AEIdeas The public policy blog of the American Enterprise Institute Tue, 21 Oct 2014 15:57:46 +0000 en-US hourly 1 Thomas Sowell on ‘predatory lending’ and ‘predatory journalism’ Tue, 21 Oct 2014 15:57:46 +0000 read more >]]> From a New York Times editorial on October 18 “A Rate Cap for All Consumers“:

Poor and working-class people across the country are being driven into poverty and default by deceptively packaged, usuriously priced loans. The obvious solution is a national standard for consumer lending. Both the House and Senate have bills pending that would adopt the 36 percent standard for all consumer transactions, including those involving payday loans, mortgages, car loans, credit cards, overdraft loans and so on.

Thomas Sowell responds in his column today “Predatory Journalism“:

The New York Times is again on the warpath against what it calls “predatory lending.”

Just what is predatory lending? It is lending that charges a higher interest rate than people like those at the New York Times approve of. According to such thinking — or lack of thinking — the answer is to have the government set an interest rate ceiling at a level that will be acceptable to third parties like the New York Times.

Low-income people often get short-terms loans when they run out of money to meet some exigency of the moment. The interest rates charged on such unsecured loans to people with low credit scores are usually higher than on loans to people whose higher incomes and better credit histories make them less of a risk.

Crusaders against such loans often make the interest rate charged seem even higher by quoting these interest rates in annual terms, even when the loan is actually repayable in a matter of weeks. It is like saying that a $100 a night hotel room costs $36,500 a year, when virtually nobody rents a hotel room for a year.

Because those who make unsecured short-term loans are usually poor and often ill-educated, the political left can cast the high interest rates as unconscionably taking advantage of vulnerable people.

Editorial demagoguery against “predatory” lending might well be called predatory journalism — taking advantage of other people’s ignorance of economics to score ideological points, and promote still more expansion of government powers that limit the options of poor people especially, who have few options already.

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On the 20th anniversary of the Agreed Framework with North Korea Tue, 21 Oct 2014 15:42:48 +0000 read more >]]> On October 21, 1994, the United States and North Korea signed the Agreed Framework, hailed by the White House at the time as an important breakthrough and a triumph of diplomacy. Fast forward 20 years, and it’s clear that it was an unmitigated disaster. After all, North Korea began cheating almost immediately and, 20 years later, the Hermit Kingdom has achieved all the aims the agreement was meant to forestall, in addition to billions of dollars in additional aid.

So how should the Agreed Framework be assessed by historians and what lessons might the Obama administration learn before making the same mistakes with regard to its Iran nuclear negotiations? Over at Commentary, I explain.

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Can Iraq be fixed? Tue, 21 Oct 2014 15:40:08 +0000 read more >]]> Les Gelb, former chairman of the Council on Foreign Relations and a Carter administration diplomat, recently revived a debate he and then-Senator Joe Biden began almost a decade ago when they suggested dividing Iraq along ethnic and sectarian lines. While I have no problem with Kurdish independence should they so choose (for Kurdish leaders like Barzani, however, nationalism has always been more a rhetorical tool than a sincerely held belief), the Gelb plan to divide Iraq into Shi‘ite Arab, Sunni Arab, and Kurdish zones is as bad an idea now as it was then. It will create a host of new problems, all the while failing to resolve the old ones.

That does not mean, however, that federalism isn’t the solution. As I wrote yesterday in Commentary, not all federalisms are the same. Just as I wrote in The New York Times back in 2002 and in a book chapter from the same year, the way forward is decentralization along administrative lines. That doesn’t disempower the Kurds—they can still form their own grouping and enjoy the same autonomy—but it does mean an Iraq of 15 or 18 regions rather than just three. Just as in the United States, decentralization and investing power in states can be a path to liberty and a defense against the tyranny of the center.

While it will take military action to defeat the Islamic State, in the aftermath of any future victory, it will be necessary to renegotiate the Iraqi compact. And as I continue to travel to Iraq to talk with Shi‘ites, Kurds, Sunnis and Sunni insurgents (the latter in Jordan), it seems that decentralizing and diluting the power of the central government –limiting it largely to foreign affairs, supervision of national resources like oil, and defense–and instead investing that power in the sub-districts, districts, or provinces is not only the way forward, but a formula which can restore stability.

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If teachers are more risk averse than other professionals, what does that mean for education reform? Tue, 21 Oct 2014 15:19:59 +0000 read more >]]> There are over three million teachers in America. Debates rage over how to prepare them, recruit them, retain them, compensate them, and remove them should they not work out.

