Results for “private equity”
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Someone has to be wrong

Paul Krugman thinks Brad DeLong is wrong.  Brad DeLong thinks that Paul Krugman is wrong.  Robert Waldmann thinks that Brad DeLong is wrong.  The topic of course is the Geithner plan.

I'm not so far from Kevin Drum's view, as stated here and here.  It has some chance of succeeding and the relevant alternatives are also bad for the taxpayer.

But can the government itself be trusted?  Here is some of the recent fallout:

…some executives at private equity firms and hedge funds, who
were briefed on the plan Sunday afternoon, are anxious about the recent
uproar over millions of dollars in bonus payments made to executives of
the American International Group.

Some
of these executives have told administration officials that they would
participate only if the government guaranteed that it would not set
compensation limits on the firms, according to people briefed on the
conversations.

The executives also expressed worries about
whether disclosure and governance rules could be added retroactively to
the program by Congress, these people said.

The bottom line?: Here are what Thugz say about the various bailouts.  Excerpt:

…they laughed when I said the government should prioritize the punishment of senior management. In the words of Shine,
the elder statesman of the group, “You have to be real careful when you
mess with folks at the top, because when the war is over, you’ll need
these guys real quick. Ninety-nine percent of people just doing what
they’re told – you couldn’t find half a brain among all of them. But the ones with the brains – don’t let them go.”

In fact you would expect a successful businessman to understand that.

At first I thought these numbers were a typo

From this story:

To entice private investors like hedge funds and private equity
firms to take part, the F.D.I.C. will provide nonrecourse loans – that
is, loans that are secured only by the value of the mortgage assets
being bought – worth up to 85 percent of the value of a portfolio of
troubled assets.

The remaining 15 percent will come from the
government and the private investors. The Treasury would put up as much
as 80 percent of that, while private investors would put up as little
as 20 percent of the money, according to industry officials. Private
investors, then, would be contributing as little as 3 percent of the
equity, and the government as much as 97 percent.

One ray of light, one bolt of gloom

Although the financial meltdown is a disaster for the country, Mr. Oros
said, “the opportunity going forward is unprecedented. It is fantastic.
It is as if I had been training for this for the last 40 years of my
career.”

Oros is currently a partner in a private equity firm.  The rest of the article, however, is deeply scary.  It’s about how much lawyers and lobbyists are benefiting from TARP and related measures.  Consider this form of optimism:

“It is a good time to be me,” said John L. Douglas, a partner in
Atlanta at the law firm Paul Hastings and a former lawyer for bank
regulators who helped create the agency that administered the last
federal bailout, the Resolution Trust Corporation.

We’re in a race to see whether politics will become the dominant means of allocating financial wealth in this country.  That could be the single biggest domestic issue today, but too few economists are speaking up about it.

Supercapitalism, by Robert Reich

Finally, I will come to some conclusions you may find surprising — among them, why the move toward improved corporate governance makes companies less likely to be socially responsible.  Why the promise of corporate democracy is illusory.  Why the corporate income tax should be abolished.  Why companies should not be held criminally liable.  And why shareholders should be protected from having their money used by corporations for political purposes without their consent.

That’s from Robert Reich’s Supercapitalism.  I’m coming late to this party, but mostly I liked the book.  It’s full of fresh thinking and most of all it is excellent on just how much invisible hand mechanisms shape an economy.  It has the best explanation (and partial defense) of high CEO pay I’ve seen, namely supply and demand.  If you think it is exploitation of shareholders, take a look at how much private equity pays its CEOs.  And as the above quotation indicates, Reich is willing to rethink just about all the old left-wing shibboleths (what a biased word) about corporations.  He separates the analysis from the moral narrative, so when you disagree with him, that point is an isolated one and it does not infect everything he says.

Reich recommends that we strengthen atrophied democratic constraints on capitalist outcomes; in his view special interest politics are just another form of capitalism and special interests are crushing voter influence.  "Bryan Caplan, telephone!"

By the way, make sure you read this piece on the futility of campaign finance reform, which counts as one of the most overrated ideas.

