Lifeboat Drill

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Word has come of a gruesome accident in the Canary Islands. A cruise ship anchored there staged a test of its lifeboats, and five crewmen died. At the moment, the cause is said to have been a break in one of the cables by which lifeboats are lowered to the water. A picture shows a capsized lifeboat next to the ship. The dead crewmen were trapped beneath it.

This is sad, but why is it of any more interest than any other industrial accident? Because lifeboats are constantly hailed as a solution, not a cause, of naval disaster.

The 101st anniversary of the sinking of the Titanic arrives on April 14. We will hear a great deal about the importance of government regulations to ensure that every ship has enough boats for its whole company of passengers and crew.

Since the Titanic, this kind of regulation has been in effect. But as with most regulations, the effects have been mixed, to use a conventional kind of understatement. When American total-lifeboat regulations came in, two things happened. One was the ruin of America’s passenger steamship lines to the Orient. The owners couldn’t afford to meet the new standards (which, admittedly, included labor-protectionist provisions only notionally connected with safety). The other was the sinking of the steamship Eastland. The Eastland capsized in the Chicago River, with immense loss of life, because it had been overloaded with lifeboats.

The story of the Eastland is ably presented by George Hilton in his book on the subject. I myself have analyzed the lifeboat issue in my book about the Titanic. I’ll hit some high points:

Only one large passenger ship has ever been evacuated solely by its own boats, and that was a vessel in which almost all the passengers and crew were under military discipline. If a large ship gets into trouble, it ordinarily sinks right away (as did the Lusitania, with horrible results from the attempted launching of lifeboats), or it takes days to sink. In the first case, few boats will probably be capable of successful launch (even the Titanic used remarkably little of its available lifeboat space). In the second case, other ships will appear to take people off the stricken vessel, if that vessel is anywhere near normal lines of travel.

It is a fearful thing to enter a lifeboat and be lowered 50, 60, or 70 feet into an ocean that is probably cold and turbulent. Usually, it’s better to stay with the ship. If the passengers on the Costa Concordia, which suffered a disastrous mishap off the coast of Italy in January 2012, had understood this, they would not have panicked, and they would have sustained fewer deaths. Instead, they remembered propaganda about the Titanic and concluded that they were doomed, because their lifeboats were not efficiently launched. In some cases, they jumped off the ship, and died.

By the way, the Costa Concordia never sank. It’s still there, lying on its side, along the coast of Italy. If you were a passenger without an operative lifeboat, you could still be living on board. Yet watching the one-year retrospectives on this event, one would think that the ship had sunk — and passengers had died because lifeboats were not available.

The truth is that everything people do, or plan to do, has its own risks. Even tests of government-mandated rescue equipment can go wrong, terribly wrong. There is no such thing as a free lunch, or a free rescue, either. Let’s end the pious pretense that there is.




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The Student Loan Bubble

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The left-leaning web site ProPublica specializes in long-form journalism — labor-intensive, 3,000-plus-word articles dedicated to serious treatments of big subjects. Think of the long pieces that appeared in The New Yorker during the 1970s and early 1980s and you get the idea. While I find ProPublica’s reflexive and unexamined bias in favor of statist schemes irritating, I do read its articles. They are usually earnest and sometimes worthy efforts.

Lately, a ProPublica article about a semiliterate gardener’s struggles to manage his dead son’s unpaid college loans got some traction in the mainstream media. (While I don’t understand ProPublica’s business model completely, it seems to involve licensing its long stories to other news organizations.)

This gardener’s woes fit neatly into the mainstream media’s narrative that student loans are an evil, evil thing about which Good King Barack needs to do something. And, by “do something,” moronic opinion-shapers mean without saying: subsidize borrowers’ bad choices with capital redistributed from taxpayers.

This proposition is wrong on many levels. It also reflects faulty assumptions and bits of specious logic that are worth some examination — because they explain many of the problems that plague America today.

First, a quick review of ProPublica’s telling of the gardener’s tale.

Francisco Reynoso lives in Palmdale, California — a dusty far suburb, north of Los Angeles. He doesn’t speak much English (though he is a naturalized citizen) and earns about $20,000 a year from his labors. While the story doesn’t offer many details about Reynoso’s work, in southern California “gardener” is often a euphemistic way to describe a causal day laborer — the kind of guys you see milling around Home Depots and such outlets, looking for work.

