Microlending Comes to Washington

Banks continue to be reluctant to lend to small businesses. As a result, NPR reports (ht Ray), some small businesses are turning to a form of microlending. A case in point is Ryan Fochler, a pet care entrepreneur:

After being turned down by bank after bank, Fochler came across the Latino Economic Development Corporation, a nonprofit microlender based nearby in Washington, D.C.

Fochler is not Latino, but he was told that was OK. The LEDC works with all kinds of local businesses that have been turned down by traditional banks. Their goal is to help fledgling, independent businesses get on their feet.

They don’t operate exactly like microlenders in the developing world, some of which issue interest-free loans and let recipients repay whatever they can, whenever they can.

In contrast, American microlenders charge competitive interest rates, and the loans must be repaid on time. Defaulting on a microloan has the same consequences as defaulting on a bank loan.

The LEDC issues loans ranging from $500 to $50,000. Often in the past, those who came to the LEDC to apply for a microloan had little or no credit history.

But Rob Vickers, director of lending at the LEDC, says the profile of his average microloan applicant changed dramatically during the credit crisis.

“I was seeing clients that I couldn’t believe weren’t bankable coming in, and thinking, ‘Wow, this person has a credit score in the mid-700s, their business existed for more than two years, and yet, not only are they not able to obtain a bank loan, but they’re having their credit line slashed.'”

As noted, it isn’t exactly the same as the microlending made famous in developing economies. But it has some interesting similarities.

For more, read the transcript on which the NPR article is based.

Pigou and the Plastic Bag

The big news in Washington today are the early returns for the new DC bag tax. As of January 1, DC shoppers have to pay a 5 cent tax for each disposable plastic or paper bag that they get at grocery, drug, convenience, and liquor stores.

The Washington Post reports that the DC government has released results for January, the program’s first month. It appears to have had a big effect on behavior:

In its first assessment of how the new law is working, the D.C. Office of Tax and Revenue estimated that food and grocery establishments gave out about 3 million bags in January. Before the bag tax took effect Jan. 1, the Office of the Chief Financial Officer had said that about 22.5 million bags were being issued each month in 2009.

In other words, 87% fewer disposable bags were handed out in January than the average month last year.

Of course, one implication of a big behavioral response is that the tax might collect less revenue than anticipated:

District officials had estimated that the tax would generate $10 million over the next four years for environmental initiatives [note: that’s $208,000 per month]. The money will go to the newly created Anacostia River Cleanup Fund, which will spend it on various projects. But in January, the tax generated only $149,432, suggesting that it might fall short of revenue projections.

One shouldn’t make too much of a single month of results–particularly when it’s the first month of the program.

But I suspect that Arthur Cecil Pigou (the father of environmental taxes) is smiling somewhere.

Tax Loopholes, Wealth Destruction, and Health Reform

AT&T, Caterpillar, Deere, and Verizon garnered headlines last week (and an unwelcome summons to Capitol Hill) for announcing that a provision in the recent health care legislation would result in substantial accounting write downs. AT&T, for example, told the SEC that it expects to take a $1 billion charge in the first quarter because the law eliminates a tax subsidy for providing prescription drug coverage to retirees. According to the Wall Street Journal, Credit Suisse estimates that the total accounting hit for corporate America will total $4.5 billion.

Citing these impacts, a Wall Street Journal editorial denounced the provision as “a wholesale destruction of wealth and capital.” White House Press Secretary Robert Gibbs, in contrast, praised it as “closing a loophole.

Who’s right?

To figure that out, I spent a lovely Saturday afternoon tracking through the intersection of health policy, tax policy, and financial accounting and emerged with a clear verdict: Gibbs is right. The provision does indeed close a tax loophole.

But the WSJ isn’t completely wrong. The first law of loopholes is that every loophole benefits someone. If you close a loophole, someone will be hurt. That’s what’s happening here. The extra subsidy for retiree prescription drug coverage provided an extra financial boost for AT&T, Caterpillar, et al. Eliminating the loophole will thus reduce the value of the companies and the wealth of their shareholders, just as the WSJ alleges. But it’s hard to get too teary-eyed since that value and wealth were created by the loophole in the first place.

