Saturday, September 6, 2014

Time for real economic sanctions against Russia.

Russia took Crimea, gave weapons to terrorists who shot down a civilian passenger plane, and has now invaded eastern Ukraine.   Hawks in the United States want us to provide greater support to NATO but NATO doesn’t really have a plan.    I believe that economic sanctions can work and that prior to the United States increasing its contribution to NATO both the United States and Europe should give sanctions a shot.

It makes no senses to me for the U.S. to subsidize NATO while Europe through its trade subsidizes the Russian economy.    Some claim economic sanctions won’t work   but economic sanctions did work.   Economic sanctions led to the bankruptcy of the Soviet Union.

 The situation today is not the way it was after World War 2 when NATO was created.  Europe can now afford to contribute to its own defense.

At the very least the west should stop subsidizing (either directly or indirectly) the Russian invasion of Ukraine.   Western bankers and Gazprom executives want an IMF bailout.  But there are Russian troops on Ukrainian soil.  Is Ukraine still a sovereign country?   Why should the west give Ukraine money and watch it flow to Russia?

Putin says the Russian army can be in Kiev in two weeks.   Currently the Russian Ruble is at 37 per dollar near its all time low.  If the Russians do go into Kiev into two weeks American sanctions (even without the support of Europe) could drive this ratio to 50. 

President Obama should give a press conference announcing new economic sanctions.

Option One:  Stop using Export-Import Bank to fund projects in Russia.  This proposal has the support of conservatives in Congress.

This prohibition should be implemented on ongoing already approved projects as well as new projects.

Option Two: Prohibit the Overseas Private Investment Corporation (OPIC) from participating in any ongoing or future deals in Russia.

Option Three:  Disqualify any company that does business with certain Russian sectors from obtaining any assistance from the U.S. Export Import Bank or the overseas private investment corporation.

Option Four:  Request Congress eliminate tax incentives for any company that trades in certain sectors, including energy, with Russia.   The goal here is to prevent Exxon and other U.S. energy firms from partnering with Russian firms until after Russia leaves Crimea and Ukraine.

Option three and four are crucial.   Why should U.S. taxpayers pay for a NATO build up while U.S. corporations get tax breaks for doing business with Russians?

Option Five:  Repeal Most Favored Nation Status for Russia.  Interestingly, Russia now has MFN status but Ukraine and many other ex-Soviet states do not.

Option Six:  Follow through with prohibitions on World Bank projects with Russia.  

The G-7 has already supported halting new World Bank projects in Russia.

It is clear that Putin has not gotten this message probably because the World Bank has not yet acted.

The World Bank should cut off assistance to projects that have already been approved.

President Obama and the U.S. Congress should condition future U.S. support of the World Bank to a rule prohibiting any World Bank assistance to Russia until a set of conditions was met.    This would reduce our influence over the World Bank, a cost that I am willing to take.

Option Seven:  Stop subsidizing Russia through the International Monetary Fund.

A I mentioned, IMF funds to Ukraine go directly to Gazprom. 

IMF finances and politics are complicated and Russia is actively trying to reduce U.S. influence in the IMF.

Putin is a good poker player but the dollar is going up and the Ruble is falling.   The IMF needs our support more than we need them.

Russia has invaded a neighboring country.  

History has shown that the costs of ignoring such actions are huge. 

Impose half of the sanctions on this list even in a watered down version the Russian Ruble will go to 50 per dollar.   If Russia does not back down the next list will devalue the Ruble to 100 per dollar. 


Thursday, September 4, 2014

Quick thoughts on whether the rich are disadvantaged in politics.

Is it true that wealth is a disadvantage in politics?

The CNBC article recently wrote an article stating that rich candidates were at a disadvantage when running for office.

Why rich candidates can't get elected

The article specifically mentions Bruce Rauner candidate for governor in Illinois, Bruce Braley in Iowa, Sean Eldridge in New York and even Hillary Clinton.

The article mentions that only 12 of 48 self-funded candidates for Congress were successful in 2012.


Money and the sense of entitlement certainly hurt the Romney campaign.   Rauner does not seem to be a smart GOP choice for Illinois.  But I believe this article overstates the negative impact of money on a candidates chances.

The fact that only 12 of 48 self-funded candidates for Congress were successful in 2012 is not a useful statistic.  I need to know how many of the self-funded candidates were challengers facing an incumbent.  Most Congressional districts are safe Republican or Democrat.  How many of the self-funded candidacies were challengers in safe districts.  If many, then the low success rate is not unusual.