On this meager income, Reynoso supports his wife and daughter. He used to support a son, too. But, in a tragic turn, that son — Freddy — died in a one-car accident in September 2008.

Freddy had recently graduated from Berklee College of Music, a school in Boston that combines elements of a conservatory with the rigors of a traditional four-year college.

It was a bit strange that a gardener’s son had matriculated to a place like Berklee. It’s no community college . . . or even a state university. Rather, its reputation has long been as a pricey second-tier Julliard. The school’s comprehensive fee is nearly $50,000 each academic year.

A lazy person might describe Freddy’s enrollment at Berklee as a version of “the American Dream.” The son of a laborer enters a world traditionally reserved for the elite, etc. But it sounds like Freddy never really entered that world. In 2005, after he’d been admitted to Berklee, the young man needed to borrow significantly to enroll. Reynoso cosigned on a series of student loans that allowed Freddy to attend. By 2008, when Freddy was finished at Berklee, he moved back to Palmdale and was driving into Los Angeles most days. Trying to find work. According to his family, Freddy was driving back from the city on the night that he ran off the highway, rolled the car, and died.

As a father, perhaps Reynoso should have told Freddy that borrowing hundreds of thousands of dollars to get a degree in music was a bad financial decision.

The principal amount of the money Freddy and his father had borrowed was nearly $170,000. With interest and fees added, the amount they’d have to repay would be closer to $300,000. The lenders didn’t mind much that Reynoso didn’t have the means to repay those amounts because, as we’ll see in more detail later, various government subsidies that support the student-loan market make rigorous underwriting unnecessary.

So, lenders lend. But why do borrowers borrow? Why did a gardener making little more than minimum wage agree to guarantee so much in college loans? His answer: “As a father, you’ll do anything for your child.”

It may not seem sporting to criticize a simple man’s devotion to his son . . . but what if that devotion is ignorant and misguided? According to a survey of music industry salaries produced by Berklee itself (and based — tellingly — in the “Parent Questions” section of its web site), most of the jobs its graduates pursue offer starting pay of less than $25,000 a year. That’s not enough income to support the debt service on nearly $200,000 in student loans.

As a father, perhaps Reynoso should have told Freddy that borrowing hundreds of thousands of dollars to get a degree in music was a bad financial decision. Some people are poor because they make bad financial choices. An unintended consequence of government programs that give material support to such poor people is that they’re free to make more bad choices. In the hands of Francisco Reynoso, Freddy’s government-subsidized student loans were a loaded gun . . . or a hangman’s rope.

A few months after Freddy’s fatal accident, collectors started calling Reynoso to demand payment on the student loans for which he’d cosigned.

The loans that allowed Freddy to attend Berklee fell into several categories — as they do for most borrowing students. There were some direct government loans, which carry the lowest interest rates and most favorable terms for the borrower. In most situations, they don’t require parents to cosign. But there are limits to the amounts available on these favorable terms; in most cases, a student can only get a few thousand dollars each academic year in this “cheap” money.

After that, a borrowing student needs to go to so-called “private” lenders. These are banks and specialized finance companies that offer loans with higher interest rates and less-favorable terms for borrowers. But the “private” loans are still subsidized heavily by the government and share unique traits with the direct government loans — most importantly, the loans cannot be discharged in bankruptcy.

(A personal aside: When my oldest child was getting ready to leave for college, we reviewed her finances and found we were a little short on the cash she would need for her comprehensive fee. She shook off the shortfall as no big deal; the college was happy to help her apply for student loans. I advised her only to borrow as much as was available in direct government loans and to avoid the higher-interest private loans at all costs. She rightly noted this advice was ironic, coming from someone who advocates against such government programs; but she heeded the irony and will graduate next year with a nominal amount of relatively cheap debt to repay.)

This is the major reason why the “private” student-loan lenders don’t bother with rigorous underwriting. Since the loans can’t be discharged in bankruptcy, the lenders or their agents can hound borrowers and cosigners for repayment endlessly.

In Freddy’s case, he borrowed about $8,000 in private money from Bank of America and about $160,000 from a company called Education Finance Partners. Neither lender kept the loans for long; as is typical in the market, the “loan originators” sold Freddy’s paper to other firms that focus on servicing debt or bundling it with other student loans and “securitizing” those bundles.

According to ProPublica, Bank of America sold the loan it made to Freddy to a student-loan financing specialist called First Marblehead Corp.; Education Finance Partners, which has since declared bankruptcy, sold the loans it made to Freddy to a unit of the Swiss banking giant UBS.

