Moneybox
A blog about business and economics.

Aug. 21 2015 10:54 AM

This Proposed Change to the Student Loan Program Might Mess With Some Married Couples

It looks like the marriage penalty, or a version of it, might be coming to the student lending program.

At the moment, the Department of Education is in the process of creating an expanded version of Pay As You Earn, the repayment plan that caps what student-loan borrowers owe each month at 10 percent of their discretionary income, and forgives the balance after 20 years. As I wrote Wednesday, this program has become more popular in recent years, especially among graduate students, thanks to the Obama administration's efforts to promote it. The new edition will be open to anybody who has taken out loans directly from the government, including older debtors who previously didn't qualify, and includes a few reforms meant to better aim the benefits at needier borrowers.

One of those tweaks is designed to make sure married couples pay their fair share by requiring them to hand over 10 percent of their combined discretionary income, which the government defines as any earnings over 150 percent of the poverty line. As the Center for American Progress explains, it's meant to close a bit of a “loophole” in the current system:

Under other plans, married borrowers can file individually, thus capturing only one income while claiming their spouse when reporting their household size. This substantially reduces the monthly payment amount on the individual’s loan. REPAYE would eliminate this loophole by basing monthly payments on combined income and household size—a more accurate measure of an individual’s ability to repay their loans.

Sound policy? Absolutely. It also probably won't cause too much havoc: According to the government's data, only 8 percent of married borrowers on income-driven repayment plans file separately today (though that might in part be because of caps, which the new version of PAYE would remove, that limit payments to what one would owe on a standard 10-year plan). But it does mean at least a few households are going to be forced to hand over a significant additional chunk of change to the government each month. So mark my words: In six to seven years, there will be a New York Times trend piece about three couples in New York who decided not to get married because of their student loan math.

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Aug. 20 2015 6:38 PM

Should We Stop Making Companies Report Quarterly Earnings?

What would Wall Street be without earnings? Those quarterly reports are a ritual—companies push out their numbers; investors react in knee-jerk fashion; reporters blog the catchiest bits; execs join after-hours calls to tout their success or mitigate the damage. This intense three-month cycle and the kind of company behavior it drives is sometimes called “quarterly capitalism.” In some ways, quarterly capitalism is funny to observe—the corporate equivalent of watching someone sprint the first lap of a 1,600-meter race, either oblivious of or willingly ignorant to the fact that three more will follow. But to many it’s emblematic of the problems with our financial system, and as the 2016 election ramps up you should expect to start hearing a lot more about it.

In mid-July, Hillary Clinton highlighted the drawbacks of quarterly capitalism in a speech outlining her economic platform. The result of a private sector obsessed with satisfying investors every three months, she said, “is too little attention on the sources of long-term growth: research and development, physical capital, and talent.”

On Tuesday, another voice took up that cry when Wall Street law firm Wachtell, Lipton, Rosen & Katz called for the Securities and Exchange Commission to consider eliminating most quarterly reporting obligations for U.S. companies. Headlining this effort is Martin Lipton, a Wachtell founding partner. In a recent memo, Lipton pointed to new research from Legal & General Investment Management, a European firm with more than £700 billion in assets under its management, which found that short-term reporting “is not necessarily conducive to building a sustainable business” and “adds little value for companies that are operating in long-term business cycles.” In the U.S., the SEC “should keep the observations in mind,” Lipton wrote, “in pursuing disclosure reform initiatives and otherwise acting to promote, rather than undermine, the ability of companies to pursue long-term strategies.”

Clinton’s proposed remedy for quarterly capitalism includes reforming capital gains taxes to reward investors who hold onto stocks for longer, and thereby encourage investing with longer-term results in mind. She’d also like to see regulators require U.S. companies to disclose stock buybacks more quickly, perhaps on the within-one-day timeline used in the U.K. and Hong Kong. It’s hard to say how these policies would pan out. As Bloomberg View’s Matt Levine noted last month, forcing companies to disclose buybacks every day might just create more pressure for those companies to do buybacks every day.

Reducing the frequency of quarterly reporting, on the other hand, is a more straightforward fix. You might loosely compare it to McDonald’s recent decision to do away with its monthly same-store sales reporting practice—“to focus our activities and conversations around the strategic, longer-term actions we are taking,” as chief executive Steve Easterbrook explained. McDonald’s, you might recall, has been struggling for the better part of a year to turn around its business. By the time the company finally decided to give up on reporting same-store sales every 30 days, they’d declined globally for 11 months straight. That seems like a telling example here because, if you’re willing to take Easterbrook at his word, McDonald’s really does want a chance to focus on longer-term turnaround efforts. But its hands have in a sense been tied by the obligation to publish financial data on a monthly basis, which makes doing anything that helps in the long run but hurts up front that much more difficult to slide past investors.

