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Economics

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.

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Government Regulations: Costs and Dangers

A government regulation is a set of rules written by some executive branch agency to organize a certain economic activity. They start when the legislature passes a law to organize some economic activity and as part of that law, it creates a new executive agency or tasks existing agency to create the rules that people and businesses have to follow to comply with that law. The agency then maintains these rules, updates them as it sees fit and enforces them through either financial penalties or prosecution for violation.

Federal Government regulations are violating the Constitution because the Congress is delegating lawmaking to the executive branch. The Constitution has a clear separation of power between the three branches and it doesn’t give the power to any of the branches to delegate its powers to another branch. Not only does Congress delegates its power to write law regarding a certain area, but also it effectively loses that power. Once created, the regulatory agencies can write as many regulations as they want and Congress can only repeal a regulation by passing a bill, but given that the President still has the veto power the Congress can repeal a regulation only if it has a two-thirds majority support for that repeal. This effectively eliminates the power of Congress in every area regulated by an executive agency. According to the information on the federal register, which maintains all the federal rules, Congress had  only disapproved one rule since 1996.

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History of Money

Money

Money is medium of exchange and store of value. In the early days of human civilization people didn’t have money but instead they bartered together exchanging surplus products they produce for surplus products others produce. If farmer Joe has excess wheat and needs eggs and neighbor farmer Tom has eggs and needs wheat they would meet and exchange a number of eggs for an amount of wheat.

The above example could become more interesting if we added farmer Max who needs wheat but can only offer beef. If Max can trade with Joe exchanging some beef for some wheat then he will meet his wheat needs. If Joe doesn’t need beef but Tom needs beef then Max will have to do a double trade. He will first trade with Tom exchanging some beef for some eggs then exchange these eggs for some of Joe’s wheat. In that example Max used the eggs as medium of exchange, which means that he got the eggs to exchange them for other products. Max may keep some of the eggs so he can exchange them later for more wheat from Joe or other farmers who accept eggs. In this use case eggs function as store of value because Max is using them to store the value he got from trading the beef.

Of course eggs and perishable similar goods cannot store value for long and cannot be easily divided. People started to use goods that don’t perish and can easily be divided as storage of value and medium of exchange and these goods played the role of money in addition to their role as commodities. Different civilizations picked different types of commodities to use as money such as types of shells and rocks. The commodities that got used as money were usually scarce and valuable in that civilization. In larger civilizations gold and silver became widely used as money and they started to take the form of coins and governments played a role in standardizing the weights and shapes of these coins.

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Government Grants

MoneyWithWings

Yesterday, I received an email from my congressman, he was sharing with the citizens of the district some opportunities for federal grants. It turned out that there is a website called grants.gov that lists all grants available from the different departments of the federal government. I did a quick web search using few states and all of them have similar grant programs.

Can the government start and fund the right projects?

In the free market when an entrepreneur starts a project, he estimates the market need for the product or service the project is going to offer and the possible price to charge. He funds the project through his money, loans or partnership with investors. The market provides a signal through profit and loss to the entrepreneur and the investors to steer the project to success or shutdown. If the entrepreneur tried to continue a failing project his investors will not continue supporting the project and may go to courts to block the project and extract what remain of their money.Read More »Government Grants

How do banks work?

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Banks play a large role in the economy. This post will shed some light on banks and the role of central banks in the economy and how they could create major economic problems with monetary policy.

First, let’s start with the basics. A bank is a corporation that accepts deposits from customers and uses these funds to give loans. Banks offer interest to account owners and charge interest on loans and the difference between the amount of interest they get from loans and what they pay to account owners will be the bank profit.

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