The loans purchased by UBS may have been sold, in turn, to the Swiss National Bank (analogous to the U.S. Federal Reserve) when the National Bank made a Fed-style bailout of UBS in 2009. Details are sketchy because of Swiss privacy laws.

So, if the ownership of the debt was unclear, who were the collectors calling Reynoso for repayment? A separate company, called ACS Education Services, which owns some student debt and contracts with other lenders to manage and collect on their loans for a fee. ACS is a unit of Xerox Corp. and one of the bigger players in the student-loan servicing market.

But Freddy was dead — and one might think that that fact would have an effect on the lenders’ collection efforts. Some student loan companies have a policy of canceling loan balances when a borrower dies. (Direct student loans from the government are generally cancelled if the borrower dies.) But, since Reynoso had cosigned for his son’s “private” loans, the lenders have the legal right to pursue payment from him.

A fundamental fraud lies beneath all this do-gooder claptrap. And that fraud may eventually destroy the foundations of many schools.

It’s easy — and emotionally satisfying, perhaps — to focus outrage at lenders like Bank of America and Education Finance Partners, or behind-the-scenes operators like First Marblehead or ACS Education Services. The establishment Left and media outlets like ProPublica certainly focus on them.

But these lenders and finance outfits are really just service providers, working the levers of government to find ways to make a few points here or there while helping to facilitate state-sponsored transactions.

The core transaction in the ProPublica story was between Freddy Reynoso and the Berklee College of Music. Freddy was pursuing a dream of being a professional musician and Berklee was selling an expensive credential that might help in that pursuit.

Freddy died. But Berklee is doing well. It has an endowment of nearly $200 million and is in the midst of an ambitious expansion of its campus — which at present comprises of some 21 buildings in the Back Bay area of Boston. The College’s website described the opening of one new building in this way:

Adorned with bright colors, the unique and hip space has an industrial feel, in step with Berklee’s cutting-edge sensibility. The building also houses the Berklee Writing Center, Berklee’s English as a Second Language Program, an Africana Studies Room, conference and seminar rooms, and a café.

More hip space in the Back Bay is in development. And Berklee has recently opened a satellite campus in Valencia, Spain.

According to a September 2011 report from the Center for Social Philanthropy and the Tellus Institute, Berklee President Roger H. Brown makes more than $550,000 a year. And five other senior administrators make more than $300,000 a year. It’s good money — although, by elite college standards, it’s not that much.

President Brown’s official biography recounts sanctimoniously the work that he’s done in places like Thailand and the Sudan for various humanitarian outfits (some connected with United Nations). It boasts about the big child-daycare company he started with his wife, but it doesn’t mention the years he spent working for Bain & Co.

I’m sure Mitt Romney will understand.

Of course, the bio focuses on the efforts Brown has made to move Berklee closer to the first-tier of private colleges:

In 2007, Brown launched the college’s first capital campaign with a goal of raising $50 million. He has initiated Berklee’s Presidential Scholars and Africa Scholars programs that provide full-ride scholarships to give top musicians around the globe a Berklee education. He has overseen the expansion of the City Music Program beyond Boston in an effort to provide educational opportunities for talented but economically disadvantaged urban youth. . . . Brown worked with the city of Valencia, Spain, and the Generalitat Valenciana to create a Berklee campus in Valencia.

He’s the very model of a modern major-general. Working the levers of government in Spain to set up a ritzy international campus. Overseeing the expansion of programs to provide for the disadvantaged. Initiating programs to give scholarships to top musicians around the globe.

But a fundamental fraud lies beneath all this do-gooder claptrap. And that fraud may eventually destroy the foundations of schools like Berklee College of Music.

For decades, striving institutions of higher education have been working the levers of government — and, specifically, the student loan market — to redistribute capital from the lower and middle classes into their self-styled “elite” pockets. A regressive racket if ever there was one.

The pieces are all present in Freddy Reynoso’s story. Nearly $200,000 was taken from people who can’t afford it, facilitated by banks and the federal government, and transferred into the coffers of a music college already sitting on an endowment of several hundred million. If the sanctimonious Roger H. Brown really wanted to help disadvantaged youth, he should have given Freddy Reynoso a free ride. But why should he do that? Uncle Sam is willing to arrange for Berklee the pretense of high-minded altruism and the profit margins of a payday lender.

