority. The most senior tranche is paid first; the second senior gets paid only after the first senior is paid and so on. Investors buy the tranche that best fits their risk appetites. We look at three products that fall under the general
heading of structured finance: mortgage-backed securities (MBS), asset-backed securities (ABS),
and collateralized debt obligations (CDO). MBS are backed by mortgages, ABS are backed by assets
such as credit card loans, auto loans, student loans, and the like, while CDO are backed by investment grade loans, high-yield loans, other structured finance products, and the like.\”

What happened in each of these three categories? In the first category, the mortgage market, the total value of mortgage originations dropped off after about 2003. However, the share mortgage originations that were packaged as securities has continued to rise. Here are a couple of illustrative figures.


Why has the share of mortgages packaged as securities continued to rise? Elamin and Bednar name three possible reasons, but don\’t try to quantify them: a rise in private demand for such instruments, polices of government-sponsored enterprises like Fannie Mae and Freddie Mac, and the Federal Reserve \”quantitative easing\” policies, which have involved direct purchase of about a $1 trillion in mortgage-backed securities.

The second broad category of securitized finance is asset-backed securities. The biggest categories here are securities backed by auto loans and by credit card loans, with securities backed by student loans as another large category. Issuance of asset-backed securities dropped off by about half after 2006. In addition, the share of total auto-loan debt that is securities fell from above 40% to 30%, while the share of credit card debt repackaged as asset-backed securities fell from more than 30% to around 15%.

The third category is collateralized debt obligations. This is the category of structured finance most thoroughly implicated in the housing price bubble. Issuance of these securities rose from less than $100 billion in 2003 to about $500 billion in both 2006 and 2007, at the peak of the housing bubble, and since has fallen to near-zero. In addition, these collateralized debt obligations at the peak were largely based on mortgages, especially subprime mortgages. These were the financial instruments that started off with subprime mortgages, and then were divided into tranches. The junior tranches agreed to take the first of any losses that arose. Thus, the senior tranches–seemingly protected by the junior tranches–managed to get AAA credit ratings, and thus regulators let banks hold these \”safe assets.\” When the housing bubble burst, and many of these subprime mortgages went sour, the popping of the housing market bubble had leaked into the banking system. Today, CDOs aren\’t based on housing; instead, what remains of the market is main involve securitizing investment-grade bonds and high-yield loans.

conversableeconomist

Want to Watch Bernanke Lecture?

From a Federal Reserve press release:

\”In March 2012, Chairman Ben S. Bernanke will deliver a four-part lecture series about the Federal Reserve and the financial crisis that emerged in 2007. The series begins with a lecture on the origins and missions of central banks, followed by a lecture that will discuss the role and actions of the Federal Reserve in the period after World War II. In the final two lectures, the Chairman will review some of the causes of, and policy responses to, the recent financial crisis, focusing specifically on the actions of the Federal Reserve.\”

The first lecture is today at 12:45 EST. Here\’s the schedule for all four lectures. Of course, you don\’t need to watch live. You can watch later, or wait until a transcript is available. For details, go to the link above.These lectures are being delivered to an undergraduate course at the George Washington University School of Business, so I expect that they will be pedagogical in tone and focus on giving a lot of background information–not on breaking news about imminent changes in monetary policy. But for teachers and students, inside academia and out, it\’s a chance to hear it all from the horse\’s mouth.

Lecture 1: Origins and Mission of the Federal Reserve
Watch live on March 20, 2012 12:45 p.m. ET

Lecture 2: The Federal Reserve after World War II
Watch live on March 22, 2012 12:45 p.m. ET

Lecture 3: The Financial Crisis and the Great Recession
Watch live on March 27, 2012 12:45 p.m. ET

Lecture 4: The Aftermath of the Crisis
Watch live on March 29, 2012 12:45 p.m. ET

conversableeconomist

Public Higher Education Gets Less State and Local Support

The association of State Higher Education Executive Officers has published their report on \”State Higher Education Finance FY 2011.\” The basic story is rising enrollments in public institutions of higher education, but falling per-student support.

The blue bars in the figure show educational appropriations for public higher education [per full-time equivalent student, adjusted for inflation. The support starts relatively high at $8,156 per student in 1987), sags in the early 1990s to $7,054 in 1993, rises again in the late 1990s and early 2000s as high as $8,316 in 2001, drops off in to $6,875 in 2005, rises to $7,488 in 2008, and now has dropped off to $6,290 in 2011.

Meanwhile, tuition revenue per full-time student is gradually rising. Overall, it rises from $2,422 in 1986 to $4,774 in 2011.

And over these 25 years, the number of full-time equivalent students in public higher education has risen from about 7 million back in 1986 to almost 12 million in 2011.

