A Backward Induction Analysis of the GSEs’ Meltdown

Note from the Digital Editor: In order to highlight the high-level of research and scholarship from the authors who have published in the William & Mary Policy Review’s peer-reviewed print journal, we have reproduced the abstracts from Volume 3, Issue 1 along with a link to an electronic copy of the full form of the piece. 

Fannie Mae and Freddie Mac, the two giant government-sponsored enterprises (GSEs), stand in the spotlight of our recent financial crisis. A multitude of articles and other publications attribute part of our economic decline to these GSEs and seek to root out causes, solutions, and everything in between regarding their faltering. The two owe this recent infamy to the 5.3 trillion dollars in mortgage loans they either guarantee or hold as part of their portfolios, and the receipt of 1.4 trillion dollars in government money, to keep the firms alive. A backward induction analysis, through the viewpoint of the GSEs’ managers, can explain the unprecedented growth and collapse of Fannie and Freddie. Using a three-period lens, this paper analyzes the opportunistic decision-making strategies Fannie and Freddie’s managers engaged in as well as the inevitable systemic risks these strategies posed for the global economy. This analysis describes how the unilateral benefits conferred upon these GSEs compelled management to take on greater risks, which confirmed the necessity of a guarantee by the government. It concludes with an examination of how the Dodd-Frank Act could prevent similar troubles for future Fannies and Freddies. First, a brief history of Fannie and Freddie and an overview of economic conditions lays the foundation for the GSEs’ crashes into conservatorship

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Charles Abrams is J.D. expected at Florida State University College of Law.

Moving Toward a More Transparent Accounting of State Public Employee Pension Plans

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State governments and public pension boards have failed to provide timely and meaningful information regarding the health of their pension plans. Because stakeholders disagree on the method of valuing these pension plans, the public lacks information necessary to develop policy alternatives. Thus, it is the responsibility of the federal government to step in, as it has done with private sector pension plans. An attempt was made with the Public Employee Pension Transparency Act, though that legislation falls short because it lacks a mandate of uniformity. Government Accounting Standards Board (GASB) Statements greatly influence state plans, but they too lack uniform standards. In this article, I propose the Uniform Pension Valuation and Reporting Act (UPVARA), which calls for mandatory uniform valuation and reporting standards. UPVARA also directs plans to report under three separate valuation assumptions, thereby decreasing the acrimonious nature of plan valuation and reporting. UPVARA is therefore a crucial step toward improving the valuation and reporting standards for state public sector pensions.

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Daniel Kaspar is an Assistant Counsel at the National Treasury Employees Union.

How a Small Rate Change Could Help Agencies Save More Lives and Make More Sense

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Over the past thirty years, the dominant rationale for mandatory, formal cost-benefit analysis (CBA) of federal health, safety and environmental regulations has changed from “CBA operates as a necessary institutional roadblock against power-hungry regulators” to “CBA is a neutral tool that assists regulators in identifying welfaremaximizing regulatory options.” However, despite this change in intention and justification, the actual CBA methodologies the OMB directs the agencies to use haven’t changed much in three decades, and still reflect the strong anti-regulation sentiment of the Reagan administration. One methodological choice that continues to operate as a very powerful bias against protective regulatory standards is the OMB directive that executive agencies must discount the public health and environmental benefits of regulation at the same rate used for monetary costs.

The standard argument against using a lower discount rate for health, safety and environmental benefits is that this would cause agencies to defer cost-beneficial regulations ad infinitum; under differential discounting, it is argued, a beneficial regulation would always produce more net benefits if its implementation were delayed another year, and so no rational agency would ever implement anything. This article demonstrates that this “perpetual delay” argument relies on an invalid assumption; once this assumption is eliminated, any perpetual delay phenomenon disappears.

Next, several “opportunity cost” arguments for equal discounting are shown to conflate the choices theoretically available to society as a whole with the outcomes actually available to regulatory agency decision makers. While the opportunity costs of any alternative investments actually displaced by regulations may be relevant considerations for regulators, the arguments—premised on opportunity cost—that logic compels equal discounting of regulatory costs and benefits all fail.

Finally, the article summarizes and discusses the substantial evidence that the discount rate agencies apply to the non-fungible, often intangible public health and environmental benefits of regulation should be significantly lower than the rate used for monetary costs within the same cost-benefit analysis.

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Melissa Luttrell is a Visiting Assistant Professor of Law, Florida International University College of Law.

The Cost of Immaterial Tax Law Provisions

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T

he United States federal income tax law has been the subject of decades of study due to its burgeoning level of detail and complexity, including many calls to scrap the income tax and replace it with new approaches, such as a consumption tax. This Article argues that a more manageable and pragmatic approach to improving the tax law, itself a creature of incrementalism, is to reverse its complexity through an incrementalist approach. The tax code contains many immaterial provisions, including two provisions applicable to millions of individuals (the $100 floor on personal casualty and theft deductions, and the up-to-$250 deduction for educators). Such provisions have trivial budget implications and negligible, if any, incentive effects on taxpayer behavior. These provisions add unnecessary complexity and thus inflate transaction costs for the government and taxpayer. For the immaterial provisions residing within tax expenditures, such as the educator deduction, an institutional economics analysis reveals such tax expenditures are ideal candidates for removal from the tax code, to instead be directly expended by the government. The Article offers recommendations as to how to identify and eliminate tax law clutter

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Stanley Veliotis is an Assistant Professor of Accounting & Taxation, Fordham University Schools of Business.

Legal and Policy Implications of Registering Juvenile Sex Offenders

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The rights-based critique and policy analysis both lead to the same conclusion: the juvenile provisions of the Sex Offender Registration and Notification Act (SORNA) should be amended. Public policy is too often crafted when emotions are high. When a child suffers the horror of sexual abuse, the community understandably wants something to be done to protect that child from a reoccurrence and to protect other children from similar attacks. Yet the resulting legislation has frequently done more to undermine children’s rights than to protect children from violence. Laws affecting juvenile sex offenders should be consistent with research on adolescent brain development and empirical studies of recidivism. SORNA is based on neither of these; it has simply swept certain categories of juvenile offenders into the adult world of criminal behavior. SORNA clearly violates the United Nations Convention on the Rights of the Child (CRC), which provides that child offenders have a right to be rehabilitated and reintegrated into the community. SORNA also violates the spirit and philosophy of decades of juvenile justice policies and practice. The CRC and the family court movement both recognize that most children learn to make more responsible choices as they mature and that juvenile offenders deserve to be given a genuine second chance. Similarly, sex offender treatment experts recognize that adolescents are not fully mature, are changeable, and are thus capable of becoming productive and law-abiding citizens. Unfortunately, there is a fundamental conflict between this view and the popular image of the sex offender, who is presumed to have a deviant and fixed preference to sexually abuse children.185 This image does not fit many of the individuals who have been ordered to register as sex offenders and it is particularly inappropriate for children.186 We do not dispute the fact that juvenile sex offenders need to be taken seriously. But legislators and policy makers should base legislation on solid research and should make an effort to comply with international standards. Rather than requiring states to register juvenile sex offenders without regard to individual circumstances, Congress should make federal funding contingent on state laws that respect children’s right to an age-appropriate proceeding and a genuine opportunity to be rehabilitated.

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Carole J. Petersen is a Professor and Director of the Spark M. Matsunaga Institute for Peace and Conflict Resolution and teaches international human rights law at the William S. Richardson School of Law, University of Hawaii at Manoa. Susan M. Chandler is a Professor of Public Administration and Director of the College of Social Sciences Public Policy Center at the University of Hawaii at Manoa.