Roger H. Brown won’t stop this deal. So Uncle Sam needs to.




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Safety Nets and Slippery Slopes

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There’s been a theme hammered in dull thuds recently by the establishment media: anyone who opposes expansion of the welfare state is a hypocrite because everyone is on the dole. The New York Times has run several such stories; lesser outlets have followed suit.

Before you gag on this rancid bit of partisan meat, let me say that I think this is a hopeful sign. The hacks are framing the argument in this way because they expect criticism of the welfare state to pick up through the course of this election cycle. As it should. They hope to inoculate the administration against such criticism; in the process, though, they’ll draw attention to related issues that don’t help their cause. These related issues include:

  • the sloppy logic and language of welfare advocacy,
  • the growing role of moral hazard in public policy,
  • the effect of high marginal tax rates on productivity, and
  • the slippery slope of unintended consequence.

Let me sketch out quickly how these all connect with one another.

The recent charges of hypocrisy are merely the latest example of the establishment media’s obtuseness and doublespeak on the topic of welfare. In the statist catechism, the terms “safety net” and “earned entitlement” are supposed to refer to sharply distinct sorts of programs — the former involves straightforward income redistribution, the latter involves a group of programs into which beneficiaries have paid. But the two are often confused. The headline of one Times article reads “Even Critics of Safety Net Increasingly Depend on It.” The article proceeds to focus on the effects of growing middle-class dependence on Social Security and Medicare, which are supposed to be “earned entitlements” and not part of the “safety net.”

The jargon is all so imprecise and indirect that the headline-writing mediocrities at the Times might be forgiven for getting confused.

Of course, there might be a more devious impulse at work — intentionally confusing programs into which people have paid with those into which they have not might be an attempt to blur important distinctions. To make “middle-class” recipients of earned entitlements the moral equivalents of the “poor” recipients of safety-net money. And if everyone’s the same, statist catechism goes, no one can criticize.

The “moral” in this equivalence gets to my next point. The sloppy logic and fuzzy language — intentional or not — may create only an ersatz version of moral equivalence but it encourages very real moral hazard.

Moral hazard has been an interest of mine for a number of years. It takes various forms in various circumstances, but the common conclusion is simple: If people are insulated from the effects of bad outcomes, they produce more bad outcomes.

In matters of public policy, the most evident example of moral hazard is a high marginal tax rate. And this is more closely related to welfare policy than it might seem on first glance.

On the low end of the income spectrum, a high marginal tax rate creates a permanent underclass; on the high end of the income spectrum, it encourages productive people to go Galt. More important, the moral hazard of taxing people stupidly creates a slippery slope; when a person drops down the socio-economic ladder, it becomes harder for him to climb back up.

If a person’s annual income falls from $40,000 to $20,000 because of a lost job or a business reversal — but that person picks up $15,000 in benefits as a result — he’s being insulated from the effects of his lower income. The benefits, which he’ll lose if his income recovers, become part of the effective marginal tax rate that discourages the climb back to $30,000 or $40,000. He’s more likely to accept his reduced circumstances and welfare benefits. Said another way: the same mechanism that acts like a safety net to someone sliding down the slope can act like a barrier to someone scrambling back up.

The problem with managing marginal tax rates is that tax systems are crude tools. The U.S. income tax tables create a roughly-hewn “stair-step” system of increasing rates. And the government benefits made available to low-income earners exaggerate the steps. At some points, a slight increase of income results in a much larger effective tax rate. In these cases, the slope isn’t just slippery — it’s negative. One solution to a negative slope would be modify the tax table to include thousands of tiny steps rather than a few rough ones; another would be to reject the step system entirely and move to a nonlinear formula for calculating the income tax rate each earner pays.

If the establishment media is right and everyone is on the dole, we need to criticize the welfare state more. Not less.

In the 1970s, Milton Friedman suggested a third option that he called the “negative income tax” (based on earlier proposals by Henry Hazlitt and Juliet Rhys-Williams). This negative tax would replace all other benefits; instead of numerous programs subsidizing food, shelter, child care, health care, etc., there would just be one lump-sum payment which would be phased out gradually as a person’s income increased. His idea was mauled and transformed into what we know today as the Earned Income Tax Credit; but the current incarnation is a far cry from what Friedman had in mind. His goal was to minimize bureaucracy and control fraud in the welfare apparatus. Our system today, an income redistribution scheme that pretends to be an “earned entitlement” program, maximizes all of that.