Here is Greg Mankiw on the book.  Here is another take on the book

Equalizing the rate of tax on income and capital gains?

Alan Blinder had a good column yesterday, summarized and discussed by Mark Thoma.  The current movement, supported by Greg Mankiw I might add, is trying to raise the rate of taxation on private equity income so that Warren Buffet is not paying a lower tax rate than someone poorer than me.  More generally, it seems to many people that the rate of taxation on capital gains should be the same as the rate of taxation on ordinary income.

It’s hard to go against the weight of that opinion, but I would like to refocus the debate on the difference between stated and real rates of capital taxation, most of all with regard to loss offsets.  I haven’t seen this discussed in the very recent debates, though it is an old theme in public finance.

My uninformed-by-ever-having-been-a-tax-lawyer sense is that loss offsets for the capital gains tax are worth a great deal to some investors.  Sell your winners to coincide with selling some losers and claim a net gains income of zero or very low.  Let the asset winners ride and they will end up in your bequest and have their taxable values reset upon your death.  If your option values line up the right way, you have enough diversification, and you are not liquidity constrained, it seems that for many people the de facto rate of capital gains taxation is not 15 percent but rather close to zero.  (Maybe not quite zero in expected value terms; it’s tricky because if the losses exceed the gains you can deduct only $3000 of the losses from regular income but on the upside you’re taxed all the way.  On the other hand, you can offset with charitable deductions.)

Let’s say we raised the book rate of tax on capital gains to forty percent.  For some people the net real rate of tax on capital gains could still be zero.  For other people it would be forty percent.

Let’s say we raised the book rate of tax on capital gains to eighty percent.  For some people the net real rate of tax on capital gains could still be zero.  For other people it would be eighty percent.

Under which of these scenarios have we equalized the tax rates on capital gains and labor income?

For any published capital gains rate, it seems there are two or more (and possibly wildly disparate) real rates de facto.  Again, I’m no tax lawyer, but it seems any capital gains tax hike falls disproportionately on the non-diversified (if you hold only one asset and it is a huge winner, where can you get a loss offset from?  The quality of your tax accountant probably matters too.  Any other factors?).

No matter what, capital gains rates for some investors are too high and for others the rates are too low.  And don’t be shocked if many of those "too low" rates are enjoyed by the wealthy.  There will be unfairnesses when compared with income taxation as well.  It is a question of choosing your unfairness, not being able to eliminate unfairness or differential treatment.  So the mere fact that one apparently unjustified unfairness has been pointed out…well…I’m not yet ready to cry uncle.

One reason why the Clinton tax hikes weren’t so bad for capital formation is because capital gains taxes can be avoided in various ways.  The Bush defenders should recognize that and admit that K gains tax hikes are not always a disaster.  On the other hand, the notion of equalizing income and capital gains rates is a myth, and always will be.  There simply isn’t a single capital rate that ends up applied to everyone, no matter what it says on paper.

You might go down another path and talk about eliminating the loss offset.  I wonder if that can be done feasibly.  For instance it would mean that assets A and B, held together in a mutual fund are worth more than assets A and B held separately.  You can think of other problems with this in your spare time.

Yet another (and better) path is to institute a consumption tax, but in the meantime these other kinds of unfairness are not going to disappear.  See also Martin Feldstein on other costs of capital income taxation.

It makes perfect sense to say: "we’ve already spent the money, taxes somewhere have to go up."  But the Buffet example, taken alone, doesn’t convince me much.  Let’s start by taxing negative externalities at a higher level, not by focusing on major creators of wealth.

I’ve been waiting for a paper like this

Steve Kaplan and Joshua Rauh write:

We consider how much of the top end of the income distribution can be
attributed to four sectors — top executives of non-financial firms
(Main Street); financial service sector employees from investment
banks, hedge funds, private equity funds, and mutual funds (Wall
Street); corporate lawyers; and professional athletes and celebrities. 
Non-financial public company CEOs and top executives do not represent
more than 6.5% of any of the top AGI brackets (the top 0.1%, 0.01%,
0.001%, and 0.0001%).  Individuals in the Wall Street category comprise
at least as high a percentage of the top AGI brackets as non-financial
executives of public companies.  While the representation of top
executives in the top AGI brackets has increased from 1994 to 2004, the
representation of Wall Street has likely increased even more.  While the
groups we study represent a substantial portion of the top income
groups, they miss a large number of high-earning individuals.  We
conclude by considering how our results inform different explanations
for the increased skewness at the top end of the distribution.  We argue
the evidence is most consistent with theories of superstars, skill
biased technological change, greater scale and their interaction.

