Why Constraints That Bind Can Be a Good Thing
Even before the financial crisis intensified the upward pressure on college costs, the price of a degree was soaring. Since 1980, the average cost of tuition and room and board has grown by a staggering 121 percent while median household income has risen a mere 18 percent, according to federal data. But the credit boom earlier this decade provided some relief for families.
Wall Street financiers packaged student loans into securities and sold them off to investors, who could trade them just like stocks. That, in turn, provided more money for lending, helping to make student loans cheaper and more available. Even people with poor credit histories could easily get a loan.
But during the last academic year, private student loan volume fell by half as financial firms became wary of lending to students, who generally do not have long credit histories. Officials from Sallie Mae, the industry leader in student lending, said they expect another significant decline this year.
Nor have families been able to keep borrowing against the value of their homes, which seemed for years to appreciate with no end in sight. Second mortgages have been shrinking along with real estate values. Money made available by banks to homeowners through home-equity lines of credit has fallen by 25 percent, to $538 billion, since the end of 2007, according to federal data.
About a decade ago, financial planners began to tout the benefits of 529 plans, which invest families’ savings in the stock and bond markets with the aim of keeping pace with the growth in college expenses. Even before the crisis, these plans couldn’t keep up. Then, in 2008, the average 529 plan lost 20 percent of its value.
And no longer can students count on the credit cards once available so freely, often by salespeople who lined campus walkways, offering free T-shirts and coffee mugs with their plastic. Many students used the cards to pay for books, meals and more…
But being in the midst of my own daughter’s college application process, I realize that the high and rising cost of college is just going to force us to evaluate and compare the benefits of her different college options that much more carefully. In many ways, access to cheap credit causes people to behave as if the money is “free”–and often to make poor economic decisions because the standards for the benefits to be obtained from that household spending are correspondingly too low.
So I think having a tighter budget constraint may be a good thing.
This is well illustrated in this story about how real families have been forced to make adjustments to their family budgets during this recession:
As crazy as it sounds, losing a $70,000-a-year job has been good for Marty Morua’s finances. The former Wall Street stockbroker says the setback forced him to scrutinize his family budget and snip away at expenses. And soon, even with less income, their savings grew.
First, he and his wife decided to live on her salary so he could be home with their 5-year-old daughter after school. Without a nanny, they saved $12,000 a year. He dropped services he didn’t use on his cellphone — texting and video games — to pocket $250 a year. He took a defensive-driving course for a 10 percent discount on his auto insurance and dropped car-rental and roadside-assistance coverage, for an extra $150 a year.
For holiday gifts, he turned to thrift stores and gave home-baked cookies.
“When I was working, I didn’t look at the price tag,” he said. “In a strange way,” he added, losing the job “has been a blessing to teach me how to become aggressive and wise about saving and ways to save — areas I never would have thought about.”
The recession has caused a seismic shift in the consumer culture, converting die-hard spenders into savers. A growing number of people, either smarting from a job loss or spooked by the financial crises of others, are scrambling to get out of debt, establish emergency funds, and add to their retirement and savings accounts.
Although I’d prefer to see a different version of the SAFE Commission than the current Conrad-Gregg version (I’d prefer one containing, but not filled with politicians, and lower required supermajorities), some such commission is the right way to go. Certainly no guarantee that it will reach agreement on a recommendation, that the recommendation will be enacted, and that it will be implemented to a substantial degree, but it’s possible and, moreover, that’s not the only way such a commission can move us in the right direction (via related P.R.; establishing a process; etc.) and thus get us to some degree of fiscal responsibility sooner than otherwise, and even a small bit of such an effect would yield benefits far outweigh the costs (explicit and opportunity costs) of such a commission. All things considered — potential benefits vs. potential costs, and magnitudes and probabilities of each — it’s a no brainer that we should proceed with such a commission.
Something that would be funny if it weren’t so unfortunate is that the left is expressing alarmed opposition to such a commission on the grounds that it will lead to cuts in entitlements, the right is expressing alarmed opposition that it will lead to tax increases, and Stan and Bruce over at CG&G keep repeating that it won’t have any effect.
Regarding Stan and Bruce, they don’t seem to be approaching the matter rationally. They seem to be defining “effect” excessively narrowly as enactment of a very substantial recommendation from the commission, and moreover they are irrationally fixated on the odds being against such a result rather than considering all the scenarios of potential benefits and potential costs and the respective probabilities involved. See my comment at http://capitalgainsandgames.com/blog/bruce-bartlett/1343/defense-deficit-commission#comment-5046 . See also Bruce’s reply to my comment; over the past week or so I have repeatedly submitted a reply to Bruce’s reply, but they have not posted it (I’ve inquired, to no effect), so I’ll just paste my reply below for anyone interested:
Bruce,
I could point out to you once again why what you are saying makes no practical sense, but I needn’t convince you of it because you seem to have already expressed (or at least apparently implied) that you agree. What you are asking for is unrealistic and impractical because any member of Congress sticking his neck out by taking such action would very substantially increase his chances of losing the next election, as would any small group of members who supported that action, which means few if any will do so, and if they did, they’d likely lose, leaving us with a more purely and rigidly fiscally irresponsible Congress. I’ve pointed this out to you, and your reply indicated agreement, at least apparently by implication as I read it. See my comment and your reply at http://capitalgainsandgames.com/blog/bruce-bartlett/1288/real-fiscal-conservative#comment-4846
Re: “The longer we wait to even begin a dialogue, the longer the problem will fester and get worse. Appointing a commission guarantees that the duialogue won’t even start until its report is finished.”