Put these together, and here\’s tuition as a share of public education total revenue, rising from 23.2% back in 1986 to 43.3% at present.

This pattern may be here to stay. As the report states: \”In the past decade these two recessions and the larger macro-economic challenges facing the United States have created what some are calling the “new normal” for state funding for public higher education and other public services. In the “new normal” retirement and health care costs simultaneously drive up the cost of higher education, and compete with education for limited public resources. The “new normal” no longer expects to see a recovery of state support for higher education such as occurred repeatedly in the last half of the 20th century. The “new normal” expects students and their families to continue to make increasingly greater financial sacrifices in order to complete a postsecondary education. The “new normal” expects schools and colleges to find ways of increasing productivity and absorb ever-larger budget cuts, while increasing degree production without, we hope, compromising quality.\”

I would add only a couple of thoughts:

1) Almost everyone believes, or claims to believe, that the economic future of the United States is intertwined with building greater human capital. But that isn\’t reflected in our spending choices. I\’d be the first to say that spending isn\’t everything–but it\’s something! Here\’s a post from July 19, 2011, on \”How the U.S. Has Come Back to the Pack in Higher Education.\” The U.S. used to be the world leader in share of population going to higher education, but no longer.

2) The main budgetary mechanism for encouraging additional higher education is using student loans. This avoids adding to direct spending for higher education, but places a greater share of the risk of not completing a degree, or not having the degree lead to a well-paid job, on the student. Also, public higher education isn\’t expanding fast enough to absorb those who want to try college, so many of those who receive these loans are headed to the for-profit educational system. Here\’s a February 23, 2012, post on \”For-Profit Higher Education.\”

conversableeconomist

Minnesota: Paying More Federal Taxes, Receiving Less Federal Spending

Here\’s an op-ed column of mine that appeared in the (Minneapolis) Star Tribune on Sunday, March 18. I\’ll put the opening paragraphs here, and all of it below the fold:

\”Minnesota taxes: More blessed to give?\”
\”Minnesota pays its fair share — and then some — in federal taxes, while federal spending here is decidedly below average. Why the imbalance?\”

The great state of Minnesota rides in a lifeboat with 49 other states, tossed by the wind and waves of global politics and the global economy.

States vary in many ways — population, size of the state economy, age distribution, industry mix, geography. No one should expect that they will all make the same contribution to keeping the lifeboat afloat.

But still, it\’s eyebrow-raising to discover that Minnesota is one of the states consistently putting a lot more into the federal budget than it gets back. That\’s the message when you compare federal taxes paid by residents and businesses within each state with federal spending in each state.

\”Minnesota taxes: More blessed to give?\”
\”Minnesota pays its fair share — and then some — in federal taxes, while federal spending here is decidedly below average. Why the imbalance?\”
Article by: TIMOTHY TAYLOR