Here is the link, here is the non-gated version.  How about this bit from the text?:

…the top 25 hedge fund managers combined appear to have earned more than all 500 S&P 500 CEOs combined (both realized and estimated).

This is important too:

…we do not find that the top brackets are dominated by CEOs and top executives who arguably have the greatest influence over their own pay.  In fact, on an ex ante basis, we find that the representation of CEOs and top executives in the top brackets has remained constant since 1994.  Our evidence, therefore, suggests that poor corporate governance or managerial power over shareholders cannot be more than a small part of the picture of increasing income inequality, even at the very upper end of the distribution.  We also discuss the claim that CEOs and top executives are not paid for performance relative to other groups.  Contrary to this claim, we find that realized CEO pay is highly related to firm industry-adjusted stock performance.  Our evidence also is hard to reconcile with the arguments in Piketty and Saez (2006a) and Levy and Temin (2007) that the increase in pay at the top is driven by the recent removal of social norms regarding pay inequality.  Levy and Temin (2007) emphasize the importance of Federal government policies towards unions, income taxation and the minimum wage.  While top executive pay has increased, so has the pay of other groups, particularly Wall Street groups, who are and have been less subject to disclosure and social norms over a long period of time.  In addition, the compensation arrangements at hedge funds, VC funds, and PE funds have not changed much, if at all, in the last twenty-five or thirty years (see Sahlman (1990) and Metrick and Yasuda (2007)).  Furthermore, it is not clear how greater unionization would have suppressed the pay of those on Wall Street.  In other words, there is no evidence of a change in social norms on Wall Street.  What has changed is the amount of money managed and the concomitant amount of pay.

There is a great deal of analysis and information (though to me, not many surprises) in this important paper.  The authors also find no link between higher pay and the relation of a sector to international trade.

Prospect theory

A loyal MR reader asks about prospect theory.  I feel it is usually too experimental and too ad hoc, are those really the general biases out there in markets?  I was heartened to see the following good paper (non-gated here) on prospect theory and the stock market.  The abstract:

We study the asset pricing implications of Tversky and Kahneman’s
(1992) cumulative prospect theory, with particular focus on its
probability weighting component.  Our main result, derived from a novel
equilibrium with non-unique global optima, is that, in contrast to the
prediction of a standard expected utility model, a security’s own
skewness can be priced: a positively skewed security can be
"overpriced," and can earn a negative average excess return.  Our
results offer a unifying way of thinking about a number of seemingly
unrelated financial phenomena, such as the low average return on IPOs,
private equity, and distressed stocks; the diversification discount;
the low valuation of certain equity stubs; the pricing of
out-of-the-money options; and the lack of diversification in many
household portfolios.

In other words, we can think of stocks as a lottery ticket.  They offer a chance at the thrill of victory, and not just a mean-variance pair; this may help explain various pricing and return anomalies.  Am I convinced?  No.  Am I moved?  Yes.

#16 out of 50.

Misandry

John Tierney lets loose in a well-researched piece:

Scholars, journalists, politicians, and activists will lavish attention on a small, badly flawed study if it purports to find bias against women, but they’ll ignore—or work to suppress—the wealth of solid research showing the opposite. Three decades ago, psychologists identified the “women-are-wonderful effect,” based on research showing that both sexes tended to rate women more positively than men. This effect has been confirmed repeatedly—women get higher ratings than men for intelligence as well as competence—and it’s obvious in popular culture.

