High Altitude Thinking

With the passage of healthcare reform, I was curious how a $940 billion spending program over the next decade was going to result in a $143 billion reduction in federal deficits.  So I followed up by looking at the scoring of the bills by the Congressional Budget Office (CBO).  Depending on how you sort the numbers the details come up slightly different than above, but the way I see it is basically as follows:  healthcare reform program spending – $928 billion, reductions in other program spendings (primarily in Medicare, Medicaid, and the Children’s Health Insurance Program) – $546 billion, and increases in fees and taxes – $525 billion.  If you net these numbers you arrive at a $143 billion reduction in spending over the next ten years.

With that as a reference point, what I found most interesting was that the CBO estimates $61 billion of reductions (43% of the $143 billion) will be derived from eliminating the federal program that provides guarantees for student loans and replacing those loans with direct loans made by ……….the Department of Education.

The current program provides for federal guarantees on loans for higher education that are administered and funded by private lenders (e.g. local community banks).  Under this program, the federal government makes the loan payments during the student’s deferral period, guarantees the lenders against default losses, and funds guaranty agencies to help administer the loans.  In other words, it is a federally subsidized program that should benefit students and communities – similar to the concept of loans guaranteed by the Small Business Administration (SBA).

Between 2005-2008, this program accounted for 78% of the total loans originated (in dollar terms).  In 2009, the CBO points out that this had fallen to 69% attributing the decline to difficulties experienced by private lenders during the financial crisis and uncertainties surrounding the future of the program.  I’m sure uncertain job prospects for fresh graduates also doesn’t help.

So the House’s reconciliation proposal provides that beginning in July 2010 all future loans originated would be made by the Department of Education.  CBO estimates that this would shift approximately $500 billion of loans that would have been made under the current program and guaranteed by the federal government to loans directly originated.

You may ask, “well, how do they come up with a $61 billion savings?”  Interesting enough, the accounting for these programs are governed by the Federal Credit Reform Act (FCRA).  Under FCRA guidelines, the cost of  a new loan or guarantee is calculated as the net present value of the government’s expected cash flows over the lifetime of the loan or guarantee, using interest rates on Treasury securities (of comparable maturity – typically 10 years) to discount the cash flows.  Take note that this calculation excludes administrative costs like originating, servicing and collecting on loans.

So the CBO figures that the difference between the old vs. new program will result in $61 billion of savings.  If the government had to use market rates to do the calculation vs. the Treasury rate, it would probably knocked about $20 billion off that savings implying $40 billion of profits from expanding the government further into the banking business.  Unfortunately I don’t  think we have $500 billion sitting around to make these loans.  I suspect associated interest costs, coupled with administration costs, will wipe out the rest of the savings.

I remember going to the Farmers State Bank with my dad to get my first student loan.  It felt like real business, offering a sense of responsibility as I sat with a real banker across the table.  I doubt those feelings will resonate at the DOE.

BA

I spend part of my time living in a resort community.  Skiing in the winter – mountain bikes and golf in the summer.  For years I have struggled with the idea of starting a business here.  While it fits with my small town up-bringing, I always circle back to the same two difficulties – not being on a major distribution route and securing a reliable workforce in a transient ski town atmosphere.  As they say, “no one moved here to become employee of the month.”  The other tongue-in-cheek quote I heard the other day reinforces this reputation – “There’s no friend on a powder day.”

Nonetheless, I am still married to the idea that a geographically diversified workforce adds to the American experience and further provides a sense of national security.  Outside of the current national recession, our diversification of business in the US has always been a strength.

While I am also the beneficiary of urbanization, I encourage the ideas that bring back to life rural America.  I don’t expect that small-scale farming will ever return in grand scale – productivity has made this a memory from the past.  But I do believe that there are opportunities to expand business into rural America. Many communities throughout the US offer an opportunity for reducing costs, leveraging technology, and slowing the trend of urbanization.

Here are some ideas.

Backoffice administration.  Over the past half century the U.S. has experienced significant changes in productivity and urbanization.  But with today’s technology why can’t these administrative jobs be re-aligned around smaller population centers?  As building leases begin to expire in central business districts, shouldn’t consideration be given to moving lower-to-midlevel jobs to communities that offer the potential for real estate and salary arbitrage?  I would suggest that many of the state and federal jobs may fall into this category.  You don’t need to be downtown to administrate.

Call centers in midsize markets.  Local governments give tax incentives for lots of things, why not attract quality call centers to your hometown.  You might also be able to piggyback on an existing reservation system to create a limited number of jobs by handling calls during peak periods.  The later may be a better option that allows the local community to partner with a call center operator using existing infrastructure.