In this way, quarterly reports are similar. Yes, transparency is good. When the pressure to put up big numbers every couple of months inhibits investments in the future, though, that’s a problem. Amazon is famous for having convinced Wall Street to accept its virtually nonexistent margins in the name of long-term growth; it’s the exception, not the norm. Eliminating quarterly reporting requirements wouldn’t necessarily be the magic bullet that turns every company into the prophet of no profit. But as ideas go, it’s certainly one worth considering.

Aug. 20 2015 1:44 PM

China’s Plans to Put the Yuan on the World Stage Just Hit a Big Snag

When China’s currency slid a striking 4.4 percent last week, the reaction was mostly alarm; it’s since settled into bafflement. Why did the nation’s central bank, which historically has kept a tight grip on its currency exchange rate, let the yuan fall so dramatically? There were two main theories: First, that China wanted to prop up exports. Second, that it was making a play for inclusion in the International Monetary Fund’s basket of reserve currencies by exposing the yuan to more market influence. The problem was that then the yuan resumed trading in a tight range, renewing everyone's bafflement. And in the latest update, the IMF indicated that the yuan won’t be joining the reserve currency list any time soon. If there was anything to theory No. 2, Beijing’s central bankers are feeling pretty lousy right about now.

The IMF on Wednesday extended the deadline for reviewing its basket of reserve currencies from this December to September 2016. Practically speaking, that’s a setback for China. It means at least another year will pass before the yuan might gain reserve currency status—a change that could solidify China’s role in the global economy by encouraging other countries to add the yuan to their stockpiles. Earlier this month, the IMF indicated that its decision regarding the yuan would hinge on how “freely usable” the currency was. That’s partly why the proponents of theory two thought China was letting the yuan slip last week—devaluation was conceivably one way of convincing the IMF that it was serious about letting market forces take a more active role in the currency. For a short while, it even looked like that strategy might be working. The IMF last week called China’s decision to let the market take a greater role in setting the currency exchange rate a “welcome step.”

So, to reiterate, if there was any truth to theory two, you can imagine that the People’s Bank of China isn’t too pleased. (China’s embassy in Washington didn’t respond to a request for comment from the Wall Street Journal.) The IMF news appeared to spark further instability in the yuan, which fell on Thursday despite the PBOC setting the daily reference rate higher. Then again, China had kept its currency stable for months in an apparent effort to convince the IMF that the yuan was a good candidate for reserve status, and investors were betting on that stability to continue. The abrupt devaluation and subsequent return to stability was the ultimate mixed message. “It is hard to have a high degree of conviction in anticipating the increasingly fitful reactions of the Chinese policy makers, and by extension the near-term direction of the [yuan],” Goldman Sachs analysts wrote earlier this week.

 Let the bafflement continue.

Aug. 20 2015 12:44 PM

Donald Trump Says the “Real” Unemployment Rate Is 42 Percent. Uh, No.

Loutish billionaire hyperbolist Donald Trump sat down for a wide-ranging interview with Time this week, during which he made the following remarkable claim:

This is not the first time Trump has shared his doubts about the official unemployment rate—he previously called it “totally phony”—which the Bureau of Labor Statistics defines as the percentage of adults who are out of a job and looking for work. Of course, there are very good reasons why the government uses that measure. Many people, such as stay-at-home parents, students, retirees, the disabled, and the occasional trust-fund kid, simply choose not to work, and their lack of gainful employment isn't really a reflection of the labor market's health. The government offers other, broader measures meant to track the number of people working less than they would like, but the most expansive, known as U-6, only shows that about 10.6 percent of the workforce is underemployed or jobless.

In any event, simply adding up all the adults out there who lack jobs and calling them unemployed doesn't make a lot of sense. So, I found myself wondering, where did Trump get this idea? It seems to have originated with David Stockman, who served as director of the Office of Management and Budget under President Reagan, and in recent years has emerged as a sort of weird, self-styled prophet of doom, beloved by conspiracy theorists, gold bugs, and Rush Limbaugh. In a June blog post railing against the Federal Reserve (a favorite pastime of his), Stockman wrote that the official unemployment rate "as a proxy for full employment does not even make it as primitive grade school economics." He continued:

At the present time, there are 210 million adult Americans between the ages of 16 and 68—to take a plausible measure of the potential work force. That amounts to 420 billion potential labor hours, if we accept the convention that all adults are at least theoretically capable of holding a full-time job (2,000 hours/year) and pulling their share of society’s need for production and work effort.
By contrast, during 2014 only 240 billion hours were actually supplied to the US economy, according to the BLS estimates. Technically, therefore, there were 180 billion unemployed labor hours, meaning that the real unemployment rate was 42.9%, not 5.5%!