And now to the details:

Continue reading “Tax Loopholes, Wealth Destruction, and Health Reform”

Inventories Still the Growth Story in Q4

The Bureau of Economic Analysis has released its third look at the economy in the fourth quarter of 2009. The economy grew rapidly in the quarter, but slightly less than previously reported: the new estimate is a 5.6% pace of real GDP growth vs. 5.9% in the prior estimate.

As usual, I think the best way to understand this report is to see what sectors contributed the most or least to reported growth:

Almost two-thirds of the growth reflects businesses restocking their shelves and warehouses slowing the rate at which they were working down inventories; the change in inventory investment accounted for 3.8 percentage points of the overall 5.9% of growth. (Updated: 3/31/10)

Consumer spending grew at a modest 1.6% pace and thus added 1.2 percentage points to overall growth (consumer spending accounts for about 70% of the economy and 70% x 1.6% = 1.2%, allowing for some rounding). That’s down from the previous quarter, when cash-for-clunkers boosted car purchases. Housing investment also slowed, again in the wake of earlier efforts–the tax credit for new home buyers–that had boosted growth in the third quarter.

Business investment in equipment and software showed signs of life, growing at a healthy 19% pace. That added 1.1 percentage points to growth, more than half of which was offset by the ongoing decline in non-residential construction.

Government spending fell slightly during the quarter. Stimulus efforts boosted non-defense spending by the federal government, but that increase was more than offset by a decline in defense spending and in state and local spending.

About that Government Takeover of the Student Loan Business …

Health care understandably dominated the headlines leading up to — and beyond — yesterday’s historic House vote. It’s important to remember, however, that the reconciliation legislation also includes major reforms in the way that the government supports student loans.

Under current law, federally supported loans are made both direct from the government and through private lenders. The government loans are direct loans (i.e., the government lends directly to students). The private loans are guaranteed by the government (i.e., private organizations lend to students and the government guarantees the lenders against the risk of default). The health/revenue/education legislation will eliminate the private lending channel. (The market for non-government private loans will continue to exist.)

Opponents have denounced this change as a government takeover of the student loan market. That makes for a great soundbite, but overlooks one key fact: the federal government took over this part of the student loan business a long time ago.

In a private lending market, you would expect lenders to make decisions about whom to lend to and what interest rates to charge. And in return, you would expect those lenders to bear the risks of borrowers defaulting. None of that happens in the market for guaranteed student loans. Instead, the federal government establishes who can qualify for these loans, what interest rates they will pay, and what interest rates the lenders will receive. And the government guarantees the lenders against almost all default risks.

In short, the government already controls all of the most important aspects of this part of the student loan business. The legislation just takes this a step further and cuts back on the role of private firms in the origination of these loans.

That step raises some interesting questions about the costs of the current system (see this post), possible benefits of the current system (some colleges and universities appear to prefer working with private lenders), and the potential budget savings of cutting out the middle man (which appear to be large but somewhat overstated in official budget analyses).

But it hardly constitutes a government takeover.

One Last (?) Health Cost Estimate

On Saturday, the Congressional Budget Office released its complete cost estimate for the health/revenue/education legislative package that the House is expected to vote on later today.

The good news: The combined package would reduce the deficit by slightly more over the next ten years ($143 billion) than previously estimated ($138 billion). And nothing has changed about the projected increase in insurance coverage. CBO still expects that the legislation would increase the number of people with health coverage by 32 million in 2019.

The interesting news: A few months ago, CBO invented a particularly useful measure of the federal government’s commitment to health care. This measure combines federal spending on health care and federal tax subsidies for health care. If you view many tax subsidies as close equivalents to spending (as I do), this is a very important metric. It would indicate, for example, that if you increase health spending, but decrease tax subsidies by the same amount, that the federal commitment to health care is not increasing, even though both spending and taxes would be rising. I think that’s a useful way to look at things.