We’ve always known that income redistribution strips all parties — sponsors and beneficiaries — of their humanity and, especially the beneficiaries, of their dignity. Forty years ago, Daniel Patrick Moynihan predicted that the U.S. welfare state would damage beneficiaries, precisely as it has. If the establishment media is right and everyone is on the dole, we need to criticize the welfare state more. Not less. And we need to get rid of any administration that enables it, even if the alternatives aren’t inspiring.

This sharp truth will cut through hacky charges of hypocrisy from outfits like The New York Times.




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More Than Just a Pretty Film

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The Illusionist is a lovely animated movie by French filmmaker Sylvain Chomet — a movie that, despite its beauty, has a disturbing message.

Its leading characters are a kindly vaudeville magician and the young working girl whom he befriends. The story is sweet and full of pathos, as the older gentleman sacrifices his own comfort and well being to please the girl. Appropriately, the film is drawn in the soft-edged, old-school style that predates Pixar. Its French pedigree is obvious, from its watercolor backgrounds and exaggerated, non-realistic faces to its impressionistic musical score. The characters communicate with each other through a combination of mime and an odd pseudo-language reminiscent of the way adults speak in the old "Peanuts" TV specials. This adds to the dreamlike quality of the story, although it can be off-putting to those who aren't fans of French animation.

Based on a story by Jacques Tati (1907–1982), the famous French filmmaker, The Illusionist is intended to show the deep father-daughter connection between a lonely old man and an equally lonely young girl. Metaphorically, however, the film offers a powerful, though certainly unintentional, warning look at the relationship between the working class and the welfare class. The magician's relationship with the young cleaning girl begins innocently and sweetly. When her bar of soap slips away from her while she is cleaning the floors, he picks it up and "magically" turns it into a fancy box of perfumed hand soap, offering it to her with a flourish. She is thrilled. The next day she washes his shirt to show her appreciation, and he "magically" produces a coin from her ear to thank her — the way kindly uncles do when they visit little nieces and nephews. Noticing that the sole of her shabby shoe is flapping wildly as she walks, he buys her a pair of bright red shoes.

Before long the magician's gig at the local vaudeville theater ends, and he must move on to the next town. Without being invited, the girl follows him. When the conductor asks for her ticket, she points to the old man, miming her expectation that he will produce a ticket for her out of thin air. Not wanting to disappoint her, the poor man complies, again with a magical flourish. Throughout the rest of the film the girl stays with the man, pointing to new goodies that she wants — a new coat, high-heeled shoes, a new dress, and a coin from her ear every time they part. The man takes on extra jobs to pay for her increasing demands. He sleeps on the couch so she can have the single bedroom in his tiny apartment. Sadly, the girl never catches on to what is happening to the man. You can probably guess where this leads. Small- time magicians, like golden geese, eventually give out.

The film offers a powerful demonstration of what has happened to a whole generation of people who have grown up under the welfare state. They have no idea where money comes from, or how to earn it. They turn to the government for housing, food stamps, education, medical care, and even entertainment in the form of parks and recreation. They seem to think that money can appear out of thin air, and that people who work owe them all the goodies they want. Like the man in the film, tax-paying Americans are becoming threadbare and exhausted. The demands on them are too many, and they're tired of not being appreciated for meeting those demands. At some point they are going to stop working — also like the man in the film. What then?

A friend who teaches middle school in the Bronx asked her students to write an essay about what they want to be when they grow up — pretty standard fare for a middle-school essay. One young man wrote about going to college, becoming a lawyer, and representing clients in court. "I'll make a lot of money, and I'll wear nice suits and carry a briefcase," he dreamed. But he ended his essay with this chilling observation: "If I do that, I'll probably earn too much money and I'll lose my housing and food stamps. So maybe that's not such a good idea." What a self-defeating decision! Yet I see that idea in practice every day as I work with people from Yonkers and the Bronx. They are so afraid of losing their tiny apartments in crumbling buildings on potholed streets in seedy neighborhoods that they won't even consider moving to a different state with a lower cost of living, where they could get a job and provide for their families themselves.

How surprising, that the demise of the American dream would be so skillfully and artistically presented in the form of a French animated film. It is well worth sharing with friends as a cautionary tale of pending disaster.


Editor's Note: Review of "The Illusionist," directed by Sylvain Chomet. Pathé-Django, 2010, 90 minutes.



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