It's one way to look at things, I guess. Good enough to convince Trump anyway.

Aug. 19 2015 5:56 PM

The Newest Scourge of the Federal Budget: Graduate Students

At some point, you've probably read that the federal government makes a big pile of money every year off of student lending. But that's an oversimplification. Washington actually runs a small loss on its loans to undergraduates, who a) benefit from low interest rates and b) aren't super-reliable about paying back what they owe. In the end, the Department of Education earns its profits from two groups of borrowers: parents and graduate students.

student_loan_profits

Jordan Weissmann

Lately, as the Wall Street Journal reports Wednesday, budget hawks and education experts have started worrying that graduate schoolers are becoming less of a reliable cash cow. There are two major reasons why. First, they're borrowing more. Between 2008 and 2012, the fraction finishing school with at least $100,000 in debt more than doubled to 15 percent. On its face, making more high-interest loans sounds like the sort of thing that should be a good for Washington's finances. The problem is that more lawyers, doctors, MBAs, and the like have started taking advantage of income-based repayment programs, which forgive their debts after a period of time. And as more six-figure borrowers start writing off their balances, the government's profits are going to fall.  

Is this something that a sane person should actually be worried about? Yes and no.

Income-based repayment is supposed to be the safety net of the federal student lending system. The most recent version, called Pay as You Earn, caps what borrowers owe each month at 10 percent of their disposable income and forgives the remainder after 20 years. The idea is to keep payments affordable and prevent people from falling into default, and then let them off the hook once they've made a good-faith effort to pay back a reasonable chunk of their obligations. The program is a godsend for young people who, for instance, go into too much debt attending a predatory for-profit college, then find themselves unable to find a decently paying job.

But it's also especially popular among graduate students—who are responsible for just south of 40 percent of all federal student lending—and the administrators whose salaries they pay. Law schools, for instance, often heavily promote income-based programs, so that aspiring J.D.s will worry less about borrowing obscene amounts to pay their tuition. As of now, the Journal reports that about half of all Grad PLUS loans are being repaid through income-based arrangements. And with a little digging, it's easy to find borrowers taking advantage of the option in ways that will make your skin crawl. Earlier this month, Bloomberg turned up Laura Strong, for instance, a part-time therapist and yoga instructor who took out $245,000 for a Ph.D. in psychology, toward which she is contributing $100 dollars a month under Pay as You Earn. Two decades from now, taxpayers will likely have to eat whatever she doesn't pay off.

People like Strong are rare—in 2012, the median graduate school borrower finished school with $41,000 in debt, according to the New America Foundation. About 10 percent took out $134,000 or more for their program. But the rise of income-based repayment has already had some impact on the federal budget: The Obama administration said in February that, as a result of the option's increased popularity, the government's student loan portfolio would be $22 billion less profitable than expected.1 And as more graduate students pile in, the government stands to lose more. This isn't exactly a critical threat to America's fiscal health at the moment—again, graduate student lending remains incredibly lucrative—but policymakers don't want the money to dry up further. Plus, there's an element of basic fairness to consider: Graduate degree holders are relatively affluent, meaning there isn't a great argument for heavily subsidizing their educations.

So, what to do? It's a tough question. On the one hand, you could take an extremely straightforward approach and simply cap the amount of federal loans that grad students are allowed to borrow. That's how things worked until 2005, and returning to that old status quo might even slow down the growth of grad school tuition by tightening the amount of credit available. My guess is that won't happen, though, since the government would probably lose money in the deal. (Once again, grad school loans are still profitable on the whole. The fewer Washington disburses, the fewer dollars it earns.)  

The other option is to make loan forgiveness less generous for advanced degree holders. And as of now, that seems to be the direction things are headed. At the moment, the Obama administration wants to change income-based repayment so that graduate school loans will be canceled after 25 years, rather than the current 20. It has also advocated limiting the amount of debt that borrowers can have canceled under the Public Service Loan Forgiveness program, which waves away borrowers' balances if they work in the public sector or at a nonprofit for 10 years. I'm less a fan of that second option.2 I wouldn't be surprised to hear about more dramatic changes in the near future. There will be more highly educated Americans stuck paying off their debts into their 50s, or longer. So think carefully about an art history Ph.D.

