AnnotatedOpinions.com

PUTTING COLD hard cash in the hands of students as an incentive to stay in school could go a long way toward solving . . . chronic dropout problem. . .  

. . . many middle class youths already operate on a rewards system that is linked to school attendance and performance. It’s called allowance. And those young people who don’t receive a regular stipend at least have a decent chance of hitting up their parents for the price of a movie and McDonald’s. . .   

[AO: Although the Boston Globe makes a strong argument, there are two problems that it fails to address. The first problem is that often the reasons kids don’t stay in school are complex and go well beyond simply not wanting to be in the classroom. As long as those reasons exist, the program is unlikely to be successful.   

Secondly, even assuming providing financial payments to kids can make them stay in school, there are alternatives to just handing out checks. The globe identifies one: creation of after-school jobs that help potential dropouts to develop “self-awareness’’ and “aspirations.’’ However, the Globe suggests that this is not a viable alternative because Neil Sullivan and Boston Private Industry Council, the nonprofit that Sullivan heads, can only find jobs for about a quarter of the kids. But this is where the “alternatives” come in. At the very least, rather than paying kids to show up to class, why not partner with private companies who are willing to hire the kids with the agreement that communities will subsidize their employment. This will enable communities to help even more kids as the total amount available will be increased by the portion of their salaries contributed by employers. Employers will also be more interested in participating in such programs because they can hire employees at lower cost.  

These two issues should be considered seriously before major investment in the types of programs the Globe seem to endorse.]

PRESIDENT OBAMA made a bow toward transparency yesterday when he described how he intended to correct the security lapses that enabled Umar Farouk Abdulmutallab to board a flight from Amsterdam to Detroit on Christmas Day with explosives sown into his underwear. . .  

. . . the near-miss on Christmas Day also highlights the need to streamline the overlapping bureaucracies that were tasked with monitoring terrorist threats after Sept. 11, 2001.  

. . . a more basic structural change is needed: to reestablish the links between collectors of intelligence and analysts that were severed in 2004, when the government moved most of its analysts into the Counter Terrorism Center. . . there is too little direct communication between the agents on the ground and those analyzing their reports.  

[AO: The intelligence failures that led to the failed Christmas Day terrorist attack in Detroit should never again be allowed to occur. To that end, the Boston Globe suggests that a basic structural change needed to forestall similar failures in the future is to increase communication between intelligence analysts and gatherers. As a means of effecting this suggestion, the Globe recommends reorganizing the intelligence community to eliminate excessive bureaucracy.  

But it is not clear that excessive bureaucracy was the cause of the intelligence failure. It is also not clear why increasing communication between intelligence gatherers and analysts, beyond current levels of communication, is necessary. Unfortunately, the Globe provides no answers. It doesn’t explain why an intelligence information gatherer can’t convey all necessary and useful information to an analyst without direct personal communications with the analyst.  

The conclusion of the White House intelligence review seems correct: a reorganization of the intelligence or broader counterterrorism community is not required to address future similar intelligence failures.  

The other changes endorsed by President Obama, such as sharing of databases, will do much to increase security and prevent future terrorist attacks. Reorganizing the intelligence community for the purposes suggested by the Globe will not. ]

The international community has failed so far to undercut the warlords, and its chances of doing so will steadily reduce as the Afghan government grows in self-confidence. . .  

So we should not be surprised at the increasingly overt dominance of warlords. Western governments should engage them, but with a high degree of transparency, consistency, and conditionality. A first step is to determine which ones show potential for long-term reform, and which ones are incorrigible. . .  

For those who show no inclination to reform themselves, there should be consequences. Ideally Karzai himself would see to this, but if he does not, donors can withdraw funding from the provinces they govern or the ministries they run. . .  

[AO: There are a number of concerns regarding the writer’s, Gerard Russell, recommendations. One concern is that although America has had limited success in Afghanistan in terms of improving conditions there, working with and funding Afghan warlords could have unintended consequences. Remember, our aid to Afghanistan in the form of assistance in defeating the Soviets led in part to conditions there now. This is the lesson of unintended consequences that America must consider before deciding to work with Afghan warlords.   