The great state of Minnesota rides in a lifeboat with 49 other states, tossed by the wind and waves of global politics and the global economy.
States vary in many ways — population, size of the state economy, age distribution, industry mix, geography. No one should expect that they will all make the same contribution to keeping the lifeboat afloat.
But still, it\’s eyebrow-raising to discover that Minnesota is one of the states consistently putting a lot more into the federal budget than it gets back. That\’s the message when you compare federal taxes paid by residents and businesses within each state with federal spending in each state.
The most recent data seems to be for 2009. The U.S. Census Bureau, in its Consolidated Federal Funds report, breaks down domestic federal spending to the state level.
It includes government payments to individuals, procurement, grants, and the salaries and wages of federal employees. Minnesota received $45.7 billion in federal spending in 2009.
On the tax side, the Internal Revenue Service Data Book for 2009 reports that gross federal taxes collected from Minnesota in 2009 were $67.6 billion.
This includes all federal taxes: individual and corporate income taxes; payroll taxes for Social Security and Medicare, and estate, gift and excise taxes. Minnesota has an above-average per capita income, and so it pays more than average in federal taxes.
Do the math: In 2009, Minnesota received about 68 cents in federal spending for every $1 paid in federal taxes. Putting the tax and spending numbers in per-capita terms is especially striking.
For the United States as a whole, federal spending was $10,395 per person in 2009.
For Minnesota, federal spending was $8,676 per person — about 16 percent below the average.
For the United States as a whole, federal taxes paid were $7,690 per person in 2009.
In Minnesota, federal taxes paid were $12,763 per person — about 66 percent above average. (Of course, the U.S. government had an enormous budget deficit in 2009, so the average spending per person far exceeded the average taxes per person.)
This general pattern has held for a number of years. Analysts at the Tax Foundation calculated that if you rank states on the basis of federal taxes paid per capita, Minnesota ranked from 11th to 15th over the years from 2001 to 2005. But when states are ranked on the basis of federal spending per capita, Minnesota ranked from 45th to 48th.
In the Tax Foundation\’s combined rankings — that is, federal spending received per dollar of federal taxes paid — Minnesota ranked from 45th to 48th over the 2001-2005 time period.
Writers at the Economist magazine performed similar research last summer. By their calculations, over the 20-period from 1990 to 2009, this gap between federal taxes paid by Minnesotans and federal spending received by Minnesotans added up to the equivalent of two years worth of gross state product for Minnesota.
By this measure, Minnesota ranked 49th among the states over this time in federal spending received relative to federal taxes paid, ahead of only Delaware.
What leads to a situation where a state is consistently sending more to the federal government than it is receiving back? Or vice versa?
Along with Minnesota and Delaware, other states with a habit of paying more in federal taxes than they receive in federal spending include New Jersey, Illinois, Connecticut, New York and New Hampshire.
States typically at the other end of the range, with a pattern of more federal spending received than taxes paid, include New Mexico, Mississippi, West Virginia, Alabama, North Dakota and Alaska.
No one explanation applies equally to all of these states, but following are four main factors.
Income. States with a pattern of paying more to the federal government than they receive are all above-average in income. Also, Delaware, New York and Illinois are all places with large numbers of major corporate headquarters, thus boosting the corporate taxes from those states.
Poverty. States with fewer people below the poverty line have less need for federal support through antipoverty programs like food stamps or Medicaid. Minnesota ranks fourth among states for lowest poverty rate. New Hampshire, Delaware, New Jersey and Connecticut all rank in the top 10 for lowest poverty rate. On the other side, Mississippi, New Mexico, Alabama and West Virginia all rank among the top eight in states with the highest poverty levels.
Elderly. A large proportion of elderly means a group whose members typically have lower incomes and are receiving Social Security and Medicare benefits. Minnesota ranks 40th among states in share of population older than 65. West Virginia and North Dakota are in the top five.
Defense. Spending on defense is quite unevenly distributed across states. Some Minnesota companies have defense contracts, but the state does not have large military bases, national research laboratories or the truly enormous defense contractors. Defense spending in 2009 averaged $1,753 per person for the United States as a whole; in Minnesota, federal defense spending averaged $786 per person.
Of course, it would be silly to argue that every state should receive just as much in federal spending as it contributed in tax revenue. The United States is more than the sum of 50 states.
Even if Minnesota doesn\’t have large military bases and ports, people here benefit from national defense spending.
If someone spends their working life in Minnesota, then retires and draws Social Security in New Mexico, it doesn\’t seem unfair in the least. States with higher incomes should pay more in taxes, and states with higher poverty should receive more federal support.
Nonetheless, Minnesota\’s status as a state that consistently pays more to the federal government than it receives should make us all ponder.
Higher federal spending on national defense, antipoverty programs, transportation, health insurance and more will typically lead to a situation in which Minnesota taxpayers will be paying more to support those programs than Minnesotans are going to receive in direct spending.
Federal tax cuts, by the same logic, will tend to disproportionately benefit Minnesota; federal tax increases will disproportionately burden Minnesota.
In a number of cases, a narrowly Minnesota perspective suggests that it would be more in our state\’s collective interest to pursue state-level taxing and spending policies, rather than supporting national policies in which Minnesota\’s federal tax dollars will exceed federal spending within Minnesota.
As an American, I don\’t advocate a purely Minnesota-centric perspective on federal spending and taxes. But as a Minnesotan, I find myself paraphrasing the sentiments of Tevye from the old musical \”Fiddler on the Roof\”:
\”Of course, there\’s no shame in being consistently near the bottom of state rankings comparing federal spending received to federal taxes paid.
\”But it\’s no great honor, either.\”
———-
Timothy Taylor is managing editor of the Journal of Economic Perspectives, based at Macalester College in St. Paul. He blogs at conversableeconomist.blogspot.com.

conversableeconomist

The Food Stamp Explosion

 For starters, Food Stamps have a new name. The 2008 farm bill changed the name to the Supplemental Nutrition Assistance Program, or SNAP. But whatever the name, enrollment rose from 17.3 million in 2001 to 46.2 million in October 2011. In the March 2012 issue of Amber Waves, published by the U.S. Department of Agriculture,  Margaret Andrews and David Smallwood ask: \”What’s Behind the Rise in SNAP Participation?\”


 What\’s perhaps less expected in the graph is that Food Stamp enrollment was rising steadily from 2001 up through 2006, although unemployment rates were low and falling during much of that time. The authors trace much of this change to changes in federal rules making it easier for people to apply, and easier for states to certify to the federal government that the benefits are being targeted. In addition, SNAP benefit levels were increased both in the 2008 farm bill and in the 2009 \”stimulus\” legislation, making it more attractive to apply. Here\’s a graph showing the maximum SNAP benefit for a household of four and the average benefit.

