Wednesday, July 29, 2009

Republicans Play with Numbers, Democrats Cook the Books

by Andrew Gillen

SLA summarizes the CBO score of SAFRA and some problems with it, as well as the response by Democrats.

Last Friday, the CBO scoring of SAFRA indicated savings of 86.8b over ten years from switching all FFEL loans to DL. However, part of this savings is imaginary. In a letter, CBO director Elmendorf notes that the 86.8b headline number in savings from killing FFEL includes the reduction in FFEL administrative costs, but does not account for the added administrative costs of DL (this wasn’t an error on CBOs part, administrative costs for DL are counted elsewhere). Thus to get an accurate estimate of the savings you need to subtract the additional DL administrative costs of 7.2b, leaving 79.6b.

(Note also that the switch from FFEL to DL will raise administrative costs by $200 million (from 7b to 7.2b). I only point this out because I was repeatedly attacked by folks not just claiming the opposite, but loudly insisting on it as a fact and questioning my integrity. Apologies can be posted in the comments.)

Moreover, Senator Gregg asked the CBO what the numbers would be if “adjusted for the cost of market risk”, which as I’ve noted before, is an appropriate thing to do. Director Elmendorf reports that this would further reduce the savings to 47b. (Recall that a few months ago, advocates were waiving around a figure of 94b, and that 47b is half of 94b.)

Democrats quickly responded that “It’s clear that Republicans didn’t like the truth – that our legislation generates almost $90 billion that could be used to help students, families, and taxpayers – so they shamelessly decided to have a little fun with the numbers”.

But Democrats are doing worse than playing here. You can cite either the 47b figure or the 79.6b figure with a clear conscience. While the 79.6b one is wrong in the sense it doesn’t take into account things that should be taken into account, it is not deliberately misleading once you understand that the CBO has been instructed to ignore these things.

But the 90b that Democrats are claiming (presumably the original 86.8b rounded up), is just plain disingenuous. It could be forgiven if out of ignorance, they were relying on the original CBO estimate. But they were replying to a letter that very explicitly noted that the 86.8 figure included 7b in savings from eliminating FFEL administrative costs, but not the 7.2b in additional administrative costs for DL. That they are aware of this and still insist on using the 90b figure is Enronesque.

By the way, I’ve figured out an ingenious way for all of us to strike it rich. Suppose you spend $6 a day on lunch at Subway. All you have to do is go to McDonald’s instead. By the Democrats logic, you’ve saved the $6 you would have spent at Subway, and you can just ignore the $6 you spent at McDonald’s. Not only did your savings make you $6 richer, but you got lunch too! And those stupid economists are always saying that there is no such thing as a free lunch. We showed them.

On second thought, perhaps that is not the way to do things. Such numerical illiteracy would rightly be considered fraud if companies did it, but I guess when Congress does it, it’s called leadership.

Some of you may be saying “whether the number is 47b or 79.6b doesn’t matter, as both indicate significant savings. We should therefore switch to DL.” To which my response is “and where are these savings coming from?” As I noted previously, the bulk of them come from
the fact that the government expects to borrow the money for DL at low rates (0.76 percent in 2010) and charge students 6.8 percent.

This substantial gain would be reported for any program that borrows at the Treasury rate, and lends at a higher one. But that doesn’t mean it’s a good idea. To understand why, note that the exact same logic -- that the government can borrow more cheaply than it lends -- could be used to argue that the government should take over all lending in any market.

Consider an analogy to mortgage lending. Just as with FFEL, there are private lenders that have received subsidies from the government (we’ve already provided Fannie Mae and Freddie Mac $200 billion, and are on the hook for losses on their $5.2 trillion combined portfolio). By the logic of the pro-DL advocates, this subsidization is much more expensive than if the government provided the mortgages in the first place, so why not have the government take over all mortgage lending? I don’t know of anyone who thinks the government should be the only provider of mortgages, but there seem to be quite a few who think such a policy is a good idea for student loans.
Republicans are indeed playing around with numbers, asking how all the things that CBO (which by law ignores) affect the numbers. But Democrats are just plain cooking the books here.

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