1The CBO projections in the graph up top, which are from March, seem to take those changes into account.

2Full disclosure: My wife is a government lawyer on PSLF. At some point, I will write an article about why the program gets a bad rap, I promise.

Aug. 19 2015 5:52 PM

Airlines Tickets Are Finally Getting Cheaper

Back in December, my colleague Josh Voorhees wondered why U.S. air travelers weren’t seeing much relief in ticket prices. The cost of jet fuel, after all, was down 32 percent in the past 12 months. But instead of passing these savings onto consumers, domestic airlines had actually increased fares by an average of $10—or about 3 percent—in 2014. The reasons, he found, were manifold. A string of megamergers in the airline industry. Increasing demand for seats. Fuel contracts set months in advance. The most optimistic outlook for consumers came from the International Air Transport Association, the industry’s largest trade group, which suggested that when summer 2015 rolled around, the average airfare could fall by up to 5 percent.

Well, now that summer 2015 is in full swing, IATA’s ticket-price predictions are looking pretty prescient. Case in point: When the Consumer Price Index for July was released on Wednesday, it showed that the index for airline fares fell a striking 5.6 percent from June to July—the biggest one-month drop since December 1995. On a year-over-year basis, the airline fare index has also fallen 5 or more percent in each of the past five months. You can see July’s sharp downturn in the chart below:

cpi_airfare_0815

Federal Reserve Bank of St. Louis

While this is good news for consumers, it’s not the best for air carriers, despite their current record profits. From the Wall Street Journal:

Costs have dropped sharply for airlines, pushing profits higher. But a decline in ticket prices has hurt the companies’ unit revenue, which measures the amount of money taken in for each passenger flown a mile. Investors remain fixated on that metric, which has slumped this year and may not turn around until 2016. They are watching for signs that airlines are responding to better times by over expanding, setting up another downturn.

What’s hard to say is whether the decline in airfare that the CPI has registered accounts for another airline trend—unbundling tickets. In an effort to bolster profits, major air carriers have increasingly started to separate out all the amenities of a flight and sell them as add-ons. JetBlue earlier this year added a fee for passengers’ first checked bag for the first time. Ultra-cheap companies like Wow Air keep their base fares deceptively low by charging more for everything from prebooked seats to bringing a musical instrument aboard. As I wrote in Slate in December, buying a plane ticket today is kind of like ordering a sandwich and having to pay extra for the bread. On its website, the Bureau of Labor Statistics says only that the CPI’s airline fare measurement takes into account “all applicable taxes” as well as “fuel surcharges, airport, security, and baggage fees.” For once, it’s truly unclear if additional fees may apply.

Aug. 18 2015 10:16 PM

Airbnb Wants to House Tons of Chinese Tourists. That’s a Lot Tougher Than It Sounds.

When Airbnb announced its latest funding round this June, it was easy to gloss over one of the names attached to it. At the time, the fact that China Broadband Capital was among the dozen-odd investors on board was much less interesting than the size of the round itself—a stunning $1.5 billion that valued Airbnb at $25.5 billion and vaulted it toward the top of the elite billion-dollar startup club. But on Tuesday, the home-sharing company made clear that China Broadband Capital is more than just another backer. It and Sequoia China are serving as two “strategic partners” in a newly announced Airbnb push to capture the vast and lucrative business of Chinese tourists traveling around the world.

Should this story sound familiar—“sharing economy” company lands big investment, makes equally big bet on China—that’s because it is. Back in December, Uber partnered with Internet giant Baidu, and then just two months ago announced it would devote more than $1 billion to expansion in China in 2015. In a letter to investors, Uber chief executive Travis Kalanick described the massive growth the service had seen since arriving there in February 2014. After its first nine months in Beijing, Uber’s trip volume was 29 times what it was during the same initial period in New York City. In Hangzhou, that multiplier was 422. “This kind of growth is remarkable and unprecedented,” Kalanick wrote. “To put it frankly, China represents one of the largest untapped opportunities for Uber, potentially larger than the U.S.” And finally: “Simply stated, China is the #1 priority for Uber’s global team.”