That’s essentially the same as your statement “I’m more inclined to see it as putting off action for the indefinite future while the problem festers” that I responded to in comment above. Please read my first paragraph. It’s very hard to square all you’ve written about Congress’ lack of readiness to seriously address this problem with an assumption that (1) progress would be made over the year during which a commission would be doing its work AND (2) that the existence of a commission would make such progress significantly less likely during that year, or more broadly during and after that year. Is that really your assumption??
Re: “Appointing a commission guarantees that the duialogue won’t even start until its report is finished.”
First of all, even if that is/were true, it wouldn’t suffice as an argument against such a commission, all things considered (per my comment above). Second, you are speaking of a sort of progress that, based on all you’ve written recently, you consider very unlikely to occur anyway, let alone that would occur only in the absence of a commission studying the problem. Moreover, your premise is dubious. Yes, I remember several months in 2006 during which members of Congress and the White House saying, when asked what Iraq War strategy/policy they favored, responded, “Let’s wait for the Baker-Hamilton recommendations”, but this is different in a number of ways. Rather than secluding itself like a typical commission, a public engagement / P.R. component is a major part of at least the versions of SAFE Commission legislation I’ve seen and that you’ve ridiculed (not sure about Gregg-Conrad’s latest version). And, while I do think that, generically speaking, an upcoming recommendation from a commission regarding some problem might delay actual legislation seriously addressing that problem, again, you don’t seem to think it at all likely that such action would occur anyway during that year, which is why you mention just “starting dialogue”. I see no reason to presume that a commission would preclude or greatly inhibit or even likely inhibit at all the “start” of “dialogue” regarding this problem. Indeed, it’s quite possible it will cause such dialogue to start sooner than otherwise.
Re: “judging by the Peterson-Pew report, a government commission is likely to be even weaker in its recommendations.”
Do you not see any validity in the argument Maya MacGuineas and I have made? Do you disagree that including a recommendation of specific, huge budgetary sacrifices in the Peterson-Pew report would have made members of Congress avoid it (avoid commenting favorably on it) like the plague, lest they be accused by constituents (probably on both ideological sides) of concurring with those recommendations, thus killing chances at even getting to the initial steps they recommend? I suppose a better argument could be made that the report should have offered a variety of potential solutions reflecting different trade-offs, but any option among the alternatives would be quite unpopular with a very large chunk of any constituency and thus associating one’s self with the report in that case would still be politically costly.
Again, the primary purpose of a SAFE Commission or similar commission is obviously to provide political cover — as Senator Gregg says, “The only way you do this is if everyone joins hands and jumps off the cliff together”. Not a particularly good metaphor, but I’m sure you understand. Without such political cover, the politicians won’t get serious. With such political cover, there is at least a small chance they will get serious as a direct result of the commission, and failing that, a substantial chance that the commission will have the indirect effect of more positive action sooner than otherwise, as I explain in comment above. And again, explicit and opportunity costs are negligible. Thus, if we take a rational approach to this question, it is clear that a SAFE Commission is worthwhile even if one assumes that the odds are significantly against Congress enacting its recommendations and substantially implementing them.
It may be cathartic, may make for more entertaining reading, and may provide more opportunities for one to showcase his experience-and-insight-borne cynicism by simply ridiculing an idea and its proponents rather than expressing justifiable skepticism but endorsing the idea nevertheless based on the aforementioned rational approach, but it’s a harmful approach to policy choices and to related rhetoric and advocacy. With all due respect, I wish you’d opt for the rational, responsible approach.
Brooks,
I’ll go check out the link in a bit. It sounds like an interesting discussion. For what it’s worth, I mostly agree that a commission is better than nothing, but, as currently constructed, only barely so.
My concerns have to do with the probability of something coming out that is actually a recommendation. If you imagine a world of 18 sitting politicians, requiring consensus (my understanding of the current Gregg proposal), the probability does seem exceptionally small. That said, exceptionally small, as you point out, is still greater than zero which is my estimate of the post commission outcome.
To be honest, I found the Peterson/Pew report (which I read most of) deeply disappointing. It said absolutely nothing of substance on the nature of a solution other than the usual pablum about everything being on the table, etc. Your argument above is understandable but weak in my opinion. Look at it differently, what did the report add to the dialog? What was the ROI on the effort that went into it? I think the ROI was roughly -100%, just not worth the effort. While writing something that took a point of view would make politicians less happy, it would at least have a chance of advancing a dialog.
My only concern about forming a commission goes to the time it would be allowed to run. I fear that having formed the commission, it might be allowed to exist for a period of a couple of years, working on a consensus solution. To be honest, the problem, while complex is not so complex as to defy a fairly rapid set of policy choices being tabled and discussed. As long as a reasonable (6 to 9 month) timeline is set and enforced, I agree the benefits outweigh the risks.