Much hullaballoo is made over the academic characteristics of teachers. There has been back and forth for years over where teachers fall in the spectrum of college graduates. But there is another teacher attribute that may also be important—how tolerant teachers are of risk.

If teachers are risk-loving, they might be enticed by merit-pay programs that stake pay to student performance. They might want more freedom in how they invest their retirement dollars to try and maximize their return. They might see a charter sector in which high performing schools are allowed to scale and low performing schools are shuttered as an ideal industry to get involved in.

But, if they are risk-averse, step and lane pay scales, defined benefit pensions, and stable, geographically zoned schools might be more up their alley. Until just recently, we knew little about the risk preferences of teachers. That is, until an intrepid band of researchers (and former colleagues of mine) from the University of Arkansas set out to try and measure them.

This table was presented to 65 teachers in a large Midwestern university’s Masters of Teaching program, 43 students in that university’s MBA program, and 24 students in its law school.


For each of the 10 lotteries, students were asked to choose option A or B.  Then the experimenters rolled a 10-sided dice twice, first to select which lottery the student would participate in and then again to determine how much the student won (each student only ended up playing once).

Afterward, the researchers analyzed the patterns of choices from each of the groups. A “risk neutral” individual (or one who simply is attempting to maximize the expected value of the payoff) would pick Option A for Lotteries 1,2,3, and 4, and then pick Option B for the rest. Someone with more risk tolerance would move from selecting option A to selecting option B sooner than someone who is risk averse.

They found that prospective teachers were consistently more risk averse than their peers in other career tracks. On average, MAT students picked 5 out of 10 safe choices, while non-MAT students picked only 4.3.

It is true that this was a small experiment and it looked at students in a relatively traditional preparation program. Perhaps looking at a cohort of Teach for America teaches might have yielded more risk-lovers. But TFA is still a small program, relatively speaking, so it’s possible that this study is representative of a very large swath of American educators.

If teachers are, on average, more risk averse, it has serious implications for education policy:

1.) Although advocates might be super excited about merit pay programs or educational marketplaces with a lot of creative destruction, it might be hard to recruit teachers who want to participate. If reformers want to restructure pensions to allow for flexibility (like portable 401Ks), they could run headlong into preferences aligned against them. They risk becoming leaders without followers, or, as the old management chestnut describes, just folks out talking a walk.

2.) Maybe that means reformers who advocate for these policy changes need to work with teacher preparation programs to recruit more risk-loving people to be teachers, or open up alternative avenues aimed at those with more tolerance for risk. That is, for the policies they support to get traction, it might be as important to change the composition of the teaching force as it is the behavior of current teachers.

3.) It is also possible that teachers only have so much tolerance for change and uncertainty, so reformers will be at a perpetual disadvantage to entrenched policies and practices. This might call for a moderation in expectation for change, given that the agents in charge of making it happen are inclined against it.

4.) There is also an argument to be made that we don’t want risk-loving people as teachers! There is good reason to prize stability and predictability, especially in creating safe and welcoming environments for children.

Wherever you come down on these questions, coming to a better understanding of the risk preferences of teachers is important. As you can probably tell, I’m still thinking through the implications of this paper myself, and imagine I will be for some time to come. I would love to hear your thoughts!

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Why attacking the Fed for making inequality worse is mostly wrong Tue, 21 Oct 2014 14:57:12 +0000 read more >]]> Fed Chair Janet Yellen is worried about inequality. As she said in a speech last week:

The extent of and continuing increase in inequality in the United States greatly concern me. I think it is appropriate to ask whether this trend is compatible with values rooted in our nation’s history, among them the high value Americans have traditionally placed on equality of opportunity.

Now some Fed critics found Yellen’s concerns ironic or even hypocritical. After all, haven’t the Fed’s actions made inequality worse? Hasn’t quantitative easing pumped up the stock market to the benefit of wealthier Americans who have more of their assets in stocks than do the 99%? To this criticism, Boston Fed boss Eric Rosengren offers a spot-on response in a chat with the WaPo’s Matt O’Brien:

There’s no disputing the fact that asset prices have gone up as a result of what we’re doing,” Rosengren acknowledged, and that “disproportionately helps somebody who has enough wealth that they have, for example, stocks.” But “on balance” he “thinks the net benefits outweigh the net costs in terms of income inequality” for a simple reason: “the one thing that really contributes to income inequality is to have no income at all.”

Or, as he put it, “being unemployed is the ultimate inequality. It not only destroys your income, but probably destroys your wealth, and frequently has big impacts on your entire family.” And that means, “to the extent that QE and the other tools that we’re using bring the unemployment rate down, that disproportionately helps people at the lower end of the [income] distribution.” Furthermore, “if you think about who’s the lender and the creditor, the creditor who’s lending the funds tends to be at the upper end of the distribution.” So “low interest rates are good for the people at the bottom of the distribution” who need to borrow to go school or buy a car or a house.

