FAIR MONEY

Face to Face with Inequality


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China’s Social Credit System

Rogier Creemers, at Oxford, has translated a set of draft regulations for China’s new Social Credit System. Creemers is outraged:

But Creemers is convinced Chinese Internet giants like Alibaba, Baidu and Tencent will cooperate with the government in operating the system. These companies are ‘in a symbiotic relationship with the government’, he argues. Wheras in the US companies like Google or Facebook show themselves fighting for the privacy of their clients against the preying eyes of intelligence agencies, in China this is not the case. There is no doubt among key players who is in command. ‘Government and big internet companies in China can exploit ‘Big Data’ together in a way that is unimaginable in the West’, says Creemers.

Perhaps Creemers has forgotten about FICO , which has been using consumer spending habits as a proxy for “good citizenship” since 1956.

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How Exactly Do Colleges Allocate Their Financial Aid? They Won’t Say.

An article written by Marian Wang on Pro Publica poses the sticky question in the title above. To receive financial aid, a student and their family must undergo a thorough investigation into their financial lives. To quote from the article:

Many universities have access to comprehensive financial profiles, sometimes down to the type of cars a family drives. Some analyze patterns and interpret even the most subtle indicators from students, such as the order in which schools are listed on the federal financial-aid application, or even how long a student stays on the phone with an admissions officer.

However, information transfer is not a two-way street. Universities, even the most charitable, generally consider the metrics used to offer financial aid packages to be in the same category as state secrets. Again from the article:

Take Newman University, a Catholic liberal-arts college based in Kansas.

What are the actual criteria the college uses to determine who gets aid and how much?  “That’s proprietary information,” said Pam Johnson, Newman’s interim dean of admissions and financial aid. “It’s part of our competitive strategy.”

The full article is well worth your time.


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Student Loan Fairness Act

Rep. Karen Bass (D-Calif.) is trying to introduce a new bill to ease the burden of student loan debt. You can read about her efforts and become a Citizen Co-Sponsor at her website.

Summary

This new legislation will be a combination of two bills from the 112th Congress: Rep. Hansen Clarke’s Student Loan Forgiveness Act (H.R. 4170), as well as The Graduate Success Act (H.R. 5895).

This legislation would establish a new “10-10” standard for student loan repayment as the new standard repayment plan. In the “10-10” plan, an individual would be required to make ten years of payments at 10% of their discretionary income, after which, their remaining federal student loan debt would be forgiven.

The Student Loan Fairness Act would also combat crushing interest rates of public and private loans by capping federal interest rates at 3.4% and allowing existing borrowers whose educational loan debt exceeds their income to convert their private loan debt into federal Direct Loans, then enrolling their new federal loans into the 10/10 program.

This bill works to jumpstart the economy and adds to the public service workforce by rewarding students who enter public service professions and work in underserved communities with a reduced period for loan forgiveness.

The Student Loan Fairness Act also sends a lifeline to student borrowers who have fallen on difficult times. The bill seeks to ensure that no one will be pushed into poverty because of illness or loss of their job and extends interest-free deferments to unemployed borrowers of unsubsidized federal student loans and those enrolled in the “10-10” repayment plan.  It also seeks to replace the current, 10 year “Standard Repayment Plan” for the full amount of the loan balance with the “10-10” plan as the default repayment option for borrowers entering repayment.


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Should We Trust Economists?

An article in the Atlantic today asks the title question: Should We Trust Economists?

I like Noah Smith’s question as stated, but I think it can be improved. I suggest: What Kind of Economics Should We Trust?

The interesting part of Smith’s article touches on the relationship between formal models and empirical reality. Economists are wonderful at formulating models and finding faults in each other’s models but less wonderful at checking those models against the messy and contingent world of human behavior. Much to Noah Smith’s credit, he is quite open about the limitations of economics as it is practiced today:

The problem is that economists haven’t really built a model of the whole economy that works. A lot of smart people have spent a lot of time creating tools with names like “dynamic stochastic general equilibrium.” But as of this moment, those models can’t really forecast the economy like our meteorologists can forecast the weather. Furthermore, they contain a lot of obviously wrong assumptions. To give just one example, many of the models stipulate that companies are only allowed to change their prices at random times! Crazy, right? Economists include things like that to make the models easier to use, and they hope that those zany assumptions are actually decent approximations to the way the world really works. But even with these kludges in place, none of the existing models can do much to predict the economy.

The participants in Fair Money’s initial study are great examples of the limits of formal modeling. Little of what they reported to us could have been predicted by standard models of consumer behavior, in large part because the conditions they face would not be predicted by those models.

While I admire Smith’s openness about the limitations of economics, I have to take issue with his implicit assumption that economists are forever doomed to work in a world dominated by formal (but empty) models derived from mathematically informed premises, which bear an uncertain relation to reality.

For inspiration, Smith needs to look no further than the example of Harold Innis. Innis’ most famous book The Fur Trade in Canada: An Introduction to Canadian Economic History, which spawned the once well known “staples thesis,” was informed by several months of fieldwork on trade routes in the Canadian wilderness. Innis quite literally took a canoe trip along the traditional fur trading routes, taking notes and interviewing people as he went. As a result, Innis’ work has empirical teeth too often lacking in economic work and remains one of the better arguments against neo-liberal economic policy.

In the spirit of Harold Innis, Fair Money welcomes any economist to our project willing to loosen the tie and pick up a notebook. No paddling required.