Top expansion priorities never come cheaply, and especially not when they involve winning the hearts and wallets of an estimated 1.3 billion people living halfway around the world. Uber hasn’t publicized its burn rate in China, but it must be astronomical. On “People’s Uber,” the UberX-like service the company operates in cities including Shanghai and Hangzhou, rider fares cover only basic driver expenses like gas. Uber subsidizes the rest, with some drivers making the equivalent of several thousand dollars a month. On a recent trip to China (arranged and paid for by the China–United States Exchange Foundation, a nonprofit, nongovernment organization based in Hong Kong), a 10-minute, 1.8-mile ride in a People’s Uber cost just 8 RMB, or about $1.30. With Uber providing a reported 100,000 rides a day in China, I’ll leave it to you to imagine how expensive that operation is.

Airbnb didn’t specify in its announcement how much it plans to spend on a China push, but again, it’s unlikely to be cheap. Airbnb’s efforts are focused on Chinese tourists looking for places to stay around the globe, though it also offers rentals within China. The company says China is its fastest-growing outbound market, with bookings from Chinese tourists traveling outside the country increasing 700 percent in the past year. (A company representative declined to provide additional specifics on bookings in China, pointing instead to a blog post by chief executive Brian Chesky.) Like Uber, Airbnb has identified China as a tremendous untapped opportunity; Chinese travelers took 109 million trips in 2014, the company explains, citing data from the World Tourism Organization. “It’s clear that Airbnb is uniquely positioned to connect Chinese guest to amazing travel experiences,” Chesky writes. “And as we move into our next phase of expansion in China, we know we will need deep local knowledge and expertise to keep this momentum going.”

That, of course, is where China Broadband Capital and Sequoia China will come in for Airbnb, and where Baidu is already helping out for Uber. To state the obvious, running a business in China is nothing like running it in the U.S., and American tech companies have largely either struggled to crack the tightly controlled market or chosen to keep their distance. Here again, the Uber narrative is telling—while the company has expanded and lobbied for regulatory changes aggressively in the U.S. and parts of Europe, Uber has carefully fallen in line in China. Earlier this summer, Uber made headlines when it warned drivers to steer clear of a protest in Hangzhou to “maintain social order.” The startup that brashly smacked down Bill de Blasio over a proposed vehicle cap in New York City is hardly recognizable in the Middle Kingdom. Airbnb’s reputation is far less brazen, but it will also presumably need to be extra-accommodating to position itself favorably in the Chinese market.

Lastly, what’s left unsaid in the Airbnb announcement is that it’s by no means the only company attempting to win the alternative-lodging game with Chinese travelers. One of the biggest competitors Airbnb will face is Tujia.com, a Beijing-based site for home rentals that in June raised $300 million at a valuation topping $1 billion. The lead investor on that round, All-Star Investments Limited, also holds a stake in Didi Kuaidi, the dominant provider of on-demand rides in China and Uber’s most formidable local rival. Chesky says that Airbnb’s partners on its China efforts have “proven track records in localizing technology for the Chinese market” and growing Chinese Internet firms into “respected market leaders.” In poetically optimistic fashion, he adds that Airbnb had its biggest night ever this summer and is eager to “help more people in China travel through the Airbnb platform” and gain “memorable travel experiences from around the world.”

In short: Airbnb is ready to belong in China. The question: Is China ready to have it?

Aug. 18 2015 5:02 PM

So Long, Cellphone Contracts. You Won’t Be Missed.

Earlier this month Verizon dealt a critical blow to the cruel tyranny of smartphone contract plans; on Monday so did Sprint. With T-Mobile eliminating the contract option long ago as part of its “uncarrier” campaign, AT&T has quickly become the only major wireless carrier in the U.S. to still offer multiyear contracts with subsidized phones, and even it is making those plans harder to obtain.

Don’t expect to see many tears. As long as contract plans have been the norm in the wireless industry, they’ve also been the bane of consumers—particuarly those who care about having the latest device. Phone contracts sign users into long-term agreements (typically two years) and keep them there with the threat of hefty early-termination fees. Want the new iPhone when it comes out only halfway through your existing carrier contract? Pay up, or tough luck.

So, are these new contract-free options better? The not-really-helpful answer is that it depends. If you’re the type of person who prioritizes having a shiny new device, then you probably stand to benefit from going the contract-free route. Under the “iPhone Forever” promotion that Sprint announced on Monday, for example, customers are eligible to upgrade any time they “don’t have the latest iPhone.” On the other hand, if you, like me, are happy to hang onto your dated smartphone for its two-year term, going contract-free might ultimately increase your spending. That’s because with most of these new plans, the cost of your freedom from a two-year contract is the full price of your device—either paid all at once upfront, or tacked onto your bill in monthly installments.