“Toxic masculinity” and “testosterone poisoning” are widely blamed for many problems, but you don’t hear much about “toxic femininity” or “estrogen poisoning.” Who criticizes “femsplaining” or pretends to “believe all men”? If the patriarchy really did rule our society, the stock father character in television sitcoms would not be a “doofus dad” like Homer Simpson, and commercials wouldn’t keep showing wives outsmarting their husbands. (When’s the last time you saw a TV husband get something right?) Smug misandry has been box-office gold for Barbie, which delights in writing off men as hapless romantic partners, leering jerks, violent buffoons, and dimwitted tyrants who ought to let women run the world.

Numerous studies have shown that both sexes care more about harms to women than to men. Men get punished more severely than women for the same crime, and crimes against women are punished more severely than crimes against men. Institutions openly discriminate against men in hiring and promotion policies—and a majority of men as well as women favor affirmative-action programs for women.

The education establishment has obsessed for decades about the shortage of women in some science and tech disciplines, but few worry about males badly trailing by just about every other academic measure from kindergarten through graduate school. By the time boys finish high school (if they do), they’re so far behind that many colleges lower admissions standards for males—a rare instance of pro-male discrimination, though it’s not motivated by a desire to help men. Admissions directors do it because many women are loath to attend a college if the gender ratio is too skewed.

Gender disparities generally matter only if they work against women. In computing its Global Gender Gap, the much-quoted annual report, the World Economic Forum has explicitly ignored male disadvantages: if men fare worse on a particular dimension, a country still gets a perfect score for equality on that measure. Prodded by the federal Title IX law banning sexual discrimination in schools, educators have concentrated on eliminating disparities in athletics but not in other extracurricular programs, which mostly skew female. The fact that there are now three female college students for every two males is of no concern to the White House Gender Policy Council. Its “National Strategy on Gender Equity and Equality” doesn’t even mention boys’ struggles in school, instead focusing exclusively on new ways to help female students get further ahead.

Read the whole thing.

Tuesday assorted links

1. Noise pollution and killer whales.

2. “We estimate an MPC [marginal propensity to consume] out of unrealized crypto gains that is more than double the MPC out of unrealized equity gains but smaller than the MPC from exogenous cash flow shocks.

3. Why so little recent progress on improved Covid vaccines? (NYT)

4. How well does he understand decentralized or for that matter centralized systems?: ““I’m a socialist,” Hinton added. “I think that private ownership of the media, and of the ‘means of computation’, is not good.”  Nice!

5. Claims by Marco Rubio.

6. The deputy mayor Midsummer’s Eve culture that is Helsinki.

The evolution of single payer health insurance

This is one of the big underreported stories these days, namely that single payer systems are working far less well than they used to, including during the pandemic but not only.  Eventually the blame will shift and will be put on something like “austerity,” whereas the deeper understanding was that those systems were bound to end up understaffed and undercapitalized all along.  In any case, here is the latest from Sweden, circa summer 2022:

In 2000, around 100,000 Swedes had private health insurance. Today, there are seven times as many, in a country of 10 million people. In 60% of cases, the insurance is paid for by the employer. According to the Swedish insurers’ organization Svensk Försäkring, the rate can vary from 300 to 600 crowns on average per month. For those dealing with health problems, the advantages are quicker consultations and avoiding long waiting lines.

And that is from Le Monde, not the Heritage Foundation.  The Canadian, British, and New Zealand systems are all in crisis too.  But that narrative is not exactly tailor-made for today’s media environment…

When in doubt, ask Alex Rampell

Alex is very very highly rated by those who know him, but still in the broader scheme of things significantly underrated as a Bay Area tech and finance thinker.  Here is Alex on SPACs:

If the best fundraise (IPO included) aggregates as many potential buyers as possible to raise money at the highest price with the least dilution and lowest fees, it’s hard to understand how a SPAC represents an improvement against those constraints. When a SPAC merges with a target (“de-SPACs”), it’s tantamount to an IPO. The SPAC (already publicly traded, with lots of cash on its balance sheet) and the target company agree on a pre-money valuation for the target; the money sitting in the SPAC becomes the “money raised” (IPO equivalent) with typically a PIPE (Private Investment in Public Equity, a further institutional fundraise / large block sale) done at the same time. As an example, a $500M SPAC might merge with a private company, ascribing a $4.5B valuation to the private company, meaning a $5B post-money valuation of the combined entity. How do we know *this* is the fair price? Should a company meet with one SPAC? Two SPACs? Three SPACs or four? Where is the price discovery?

