Author Archives: James A. Bacon

Where Are the Consumer Rights Advocates When You Really Need Them?

Consumer rights advocates work themselves into a wrathful froth over the misdeeds of banks, payday lenders, credit card companies, and mortgage lenders. But what about the truth-in-lending abuses perpetrated by institutions of higher education? We don’t hear so much.

With the cost of attendance of a four-year degree routinely exceeding $100,000, selecting a college can be one of the biggest financial decisions that Americans can make — probably the biggest decision for low-income families that never purchased a house. But the financial terms and conditions provided in acceptance letters are notoriously opaque, finds a study by the New America think tank and financial-counseling firm uAspire.

The two outfits published a study last week based upon an examination of 11,000 award letters sent in 2016 by more than 900 colleges. Summarizes NewAmerica’s Kevin Carey in the Wall Street Journal: “It found most of them use obscure terminology, omit vital information, or present financial calculations that appear deliberately deceptive. Many letters are confusing in their own unique ways, making it difficult for students to compare colleges.”

Of the 515 colleges that awarded them via nonstandard letters, more than a third provided no information about how much attending school would cost. The letters highlighted grants and scholarships as a way of convincing students to enroll, but without listing tuition or explaining how much money students would owe. …

The letters that did disclose costs were inconsistent. Some listed only tuition. Others included room and board. Others added books and estimated living expenses. … Seventy percent of colleges with nonstandard letters created further confusion by lumping together grants and loans, as if both were freebies.

Carey cited a letter sent by the University of Arizona that told a student that the cost of attendance was $48,200 a year, then subtracted $5,815 in grants, $5,500 in work-study opportunities, and $26,885 in loans. “Net Costs After All Aid” were “$0.00.”

A used car dealer who delivered a pitch like that would be slammed with a fine and driven out of business.

Many (not all) public colleges and universities engage in practices that would make a payday lender blush. It all makes sense when you understand that higher-ed institutions are, beneath the lofty rhetoric about justice and equality, mechanisms for the extraction of wealth from students and taxpayers, the pursuit of status and prestige within the academic community, and the remuneration of elite faculty and administrators.

Feeding the system requires inducing as many students as possible to enroll, which is becoming increasingly difficult as the cost of attendance continues to outpace incomes and financial aid.

How can lower-income Americans be protected from the higher-ed racket? New America recommends requiring colleges to use a standardized award letter that explains expenses, grants and loans clearly so recipients can easily compare offers by competing institutions. The Department of Veterans Affairs already mandates this kind of transparency for students benefiting from the GI Bill. Congress should require a standardized letter for all institutions receiving federal money.

And if Congress doesn’t act, I would suggest, the Commonwealth of Virginia could require a standardized letter for all state institutions — or, at the very least, for institutions offering state-funded financial aid. Colleges and universities should be free to determine the substance of their own financial aid packages, but there should be full transparency in how those packages are presented to students and their families.

The “Energy Cloud” — Buzzword or the Future?

To get an idea of how people outside of Virginia are thinking about energy policy, I listened two days ago to a webinar produced by Navigant Consulting on the emerging “energy cloud.”

The energy cloud, says Navigant, will come from applying digital technologies to the electric grid, shifting from a one-way flow of electrons on power lines to a multi-directional flow and moving from large, central power stations toward Distributed Energy Resources (DER). “A cleaner, intelligent, increasingly mobile, and more distributed grid is just around the corner.”

After decades of relative stability, Navigant opines, the U.S. is entering a period of great change. “New value will be created and captured across highly dynamic and disruptive Energy Cloud platforms. … Energy incumbents, especially utilities, have less than 5 years to reorient their products and business models around fast emerging technology ecosystems like iDER, Smart Cities, and IoE (Internet of Everything) or risk becoming a fringe player in the emerging energy economy.”

Now, I recognize that Navigant charges exorbitant fees for business-intelligence services by persuading people that its consultants and analysts perceive the onrushing future with greater clarity than anyone else. The firm touts the Next Big Thing and makes the case that disaster will befall anyone who gets left behind. That said, Navigant talks to a lot of people, including those with potentially disruptive technologies and business models, not just established players wedded to the status quo. It would be unwise to dismiss its prognostications out of hand.

