Arnold Kling


Arnold Kling
Subprime Mortgage Loans... Tyler on the Problems of Liber...

John Fund writes,

In their favor-seeking, all of the lobbyists visiting Capitol Hill are bound by House and Senate ethics rules that cap most individual gifts at $50 per elected official or staffer, with an annual limit of $100 per recipient from any single source. But local governments, public universities and Indian tribes are exempt from the limit, so they are able to shower members and their staffs with such goodies as luxury skybox tickets to basketball games and front-row concert tickets.

...Universities and colleges spent at least $75 million in 2005 on lobbying according to a study by USA Today. The Chronicle of Higher Education reports that $2 billion in grants flowed into higher education in 2003.

The latter is an interesting data point for the discussion of whether faculty tenure is a market phenomenon.

The point I would make here is that an even greater privilege than being tax-exempt is to be regulatory-exempt. For example, in the 1970's, when Freddie Mac was chartered, the only competitive tool it had with respect to the Savings and Loan industry was its exemption from regulations that kept the S&L's from attracting money from out of state. Today, the S&L's are pretty much dead, and Freddie Mac, along with Fannie Mae, dominates the mortgage market.

One reason that Medicare ought to be more efficient than private health insurance is that Medicare does not have to comply with mandates from 50 different state regulators about what to cover. Again, regulation-exemption matters.

Colleges and universities have the best deal of all. Potential new entrants are much more heavily regulated than incumbents. They get Federal subsidies plus tax exemptions. And, as Fund points out, when they lobby to keep these benefits, they do not face the same restrictions as private-sector supplicants.

CATEGORIES: Public Choice Theory

COMMENTS (6 to date)
spencer writes:

I always thought that Freddie Mac's major advantage was the implied assumption that it was backed by the government allowed it to borrow at a lower rate then other mortgage lenders.

Is that belief incorrect?

Moreover, wasn't the major problem that the S&Ls had is they did not realize that removing Reg Q meant that short term interest rates could now rise much higher then in previous tight money cycles? They tried to continue making money by borrowing short and lending long when largely because of the removal of Req Q the yield curve remained negative for almost 5 years -- as compared to the few months in previous cycles.

So wasn't the S&Ls real problem was not realizing that deregulation --that largely prevented such unprofitable behavior --changed the rules of the game?

Arnold Kling writes:

Spencer, the S&L's also had a guarantee--small depositors protected by deposit insurance and large depositors de facto protected as well by policies to merge failed S&L's at government expense rather than let depositors suffer. So the government guarantee was not a difference between Freddie and S&L's. Being able to solicit funds across state lines, being exempt from interest rate ceilings, being exempt from securities registration regulations--those were big advantages for Freddie.

Bob writes:


You're right, sort of, except that Fannie and Freddie are not direct lenders and don't compete with banks and thrifts to originate loans. They do "compete" with private morgage insurance providers and the advantage you cite is significant, leading them to dominate the market. They also have taken hugely-profitable, hugely-leveraged positions to exploit the spread between mortgage yields and their close-to-treasury cost of borrowing. Again, only possible with the implicit guarantee.

I'm pretty confused about the Fannie/thrift anecdote and I'm not sure that Fannie/Freddie speaks to Arnold's main point. I would say that they are more regulated than the private mortgage insurers (at least via mandates if not supervision, although even that is changing). Sure, they were a lot less regulated than thrifts back in the day, but that's not apples-to-apples.

Barkley Rosser writes:


I am willing to grant that non-profit and state unis and colleges have an advantage by being tax exempt. But in what ways are they regulation exempt? Actually state universities face all kinds of regs that privates of whatever sort do not. And all that grant money involves all kinds of paperwork and regs, which I do not think would be any worse for a for-profit institution.

So, just what are all these regs the for-profits face the others do not, please?

Barkley Rosser writes:


Maybe it is time for me to pinpoint what I think is really going on with all this debate over tenure and the for-profits and so forth. I think that we are seeing something like a long-run equilibrium, and not something that is going to shift in favor of the for-profits, unless indeed there was some general abolition of tenure.

The problem is that indeed faculty salaries are able to be kept somewhat lower than they might otherwise for people of the requisite level of education and ability because of the job security granted by tenure. The problem for the for-profits is not that they face steeper regs (they don't) or that they must pay taxes (if they were so efficient they would save costs and be like for-profit hospitals that are doing just fine, thank you).

No, the problem is that they do not offer tenure, but then they do not offer salaries that would attract quality people who are going to be without the job security of tenure. The upshot is that they have faculties that suck. University of Phoenix and Upper Iowa University is about as good as they are going to get, unless thay ever grant tenure or pay faculties much more than other places, presumably to be covered by much higher tuitions. Not holding my breath.

Robert A. Book writes:
One reason that Medicare ought to be more efficient than private health insurance is that Medicare does not have to comply with mandates from 50 different state regulators about what to cover. Again, regulation-exemption matters.

Yes, but most employer-sponsored plans are governed by ERISA, a federal law that speceficially preempts most state laws governing health and pension plans.

Thus, most private health insurance plans do not, in fact, have to comply with mandates from 50 different state regulators about what to cover.

Of course, plans sold to individuals do -- and that's one (yet another!) reason why employer-sponsored plans are more efficient than individual plans. (The other reasons being the tax advantages, and adverse selection.)

Former Senator Jim Talent's proposal for "Association Health Plans," endorsed by Pres. Bush in the State of the Union Address, is supposed to be away around this -- it would allow non-employer "associations" -- like the AEA, or whatever -- to buy health insurance on behalf of their members under ERISA, instead of under state regulations. The goal is to make it easier for the self-employed and small employers to buy health insurance.

Comments for this entry have been closed
Return to top