And while the fee structure of SPACs will likely change, right now it is indisputably a more expensive option with less price discovery. Bankers are paid 5%+ for taking the SPAC public; SPAC investors typically get warrants with their investment; the SPAC sponsor typically gets 20% (of the pre-merger value of the SPAC) for finding a target, so 2% in the above example; a banker is normally hired and paid to handle the merger; a mini-roadshow happens to get approval from the SPAC shareholders AND to potentially secure more cash in the form of a PIPE, for which a banker is also paid.

Most of the post is on why IPOs are less inefficient than you might think, informative and interesting throughout.

Zachary Booker on bridge loans and bankruptcy

This is an email, all from him, I won’t add in any other formatting:

“Like you, I have an extraordinarily deep concern about the capacity for businesses – not only SMBs, but also larger, capital-intensive firms – to weather this path of suppression. I was quite surprised to hear Russ take a lighter note.

…I am deeply sceptical of the efficacy of bridge loans that you spoke about early this morning. While Brunnermeier, Landau, Pagano, and Reis have laid out the best transmission mechanism, I can not possibly envision it will move the needle enough for the majority of those businesses while also not leaving a wake of loss provisions for future generations. I suppose you could say I am partial to point two in your piece.

I also simply can’t understand the legal logistics of bridge loans in this scenario. Most companies will have a capital structure of some kind (perhaps without the most sophisticated lenders). How are you cramming down those who you are priming in the capital structure? You need consent. Who will be managing this incredibly laborious process of gaining consent and creating the terms? Cash grants are one thing, but bridge loans that aren’t unsecured at the bottom of the capital structure are an entirely different matter.”

“While the benefit of hindsight can be a hindrance to pontificating on novel circumstances, it strikes me as unequivocally true that the GFC had a much simpler – intellectually, if not politically – solution. Namely a solution that at its core involved taking known, marketable securities out of the system at haircuts or depressed valuations to abate panic, settle markets, and of course eventually sell at a profit.

In short, I’m partial to the view that mark-to-market accounting was both a central impetus for why the crisis was so severe and why action could be taken so decisively without burdening tax payers for generations to come (see Ball’s very good book here and Fragile by Design, both of which you’re likely familiar with). This crisis provides no such “simple” solutions that can be concentrated against a singular sector of the economy by taking decisive action.

I, of course, have no grand unified theory to share with you. However, I did want to pass along some thoughts I had upon reading your bridge loan piece that came to mind.

Like you, I am also worried about how broad the demand shock is currently and will be moving forward. Affecting not only every industry severely, but also every locality in the economy (e.g. leaving no state or municipality without deep, painful bruises). This raises the question of how the economy – when this is all said and done – reconstitutes itself in an orderly, efficient fashion.

While I’m partial…I believe one of the incredible strengths of the United States is its bankruptcy code. In particular, the out-of-court and Chapter 11 processes.

I would perhaps mull over how the United States can leverage the bankruptcy code to provide support, both out-of-court (e.g. before filing) and to expedite the process while in-court (e.g. by utilizing pre-packs, which are very popular, very quick, and incredibly effective at providing sustainable balance sheets).

The United States could explore offering – or backstopping – DIP Financing for firms that file Chapter 11 (see explainer on DIP financing from Davis Polk here). DIP Financing has been around for many decades, is incredibly safe, and deeply effective.