Really, you have to consider the counterfactual, as Rosengren does. The US economy likely would look a whole lot more like the depressed eurozone right now if the Fed had mimicked the ECB and followed similar tight money policies. If the price for avoiding a multiyear depression is higher inequality, then so be it. Don’t forget that inequality dropped sharply during the Great Recession, though America was hardly better for it.

Now of course, the Fed could have theoretically followed a more egalitarian path by foregoing a bond-buying program that supports asset prices and instead doing a “helicopter drop.” Economist David Beckworth describes how that ideally might work:

First, the Fed adopts a NGDP level target. Doing so would better anchor nominal spending and income expectations and therefore minimize the chance of ever entering a liquidity-trap. In other words, if the public believes the Fed will do whatever it takes to maintain a stable growth path for NGDP, then they would have no need to panic and hoard liquid assets in the first place when an adverse economic shock hits.

Second, the Fed and Treasury sign an agreement that should a liquidity trap emerge anyhow and knock NGDP off its targeted path, they would then quickly work together to implement a helicopter drop. The Fed would provide the funding and the Treasury Department would provide the logistical support to deliver the funds to households. Once NGDP returned to its targeted path the helicopter drop would end and the Fed would implement policy using normal open market operations. If the public understood this plan, it would further stabilize NGDP expectations and make it unlikely a helicopter drop would ever be needed.

Certainly a more populist approach to monetary policy. Yet I doubt many Fed critics, at least those on the right, would like this alternate option any better than QE. But unless you wanted a repeat of the 1930s, doing nothing and letting the financial crisis “burn itself out” hardly seems realistic.

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Chart of the day: The Iowa Electronic Markets odds of Dems losing Senate have increased from 20% last year to 95% now Tue, 21 Oct 2014 14:32:51 +0000 read more >]]> iowaThe chart above shows the history of market quotes for the Iowa Electronic Markets contract “2014 Senate Control Market” back to January 2013. Between January and June 2013, the odds for the Democrats to lose control of the Senate after the November 2014 mid-term elections were only about 20%, and were as low as 15% in May 2013 (see red line in chart). After a lot of volatility in the second half of last year, the odds of the Democrats losing the Senate increased and stabilized at around 60% between March and July of 2014, before gradually rising over the last three months to the current all-time contract high of 94.8% this week.

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Is breaking up the megabanks back on the Washington agenda? Tue, 21 Oct 2014 13:54:16 +0000 read more >]]> Shape up or break up. That’s the message Federal Reserve Bank of New York President William Dudley gave to Wall Street yesterday. Too much risk taking and law breaking means government will have to take action without some big changes by the megabanks. From the Wall Street Journal:

His comments, at a closed-door meeting at the New York Fed with big bank executives, continue his campaign of publicly and privately criticizing what he sees as Wall Street’s ongoing ethical lapses. Mr. Dudley said that if big banks don’t make significant changes to improve their ability to comply with laws, pressure to break up the banks will only increase.

“The inevitable conclusion will be reached that your firms are too big and complex to manage effectively,” he said. “In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively.”

Almost a decade, now, after the start of the Financial Crisis, this issue isn’t going away. The megabanks are getting bigger and the US financial system more concentrated. Too Big To Fail is still here, despite the Dodd Frank financial reform law. As Guggenheim analyst Jaret Seiberg puts it in a morning note:

– We believe this is consistent with our view that the mega banks are still facing increased policy risk, including pressure to break themselves up.

– In our view, regulators would like investors to pressure the biggest banks to shrink and to clean up their act so the agencies do not have to actively break up the mega banks. Yet we believe it would be a mistake to confuse this preference with an unwillingness to act. More mega bank scandals may compel regulators to impose structural punishments on the mega banks.

Dudley had some specific recommendations, too, such as the creation of a “performance bond” that senior management would forfeit if the bank got hit with a big fine. Also, he suggests building a central database to track lower level employees so bad eggs don’t keep getting fired and rehired across the industry. The point here is to wring short-term thinking out of megabank management.

I am all for that goal generally, not just on Wall Street but across Corporate America. But this would seem a losing or at least insufficient battle as long as investors believe the government backstop still exists. That presumed support not only makes yet another financial crisis more likely but also makes the US economy less innovative and productive. A next-stage financial reform agenda might include thing like much higher equity funding levels (which might cause banks to shrink on their own) and/or avoiding the deflationary consequences of megabank failures through “helicopter drop” monetary policy and fast-tracking the approval of new banks. But whatever your policy preference, Dodd Frank certainly has not ended the debate about US financial reform.

