Tuesday, April 19, 2016

Impediments to Solar Power In North Carolina

Impediments to Solar Power In North Carolina

A non-profit organization in North Carolina installed solar panels on a church and sold the power back to the church for half the price that was charged by Duke Power the main utility in the state.  

The North Carolina Utilities Commission ruled that the group's arrangement with the Greensboro's church violated the state's system of legal electricity monopolies. The regulator hit the group with nearly $60,000 in fines, which would be suspended if it refunds the church's payments with interest and donates the solar equipment to the church.

"North Carolina by statute does not permit retail electric competition," the commission's order said.

A description of this decision can be found at the link below.

The above article mentions that North Carolina provides preferential tax treatment to solar power and a law requiring that 12.5% of power sold by utilities be obtained from renewable energy or improvements in efficiency,

However, the article below states that a tax credit for solar power in North Carolina was not renewed in 2015.   The law requiring purchases of renewable energy or improvements in fuel efficiency still exists but conservatives want to abolish it.


Comment One:  Since the late 1970s free market economists have pushed very hard to deregulate electric utilities and separate the market for production of electricity from its sale to customers.  This deregulation effort, which has been supported by conservative politicians, should facilitate the sale of low-cost solar power.  Apparently this approach has not been adopted in North Carolina.


Comment Two:  One approach to the sale of solar energy would involve homeowners placing panels on roof and selling the excess energy back to the main utility.  Utilities have resisted mandates to buy solar energy from homeowners in some states.

See link below for discussion of solar power purchases by utilities.

There are some costs associated with purchasing power from homeowners with solar panels but the main source of opposition for these purchases seems to be lower revenue from larger utilities.  Again, deregulation does not appear to have benefited the solar industry.

Comment Three:  The discussion of solar panel on the campaign has centered on how fast this market will grow.  True to form both Hillary and Bernie want many solar panels to be installed with Bernie being more ambitious than Hillary.   Neither candidate discusses the policy changes, which are needed to remove the impediments for increased use of solar.  Sander’s view that special interests are blocking progress does appear to be supported by the North Carolina decision.

Comment Four: Most economists favor the use of carbon taxes to offset problems associated with global warming.    A carbon tax would in theory assist firms and people who want to sell solar panel by increasing the relative cost of fossil fuels to clean energy.  Many conservative businessmen favor carbon taxes over regulation but given the resistance of Duke Power and regulators to low cost solar power regulatory mandates for solar panel might be needed in addition to carbon taxes.

Concluding Thoughts:  The regulator outlawed the sale of solar panel that was half the price of power sold by Duke Power.   Why isn’t Duke Power embracing this lower cost alternative?   There is something wrong with both the market and the politics of electricity in North Carolina.

Author's Note:   Some of my posts on education issues have been well received.

this post suggests the most cost effective way to reduce the burden of college debt is to target financial aid towards first-year students in order to substantially reduce the amount of debt incurred by people who are just beginning their college careers.


This post examines President Obama's proposal to rank colleges based on costs, quality and the amount of debt incurred by students.   The proposal was killed by university presidents.


Tuesday, April 12, 2016

Ranking Colleges based on Value and Costs

History of President Obama’s Effort to Rank Colleges Based on Affordability and Value

The Announcement:

In 2013, President Obama announced plans to create a federal rating system that would allow parents and students to easily compare colleges. He also planned to encourage Congress to pass legislation to link student aid to the rating system.

New York Times Article on Announcement by President Obama on plan to rank colleges on results and costs and link financial aid to the college rankings

The Opposition:

The plan was bitterly opposed by university presidents.  

Robert G. Templin (President of Northern Virginia Community Colleges)

  “Applying a sledgehammer to the whole system isn’t going to work.  They think their vision of higher education is the only one.”

Adam F. Falk (President of Williams College)

“As with many things, the desire to solve a complicated problem in what feels like a simple way can capture peoples imaginations.   …. Information about the colleges is likely to be oversimplified to the point where it actually misleads.

Charles L. Flynn, Jr.  (The President of the College of Mount Saint Vincent)  

A rating system is a bad idea that  “cannot be done well.”  He added “I find this initiative uncharacteristically clueless.”

Kenneth W. Starr, (President of Baylor University.)

“We think the entire approach is quite wrongheaded.”

New York Times Article on Reaction to College Rating Proposal by University Presidents:

The Result: 

On September 12, 2015, the Obama Administration abandoned its proposal to rank colleges let alone tie the ranking of the colleges to student aid.

At this time, the Obama Administration introduced a web site that provided raw statistics on annual costs, graduation rates, and salaries after graduation.