Supporting warlords directly has the potential to ossify the current culture of strong-man-rule, preventing or prolonging the day that the Afghan people can move beyond warlordism. Moreover, just having warlords will mean that certain problems, for example warlord related crimes and fighting, will continue as long as they exist.  

There is also the problem of identifying the warlords to work with. On the one hand, Russell advocates a transparent relationship between America and the warlords. But as warlords, America’s counterpart in that arrangement will no doubt be scheming and engaging in activities that it will not divulge to the US. In other words, American will deal transparently with warlords base on information it has on them while the warlords continue their actions and attempt to drive those actions further underground maximize their total benefit.  

That is, because warlords benefit by being, well, warlords, and because warlords can benefit by being friends or seen as friends of the US, the circumstance will incentivize the creation and perpetuation of warlords who can both seem to be on the right track, for US assistance purposes, and at the same time move as much of their warlord activities underground as possible. In short, following the writer’s suggestion could encourage development of a system that encourages survival of warlords who can do what we want while efficiently and effectively hiding their illegal actions.   

This is probably not what the US administration wants.]

. . . But with plummeting housing prices, many [homeowners] have faced a new reality: their home’s value is worth less than the mortgage. Maybe these owners are still employed; maybe they can still make the payments. But why should they? Financial gurus on cable TV are advising them to walk away, leave the keys in the mailbox, bid adieu to the lender – in short, to default. [AO: The reason financial guru’s advise home owners to walk away is not because these gurus have discovered a new way to dispose of a “troubled” home, it is because this is exactly the contract the homeowner and the his lender entered into. When a lender makes a loan, the lender prices into the loan the possibility that the home value will decrease and the lender will be left holding the bag when the homeowner strategically defaults. This is a risk the lender takes on and the lender is paid handsomely for this risk in terms of interest rates that it spreads across all of its borrowers.  

When homeowners choose not to strategically default, they are unilaterally agreeing to a higher interest rate above and beyond the rate the homeowner and lender agreed to. This higher interest rate goes directly into the pockets of bankers who can then pay record setting bonuses.   

Now, I’m not suggesting that every homeowner who can should strategically default. Instead, I am suggesting that homeowners should not allow ethical intimidation, fear or other forms of pressure to be the goad that is used to keep them in a lending contract when there is an out.]  

Strategic defaulters, though, threaten the larger economy. In 2001, 3.9 percent of owners of single-family homes had “negative equity.’’ In 2009, almost 25 percent had negative equity. If even half of those owners defaulted, there would be more depressed neighborhoods, more troubled banks – and, looking not too far into the future, stringent lending standards that would shut the doors of homeownership to the next generation. Lenders calculate risk: adding the risk of “strategic defaults’’ to their calculus would lead to higher down payments and higher borrowing rates. . . [AO: Strategic defaulters who default on their homes still have to live somewhere. They will rent in the same or another community. Think about it this way: if 25 percent of owners of single-family homes strategically defaulted, we’d need that many more rental homes. In other words, the economics is sifted from owning to renting.   

As for troubled banks, homeowners who contracted with banks cannot be expected to unilaterally increase their interest rate so that so-called troubled banks can continue to pay record bonuses. It’s unfair and unethical. Worse, it’s not part of the agreement between the homeowner and lender.  

Again, lenders were well aware that homeowners had the right to strategically default. Indeed, in many tax and finance classes across the country (mine included) professors have been explaining this to students for decades. Moreover, a number of states, including California and Colorado, are non-recourse states meaning lenders were on notice that they couldn’t even come after borrowers who walk away from their homes.   

Think about it this way: If Bank of America owed Citibank and discovered that the loan was underwater, would it continue to pay Citibank because of a concern for depressed neighborhoods, Citiban’s liquidity, or future lending to businesses? Of course not. Why then should John, who has a home loan with Bank of America, or Sue, who has one with Citibank, continue to pay that loan?  

Lenders already add the risk of strategic defaulters into loans. However, they miscalculated during the last housing boom just like they miscalculated the appropriate interest rates and the loan terms more generally. In the future, lenders won’t miscalculate or at a minimum they will try to be less wrong. Lenders will do this no matter what.]

Teaching in college, especially one with a large international student population, has given me a stark – and unwelcome – illustration of how Americans’ work ethic often pales in comparison with their peers from overseas.  