Distributed energy will be as disruptive to the electric power industry as solar and wind power, Navigant says. For example: Electric-powered vehicles, which operate on batteries and plug into the grid, will be huge. Over the next 10 years, distributed energy resources — which includes fleets of electric vehicles that can feed into and draw down from the grid at will — will grow at eight times the pace of central-station generation, the firm predicts.

Also, says Jan Vrins, managing director-energy for Navigant, the industry is moving away from one-size-fits-all electric power to highly personalized products and services. “Energy providers are providing what customers are looking for. As energy and electric power becomes more important to our society,” he says, “there’s a significant opportunity to go after new revenue streams around transportation, around industrial and commercial customers.”

Mary Powell

The Un-utility. One of the presenters was Mary Powell, CEO of Green Mountain Energy, a Vermont utility. “I don’t view DER as a threat,” she says. “We see opportunities to create deeper, more substantial relationships with our customers. We have a customer-obsessed culture. … Three or four years ago, we began to focus on how do we accelerate the consumer-led revolution to distributed resources.”

Vermont customers are politically progressive, and they want a different energy future. A decade ago the emphasis was on solar energy and putting solar on rooftops. The conversation has evolved since to smart grids, demand-management, energy efficiency, energy storage, and flattening the peak in energy demand. “We’re not just attacking the peak, we’re crushing it,” Powell says.

Reinventing itself as the “un-utility,” Green Mountain Power has transformed its corporate culture. Instead of thinking about how to grow demand for electricity, the team has asked, “What happens if we lost 40% of our traditional revenue over 10 years? How do we create a new value stream?” The approach has been to experiment a lot. “Try something in a nimble, gritty, low cost way,” says Powell. “Don’t take massive bets. Make lots of small bets, and lean into the ones that offer great value for customers.”

How’s that all working out for Vermonters? The webinar didn’t get into that. Vermont’s electric rates are about 50% higher than Virginia’s. But then, electric bills are lower. Vermonters don’t need air conditioning, and they typically use gas or oil to heat. Can lessons learned in Vermont apply to Virginia? That would make an interesting discussion.

Paula Gold-Williams

Utility-scale solutions in an era of DER. CPS Energy, which supplies electricity to the San Antonio, Texas, area, serves a very different customer base. Energy customers aren’t as politically driven in Texas as in Vermont, but they are changing, and CPS Energy is changing with them, says CEO Paula Gold-Williams.

Some customers want the kind of personalized electricity described in the Navigant playbook. But, Gold-Williams says, “I have customers on the other end of the spectrum who say, ‘I don’t even want to think about it. I don’t want to think about technology. You’re the energy expert, you do what you think is right.'” Continue reading

What the 2018 Tax Cuts Mean for Virginia

How will the tax cuts from the 2018 Tax Cuts and Jobs Act impact Virginia households? The results vary considerably by income bracket, according to a tax calculator published by the Tax Foundation. Higher income households, making over $200,000 per year, will get the biggest income tax breaks as measured in absolute dollars and by percentage of income.

But, despite the hand-wringing over the elimination of the tax deduction for state and local taxes, there is only modest variance among high-income households between high-tax Northern Virginia and other parts of the state.

To illustrate the impact by income category, I selected Congressional District 7, which stands at the geographic center of the state and encompasses a range of higher-income suburban households and lower-income rural households. As seen in the table above, there is very little in the tax package for people making less than $25,000 per year. Of course, given the highly progressive structure of the tax code, people making less than $25,000 per year pay almost no taxes to begin with.

The tax act is fairly generous to working-class and middle-income Virginians but most generous to those making over $200,000 per year. If your No. 1 concern is sticking it to the rich, this bill doesn’t do it. In fact, the Tax Foundation data makes the tax act look like a giveaway to the rich — more or less as its Democratic Party critics described it.

Unfortunately, this static analysis obscures as much as it reveals. By eliminating many deductions employed by the wealthy, tax reform should flush considerable income out of tax shelters into the taxable open. One can predict several things: (1) that taxable income will rise, which (2) will induce hysteria among the social justice warriors obsessed about income inequality without appreciating the difference between gross income and net (taxable) income, and (3) will result in higher tax payments than would be predicted by static analysis. If your No. 1 concern is ensuring that the rich shoulder an increasing share of the income tax burden, then such an outcome is entirely possible under the tax plan — although we won’t know for sure until the data comes in.