  1. The US could offer DIP Financing at favourable terms directly and automatically under preset conditions (e.g. a firm that was FCF positive in 2018 with EBITDA +$[10]mln, but needing to file Chapter 11 in 2020, would immediately get a facility at L+[100]). This would also give the US the highest seniority in the cap stack with very favourable terms upon a potential future Chapter 11 (Chapter 22) or a future Chapter 7 (liquidation). For firms that have not been in distress prior to the crisis, this would have the US assuming very little real credit risk. 
  2. The US could backstop private DIP providers – to get credit rolling again – by guaranteeing [95] cents on the dollar for any facility extended within the next [X] months. Historically, DIPs have returned much more than this so this is reasonably safe from a credit perspective. Note: this could also be done for TL1s or revolvers out-of-court. Same principle applies regarding seniority, lessened credit risk, etc. although you’d need consent down the capital structure.
    1. The United States could explore offering participation in pre-packs whereby:
      1. The US would inject $[X]mln in senior secured notes if;
      2. Existing Senior Secured take a [5]% haircut
      3. Unsecured take a [15]% haircut
      4. Equity take a [50]% haircut
      5. Again, the idea would be for pre-packs to be, well, pre-done. The idea would be that if your business is hurling towards bankruptcy, it may be best to bite the bullet and recapitalize (via the US notes) while re-working your balance sheet right now. If your firm meets the FCF, EBITDA, or whatever criteria is determined then the US would offer this package automatically. Contingent only on those within the capital structure consenting to taking at least [X]% haircuts (as consent is required by law). Note: you may want to say that any financing put in – or backstopped by – the US will not be additive to the covenant ratios underpinning the rest of the capital structure (or these covenants can just be amended, if necessary, to allow for this new capital injection as is commonplace anyway).

One would hope that if The United States does something like this it could serve three useful functions:

  1. Providing confidence to market participants that there will be a financing backstop – for otherwise healthy firms blindsided by COVID-19 – by the United States, which will likely have the paradoxical affect of freeing up credit from private participants and stopping the explosion in credit spreads and the halting of credit extension we’re currently seeing.
  2. Allowing firms, without much relative credit risk to the United States, to obtain a runway through the fresh injection of capital along with a modest restructuring that will help them weather the storm if it is to be prolonged.
  3. Providing an automatic, guaranteed solution that is widely accessible to firms as all qualifications and terms would be preset and thus remove any uncertainty as to what firms would be able to qualify for or ultimately obtain.

Using the bankruptcy code in this way would allow the United States to help firms (albeit, likely slightly larger ones than mom-and-pops) in a predictable, known, guaranteed way while also protecting tax payers from taking significant downside risk positions in an ad-hoc and convoluted matter via bridge loans (if they are feasible at all, which I doubt). In short, the United States would leverage the incredibly strong institutional and intellectual framework of its existing bankruptcy code.

I believe – as I believe you do as well – that we are in for a much lengthier protraction than many anticipate…I do not believe Goldman’s forecast…that we’ll see 13% GDP growth in Q3. I do not believe demand will return so quickly or in such force, because I do not believe we will return to normalcy as quickly as we have just departed it.

As I said previously, I have no grand unified theory to get American business through this crisis. However, we both agree in the general goodness of Big Business as a driver of America. What I’ve just laid out is perhaps the most politically palpable solution (because it involves bankruptcy, even if only in name only) that can give a strong life line to those currently in need while not exposing taxpayers to absurd (albeit still large) credit risk. This solution also can be worked to protect pension liabilities and other essential worker benefits.

I think it’s inevitable that we have mass insolvencies, dislocations, and mismatches moving forward. For small businesses, there are solutions around the edges, but I simply cannot comprehend how the United States would be able to figure out and then extend the appropriate levels of credit via bridge loans en masse to these folks. It is surreal to imagine it possibly working and I worry deeply about what such a program – if tried, almost certainly with less dollars than would be required – would do to the social fabric and psyche of the American people when firms inevitably still buckle and break.

I haven’t given much thought to how to leverage the institutional framework of America to best ameliorate this crisis, but I’ve seen no one speak much about how out-of-court or in-court restructuring could be a partial solution. So I figured I’d pass this along as something to keep in the back of your mind and mull over.”

Zachary tells me you can reach him at [email protected].

Income Share Agreements

Mitch Daniels, former Governor of Indiana and now President of Purdue University, writes about income share agreements in the Washington Post:

In an ISA, a student borrows nothing but rather has his or her education supported by an investor, in return for a contract to pay a specified percentage of income for a fixed number of years after graduation. Rates and time vary with the discipline of the degree achieved and the amount of tuition assistance the student obtained.