My “C,’’ “D,’’ and “F’’ students this semester are almost exclusively American, while my students from India, China, and Latin America have – despite language barriers – generally written solid papers, excelled on exams, and become valuable class participants. . .  

Of course, it would be wrong to suggest that all American students are the same. I’ve taught many who were hardworking, talented, and deeply impressive. They listened intently, enriched class discussions, and never shied away from rewrites. At their best, American students marry knowledge and innovation, resulting in some astoundingly creative work. . .    

[AO: The writer, Kara Miller, makes a common mistake that it worth addressing. She assumes her typical American student’s performance should be similar to her typical foreign student’s performance. This is not necessarily an appropriate assumption.  

Miller describes how her foreign students go to great lengths to ensure that they understand the material and are prepared for and engage in class discussions. On the other hand, it seems, her average American student puts forward much less effort. But there may be a flaw at the root of her comparison.   

The typical foreign student in one of her classes is someone, whatever their level of intelligence, who has already gone to great lengths to get to her classroom. In other words, unlike her American students, her foreign students are representative of individuals who are willing to and have done much to have the opportunity to sit in her class. The equivalent of her typical American students may be individuals back in her foreign students’ country of origin. If those students are compared to their American counterparts, it is quite possible that the American students will outshine their foreign counterparts.  

This is a common mistake that shows up often when foreigners, where students or non-students, are compared to Americans.]

The last best hope is that Obama advances a surprise climate initiative surge that goes beyond short-term politics. . .   

An Obama climate surge would mean offering at least a 30 percent US reduction in emissions by 2020 from the 1990 level, as part of a commitment to embrace real target emissions as demanded by the Africans and other nations who walked out of the talks earlier this week.  

It would also offer a global US climate policy package to developing nations, including China, India and Brazil, that would lead them to embrace more ambitious emission targets and green development. . .  

Among such solutions in a climate surge initiative are:  

-           A green Tobin tax on very short-term speculative financial trades, which was proposed by George Soros at Copenhagen. Such a tax would raise hundreds of billions for investing in energy efficiency and green development projects in poor nations. . . 

[AO: Considerable scientific evidence support the conclusion that climate change is a real and ongoing problem. America must take steps to do its part to arrest this problem. Yet, there is little that America can do on its own to fix the problem without the participation of the international community. However, in our efforts to engage the international community on the issue of global warming, we must be careful not to take steps that later prove harmful to America.  

In that regard, the “Obama surge” the writer, Charles Derber, recommends may be an unnecessary action that could harm America if other countries do not follow suit. First, we cannot afford to commit to significant emissions reductions just because other countries demand we do so as Derber recommends. Also, we cannot afford to commit to significant carbon reductions as a means of encouraging developing countries like China, India and Brazil to follow suit. Those countries will not commit to significant emissions reductions simply as a way to copy America. Instead, they will do what they believe to be in their best interest which may or may not involve committing to significant emissions reductions.   

On the other hand, if a US commitment to significant emissions reductions is negotiated with other counties, including developing countries such as China, India and Brazil, we will be in a better position to use offers of significant emissions reductions to encourage other countries to do the same.  

There has been much talk about different mechanisms for generating revenue for funding green initiatives in developing countries. Here, Derber suggests using revenue from a Tobin tax on very short-term speculative financial trades for such a purpose. This may be a good idea. However, we must be cognizant that climate change is not our only immediate problem. America has a huge deficit that could be alleviated somewhat by revenues from such a tax. We also have millions of Americans who go without health insurance because we cannot “afford” national health insurance for all Americans. We must at least consider these other priorities as potential recipients of any revenue generated by a Tobin tax.]

IN A BLATANTLY political move this month, the Labor government of British Prime Minister Gordon Brown imposed a one-time, 50 percent tax on bankers’ bonuses. Yet even though it may spring from Brown’s fear of losing an election next year, the tax is justified on economic grounds and as a matter of social justice. And after France followed suit with its own 50 percent tax on banker bonuses, arguments against a similar tax in the United States lost a key rationale.  

In the past, US banking executives warned that any such taxes would make them less competitive than London or Paris in attracting and keeping “talent.’’  

The profits of US banks during the past year are exceptional because they owe so much to taxpayer bailouts and the government’s interest rate policy. . .  

