As student loan debt passed the $1 trillion mark, President Obama, speaking at Chapel Hill yesterday, called the upcoming interest rate hike on student loans a tax. He didn’t tell the half of it. Congress’ dirty secret is that the government makes a huge annual profit on student loans. According to the scrupulously nonpartisan Congressional Budget Office, $37 billion will flow IN to Treasury from student loans made this fiscal year at the 3.4% rate (on a net present value basis and net of about $1.5 billion to administer them.) The President’s current dispute with Congressional Republicans is about whether to increase this annual profit next year. The interest rate that students pay on the basic “subsidized” loan is slated to rise from 3.4% this year to 6.8% next year, unless the lower rate is extended by Congress.

But how can this be?

Treasury can borrow money at 0.5% or less, and lends it to students at 3.4%. Administrative costs are well below 1%. Prepayment risk is minimal; repayment stretches over many, many years, and the yield spread just keeps on coming. Interest rate risk is also minimal, given that Treasury can issue debt in a range of maturities.

What about the credit losses, you ask? While many loans go into default (about 10% projected for 2013 loans), credit losses are relatively modest. The Education Department assumes it will collect between 75% and 80% of defaulted loans (on a discounted NPV basis), using its supercreditor powers, especially wage garnishment and tax refund intercepts. There is no statute of limitations on student loans, and even bankruptcy discharge is difficult. The $37 billion Treasury profit for FY2012 is after allowing for estimated credit losses in the $5 billion range.

Check out the rest (and the comments) here.

Internships save firms roughly $600 million every year, reports Ross Perlin in Intern Nation: How To Earn Nothing and Learn Little in the Brave New Economy. In a recession-stricken market, employers have little trouble finding bright young things willing to exchange free labor for a foot in the door. Think of it as a version of the prisoner’s dilemma. If the intern-age population collectively refused to work without pay, subsequent conditions would favor all workers. But it takes only a few defectors to make unpaid internships intensely profitable for the people involved—for the companies that get free labor and the interns who get a leg up in the job market.

Some people have raised the provocative idea that we should require a period of volunteer national service for all young people – apparently we already do – just not for the public good, but rather, corporation benefit. H/T ALPG

Stephens Dubner and Levitt provide their take on the power of the president in their most recent podcast. Here’s a glimpse:

The episode begins with this simple, heretical question: Does the President of the United States really matter as much as we believe, and on which dimensions? In this new episode, you’ll hear men from both sides of the aisle, Donald Rumsfeld and Austan Goolsbee, agree quite heartily, at least on the topic of the President’s influence on the economy. You’ll also hear Steve Levitt talk about how President Obama let him down. Also: Justin Wolfers and Bernadette Meyler talk about how the President’s actual influence can be measured.

The conversations with Rumsfeld are particularly interesting. They then ask two economists, a law professor, and a business professor about the power of the presidency. I guess all of the political scientists were busy that day.

The Fair Labor Standards Act requires employers to pay everyone — not just official employees, but anyone whom they “suffer or permit to work.” Purely educational positions are exempt from this requirement, but to qualify, an internship has to exist for the exclusive benefit of the intern. It can’t help the employer in any way; in fact, it’s a bonus if it actually impedes the employer’s operations.

Plenty of internships that violate employment law might still benefit the intern, of course, by giving her an inside track in a competitive field. Even crummy internships have some value. A firsthand glimpse of the mailroom may not be the stuff of dreams, but it’s more informative than no glimpse whatsoever.

Ethicist columnist Ariel Kaminar then goes on to comment on the underlying class issue:

That’s why, whether an individual internship is fun or awful, the system as a whole is unethical: it reserves those foot-in-the-door opportunities for people who can afford to go without a paycheck. That only entrenches the advantages that children of privilege already enjoy, further tilting an uneven playing field. And it undermines paid employees, who have the same interest you do in making sure every worker is fairly compensated.

You can check out the rest of the reply here. Also commenting on the internship situation is Charles Murray. To say that Murray’s work is controversial would be an understatement. However, he may have found common ground with critics in his op-ed article “Narrowing the New Class Divide.” In it he outlines a number of proposals to narrow the divide between the rich an not so rich. One of them involves internships.

For one thing, we should get rid of unpaid internships. The children of the new upper class hardly ever get real jobs during summer vacation. Instead, they get internships at places like the Brookings Institution, the American Enterprise Institute (where I work) or a senator’s office.

It amounts to career assistance for rich, smart children. Those from the middle and working class, struggling to pay for college, can’t afford to work for free. Internships pave the way for children to move seamlessly from their privileged upbringings to privileged careers without ever holding a job that is boring or physically demanding.

So let the labor unions win this one: If you are not a religious organization and have more than 10 employees, the minimum wage law should apply to anyone who shows up for work every day.

You can find the rest of his proposed reforms here.