Another thing that static analysis overlooks is the impact of the tax cuts on the economy. At a minimum, lower taxes will create more disposable income, some proportion of which will be plowed back into the economy in the form of increased consumer spending. If the money isn’t spent, it will be used either to pay down debt (a good thing) or invested (also a good thing). It seems pretty clear that Democrats’ fears of an economy cataclysm resulting from the tax cuts are not being borne out. In the short run, the cuts clearly are boosting the economy. They’re also boosting deficits, however, which does aggravate the long-term problem of endemic deficit spending and make a Boomergeddon scenario all the more likely.

There is some geographic variability in tax cuts for top-earning households ($200,000 and up), as can be seen in the chart to the left, but it is modest. Fears fanned by critics that high-income earners in high-tax districts might be losers do not appear to be panning out in Virginia. Northern Virginia districts 8, 10, and 11 don’t get tax breaks as big as their high-income earners in other districts, but they do get tax breaks. Big ones. If anyone has a problem, it’s Maryland’s 4th and 5th districts east of the District of Columbia. There, top income earners get tax breaks averaging only $9,000 per household. Is that a big enough difference to induce some to move across the Potomac? We’ll see.

Murders, Arrests and the Politics of Racial Grievance

Baltimore. Orange patches represent “low arrest” areas, blue high-arrest areas.

The Washington Post had what could have been an interesting idea: Map more than 52,000 homicides and arrests in major American cities over the past decade. Sadly, the newspaper floundered with the data, unable to identify any meaningful trends other than the entirely predictable finding that some cities do a significantly better job of clearing its murders than others. Why that might be, other than some vague talk about the level of trust between police and inner-city populations, the Post had no clue.

Two cities were highlighted graphically in the WaPo’s analysis: Washington’s metropolitan neighbors Baltimore and Richmond. Baltimore stands out as a city dominated by “areas of impunity,” where murders go unsolved and murders are rarely caught. Richmond shines nationally as an example of a city where most murders are solved. Comparing policing practices and community attitudes in the two cities might have been instructive, but the WaPo took a different path.

There are no one-size-fits-all explanations for the variation in arrest rates across all cities, but I will nominate one factor that plays an outsized role: the politics of racial grievance.

Baltimore and Richmond are ideal test cases. Both have large populations of poor African-Americans living in highly segregated neighborhoods. Both have black-majority city councils. Both have black police chiefs and public prosecutors. Richmond has a black sheriff — I’m not sure what the equivalent position is in Baltimore, but whatever it is, I’ll wager that a black politician occupies the post. Thus, we can’t explain away the difference in arrest rates by the suggestion that, say, Richmond doesn’t have same kind of poor, inner city neighborhoods as Baltimore. Nor can we can’t blame the indifference of a white-dominated political class, as might be the case in other cities.

The difference, I submit, is political ideology. In Baltimore the death of Freddie Gray while in the custody of Baltimore police escalated into a highly emotional and widely publicized controversy that fed into the Black Lives Matter narrative of endemic racial injustice. Egged on by the media, Baltimore’s politically progressive mayor and prosecutor appealed to the black population’s resentments and grievances and lambasted the performance of the police. The resulting polarization sowed mistrust between police and blacks. In such a toxic environment, the police enjoy little cooperation from the black population, making it exceedingly difficult to track down murderers and close cases. As a consequence, the murder rate soars.

Richmond’s African-American leaders are notable for their moderation and pragmatism. They don’t stoke racial grievances. While they clearly represent the interests of their poor constituents, their rhetoric supports the idea that “we’re all in this together.” They don’t see politics as a zero-sum game. They see prosperity as a rising tide that lifts all ships. As a consequence, the racial polarization that poisons police-community relations in Baltimore is far less of a problem in Richmond. The payoff is a much higher rate of arrests and convictions of murderers, and safer streets for law-abiding minority residents. Bottom line: By eschewing radical progressive rhetoric, Richmond’s black politicians get better results for their constituents.