So how does the legislative package line up on this measure?

CBO estimated that H.R. 3590, as passed by the Senate, would increase the federal budgetary commitment to health care over the 2010–2019 period; the net increase in that commitment would be about $210 billion over that 10-year period. The combined effect of enacting H.R. 3590 and the reconciliation proposal would be to increase that commitment by about $390 billion over 10 years. Thus, the incremental effect of the reconciliation proposal (if H.R. 3590 had been enacted) would be to increase the federal budgetary commitment to health care by about $180 billion over the 2010–2019 period.

In subsequent years, the effects of the provisions of the two bills combined that would tend to decrease the federal budgetary commitment to health care would grow faster than the effects of the provisions that would increase it. As a result, CBO expects that enacting both proposals would generate a reduction in the federal budgetary commitment to health care during the decade following the 10-year budget window—which is the same conclusion that CBO reached about H.R. 3590, as passed by the Senate.

In short, the reconciliation package increases the federal commitment to health care over the next decade (e.g., by rolling back the excise tax on expensive insurance plans that’s in the Senate bill) but then brings it down in the future (e.g., by ramping up the excise tax beyond the ten year window).

From a budget point of view, the basic structure of the legislative package is thus: Expand the commitment to health care in the next decade, pay for that expansion using other revenue sources, and then reduce the overall health commitment in later years. It’s that structure that leads to disagreement among budget experts about the long-run effects of the legislation. If the legislation executes as written, it will reduce future deficits substantially. If future Congresses flinch on the future budget savings (without flinching on the continued new spending), it will increase future deficits.

The shout-out: Long-term readers of CBO cost estimates know that they traditionally end with a sentence identifying the one or two people most responsible for the analysis. Given the importance of this cost estimate, however, the letter takes a different approach, identifying several dozen dedicated analysts who have been doing their best to provide Congress (and the American people) with as much information as possible about the legislation. They all deserve our thanks:

David Auerbach, Colin Baker, Reagan Baughman, James Baumgardner, Tom Bradley, Stephanie Cameron, Julia Christensen, Mindy Cohen, Anna Cook, Noelia Duchovny, Sean Dunbar, Philip Ellis, Peter Fontaine, April Grady, Stuart Hagen, Holly Harvey, Tamara Hayford, Jean Hearne, Janet Holtzblatt, Lori Housman, Justin Humphrey, Paul Jacobs, Deborah Kalcevic, Daniel Kao, Jamease Kowalczyk, Julie Lee, Kate Massey, Alexandra Minicozzi, Keisuke Nakagawa, Kirstin Nelson, Lyle Nelson, Andrea Noda, Sam Papenfuss, Lisa Ramirez-Branum, Lara Robillard, Robert Stewart, Robert Sunshine, Bruce Vavrichek, Ellen Werble, Chapin White, and Rebecca Yip.

Should Campaign Contributions Be Anonymous?

Although it addressed only direct spending by corporations and unions, the Supreme Court’s recent Citizens United ruling has rekindled broader concerns about the power of money in politics. Over at the Washington Post, Marc Geffroy and R.R. Reno argue that our traditional approach to these concerns –in particular the requirement that campaigns disclose their contributors — might be exactly backwards. Instead, they suggest that we should move in the other direction:

There is a way to break the iron grip on access that campaign contributions provide. The United States should establish an anonymous campaign finance system. We need a federally chartered clearinghouse for campaign donations that matches donors to designated, registered candidates and political action committees. Under such a system, politicians would not know who supports their careers, er, causes.

It’s a simple but powerful concept. The identity of the campaign donor would be kept secret, which would break the wink-and-nod link between money and the legislative process

Imagine the confusion on Capitol Hill. Members of Congress wouldn’t know exactly whom to reward with special carve-outs. Union leaders might say they’re big supporters of certain candidates, but who could know for sure?

The proposal raises some obvious practical questions about designing a truly anonymous system (many of which are addressed in Voting with Dollars by Bruce Ackerman and Ian Ayres). But leave those aside for a moment and ponder how this approach might (or might not) address whatever concerns you have about the role of money in politics. Disclosure is a double-edged sword: we can see who is giving how much to whom, but so can the whom.