Publicly available data reveals that the median net worth of a member of Congress is now over $1,000,000.   In the scheme of things this is not a lot of money given the importance of the job.  There is huge disparity in reported net worth of members of Congress

Data on net worth of members of Congress:

Are the rich disadvantaged in politics?  Probably not by much.  I would like to have such a problem.  

Thursday, August 21, 2014

Reprint of Seven Ways to Provide Student Loan Debt Relief.

The National Association of Student Financial Aid Administrators originally published this article.   I am grateful to them for allowing me to reprint it here.
The original link for the article is here.

Seven Ways to Provide Student Loan Debt Relief
The current generation of students is leaving school with more debt than any previous generation. While postsecondary education remains a good investment for the average student loan borrower, some borrowers will never be able to repay their student loans in full. Moreover, current bankruptcy law and procedures make it very difficult for borrowers with student debt to ever obtain a fresh financial start.

At the federal level, there is some interest in policies that might alleviate student loan debt burdens. The desire to provide student debt relief to borrowers is tempered by concern about the cost to taxpayers when this government guaranteed debt isn’t fully repaid. In my view, it is possible to provide a modest level of student debt relief to borrowers without imposing substantial costs on taxpayers. This could be accomplished by modifying the Income Based Replacement (IBR) Loan Program and through changes to the bankruptcy code.

The IBR program, enacted in 2009, provides four benefits to student loan borrowers.
1.     Reduction in student loan payments when household income is low in relation to qualified student debt,
2.     Reduction in interest payments when IBR payments do not cover interest due,
3.     Limits on the capitalization of interest for loans in deferment or forbearance, and
4.     Forgiveness of a remaining loan balance 25 years after the student loan enters repayment.

In addition, some student loan borrowers who maintain payments through the IBR program will be able to utilize public loan forgiveness programs

The primary purpose of the IBR program is to prevent borrowers from defaulting on their student loan when their household income is low compared to qualified student loan debt. Only student loan borrowers with chronically low levels of household income can receive some debt forgiveness. Borrowers who receive lower payments through the IBR program will often pay more on their loan than if they remain in the standard 10-year payment plan.

The IBR program is complex and does not offer assistance to many overextended student loan borrowers. First, the IBR program does not cover PLUS loans made to parents, private loans, or consolidated loans that include a parent PLUS loan or a private student loan. The decision to consolidate 10-year loans into a 20-year loan could also make borrowers ineligible for the IBR program. To fully benefit from the IBR program, borrowers need to be aware of IBR rules long before they are aware that they will need IBR, when they are borrowing or consolidating federal student loans.

Second, the IBR program often provides little or no relief to a household that has high levels of both consumer debt and student loans. The IBR program is especially complex for married households.  A single person who qualifies for the reduced IBR loan payment could lose this benefit if he or she marries someone with high levels of consumer debt, even if household debt-to-income ratios increased after marriage. Married individuals could choose to file separate tax returns to take advantage of the IBR program, but that decision usually results in a larger tax obligation.

It is impossible to modify the IBR program to account for consumer debt without creating an incentive for additional borrowing.  Borrowers with high levels of student debt and consumer loans might seek relief in bankruptcy courts.  However, current bankruptcy laws and procedures offer little relief for borrowers with student loan debt.

There are two ways debtors can seek student loan debt relief in bankruptcy. First, the debtor could petition the court for a complete or partial discharge of student debt. Second, in a Chapter 13 bankruptcy the debtor could petition the court for a payment plan that favors the repayment of student loans over the repayment of other unsecured loans. Neither remedy is easily obtained.

To discharge student debt in bankruptcy, the borrower must prove that he or she has an “undue hardship.” Most courts require that the borrower show a “certainty of hopelessness” for his or her financial situation over the repayment term of the loan. A certainty for hopelessness is extremely difficult to demonstrate because there is some probability circumstances will improve, even for individuals in extremely dire circumstances. An August 31, 2012, New York Times article describing the petition of a legally blind, unemployed man illustrated the hurdles a student loan borrower must clear in order to have student debt discharged in bankruptcy.

