Homo Economicus
The Warren Bubble Act
Last week, Massachusetts Senator and former Harvard Law Professor Elizabeth Warren introduced her first piece of legislation, a bill that would require the Federal Reserve to allow students to take out student loans at the same interest rate as banks. The bill addresses the important affordability issue facing higher education, but it fails to do so with sound economics.
In her unveiling of the bill, Warren pointed out that it “isn’t right” that the Fed charges banks an interest rate of .75 percent, while the unsubsidized Federal Stafford Loan program charges students 6.75 percent. There are, however, many right reasons why the rates are different. The .75 percent discount rate is for overnight loans, which are loans only available to banks in good financial condition and which provide collateral for their loans. It is also not a day-to-day financing option for banks, but rather a last resort to ensure financial stability during events such as the September 11 attack. Student loans, on the other hand, are mostly risky long-term loans to individuals without credit history and collateral. Banks are very unlikely to default on their overnight loans, while 17.3 percent of student loans which originated in 2009 are expected to default over their lifetime. The suggestion that banks and students should have the same interest rate may be politically popular, but it shows Warren’s lack of understanding of debt and finance.
Winter Is Coming
For a show filled with fire-breathing dragons and Machiavellian politics, Game of Thrones is surprisingly rich with economic metaphors that resemble the world we live in.
To start, although the Seven Kingdoms of the Westoros continent, where the saga unfolds, have the social and technological characteristics of medieval Europe, its economy ebbs and flows like the modern business cycle. Seasons on the continent lasts years. For an agrarian society, summer is like an economic boom and winter is like an economic depression. The grumpy old characters often deride the young ones as “summer children,” who have not experienced the hardship of a prolonged winter. The wise Northmen’s motto? Winter is coming.
Heard 'Round the World
Monday, an explosion at the finish line of the Boston Marathon wounded dozens and killed three. The race, a quintessentially Bostonian tradition that brings joys to the city and many in the Harvard community, became a tragedy that was heard around the world.
As my high school friends began inquiring about my safety, I had a novel realization that I was a proud Bostonian. I have lived in the city for almost three years. I’ve savored the food, cheered for the teams, and complained about the weather. But it took a tragedy for me to become fully conscious of my identity as a Bostonian.
The Soul of Economics
When I present an economic argument in debates with my liberal friends, I often hear the counterargument that “economists only care about efficiency.” On issues ranging from free trade to price gouging, mainstream economics seemingly values efficiency over equality and social justice. The discipline, however, has a long history of promoting peace, tolerance, and benevolence.
Capitalist economics has celebrated peace since its inception in the publication of The Wealth of Nations. While Adam Smith is primarily known for his stance against government intrusion in markets, he was also a strong opponent of government involvement in imperialist conquest. During a period when nearly 70 percent of Great Britain’s non-interest expenditure was spent on a military arms race against other European imperial powers, Smith recognized that the military, “however honorable, however useful, however necessary… produces nothing for which an equal quantity of services can afterwards be procured.” In particular, Smith argued that the benefits of British monopoly in North America are not properly compensated by its cost of subduing the American colonies. The merchants are the overwhelming benefactors of imperial colonies, although British taxpayers ended up paying for military spending. At a time when Great Britain’s commercial oligarchy oppressed the American people with force, Smith laid down an economic case for self-determination.
Irresponsible Divestment
Last week, a student group called Responsible Investment at Harvard criticized the Harvard Management Company for investing in an index fund that partially invests in gun manufacturer Smith & Wesson. The organization has chosen its name rather unwisely, because their criticism shows an ignorance of how investments work and a lack of responsibility.
First, the group was factually incorrect to call for Harvard to “sever financial ties” with gun manufacturers because Harvard has no financial ties to gun manufacturers. The morally dubious fund in question is iShares Russell 2000 Index Fund, an index fund that tracks the performance of 2,000 small-cap American companies indiscriminately. According to the prospectus of the exchange-trade fund, HMC is not a stakeholder of Smith & Wesson until it chooses to redeem its share in the ETF, a process that HMC is not qualified to do. The most that the group can claim is that Harvard’s endowment “gains exposure to Smith & Wesson’s price movement.” Also, even if Harvard owns stock in a company, it does not mean that Harvard’s money is supporting the company’s operations. Since Smith & Wesson is unlikely to raise capital in the future, both the ownership of the stock and price of the stock are irrelevant to the company’s daily operation. Claiming that Harvard’s money will “support the manufacture and production of assault weapons” is vast hyperbole and shows the group’s lack of understanding of the investment process.