Steve,
Happy Holidays.
Taking your points in order:
- Just to make sure it’s clear, as I explain in my comment above, the potential benefit of the commission — i.e., the effect of directly or indirectly causing more movement toward fiscal responsibility sooner than otherwise — in not limited to the prospect of adoption of its recommendation (or even to the prospect of it at least arriving at agreement on a recommendation). Of course, that degree of success could have enormous benefit, thus representing a large benefit with arguably low probability (perhaps moderate probability, but I think it’s not unreasonable to assign low probability), while other, higher probability effects that would get us to at least a bit more fiscal responsibility a bit sooner, even if small relative to the size of the problem, would still yield benefits far outweighing the costs (explicit and opportunity) of a commission.
As a note, I do not assign any significant opportunity cost because (1) I rather doubt (and doubt that anyone else thinks) that it is at all likely that, absent a commission, there would greater movement toward fiscal responsibility without a commission than with it (over time and even during the several months or year of the commission’s work), and (2) I don’t think there would be some great contribution by those who would work on the commission if they devoted their time to other matters in lieu of commission-related work (and as for the members of Congress involved, it’s arguable that the less time they have to meddle in other matters, the better off the nation is — and I ain’t jokin’).
As I mentioned, I agree with (what I think is) your implication that such a commission would be better overall if not filled with politicians. Having it filled with politicians makes it more likely that it will be enacted, but as you imply, reduces the chances of arriving at agreement on a recommendation representing substantial progress relative to the size of the problem. But any port in a storm; if it is not politically feasible to establish a commission filled mostly with non-partisan experts and a few D.C. “wise men” respected by each/both of the political parties, I’d prefer one filled with politicians over nothing.
Re: Peterson-Pew report, first of all, sorry for not getting back to that prior thread after I read/scanned it. I think your disappointment is understandable, and your question essentially of “why bother?” is a legitimate question. But I see the report as intended to be just a starting point, going as far as possible without saying things that would lead politicians to reflexively distance themselves from it, increasing focus on the issue (at least a bit) among members of Congress and the White House, trying to reign in debate to at least politically and economically plausible bounds by emphasizing that we will need both reductions in projected spending and reductions in projected spending, offering itself as a resource that can help in developing solutions, and apparently at later points offering some specific ideas. So I would just suggest that you consider viewing the report as a starting point and judge it from that perspective. Getting to a solution will be chess, not checkers, and this is one of those cases in which the shortest distance between two points is not a straight line (forgive the mixed metaphors). It will require multiple steps, not all bringing great progress or even any progress at all in themselves at the time, but having direct and/or indirect effects that increase the chances of desirable results.
Bill,
In an ideal world, we would have responsible leaders who gave us straight talk and put the interests of the nation above their personal political ambition. But we don’t have that because we don’t elect such people. We elect bullsh*tters who tell us enough of what we want to hear and not too much of what we don’t want to hear, and who act accordingly, based mostly on how their words and actions will affect their chances at election/re-election.
Given the above, what is needed is a mechanism for providing political cover for the politicians, a way they can act responsibly without making it (much) more likely that they will lose the next election or otherwise adversely affect their political career prospects (e.g., the 100 senators who plan to run for president someday). Providing that political cover would be the primary contribution of a SAFE Commission, just as the BRAC commission enabled members of Congress to go along with a set of base closures rather than each fighting closures in the respective districts/states.
Brooks,
My only concern is that the issue is “in limbo” while the commission is active. As long as it has a time limit or a sunset I would be for it. Without that, I worry it could be in session for far to long…fiddling while Rome burns and providing cover all the while.
As to Peterson/Pew, I take the point but it was rather a lot of nothing for a 100 page report. I guess my point is why publish 100 pages that don’t say anything. If you are just trying to keep the issue alive, it could be done in far less.
Steve,
Re: the “in limbo”, (1) I assume the commission wouldn’t take more than a year to either agree upon a recommendation or determine that it cannot reach agreement, but moreover (2) as I’ve indicated in comments above, for there to be the implied opportunity cost of the issue being in some “limbo” in the interim, we’d have to assume some plausible progress that would have been made in absence of a commission that wouldn’t be made during a commission’s work, but that would be a dubious assumption because (a) if we’re speaking of taking substantial legislative action , I don’t think I have to convince you that it’s unlikely that Congress will suddenly next year take bold action (and that this bold action would not happen because a commission was working on the problem, and (b) if we’re speaking of just dialogue on the issue, there’s no reason to presume that the existence of a commission would preclude or make such dialogue less likely. On the contrary, the commission would probably stimulate more such dialogue. And apropos of that point, when Greenspan testified before a senate committee recently in support of this commission idea, he pointed out that a key factor in adoption of a commission’s recommendations is that the process is actually inclusive of members of Congress (and the White House) outside of the commission, sharing and exchanging information, ideas and opinions, as opposed to the commission coming up with a recommendation behind closed doors and springing it on Congress. I’m pretty sure a SAFE Commission would take the former approach.
Source: EconomistMom.com