So a tax on bonuses at US banks would simply give back to taxpayers some of the money they have donated to the banks. . .  

[AO: Taxpayers are rightly concerned by high bonuses paid to bankers. However, levying a 50 percent tax on bankers’ bonuses is unworkable and may be largely ineffective.  

For one, though London and Paris have instituted 50 percent taxes on bankers’ bonus, there really still are other places bankers can move to. The article suggests Zurich, Hong Kong and Singapore. These are viable options. There are others too.  

Moreover, a 50 percent tax on bankers’ bonuses is not advisable because the goal the editorial articulates, giving taxpayers back some of the money they have donated to banks, can be achieved in a better way—by retrieving the funds from the bank.   

A one time 50 percent tax leave room for companies to evade the tax by postponing bonuses or making other arrangements that delay payments or convert those payments to other types of compensation. Such a tax, if not evaded, would also disproportionately affect those who, presumably, contributed most to the economy.  

A better approach may be a one-time tax on banks themselves. Banks would be unable to avoid paying the tax. Moreover, the tax would not disproportionately affect individual employees. Instead, since the American taxpayer lent money directly to the banks, the taxpayer would be getting a refund, directly from the bank, of her donated money.]

IF THE LAWS about music file-sharing bore any relationship to common sense, Boston University graduate student Joel Tenenbaum’s civil trial might not have turned into a circus. But the inadequacies of the law brought out the worst both in Tenenbaum and in the record companies that sued him. . .

The exceedingly widespread act of sharing electronic files of copyrighted songs is, under multiple court precedents, a form of copyright infringement. Yet the penalties are draconian – up to $150,000 for what amounts to the theft of songs that are sold online for about $1 each. . .  

. . . a $675,000 penalty seems appropriate for gross misdeeds, rather than for an act that requires just a few keystrokes and mouse clicks, but the award falls well within guidelines of the relevant laws.  

In the meantime, though, the law should reflect the difference between large-scale counterfeiters who profit off of copyright infringement and the student who casually shares files.  

[AO: The law attempts to discourage individuals from stealing copyrighted material by setting a high penalty for those who are caught. This is consistent with at least one legal theory for punishment: deterrence.  

Basically, the deterrent theory for punishment argues in favor of punishment calibrated to prevent that individual and others from committing similar future criminals. One consideration when setting punishment under this model is the likelihood of apprehending the criminal. The less likely that one will get caught for the crime, the higher the punishment must be to serve as a deterrent.  

In music copyright cases, if the change of getting caught is near 100%, there would be no need to set the penalty for copyright infringement much above the price of the song, about $1. But because the probability of getting caught is so small, the punishment may be increased significantly before it serves as a deterrent. Alternatively, however, measures may be taken to increase the probability of identifying copyright infringers. This is probably a better solution.  

Increased detection is probably a better solution because, as evidenced here, setting fines as high as $150,000 doesn’t appear to be a sufficient deterrent. Too many individuals continue to illegally distribute songs. Further increasing fines is unlikely to deter significant numbers of individuals short of imposing the death penalty or some absurdly high fine. On the other hand, increasing the probability of getting caught may be the best means of halting this problem. If for no other reason, increased detection will enable copyright holders to collect their lost revenues. As an added benefit, with increased detection, fines can be lowered so that they don’t seem so disproportionate. ]

Ignore for a moment that the bill promises [subsidies] for a family making $88,200 but not $88,201, the income at which the cap is
lifted. (How fair is that?). [AO: Subsidies and laws in general, always start and end somewhere. One might have a strong argument where the end is abrupt rather than being phased in but the health insurance bill has a phased-in subsidy. One who complains about subsidies ending has a lot to complain about because so many programs start and end somewhere.   

Take the tuition interest tax credit. It is phased-out for those who earn between $48,000 and $58,000 ($96,000 and $116,000 couple). Those who make $58,001 ($116,000 couple) cannot claim the tuition interest tax credit. By the writer’s reasoning, this is also unfair. But surely the line must be drawn somewhere?] 

. . . focus on Jane, a primary breadwinner making $48,000 (in 2016) to support her family of four. If Jane is offered insurance by her employer that meets the test, she must accept it or pay a fine. That means Jane ends up paying for the entire cost of, say, a $14,100 policy, according to some economists. They say she pays the premiums out of pocket and the remainder indirectly because employers offer reduced paychecks to offset the cost of their share of health insurance.  