Any proposal that makes it easy to discharge government guaranteed student loans in bankruptcy entails some additional cost to the taxpayer. However, it is easy to envision a less stringent student loan discharge rule that does not significantly increase taxpayer costs. Such a rule would rely on objective criteria rather than the subjective “undue hardship” concept. For example, student loan discharge could be limited to individuals with incomes near poverty level, contingent on participation in the IBR program, favor individuals with medical problems, and allow for partial, rather than full, loan cancellation.
Two other aspects of the bankruptcy code have a substantial impact on financial outcomes for student loan borrowers in bankruptcy and for the government agencies that hold or guarantee student debt.  First, financial outcomes are affected by the rules governing whether a debtor can obtain a Chapter 7 bankruptcy or a Chapter 13 bankruptcy.  Second, financial outcomes are affected by the rules governing repayment of student debt and other unsecured consumer loans under a Chapter 13 repayment plan.

Under a Chapter 7 bankruptcy, the bankruptcy court will immediately discharge most unsecured consumer loans. In a Chapter 13 bankruptcy plan, debtors must file repayment plans with the bankruptcy court. The repayment plan determines how much debtors can repay creditors and the amount received by each creditor. Prior to the 2005 bankruptcy law, debtors could choose to either file under Chapter 7 or Chapter 13. The 2005 bankruptcy law created a means test that required many individuals with incomes over the household median to file Chapter 13 rather than Chapter 7.

When student loans are dismissed under Chapter 7 bankruptcy, the borrower gets an immediate fresh start and can use all the newly available funds for the repayment of student debt. A borrower who obtained a deferment prior to bankruptcy can immediately renew payments on his or her student loan. By contrast, when borrowers are placed into a Chapter 13 repayment plan, the amount allocated to the payment of student loans might not even cover interest and, in many circumstances, the debtor will leave bankruptcy with a substantial student debt intact.

Student loan borrowers in Chapter 13 can petition the bankruptcy court to allocate a greater amount of their payment plan to the repayment of student loans and a lower amount to the repayment of other unsecured credit card debt. However, most courts tend to favor a payment plan that does not discriminate against any class of unsecured creditors. As a result, many student loan debtors emerge from the bankruptcy process five years older with a substantial amount of unpaid student loans. Many individuals experience decreases in income and have fewer job prospects after age 50. A delay in repayment of student loans caused by a forced entry into a Chapter 7 bankruptcy plan will increase financial exposure to taxpayers, increase student loan default rates, and decrease collection rates.

A revision of Chapter 13 bankruptcy rules that gives priority to student debt payments over other unsecured debt payments in bankruptcy would provide student loan debtors with a fresh financial start and would ultimately reduce taxpayer losses. Unsecured creditors would still enjoy greater collection rights than existed prior to the 2005 bankruptcy law.

Under current law, very little debt relief is offered to overextended student loan borrowers experiencing substantial economic hardship. Several policy changes might provide modest debt relief to these borrowers, maintain strong incentives against default, and protect taxpayer interests.  These policies include:

·      Allowing married couples to obtain IBR debt reduction without having to actually file separate tax returns,
·      Making PLUS loans to parents and consolidated student loans with a PLUS loan eligible for the IBR loan program,
·      Allowing private student loans to be discharged in bankruptcy,
·      Basing the decision to discharge student loans in bankruptcy on objective criteria pertaining to the economic status of the bankruptcy applicant rather than the subjective “undue hardship”  concept,
·      Allowing for quicker loan forgiveness under the IBR program for individuals in dire economic circumstances,
·      Repealing or modify the Chapter 13 means test, 
·      Providing priority to student debt over other unsecured loans in Chapter 13.

The goal of debt forgiveness policies inside and outside of bankruptcy is to balance two competing objectives: providing overextended borrowers a fresh start, and fair treatment towards creditors. The pendulum may have swung too close to the creditor, especially with regard to the treatment of student debt.

The author is a retired economist who worked in the Office of Economic Policy of the U.S. Treasury from 1988 to 2012. He publishes a blog

Tuesday, August 19, 2014

Is Facebook a bully?

I found this article about how Facebook and Instagram are threatening a small start up named Evergram disturbing.

thoughts on using lawyers to bully.

there needs to be penalties against firms that use deep pockets to bully competition in court.


Friday, August 8, 2014

Political Energy in Iowa and the Iowa Senate Race.

Political energy in Iowa and the Iowa Senate Race

Republican Presidential aspirants are flocking to Iowa.   Democratic Presidential aspirants are AWOL.