Article discussing the Obama Administration decision to abandon its effort to rank colleges on affordability and value:

A Discussion of the Web Site:

The Web site introduced by the Obama Administration to provide additional information on the cost and value of colleges can be found below.

Web Site on College Value and Costs:

The site contains information about schools but does not provide a composite ranking or clearly identify schools that are not good buys. 

Interestingly, the web site does contain some quick links to lists of schools with low costs and/or high incomes but no quick links to lists of schools with high costs and low incomes.

The information obtained on this web site for each school includes – average annual cost, graduation rate, salary 10 years after attending school, percent of students receiving guaranteed loans, typical loan amount for student borrowers who finished the program, percent of graduates who earn more than a high school graduate, SAT and ACT scores, demographics of students, and type of programs.

Limitations of the Debt Information:

There are a number of limitations with the data on the site, especially with the information on debt.

  • The debt totals excluded private student loans and PLUS loans.   These loans could be more important at some schools than other schools.

  • The database only reports median debt levels by student borrowers at a school.   It is likely the dispersion of debt levels is higher for some schools than for other schools.   It would be interesting to know the percent of borrowers with debt levels exceeding certain amounts ($50,000 or $75,000) at each school.

  • The repayment statistic in the database -- the share of students who paid back at least one dollar on their student loan three years after leaving school -- is not particularly useful.  Initial repayment rates could be low at a school where many alumni go to graduate school.   The default rate, delinquency rate, and the proportion of students not in graduate school who are on target to finish payment on their student loans in 10 years would be more useful than this at-least-one-dollar repayment rate.

One goal of the exercise was to identify colleges that are leaving their students incapable of paying off their student loans.  It is not clear whether the information in this database could be used for this purpose.

Using the College Score Card to Compare Universities

Common sense suggests that the College Score Card cannot be used to compare the value of a state university to the value of an elite private institution.   The difference in post-graduate earnings is likely largely determined by the difference in the talent as measured by SAT score of the student body.  The difference in debt is likely determined by the price tag and the amount of available aid.  A ranking that found Harvard University graduates earned more than students from Ohio State but owed more at graduation would not provide new news.

Issues that could be addressed with the College Score Card:

  • On average how do similarly situated schools differ in terms of income and debt levels of students?  (Harvard would be compared to Cornell while Ohio States could be compared to Rutgers.)

  • How large are the differences between income and debt incurred for students at elite private schools compared to students at high-quality but not elite private schools?   How much of this difference can be explained by SAT scores?

  • Do students at large state universities fare better or worse than students at smaller state universities?  What are the sources of these differences?

  • Do students at universities that place a high emphasis on athletics fare better or worse than universities without a strong emphasis on athletics?

  • Do university graduates from one part of the country fare better than university graduates from other parts of the country?  Are these difference due to the school or the economy?

Concluding Thoughts:  President Obama, under heavy pressure from university presidents, backed off his proposal to rank colleges and use the rankings to limit student aid to schools that did not contain costs and provide students a high quality education.   There are significant limitations with the data on the College Score Card.  However, future research might use College Score Card data to compare similarly situated colleges and to compare one type of college to another.

Authors Note:  I believe you will find my boon on debt management and your retirement useful.  It is available on Kindle.

Thursday, April 7, 2016

The View from Brookings on College Debt

The View from Brookings on College Debt

Beth Akers and Mathew Chingos two researchers from the Brookings Institution provide their insight on college debt issues.

The experts focused on four policy initiatives  -- (1) increase information on the value and cost of higher education, (2) create incentives that provide more loans to students at effective schools and fewer loans to students at ineffective schools, (3) have private non guaranteed loans provide funds for graduate education, and (4) reallocate aid for college education from tax credits, which go to higher income households towards Pell grants that go to lower-income students.

Most academically trained economists probably agree with this perspective.   This post provides additional discussion and my assessments.


Comment One:  Economists always support more information on the value of a good.  However, the existence of more information does not always assure that the market will function properly.   Information on average returns for some universities may not be highly telling because there is a large dispersion among outcomes for students who graduate from the same university.  It is also very hard for a person who is 18 years old to process information leading to an estimate of the value of an educational choice on lifetime earnings.

Comment Two:  The proposal to provide students with ratings on the value of universities was abandoned by the Obama administration because of pressure from university presidents.

The article describes how Obama wanted strong ratings on schools. His proposal for ratings was strongly criticized by several university presidents. 

Below is an excerpt from the Times article: 

Charles L. Flynn Jr., the president of the College of Mount St. Vincent in the Bronx, called the president’s idea “uncharacteristically clueless.” Adam F. Falk, the president of Williams College in Massachusetts, predicted that it would be “oversimplified to the point that it actually misleads.” And Kenneth W. Starr, who is the president of Baylor University in Waco, Tex., and who, as a prosecutor, led the investigations of President Bill Clinton, called it “quite wrongheaded.”