Whether ditching a two-year contract is cheaper or more expensive in the long run will depend on your particular plan and device. Consider Verizon. Under the company’s new pricing plan, an iPhone 6 user with 3GB of data would get a pretax monthly bill of about $92—$45 for data, $20 for the smartphone connection, and $27.08 for the monthly device payment—and can upgrade any time once she’s paid the device off. By contrast, with Verizon’s older “more everything” plan, that same iPhone 6 user would have paid $90 a month pretax ($50 for data plus $40 for the smartphone connection), as well as $199.99 for the subsidized device and $40 to either activate or upgrade. In this case, the new pricing model is cheaper because the subsidized device cost was essentially built into your monthly smartphone connection charges under the two-year contract. Still, there’s no guarantee that you’ll always save money by going contract-free.

That said, my guess is that lots of people will do it anyway because they fall into the I-want-a-new-phone category rather than the I’ll-hang-on-to-it-for-two-years one. In February, research firm Recon Analytics reported that 49 percent of Americans replaced their device every year in 2014. That was up from 45 percent of consumers in 2013. The portion of people replacing their device every two years, meanwhile, plummeted from 40 percent in 2013 to 16 percent in 2014. As you can see in Recon’s chart (above), many of those people appeared to shift to a third category—replacing their device at obsolescence. What’s unclear is whether that means they were ultimately hanging onto it for more or less time.

When you consider that trend, it makes sense that all the big carriers are hopping on the contract-free bandwagon. Phone technology improves fast, and consumers want to be able to upgrade apace. For now, it’s hard to say whether they’ll also pay a bit of a premium for that right. But as carriers compete to bring users on board—especially without the security of two-year contracts to lock them in—you can bet that costs will fall. So look forward to that.

Aug. 18 2015 3:36 PM

Scott Walker and Marco Rubio Explain How They Would Replace Obamacare, and It Isn’t Pretty

In what can only be described as a ill-fated attempt to focus this summer's primary campaign season on something other than Donald Trump's noxious opinions about Hispanics and women, both Florida Sen. Marco Rubio and Wisconsin Gov. Scott Walker have unveiled their plans for repealing and replacing Obamacare. Rubio laid out his thoughts in a Politico op-ed Monday night. Walker released a brief policy paper Tuesday, which he elaborated on during a speech delivered, as a few sharp observers noted on Twitter, before the symbolically inconvenient backdrop of a screw machine factory. The two proposals have much in common, and together should give the public a pretty good notion of what to expect from the GOP field on health care.

What's the major idea? After scrapping the Affordable Care Act, both Rubio and Walker would essentially give Americans a little bit of money so that they can possibly afford to buy cheap insurance. And by cheap insurance, I mean really crappy insurance. This is the approach that has been popular among conservative policy thinkers for a while, and is basically the inverse of Obamacare, which gives Americans subsidies to buy higher quality coverage. The GOP strategy consists largely of three main steps:

  1. Allow Americans to buy coverage across state lines.
  2. Give people who don't get insurance through their employer a tax credit so that they can purchase a private plan.
  3. Create special "high-risk pools" for the sick who can't get coverage otherwise.

Now here's how that all works together.

Today, even though Obamacare put in place a new set of federal standards, health insurers are still basically regulated by the states, which have different laws about consumer protection and what conditions companies are required to cover. The result is that Americans have to buy health plans in the state where they live. Republicans, like Rubio and Walker, would like to change that system by allowing consumers to shop around the country, which they argue would create competition and drive down prices.

In theory, there's nothing wrong with this idea. But it only works if the federal government sets acceptable guidelines about what sorts of plans insurers are allowed to sell. Otherwise, it would almost certainly spur a harmful race to the bottom, in which companies would flock to states with the loosest regulations, and offer cut-rate insurance offering little protection. The likely result, as the Congressional Budget Office argued years ago, is that young, healthy customers would opt for the least expensive options available, while older, sicker Americans would end up paying more for coverage. Meanwhile, many of those invincible-feeling twentysomethings would find their health insurance wasn't worth much once they actually needed it. And the chances are that a Walker or Rubio administration wouldn't do much to stop that from happening.

Setting those niggling little problems aside, letting Americans buy health insurance in a lightly regulated national market would probably lead companies to offer some affordable catastrophic coverage. That's where we get to Step 2. Both Rubio and Walker would offer Americans without job-based insurance a tax credit to buy on the individual market, which would likely be enough to pay for a low-end plan.