Needed: The Right Parking Policies for a Growing Richmond

Photo credit: Richmond Times-Dispatch

by Stewart Schwartz

Editor’s Note:  The City of Richmond has launched a parking study focused on seven distinct areas of the city and is holding seven public meetings this week. Meeting dates and locations.

Parking is perhaps the most important aspect of a city to get right if we are going to address traffic, make housing more affordable, and create a sustainable, walkable, bikeable city. The City of Richmond is growing, but if it’s to grow without making traffic really bad, we need to get parking right. Too much parking, especially free or underpriced, will lead to more driving and traffic. Too much parking can also drive up building costs and housing prices, making it harder to provide housing affordable to the full range of our workforce.

As we grow, we need to provide good alternatives by expanding our transit system and adding more dedicated bus lanes over time, and adding bike lanes — especially protected ones, and make walking safer and interesting. Combine these with car sharing like Zipcar and Car2Go, taxis, and ride hailing like Uber and Lyft. With all of these options, you may not need a second car, and for some people, any car at all.

Cities around the U.S. are adopting a range of creative parking policies that combine both market-oriented and regulatory approaches to managing parking. These include:

1) Setting the right price for parking on the street so that there is good turnover in retail districts and 20% of spaces are rotating open at any one time.

2) Using residential parking permit programs but pricing the parking passes appropriately and adding car sharing options to the neighborhood.

3) Dropping use of parking minimums and putting in a maximum limit on number of spaces, while exempting small buildings from having to have any parking. Today our city actually has many zoning districts which actually do get parking right — without requiring too much.

4) Sharing parking between users — one example is daytime office parking used for nighttime entertainment parking.

5) Pricing all off-street parking in lots and structures and separating the rental of parking spaces from the apartment lease or condo purchase price, and from the office lease. This makes clear the high cost of providing parking and always results in lower demand.

6) Equalizing employee commute benefits — instead of just offering free or subsidized parking, an employer should also offer a transit pass benefit, or even a “parking cash out” where an employee offered a parking space can “cash it out” for an equal value in a transit pass + cash, or cash + walk or bike to work.

For a comprehensive presentation on modern parking policies, I recommend this presentation to the City of Portland, Oregon by Jeff Tumlin of Nelson\Nygaard. Jeff is one of the premier national experts in parking policy. Or for the scientific and technical basis for changing a city’s parking policies, see UCLA Professor Donald Shoup’s “The High Cost of Free Parking.”

If Richmond wants to maintain its quality of life as it grows, the city needs to get parking right. Hopefully, the ongoing study will lead to the adoption of the best combination of market-rate and policy solutions for our community.

Stewart Schwartz is a board member of the Partnership for Smarter Growth and executive director of the Coalition for Smarter Growth.

The Virginia529 Board Should Be Lauded, Not Criticized

Participation in Virginia 29 pre-paid tuition plan has declined in recent years as measured by the number of accounts and semester-units sold. Graphic credit: Joint Legislative Audit and Review Commission.

State government, local government, universities and independent authorities in Virginia are larded with debt and unfunded liabilities. No one, to my knowledge, has compiled a total inventory of public institutions’ exposure to pension obligations, leases, maintenance backlogs, infrastructure debt, economic development loans, and other long-term obligations. Institutions’ exposure to the vagaries of the economy and fluctuations of interest rates is largely hidden from public view.

One fund operating in the shadows is Virginia529’s tax-advantaged, pre-paid college tuition program. In contrast to the many entities that take on unwarranted risk, however, Virginia529 is a rare instance of sterling governance. The $2.7 billion fund for the prepaid tuition plan is defensively invested to guard against market downturns. It makes a conservative assumption about future returns on its investment portfolio — only 6.25% annually rather than 7.0% for the Virginia Retirement System. And rather than being chronically underfunded as the General Assembly has allowed the VRS to be, Virginia529 is 138% funded. Indeed, the plan is in such solid shape that actuaries judge that it has a 98% likelihood of meeting future obligations to the parents who are trusting that it will deliver on promises to pay for their children’s educations.

Apparently, that’s a problem.

In a review of the 529 plan, the Joint Legislative Audit and Review Commission (JLARC) suggested that the plan is too conservatively run. Its intolerance of risk means that has built up unnecessarily large reserves that make the program unnecessarily expensive. By reducing the size of the pricing reserve on future contract sales from 10% to 7%, JLARC says, Virginia529 could lower the price of an eight-semester contract by $1,851.