When you look at the numbers, Food Stamps play what may be a surprisingly large role in America\’s social safety net for the poor. Total spending on Food Stamps in 2011 was about $78 billion. According to the Center on Budget and Policy Priorities, \”Roughly 93 percent of SNAP benefits go to households with incomes below the poverty line, and 55 percent go to households with incomes below half of the poverty line …\”

For comparison, federal expenditures through the Earned Income Tax Credit were about $56 billion in 2011. As another comparison, total spending on Temporary Assistance for Needy Families (TANF), what is what most people mean by \”welfare,\” was about $33 billion in combined federal and state spending in 2010. In many states, SNAP far outstrips TANF in the level of support it provides for low-income families.

conversableeconomist

Top Marginal Tax Rates: 1958 vs. 2009

Top marginal income tax rates used to be much higher back in the 1950s and 1960s. How much revenue did those higher tax rates actually collect? Daniel Baneman and Jim Nunns address that question in a short report,\”Income Tax Paid at Each Tax Rate, 1958-2009,\” published by the Tax Policy Center last October.

 For starters, take a look at the statutory tax brackets for 1958 and 2009. The The tax brackets are adjusted for inflation, so the horizontal axis is constant 2009 dollars. The top statutory tax rate in 2009 was 35%; back in 1958, it was about 90%.  Marginal income tax rates are lower across the income distribution in 2009. In addition, the top marginal tax rate occurs much lower in the income distribution in 2009 than it did in 1958.

How many households actually paid these rates? Here\’s a figure showing the share of taxpayers facing different marginal tax rates. At the bottom, across this time period, roughly 20% of all tax returns owed no tax, and so faced a marginal tax rate of zero percent. Back in 1958, the most common marginal tax brackets faced by taxpayers were in the 16-28% category; since the mid-1980s, the most common marginal tax rate faced by taxpayers has been the 1-16% category. Clearly, a very small proportion of taxpayers actually faced the very highest marginal tax rates back 1958. It\’s interesting to note how the share of taxpayers facing higher marginal rates expanded substantially in the 1970s, probably due in large part to \”bracket creep\”–that is, tax brackets at that time didn\’t increase with the rate of inflation, so as wages were driven up by inflation, you were pushed into higher tax brackets even though real income had not increased.    

How much revenue was raised by these high marginal tax rates? Although the highest marginal tax rates applied to a tiny share of taxpayers, marginal tax rates above 39.7% collected more than 10% of income tax revenue back in the late 1950s. It\’s interesting to note that the share of income tax revenue collected by those in the top brackets for 2009–that is, the 29-35% category, is larger than the rate collected by all marginal tax brackets above 29% back in the 1960s.

A few quick thoughts:

1) Perhaps it goes without saying, but there\’s no reason to think that 1958 was the high point of social wisdom when it comes to tax policy. In addition, the economy has evolved considerably since 1958: talent and tasks are probably more mobile, and methods of categorizing income in ways that affect tax burdens have become more sophisticated. Also, the distribution of income has become much more unequal in recent decades, and so arguments over the appropriate share of taxes to be paid by those in the top income groups have evolved as well.

2) Raising tax rates on those with the highest incomes would raise significant funds, but nowhere near enough to solve America\’s fiscal woes. Baneman and Nunns offer this rough illustrative estimate: \”If taxable income in the top bracket in 2007 had been taxed at an average rate of 49 percent, income tax liabilities (before credits) would have been $78 billion (6.7 percent of total pre-credit liabilities) higher, taking into account likely taxpayer behavioral responses to the rate increase.\” The behavioral response they assume is that every 10% rise in tax rates causes taxable income to fall by 2.5%.
 

3) If one wants to use the 1958 example as a precedent, it would be fair to point out that the lowest-bracket income tax rates are a fairly new development, as of the mid-1980s. One could also use the example of 1959 to argue that many more taxpayers in the broad range of lower- and middle-incomes should face marginal federal tax rates in the range of 16-28%.

4) If the goal is to raise more tax revenue from those with high incomes, higher tax rates are not the only method of doing so. For example, one could limit various tax deductions that apply with greatest force to those high up in the income brackets. One could also look at ways in which the tax code lets those with high incomes pay lower rates, like the lower tax rates for capital gains and on tax-free investments like state and local bonds.