THE LIBERTARIAN

Obama's Bogus Case for Tax Fairness Calling something just does not make it so. Sheldon Richman

In his State of the Union speech Tuesday night President Obama played the fairness card in calling for higher taxes on upper-income people. He said:

[W]e need to change our tax code so that people like me, and an awful lot of Members of Congress, pay our fair share of taxes. Tax reform should follow the Buffett rule: If you make more than $1 million a year, you should not pay less than 30 percent in taxes. [Emphasis added.]

And:

When Americans talk about folks like me paying my fair share of taxes, it’s not because they envy the rich. It’s because they understand that when I get tax breaks I don’t need and the country can’t afford, it either adds to the deficit, or somebody else has to make up the difference. . . . [Emphasis added.]

Is it unfair to compare the Obama and Reagan economic recoveries? No

By James Pethokoukis

Ronald Reagan inherited a Long Recession. The economy declined 0.3 percent in 1980, grew at a subpar 2.5 percent in 1981, and then plunged 1.9 percent in 1982. The lengthy downturn was really the culmination of more than a decade of bad economic policy. But the Reagan Recovery was stunning. GDP rose 4.5 percent in 1983 and 7.2 percent in 1984. It was Morning in America, and Reagan won reelection by a landslide.

How to Think about Private Equity

By Steve Kaplan

If the overall pattern is so positive—for investors, companies, and even employment—why is private equity so controversial?

Interest in the private equity business has exploded with the intense scrutiny of Mitt Romney’s experience as a private equity investor. Some of the discussion has been confused and confusing. In what follows, I briefly describe how private equity works and what the results have been. When all is said and done, the evidence from empirical research is that private equity funds have delivered strong returns to their investors, improved the operating performance of their companies, and had surprisingly small net effects on employment.

The Problem with Bambi-nomics

By Robert McHenry

On Mitt Romney, Bain Capital, and modern political discourse.

Mitt Romney's difficulty with his history at Bain Capital may be our most nearly perfect example of how ignorance and misunderstanding, willful or otherwise, render our political discourse impotent.
Businesses that do what Bain does are sensitive about the common analogy comparing them to scavenger species in nature. In large part this is owing to how we are trained from childhood to think of nature in terms of postcard vistas, pettable furry things with large eyes, and the romantic notion of some sort of sweetly cooperative community of creatures. We tend not to teach children about vultures, fungi, slime molds, or maggots. More importantly, we do not teach them why such things are every bit as important to the ecology as Bambi. Without them, the world would soon be tree-deep in corpses, large and small, and life would become impossible. With them, the soil is constantly enriched with recycled nutrients, and life continues abundant. But this kind of comparison clearly doesn't help Bain's image very much.

Fixing Student Loans: Let’s Give Colleges Some ‘Skin in the Game’

By Alex J. Pollock

What lessons on student loans can be learned from the searing national misadventure with mortgages?

There are provocative parallels between student loans and the mortgages that created the disastrous housing bubble. In both cases, the government promoted plausible goals— higher education and home ownership—to excess, through the overexpansion of debt to levels beyond the repayment ability of a large percentage of borrowers. In both cases, the government guaranteed much of the credit, putting the ultimate risk of bad debts on taxpayers. In both cases, debt expansion drove the price of the object being financed (colleges and houses) to heights sustainable only if debt could always be increasing. In mortgages, it could not, and the subsequent collapse raises the question: will there be a similar outcome with student loans?

Professor Richard Vedder, considering the question of a student loan bubble, recently concluded that the worst idea ever “was the creation of federally subsidized student loans in the first place.” Can any lessons from the searing national misadventure with mortgages be usefully applied to student loans? I believe so.
A principal lesson from mortgages, nearly universally agreed upon, is that those who create the mortgages should retain a material part of the credit risk. Such “skin in the game” obviously aligns the incentives of the originator of the loan with taxpayer guarantors to control excesses in debt expansion. For mortgages, this “skin in the game” concept was adopted by the Dodd-Frank Act of 2010. More importantly, its advantages are displayed by one of the highest quality mortgage portfolios that exist today: the Mortgage Partnership Finance (MPF) mortgages of the Federal Home Loan Banks. All of these MPF mortgages have credit risk retained by the originator, with excellent results for their credit performance. This program has been operating for more than 14 years.
Let’s apply this mortgage lesson to student loans.

Colleges are the effective originators, the promoters, and the chief financial beneficiaries of student loans.

Who are the most important parties to have “skin in the game” in student loans? The colleges themselves, of course! They are the effective originators, the promoters, and the chief financial beneficiaries of student loans. It is their rising costs which result in ever more debt and more risk of default for student borrowers and for taxpayers.
The federal student loan programs should simply compel colleges which get proceeds from the programs to maintain a 10 percent first-loss share in the credit performance of the loan. This puts a material risk of excessive and un-repayable debt and of high college costs on those who are promoting the loans. The colleges would stand to take losses on bad loans before the taxpayers, as they should—they would, in financial parlance, be subordinated or “junior” to the taxpayers. A highly desirable improvement in financial structure and incentives!
So, just as for the mortgage lenders, let’s give the colleges some “skin in the game.”
Alex J. Pollock is a resident fellow at the American Enterprise Institute. He led the creation of the MPF program during the 1990s when President and CEO of the Federal Home Loan Bank of Chicago.

Dining with Vultures: Rent-to-Own, the Feds, and the Housing Sector

By Jay Weiser

Distressed asset buyers are either ruthless or go bust, and government entities have no business co-venturing with them.

Rent is suddenly the rage for solving the housing debt crisis—and vulture capital with it. But the ambivalence conjured up by private equity magician Mitt Romney, who has simultaneously restructured himself into the leading Republican presidential candidate and America's most reviled business leader across the ideological spectrum, suggests that the housing crisis requires free and clear, as-is sales, even if they increase short-term losses. The federal government should exit the real estate business and let vulture investors convert busted planned communities into rentals.