Walker notes that there are some people who, under his system, might actually get a bigger tax credit than they would now under Obamacare, which subsidizes coverage purchased on its health care exchanges. But if the governor really wants to offer even remotely generous tax credits, it's probably going to be expensive. And that's a bit of a problem, since he's planning to 86 all of the taxes that currently pay for the Affordable Care Act.

Of course, tax credits won't do much good for people if they can't get coverage because they have cancer or a disability. Obamacare, of course, outright bans insurers from discriminating against people with pre-existing conditions, then makes it up to the companies by requiring every American to get insured, which gives them more healthy (and profitable) customers. Rubio, Walker, and other Republicans would eliminate those rules. Instead, they would likely try to help the sick get coverage through other means, likely by subsidizing state-run "high-risk pools." (Both Rubio and Walker suggest this is only one option, but it's really the conservative policy of choice.) The idea is that companies can sell special insurance plans designed for the infirm, which the government can help pay for.

This is an idea that has been tried many times before, most recently as a stopgap measure under Obamacare that was meant to tide people over until the law went into full effect. The lessons have been pretty clear: Most of the time, the plans offered in high-risk pools remain extremely expensive and tend not to enroll many individuals. You could potentially fix those problems by injecting many billions of dollars into them. But last I checked, Republicans aren't typically fans of government spending, and the chances that they would appropriately fund the pools seem rather small.

Both Rubio and Walker offer up additional ideas, some of which would be, well, controversial. For instance, Rubio would seemingly fund his plan partly by cutting back on the tax break for employer-provided health insurance, which, as Vox's Sarah Kliff writes, would have the obvious effect of making most Americans' insurance more expensive (it's also probably a nonstarter in Congress). Both he and Walker, would also give more control over Medicaid to the states, which is typically code for cutting back on benefits to the poor. Rubio also explicitly says he would eventually turn Medicare into a program that helps seniors buy private insurance. Walker, perhaps wisely, doesn't really touch the subject.

But the big takeaway is that the establishment GOP contenders are edging toward a consensus alternative to Obamacare, a three-part plan that would potentially make insurance cheaper for the young, more expensive for the old and sick, and depending on how tight-fisted Congress felt, unaffordable for the ill. Thankfully for them, nobody should notice for a while. Everybody is still paying attention to Trump, after all.

Aug. 18 2015 12:31 PM

Nairobi Used to Be a Terrible Place to Do Business. How Did It Transform Into a Tech Hub?

This post originally appeared on Inc.

At first blush, you might not think of Nairobi, Kenya, as being especially ripe for startups. Public concerns over security, government red tape, and a long waiting period for corporate registration are a few reasons why the capital city has historically fostered less entrepreneurial activity.

Still, in recent years, Nairobi has seen massive development in all things digital. Counting thousands of STEM graduates from local colleges each year, Nairobi's tech scene could be worth as much as $1 billion to Kenya in the next three years, Bloomberg reports. 

As the use of mobile phones gains popularity, a more fertile marketplace for e-commerce businesses is being created. IBM recently chose Nairobi as the location for its first-ever "African research lab," citing the city's notable tech "buzz" and connectedness to the African continent at large.

M-Farm is one of the many tech startups to emerge from Nairobi's entrepreneurial ecosystem. Founded in 2010 by a trio of women, the company gives farmers access to real-time information about market prices, and where they can sell produce and buy supplies, all at the touch of a mobile button. 

To sign up for the service, farmers pay 800 Kenyan shillings ($8 U.S. dollars, which is a reasonably small fee in Kenya), for a six-month M-Farm subscription. An SMS transaction for a single crop, instead, is simply the cost of a text message. The company counts nearly 17,000 users in Kenya, and projects to have 1 million by the end of next year.

M-Farm aims to be more than an information platform. It wants to empower African farmers to grow more effectively by cutting out the costly middle man. Presently, those farmers are producing just one seventh of the possible yield per hectare that is produced in developing countries, according to consulting firm McKinsey and Co.

"In Kenya, agriculture has always been looked at as a punishment," says Linda Kwamboka, one of the M-farm co-founders. "You always hear farmers saying that they don't get enough profit from their transactions because the middle man is taking everything."

Still, Kwamboka continues to explain that it's the small-scale farmers who actually feed everyone. So the idea for M-Farm was born: "If the farmers really know how much their produce is going for in the market, they will be able to negotiate with the middle men," she said.