Key lawmakers strongly favor the JLARC recommendations, reports the Richmond Times-Dispatch, and they have pressured Virginia529 CEO Mary Morris to adopt the recommendations. Said Senate Majority Leader Tommy Norment, R-James City ominously: “Sometimes there’s a very thin line between defiance and supreme independent confidence.”

True enough, the cost of participating in the Virginia529 plan has surged as the cost of college tuition has consistently outpaced inflation and income growth — a fact that can be attributed (a) to the General Assembly’s cutbacks in support for higher education, and (b) administrative bloat, mission creep and other policies pursued by colleges and universities themselves. Rather than price its plans over-optimistically as, say, long-term care insurers did a decade or two ago only to increase their premiums in order to maintain plan solvency, Virginia529’s governing board prices its product based on the conservative — one might say, cynical — assumption that tuition and fees at Virginia four-year institutions will increase by 5% in the 2018-19 academic year and by 6.5% each year thereafter.

Also true, participation in the plan has declined in the past 10 years as the price has risen, as seen in the chart above. Since fiscal 2009, the number of plan participants has declined from 71,800 to 63,900. Meanwhile, participating families are buying less coverage. The number of annual “semester units sold” has tanked 43% from 18,800 to 10,700 over the same period. Admittedly, that is a disappointing trend.

Virginia529’s investment performance has lagged industry benchmarks over one-, three- and five-year time horizons, says the JLARC report, although it has met or outperformed benchmarks for the 10-year period. “Virginia529 staff, the investment advisory committee, and the program’s investment consultant indicate that the fund is defensively positioned with the intention of protecting assets in down markets and periods of market instability.”

The JLARC report seems to accept that explanation. Staff has a bigger problem with Virginia529’s large pricing reserve. The pricing reserve is a portion of the contract price in excess of the amount needed to pay future contract benefits; the reserve generates surplus revenue to protect the fund against risk. JLARC recommends a guideline that would reduce the pricing reserve as long as the Virginia529 fund has assets in excess of 130% of liabilities. “Reducing the pricing reserve from 10 percent to seven percent would improve affordability of Prepaid529 contracts but would have only a minor impact to the fund.”

Virginia529 staff disagrees. First, reducing the pricing reserve on future contracts creates equitability concerns for those who already purchased contracts. In effect, risk would be shifted to people who paid higher premiums so newcomers could enjoy lower premiums. Second, future dips in portfolio performance could affect actuarial soundness and necessitate returning the reserve to a higher percentage, creating contract pricing volatility. And third, reducing the pricing reserve would have only a modest impact on contract prices. Slashing the reserve to 7% would reduce the price of an 8-semester contract of $67,880 by only $$1,851.

Bacon’s bottom line. Here’s what JLARC and Virginia legislators seem to miss: Virginia529 signs a contract with Virginia families locking in college tuition at a certain price. Virginia529 doesn’t promise to “try real hard” to fulfill the terms of the contract. It will fulfill the contract. It doesn’t have the luxury of raising taxes, or diverting revenue from other programs, or literally borrowing from its investment portfolio and promising to pay it back later, as the General Assembly has done with the VRS. The program should be applauded for adopting an actuarial gold standard.

While JLARC raises reasonable points worthy of discussion by the Virginia529 board, legislators need to butt out. They have no skin in the game. They don’t pay a price if Virginia529 fails to fulfill its promises. If lawmakers want to make college tuition more affordable, they should either (a) increase state funding for public institutions, or (b) do the really hard work of driving costs out of the higher-ed system. Otherwise, brow-beating the Virginia529 board is cheap grandstanding.

No Contract, No Pulse… No Riders, No Sympathy

What a clever way to introduce Richmonders to their new Bus Rapid Transit service, Pulse, when it is scheduled to commence in less than two weeks — a drivers’ strike.

The Amalgamated Transit Union has been negotiating with the GRTC Transit System since September 2017 over a new contract, and apparently union members are getting impatient about the lack of results. Now the union is using the Pulse roll-out as leverage in the talks. Bus drivers have been wearing buttons that say, “No Contract, No Pulse,” reports the Richmond Times-Dispatch.

