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Big Government

The problem with modern America

If you follow the news coverage of this election cycle you will think that the most important issue that the voters care about is Donald Trump’s vs Bill Clinton’s affairs and sexual misconduct. In reality, this is all noise that has zero chance of affecting the lives of citizens. We have a legal system where crimes such as sexual assault and rape are supposed to be tried, where people can be convicted by juries of their peers after adversarial trial but the media focus on trying these crimes instead of the courts because they get good ratings and divert people’s attention from the real issue.

The real issue that affects America is the lack of free market in many fields that leaves people victims of monopolies that prey on them. In this post, I will touch on some of these areas and show why the lack of free market is hurting our country.

Trade

Many people on both the left and the right argue that our current trade deficit is caused by our trade agreements and blame the decline in manufacturing jobs on free trade. Trade is not the reason for this decline but it is the factor that exposed the weakness in the American industrial field which is the high cost caused by the taxes, regulations and labor laws that are enforced by the different levels of government. The cost of the government policies prevents the free flow of labor and capital to many industries such as clothing, furniture, and electronics because it is very hard to compete with cheaper imports coming from countries that don’t have the same tax, regulatory and labor burden. There is the wrong way to handle this issue by going into protectionism which will shield our industries from global competition while raising the cost of consumer goods and making all of us poorer. The right way is for the government to realize that it needs to free the American business from these burdens and dramatically reduce taxes and regulations burden and ease the laws protecting labor unions and restricting the flow of labor to the most productive use.

Many Trump supporters point to the foreign governments’ unfair trade practices such as currency manipulation and dumping of cheap products. I think that we should respond to such practices but not before we make sure that our government does everything it can to remove the obstacles facing our industries.Read More »The problem with modern America

Student Loans: Solutions vs. Delusions

The total amount of federal student loans has been growing quickly. The following diagram from the Federal Reserve shows the growth of student loans since 2006.

StudentDebt

The total amount at the time of writing is over 1.3 trillion dollars, and the federal student loan portfolio is 1.221 trillion dollars according to the latest data from the department of education. This huge increase in spending on student loans indicates both an increase in the number of people seeking a college education and a rise in the cost of college education.

The problem of student loans is one of the hot topics this election cycle with both presidential candidates on the left proposing some variations of free college to solve the problem. Many young students with large student loan balances surely cheer that, who doesn’t like free stuff? Free college may make some voters happy and may even win someone the elections but it won’t solve the fundamental problem with higher education.

Let’s start with asking why do people get a college education? Sound economic thinking says that they do that to raise their human capital and raise their productivity and income. College then is an investment that has expected return in the form of future earnings. People who don’t have the financial resources to make needed investments get loans to finance their projects. The interest rate on a loan is determined by the lender based on the borrowers’ ability to pay which depends on the risk of the project. So if two students with similar academic abilities applied for loans one for an engineering degree and the other for an animal studies degree the first will definitely get lower interest rate on his loan because an engineer has a higher earning potential than a person with an animal studies degree. The effect of interest rates will be to steer students towards more productive majors and only students who really are interested in low productivity majors will take the high-interest loans to get into these majors. The other effect of the interest rate is that they force borrowers to take the smallest loans that can meet their goals so each student will have a strong incentive to select the cheapest college program that gives him the education he needs. This will pressure the universities to be more efficient and offer better education packages to attract students with different budgets.

Read More »Student Loans: Solutions vs. Delusions