Education Secretary: Stop Subsidizing Student Loans

Arne Duncan, the director of the U.S. Department of Education, thinks his agency should stop subsidizing banks for providing student loans.

“Is this program helping students learn? And is it a good use of taxpayer money? In the case of the Federal Family Education Loan (FFEL) program, the answer to both questions is no,” Duncan writes his Wall Street Journal op-ed.

Under FEEL, the largest student loan program in the U.S., the Department of Edcuation pays interests on students’ loans while they attend school. If a student defaults, the department pays the student’s entire loan plus interest.

“The FFEL program,” Duncan writes, “is a great deal for bankers but a terrible one for taxpayers.”

The Congressional Budget Office estimates that by 2020, the Department of Education is expected to subsidize banks up to $87 billion to allow them to provide student loans.

All of this money would be put to better use providing financial aid directly to millions of needy students who want a college education. The Education Department will be able to accommodate the new loans through an existing federal public-private partnership, Through that partnership, the federal government makes loans directly to students and uses companies that will provide better service to borrowers at a lower cost to taxpayers

Critics contend that the government is trying to nationalize a private industry and do away with competition. Our real aim is to simply stop using banks as the middle man for student loans.

How US subsidies harm Mexico

Writing for Economix, Elisabeth Malkin points to a new paper that U.S. argues U.S. farm subsidies harm Mexican farmers:

A new paper from Timothy A. Wise at the  Global Development and Environment Institute at Tufts concludes that America’s generous subsidies allow farmers to sell their products to Mexico at below-market prices. The cost to Mexican farmers, he estimates, was $12.8 billion from 1997 to 2005. Corn farmers fared worst; American subsidies cost them $6.6 billion.

Despite protests by weathered farmers who periodically march down Mexico City’s main avenue, the government has not responded with tariffs.

Quite the contrary, under the North American Free Trade Agreement, the Mexican government quickly opened up to American agricultural imports to take advantage of lower food prices. Mexican agricultural subsidies — yes, Mexico also has them — have been channeled to favor large well-capitalized farmers, most critics agree, at the expense of peasant farmers.

Remember, those who generally argue for farm subsidies one day complain of global poverty the next. How easily they overlook the former’s role in the latter.

Again, government doesn’t anticipate unintended consequences

From Freakonomics:

The island of Kiribati began to subsidize coconut harvesting in the hopes of encouraging fishermen to switch to the coconut trade and thereby help preserve Kiribati’s reefs from the ravages of overfishing. But as NPR reports, the plan backfired: with more money coming in, coconut harvesters worked fewer hours, which left more time for their favorite leisure activities — including fishing, which increased 33 percent since the start of the program. Says one researcher who studied the unintended consequences of the subsidies: “It hit us like a bumper sticker saying — a bad day fishing is better than a good day working.”

Freedom is Delicious

From the BBC:

They say there is no such thing as a free lunch – but for years the majority of Cubans have been given free meals at state-run workplace canteens.

But in a bid to balance the budget, the Cuban authorities are about to abolish the scheme.

This week, four government ministries closed all their free lunchrooms across the country.

…The government says in these tough economic times it can no longer afford $350m a year it spends on the scheme.

In his most recent address to parliament, President Raul Castro said subsidies “are ineffective or, even worse, make some feel that they don’t need to work”.

HT: Will Mason

Iran and Energy Subsidies

Last week I posted on the magnitude and consequences of Iranian energy subsidies.

Yesterday, The Economist published a chart illustrating energy subsidies around the world:

Iran leads the world with a total expenditure of US$786 per person on energy subsidies. It ranks first in spending on oil subsidies and second for spending on gas subsidies. Some consequences are explored here.

Subsidies Pushing Iran to Import Gasoline

Financial Times reported yesterday that Chinese state oil companies began supplying gasoline to Iran this month and now provide the Islamic Republic between 30,000 to 40,000 barrels a day, or as much as a third of the country’s imports. This is despite US attempts to” shut off the supply of fuel on which its economy depends.”

But why would Iran, with 10.20% of the worlds proven oi reserves (leaving it ranked third), need to import gasoline?

The answer, is failed economic policies in the form of subsides.

In 2006, gasoline subsidies accounted for between twenty-five and twenty-eight percent of the government’s total budget at a cost of over $80 billion in the energy sector alone. This left Iran the highest payer of energy subsidies in the region.

Subsidizing below market prices, whether for gasoline, water, bread or any other product, results in shortages as it removes the consumer’s incentive from limiting his or her consumption. As consumers purchase more than they otherwise would under a free market (since the product is cheaper), waste ensues and shortages result. Waste in Iran, in this case, is typified most by inefficiency.

A Deutsche Bank report, for instance, estimates that Iran’s seven million vehicles consume about the same amount of gasoline as Britain’s thirty-five million vehicles. Given the artificially cheap price of gasoline, Iranians have lost the incentive to purchase more efficient cars or limit their gasoline consumption. Shortages, caused by increased demand and subsequent waste, are especially visible if supply is not increased to meet new demands, as is generally the case when subsidies occur. This is the case in Iran for reasons of its own.

The government mandated price of approximately $0.09 a liter (nearly a fifth of its market value), the lowest in the Middle East after Libya, has made Iranians among the world’s largest consumers of gasoline. Iran’s twelve percent growth in gasoline consumption, as well as limited refining capacity (due to foreign isolation), has forced Iran to import roughly one third of its gasoline at a higher price while continuing to sell it at a low, subsided one.