Innovative companies like M-Farm have given Nairobi the boost it needs to succeed economically. Currently home to 242 startups and nearly 2,000 private investors, the city—once nicknamed "Niarobbery" for its crime rates—is now adopting a new title: "Silicon Savannah."

The Kenyan government is recognizing that startups create jobs, and to that end, is making several investments to support the entrepreneurial ecosystem. In 2013, the government partnered with Kenyan incubator Nailab to launch a $1.6 million technology program to provide entrepreneurs with access to capital, education, as well as helpful contacts in the industry. Graduates of the program, which runs for three to six months, include startups like Soko Text, which solicits text messages to aggregate demand for food, and then determines wholesale prices for local micro entrepreneurs. 

Technology resources unaffiliated with the government are also springing up in Kenya. Founded in 2008, iHUB conducts business research in partnership with the University of Nairobi. The organization offers consulting services as well as a collaborative local workspace for business owners.

The IPO48 startup competition is another initiative that proved particularly useful to M-Farm's co-founders. The program brings together more than 100 Kenyan entrepreneurs, programmers, designers, and project managers, and solicits them to build a new mobile or web service over the course of just two days.

As the 2010 winner, M-Farm received a prize of $10,000 in investment money. Since then, the company has received additional (undisclosed) funding from other investors. "The most important thing we got out of this was the networking," Kwamboka says. "It gave us visibility for other people to know what we're doing, and to start getting involved. People know where to find you. If they come to Nairobi, and want to invest, people check the iHub to see what's going on." 

What's more, Kwamboka notes that the Kenyan government is remarkably supportive of women in business. "The Kenyan president [Uhuru Kenyatta] is taking strides to ensure that women entrepreneurs are being recognized and heard," she adds. 

Internet penetration in Kenya has surged over the years, creating a massive opportunity for digital entrepreneurs. As of 2014, nearly half (43 percent) of the Kenyan population had access to the Internet, according to the World Bank. This is a significant uptick from 2010, when penetration hovered at just 14 percent. What's more, 82 percent of Kenyans now own a cellphone, compared with 89 percent of Americans.

"Mobile phones are the best way to go [for businesses]," says Kwamboka. "The information it contains is very personal. You can store it, and you can always go back and check yesterday's price, or last week's price."

The ability to make smart and analytical decisions is essential for farmers. A suburban town elsewhere in Kenya, for instance, might have a better tomato market this week than Nairobi had last week, which lets farmers sell at a higher (more appropriate) price point. As Kwamboka explains, a farmer—equipped with the right market information—might be able sell his crop for an extra 10 shillings. Predictably, the middle man may reject that price in the morning but will agree to it by the afternoon. 

In 2007, Kenyan provider Safaricom also took advantage of mobile penetration to launch M-Pesa, a microfinancing company, in partnership with Vodafone. M-Pesa has become something of a mobile banking revolution, which has since spread across Eastern Africa, Afghanistan, India, and parts of Europe, and now counts about 15 million daily active users.

The service allows for easy money transfer, bill payments, and money withdrawals by simply sending a PIN-secured, SMS text message. The platform has spawned offshoot ventures, which all leverage the same technology. M-KOPA Solar, for example, gives Kenyan cheap access to solar energy.

In 2014, M-Farm partnered with M-Pesa to process mobile payments on the back end, as it sends out pricing information and updates to its users.  

Nairobi is fledgling when compared to urban giants like New York City or Los Angeles, but within Africa alone, it's one of the fastest-developing cities. In economic terms, Nairobi is Africa's seventh leading city, according to a recent report in PwC's series on "Cities of Opportunity." And in a 2012 study from the Economist Intelligence Unit, "Hot Spots: Benchmarking Global City Competitiveness," it was projected that Nairobi will become one of the 40 fastest growing urban economies in the world by 2016, due to its highly skilled workforce and comparatively low cost of living.

In fact, Kwamboka and her co-founder Jamila Abass, who studied in Kenya and Morocco respectively, each hold bachelor's degrees (Abass in computer science, and Kwamboka in business information technology). "Really, I do feel supported as a woman in tech [in Nairobi]," Kwamboka adds. 

Still, to better compete on the global landscape, the city needs to develop its physical infrastructure: Transportation in Nairobi is an infamous headache, for which the city ranked in the bottom 10 out of the total 120 cities surveyed by the EIU. 

With digital startups like M-Farm, though—which was recently singled out by U.S. President Barack Obama as inspiring "hope" for the country, during his July trip to Nairobi for the Global Entrepreneurs Summit—Kenya is fast emerging as a business hub within the global marketplace.

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