The system that was introduced does not attempt to rank colleges or universities or in any way link the information on the web site to the amount of student aid that is available for students at a university.

Comment Three:  For many students, the basic choice that must be made is whether to go to a public school or a private one. Efforts to get parents and students to carefully consider the costs and returns of their education may have the unintended impact of discouraging applications to elite schools.

The affordability and amount of access to elite schools is an empirical issue.   Some elite schools have generous aid packages.  However, the number of slots open to people who need aid is influenced by other factors including the number of slots given to legacy applicants and foreign applicants who pay full freight.

Comment Four:  Different majors and courses of study have different expected returns.  There is a lot of pressure on students to go into fields where they might make money.   I am not sure that this is good advice. It reminds me a bit of the line in the movie the Graduate “Just one word Benjamin, Plastic” Often people make money and contributions to society from the endeavor they love.  I would hate to see a world where artists are forced to emulate Alex P. Keaton when this is not who they are.

Comment Five:  Mathew Chingos makes a valuable distinction between loans to graduate students and loans to undergraduates.  He would attempt to get the government out of the market for graduate student loans and concentrate on the market for undergraduate loans.  My problem with this approach is that private student loans are both expensive and not dischargeable in bankruptcy.   Not all graduate students with private student loans become affluent.   In my view, private student loans should have the same priority as credit cards in Chapter 13 bankruptcy.   I would not support any expansion of private student loan programs unless the bankruptcy code was also changed.

For a discussion of my views on bankruptcy and student debt go to my Kindle book on the topic.

Comment Six: The market for undergraduate debt is larger than the market for graduate student debt.   Most undergraduates do not go on to law school and medical school and become rich.   A proposal that reduces college debt to undergraduate students would be more progressive and cost effective than a proposal that reduces costs to graduate students.  First-year students have higher drop out rates than people who are nearer completion of college.   The cost of paying in-school interest subsidies on student loans is greater when loans are provided to first year students. 

I have written a proposal that attempts to eliminate student loans for first-year undergraduates at public universities.  

In my view both Sanders’s proposal for free public college and Clinton’s proposal for debt-free public college are unaffordable.   A more feasible approach would involve making the first year at public colleges debt free.

Comment Seven:  The panelists call for reduction in tax credits and an allocation of resources towards Pell grants for lower-income households.   This proposal makes sense. Pell grants probably have a greater impact on behavior than tax credits, which go to higher income people who are likely to complete school without the tax credit.

 President Obama’s proposal to get rid of the tax advantages associated with 529 plans died largely because of bipartisan opposition. 

Political support for a proposal to reallocate student aid from tax credits to grants does not appear to exist.

Authors Note:  I hope people will consider my book Nine Essays on Debt and Your Retirement.

Friday, April 1, 2016

Thoughts on New Retirement Security Proposals

Thoughts on New Retirement Security Proposals 

Many current retirees lack adequate retirement income and declining pension coverage means this problem will worsen.  In response to these trends,  Teresa Ghilarducci has put forward a bold plan for a new mandatory pension, which would increase retirement income for future retirees.   Her paper touting her new pension plan called a Graduated Retirement Account (GRA) also reviews other plans to expand pension coverage.  

This post, motivated by Ghilarducci's paper, describes issues related to proposals to expand retirement security. 

A Brief Description of Some Retirement Reform Proposals

The GRA has four main features.   First, the plan is mandatory for all workers.  Second, the plan does not allow any hardship withdrawals.  Third, the plan provides high quality investments with low fees.  Fourth, all payouts from the GRA are in the form of an annuity that pays out over a lifetime. 

The GRA account would be administer by the Social Security Administration and managed by professional fund managers.   The GRA could also b be administered at the state level by state pension agencies.

Most workers would receive an $800 tax credit.

Contributions and some returns on the account would be guaranteed by the government.  

The GRAs could replace 401(k) plans.   GRA costs could be offset by declines in 401(k) tax preferences, either through out right elimination of the benefits or their reduced use because of substitution to the GRA.

Other proposals discussed in Ghilarducci's paper were notably less ambitious than the GRA proposal.  Two of the proposals mentioned were  the automatic IRA and the MYIRA initiatives.

The Obama Administration advocated an automatic IRA.   Under this proposal employers who did not offer a 401(k) plan will be required to enroll their employees into a Roth IRA.   Many people who contributed to the automatic IRA would be eligible for a savers tax credit.   The automatic IRA was not adopted by congress.  