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If only 12% of campus sexual assaults get reported, then only 1 in 32 women at Ohio State are sexually assaulted, not 1 in 5 Mon, 20 Oct 2014 20:54:49 +0000 read more >]]> Assuming that only 12% of campus sexual assaults at OSU are reported.

osuAssuming that 1 in 5 women at OSU are assaulted over 4 years.


In May, I wrote a CD post titled “Using White House claim of under-reporting, only 1 in 34 women at Ohio State are sexually assaulted, not 1 in 5.” The analysis in that post was used by syndicated columnist George Will in an op-ed (“Colleges become the victims of progressivism“) that appeared in several hundred papers around the country, including the Washington Post on June 6. Here’s George Will’s reference to my May 9 blog post:

The administration’s crucial and contradictory statistics are validated the usual way, by official repetition; Joe Biden has been heard from. The statistics are: One in five women is sexually assaulted while in college, and only 12 percent of assaults are reported. Simple arithmetic demonstrates that if the 12 percent reporting rate is correct, the 20 percent assault rate is preposterous. Mark Perry of the American Enterprise Institute notes, for example, that in the four years 2009 to 2012 there were 98 reported sexual assaults at Ohio State. That would be 12 percent of 817 total out of a female student population of approximately 28,000, for a sexual assault rate of approximately 2.9 percent — too high but nowhere near 20 percent.

George Will’s column generated a lot of controversy, especially from women’s rights activist groups and a group of US senators, and the St. Louis Post-Dispatch, one of the largest newspapers in the Midwest, dropped Will’s syndicated column following the outburst of criticism. None of the other approximately 449 papers nationwide that subscribe to Will’s bi-weekly columns dropped him. Washington Post Editorial Page Editor Fred Hiatt defended George Will and his column, saying it “was well within the bounds of legitimate debate.”

My original post and George Will’s column were both based on OSU’s campus crime data from 2009-2012. Now that Ohio State University has just released its Annual Campus Security Report for 2014, updated data for the years 2010-2013 are displayed in the top table above. From my previous post in May:

In a January 2014 report titled “Rape and Sexual Assault: A Renewed Call to Action” (which led to the creation of the “Task Force to Protect Students From Sexual Assault” headed by Biden), the White House made the following two statements:

White House Statement 1. Sexual assault is a particular problem on college campuses:1 in 5 women has been sexually assaulted while in college.

White House Statement 2. Reporting rates for campus sexual assault are also very low: on average only 12% of student victims report the assault to law enforcement.

There’s a huge, irreconcilable statistical problem here. Using actual reported crime statistics on sexual offenses at almost any US college and applying the White House claim that only 12% of campus sexual assaults actually get reported, we have to conclude that nowhere near 1 in 5 women are sexually assaulted while in college. Alternatively, if the “1 in 5 women” claim is true, the percentage of sexual assaults that don’t get reported to the campus police would have to be much lower than 12%. In other words, the claims that the White House uses don’t work together and they therefore both can’t be simultaneously correct.

Here’s an updated analysis of sexual assaults at the Ohio State University, summarized in the top table above. Over the most recent four-year period from 2010 to 2013, there were 104 reports of “forcible sexual offenses” to the OSU’s Department of Public Safety, which included incidents that allegedly took place on campus, in university residence halls, on non-campus properties including fraternity and sorority houses, and on public property adjacent to or accessible from the campus. Using the White House claim that only 12% of campus sexual assaults get reported, there would have been 763 unreported forcible sexual offenses at OSU during that period, bringing the total number of sexual assaults (reported + unreported) to 867 (see top table above).

The Columbus campus of OSU has a total female student population of about 28,000. Dividing the 867 estimated sexual assaults over a four-year period into the 28,000 OSU female students would mean that only 3.1% of OSU women, or about 1 in 32.3, would be sexually assaulted while in college. Certainly that’s still too high, but not even close to the White House claim that one in five (and 20% of) female students are sexually assaulted while in college.

Further, these calculations make the assumptions that: a) 100% of the 104 forcible sexual offenses at OSU from 2009-2012 were male on female incidents (and none were female on male, male on male, or female on female), b) none of the 104 reported offenses were filed falsely or later retracted (see recent example here of a campus sexual assault that was falsely reported and later retracted), c) all of the 104 reported cases involved OSU students and none were reported by OSU faculty or staff. If any of those three assumptions don’t hold perfectly, the 3.1% figure above would be even lower, and the 1-in-32.3 ratio would be even greater.