Said Local 1220 president Frank Tunstall III: “We wanted to get GRTC’s attention that it’s very important we have a contract before the Pulse starts. That would be to everybody’s advantage, and when I say everybody, I mean passengers, the company and the union members.”

The union may or may not be justified in its contract demands, I really don’t know. What I do know is that in other transit systems, such as the Washington Metro, transit workers have successfully used the threat of strikes to negotiate contract terms so favorable that they damage the integrity of the transit enterprise. Washington Metro faces a multibillion-dollar backlog of maintenance projects due in considerable part to its expensive and unproductive union workforce.

But there’s a big difference between a strike by Washington Metro workers and a strike of Pulse workers. Without a functioning Metro, transportation in the Washington region would gridlock, causing massive economic dislocation and pain. That gives the union power. Without a functioning Pulse, Richmonders wouldn’t notice or care — the region is doing just fine without the BRT service at the moment, and it will do just fine if it doesn’t start on time. A strike would do nothing but get prospective riders irritated at the union, generate red ink for the GRTC — and give people an argument for investing in roads instead of mass transit.

CyberX Not Just an Amazon.com Subsidy

Virginia economic development officials have kept their lips tight about the incentive package Virginia is extending to Amazon.com, Inc., to induce the e-commerce giant to locate its second headquarters in Northern Virginia. My concern has been that the Commonwealth might attempt to outbid other states in dangling obscene tax breaks and subsidies to attract the project, which could  generate $5 billion in investment and hire 50,000 employees. But as it turns out, it looks like Virginia might be taking the right approach.

Del. Chris Jones, R-Suffolk, chairman of the House Appropriations Committee, made some reassuring statements to Michael Martz in the Richmond Times-Dispatch reporter’s article today about the CyberX initiative.

[Jones] and other state officials would not comment on the contents of a state incentive package to land the coveted headquarters, but Jones confirmed the state would rely heavily on indirect incentives, such as investments in higher education and transportation improvements that Amazon has made priorities in the high-profile search it began in September.

Prominent among those investments, apparently, is CyberX, a $50 million initiative cooked up by Jones and Virginia Tech President Timothy Sands during the General Assembly’s extended budget deliberations earlier this year. Here’s the thing: CyberX, which aims to address the unfilled 30,000 positions in cyber-security and related jobs in Northern Virginia, represents a workforce-related investment that Virginia needs to make whether Amazon decides to locate in Virginia or not. The severe cyber-security skills shortage is throttling on growth in Virginia’s most economically dynamic region. If we could solve this issue, we’d get plenty of economic growth with or without Amazon.com.

As described in the budget amendment, modest sums will be allocated to the initiative in the upcoming fiscal year, with a bonanza scheduled for FY 2020. The initiative will consist of a “primary hub” located in Northern Virginia with a network of “spokes” linking to other universities around Virginia for the purpose of building “an ecosystem of cyber-related research, education, and engagement that positions the Commonwealth as a world leader of cybersecurity.” Virginia Tech will serve as the “anchoring institution” and coordinator of the Hub.

Funding includes:

  • $15 million to the Virginia Research Investment Fund (VRIF), which will do two things: (1) certify public institutions of higher education to participate as “spokes,” and (2) provide matching funds for faculty recruitment.
  • $10 million for Virginia Tech to lease space and establish the Northern Virginia Hub.
  • $15 million for Virginia Tech to provide research faculty, entrepreneurship programs, student internships and educational programming at the Hub.
  • $3 million for a cyber-physical systems security lab at the Hub.
  • $3 million to support cyber-physical systems security labs at spoke sites across the Commonwealth.
  • $3 million to establish a machine learning lab at the Hub.
  • $1 million for classroom and distributed learning infrastructure improvements at the Hub.

Increasing the capacity of Virginia’s higher-ed system to train cyber-security employees may be a necessary condition for addressing the yawning IT skills gap, but it may not be a sufficient condition. Several questions arise.

First, how much of this money is going to workforce training and how much going to academic R&D? Martz’s article focuses on the fact that Virginia Tech and George Mason University are getting $250,000 each to hire a top cyber-security researcher. How does more research impact the skill shortage?