Distribution hubs.  Cheyenne, WY has been the beneficiary of distribution outlets for Walmart and Lowes.  There must be further opportunities to expand distribution outlets to smaller communities.  Check out  http://www.dotfoods.com for a distributor in my hometown that stuck to its local roots.

Distance learning. Eleutian Technology (http://www.eleutian.com) is an innovative company headquartered in Ten Sleep, WY providing online English teaching around the world through technology and a network of U.S. Certified Teachers.  While their current focus is on English language, there are many other opportunities to leverage technology and available skills in similar endeavors.

Major cities offer many wonderful things.  World class arts, theatre, sports and entertainment are difficult to achieve without a core population and a tier of wealth that does not typically drift down to smaller communities.  That said, many folks don’t need the big city lights every day.  Today’s challenges may be just the catalyst we need to de-urbanize and begin to re-build a broader economic footprint.

BA

To end on a somewhat quirky note, here is a link to an audio slideshow that was done last fall about my hometown in Illinois underscoring the benefits of local commitment to a small community.

http://interact.stltoday.com/mds/news/html/2641

In responding yesterday to President Obama’s push for health care reform, Senate Minority Leader Mitch McConnell commented that “looking at the poll data, one could conclude that you would be history if you voted for this bill.”  Spoken like a true career politician with over 25 years in the U.S. Senate.

Isn’t it time for term limits on Capitol Hill?  Not to directly criticize McConnell’s comments, but isn’t this attitude (or arrogance) part of the problem?  For many years they have touted the need for experience and continuity as their arguments against term limits, but isn’t that really just empty spin?  It seems that McConnell considers this a career position that comes with a sense of entitlement if you put your priorities around maintaining that status.

Weighting of decisions based on one’s ability to survive politically seems to run in conflict with a commitment to public service.  Surely years of campaigning and serving in office provides these senior statesmen with plenty of opportunities for employment in the private sector (or other jobs in the public sector if they so choose) following their distinguished, but albeit, shorter careers in Washington.

The idea of term limits, or rotation in office, dates back long before the foundation of America.  As a result, when the continental congress appointed a committee of thirteen in 1776 to examine forms of government for the impending union of the United States, Thomas Jefferson promoted a limitation of tenure, “to prevent every danger which might arise to American freedom by continuing too long in office the members of the Continental Congress….” As a result, the Articles of Confederation stated that “no person shall be capable of being a delegate for more than three years in any term of six years.”

In contrast to the Articles of Confederation, the federal constitution Convention at Philadelphia omitted mandatory term-limits from the Constitution. Nonetheless, due to broad support for the principle of rotation, rapid turnover in Congress prevailed.  Also George Washington set the precedent for a two-term tradition at the presidency by refusing to run for a third term.

According to a February profile prepared by the Congressional Research Service, the average length of service for Representatives at the beginning of the 111th Congress was 11.0 years (5.5 terms); for Senators 12.9 years (2.2 terms).  Representative John Dingell (D-MI) has the longest service of any House Member in history (54 years).  In the Senate, Robert C. Byrd (D-WV), 92 years old, has served longer (51 years) than any other Senator in history.  As a point of reference, the President at the time each began their career was Dwight Eisenhower.

At the beginning of the 111th Congress, the average age of Members was 58.2 years, with the average for Senators at 63.1 years.  Keep in mind the average would exclude Joe Biden (67 years) who became vice-president in January 2009 and Ted Kennedy (77 years) who passed away in August 2009.

Traditionally, incumbents have improved odds in running re-election campaigns.  Access to campaign cash, voter recognition, claims of accomplishments during previous terms, and established media recognition form the foundation of successful campaigns.  The seniority system in Congress also adds to the appeal of re-electing an incumbent.

Over the years, many proposals have been put forward concerning term limits for Congress.  In November 2009, Jim DeMint (R-SC) introduced a proposed constitutional amendment that would apply term limits to all members of Congress, limiting U.S. Representatives to three terms, or six years, and U.S. senators to two terms, or 12 years, of service.  As Senator DeMint comments, “Some say only long-serving, seasoned elites have the skills to lead the people, but that’s exactly what we have today and how do you think it’s working for us?”

Changes to the Constitution would not come easy however.  Any term limitation bill would require a two-thirds vote in each of the House and Senate along with approval by three-fourths of the States.

While unlikely to gain much traction, Senator DeMint’s observation highlights one of the root causes of the gridlock we have in our current system.  As the saying goes, “Lead, Follow or Get Out of the Way!”  Unfortunately, it seems that the folks in Congress show little desire for any of these under their own initiative.

BA