The Obama administration did create a MYIRA program.   Under MYIRA, people can contribute up to $5,500 per year to a Roth IRA.   The money would be initially invested in a government bond fund administered by Thrift Savings Bond TSP.   However, once the amount in the fund reaches $15,000 the saver would have to turn the fund over to a private investment firm.

Neither the automatic IRA proposal nor the MYIRA proposal required mandatory contributions from workers.    Neither plan did anything to expand options for additional annuity income during retirement.   


Comment One:   This paper and other papers document the existence of a worsening retirement crisis due to declining use of traditional pension plans and shortfalls with 401(k) plans.   The retirement crisis is occurring in tandem with a Social Security financial solvency crisis.    The chief actuary for the Social Security Administration projects that by 2035 Social Security would only be able to pay around 75 percent of current benefits.

Ghilarduccii’s paper does not recognize the challenges associated with simultaneously expand pension coverage and fixing Social Security.  Clearly these issues are inter-related.  Resources used to fund a new private pension system could be used to maintain current Social Security benefits.    Alternatively, a new mandatory private pension could  provide additional income if Congress raises the age for claiming Social Security benefits or cuts Social Security benefits in some other way.

Comment Two:  One way to fund a new private pension plan is to scrap or sharply reduce current 401(k) tax incentives.  A complete switch from 401(k) plans to a new mandatory pension would severely impact current financial firms and their shareholders. The  amount of financial turmoil would depend on the details of the proposal.

A proposal to fund a new mandatory pension by scrapping 401(k) incentives reminds me of Sander's health care plan. Even if one concluded that the proposed new system was better than the existing system it is hard to envision a way to seamlessly transitional from the current system to the new one.   

Comment Three:  The GRA proposal includes government guarantee on return and principal.  The financial literature suggests the expected costs of these guarantees could be large due to large losses in extremely bad years like 2008 and 2009.

Comment Four: The GRA is mandatory.   Also, unlike 401(k) plans, money in GRA plans cannot be tapped for emergencies.   Mandatory contributions and a prohibition on tapping funds for emergency uses assure that the GRA would be an effective way to expand retirement income and reduce poverty among the elderly.   However, many current workers and their families have high levels of debt and often need funds for emergencies.   A large mandatory contribution to a new illiquid pension could exacerbate financial problems for people in their working years.   Support for mandatory contributions and prohibitions on premature disbursements would be much higher if the GRA proposal was tied to a proposal to reduce Social Security benefits and raise the age recipients could claim Social Security benefits. 

Comment Five:  There is a big difference in the scope of the GRA proposal and the IRA expansion proposals.  The GRA proposal is mandatory for the entire population including those with excellent pension coverage.   The IRA expansion proposals are voluntary options for people who currently lack employer pensions or defined contribution plans.   The case could be made that the GRA does too much and is too intrusive while the IRA extension programs do too little.   

Comment Six:   The GRA proposal requires all payouts be in the form of a required annuity.   The use of mandatory rather voluntary annuity increases the value of the annuity because of market imperfections when annuity purchases are voluntary.   (People with longer expected life spans are most likely to purchase an annuity when annuity purchases are voluntary.   This adverse selection  drives the price of an annuity up compared to a situation where annuity purchases are mandatory for all people.)

Comment Seven.Participants in the MYIRA program are only allowed to invest in one fund-- the short term government bond fund.   This restriction is not optimal.  The default investment option for the TSP plan should include a mix of investments in both bonds, stocks and some liquid assets.   It would be desirable to offer a few investment default option that mirror difference in risk tolerances.  

Comment Eight:   The MYIRA proposal requires disbursement of all funds to private investment fund once a $15,000 threshold is met.  Many private investment options are unsuitable for holders of the relatively small MYIRA accounts because of high costs, low levels of diversification, and unsuitable investments.   It would be appropriate and desirable to only partner with reputable, high quality firms.   This reform would be difficult to implement because quality and reputation are in the eye of the beholder.   Neither government regulators or private financial rating firm have a good record in identifying bad financial products, let alone picking good ones.  

Comment Nine:  Annuities available on the private market are expensive.   The MYIRA program does not provide a low-cost annuity option.  TSP annuities while voluntary are a good buy compared to most private annuities.  MYIRA contributors would benefit greatly if they were allowed to use the proceeds of their funds to purchase a TSP annuity.

Authors Note:  One reason why so many people find it so difficult to save for retirement is that they start life after college with a ton of debt.   The reader of this post may be interested in my work on the tradeoff between saving for retirement and debt reduction and management.

Nine Essays on Debt and Retirement


Another complicate issue directly related to pension reform proposals involves selecting suitable investment funds.   I am beginning work on this topic at my finance blog.

An interesting Vanguard Fund of Funds.