Now, meet Julie, who also makes $48,000 and is not offered insurance at her job. Julie heads to the newly created exchange to purchase the same policy. But it costs her only $5,300. The rest – about $9,000 – comes from federal subsidies.  

Fair? [AO: Yes, fair. The point the writer misses is that Jane’s employer is not paying her $48,000. Given that employers know the law and recognize that Jane will have to accept the policy it offers or she pays a fine, when the employer hires Jane and offers her a salary of $48,000 and a health insurance plan that cost $14,100, the employer is actually offering her a “take-home” salary of $33,900. This is a fact that they both recognize. As a result, when Jane is considering job offers from Company A (salary, $48,000 with health insurance cost of $14,100) Company B (salary, $48,000 and health insurance cost of $5,000) and Company C (salary, $48,000 with no health insurance), she understands exactly the “take-home” salary the employers are offering and can decide accordingly. If she chooses the $48,000 with $14,100 health insurance, no one can later claim that it is unfair.]  

Of course, it’s also predictable what will happen next. In the interest of fairness, Congress will rush to expand insurance subsidies to everyone. [AO: Not necessarily. The marketplace can and will move faster than congress. Employers, recognizing the fact that health insurance is a cost that is now exposed to employees, will adjust salaries in recognition of this reality. Currently, too many employees don’t realize that health insurance payments made by their employer represent a portion of their salary. Now, employees will recognize this and employers will make compensation decisions in light of this reality. ]

. . . OK then, what’s to be done? Answer: plenty, but how about starting with this – have the federal government take over the rating of securities. Give this function to the SEC or create a new agency, but, in either case, make certain the new entity’s funding is not subject to legislative meddling and that it is staffed by persons talented enough to cut through complexity, spot mutton dressed up as lamb, and not be threatened or penalized for making that call.  

Strip Moody’s, Standard & Poor’s, and Fitch of their power to determine whether a security is a permissible investment for  regulated purchasers and, by rule or statute, transfer this function to the new federally chartered entity. Thank the rating agencies for their diligence, then hire their ablest analysts. . .  

[AO: Credit rating companies, CRAs, are companies that assign credit ratings, a measure of the credit worthiness, to issuers of security instruments. So basically, the writer, Frank Porter Jr., is recommending that the government create an agency to decide  which companies are credit worthy and which are not. This is unnecessary.  

The current system, sans private credit rating firms, can be made to function properly with minor tweaks. What is required is a careful look at the causes of failure in the current system and taking actions to remedy those problems. After all, a government credit rating agency will come with its own share of issues that have to be resolved, the least of which is legislative meddling.   

The current system failed for a number of reasons including (1) competition that created a race to the bottom in terms of rating agencies being willing to boost ratings to gain customers, (2) the pay structure that has clients paying for their own ratings, and (3) rating agencies had no “skin” in the game.  

The first problem, competition for business, can be solved by requiring that securities of certain value obtain ratings from at least three agencies. This will limit or eliminate the destructive competition for customers among top ratings firms. These agencies can still compete for smaller securities work but the big client work that is mostly of concern will be available to at least three agencies. More importantly, I will take the pressure off ratings agencies so that they don’t feel as if theyhave to give a high rating or loose customers. In other words, this gives the rating agencies some breathing room to make ratings without the incredible pressure to give high ratings or loose a customer. Requiring three agencies to rate the same security will also introduce an element of competition for creating the best ratings. The company that continuously produces poor ratings will not be trusted by the public so they will strive to produce the best ratings the can.  

The pay structure problem can be solved by requiring companies that require ratings services to pay into a fund that in turn is used to pay all or part of the fees for rating agencies for certain types of work they do. By disconnecting the fee from the service, or at least making it less direct, the pressure to rate for fees will be taken off.   

The third problem, rating agencies having no skin in the game, can be addressed by imposing fines on rating agencies when their ratings don’t hold up after a certain amount of time. If an agency rates a security AAA that turns out after six months should have been rated CCC, the agency should pay a price.  

These are smaller changes, compared to a government run ratings agency, that will help prevent the problems of 2008 and the years before that from returning. ]