'Office Space' is not really about the mailroom per se, but it's a great movie

The NY Times Sunday magazine carries an intriguing story by Adam Davidson, “Why Are Harvard Graduates in the Mailroom?” Of course, the idea is that the company mailroom is where one goes from low on the ladder to (eventually) get a shot at big dreams of success. This theme is made famous by film and TV, but  I’ve never known anyone who actually worked in one – probably because, I’ve never really lived in a big city such as LA or NYC. He discusses that which is often not discussed in friendly company – employment represents a distinct set of opportunities, choices, risks, and rewards – and that’s just the start of it.

There are a number of professions in which workers are paid, in part, with a figurative lottery ticket. The worker accepts a lower-paying job in exchange for a slim but real chance of a large, future payday.

And then:

This system is unfair and arbitrary and often takes advantage of many people who don’t really have a shot at the big prize. But it is far preferable to the parts of our economy where there are no big prizes waiting. That mailroom clerk at Warner Brothers may make less than a post office clerk (maybe even half as much), but the latter has less chance of a significant promotion. Workers in retail sales, clerical settings, low-skill manufacturing and other fields tend to have loose, uncommitted bonds to their industries, and their employers have even looser commitments to them. These jobs don’t offer a bright future precisely because they don’t require a huge amount of skill, and therefore there’s no need to do much merit-sorting.

That last part may yield some ire in people. I don’t think that he means that people in these jobs don’t work hard or have skill, but rather that such jobs are readily available – if you dislike a particular job, then you can quit it and find a similar one quickly – hence, there is less personal investment and accordingly, little long-term opportunity payoff (even if it’s just a lottery). Or at least that used to be the case. Now such jobs have become more scarce, but even more scarce are the jobs that used to populate America – the solid “Plan B” jobs – although I find that an odd way to portray them. I’ll let Davidson explain:

But part of the American post-World War II economic miracle was that most people didn’t have to choose between a high-stakes-lottery job or a lousy dead-end one. Steelworkers, midlevel corporate executives, shopkeepers and plumbers were all able to make a decent amount from the start of their careers with steady, but never spectacular, raises throughout. These two tiers actually supported each other. Strivers were able to dream bigger because they had a solid Plan B. New York City and Los Angeles are buoyed by teachers, store owners, arts administrators and others who came to town to make it big in film or music or publishing, eventually gave up on that dream and ended up doing fine in another field.

I don’t think that Davidson is in any way denigrating these good careers that are rapidly disappearing, but rather sees them as an excellent opportunities for people who ‘go for it’ (be it to become famous or rich through business building) and don’t make it. His point seems to be that without such ‘fall back’ positions, people are less inclined to take significant chances and foster innovation – thus, the economy finds itself in a self-perpetuating downward spiral. We become a nation of ‘lottery players’ and the people who serve those players (some eventual winners and some losers) their coffee or ring up their merchandise at the store.

You can check out the rest of the story here.

Among the 435 members of the House, for example, there are one physicist, one chemist, one microbiologist, six engineers and nearly two dozen representatives with medical training. The case of doctors and the body politic is telling. Everyone knows roughly what doctors do, and so those with medical backgrounds escape the anti-intellectual charge of irrelevance often thrown at those in the hard sciences. Witness Senator Bill Frist, Gov. Howard Dean and even Ron Paul.

But why is it so low relative to some other nations?

One reason is that an abstract, scientific approach to problems and issues often leads to conclusions that are at odds with religious and cultural beliefs and scientists are sometimes tone-deaf to the social environment in which they state their conclusions. A more politically sensitive approach to problems and issues, on the other hand, often leads to positions that simply don’t jibe with the facts, no matter how delicately phrased. Examples as diverse as stem cell research and the economic stimulus abound.

This article prompts some questions – what are the determinants of “scientists presence” in elected government? Does it make a difference, and if so what? You can check out the rest of the article here.

On the horizontal axis is the Gini coefficient, a measure of inequality. On the vertical axis is the intergenerational elasticity of income — how much a 1 percent rise in your father’s income affects your expected income; the higher this number, the lower is social mobility.

What would Daisy Buchanan say? I’m guessing that the movie version will be a disappointment. Check out more here and here.

I know. It sounds like one more gimmick, too good to be true. Perhaps, but in a new study, two psychological scientists propose just such an intervention — along with some preliminary evidence to back it up. Christine Logel of the University of Waterloo, Ontario, and Geoffrey Cohen of Stanford University describe a brief and simple way to give people the tools for resisting temptation and coping with life’s pressures.

It’s called “values affirmation,” and it’s done with a simple writing exercise. The theory is that focusing on one’s core values triggers a cascade of psychological processes: It bolsters a sense of self-worth and personal integrity. It underscores our higher values rather than our impulses, and by reminding us what’s really important in life, it buffers against mundane stresses. Since stress saps our limited cognitive resources, such an affirmation frees up these resources for willpower and self-discipline.

See the rest here.

Both experiments seem to have gone well, but critics point out that such approaches may have limitations – for instance, both Louis CK and Radio Head are established acts and enjoyed the ability to market their product rather cheaply. Time will tell if these experiments have an impact on the entertainment industry. You can check out the Louis CK offering here. Caution: his material is decidedly R Rated.