Alternatively, we could ask the question: For the “1 in 5 women” claim to be true at OSU, what level of under-reporting would support that claim based on the actual reported assaults over the last four years? If one of every five of OSU’s 28,000 female students had been sexually assaulted from 2010 to 2013, there would have been 5,600 sexual assaults during those four years – or 1,400 sexual assaults every year and almost 4 every single day of the year. For that to be true, fewer than 2% of the actual sexual assaults would have been reported, and more than 98% would have to go unreported.

Bottom Line: From a political standpoint, using the totally implausible statistic that “1 in 5 women” are sexually assaulted while in college certainly gets a lot of attention. The “1 in 32 women” statistic found at Ohio State University over the most recent four years, though not as attention-grabbing as “1 in 5,” are probably pretty representative of college campuses around the country and much closer to the truth than what the White House is claiming. And for the “1 in 5 women” claim to be true, it would imply an unbelievably low reporting rate of less than 2% for campus sexual assaults. That would be almost 53 actual sexual offenses that take place on campus for every one that gets reported), which is an under-reporting rate so low that it must be insulting to women. Women and men attending college today, their parents, their college administrators and professors, and society in general, are all much better served by the truth about college sexual assault than by Team Obama’s misleading, exaggerated, and false claims about “1 in 5 women will be sexually assaulted while in college.”

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Wow. 5 years into a recovery, 65% think the US is on the ‘wrong track,’ while 64% say things are ‘out of control’ Mon, 20 Oct 2014 18:48:46 +0000 read more >]]> Which of these polls is more depressing? This one:

The depressive donkey in A.A. Milne’s “Winnie the Pooh” stories pretty much matches the mood of Americans lately, according to the new Wall Street Journal/NBC News poll released last week. When 1,000 potential voters were asked whether they think the nation is on the right or wrong track, 65% of them said the country had taken a wrong turn, and only 25% said the U.S. was on the right path.

The only time the public has felt worse was in October 2008, during the first, deep spasms of the recession. Then, 78% said the nation was on the wrong track, and only 12% felt good about the country’s direction. The last time “right direction” beat out “wrong track” was in January 2004 — and the last election cycle where that was the case was 2002.

Or this one:

An overwhelming majority of voters in the most competitive 2014 elections say it feels as if events in the United States are “out of control” and expressed mounting alarm about terrorism, anxiety about Ebola and harsh skepticism of both political parties only three weeks before the Nov. 4 midterms.

In a POLITICO poll testing the hardest-fought states and congressional districts of the year, two-thirds of likely voters said they feel that the United States has lost control of its major challenges. Only 36 percent said the country is “in a good position to meet its economic and national security” hurdles.

I mean, the Ebola outbreak is scary, but more than five years into an economic recovery, and most Americans think the country is on the “wrong track” and “out of control.” Maybe it’s time for another Washington pep talk about how bad the economy was in January 2009 …

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

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Here’s another way Yellen’s big inequality speech was a missed opportunity Mon, 20 Oct 2014 18:19:55 +0000 read more >]]> The apparent decline in US startups is bad news for two reasons. First, it means fewer potential Googles and Apples and Twitters and other high-impact businesses. Second, it also means fewer small businesses that — while they may not make their owners millions or billions — might provide a rung or two up the economic ladder. Although I had many problems with Fed Chair Janet Yellen’s inequality speech last week, at least she did address the business formation issue:

For many people, the opportunity to build a business has long been an important part of the American dream. In addition to housing and financial assets, the SCF shows that ownership of private businesses is a significant source of wealth and can be a vital source of opportunity for many households to improve their economic circumstances and position in the wealth distribution. …

Owning a business is risky, and most new businesses close within a few years. But research shows that business ownership is associated with higher levels of economic mobility. However, it appears that it has become harder to start and build businesses. The pace of new business creation has gradually declined over the past couple of decades, and the number of new firms declined sharply from 2006 through 2009. The latest SCF shows that the percentage of the next 45 that own a business has fallen to a 25-year low, and equity in those businesses, adjusted for inflation, is at its lowest point since the mid-1990s. One reason to be concerned about the apparent decline in new business formation is that it may serve to depress the pace of productivity, real wage growth, and employment. Another reason is that a slowdown in business formation may threaten what I believe likely has been a significant source of economic opportunity for many families below the very top in income and wealth.

Still, while Yellen had plenty to stay about public funding and education, she had nothing to say about how regulation is sapping our startup culture. I mean, not even a word about the terrible burden of occupational licensing on lower-income Americans. What a missed opportunity to bring some light to an issue that plenty of folks across the political spectrum agree on.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

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