Second, is there a sufficient supply of high school graduates with the academic preparation and aptitude to enter these programs — or will Virginia Tech have to recruit aggressively from outside the state to find students?

Third, given the high cost of housing and the horrendous, soul-draining traffic congestion in Northern Virginia, will graduates of these programs even want to seek employment in the region — or will Virginia spend money to develop the human capital that other metros end up hiring?

Fourth, Jones’ comment to Martz implies that the General Assembly might be willing to make additional transportation “investments” in Northern Virginia, which are sorely needed. But what magnitude of such investments will be required to diminish NoVa traffic congestion to a degree that anyone can notice?

Despite those questions, CyberX strikes me as sound strategic thinking. The initiative serves an indisputable need, and the funds invested don’t put money in the pockets of a company with the world’s largest market capitalization. The investment builds Virginia’s capacity for cyber-security innovation.

Free Speech Zones in the Land of Fruits and Nuts

Regular reader and roving California correspondence Larry Gross shared the photo above of a sign post at Yosemite National Park. “We’re seeing these signs at other places including the Walmart,” he reports.

What an interesting concept — special zones where people can exercise their right to free speech. I wonder what rights people have outside these zones. Only in California.

A World Awash in Capital

Lawrence H. Summers

Shifts in the global supply and demand for capital are depressing interest rates over the long term, with momentous implications for investors and borrowers, argues Lawrence H. Summer, former Treasury Secretary under President Clinton and former president of Harvard University.

For many years, it has been the conventional wisdom among managers of pension funds, foundation endowments, and other large investment portfolios that it is prudent to operate on a payout ratio of 5%. That wisdom was predicated on the assumption that funds could earn at least 5% annually on a long-term basis after accounting for year-to-year fluctuations in performance. But Summers contends that the payout ratio should be “somewhere under 3%.”

“Payout ratios should be far less, or expected return assumptions should be far lower, than has been the case historically,” he said at a conference sponsored by the National Bureau of Economic Research, “New Developments in Long-Term Asset Management.”

If global finance is in fact experiencing a capital glut, it is excellent news for the United States government, which is the world’s largest debtor. Interest payments on the $21 trillion national debt are a huge driver of budget deficits, and an increase in interest rates could prove calamitous. If Summers is correct, my Boomergeddon scenario could take considerably longer materialize than I suggested in my recent post, “Moody’s Reaffirms AAA Rating. Don’t Get Cocky, Virginia.”

On the other hand, if Summers is correct, chronic low interest rates could depress returns for the Virginia Retirement System and universities like the University of Virginia. The VRS assumes that its assets will average returns of 7% annually over the long term.

Summers argues that the global economy is undergoing a “de-massification” in which technology substitutes for capital-intensive in investment in equipment and real estate. The trend, which is driven by the declining cost of computing power and the rise of Artificial Intelligence, means that businesses need to invest less capital to achieve economic growth. Thus, law firms have shrunk the office space per attorney from 1,200 square feet to 600. And Apple, the world’s most valuable company, decided recently to funnel $100 billion into dividends and share buybacks instead of investing in new capital projects. “Something very important and structural is happening,” he said, when a global innovation leader is deploying its capital that way.

The average yield on U.S. 10-year Treasury bonds and comparable debt for Japan and European nations arguably has shrunk by 250 to 350 basis points (2.5 to 3.5 percentage points) over the past 10 to 15 years, Summers said. In addition to de-massification, he suggested, slower rates of population growth around the world are dampening economic growth and reducing the demand for investment capital.

Writing in my book, “Boomergeddon,” eight years ago, I argued that aging populations, the draw-downs of pension funds, and the rising cost of government entitlements would lead to higher interest rates over the next two or three decades. I failed to consider that de-massification, slower population growth, and slower economic growth would simultaneously depress the global demand for capital.

I’m open to the possibility that an interest rate-led meltdown of U.S. government finances is less likely in a world awash in capital. Let’s just hope that the politicians never get the message, though: Otherwise, they are likely to ramp up deficit spending and the national debt higher than ever. Meanwhile, state governments, elite universities, insurance companies and people saving for their retirement need to adjust to the reality of lower returns on their investment portfolios.