Recent polls have Joni Ernst leading Bruce Braley in the Senate race. 

The Presidential contest is already energizing Republicans and Independents in Iowa.   This energy gap could be the difference in the 2014 election and in 2016.

Republicans are building a grass roots organization in Iowa.  Hillary hasn’t been in the state since 2008. 

I wrote this note as to why anointing Hillary is a disaster some time ago.  I will update it soon.


What does it mean to compromise?

What does compromise mean?

President Obama in a recent press conference stated that when Republicans and Democrats agree on 80% of what needs to be done on an issue there should be agreement on the 80% and no action on the other 20% of items.   I believe this formula is a recipe for capitulation rather than compromise.

The process of negotiation leading to a compromise somewhere in the middle requires that initial positions must be based in reality.    Consider a negotiation over the price of a house.  Buyer wants to pay $800,000 and seller wants $1,000,000.   Let’s assume they meet at $900,000.   Alternatively buyer wants $800,000 and seller wants $2,000,000.  Does this mean they should meet at $1,400,000.  I don’t think so!

The best way to illustrate the fact that the passage of areas of common agreement is not equivalent to compromise is to discuss examples.

Social Security:  Democrats want to bring the Social Security system towards balance by cutting benefits and providing new revenue.   Democrats presumably want guarantees that reductions in benefits if enacted now will not lead to even more reductions in benefits in the future.   Democrats oppose private accounts and want to insure that Social Security remain a defined benefit pension plan.

Republicans favor benefit cuts but do not favor additional revenue.   Republicans favor private accounts and do not want to guarantee the existence of a defined benefit plan in the future.

Both President Obama and many Republicans support a reduction in the CPI COLA.   I have argued that there are merits to this type of budget cut. 

However, the Social Security COLA would only marginally delay future mandated cuts in the Social Security program because the full impact of the impact of the Social Security COLA would not be realized for many years in the future.

A reduction in the Social Security COLA would reduce retirement security for many Americans.  Unless this benefit cut was tied to other changes in the Social Security program it would hasten the demise of the program and lead to additional support for private accounts a Republican priority.

From the perspective of a progressive, the COLA cut only makes sense if it helps shore up the Social Security system and helps insure that a defined benefit program will persist in the future.    Agreement on a subset of items cutting benefits but not strengthening the system in the long run is capitulation not compromise.

The ACA:  Advocates of health care reform had several goals – (1) reduce the number of uninsured, (2) reduce the likelihood of people going into bankruptcy due to medical costs, (3) reduce premiums, (4) provide an alternative to employer sponsored insurance, (5) control medical costs …..

President Obama did compromise on the ACA.   

He refused to push for government options favored by many in his own party.

The ACA plan allows higher deductibles and copays than favored by most Democrats.

The ACA uses state exchanges as an alternative to employer sponsored insurance – the approach favored by Republicans.

The Administration delayed the employer mandate a stipulation opposed by Republicans.  (Republicans opposed the delay of the mandate even though they oppose its existence.   Rather than work with the Administration on a reform of ACA that strengthens the ACA and replaces or modifies the mandate the Republicans seek quick political points.)

The ACA includes cuts to Medicare.  Republicans take full advantage even though they favor such cuts.

Republicans vilify needed discussion of end-of-life health care costs by calling provisions “death panels”

Compromise requires that parties take genuine positions rather than fake positions.    Responding to Republican demands on health care is a bit like a buyer and seller splitting the difference after the seller posts an asking price that is double appraised value.

Keystone:   It is not secret that many Democrats want the Keystone pipeline built because it would help assure U.S. energy independence.  Keystone would also raise baseline carbon emissions.  Democrats want energy independence + future emission reductions.   Republicans want energy independence and no restrictions of fossil fuels.  The approval of the Keystone pipeline without strong measures to protect the environment leads us to continued dependence of fossil fuels.   Again, this is capitulation not compromise.

Concluding thoughts:  I believe that President Obama is a very good man.  I support many of his initiatives.   But I wonder if he is tough enough as President.

President Obama is being threatened with impeachment.  He is being pushed around.   Republicans are giving support to our foreign enemies --- Putin and ISIS by attacking our President.    His enemies both domestic and foreign believe President Obama is weak and will seek compromise, even a poor one.   Many of his current problems would not exist had he gone over the fiscal cliff at the beginning of his second term.

#Social Security
#Keystone pipeline
#President Obama