Marc and R.R. finish their argument with an analogy to the secret ballot:

If you think requiring anonymity for political donations wouldn’t work or is impractical, ask yourself: Does the secret ballot work? Imagine politicians paying you if you promise to vote for them. You can’t — for good reason. The secrecy of the voting booth prevents anyone from knowing whether you are true to your promise. The same would hold for an anonymous campaign finance system.

On this point, I think they identify one benefit of the secret ballot, but overlook at least two others. First, the secret ballot protects voters from politicians that would retaliate against them if they cast the “wrong” vote. That’s the flip side of the paying-for-a-vote argument. Second, the secret ballot protects voters from anyone else punishing them for their vote.

Which leads to what I think may be the most interesting question about their anonymous contribution proposal: How many people out there don’t make campaign contributions because they don’t want relatives / neighbors / friends / employers / activists to know which candidates and causes they are supporting? And would it be a better world if they felt free to make their contributions anonymously?

Update: R.R. Reno suggests a related question: how many people and businesses feel they have to make contributions in order to avoid reprisals from elected leaders? In other words, to what extent are contributions defense rather than offense?

How Much Does Health Reform Cost?

It figures that CBO would release its much-awaited score just as I was boarding a plane to go to a conference. So apologies for being slow to the party.

The headlines are reporting that CBO scored the health reform effort as costing $940 billion over the next ten years. Readers of this blog know that isn’t correct. The $940 billion figure refers only to the coverage expansions in the legislative package. There are also many other health reform initiatives–e.g., filling the “doughnut hole” in Medicare’s prescription drug benefit and increasing funding for community health centers and prevention efforts–in the legislation. Add it all up and the ten-year cost of health reform is about $1,072 billion.

Bonus question: How much does health reform reduce the budget deficit?

The headline claim is that CBO says the health reform package will reduce the deficit by $138 billion over the next ten years. That’s not right either. First of all, the health reform has now been stapled together with student loan reform in order to deal with some of the specifics of reconciliation. The student loan package accounts for $19 billion of the ten-year savings. So at best health reform should get credit for $119 billion in deficit reduction. But then there’s the CLASS Act gimmick. Lop that off and health reform really should be credited with $49 billion in deficit reduction. And even then it isn’t really health reform that’s creating those reductions. The health policy changes are actually expanding the deficit over the next ten years; other, non-health tax increases offset those increases and provide some deficit reduction.

Lest I be viewed as relentlessly beating on the package, let me offer a second bonus question:

Does the package generate budget savings only because it’s using ten years of taxes to pay for six years of benefits?

This appears to be a common refrain among opponents of the package. But it doesn’t hold up either. It is true that the new health benefits don’t start in earnest until 2014; that helps keep the ten-year sticker price down. But those six years of costs are offset by a combination of spending cuts and tax increases during those years, even if you strip out the CLASS Act gimmick. And in the second decade, CBO tells us that the bill reduces the deficit significantly more if–and this is a huge if–it executes as written.

Economic Bloggers Forum on Friday

On Friday I will be speaking at the Kauffman Foundation’s second annual Economic Bloggers Forum. Naturally, the event will be webcast and you can submit questions online on the page with the speaker line-up.  Panels will discuss the aftermath of the Great Recession, the prospects for growth in Haiti, Afghanistan, and Africa, and the daunting fiscal challenges facing the U.S.

America in the Red

The new issue of National Affairs includes an essay in which I summarize my thinking about our nation’s fiscal challenges.

In “America in the Red” (pdf version), I describe our fiscal challenge, explain how deficits and debts may undermine our prosperity, and emphasize the importance of setting clear budget goals.

I also argue that everything should be on the table in thinking about our budget future. Growth alone won’t set us free. Spending cuts alone won’t be enough. And tax increases alone won’t work either. We need to pull on all the levers–reducing spending, increasing revenues, and promoting growth–if we want to get our fiscal house in order.