These imports have cost the state, and by default its citizens, an estimated $5 billion annually. While at the pump it appears that the subsidies have reduced gasoline prices for the consumers, the hidden costs, in terms of both taxes and inflation, far outweigh the benefits leaving gasoline more expensive than initially apparent.

But even with its imports, demand has not been met. In June 2007, the Iranian government decided to limit gasoline consumption. Its citizens were consuming nearly 75 million liters of gasoline daily, while its refineries were only producing 44 million liters of gasoline per day for domestic consumption. Instead of eliminating the subsidies, which would reduce gasoline demand by thirteen percent, according to the International Energy Agency, the government instead attempted to minimize public consumption through a rationing scheme that limited gasoline purchases to one hundred liters per month at an insignificantly higher $0.11 a liter. By March 2008, the government changed its rationing rules and permitted the sale of extra, higher-priced gasoline at $0.44. This has done little to fix the core problem. Iranians are clever and found ways to bypass the law—for instance purchasing two license plates.

One consequence of Iranian gasoline subsidies, in addition to domestic shortages and unsustainable costs, has been an emerging black market. The cheaper gasoline, approximately one-tenth the price of its neighbor’s, encourages its smuggling into neighboring countries, particularly Afghanistan, Pakistan, Turkey and Iraqi Kurdistan. According to some estimates, between 3.5 and 4.5 million liters of gasoline and nearly two million liters of diesel fuel are smuggled daily out of Iran worth approximately $1.5 billion annually.

The Iranian government will likely point to the US as the reason Iran needs to import foreign gasoline. While this is partially true, Iranian domestic economic policy is the true culprit.  American policy will only sustain the problem.

On ‘illegal foreign subsidies’

Below is a letter that I sent to the New York Times:

To the Editor:

Re “Illegal Airbus Subsidies” (Opinion, Sept. 17):

Preventing European aircraft maker Airbus from accepting billions in government subsidies will only harm the already weak American consumer.

If European governments choose to tax their citizens to sell artificially cheap products to American consumers, who are we to complain? We should gracefully accept their charity. We can only hope that all foreign governments tax their citizens for the benefit of our own.

If the Obama administration held honest concerns for the American consumer, it would dictate policy based on economic logic before special interest emotions. A push against foreign subsidies makes evident which of the two has been accepted.

Sincerely,

Ariel Goldring

Do Economists Agree on Anything? Yes!

Several years ago, Greg Mankiw posted on a column by Robert Whaples in which he “surveys PhD members of the American Economic Association and finds substantial agreement on a wide range of policy issues” from free trade to educational vouchers.

The information below shows his findings:

• 87.5 percent agree that “the U.S. should eliminate remaining tariffs and other barriers to trade.”
• 85.2 percent agree that “the U.S. should eliminate agricultural subsidies.”
• 85.3 percent agree that “the gap between Social Security funds and expenditures will become unsustainably large within the next fifty years if current policies remain unchanged.”
• 77.2 percent agree that “the best way to deal with Social Security’s long-term funding gap is to increase the normal retirement age.”
• 67.1 percent agree that “parents should be given educational vouchers which can be used at government-run or privately-run schools.”
• 65.0 percent agree that “the U.S. should increase energy taxes.”

And, finally, the topic that generates the most consensus:

• 90.1 percent disagree with the position that “the U.S. should restrict employers from outsourcing work to foreign countries.

Click here to view the original article.

Click here to view the data.

Tire Industry Opposed ‘Punitive Tire Tariff’

Mark J. Perry points to an interesting New York Times article that claims the “punitive tire tariffs” against China were in fact opposed by the domestic tire industry (Goodyear and Cooper):

Last Friday night, Mr. Obama, responding to a complaint by the United Steelworkers, imposed a 35 percent tariff on Chinese tires for cars and light trucks. China quickly responded by threatening to retaliate against American auto products and chicken meat, raising fears of a possible trade war, an especially unwelcome prospect just as the global economy is struggling to recover.

China has deplored the administration’s decision, suggesting it caved to domestic support for protectionism. The Tire Industry Association, which represents American tire retailers, said the decision was ill-advised and would lead to higher prices for consumers.

Asserting that the decision would hurt tire retailers, the association said it “believes this was a politically motivated decision that will end up costing more jobs than it saves. These tariffs will not bring back the jobs that the union claims have been lost.”

Responding to New Tire Tariff, China Targets American Auto Parts and Chicken Products

Just days after Obama bowed to union pressure and imposed a 35 percent tariff on Chinese tires, China has retaliated:

Chinese officials lambasted the decision, accusing the U.S. of engaging in protectionism and violating World Trade Organization rules. They argued that the U.S. tire industry had long ago abandoned the low-end market that China covets and said Chinese tire imports had increased only 2.2% between 2007 and 2008, state media reported.

By announcing the probe of U.S. imports, the Chinese Ministry of Commerce signaled that it was prepared to challenge Obama’s decision.

“Recently, the commerce ministry has received word from domestic industries indicating that [chicken and auto] products had entered our nation’s markets via dumping, subsidies and other unfair trade means,” the ministry said on its website, giving no details about the specific products.

James Zimmerman, a partner in the law firm of Squire Sanders & Dempsey in Beijing, recently told the Los Angeles Times, “American business in China should be prepared for what might be a zealous retaliatory response from China, which might impact a broad range of U.S. commercial interests.” Just what we need.