An ISA is dramatically more student-friendly than a loan. All the risk shifts from the student to the investing entity; if a career starts slowly, or not at all, the student’s obligation drops or goes to zero. Think of an ISA as equity instead of debt, or as working one’s way through college — after college.

An excellent point. If you watch Shark Tank the entrepreneurs are always wary about debt because debt puts all the risk on them and requires fixed payments regardless. Yet when it comes to financing the venture of one’s own life suddenly equity becomes akin to slavery and debt bondage becomes freedom! It’s very peculiar.

Another advantage of ISAs is that they provide feedback. Is the university willing to educate you for free in return for a share of future earnings? That’s a good signal!

ISAs have emerged principally in response to the wreckage of the federal student debt system but they also represent an opportunity for higher education to address another legitimate criticism: that it accepts no accountability for its results. As the lead investor of the two funds Purdue has raised to date, our university is expressing confidence that its graduates are ready for the world of work.

Check out Lambda School. “We invest in you. Pay nothing until you get a job making over $50,000.”

At Purdue, the university I lead, hundreds of students have such contracts in place, and other colleges large and small are joining the ISA movement. Beyond traditional higher education, coding academies and other skill-specific schools are making the same offer: Study for free, and pay us back after you get the good job we are confident you’ll land.

Although the very nature of ISAs protects the participant, early adopters such as Purdue have built in safeguards. A user-friendly computer simulator provides quick, transparent comparisons with various public and private loan options. No investee pays anything for the first six months after graduation or until annual income exceeds $20,000. For those graduates who get off to fast career starts, a ceiling of 250 percent of the dollars that purchased their education limits total repayment.

I’ve been writing about income-contingent loans for years. Milton Friedman was an early advocate. It’s good to see forward movement.

Medicare for all is not entirely efficient

There is increasing interest in expanding Medicare health insurance coverage in the U.S., but it is not clear whether the current program is the right foundation on which to build. Traditional Medicare covers a uniform set of benefits for all income groups and provides more generous access to providers and new treatments than public programs in other developed countries. We develop an economic framework to assess the efficiency and equity tradeoffs involved with reforming this generous, uniform structure.We argue that three major shifts make a uniform design less efficient today than when Medicare began in 1965. First, rising income inequality makes it more difficult to design a single plan that serves the needs of both higher- and lower-income people. Second, the dramatic expansion of expensive medical technology means that a generous program increasingly crowds out other public programs valued by the poor and middle class. Finally, as medical spending rises, the tax-financing of the system creates mounting economic costs and increasingly untenable policy constraints. These forces motivate reforms that shift towards a more basic public benefit that individuals can “top-up” with private spending.If combined with an increase in other progressive transfers, such a reform could improve efficiency and reduce public spending while benefiting low income populations.

That is from a new NBER working paper by Mark Shepard, Katherine Baicker, and Jonathan S. Skinner.

An argument about monetary policy I had never heard before

This paper studies a model in which a low monetary policy rate lowers the cost of capital for entrepreneurs, potentially spurring productive investment. Low interest rates, however, also induce entrepreneurs to lever up so as to increase payouts to equity. Whereas such leveraged payouts privately benefit entrepreneurs, they come at the social cost of reducing their incentives thereby lowering productivity and discouraging investment. If leverage is unregulated (for example, due to the presence of a shadow-banking system), then the optimal monetary policy seeks to contain such socially costly leveraged payouts by stimulating investment in response to adverse shocks only up to a level below the first-best. The optimal monetary policy may even consist of “leaning against the wind,” i.e., not stimulating the economy at all, in order to fully contain leveraged payouts and maintain productive efficiency.

That is from a new NBER working paper by Viral V. Acharya and Guillaume Plantin.

Since I don’t see share buybacks as “draining” the economy of investment (the funds simply get recycled to other companies and ventures), I can’t agree with this argument.  Still, if you are worried about buybacks, perhaps you should think twice about always pushing for easier monetary policy.